Installed capacity rising to meet Morocco's growing energy demand

With the implementation of renewable energy plans in full swing and considerable investment going into traditional forms of production, Morocco is making serious changes to its energy mix that could provide a window of opportunity. The need for such moves is clear: excessively dependent on energy imports to support growing consumption, the country has paired capital spending with the rollout of regulations to increase efficient energy use and attract new private producers. The state has also continued to explore the potential of sourcing hydrocarbons domestically, with upstream onshore and offshore exploration ongoing.

The only country in North Africa without commercially relevant oil or gas reserves, Morocco has long had to depend on imports – and accommodate the accompanying swings in market prices – to satisfy domestic needs. This has had a huge impact on public finances (see Economy chapter). To counter this, the government has embarked on reforms, including boosting renewable energy sources and further liberalising of the power sector. Starting in late 2014, the drop in global oil prices has given the government breathing room, allowing it to reduce energy subsidies. The lower barrel price may have knock-on effects for upstream exploration but it has allowed for a structural readjustment, and with the pending launch of several key wind and solar ventures, the country is making strides towards achieving two goals of its 2009 National Energy Strategy: reducing dependence on foreign markets and increasing the role of clean energy sources.

Figures

With 96% of its requirements coming from abroad, Morocco is North Africa’s largest energy importer. The majority of imports are oil and petroleum products, but it also relies on imported coal and gas. This comes through the Maghreb-Europe pipeline that connects the Hassi R’mel field in Algeria to Gibraltar. Morocco receives gas as payment for transportation of Algerian gas exports through the kingdom.

Annual electricity consumption in Morocco reached 33.5 TWh in 2014, and has been increasing by around 7% per year on average over the past decade, according to the national utility company, Office National de l’Electricité et de L’Eau Potable (ONEE).

Besides economic expansion and a growing urban population, electricity consumption has also jumped due to a rural electrification scheme that has connected over 37,000 villages since 1996, taking the rural electrification rate from 18% in 1995 to 99% in 2013, according to ONEE. Per capita consumption of energy is relatively low, at 540 kg of oil equivalent (kgoe), compared to the 1840 kgoe world average, according to 2012 figures from the International Energy Agency (IEA). However, at 864 KWh per capita its level of electricity consumption is far higher than the world average of 313 KWh. This underlines the importance of the power sector, which, according to a 2015 report by the OCP Policy Centre, accounts for the transformation of more than half of the kingdom’s primary energy. This has made the power sector a central aspect of the government’s ongoing reform plans.

Subsidies

A lack of domestic hydrocarbons or hydroelectric resources means imports have traditionally left the country exposed to price volatility. Combined with a subsidy system on key energy and non-energy goods, negative external shocks were a common blow to the national budget. This was clear during the high oil price years of 2011 and 2012, which took Morocco’s 2012 budget deficit to 7.7%, with 6.6 percentage points of this resulting from energy subsidies, according to 2013 figures from Morocco’s Higher Planning Commission.#

Imports

Recent decreases in oil prices combined with the growing use of other energy sources have facilitated a reduction in the import bill in recent years, however (see Economy and Trade & Investment chapters). According to the central bank, imports of energy products reached some Dh106.6bn (€11.6bn) in 2012, falling to Dh103bn (€11.2bn) in 2013 and Dh74.4bn (€8.1bn) in the first nine months of 2014. Imports of energy products accounted for 26.9% of Moroccan imports in 2013, down from 27.4% in 2012.

Strong measures from the current government to eliminate most energy subsidies over the past two years should allow the country to improve its fiscal position further, despite ongoing subsidising of food staples such as wheat and sugar. In late 2013 and early 2014 subsidies for petrol and fuel oil were eliminated, as were diesel subsidies in December 2014. The government has not yet rolled back all of the programmes. A subsidy of up to 200 KWh for low-income households remains, as does a subsidy on cooking or butane gas, as it comprises a major source of household spending, although maintaining it may make segments of the renewable energy market hard to expand.

“Butane represents about 70% of domestic energy consumption, but while we have cheap butane gas, the solar heating market will have trouble developing,” said Mohamed Berdai, manager at Alternative Green Energy & Environment Solutions, a consultancy.

Power

The state-owned ONEE has a prominent role, managing much of the production capacity, as well as owning the transmission network and the majority of the distribution network. Despite being the principal power producer, ONEE can concession-out production to private producers through long-term purchase agreements. ONEE also acts as the sector’s regulator.

Public power generation has relied heavily on two production units, the combined-cycle power plants at Mohammedia and Ain Beni Mathar. In 2013 ONEE launched a tender to equip the existing coal-fuelled power plant in Jerada, near the Algerian border, with an additional 350 MW of capacity. The plant, which has been operating since 1971, currently has three 55-MWcapacity units, and was initially supported by nearby coal production. Today the plant is fed through coal imports through the port of Nador.

