New horizons: As demand grows the country is looking to supplement its energy mix with new sources

As a net importer of energy, Morocco is faced with the challenging proposition of satisfying rising local demand while keeping its import bill in check. This has proven problematic as consumption figures and global commodity prices have risen, putting particular pressure on the government’s balance sheet, which has for the better part of two decades help fund generous fuel subsidies to minimise inflationary pressures on residents. According to the Ministry of Energy, Mines Water and Environment (Ministére de l’Energie, des Mines, de l’Eau et de l’Environnement, MEM), total expenditure on energy imports – dominated by crude and refined oil products – rose from 7% of GDP in 2009 to 10.7% in 2011, when it equalled Dh85bn (€7.55bn).

As a result, energy independence is at the top of the government’s agenda, bundled with efforts to improve domestic energy infrastructure, such as refinery capacities, storage and power generation, and more efficient use of cleaner energy sources. Meanwhile, continued liberalisation of the sector and its price setting regime is set to encourage commercial players to assume a greater role in the design, construction, management and financing of these plans.

AT THE PUMP: Among the variety of long-term cost saving measures the government has adopted in recent times, rescinding fuel subsidies ranked as the most politically sensitive one. Expenditures on subsidies have been high and rising annually. As a result of increasing oil prices and domestic consumption rates over the past decade, the subsidy bill reached levels in 2012 that were 10 times those of 2002, equal to around 6% of GDP, pushing the public deficit to 7.6%. Partly influenced by turmoil elsewhere in the region and to minimise the impact on vulnerable portions of the population, Morocco has implemented a gradual reduction programme since the second half of 2013, affecting product categories with limited social impact, such as industrial fuels, petrol and diesel. Other subsidised categories such as wheat, sugar and cooking gas have remained unaffected. Following their partial indexation in September 2013, subsidies on petrol and fuel oil were withdrawn altogether in February 2014, while those on diesel are currently being reduced from Dh2.15 (€0.19) per litre to Dh0.80 (€0.07) by October 2014.

A key factor has been the high and rising annual expenditure on subsidies, with the subsidy bill reaching 6.5% of GDP in 2012, or 10 times that of 2002. According to government estimates, the latest cuts will bring the cost of subsidies down from Dh53bn (€4.70bn) in 2012 to Dh35bn (€3.10bn) in 2014, equal to 3.7% of GDP. The move has a double-edged impact on the downstream segment. It has alleviated capital pressures on the country’s fuel distributors, which have been struggling with delayed payments from the Caisse de Compensation, the agency responsible for disbursing the subsidies. According to figures from the Moroccan Petroleum Firms Group (Groupement des Pétroliers au Maroc, GPM), the national association of fuel distributors, a total of Dh14bn (€1.2bn) was owed in January 2014, while regular payment periods of two months were frequently extended to twice as long.

Nevertheless, while their financial positions are set to improve, there are concerns over smuggled imports from Algeria, where subsidised products have traditionally been cheaper. GPM estimates that the size of incoming black market volumes reaches up to 8% of the national domestic trade, while in the east along the border with Algeria it can reach as high as 30%. Competition is also set to increase with new players, such as Société Anonyme Marocaine de l’Industrie de Raffinage (SAMIR), entering the market.

REFINERIES: The country’s only operating refinery is the plant in Mohammedia run by SAMIR, a subsidiary of Saudi Arabia-based Coral Holding. The facility underwent a $1bn modernisation programme from 2005 to 2010 that oversaw the introduction of a new hydrocracker, as well as desulphurisation units in a bid to upgrade production to EU standards. Besides an overall capacity increase to 200,000 barrels per day (bpd) of crude, up from 125,000 bpd before, the share of diesel production also rose from 38% to 50%. In 2011 and 2012 the company saw an easing in profit margins by 49% and 19%, respectively, as a result of weaker than anticipated domestic demand due to the shift towards renewable power generation and a delay in the reengineering of the debt taken on to fund the modernisation. Since 2012, various efforts to restructure the company’s debt have improved its outlook, such as a $200m loan from commodity conglomerate Glencore, followed by another $300m in early 2014.

In recent times, potential for additional refinery capacity has increased. As such, in early 2014, following its winning bid for two-year exploration rights in the promising Timahdit oil shale licence, Irish oil independent San Leon Energy announced it had signed a memorandum of understanding with Chevron Lummus Global, which is also behind SAMIR’s hydrocracking technology, for the construction of a synthetic oil refinery. Initial studies suggest the plant will consist of three production units with a capacity to process Timahdit’s estimated resource of some 600m barrels. If the results of initial exploration in the Timahdit licence, expected by mid-2014, are positive, the plant’s construction would commence as early as 2015.

