Jordan’s reliance on energy imports is becoming increasingly problematic for the small kingdom. In the past, the country relied on cheap oil from Iraq and, in more recent years, on gas from Egypt, also bought at less than the market rate. But supply disruptions from the North African state, itself beset by political instability and a vanishing gas surplus, have meant that it can no longer be relied upon as a supplier.

In 2009, Egyptian gas accounted for 80 per cent of Jordan’s electricity generation fuel requirements, but by 2012, this had fallen to just 18 per cent, according to Lebanon’s Byblos Bank. In November 2012, Egypt agreed to increase gas exports to Jordan, but this appears to have had little effect.

Supply disruptions

The November agreement is thought to have covered an increase in gas supplies from Egypt to about 240 million cubic feet a day (cf/d), from an average of about 40 million cf/d for much of 2012. The agreed volumes were delivered in the first week of January, up from 150 million cf/d in the last week of December. But in the last week of January, an average of just 80 million cf/d reached Jordan from Egypt, according to Byblos Bank.

As a result of falling supply from Egypt, Jordan has been forced to resort to much more expensive imports of diesel and fuel oil from a variety of partners, including Saudi Arabia, Iraq, Italy and Turkey. The impact on public finances has been startling. According to Byblos Bank, the cost of imports of petroleum products in the first 11 months of 2012 was $3.1bn, a 52.5 per cent increase compared with the previous year.

Egyptian gas has been unreliable due to a combination of political upheaval, sabotage and a lack of feedstock

Laura el-Katiri, Oxford Institute for Energy Studies

The cost of crude oil imports also increased by 9.1 per cent over the same period, to $2.6bn, the result of an increase in both global oil prices and volumes imported. Over the period, the cost of energy imports as a whole increased by 29.1 per cent year-on-year to $5.7bn, accounting for 30.1 per cent of Jordan’s total imports bill, according to Byblos Bank.

“Jordan’s energy situation has been precarious for a long time,” says Laura el-Katiri, research fellow at the Oxford Institute for Energy Studies in the UK. “Egyptian gas has been unreliable due to a combination of political upheaval, sabotage and a lack of feedstock. Egypt has agreed to increase its supplies, but it remains to be seen whether this is reliable.”

The incentives for Egypt to continue to supply relatively cheap gas to Jordan are political rather than economic. “At the moment, Egypt is itself considering importing LNG [liquefied natural gas],” says El-Katiri. “In the long term, I don’t think they will have enough gas [to export to Jordan] and the price is far below what it could get if it sold the gas to Asia on the international market.”

Egypt has already decided to cancel its gas supply agreement with Israel, after it failed to reach agreement on price.

Few alternatives

Alternatives to Egyptian gas supply are few and far between. Civil war in Syria has turned Jordan’s neighbour from a gas exporter of some considerable potential to an importer. Iran has huge gas production, but massive domestic consumption means that it too imports gas.

Iraqi Kurdistan has gas export capacity, but is looking to Turkey as a buyer, and faces a protracted contractual battle with Baghdad over rights to market its gas. As for the rest of Iraq, a lack of gas-capture facilities on the country’s oil fields means the only real prospect are the Shell fields in the south, which have also been earmarked to cover domestic demand.

Israel and Cyprus have both recently made sizeable gas discoveries, but Cyprus is focusing on developing LNG export capacity, while securing gas from Israel would be subject to overcoming political differences. “Jordan is running out of options,” says El-Katiri.

As a result, the kingdom is looking into the option of building an LNG import terminal of its own at the port town of Aqaba in the south. This, though, would take some considerable time to build and would come at a great capital cost. Whether the necessary finance could be raised to build a terminal to supply gas to such a small market is questionable given the country’s dire finances.

Cuts in fuel subsidies, November 2012
Product Old price (JD) New price (JD) Percentage change
90-octane petrol (litre) 0.7 0.8 14.29
Diesel (litre) 0.515 0.685 33.01
Kerosene (litre) 0.515 0.685 33.01
Cooking gas (canister) 6.5 10 53.85
Source: Jordanian government

In the meantime, Jordan has a programme to develop domestic sources of energy. The UK’s BP agreed a series of deals with Jordan’s National Petroleum Company in October 2009 to be included in the state company’s Risha gas concession near the border with Iraq.

