Plan of action: Preparations to meet increasing demand are under way

Addressing Jordan’s energy imbalance had already been at the top of the government’s agenda before its Egyptian natural gas imports began to be disrupted in early 2011. But in view of the ongoing attacks on the Egyptian gas pipeline, policymakers now see the country’s energy balance as an issue of national security. As such, the government is keener than ever to diversify the national energy pool, and to tap domestic energy resources which have to date remained largely unexploited. In pursuing a Master Plan which seeks between $14bn and $18bn in energy investment from 2008 until 2020, it has opened its arms to new ventures in oil shale, nuclear, renewables and conventional hydrocarbons.

Jordan’s energy sector has bucked the trend in a year which saw total foreign direct investment decrease by 32% compared to 2010, according to the World Bank. New agreements have been signed for shale oil extraction and a shale-fired power plant, and Gulf investors have bought stakes in electricity generating companies. A bidder is also to be selected for the construction of a nuclear reactor, while the endorsement of a Renewable Energy and Energy Efficiency Law has enabled private sector investment in solar, wind and other renewables.

GAS DISRUPTED: The past two years have made plain the risks the kingdom faces in relying on Egypt as its primary source of natural gas. Increased gas demand in Egypt saw exports drop from a daily average of 300m cu feet in 2009 to approximately 220m cu feet in 2010. But in the wake of recurring disruptions to the gas flow caused by a series of attacks on the pipeline in Sinai over the past year, imports plummeted to 80m cu feet in 2011.

The problem with the drop in imports is further compounded by an increase in demand. According to Abdel Karim Alawin, the CEO of the Jordan Petroleum Refinery Company (JPRC), “Over the past decade energy demand in Jordan grew by roughly 4.5% per year. But from 2010 to 2011 demand grew by more than 20%, largely due to the frequent interruptions in the supply of natural gas from Egypt.”

The attacks have continued into 2012, with the latest disruption occurring in early March. According to Mahmoud Al Aes, the director of the planning department at the Ministry of Energy and Mineral Resources (MEMR), “It has taken the Egyptian government anywhere from a week to a month to get the gas flowing again.” The fall in gas imports has been extremely costly for Jordan. Relying on natural gas for around 85% of its generated electricity, the kingdom has been forced to revert to more expensive diesel and heavy fuel reserves in order to make up the shortfall, at a cost of roughly JD1bn ($1.45bn) in 2011. “The result is that we paid the largest ever national energy bill last year, totalling JD4.19bn ($6.08bn),” said Al Aes. This amounts to approximately 20-25% of the kingdom’s GDP. If normal gas flows do not resume in 2012, the bill is likely to reach new highs by the end of the year.

Furthermore, in the event of renewed flows, Jordan will have to pay more for its gas, as Cairo is now insisting that the current tariff be revised before imports are resumed. Under the new agreement Jordan is expected to pay $6 per 1000 cu feet, up from the previous rate of less than $2, although the agreement is also reported to stipulate compensation from Egypt in the event of supply disruptions.

SHORT-TERM SOLUTIONS: Policymakers are now talking of a “five-year gap” in the national energy supply. The country’s investments in oil shale will not begin to come on-line until late 2015 or 2016, and the proposed nuclear reactor would not be available until 2019 at the earliest. In the short term, the MEMR is looking into sourcing extra conventional hydrocarbons to meet national demand.

The possibility of establishing an offshore terminal for imports of liquid natural gas (LNG) at Aqaba is currently being explored. While a permanent terminal is expected to take three years to construct, a floating ship could be established more quickly. Both options are currently on the table, and are likely to generate significant opportunities for foreign investment. While a firm agreement has not yet been made, Qatar is discussing the possibility of supplying gas to Jordan (see analysis).

Meanwhile, the Jordanian government may decide to increase its overall national storage capacity for oil and oil products, at an estimated cost of $250m, according to the MEMR. This is primarily aimed at ensuring that Jordan’s combined-cycle power plants have an alternative to natural gas. But at a time of high global oil prices, increasing the country’s dependence on oil derivatives comes more out of necessity than choice. Spending on oil imports increased by 80% year-on-year in January 2012. This follows spending of JD3.5bn ($5.08bn) on oil imports in 2011, an increase of 58% since 2010, according to the Department of Statistics.

Complementing a substantial increase in storage capacity, Jordan is also looking to boost oil imports from its neighbours, in particular Iraq. Exports currently stand at approximately 6000 barrels per day (bpd), short of the agreed 10,000 bpd, but are expected to increase to 15,000 bpd, according to an announcement made in March 2012 by the Iraqi Oil Ministry. In August 2011 Jordan managed to secure an extra 30,000 tonnes of exported Iraqi heavy fuel. These products are brought to Jordan by truck.

