Bereft of hydrocarbon reserves and experiencing the sharpest water crisis in the region, Jordan is facing an energy crunch.

Forced to use diesel supplies to keep its power stations operating, the country is actively seeking new ways to reduce its reliance on foreign oil imports, which currently account for an estimated 25 per cent of the kingdom’s gross national product (GNP).

Aside from developing a civilian nuclear capacity, Jordan is attempting to tap the one uncontested resource that it has in abundance: oil shale.

Jordan has the fourth largest oil shale resources in the world, behind the US, China and Russia, with an estimated 90 billion-100 billion barrels of oil in its shale deposits.

Jordan’s Natural Resources Authority (NRA), the government department charged with implementing a masterplan for the energy sector, conservatively estimates the country’s shale could yield about 4 billion tonnes of oil.

Jordan’s energy demand

For Amman, the need to find alternative sources of energy has become more pressing. The bill for heavy fuel oil and diesel is putting greater strain on the national budget, with annual imports of oil and gas doubling in value from $2.28bn in 2009, to an estimated $4.6bn in 2011, according to estimates by the Washington-headquartered IMF.

Exploiting nascent oil shale deposits has quickly become a priority. The NRA envisages electricity produced by oil shale will account for 14 per cent of Jordan’s energy requirements by 2020.

Oil shale development in Jordan began in  2006, with the drafting of concession terms focused on three major shale developments. In 2009, the government awarded a $500m concession to the UK/Dutch Shell Group to exploit shale reserves. Shell formed a wholly owned subsidiary, Jordan Oil Shale Company (Josco), to develop the project.

With Syria next door, it’s not easy … to raise the $300m-400m you need to get an oil shale project off the ground

Jamal al-Ali, Apco

The exploration phase involves drilling a 22,000-square-kilometre concession – one quarter the size of the entire kingdom – with production work due for completion by 2023. Utilising proprietary in-situ processing technology, Josco will focus on the deeper layers of Jordan’s oil shale deposits that the company claims would not otherwise be viable using currently available technologies such as surface retort or direct combustion.

Shell is the biggest name active in Jordan’s oil shale sector, but independents are also looking to establish a foothold. In March 2011, a concession was granted to Karak International Oil, a subsidiary of the UK’s Jordan Energy and Mining Ltd (JEML), to produce shale oil from the Al-Lajjun area by 2015. 

In 2008, the government signed an agreement with Estonia’s Enefit to develop a 460MW oil shale fuelled power station in Jordan, together with Malaysian partners YTL Power International Berhad and Near East Investment. In July 2010, Enefit was awarded the Attarat Um Ghudran shale concession. The company says the mining plan and technical designs for the plant are in place and ready to be implemented once it has finalised agreements with a construction company and mine contractors, and the project financing stage is complete. 

Despite the obvious potential of each project, there may be some changes to production timetables, particularly as Jordan contends with the fallout from the Arab Uprisings. Regional instability has stifled financing for what are highly capital-intensive projects.

Funding challenges

Having signed a concession agreement with the Jordanian government in March 2011, JEML sought further development funds but this has proved more challenging than envisaged, due to the Arab uprisings.

“Initially, we were seeking $1.8bn, but now the project is aiming at a lower production figure, we are looking to raise a more manageable sum in the range of $500m for the first phase,” says Chris Morgan, the firm’s chief executive officer. 

JEML’s project originally targeted 15,000 barrels a day (b/d) in production by 2015, but Morgan tells MEED that this target will be scaled back. “We are now aiming to produce an initial 4,000-5,000 b/d and then ramp up to 20,000 b/d and eventually 30,000 b/d,” he says.

High costs are a major obstacle associated with oil shale developments, requiring attractive and stable legal, fiscal and environmental frameworks linked to long-term concession periods typically in excess of 40 years. Jordan’s shale projects were modelled on the basis of being profitable at a crude oil price of above $55 a barrel, yet even though oil prices have been significantly lower, for the smaller players the economics are still proving tough.

“Last year, we were talking to Morgan Stanley and JP Morgan, hoping that they’d find a strategic partner for us. But with the emerging situation going on in Middle East that didn’t happen,” says Morgan. “However, in the longer term, we continue to seek a sizeable partner with a strong balance sheet in order to underpin the development of major projects.”

