( bL Report No. 7984-)0 Jordan Energy Sector Study (In Two Volumes) Volume 1: Main Report February 7, 1990 Country Department IlI Industry & Energy Operations Division Europe, Middle East and North Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a resuricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit Jordan Dinars (JD) JD 1.00 - 1,000 fils JD 0.500 US$1.00 (March, 1989) JD 1.00 US$2.00 WEIGHTS AND MEASURES 1 meter (m) 3.281 (feet) 1 kilometer (km) - 0.621 mile 1 kilogram (kg) 2.205 pounds 1 ton (1,000 kg) = 1.102 short ton 0.984 long ton 1 barrel (bbl; o.159 m3) 42 US gallons 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) 1,000 kW 1 kilowatt hour (kWh) = 1,000 watthours 1 gigawatt hour (GWh) - 1,000,000 kWh - 1,000 MWh (106kWh) 1 kilovolt (kV) - 1,000 volts 1 kilovolt ampere (kVA) = 1,000 volts amperes 1 megavolt ampere (MVA) = 1,000 kVA 1 kilo liter (103 liters) - 6.28981 American barrels 1 cubic meter - 6.29 barrels 1 bbl oil = 0.1349 tons oil 1 cubic meter = 6.28976 US bbl 1 tonnes 8.17 US 1 metric ton = 0.77 cubic meters GLOSSARY OF ABBREVIATIONS ATPS - Aqaba Thermal Power Station EMENA - Europe, Middle East and North Africa ESS - Energy Sector Study FBC - Fluidized Bed Combustion HTPS - Hussein Thermal Power Station ICB - International Competitive bidding IDECO - Irbid District Electricity Company IAEA - International Atomic Energy Agency IOC - International Oil Company JEA - Jordan Electricity Authority JEPCO - Jordanian Electric Power Company JPRC - Jordan Petroleum Refining Company LPG - LiqueLied Petroleum Gas MAED - Model for Analysis of Energy Demand MEMR - Ministry of Energy and Mineral Resources MOP - Ministry of Planning PCIAC - PetroCanada International Cooperation NRA - Natural Resources Authority SOE - Statement of Expenditure toe - tons of oil equivalent WASP III - Wien's Automatic System Program Package III Financial Year - Calendar Year FOR OFFICIAL USE ONLY JORDAN ENERGY SECTOR STUDY Abstract The objective of this report is to assist GOJ develop a refined energy sector development strategy. It reviews changes in Jordan's energy sector in light of the macroeconomic situation; institutional changes; current energy pricing policies; demand management and conservation needs; energy supply diversification; and the prospects for developing primary energy resources within Jordan. The report analyzes the following issues: energy demand projections, the exploration and development of domestic energy resources; institutional and operational efficiency; and energy sector investment and financing. It focuses on human resources development, debt reduction and the expansion of the private sector in energy investment and environmental protection. The Rreferrea strategy is a continuation of GOJ's policies: energy conservation; the development of indigenous resources to substitute for imports; economic pricing; efficient investment and operations; and the removal of institutional rigidities. The report recommends continuing petroleum products and electricity pricing reforms; restructuring of sector institutions to improve efficiency; and exDanding the role of the private sector in energy sector development projects. The study was undertaken as a collaborative effort of the World Bank and the Government of Jordan. The World Bank core group for this report was R. Vedavalli (Task Manager), J. Maweni, A. Adamantiades and P. Cordukes (Power Subsector); U. Kirmani (Oil and Gas, and Oil Shale); and R. Berney (Petroleum Refining). The core Jordanian counterpart team included: R. Aburas (Team Coordinator and Energy Conservation); A. El-Saadi (Joint-Team Coordinator); M. Zaharan, M. Dabbas and M. Talal (Macroeconomic Prospects); Ali Anani (Renewable Energy), M. Faisal and M. Abu-Aqola (Energy Demand, Energy-Economy Model, and Petroleum Refining); F. El-Ken-wi, F. Kharbhat, N. Idris, Z. Khamis (Power Subsector and WASP model); M.A. Nabulsi and K.H. Khalidi (Oil and Gas); M. Abu Ajamieh, F. El-Faiz, W. Jaouni, and M. Bseaso (Oil Shale). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. JORDAN Energy Sector Study Main Regort - Volume I Table of Contents Page I. SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . 1 II. ENERGY AND ELECTRICITY D)EMAND PROJECTIONS . . . . . . . . . . . . 12 A. Overall GDP and Sectoral Growth Prospects . . . . . . . . . . 12 B. Energy-economy Relationships ................ . 13 C. Demand for Petroleum Products ................ . 15 D. Electricity Demand ..................... . 16 E. Energy Pricing ....................... . 18 F. Energy Conservation . . . . . . . . . . . . . . . . . . . . . . 22 G. Energy and Electricity Demand Projections . . . . . . . . . . . 23 III. DOMESTIC ENERGY RESOURCE DEVELOPMENT . . . . . . . . . . . . . . . 25 A. Oil and Gas Exploration ................... . 26 B. Natural Gas Development and Utilization . . . . . . . . . . . . 28 C. Natural Gas Pricing .... . . . . . . . . . . . . . . . . . . 29 D. Oil Shale . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 E. Renewable Energy .... . . . . . . . . . . . . . . . . . . . 32 IV. ENERGY SECTOR INSTITUTIONAL AND OPERATIONAL EFFICIENCY . .33 A. Institutional Se.ting .................... . 33 B. Energy Enterprises - Institutional Arrangements and Operational Efficiency .... . . . . . . . . . . . . . . 36 C. Operational Efficiency in EIectric Power Sector . . . . . . . . 40 V. ENERGY SECTOR INVESTMENT STRATEGY . . . . . . . . . . . . . . . . . 41 A. Planned Energy Investment during 1986-90 .......... . 41 B. Future Investment Planning and Financing Strategy . . . . . . . 43 Table of Contents (Con't) Annexes Annex 1 Table - Energy and Electricity Consumption Annex 2 Table - Percentage Shares of Oil Import Cost Annex 3 Table - Energy Consumption by Sectors Annex 4 Table - Price Structure of Petroleum Products Annex 5 Table - Critical Indications for Generation, Transmission Distribution, and Commercial Operations Annex 6 - A List of Proposed Studies Charts 43931B - Organization Chart: Ministry of Energy and Mineral Resources 44503B - Organization Chart: Ministry of Energy and Mineral Resources (Proposed Status) 43031C - Organization Chart: Natural Resources Authority - Organization Chart: Natural Resources Authority (Proposed Status) 43931A - Organization Chart: Jordan Electricity Authority Mineral Resources IBRD 21349 Petroleum Concessions IBRD 21350 National Electric Grid IBRD 21351 I. SUMMARY AND CONCLUSIONS Introductigu 1.01 The __i Rpurpose of this report is to assist GOJ in formulating a development strategy for the energy sector in light of the current macroeconomic situation and recent developments in the energy sector. The report is organized in o volumes: the first covers the main issues and recommendations; the gego consists of a set of background papers and annexes which deal with the issues in more detail. Volume I consists of five chapters. Chapter I summarizea the main findings and conclusions. Chapter 1I examines the factors influencing the energy and electricity demand to the year 2000, including current energy pricing and conservation policies. The Government policy of ex-refinery pricing and cross-subsidization of electricity prices is discussed, and a proposed strategy for correcting existing distortions in pricing is outlined. Chapter III reviews Jordan's energy resource deve.lopment programs and focuses on the strategies for petroleum exploration and development, paying particular attent4'rn to the natural gas development and economic exploitation of oil shale. Chapter IV addresses the need for institutional reforms and efficiency improvements in energy enterprises; it recommends streamlining the institutional structure and an action plan for effective efficiency improvements. Finally, Chapter V reviews the Government investment program for the 1986-90 period and presents a core program of investment in the energy sector to the year 2000, with financing options. Overview of the Energy Sector and Sector Issues 1.02 The last Bank review of Jordan's energy sectoc was done in 1983. Since then GOJ has successfully implemented a number of sector reforms. These include: (a) creating a central institutional base by forming the Ministry of Energy and Mineral Resources (MENR) to undertake energy planning and formulate energy strategy; (b) exploring ar.d developing both conventional and renewable energy resources with interested foreign investors; (c) eliminating energy subsidies by implementing economic energy pricing measures; and (d) promoting Jamand management and energy conservation measures to encourage efficiency in energy use. These measures have contributed to a series of devel'pments in Jordan's energy sector. 