For the medium- to long-term, Amman and Baghdad were also in talks during 2011 over the possible construction of an oil pipeline. With Jordanian gas supplies looking increasingly threatened in 2011, the thrust of discussion has now shifted somewhat to the construction of a 500-km gas pipeline between the two countries – a project which would take around five years to complete.

OIL SHALE: Of all the medium-term options available to the kingdom, oil shale has perhaps inspired the most interest amongst investors. Although official estimates for total shale reserves stand at more than 40bn tonnes, some believe that further exploration could reveal the country has between 70bn and 100bn tonnes of shale reserves.

The biggest shale deal of the year came in March 2011, when the government signed a commercial agreement with Karak International Oil (KIO), a subsidiary of UK-based Jordan Energy and Mining Limited (JEML), for the extraction of oil from surface shale reserves in the Karak area. KIO says it will invest approximately $1.8bn in the project, with JEML having already injected some $30m.

“We are hoping to produce 15,000 bpd by the end of 2015 or early 2016,” said Munther Akroush, the director of the Jordan office at JEML, although he added that the financial and technical aspects of the project are still being optimised. With the support of Germany’s Thyssen Krupp Group, KIO will use ATP technology, which was used on shale oil extraction in Australia between 1999 and 2004. Production is expected to increase incrementally to around 35,000 bpd by 2020 and around 60,000 by 2026. This will make a significant contribution to total national oil consumption of around 100,000 bpd.

The agreement with KIO followed another major deal that took place in May 2010. The Jordanian government granted the Jordan Oil Shale Energy Company, a subsidiary of Estonia-based Enefit, rights to explore and produce oil from the shale reserves at the Attarat Um Ghudran deposit, which is estimated to contain 2.5bn tonnes of oil shale. YTL Power International and the Near East Group have a 30% and a 5% stake, respectively, in the project, which is set to see $2.5bn in investment, according to Maher Hijazeen, the former director-general of the Natural Resources Authority (NRA).

“We are expecting to produce around 20,000 bpd in the project’s first train by around 2017. This is to be scaled up to 40,000 bpd in the second train a year or so later,” said Mohammed Maaitah, the vice-president at Near East Engineering. He added that a pilot operation is being established in Frankfurt, Germany, which will process 300 kg of shale per hour and study the properties of the produced oil. At the end of the pre-development phase, they will decide on the financial viability of the project.

In addition, Royal Dutch Shell was granted an oil shale concession agreement in 2009 to evaluate Jordan’s deep-seated oil shale reserves. The project is being carried out by the Jordan Oil Shale Company (JOSCo), a subsidiary of Shell, which will utilise its propriety technology, the in situ conversion process (ICP). JOSCo said that the process is more efficient and has environmental advantages over surface retorting technology. JOSCo is following a phased approach to demonstrate that ICP can be applied commercially in Jordan. A decision to invest in a commercial project would be made in the late 2020s.

FEASIBILITY: Despite all the interest from investors, Jordan’s shale ventures still have a number of obstacles to navigate. “We are using one of only two proven technologies for the extraction of shale oil,” said Maaitah. It is also not yet certain that the technologies can be operated profitably on a large scale.

If feasibility is proven, there is also the issue of securing finance to make the project a reality. “Credit for capital-intensive energy projects has become more difficult to obtain since the global financial crisis. Given that the biggest risk for oil shale projects is accessing finance, the Jordanian government should create more opportunities for public-private partnerships,” said Samer Makhamreh, the geology and exploration manager at Karak International Oil. However, provided the price of conventional crude oil stays above the $70 per barrel mark – as seems likely – then oil can be extracted profitably from shale, according to Maaitah. The NRA told OBG that the cost of producing shale oil ranges from $50 to $80 per barrel, depending on the technologies used.

POTENTIAL AGREEMENTS: Further deals for shale oil extraction may be on the government’s agenda for the near future. “In addition to the existing commercial agreements, the government has signed memoranda of understanding (MoUs) with seven international companies, which are currently engaged in technical and financial feasibility studies,” said Mousa Ali Alzyoud, the director-general at the NRA. “Negotiations for a further commercial agreement have begun,” he added. Companies that have MoUs include Brazil’s Petrobras, Canada’s Forbes and Manhattan, Russian Inter RAO UES, a Jordanian-Emirati joint venture and Incosin BVI. A group of Saudi investors are also looking to a venture in Jordan.