Other shale developers hope to work to faster timetables. According to Martin Amison, a partner with UK law firm Trowers Hamlin, which advised the Ministry of Energy and Mineral Resources on the shale licensing process, JEML’s private sector approach has left it more exposed.

“Shell will be financing its development with its massive corporate resources. It will spend a lot more money [than JEML], but that shouldn’t be an issue for them. The Estonians have Malaysian and local investment partners and are getting on fine,” says Amison.

“JEML, on the other hand, will have to work harder to have a bankable project, but the lenders will ultimately be able to generate a decent commercial return from it.”

On the positive side, the overall legal and fiscal terms designed by the government are intended to incentivise shale development, and explicitly not create a new avenue for rent seeking. “We deliberately set out not to put obstacles in the way of the financing and to avoid providing opportunities for the government to take concessions away, save for in the case of default,” says Amison. 

Regional stability

For other small players looking for to invest in Jordan’s oil shale sector, securing financing is proving the major challenge in transforming projects into workable schemes. In 2009, the local Aqaba Petroleum Company (Apco), signed an MoU with the NRA to exploit a 450-sq km area in Wadi An-Nadiya, 135 kilometres south of Amman. 

“Although Jordan is very stable by regional standards, with Syria next door it’s not easy for investors who are looking to raise the $300m-400m you need to get an oil shale project off the ground,” says Jamal al-Ali, general manager of Apco. “They are waiting for things to settle down before proceeding.” 

Although Jordan’s shale projects still have a long way to go before the country can think seriously about becoming energy independent, they still offer a substantial economic payoff, not least in obviating the need to spend upwards of $500m a year on costly imports of oil products for power generation. 

Enefit’s power plant, comprising two 230MW oil shale-fired power units, will consume 8 million tonnes of oil shale a year and should help Jordan save hundreds of millions of dollars every year. It will also create 3,000 construction jobs and 1,000 permanent jobs, according to the company. 

Enefit’s plant is due to commence operations before the end of 2016, with the main engineering, procurement and construction (EPC) tendering stage due soon.  

An Enefit official in Estonia tells MEED that it has received a strong response to the tender and is now in the process of shortlisting companies. By early next year, it will have selected a firm and can then proceed with the project financing. 

The plant will be built as an independent power project, with additional fuel and water supply risks transferred to the developer. Enefit will raise approximately 70 per cent through project financing, while the remainder will be provided by the shareholders as equity.

Discussions with potential financiers have commenced and are set to be finalised at the conclusion of the tender process. The company is confident that project financing will be arranged fairly quickly and that it will be ready to proceed with construction by the second half of 2013.

Stakes high

The oil shale-fired power plant will reduce Jordan’s expenditure on imported oils for electricity generation by an estimated $500m a year, says Enefit. The firm’s second project is a shale oil production plant that, when fully operational in late-2017, will produce approximately 40,000 b/d of output at full capacity.

The government is keen to ensure the momentum continues. In September, Canada’s Global Oil Shale Holdings (Gosh) struck a deal to assess oil shale resources in central and southern Jordan, under a two-year agreement that encompasses exploration across 221.3 sq km. Gosh estimates the areas could produce up to 50,000 b/d of oil over the planned 40-year development period.

“The Jordanians are now getting to a point where they will start awarding more concessions as they have given out a lot of MoUs and a lot of people have come back,” says Amison. 

The NRA has every intention of making oil shale a key resource for Jordan, says Amison. “The three concessions signed so far are clear, create considerable certainty, have international dispute resolution and the status of law, so that what you see is what you get. They have a very progressive and self-enclosed tax and royalty regime that was specifically designed to cope with a low margin project, as well as to cope with upside creaming, by reacting to oil price and profitability in a way that should be fair to both parties.”

For the kingdom, the stakes are high. The government urgently needs to find a solution to its energy supply shortage, and oil shale development is a key part of that solution.

If Enefit’s project hits its schedule, the first fruits of Jordan’s oil shale investment will be feeding into the kingdom’s stretched energy grid by late-2016 and Jordanians can finally start to catch up on their neighbours to the east and south.

In numbers

$500m: Value of the concession agreement between Amman and Shell Group

5,000 b/d: Jordan Energy and Mining Ltd’s production target from its first concession

Source: MEED