The €296m Jerada extension contract was won by Chinese contractor Sepco III, and ONEE announced in 2014 that it had secured €256m in financing for the project from China Exim Bank. The new Jerada coal plant should be completed by the end of 2016.

By 2013 Morocco’s total installed power capacity was 7342 MW, with a net energy production capacity of 25,941 GWh, according to ONEE. Much capacity has been added via greater participation of private energy producers. In the early 1990s the government allowed the participation of independent power producers. As a result, several privately led generation units were established, the biggest of which, Jorf Lasfar Energy Company (JLEC), started operations near the city of El Jadida in 1994, based on a 30-year electricity purchase agreement with ONEE. The Middle East’s biggest coalfired power plant, JLEC raised €155m through the Moroccan stock exchange in 2013 to help finance a €1.2bn expansion that saw capacity rise from 1356 to 2056 MW. The project, which added two carbon-fired units to the existing four, was completed in 2014. The plant produces 38% of Morocco’s electricity.

Another private carbon-fuelled unit is under construction in the city of Safi, scheduled for completion by 2018. A joint venture between Moroccan energy firm Nareva, France’s GDF-Suez and Japan’s Mitsui, it will have a production capacity of 1386 MW. The €2.2bn project has already secured a 30-year electricity purchase agreement with ONEE. To increase electricity supply in the Sous-Massa Draa region, ONEE has also commissioned the construction of a 72-MW diesel-fuelled power plant, which is set to start generation in 2015.

Renewables

Solar, wind and hydroelectricity are each expected to contribute 14 percentage points to the goal of 42% of national energy coming from renewable sources by 2020 (see analysis). The 2010 introduction of the Renewable Energy Law galvanised the sector, allowing the development of private production. The move freed investors to establish renewable energy projects, sell electricity directly to customers on the high-voltage market and export unutilised energy.

Authorities have announced plans for new regulation, opening the possibility of electricity production by renewable sources for medium- and low-voltage users too. The move is set to be implemented before 2016, and will make renewables projects accessible for smaller investors. “This will allow communities and smaller industries to participate in electricity production,” Berdai told OBG. The 42% goal also led to the establishment of the Moroccan Agency Solar Energy in 2010, with a mandate to implement the Moroccan Solar Plan, which aims to invest €7.7bn in several solar power units that will contribute 2000 MW of installed capacity.

Wind is also expected to contribute heavily to clean generation in the future, with the 300-MW-capacity wind farm in Tarfaya having started operations in 2014 and another 150-MW project in Taza entering production in 2016. A further 850 MW in smaller projects are expected to be built across Morocco in the short term.

Regulation

Other legal steps are soon to impact the sector. Alongside Morocco’s investment in gas infrastructure, the government is also working to establish its Gas Code to regulate the market. Also gaining renewed traction is the move to establish an independent sector regulator. Electricity producers currently sell onto the grid owned by ONEE, which not only regulates the sector but also manages over half of current production capacity. The design of a regulatory body is set to follow a 2010 feasibility study, which suggested the creation of an independent authority to regulate generation and transmission, separately from distribution. This was also one of the recommendations in an IEA report on Morocco published in 2014. The law regulating the creation of a new sector watchdog is expected to go to parliament for approval in 2015.

Infrastructure

The diversification efforts will focus on increasing the use of liquefied natural gas (LNG), initially to support electricity production at ONEE’s combined-cycle power plants, and later for the industrial and domestic sectors. The push is part of Morocco’s LNG development strategy. Included is a €3.9bn investment in infrastructure, which aims to raise the number of LNG-powered plants and set up necessary transport infrastructure. Building an LNG terminal in Jorf Lasfar, which will cost up to €680m and should be operational by 2019, is under discussion, according to the Ministry of Energy, Mining, Water and Environment (Ministère de l’Energie, des Mines, de l’Eau et de l’Environnement, MEMEE). The project also includes the construction of a 400-km pipeline linking the Jorf Lasfar terminal to power plants in Mohammedia and Kénitra, and eventually to gas-powered plants set to be commissioned by ONEE in a €209m investment included in the overall plan.

Parallel to these developments, early 2015 saw Moroccan officials on a road show to sign long-term LNG supply contracts, aiming to secure 3bn-5bn cu metres. Natural gas has a limited history in Morocco. The authorities expect the recent LNG investments to make it the source of up to 13% of the country’s energy mix by 2025, up from 7% in 2012, according to the MEMEE. The LNG strategy also takes into account that the existing deal with Algeria expires in November 2021.