1.03 Jordan's energy sector at present has significant privLte participation. This participation is in the form of private shareholding in the electricity distribution companies (Jordan Electric Power Company (JEPCO) and Irbid District Electric Company [IDECO) The private sector is very active in the oil refining and distribution of petroleum products. Jordan has also encouraged private oil companies to explore for oil and gas in Jordan; three private oil companies and two foreign national oil companies are currently engaged in oil exploration activities. In parallel, the Natural Resources Authority (NRA), the Jordanian entity, is also active in oil exploration and has made the first commercial natural gas discovery in Risha. NRA has also made some small oil discoveries in the Hamza and Sirhan areas. Efforts to diversify supply sources and promote development in oil shale -2- resources and solar and wind energy are well underway. On the demand side, OJ has tried to reduce the rate of growth in energy demand by increasing efficiency in energy use, promoting energy conservation measures, and increasing energy prices to reflect their economic cost. However, despite these favorable developments, Jordan's energy sector still faces a complex future characterized by considerable uncertainty. Besides the prevailing uncertainty about world oil prices, Jordan must now cope with planning uncertainties about GDP and sectoral growth, including energy and electricity demand growth and domestic oil and gas availability. The recent slowdown in GDP growth, accompanied by stagnating remittances and the devaluation of the JD against foreign currencies, has increased the debt burden and lessened the financial viability of energy enterprises. The impact of the devaluation of the JD has also increased the cost of import on Jordanian economy. In 1988, the cost of oil imports amounted to 7.5% of GNP, 20.3% of total imports, and 62.8% of export earnings. Consistent with tne structural adjustment of the Jordanian economy, the Government should give high priority to the following main sectoral issues: (a) energy and electricity demand projections; (b) domestic energy resource development; (c) institutional reforms and operational efficiency; and (d) sector investment planning and financing. Energy and Electricity Demand Projections 1.04 Energy consumption increased at an average rate of growth of 13.7X between 1975 and 1984. Electricity consumption increased at an average rate of growth of 20.8z p.a. in the same period. These high energy and electricity growth rates reflect high economic rates of growth, rapidly rising incomes stimulated by remittances, and accelerated growth in the manufacturing, transport, household and service sectors. The declining GDP and sectoral growth rates during 1984-88, together with the impact of energy pricing and conservation measures, contributed to slowing down the rate of growth in total energy consumption to 2.5% p.a.; eleccricity consumption also declined by 55% to 9.4% p.a. during the same period. The future rates of growth of energy and electricity demand depend on a number of inter-related factors: (a) regional economic conditions; (b) Jordan's overall economic (GDP) and sectoral growth prospects; (c) the changing structure of the economy; (d) energy pricing; and (e) conservation measures. On the basis of a reassessment of these factors, energy demand is projected to grow at 2.8% p.a. through the year 20001; electricity demand is projected to grow at 4.8% p.a. during the same periodV. The rates of grbwth of petroleum products and electricity demand are expected to decline substantially, i.e., by more than two thirds. EnLergy PrLicig 1.05 The main thrust of GO's energy pricing policy is to continue to price petroleum products and electricity to reflect their economic cost. At present, even after reflecting the full impact of the depreciation of the JD j/ Energy demand projections were derived using MIT's energy-economy model of Jordan. 2/ Electricity demand projections are based on the Jordan Electricity Authority's econometric model. against the US$, petroleum product prices, on average, are 40X above the current world market prices. Domestic gasoline and LPG prices are 1001 above their border prices. Domestic prices of gas oil and kerosene, used mainly by the household and transport sectors, are ih the range of 51 to 201 above their respective CIF prices. The pre-1988 electricity tariffs, on average, reflected 100l of the long-run marginal cost (LRKC). The adverse JD/$ depreciation impact has lowered the average tariff at present to62% of the LRMC. Given that domestic tariff levels rarely reflect the total LRMC, Jordan's pricing policy standard is comparatively higher than the prevailing situation in the region. 1.06 However, given :hat petroleum products and electricity demand projections are sensitive to the effects of pricing and energy conservation, a failure to implement economic pricing, and conservation and demand management measures would increase energy and electricity consumption about one and a half times above their base case levels. It is, therefore, recommended that GW continue to puraue its policies of econumic energy pricing (balanced with programs to ensure the social welfare of poorer sections of the population) by: (i) rationalizing ex-refinery prices of petroleum products and separating ex-refinery prices from taxation; and (ii) removirng the existing economic and financial cross subsidies in electricity tariffs. Energy conservation and efficiency improvement measures should be instituted at all levels of energy use. Tha TAM2lo22ment e. Domestic Energgy Resources 1.07 The Government has adopted a sound policy to encourage foreign oil companies to explore for oil and gas and has succeeded in attracting five companies to undertake petroleum exploration. In parallel, NRA has continued its oil and gas exploration activities in its own areas where foreign companies are not active. NRA's efforts in the last eight years have established the potential for oil and gas in Jordan by making small oil discoveries at Azraq and the Sirhan basins and a gas discovery at Risha. The NRA is currently making efforts to evaluate the gas discovery. The future planning and investment in the Risha area should be deferred until the long- term testing of the Risha field is completed and a comprehensive diagnostic study of the Risha Reservoir is undertaken. In view of the complexities involved in the evaluation of the Risha area, GOJ should consider permitting foreign oil companies to explore NRA's reserved areas to benefit from the latest state of the art technology while minimizing investment risks. 