The resumption of crude oil imports from Iraq by Jordan announced last week by the Kingdom’s Energy Minister, Hala Zawati, will give Baghdad’s (and Tehran’s) beleaguered finances a much-needed boost and Jordan’s energy plans as well. It will also serve to consolidate the Shia crescent of power falling across the region by dint of Iran, and its prime backers, China and Russia.
According to Zawati’s comments, Jordan will resume imports of at least 10,000 barrels per day (bpd) of Iraq crude oil via tankers at a discount of US$16 to the Brent price, reflecting transport costs and quality differentials. These supplies – which had been suspended earlier this year due to the oil price crash – will come from Baiji in Iraq to the Jordan Petroleum Refinery Company (JPRC), constituting around seven per cent of Jordan’s daily demand. The original deal that had been struck in 2006 mandated a discount to Brent of US$18 pb, on the basis that Jordan bore the transport costs between Kirkuk in northern Iraq and Zarqa in Jordan and presaged a broader build-out of energy ties between the two countries.
Discussions had long been running to build a pipeline between the two countries, with the original idea being for a Basra-Aqaba route spanning around 1,700 km, including traversing the ever-volatile Anbar province. The agreement to proceed had been made in 2013 but was delayed both by the paucity of domestic and/or international investment required for the build-own-operate-transfer (BOOT) contract and by the activities of Islamic State from 2014. A revised route via Najaf was then proposed in 2016 but again failed due to lack of investment, as did subsequent reiterations of the idea until December last year saw an announcement from Iraq’s Oil Ministry that it had completed the prequalifying process for companies interested in the pipeline project.
At that point, from the Iraq side, the first phase of the project included the installation of a 700-kilometre-long pipeline with a capacity of 2.250 million barrels within the Iraqi territories. The second phase included installing a 900-kilometre pipeline in Jordan between Haditha and Aqaba with a capacity of one million barrels. The then-Iraq Oil Minister, Thamir Ghadhban, set May this year as the final date to receive offers for the project from the qualified companies. Given the oil price war and the outbreak of the COVID-19 pandemic, the final consideration date has been pushed out, although a decision is likely to occur before the end of this year, OilPrice.com understands from sources close to Iraq’s Oil Ministry. Related: OPEC+ To Discuss Oil Production Cuts This Week
Ghadhban had added that whilst the Jordan contract would be the BOOT model, Iraq would operate the engineering, procurement, construction and financing contract (EPCF) model. Under the deal, Jordan will initially have the right to buy 150,000 bpd of oil transferred through the pipeline, which is estimated will cost at least US$5 billion, with incremental increases in volume if required to follow. For a period, it will run alongside the 10,000+ barrels coming from Baiji to the JPRC, although it is envisaged that all crude oil supplies from Iraq to Jordan will eventually be migrated to the pipeline delivery system.
From Jordan’s perspective, the oil it receives from Iraq will be vital in alleviating the pressure on its chronically-stretched energy supplies. A key turning point in the Kingdom’s energy security came in 2011 when Egypt ended its sale of cheap gas to the country, although it did later resume supplies sufficient to cover around half of Jordan’s electricity needs. This said, problems with supply have sparked frequent social unrest, most notably in 2018’s widespread demonstrations across Jordan against new price hikes on fuel and electricity.
With proved oil reserves of just 1 million barrels and proved natural gas reserves at slightly more than 200 billion cubic feet, Jordan historically has had no choice but to import an average of at least 90 per cent of its energy needs each year (currently 96 per cent). Not only has this led to crippling energy import bills (at the time of the demonstrations, nearly US$3 billion) and heavily contributed to spiralling government debt levels (currently over 92 per cent of its gross domestic product) but has also meant repeated price rises for the public.
At the same time, Jordan’s efforts to develop its potentially abundant shale oil reserves appear a long-term proposition, although they could be game-changing. These oil shale reserves, according to various domestic and foreign studies, underlie at least 70 per cent of Jordan’s entire territory, translating into around 31 billion tons (227 billion barrels) of oil, putting Jordan among the top 10 largest oil shale holders in the world. Its most significant deposits thus far have been located in 26 different locations around the country, with the nine most important of these situated in the west-central region of the Kingdom (Sultani, Attarat Umm Ghudran, Wadi Maghar, Khan Az Zabib, Jurf Ed Darawish, Siwaqa, El Hasa, El Lajjun, and Eth Hamad).
According to Jordan’s National Energy Strategy, covering the Kingdom’s energy requirements from 2007 to 2020 – which clearly could not account for the impact of the oil price war or the COVID-19 pandemic – the country aimed to increase the contribution of local energy sources to 39 per cent by the end of this year while reducing foreign sources from their current level of 96 per cent to 61 per cent. An adjunct to this are plans announced last week by Zawati for 21 per cent of electricity to be generated from renewable sources with the twin aims of reducing Jordan’s reliance on imported energy and reducing energy costs for domestic consumers. As part of this drive, she added, smart metres would be adopted by the end of 2022, and that her ministry will work on the renovation of the Hamzeh oil field over the next six months. Related: Chinese Oil Imports Surged In H1 2020 Despite COVID-19
For Iraq – and Iran – the Jordan pipeline offers three key advantages. First, it allows another alternate Iraq/Iran oil export line to the historically vulnerable Strait of Hormuz route. This would augment the current plans for the Guriyeh-Jask pipeline and adjunct plans to roll out a pipeline to Syria as well. Second, it provides another ‘cover’ route for Iranian oil disguised as Iraqi oil, which can then be shipped easily both West and East. And third, it will provide a much-needed boost for Iraq’s appalling finances. Only very recently, Iraq’s economic parliamentary committee suggested that international oil companies (IOCs) be paid with crude oil rather than cash or cash-equivalents as a means to reduce near-term state expenditure. It also proposed delaying payments of foreign debt, introducing salary cuts of 60 per cent for various state sector employees, and reducing all non-essential spending.
This financial straitening poses severe danger to Baghdad, with new Prime Minister, Mustafa al-Kadhimi, requiring IQD12 trillion (US$10 billion) just to pay the next two months’ salaries of more than four million employees, retirees, state beneficiaries, and food relief for low-income families, which together constitutes the majority of households in Iraq. It is believed in Iraqi government circles that any failure to pay any of these obligations could result in the sort of widespread protests that occurred at the end of last year.
As an adjunct to these factors, Jordan is not only strategically important for Iran in increasing its influence over the Shia crescent countries (stretching from Yemen in the south, eastwards up through Bahrain, Iran and Iraq, and then westwards into Syria and Lebanon) – as it borders Syria and has strong links to Palestine, which houses key Iranian military proxies in the region – but also is part of China’s ‘One Belt, One Road’ initiative. Last year, a sizeable delegation from China visited Jordan with the aim of increasing cooperation, according to Xie Yuan, vice president of the Chinese People’s Association for Friendship with Foreign Countries.
This followed the signing in September 2015 of a number of investment deals by China in Jordan, worth over US$7 billion. These included US$1.7 billion to build Jordan’s first oil shale-fired power plant in the Attarat area, a US$2.8 billion investment to construct the national railway network, and a major investment agreement signed by the Aqaba Special Economic Zone Authority with China’s Shenzhen Chamber of Investment to develop an industrial and logistics estate in the port city on an area of about one-million square metres.
By Simon Watkins for Oilrpice.com
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