As well as extracting oil from its vast shale reserves, Jordan also recently signed agreements for the construction of two shale-fired power plants. Government authorities are also currently in the final stages of negotiating a power purchase agreement with Enefit, while an MoU was signed in November 2011 with the China-based Lejjun Oil Shale Investments for feasibility studies to be conducted on the potential construction of a second power plant (see analysis). As oil shale looks likely to become an important part of the global energy mix, the expertise which Jordan is fostering could be exported elsewhere. “We may sign a deal with the Egyptian government, and we’re also looking at Syria, Morocco and Turkey as potential markets,” said Makhamreh.

On a similar note, Thomas Meijssen, the general manager of JOSCo, told OBG, “95% of staff working on JOSCo’s operations are Jordanian. To fully capitalise on oil shale-related opportunities, the kingdom must produce more graduates with technological know-how through the assistance of industry leaders. In parallel, universities would then be able to engage more in applied research and development to support the oil shale industry.”

REGULATION: Given that the development of Jordan’s shale reserves is playing a pivotal role in assuring the country’s long-term economic and energy security, the government is keen to offer prospective investors an attractive regulatory environment in which to operate. “Until production reaches the equivalent of 100,000 bpd in oil – Jordan’s current local demand – all parties are contributing to the country’s energy needs, so the government will remain keen to attract investors with equally favourable terms,” said Maaitah.

Maher Hijazeen, who is looking to establish a Saudi-backed shale venture in Jordan, told OBG that Jordan is more attractive than other countries in the region. “Under the Jordanian constitution, energy contracts are subject to a number of special laws that prevail over general laws. Thus, changes in the tax regime will not affect an energy company that has already signed a government contract. This gives investors stability and predictability,” Hijazeen said.

Having witnessed some of the world’s first oil shale contracts, Jordan is a legal pioneer in the industry. Although long in the making, these agreements now provide ready-made templates for prospective investors. “We can use the KIO model for investments which are near cities and the Estonian model for those which are more remote,” said the NRA’s Alzyoud, in reference to managing the environmental risks of oil shale investments.

In addition, the Jordanian government is now talking about expediting the process for prospective investors. “Currently, the prospective company signs an MoU with the government and then carries out pre-feasibility studies for a period of 24 months or longer,” said Alzyoud. “We are now considering shortening this period to 12 months, such that the pre-development studies – which have to be repeated in greater detail at the pre-development stage anyway – would be further simplified.”

As for the fiscal regime for oil shale, Alzyoud noted that companies are subjected to two forms of tax: royalties and an oil tax. Royalties range from 1% to 5%, depending on the oil prices at that time, while the oil tax varies from 15% to 65%, depending on the “R” factor (total revenue/total expenditure). Alzyoud added, however, that the NRA is brainstorming potential changes to the fiscal regime.

GAS & OIL: With shale projects not due to come online before late 2015, Jordan is hoping in the meantime it can boost production of conventional gas and oil reserves. The Risha Gas Field, which is currently undergoing an expansion project at the hands of British Petroleum, looks most likely to bear fruit (see analysis). Further conventional oil and gas resources could also be discovered in six blocks currently under concession. The East Safawi block has been explored by the National Petroleum Company (NPC) and is thought to have potential. “We have, in fact, submitted a development proposal to the Jordanian government,” said Abdel Qteishat, the exploration manager at the NPC. Seismic studies have also been completed by South Korea’s Global Petroleum at the West Safawi block and submitted to the NRA. The US-based Sanoran is exploring the Azraq block, while Indian Universal is exploring the Sirhan block.

In February 2012, Global Petroleum signed an MoU with the government for exploration at the Dead Sea block. There has been much speculation surrounding the potential oil resources to be found here, following unverified claims made during the course of previous exploration activities. If Global Petroleum decides to sign a production sharing agreement (PSA), it will enter a four-year exploration phase, committing $14m to the government.

PSAs are the legal mechanism used to regulate the exploration and development of conventional oil and gas resources. Alzyoud explained that under the agreement, production would typically grant the company 60% of production, with the government taking 40%; the government’s share is increased gradually until it reaches 70%. An income tax of 15% also applies to such agreements.

REFINING AND DISTRIBUTION: The privately held JPRC is the country’s only refinery. Importing most of its crude from Saudi Arabia and Iraq, it supplies the local market with fuel oil, diesel, gasoline and other products. Demand for oil products has grown steadily from 4.3m tonnes in 2008 to approximately 4.9m tonnes in 2010, but jumped by 20% in 2011 to around 6m tonnes, according to Abdel Karim Alawin, the CEO of JPRC. The growth is primarily due to vastly increased demand for heavy fuel oil, in view of the shortages of Egyptian natural gas.