1.08 The Government is also currently assessing the potential for using its oil shale resources to produce synthetic crude oil and to burn oil shale directly in power plants. The results of three prefeasibility studies indticate that the exploitation of oil shale, both for the extraction of shale oil and as a fuel for direct combustion for power generation, is technically viable. However, the results of these studies are based on laboratory tests and some performance tests in the vendor's facilities; neither the retorting technology nor the fluidized bed combustion (FBC) technology has been tested in a commercial plant using oil shale. In addition, oil shale is not competitive with current crude oil price projections and is therefore uneconomical in the foreseeable future. In view of the high economic, financial and technical risks of venturing into oil shale power plants or syncrude projects, GOJ should not commit any public investment resources - 4 - to oil shala exploitation until the techno-economic commerciality of oil shale exploitation is proven elsewhere. In the meantime, the Government should continue to monitor developments in commercial oil shale exploitation worldwide, but it should only undertake studies which address water resource availability, ash disposal, and environmental protection issues. 1.09 The programs for the development of renewable energy resources, such as solar and wind energy, are progressing satisfactorily. There is, however, still the need for a coo'dinaced action plan to assess the potential of renewable energy resources. Even though renewable energy resources could only make a marginal contribution to Jordan's energy requirements, appropriate guidelines and an implementation schedule would help maximize their development and use and contribute to part of the overall domestic energy supply. Sector Institutions and Operational Efficiency 1.10 At the ministerial level, major issues include the adequacy of institutional arrangements and the effective coordination of MEMR (which is responsible for energy planning and policy formulation) and the line energy- operating agencies. Since its inception in November 1984, MEMR has satisfactorily undertaken overall energy planning and policy formulation functions. Jordan's energy sector has now reached a stage where sector development requires greater comprehensive planning, more in-depth analysis, and the effective regulation, coordination, and monitoring of energy sector activities. It is recommended that the Governueat restructure MEMR to strengthet. its analysis, planning, and evaluation capabilities, as well as its regulating, monitoring, and coordinating functions. i.il Analyses of operational efficiency in energy enterprises indicate that, although these enterprises generally operate efficiently, there is still room for considerable improvement in technical, operational, financial and managerial efficiency. Efficiency improvements in energy sector enterprises would help reduce additional capacity expansion and associated investment requirements. In addition, institutional reforms to restructure the energy organizational structure should be implemented to realize the benefits of efficiency improvements. 1.12 NRA, responsible for all activities relating to the exploration and development of minerals and hydrocarbons, has so far carried out its functions in a satisfactory manner and has contributed to proving hydrocarbon generation prospects in Jordan. However, in view of its present setup as a fully funded government agency, NRA's operational orientation lacks commercial focus. Efficient operations require rational planning, a flexible approach in considering available options, and the freedom to choose the optimum and most cost-effective option. Given the need to minimize government expenditure on risky oil-exploration activities, it is necessary to restructure NRA's organizational structure to redefine its objectives and role and to improve its operational, technical, financial and managerial capabilities. The Government should undertake an organizational restructuring study to consider -5- alternative ways to give NRA a commercial focus. 1.13 Alchough petroleum downstream activities (refinery, storage, transport and distribution) are privately owned and staffed with skilled personnel, efficiency measures are required to cut costu and optimize operating and investment decisions. The present system of combining refinery prices with product taxes and fixing ex-refinery prices on a cost-plus basis is unsatisfactory as a basis for commercial refinery operations. To improve efficiency it is recommended that ex-refinery prices be set at international levels. A revised remuneration formula should separate refinery prices from taxation and other retailing activities such as storage, transport and distribution. It is recommended that the Government evaluate the storage, transport and clistribution of petroleum products and examine alternative options for the future expansion of these facilities. 1.14 The three power-supplying entities in Jordan -- the Jordan Electricity Authority (JEA), the Jcrdan Electric Power Company (JEPCO), and the Irbid District Electric Company (IDECO) -- have been an integral part of the rapid development of the power subsector. They have conducted their plaxning, construction and operations in a timely, efficient, economical and professional manner. However, at present Jordan's power utilities face operational, financial and institutional efficiency issues. Power subsector planning should evaluate improved efficiency and load management as an alternative to capacity expansion. Studies completed so far have identified efficiener --rprovements to: minimize production costs and reduce system losses; a.< kiize utilization efficiency and reduce investments; and optimize system performance and reliability. The next step is for the utilities to develop an implementation plan to identify critical indicators of operational efficency; define priorities and set specific targets; and monitor results as plans are implemented and targets achieved. 1.15 As a result of the adverse financial impact of the 1988/89 devaluation of the Jordanlan dinar, the power utilities are facing a severe liquidity constraint in meeting their debt service payments and in financing their operations and construction. The debt service commitments of JEA, JEPC0, and IDECO on existing foreign loans have increased by about JD 70 million for the duration of the repayment period. The Government is considering short-term relief measures such as postponing loan repayments for 3 years, rescheduling outstanding loans, and increasing tariffs from 1990 onwards. A tariff increase of 15X in real terms is urgently required in 1990 to help address the electric utilities' financial problems. In addition to these proposals, other short-term options that right be considered include: (i) converting some existing loans to equity (or capital); (ii) treating the revaluation losses, as they are realized, as equity contributions; (iii) refinancing existing debt service commitments by rollover loans or new borrowing; (iv) temporary exemption from corporate taxes for JEPCO and IDECO; and (v) tariff increases to eliminate cross-subsidies in water pumping, hotels and street lighting. In the long-term, more permanent solutions may be needed to restore the liquidity and financial viability of the sector. These include: (i) new borrowing to restructure the finances and capital of the companies; (ii) the revaluation of fixed assets to increase depreciation and cashflow; (iii) increases in the 6- structure and level of tariffs to restore long-term financial viability and remove existing tariff distortions; (iv) the development of a foreigr. currency risk management program, including proposal: for monitoring debt service commitments to minimize losses from future movements in foreign exchange rates; and (v) the institutional restructuring of power utilities, as discussed above. 