EXPLORATION & PRODUCTION: As demonstrated by a 96% reliance on foreign energy supplies, Morocco’s upstream hydrocarbons sector is marginal in size. According to figures from the US Energy Information Administration, the country produced 5100 bpd in 2012, the latest year for which figures were available, up from 3700 bpd in 2003. Annual natural gas production has remained stable over the past decade at about 2bn cu feet (bcf). The lion’s share of this output comes from several small sites in the Gharb and Essaouira basins, which have been operating since the 1960s.

According to figures from the National Office of Hydrocarbons and Mines (Office National des Hydrocarbures et des Mines, ONHYM), which is responsible for supervising licence blocks, drilling density ranks at 0.04 wells per 100 sq km, illustrating the significant scope for further exploration, which is encouraged by a set of attractive fiscal terms. Incoming companies are exempted from a 30% corporate tax rate for a period of 10 years, while royalties are capped at 10% for oil and 5% for gas production of over 10 bcf. In addition, Morocco offers a competitive domestic market for producers. Projected gas requirements are estimated at 275 bcf per year until 2020 in order to feed, among other things, the country’s established phosphates industry. Moreover, with plans for a liquefied natural gas (LNG) terminal shaping up, operators would benefit from transportation and processing infrastructure.

Despite the absence of commercial discoveries, the interest from the private sector is solid. Over the past two years, 10 wells have been drilled and a number of foreign players have entered the market, including US firms Chevron and Plains Exploration & Production, Portugal’s Galp Energia and the Anglo-Turkish Genel Energy. This has led to some mixed results. As such, in January 2014 UK-based Gulfsands Petroleum announced it had identified sizeable gas pockets on its Rharb permit that it operates in partnership with ONHYM, although commercial viability had yet to be determined. In the same month, Canadian independent Longreach Oil & Gas reported positive findings and announced additional wells for its Sidi Moktar permit in the Essaouira basin that it operates in partnership with ONHYM and MPE. In February 2014 US-based Kosmos announced that it would start drilling its first well by mid-March 2014 in the Foum Assaka block, targeting 500m barrels of oil. The firm also has exploration permits on the Cap Boujdour area, which is 70 km offshore of Western/Moroccan Sahara. Meanwhile, US player Cairn Energy has picked up its drilling campaign since 2013. After not finding much in its first well in the Foum Draa permit, the firm started activity on a well in the Cap Juby offshore permit in February 2014.

INFRASTRUCTURE: Moroccan firm Winxo, formerly known as Compagnie Marocaine des Hydrocarbures, is scheduled to start work on the construction of a new fuel terminal in Jorf Lasfar, some 190 km south of Rabat. The facility, with a projected capacity of 600,000 cu metres, will be able to accommodate fuel tankers above 100,000 cu metres and will more than double the country’s currently available fuel storage capacity. Hassan Agzenai, the CEO of Winxo, told local media that the port will focus on exports to West Africa, a strategic growth market for the kingdom. Winxo’s plans are part of a range of initiatives to expand Jorf Lasfar’s storage capacity. As such, a new 95,000-cu-metre depot is slated to become operational by the end of 2014, while two other projects, with a combined capacity of 250,000 cu metres are set to be delivered before the end of 2017, are under discussion with the MEM.

Over the past years, various efforts have been undertaken by the MEM to map the requirements for a local LNG terminal with the help of international consultancies like Tractebel Engineering, part of the GDF Suez Group, and Boston Consulting Group. The results were presented to the MEM in September 2013 which has since begun pushing for further follow-up discussions among interested parties.

According to the ministry’s original plans, a reception terminal will be constructed, for which Jorf Lasfar seems to be favoured, as well as storage facilities, pipelines and a distribution network. In addition, efforts have been kicked off to develop corresponding legislation regulating the segment’s entire value chain, from acquisition to domestic delivery. Although somewhat delayed by changes at the helm of the ministry at the start of the year, expressions of interest from domestic and foreign parties have been significant. Among the interested international players is Shell, which is keen to expand its global LNG footprint to Morocco. Though the firm does not currently supply Morocco with LNG, its nearby production bases in West Africa, North America and the Atlantic basin are strategically placed for LNG supplies to the country. Optimism is high that, under the new minister, plans might finally come to fruition. Completion of the plans is expected to take at five to six years, which remains in line with the government’s earlier stated objective to have the required infrastructure up and running by 2021.

POWER: While the early phases of power liberalisation date back some two decades, the majority of production remains under the management of the national utility company, Office National de l’Électricité et de l’Eau Potable (ONEE), which also serves as the regulator. In 2012 the state-owned company oversaw a total production of 13,188 GWh, of which the largest contributions came from the combined-cycle plants of Ain Beni Mathar (3370 GWh) and the Mohammedia plant (2826 GWh), which is run on coal and diesel.