The JPRC understands that it needs to expand its capacity. “As well as increase our output, we need to improve the quality of diesel produced and work to convert heavy fuel oil into lighter products,” said Alawin. He added that the refinery is engaged in a four-year expansion project valued at around $ 800m1bn, although this had to be scaled back from an original $2bn plan due to financial constraints.

Plans are now in the pipeline to inject a raft of new investments into the refining and distribution of oil products. Since the end of the JPRC’s exclusive concession in 2008, the government has been looking to collaborate with companies in the private sector in order to expand and rehabilitate the refinery, as well as reform the distribution sector, whose supply and logistics are currently controlled by the JPRC. A first attempt at the tender was resisted by the JPRC, but it has since been re-launched, with results expected to be announced in 2012.

“As things stand, it seems that the four firms which have submitted bids will each supply 25% of the market,” said Yasser Manaseer, the managing director of the Manaseer Oil & Gas Company, in January 2012. “The tender is designed to improve the quality of fuel in Jordan, to make the fuel logistics network more efficient, and to upgrade petrol stations in accordance with international best practices.” Manaseer Group is one of the firms to have submitted a bid. As of 2009 it operated 25 petrol stations, but has plans to increase this to over 100.

Also involved in the tender is Total Group, which established Total Jordan in 2007. Total’s decision to invest in Jordan was based on the group's trust in the potential of Jordan and the kingdom’s commitment to attracting foreign investment, encouraging market competition and increasing the private sector’s share in the economy. Total Jordan opened its first service station in 2009 and as of June 2012 had 21 service stations operating across the kingdom. The firm is moving forward with expansion plans in accordance with the opening of the oil distribution market. In addition, the company recently launched two oil change centres in Amman, where car ownership has been rising steadily.

RENEWABLES: At present, less than 1% of Jordan’s energy mix is derived from renewable sources, but the government is planning to increase the level of renewables’ contribution to 10% by 2020. This seems all the more achievable following the endorsement of the Renewable Energy and Energy Efficiency Law by the Upper House of Parliament in February 2012.

FRAMEWORK: Issued in 2010, the law provides a much-needed regulatory framework for the sector and has opened the door for private sector investment. “Up until now,” said Hanna Zaghloul, the CEO of Kawar Energy, “getting the Jordanian government on board for renewable projects has been a slow process. But now that we have a national energy crisis on our hands, there is a new incentive to move away from conventional sources of energy.”

The law creates a registry of renewable energy sites and authorises the MEMR to initiate a competitive tendering process for projects that are in line with the ministry’s development plans, as well as allowing unsolicited proposals that comply with certain conditions. There are also a number of incentives on offer: the National Electric Power Company (NEPCO) will be responsible for the implementation and costs of linking the project to the grid. A feed-in tariff, which would subsidise electricity from renewable sources to encourage private investment, has been contemplated but not offered to date.

Zaghloul is optimistic about the Upper House’s endorsement of the new energy law. “This will serve to expedite the issuance of a reference price list and the establishment of net metering,” he said, referring to a further clause. Net metering would allow, for example, a homeowner with a photovoltaic panel on his roof to subtract from his electricity bill the value of the electricity which he injects back into the grid. He added, however, that the Jordanian government has not yet clarified precisely how individual producers can interact with distributors.

NEW PLAN: Another policy landmark in recent months has been the drafting of the National Energy Action Plan. Begun in late 2011 and submitted to the MEMR in January 2012, the plan is a broad set of strategies for both the public and private sectors. According to Muhieddin Tawalbeh, the head of solar thermal division at the National Energy Research Centre (NERC), “The plan includes the promotion of efficient lighting, solar thermal heaters, and energy services companies (ESCOs).” Tawalbeh believes that Jordan has an insufficient number of ESCOs which are qualified in the certification and implementation of energy-efficiency programmes. “There is real potential for growth in this area,” he said.

Despite progress in the past year, the renewables segment faces challenges. “On a national level, the high turnover in government hinders the implementation of energy strategies, whilst the recent downgrade in our sovereign credit rating makes it harder to obtain finance,” said Zaghloul. “Forming policy on energy subsidies is difficult. They need to be removed to encourage energy conservation, but without endangering the livelihoods of lower-income groups,” added Tawalbeh. “At the moment, the government will find it difficult to remove any subsidies, given the difficult economic climate.”