1.16 To cut public expenditures, the Government intends to subject all public utilities to civil service laws requiring gov.rnment pay scales and, uther service conditions. Although reducing public expenditure is a desirable objective, more regulation is likely to work against achieving this objective, as it would erode the morale, efficiency and perforr-nce of JEA staff. It is important to preserve institutionatl autonomy and efficiency in order to continue to attract and retain competent staff. To improve efficiency, the Government could consider several alternatives to increased government control of power subsector institutions. These alternatives include: corporatizing of JEA; encouraging private sector participation by issuing shares; establishing a completely new national power corporation comprising JEA, JEPCO and IDECO; establishing JEA as a wholly-owned government corporation responsible for generation and transmission and combining the distribution functions of JEA, JEPCO and IDECO under a single corporation. It is necessary to revise regulatory procedures to ensure greater accountability and compliance with government policies whe:. reorganizing the subsector. Energy Sector Investment Strate-y 1.17 Given the scarcity of public investment resources and the Government's need to reduce the cost of drbt servicing, GOJ faces the difficult challenge of daveloping a rational investment strategy which promotes optimum sector development and expands energy supplies at least cost. In the nineties, to meet the minimum energy demand requirements (para 1.04), a core investment program should include funding for the incremental expansion of 1.4 mtoe of petroleum products and associated infrastructure facilities in storage and transportation; 580 MW of new generating capacity in electric power and a corresponding expansion in transmission and distribution facilities; and the implementation of energy conservation and efficiency measures. The likely investment requirements in the next decade to finance the core-program are estimated at around $1,500 million, or an average annual investment of about $150 million. Given the need to reduce public funding requirements, the financing options would be: to strengthen the organizational structure of energy enterprises, thereby encouraging a commercial focus in energy operations; to increase the self-financing capabilities of energy enterprises; and to find new sources of funding, including expanding the role of the private sector in electricity generation and energy resource development activities. Given Jordan's proven record of private sector participation in energy operations, the Government could promote private sector financing by (i) restructuring JEA as a corporation and issuing shares to equity investors; (ii) allowing the private sector to build new generation facilities and sell their power to the network through financing schemes, such as Build Operate and Turnover (BOAT) or Build, Operate and Own (BOO); (iii) restructuring NRA with a commercial focus; (iv) and promoting private company participation on a joint-venture basis. - 7 - 1.18 These issues and recommendations are summarized i'm the matrix and are discussed in greater detail in the following chapters of Volume I and in the Background Papers of "olume II of the report. 1.19 Based on careful analysis, it is recommended that GOJ give top priority to the following major issues: (i) Ascertaining, as quickly as possible, the availability and suttainability of natural gas to permit its substitution for costly imported fuels in power generation and other uses. (ii) Strengthening NRA's capability to deal with various exploration and development complexities by reorganizing the petw'eu1. and gas operations with a commercial focus. (iii)Restructuring the ex-refinery pricing of petroleum products by separating refinery pricing from taxation and streamlining refinery operations by separating cost centers for refinery, storage, transport and distribution activities. Xiv) Implementing an action plan to improve the financial viability of electric utilities through organizational'reforms, tariff adjustments, financial and institutional restructuring and efficiency improvements. (v) Reorganizing MEMR's institutional base to effectively undertake energy planning, coordination and regulating functions. (vi) Preparing a coreinvestment program and financing options for the next five years. The program should include: (a) the continued production of oil and gas in the Hamza and Risha fields; (b) the evaluation of the Risha gas reserves and other investment requirements for the further development of Risha gas; (c) about $80 million per year to provide increased power supply and associated transmission and distribution facilities; (d) a feasibility study to determine the optimum storage and transportation facilities for petroleuim products to the year 2000 and the constructoin of the first phase of these facilities to supply the demand for petroleum products to 1995; (e) financing for the maintenance and rehabilitation of existing intvestments in the sector; and (f) a financing plan to improve the sclf-financing levels of energy enterprises by: appropriate pricing of petroleum products and electricity; restructuring of energy enterprises to allow greater private sector participation in oil exploration and power generation; and the increasing of incentives to attract new funding from bilateral, mt.ltilateral and private sector financlng. Proposed Strateag for Eneray Sector Develooment I. Energy-Electricity Demand. Prie1nr arid Enerav Conservation Dbiectivel Recommendations Energy Sector Level Enterorise Level Issues A. Energy Electricity Demand Proiections Energy and electricity demand Reassess energy and electricity Streamline and strengthen MEMR's Improve JEA's electricity projections deal with demand projections in light anitlytical capability for demand demand forecasting increasing uncertainty of macro and sectoral growth analysis and forecasting; and techniques and coordinate about world oil prices, prospects and the impact of coordinate with line energy with JEPCO and IOECO in pre- GOP, sectoral growth, pricing and conservation agencies and MOP in preparing paring a consistent subsec- domestic pricing and policies consistent energy demand toral demand projection. conservation policies. projections. B. Energv Pricina Currently. ex-refinery pri- Achieve economically efficier.t Restructure ex-refinery pri Streamline refinery opera ces are based on a cost-plus ex-rcfinery pricing of petro- COng by (a) separating reft- tions by separating formula with a guaranteed leum products. nery pricing from taxation: cost centers for refinery. rate of minimum return, which (b) settinq ex-refinery prices storage. transport and does not provide incentive at *-ternational levels so distribution activ-ties and for the refinery to operate that refinery is encouragec by making these operitions efficiently. Also, the to improve its efficiency. efficient. present system of combining taxes and refinery costs in sales prices