Exploration

Morocco is also looking to source hydrocarbons closer to home. Upstream hydrocarbons production remains marginal, but Morocco continues to attract investment into exploration. According to the US Energy Information Administration, Morocco produced 5100 barrels per day (bpd) of petroleum and other products in 2013, against consumption that averaged 209,000 bpd. Similarly, the country produced 3bn cu ft (bcf) in 2012, but consumed a total of 38 bcf.

A combination of favourable fiscal conditions for exploration and unexplored potential has attracted interest from small-scale oil and gas ventures, as well as established giants. Under current laws, upstream private operators are entitled to a 10-year tax exemption, as well as value-added tax exemptions for equipment needed for exploration. Up to 75% of reserves are allocated to the company in case of a find, with the government retaining the remaining 25%. Current rules also cap oil royalties at 10% and gas royalties at 5% for production levels over 10 bcf. This has led to a rise in investment into oil and gas exploration, which grew from Dh2.3bn (€250m) in 2013 to Dh7.6bn (€827m) in 2014, according to the National Office of Hydrocarbons and Mining (Office National des Hydrocarbures et des Mines, ONHYM), which allocates and supervises licence blocks. But exploration potential remains mostly untapped. According to the MEMEE, as of mid-2014, drilling density in the kingdom was 0.05 wells per 100 sq km.

In January 2013, US-based Chevron signed an exploration agreement with ONHYM to look for oil and gas in three deepwater concession areas off the west and north-west of Agadir. The deal gives the firm a 75% stake, and the remaining 25% to the state. In May 2014 Chevron stated that it would need at least two years to conduct the necessary seismic data studies to know the production potential. Also in 2013, BP acquired 45% stakes in two exploration operations and 26% in a third, all off them in the Agadir Basin, off the coast of Morocco, partnering with US-based Kosmos Energy. Another company, Engel Energy, has been drilling in its Sidi Moussa offshore concession, owned with partners Serica and San Leon, and reports having found a limited amount of oil. Canada’s Longreach Oil and Gas has also been drilling in its Sidi Mokhtar plot since early 2014.

Some success has come from onshore exploration. UK-based Gulfsands Petroleum announced in February 2015 it had found gas in its Sebou concession, after it had reported another gas find in Rharb. Another firm operating in the Sebou area, Circle Oil, has reported two gas finds, one in its SAH-W1 well in June 2014, and in late 2014 at the KSR-12 well. Circle Oil has planned to drill six wells in its concession at Sebou, and another six at the Lalla Mimouna concession in the Rharb Basin.

Overall, exploration results have been encouraging, although relevant discoveries have yet to be confirmed. “We need to continue with exploration. When you compare Morocco to other regions with the same type of geological structure, our exploration efforts are well behind what was done in producing countries to find relevant oil reserves,” Amina Benkhadra, managing director at ONHYM, told OBG. There is near-term risk that lower oil prices will impact the rate of exploration in Morocco, especially considering the role junior oil and gas firms with strong backing through exchange markets have had in exploration efforts.

Shale

One potential source of hydrocarbons production is unconventional deposits. Exploration into shale gas and oil has been taking place since the late 1970s, and the country has the seventh-largest proven shale oil reserves in the world, at 50bn barrels, according to the OCP Policy Centre. In early 2015 Gulfsands Petroleum announced that it had discovered relevant shale gas reserves while drilling in its exploration area in Rharb, in northern Morocco, indicating that the prospects for further discoveries are good.

However, plans to further develop these reserves might be limited by current price trends and environmental concerns. In neighbouring Algeria there have been protests in different southern cities against state-owned energy firm Sonatrach’s exploitation of shale gas reserves and its environmental impact. A similar trend could slow Moroccan development of its shale gas. “A lot of Morocco’s water comes from the middle-Atlas, where potential shale reserves are, so there is the question of threatening our water sources. Lower oil prices in international markets might also delay the process,” Mehdi Lahlou, an economist at the National Institute of Statistics and Applied Economics, told OBG.

Outlook

Morocco’s energy sector is continuing its move towards further liberalisation. It is also diversifying its energy mix with a plan to increase the use of renewable energy sources, alongside other fuels like LNG. Although fossil fuels are set to continue to have a strong role in energy generation, diversification of sources and exploration along Morocco’s potentially rich basins may help to reduce foreign energy dependence further. Private investment has found a relatively stable haven in Morocco’s energy industry, but much of the sector’s development will depend on establishing the necessary regulation. Many of the elements currently under preparation – such as the Gas Code, the creation of an independent regulator or the permission of renewable energy producers to sell electricity directly to lower-voltage users – will help speed up foreign and domestic private investment into the sector.