Over the past two decades, publicly run generation has been complemented by three independent power projects. The coal-fired Jorf Lasfar Energy Company plant is the country’s single biggest plant, producing close to 40% of annual volumes, or 10,191 GWh, while Energie Electrique Tahaddart and the Compagnie Eolienne de Détroit contribute 2830 GWh (10%) and 146 GWh (0.5%), respectively.

By the end of 2012, total installed capacity had reached 6692 MW, bringing net energy production to 26495.5 GWh, up 8.6% on 2011. Overall demand saw an increase of around 8%, with peak demand in 2012 totalling 5280 MW and real demand reaching 31,056 GWh. ONEE predicts that, in view of ongoing projects, an additional 4585 MW will be added to the grid by 2017. The plans anticipate alleviating the growing reliance on electricity imports – representing 18% of 2012 volumes – primarily through renewables, which will constitute 45% of additional capacity in the next three years. This is to offset a heavy reliance on coal, which accounted for 37% of 2012 generation in 2012, and diesel, with 17.7% in that same year.

Meanwhile, a slate of transmission reinforcements and extensions are designed to ensure ample absorption capacity. Key projects here include additional highvoltage lines from the Kenitra and Safi thermal plants and a double 400-KV line over a distance of 140 km between the cities of Sidi Ghanem and Mediouna. In addition, collaboration between ONEE and Spanish transmission company Red Eléctrica de España is ongoing over plans to expand the two 700-MW, double-line bilateral connection to 2100 MW to increase energy transmission between Europe and North Africa.

POWER EXPANSION: Consistent economic development has been accompanied by significant improvements in access to power. Today more than 98% of the population is connected to the grid, as compared to 18% in 1995. Such developments, combined with a regular rise in usage levels, have led to an average annual growth in demand for power to the tune of 8% over the last decade, straining capacity. Therefore, ramping up generation levels is an immediate priority that the government is pursuing through an ambitious roadmap that arms to expand current installed capacity to 14,500 MW by 2020. The plans provide for a particular contribution of solar and wind energy, both of which are to receive an estimated $9bn in investments to facilitate their planned individual contribution of 14% of the 2020 energy mix, or 2000 MW, equal to the projected capacity of hydro-generated facilities.

LETTER OF THE LAW: Significant progress has been made since the introduction of the Renewable Energy Law (Law 13-09) in 2010, which liberalised the high-voltage market for renewables, allowing investors to sell directly to users on the high-voltage grid, such as cement producers, steel manufacturers and the mining sector, and to export excess production. Notable progress in both areas has been made since the launch of the Moroccan Solar Plan and the Moroccan Wind Energy Project in November 2009 and June 2010, respectively. Solar projects are overseen by the Moroccan Agency for Solar Energy, which also concludes power purchase agreements (PPAs) with commercial generators. Following a range of feasibility studies, the agency selected five geographical sites for development. These include in the southern city of Ouarzazate, where the 500-MW Noor project has recently broken ground, Ain Beni Mathar (400 MW), Sebkhate Tah (500 MW), Foum Al Oued (500 MW) and Boujdour (100 MW). Each of these sites is characterised by large arid surfaces and sunlight levels of 2140-2642 KWh per sq metre per year.

While contracts for most of the projects will be issued before the end of 2014, work on Noor has been ongoing since 2013. The three phases of the projects will gradually come on-line, starting with the delivery of the 160-MW Noor I, a concentrated solar power field, in the second half of 2015. Meanwhile, tenders were issued over the course of 2013 for phase II, constituting a 200-MW parabolic component, and phase III, consisting of a 100-MW tower section. As of May 2014, three companies were shortlisted for phase II and four were in the running for phase III. Among the bidders are consortia led by global energy players such as Spain’s Abengoa, Saudi Arabia-based ACWA International Power and GDF Suez, all of which bid for both phases. Meanwhile, a consortium led by France’s EDF is on the shortlist for phase III. The contracts are scheduled to be awarded before the end of 2014.

CHANGING WINDS: There is equal attention being paid to wind energy. By the end of 2013, total installed capacity had reached 450 MW and wind production reached 1351 GWh, 85% more than 2012. Work is ongoing on various components of the government’s Integrated Wind Programme, which provides for a total capacity of 1000 MW divided over six sites. The most advanced is Taza, a 150-MW facility scheduled for completion in 2015. Other sites include Tanger II (100 MW), Boujdour (100 MW), Tiskrad (300 MW), Midelt (150 MW) and Jbel Lahdid (200 MW), all of which have been awarded in November 2012 and will come on-line in slots of 150 MW between 2016 and 2020. Beyond the projects in the pipeline, a combined capacity of 420 MW is currently being developed under private initiative and set to come on-line by the end of 2014. These include projects at Akhfennir (200 MW), Laâyoune (50 MW), El Haouma (50 MW) and Jbel Khalladi (120 MW). The Laâyoune and El Haouma, as well as the first phase of Akhfenir (100 MW) came on-line in June 2013.