causes fluctua- tion of taxes with changes in oil product prices and I refining costs; it does not o provide any incentive to reduce costs. C. Electricity Tariffs Tariffs for individual con- Implement economic electricity Introduce a framework for Prepare specific tariff sumer categories reveal pricing by removing economic tariff restructuring for bulk, restructuring measures by economic and financial and financial distortions in domestic, comuercial, and consumer categories reflec- cross-subsidies. individual tariff categories, other categories. ting load management efforts Progressively adjust the and review of time differen- level of tariffs to tiated demand charges and eliminate the deficits. corrected classification of consumer categories. Undertake measures to im- prove operational efficiency by reduction of losses, re- ceivables and improving cost control and productivity measures. D. Conservati.nm Major constraints to energy Improve efficiency in energy Formulate of a package of Establish a framework of conservation are: (a) the and electricity use to incentives to promote energy priorities for industrial inability to identify .onserve energy and conservation by providing and transport sector conser- attractive projects at the coordinate conservation tax incentives, improving vation programs and prepare individual plant level; policies across industry, industrial legislation and a dated and monitorable (b) the lack of adequate transport and household coordinating conservation action plan for the technical know-how in imple- sectors. measures across industrial prioriti2ed programs. menting Such projects at the transport and household sectors. plant level; (c) inadequate financial and incentive - framework. II. Domestic Enerav Resource Develonment Issues Ob,iectives Reconmendations Energy Sector Level Enterprise Level A. Develonment of Oil and Gas Resources Low success of exploratory Improve success ratio; maxi- Expand the strategy of attrac- Develop NRA's expertise in wells. Uncertainty as to mize probability of proving ting international oil companies dealing with exploration and the comnerciality of oil comnercial oil and gas in oil exploration and development complexities; and gas potential. reserves. developennt to include NRA's continue to use state-of-the- exclubive areas. art techniques and a flexible approach. Complex stratigraphic and Minimize risks by using state- Prepare goal-oriented Undertake detailed analyaes reservoir conditions of of-the-art industry technique planning and investments on the of goological, geophysical. Risha field increase uncer- to evaluate Risha field to assessment of technical and well test and other data; tainty to determine gas determine proven. probable financial risks, conduct long-ternm well test, reserve potential; mnade- and potential gas reserve integrate all available data quate planning anid program- scenarios. ming for appraisal drilling and conduct a diagnostic study drmiling prior to detailed of the Risha reservoir prior to analyses of seismic, geo- driling more wells. logical and well date eva- luation. B. Oil Shale Economic exploitation of Make investment decisions Pobtpone public investment in Continue to monitor develop oil shale. on the basis of evaluation of oil shale exploitation as such ments worldwide in the feasibility studies recently investments are uneconomic in economic exploitation of oil completed to produce shale oil the foreseeable future. shale. and use of shale in power- generation. Deal with technical and Continue to address the Formulate guidelines and NRA/JCA should continue to operational issues of oil t,..nical and operational codes for oil shale mining, monitor technological break- shale exploitation such as: issues of oil shale ash disposal and environmental throughs. and study the guide water resources availability, technologies in the lons- protectton; address the water lines and codes for oil shale ash disposal and environ- run. resources availability mining and advise the GOJ in mental protection. issue. formulating the policy guidelines. C. Renewable Enerav Need for a coordinated, Assess the potential for Formulate a policy for renewa- Evaluate ongoing activities, well conceived and measured renewable energy resources ble energy development in formulate a strategy program of assessment of and increase the competitive Jordan and prepare a plan of for future development. and renewable energy technology ness of local solar a 1ion. prioritize specific imple- on the basis of ongoing, collectors manufacturing. mentation tasks. as well as future activities. Determination of economies of scale for local manufacturing of solar collectors and improvement of its competitiveness. III. Institution and Laerational Efficiency of Enerav Enterorise ,Lssues Obiectives Recommendations Ener4v Sector Level Enterorise Level A. Central Institution Fragmentation of energy Develop KE2R as a central Re-evaluate MEMR's institutional Strengthen MEMR's staffing planning and coordination agency for undertaking: objectives and functions to to effectively undertake in functions: absence of central comprehensive energy planning: match changing sector needs; depth analysis, policy for- planning and regulation of bndgeting and management; reorganize MEMR's institutional mulation, preparation of a energy sector activities. base to effectively urndertake regulatory framework, and the policy formulation; coordina- energy planning, coordination coordination of sector tion; and, the regulation of and regulation, including review- activities. energy sector activities. ing and updating the legislative framework for energy sector activities. S. Oil and Gas Currently NRA functions as Restructure NRA to achieve Undertake an organizational Straiithen Nto e *ltaff capn- a Government Authority efficiency comparable to inter- review of NRA to improve bilies to evaluate and whose activities are fully national oil industry standards. its oerformance. mange oil/gas reserves, funded by the Government. reservoir engineering, and the NRA's present organization monitoring of oil coany set up lacks commercial focus activities. in petroleum activities. C. Petroleum Products Supol an3d PLjribsd,or The need for rationalizing Ensure that future demand for Introduce ex-refinery pricing Assess future pattern of refining capacity and mini- petroleum products is met at reforms to encourage more efficient petroleum consumption e mi2ing the cost of storage. least cost to the economy. operation of the refinery and and location of demand transport and distribution to provide incentives for centers. Following thi~ facilities, optimizing investment in sto- assessment review option- rage, transport and distribu- 'or expansion of -efinery tion activities. capacity; and uniertake a study for determining the optimal storage. transportation aid d !tri bution of petroleum products. The uncertainty of future Improve load forecasting Undertake an organizational Prepare a plan of action for load growth; the impact of tecIniques. undertake effi- review of JEA to introduce efficiency improvements, 1988/89 JD versus foreign ciency improvements, and institutional reforms and prioritize specific measures, currency exchange rate prepare least-cost investment create a regulatory framework to and monitor implementation. movements on utilities strategies and fuel choices. improve efficiency. finances; the need to optimi2e investment options optimi2e future invest- and encourage private ment options in power sector involvement in power generation. generation. Consider alternative% to increased government control over