The company has embarked on an evaluation programme of seismic and drilling activity to establish the resource potential of the 7,000-square-kilometre field, which is due to take three to four years.

BP drilled its first well in the field in June 2012 and is due to make a decision on whether to enter into the development and production phase some time this year. But the commercial viability of the tight gas project remains uncertain. “It’s a very difficult project,” says one Middle East energy analyst, based in the UK. “It might be difficult to justify a commercial return from the field.”

Even if BP’s own output estimates – between 300 cf/d and 1 billion cf/d – are realised, production is unlikely to begin before 2020, according to a statement by Energy Minister Alaa Batayneh in early March.

Shale oil

The government has also signed a series of agreements to develop shale oil resources in the kingdom, which it estimates could amount to 70 billion tonnes. Several agreements have been signed with international companies to develop its shale oil potential. Estonia’s Enefit has devised a project to finance, build and operate a 430MW power station fuelled by oil shale. Another UK major Shell, has invested more than $100m in oil shale exploration in the north and east of the country. But, as with tight gas, oil shale is a long-term prospect.

Jordan is pursuing other means of energy generation too. It is looking to make use of abundant sunshine to generate solar energy, and has set up a state agency dedicated to developing a nuclear power project to exploit the country’s uranium reserves.

For the time being, though, solar technology remains prohibitively expensive and difficult to deploy on a large scale, and few believe that the kingdom will become a nuclear power producer any time soon. “If it’s not happening in the bigger economies it’s not going to happen there,” says the analyst.

While Jordan waits to see whether its plans for indigenous energy supply come to fruition, its priority is to reform a power sector that years of subsidies and underinvestment have left in disarray. The state power company, National Electric Producing Company (Nepco), has accumulated debts of more than $3.3bn.

Jordan has tried to reduce subsidies several times, but it’s an enormous challenge

Laura el-Katiri, Oxford Institute for Energy Studies

“The problem in Jordan is long-term underinvestment and a totally distorted pricing system,” says El-Katiri. “There has been too little investment in the sector in the past 20 years. Jordan prices its electricity substantially below international prices and then provides subsidies to make up the difference.

“This means that money is going into subsidies rather than maintenance, grid expansion, grid improvements and improvements to plant efficiency.”

But reducing state subsidies is a delicate matter for a country in which an estimated 13 per cent of the population lives below the poverty line and the majority of people benefit from subsidies. “Jordan has tried to reduce subsidies several times, but it’s an enormous challenge,” says El-Katiri. “The government has to be particularly careful in the context of the Arab unrest.”

Between 2005-08, the government implemented a relatively successful reduction in subsidies for petroleum products, cutting the size of energy subsidies from 5.8 per cent of gross domestic product (GDP) in 2005 to 0.4 per cent in 2010, according to the IMF. But the measure had a direct impact on household income, reducing it by 4.4 per cent, according to a study carried out in 2006. In January 2011, the government responded to popular protests against poor living conditions by injecting $230m into a reduction of food and fuel prices.

In November 2012, a further liberalisation of petroleum product prices resulted in a 15 per cent increase in 90-octane petrol, a 33 per cent rise in diesel and kerosene prices, and an increase in the price of cooking gas of almost 50 per cent. Again, people took to the streets, but the government has kept the measures in place, while introducing cash compensation for the most vulnerable.

Electricity subsidies

The government has also pledged to cut subsidies to electricity prices too, which amount to an estimated 60 per cent of the cost of generation. As a result, electricity prices are expected to increase by 40 per cent by 2017, say local press reports. Again, though, the government has stated that it will ensure a compensation programme is in place before it does so.

The implementation of this programme risks further social unrest, particularly if the government fails to make its reasons for cutting subsidies clear to the population. “So far there has been a complete lack of communication from the government as to why they want to cut subsidies,” says El-Katiri. “The perception is that removing subsidies will affect the poor more than anyone else, but in fact subsidies have a disproportionate benefit for the middle and upper classes.”

The long-term benefits for the economy of removing subsidies are hard to ignore. “The government simply can’t afford to continue to subsidise electricity,” says El-Katiri. “In the long run, if the government can reduce subsidies to a level it can afford then it will be able to release funds to improve electricity transmission and power generation infrastructure. But in the short term, it’s going to be very painful.”

Key fact

Cost of energy imports as a whole increased by 29.1 per cent year-on-year in 2012

Source: MEED