Developments are also ongoing at the Tarfaya site, located about 20 km south of the similar-named city in the centre of the country where 131 windmills are being installed. Following its kick-off in 2008, the project is on track to bring 300 MW to the grid by the end of 2014. The project is in the hands of Nareva, a subsidiary of the state-owned Société Nationale d’ Investissements, and GDF Suez and valued at some €450m. Aside from eventually being Africa’s largest wind farm, it will also supply as much as 6% of the country’s projected power production.

FOSSIL FUELS: While it is increasing its focus on renewable energies, Morocco will continue to rely on fossil fuels for a sizeable share of its generation capacity in the next decade. Diesel-run facilities are set to gradually take a supporting route, but coal remains an integral part of the energy plan. The start of work on the coal-fired Safi power plant is a major development.

With projected capacity of about 1320 MW, the facility will provide close to a third of the mid-term objectives planned for 2017. In August 2013 ONEE awarded the tender for the financing, design, construction and operation to a consortium of GDF Suez, Nareva and Japan’s Mitsui & Co. The outfit, which will operate under the name of Safi Energy Company (SAFIEC), will operate the facility for a minimum of 30 years under a PPA with ONEE. Shortly after winning the bid, SAFIEC announced that South Korean conglomerate Daewoo Engineering & Construction will be the primary contractor for construction of the site at a cost of $1.8bn.

In line with the country’s clean energy ambitions, the contribution of gas to the energy mix has risen significantly. As such, following its introduction in 2006, it represented 20% of total generation volumes in 2012. While its main present use is for power generation, the government has ambitious plans to develop ample local capacity to supply big industrial clients.

REGULATORY MODIFICATIONS: Law 13-09 liberalised direct sales and exports in the high-voltage sphere, but efforts are also under way to extend its application to include mid- and low-voltage project as well. Inclusion of mid-voltage is planned for 2014 with low voltage following one year later. “This will democratise investments in renewable projects, particularly in the area of solar, which will become accessible to small and medium-sized businesses,” Ahmed Baroudi, the director-general of Société d’Investissements Energé- tiques (SIE), told OBG.

The potential for incremental increase in market share is significant, with entities such as airports, local industries and the Office National des Chemins de Fer committed to reducing costs by increasing their share of green energy consumption. In addition, efforts to kick-start local production of renewable equipment, such as solar panels, and a gradual withdrawal of subsidies on fossil fuels are promoting cost-competitiveness (see analysis). “Besides long-term benefits in innovation and adaptation of local power technologies, small to midsized power projects have an instant contribution to minimising cost per KWh,” Chemsedine Sidi-Baba, CEO of mapping and geolocation firm Urbasoft, told OBG.

Meanwhile, a push to establish an independent regulator has been restarted. Currently, incoming producers sell onto the grid owned by ONEE, which oversees more than half of the country’s generation capacity and regulates the sector. Current plans, based on a 2010 feasibility study, call for the establishment of an authority overseeing generation and transmission activities, while distribution will be handled in separately. While few concrete details were available as of early 2014, industry players, like the SIE, are expecting final implementation by early 2015 at the latest. “An independent regulator is the last remaining critical factor that energy investors are looking for, and therefore ranks at the top of the agenda for 2014,” said Baroudi.

Additionally, Law 47-09 set clear guidelines for energy efficiency and thermal regulation. The law makes energy audits mandatory for companies and institutions, as well as requiring energy impact studies for new construction and urban projects. It is expected to push further growth in green energy, and Amine Homman Ludiye, the managing director of energy services firm Cofely, told OBG, “The implementation of Law 47-09 will improve energy efficiency controls and should be a catalyst for growth for the energy sector.”

OUTLOOK: Morocco’s bold energy policies have attracted significant investor interest in recent years. As results are becoming apparent, an increasing number of players are addressing opportunities in the upstream segment. If the government’s plans stay on track, the 2020 power generation capacity might even allow for exports to the European energy market. As generation and cross-border transmission capacities are upgraded, the EU energy market mechanism will soon be the only hurdle to realise that goal. Morocco is looking south, where promising growth in the West African market is generating interest among policymakers’ in developing grid connections. Significant challenges remain, however, in terms of funding government-owned entities and so far largely unsuccessful hydrocarbons exploration. The government is also embracing a liberal regime and investment incentives to help mitigate their impact on overall sector development. Consistency and forward thinking will play a critical role in its future.