JEA*JEPCO and IDECO: such a4. establishing a new national power corporation comprising JEA JEPCO and IOECOJ establishinq JEA as a wholly owned government coroorz. t on responsible for generatioN inc transmi%qion and to merge JEP0 imc IDECO "nto a single distributio'i compamy n'oroornting JEA's distributiv'r :,eia. 1,Ssues Ob-iectiv E6eres Sector Level Recommendatios Etersat eons Enerav Sector Level Enterorise Level The government's intention to Preserve institutior.al Consider alternative insti- JEA should evaluate the subject JEA to civil service autono,ny and efficiency to tutional arrangements for corporatization option and laws requiring Government continue to attract and JEA. such as corporatiza- agree wiLh the Government on pay scales and other retain competent staff. tion and greater a regulatory framework for service conditions. private sector increasing efficiency and participation. operational performance. The development of a rational Evaluate the cost-benefits Coordinate a review of Review the cost-effectiveness data base management system, and appropriateness the cost benefits of MIS of developing an MIS system. the need for which appears to of developing the manage- development. be premature. ment information system (MIS). IV. Investment Strateav and Financing Options Care Investment Proeram The need for a core invest- Prepare a sector investment and Formulate a policy framework for Prepare a financing plan for ment program for the financing strategy and a core f-nanclng sector investments each of the sectors as well sector as a whole, as well program as part of the invest- including the expansion of as the core program; as for each entity. ment strategy. the private sector in energy evaluate financing options, as for each entity. ment strategy. resource development and ivaludin internal cash power generation including intemal cash activttles. generation, contribution of local and foreign loans, and options for the expansion of private sector financing. - 12 - II. ENERGY AND ELECTRICITY DEMAND PROJECTIONS Background 2.01 Erergy demand projections are influenced by overall and sectoral growth prospects, energy pricing policies, conservation measures, and changing trends in energy consumption. This chapter examines the influence of these factors on Jordan's energy and electricity demand projections, formulates the key assumptions for future demand growth, and presents energy and electricity demand projections to the year 2000. A. Overall GDP and Sectoral Growth ProsRects 2.02 Jordan's economy is vulnerable to changes in world oil prices because income, employment and domestic investment is directly related to income levels in the neighboring oil-producing countries in the region. During the 1974-82 oil boom, Jordan's economy experienced an economic growth of 10X per year and operated at full employment. The balance of payments and public performarnce remained strong. This high rate of economic growth was sustained by growing remittances from Jordanians working abroad, the rising demand for Jordanian exports, and increased grant-aid. These positive developments resulted in significant progress in diversifying the production base and triggered iutdustrial growth. Between 1974-82 the industrial sector's real rate of growth averaged 102 per year. The real rate of growth of the agriculture sector avereged 7%, and the transport and services sectors each averaged 82 percent per year. 2.03 The rapid decline in oil prices and the subsequent slowdown in the regional economy beginning in 1983 affected Jordan's economic growth prospects. Between 1984-88 Jordan's economic growth averaged 2.5X per year. Sectoral growth averaged 0.11 per year for manufacturing and 3.2X per year for services. Exceptionally good weather in 1986 and 1987, preceded by a long period of drought, gave rise to the high growth rate of 11.12 per year for agriculture. 2.04 Given that the regional recession is not a temporary cyclical phenomenon, the future economic rate of growth is expected to remain less robust than in the past. According to World Bank projections, the real rate of GDP growth, after reaching the low of zero percent in 1989, is expected to increase to 2.62 in 1990 and to 4.0% in 1991. Thereafter, the real GDP growth rate is projected to accelerate to about 4.5% p.a. by 1992 and continue to maintain this rate of growth through 1997. Manufacturing is expected to grow nearly 5.5X p.a. between 1992-1997; agriculture and services sectors are projected to grow each at 42 p.a. during the same period. Table 2.1 below presents the actual and projected macroeconomic scenario of Jordan's economy. - 13 - TIble 2.1: Actual and Projected Macroeconomic Scenarios (Percent per Annum) Actual /a at.. Proiected 1984-88 1989 1990 1991 1992-97 GDP 2.5 0.0 2.6 4.0 4.5 Agriculture Lk 11.1 1.0 3.0 3.5 4.0 Manufacturing 0.1 3.0 4.5 5.5 5.5 Services 3.2 -1.3 1.0 3.3 4.0 Source: Jordan - Proposed Industry and Trade Policy Adjustment Loan - Initiating Memorandum, May, 1989. La Least square growth rates, or average values 1984-88. b Exceptionally good weather in 1986 and 1987, preceded by a long period of drought, gave rise to this high growth rate. B. Energy-economy Relationships 2.05 Historically, the relationship between the growth rate of total energy and electricity consumption relative to that of GDP in Jordan has remained quite high. Between 1975-84 total energy consumption grew at 13.7X p.a to reach 2.8 toe in 1984. The onergy/GDP elasticity was 1.9. Electricity consumption during the same period grew at 20.8% p.a., reaching 1,944 Gwh in 1984, with a relatively high electricity/GDP elasticity of 2.4. High growth rates of energy and electricity consumption in Jordan are a reflection of high economic rates of growth; rapid population growth; rising incomes stimulated by remittances from Jordanians abroad; increased public access to electricity; the establishment and growth of large energy-intensive industries such as cement, potash and phosphate; and the expansion of the service sector. The high energy/GDP ratio during 1975-84 reflects the unrestricted growth in the demand for energy and electricity due to the low level of domestic energy and electricity prices. 2.06 Since 1984, the Government of Jordan has raised domestic energy and electricity prices to reflect their economic cost and also initiated energy conservation programs to promote efficient energy use. The impact of these pricing and conservation measures together with the declining GDP growth rates of 2.5% p.a. during 1984-88 have reduced energy consumption drastically, to 2.5% per year during the same period. Electricity consumption during the same period fell by two thirds and the rate of growth of electricity demand declined to 9.4% per year. The future rate of growth of energy and electricity demand is influenced not only by the overall GDP and sectoral growth prospects, but also by the Government's energy and electricity pricing and conservation policies and the effects of demand management measures. - 14 - PER CAPITA ENERGY CONSUMPTION 1970 - 88 l.1 0.8 0.6 04 0.2 loo X~~~~~~~~~l 1970 t910 1664 1966U 1363 TOTAL ENERGY CONSUMPTION 1970 - 1988 3.2 3 2.8 2.6 L2. 