SOLAR: “Of all renewable energies in Jordan, solar has the greatest potential,” Zaghloul told OBG. Studies conducted by the Jordanian government have demonstrated that Jordan has one of the world’s highest average solar irradiance rates – around 1600-2300 KWh per sq metre annually. In 2011 the MEMR received expressions of interest in solar projects from 37 different investors. In its pursuit of solar energy, Jordan has received significant international support, from the likes of the German Development Bank and the Spanish government.

The long-anticipated Shams Maan project, which is being developed by Shams Maan Power Generation Company in the Maan development area, is expected to operate at 100 MW at a cost of $320m, and, as such, will be one of the world’s largest photovoltaic power facilities. Output will eventually be scaled up to 500 MW. Progress has been made on the project, with Kawar Energy declaring in December 2011 that its technical feasibility studies were 90% complete. Kawar Energy is now waiting for the go-ahead from the Jordanian authorities. “The government has already expressed an interest in the project, so the path is clear for implementation. But we need to trigger this with an MoU,” said Zaghloul in February. Construction of the project has been pushed back from 2012 to 2013-14, he said.

New projects have emerged in the housing market as well. In January 2012 Kawar Energy launched the Shamsi project during the World Future Economic Summit in Abu Dhabi. Currently in the design phase, the initiative aims to enable households to increase their energy-efficiency and to produce renewable energy through the installation of photovoltaic panels, for example.

Jordan is also hoping to make greater use of solar thermal energy. “The country has been producing solar thermal units for approximately 25 years, but penetration rates have decreased from around 25% in the 1990s to roughly 12%,” said Tawalbeh. This is in part due to the emergence of apartment units, for which the installation of solar thermal heating is more difficult. This looks set to change, however, as the National Building Council approved new solar standards in December 2011. As a result, it is now mandatory for every new building over a certain size to have thermal water heating installed.

In co-operation with the Jordan Standards and Metrology organisation, NERC is now producing industry standards for thermal systems, but Tawalbeh noted that the lack of testing labs to certify the water heaters is proving an obstacle. They are currently making use of European certifiers.

WIND: International and regional investors are also looking with increasing interest at Jordan’s potential for wind energy projects. In fact the MEMR received 22 expressions of interest in wind ventures in 2011. This is good news for the government, whose Master Plan is looking to develop approximately 600 MW of wind capacity by 2015, which it expects to increase to some 1000 MW by 2020.

Two commercial projects are already in the pipeline. The first is a 40-MW facility at Al Kamshah, to the north of Amman, which is to be developed by a consortium led by Greece’s TERNA Energy at an estimated cost of $65m. Development of the project has been held up in negotiations over tariff pricing, and the expected date of operation has been pushed back from 2013 to 2014.

The second is a 90-MW plant at Al Fujeij, south of Amman, and is expected to cost $150m. According to the MEMR, proposals from four firms are being studied, and the plant should be operating by 2014.

NUCLEAR: 2012 could well be the year in which Jordan finalises its plans to construct its first nuclear reactor, which is expected to begin operating in 2019, contributing approximately 6% to the national energy mix. The Jordanian government said in early 2012 that it would soon declare which of three bidders – one Russian, one Canadian and one a Japanese-French joint venture – is to construct the plant in a public-private partnership.

However, the site of the reactor still needs to be finalised. Some in the industry have also questioned whether the requisite regulatory framework can be established by 2019, when the plant is due to come on-line. But with the support of the international community, which as of early 2012 also includes the US, prospects look promising (see analysis).

While this segment appears set for a sustained period of development, at the end of May 2012 parliament suspended work on the first reactor, stating that before further work can be carried out, economic feasibility studies need to be completed.

OUTLOOK: As the kingdom’s energy bill is set to soar, the government may have to request direct aid. In February 2012, the MEMR laid this option on the table to an EU taskforce. The rising energy bill should also provide impetus to the National Energy Action Plan, which was submitted in January 2012, amongst other energy-saving initiatives. Policymakers will continue to pursue an energy diversification strategy with a greater sense of urgency, focusing on new sources of natural gas in the short term, as new private sector proposals in oil shale, nuclear and renewables come to fruition for the long term.

The implementation of these proposals is not yet guaranteed. The financial feasibility of oil shale projects – both oil extraction and direct burning for power generation – has yet to be verified, but rising prices for conventional oil increase their feasibility. The nuclear option still holds potential, while renewable sources may take off in light of the investor-friendly legislation and political support.