2. I.e t.6 1.4 / 1.2 0.6 06 0.4 1970 l9o1w t 196 tW TOTAL ELECTRICITY CONSUMPTION 1970 - 88 2.6 2.6 2.4 2.2 2 I.. 1.6 1.4 / 1.2 0.6 0.4 0.2 0 1070 1960 1684 1986 1689 - 15 - C. Demand for Petroleum Products 2.07 After a decade of a high rate of growth (13.7X p.a.), demand for petroleum products began to decline in 1984 and has stabilized at present around an average rate of growth of 2.2X p.a. The variations in the rates of growth in the demand for individual products reflect the specific developments in the respective end-use activities. The negative growth rate for jet fuel during 1984-88 reflects the direct effect of the depressed regional economic environment and the consequent decline in air traffic activity. The low rate of growth in kerosene demand reflects the continued substitution of LPG for karosene in the household sector. The lower rates of growth of gasoline and gas oil reflect the slowing down of the rate growth of transport sector activity; in addition, in the case of gasoline, the effect of taxes on large engine automobiles, as well as the price effect, contributed to the declining rate of growth. The rate of growth of fuel oil consumption also showed a declining trend, 3.6X p.a. compared with 23.51 during 1975-84, indicating the slowing down in electricity consumption. Table 2.2 summarizes the main trends of petroleum product consumption. Table 2.2: Petroleum Consumption 1975 - 1989 ('000 tons) Growth Rates Percentages p.a. 12Z_5 1982 1984 1985 1988 1989 A/ 1975-84 1984-89 LPG 25 67 83 87 111 112 14.3 6.2 Gasoline 155 301 331 331 341 345 7.7 0.8 Jet Fuel 73 296 245 227 190 233 16.8 -1.0 Kerosene 118 170 143 133 159 154 2.2 1.5 Gas Oil 229 674 685 737 792 804 12.9 3.3 Fuel Oil 138 598 920 962 1,108 1,099 23.5 3.6 Others k/ 130 314 354 342 343 327 11.8 -1.6 Total 868 2,420 2,761 2,819 3,044 3,074 13.7 2.2 L/ Preliminary Estimates. hI Includes refinery consumption and losses. - 16 - SECTORAL ENERGY CONSUMPTION 10 Go *.N . , 190 80 15 u" I t901 lU- 9l ~~am cm w M D. Electrcity Demand 2.08 High growth rates in electricity consumption, 21% p.a. between 1975-84, reflected high investment levels which generated large increases in the demand for electricity in various sectors. During 1975-84 the household sector's demand for electricity grew at the very high rate of 21% p.a. This growth reflected the sector's heavy investment in energy-using household appliances, made possible by an increase in disposable incomes due to a high level of remittances from Jordanians working abroad. The rate of growth of the household sector's demand for electricity declined to 8% p.a. during 1984-88, a result of saturation as well as of a decline in remittances from Jordanians working abroad. 2.09 Industrial demand for electricity also grew at a very high rate, 20% p.a. during 1975-84, reflecting the expansion and diversification of Jordan's industrial base and the setting up of energy-intensive industries such as cement, mining, etc. In addition, the increased availability of cheap power encouraged the industrial sector to buy power from the grid. In 1971, industry met 61% of its own electricity needs. This share declined steadily over the years to reach 31% in 1986, a result of the growth in industrial demand for electric power supplied from the grid. The rate of growth of industrial electricity demand declined to 5.8% p.a. during 1984-88, reflecting the slowing down of industrial activity and the absence of new, energy- intensive industrial investment. - 17 - 2.10 The average growth in electricity demand in the commercial sector was 22X p.a. during 1975-84. This sector includes office buildings, shops, restaurants, and hospitals. During 1984-89, the rate of growth in electricity demand in the commercial sector declined to 5X p.a., which indicates the overall reduced growth of the sector. 2.11 A very significant addition to electricity demand in recent years has come from the water pumping sector. Annual growth rates actually increased from 20X during 1975-84 to 261 during 1984-89. Between 1984-89 this sector added 306 Gwh of annual demand or 30X of the total growth in electricity demand during this period. Water pumping now accounts for 15% of total national electricity demand, comnFAred to 81 in 1975. 2.12 The shares of street lighting and other uses in total electricity demand declined to 3X during 1984-89, compared with 61 during 1975-84. Table 2.3 below shows electricity demand by major sectors. Table 2.3: Electricity Demand by Major Sectors 1975-88 (Gwh) 1975-84 1984-89 Percentage p.a. 1975 1982 1284 1985 1988 1989 A/ Rate of Growth Domestic 92 455 604 655 821 844 23.3 6.9 Industrial 165 488 851 903 1,040 1,128 20.0 5.8 Commercial 40 160 233 268 292 302 21.6 5.3 Water pumps 29 98 151 215 446 472 20.1 25.6 Street lighting 10 25 38 46 77 90 16.0 18.8 others 20 48 67 64 85 122 14.4 12.7 Total 356 1,274 1,944 2,171 2,761 2,958 20.8 8.8 Source: JEA a/ Preliminary estimates. ELECTRICrIY DEMAND BY SECTOR a2 . 26 2~~~~~~~~~16 a i{ l n _a aN \\ - 18 - E. Energy Pricing 2.13 One of the main thrusts of GOJ's energy strategy is the economic pricing of petroleum products and electricity. Jordan's pricing strategy is aimed at removing energy subsidies by bringing domestic energy and electricity prices in line s.th their respective economic costs. Petroleum Product Pricing 2.14 Petroleum product prices were increased between 1978 and 1985 to reflect increases in world market prices, to eliminate subsidies, and to provide a source of revenue for the government budget. In 1988, petroleum revenues of JD 70 million accounted for 21X of government total tax revenues and 13X of total revenue receipts. Despite the decline in world oil prices, GOJ has continued to raise domestic petroleum product prices in order to maintain these prices in real terms; promote efficiency in energy use; and finally, raise more revenue for the Government in its efforts to reduce the deficit. Follow!lng the May 1989 price increase, and even after reflecting the full impact of the depreciation of the JD against the US dollar, domestic petroleum product prices are 281 above their border prices. However, th. relationship between domestic and border prices varied considerably among different products, from 281% for gasoline, 991 for kerosene and 98% for gas cil. Table 2.4 compares domestic and border prices for petroleum products. The relatively lower retail prices for kerosene, gas oil and LPG, consumed mainly by the household and transport sectors, are in line with the Government's attempts to balance economic pricing with equity and social welfare objectives. Table 2.4: Petroleum Product Prices (Fils/liter) Domestic Prices as May Percent of Average 1975 1985 1988 1989 1989 World Prices Super Gasoline 95 210 210 270 281 Regular Gasoline 75 180 180 220 251 Kerosene 20 65 65 75 99 Diesel 20 65 65 75 98 Fuel Oil ton 8 50 50 50 86 LPG (12.5 kg) 1,050 1,800 1,800 2,000 192 Weighted average 128 Source: MEMR. - 19 - LOCAL PRICES OF OIL PRODUCTS (7/79 TO 11 /88) ISO0- . 170 - 160 150IS 140 - 130 - 120 - 110 - 100 300 80 - 70 60 50- 40- 30 20 7/79 2/Q1 11/81 12/84 11/88 GASOLINE 0 + KEROSENE C AS OIL A FUL OIL Structure of Petroleum Product Prices 2.15 At present, GOJ policy is to set the prices for all petroleum products at the retail level and to provide a fixed margin for refining, transportation and distribution activities. Under this framework, taxes on petroleum products are determined as a residual of gross revenue received for the sale of all petroleum products minus the total costs of crude oil purchases, refining, transport, distribution and retail saies. lhe current pricing formula provides the refinery with a cost-plus, guaranteed-fixed return between 7.5X and 161 on a paid-in-equity of JD 32 million. This system of refinery pricing eliminates all potential incentives for the refinery to operate efficiently. In addition, under the present pricing framework, which combines taxes and refining costs in sales prices, taxes fluctuate with changes in world market crude and product prices as well as with changes in refining costs. The present ex-refinery pricing approach is, therefore, unsatisfactory as a basis for commercial refinery operations. Recommended Strategy for the Pricing of Petroleum Products 2.16 A proposed strategy for pricing petroleum products would include the following: - 20 - (a) setting ex-refinery prices of petroleum products at international levels so that the refinery is encouraged to improve its efficiency; (b) separating refinery pricss from taxation and other retailing activities such as storage, transport and distribution to eliminate fluctuations in government revenue receipts and to control costs; (c) restructuring the tax system for petroleum products so that each component of the tax is a fixed amount per unit (JD/to..), taking into consideration government revenue-generating and equity objectives; and (d) restructuring downstream operations by setting up separate cost centers for refinery, storage, transport and distributic activities. Electricity Tariffs Tariff Structure 2.17 The current tariff structure consists of: (a) demand rates and time-of-day kwh rates for bulk supply to the distribution companies and to large and medium industries; (b) an increasing block rate for domestic consumers and public buildirgs; (c) flat krih rates for commercial consumers; and (d) a declining block rate for small iniustrial consumers. Large and medium industries, as well as distribution companies, also pay a penalty for poor power factor. E-xisting Tariff Levels 2.18 During 1984-89 tariffs by consumer category have remained substantially unchanged, with the exception of minor downward adjustments in 1986 and 1988. Prior to 1988, average tariffs reflected 100% of LRMC. However, taking into consideration the 1988/89 depreciation of JD against foreign currencies, at present the average tariff represents about 62% of the ecoaLomic cost of supply (LRMC). Given that tariffs reflect full economic cost in very few countries in the region, Jordan's average electricity tariff level is better than the level prevailing in a majority of both developing and developed countries. However, the present tariff structure shows several distortions in both the economic and financial costs of providing electricity. The bulk tariffs indicate that large consumers are supplied 6X below the economic cost of supply. The retail tariff structure contains several distortions when retail tariffs are compared to the economic costs of providing electric services. Economic subsidies are provided to all categories of consumers excluding commercial businesses, broadcasting and TV, and the tail-block of the standard tariff applicable to domestic consumers. Large commercial consumers pay electricity prices 18% above the economic cost of supply. The rationale for life-line tariffs for domestic consumers below 100 kwh consumption is in line with the Government's objective of protecting the low-income household consumers. However, there is a need to correct the existing distortion in tariff levels for waterpumping, street lighting and hotels to reflect economic cost, to encourage the conservation of electricity and to improve the financial viability of utilities. Table 2.5 shows the comparison of existing tariffs with economic costs of supply. - 21 - ob-la 2,5: Comparison of Existing Tariffs with Economic Costs of Supply Average Tariff Economic Costs Average Tariff as % of Existing Tariffs (fils#kwh) (fils/kwhL Economic Costs Bulk Tariffs JEPCO 33.00 21.26 64.42 IDECO 35.00 21.36 61.03 Large Consumers 31.00 16.93 54.61 Medium Industiv 37.00 22.90 61.89 Small Industry 47.00 24.90 52.98 Commercial Large (MV) 39.00 46.00 117.95 Small (LV) 47.00 46.00 97.87 Hotels 47.00 24.00 51.06 Water Pumping and Agric. 64.00 21.00 32.81 Domestic 50.00 36.30 72.60 Institutions 50.00 38.00 76.00 Street Lighting 56.00 13.OOL& 23.21 Average 35.69 21.94 61.47 m Applied to consumption above 1988 levels. 2.19 A comparison of the existing tariffs with the average financial cost of providing electric services at 25.55 fils/kwh shows that the subsector as a whole was financially viable up to 1988, fully met its debt service requirements, and also generated sufficient internal sources of revenue to finance up to 241 of its financing requirements. However, the relationship between average tariffs and the average f,.nancial cost of supply by individual consumer category indicates the existence of financial cross-subsidies. Most categories of consumers, with the exception of commercial, domestic and -ublic institutions, paid prices below the average cost. In fact about 60% of electricity sales were made at prices subsidized by commercial and domestic consumers. JEA is estimated to incur losses on about Q0% of its sales, YEPCO on about 60%, and IDECO on about 85%. Recommendations on Tariffs 2.20 The existing cross-subsidies between and within consumer categories are not providing appropriate signals to users and may be encouraginwg the uneconomic use of electricity. Prudent monitoring of the level and extent of - 22 - cross-subsidies should be maintained to enable the Government to make informed decisions about the wisdom of continuing these subsidies. Low rates for small domestic consumers may be justified on social grounds, but larger consumers should be charged to reflect the economic cost. It is recommended that the existing tariff structure be modified to better reflect the economic cost of supply and minimize cross-subsidies between consumer categories. Specific areas which might be considered for review are: (a) Bulk Tariffs. Bulk tariffs to JEPCO, IDECO and large consumers could be reset based on economic levels determined from the long-run marginal cost model. This may mean slightly lower prices for JEPCO and IDECO, whL.h would improve their financial position, and slightly higher prices for JEA's other large bulk consumers. To maintain uniform tariffs in the Irbid district, compensatory payments could be made directly by the Government from its budget. (b) DQ=stic 3-axlUa. Domestic tariffs could be modified so that the concessional block applied onlv to domestic users with consumption below 100 kWh/month. Those consuming above this level would not receive any concessions. (c) Commercial Tariffs. The present flat rate for commercial consumers does not encourage load management. Commercial consumers could be offered a two-part, maximum demand/energy tariff which could also provide some overall lowering of rates for the larger, medium-voltage users. The energy component could incorporate time-of-day rates. For low voltage commercial users, a lower flat rate more consistent with economic costs could be applied. The commercial tariff category could also include hotels and public institutions, thus providing these categories with incentives for load management. Tariffs should be adjusted to reflect full economic costs to consumers in these categories. (d) Other. Small industry, water pumping and agricultural tariffs could also be reviewed with time-differentiated and demand charges a possibility. (e) Streetlighting. The cost of free streetlighting should be accounted for and consideration given to whether it should be financed directly from the government budget. (f) Discounts. All existing discounts should be identified and accounted for so that the cost of these concessions could be monitored. F. Energy Conservation 2.21 A comprehensive national program to promote energy efficiency and energy conservation is now seen as an indispensable element of the - 23 - Government's energy policy. A very important component of such a policy is economic energy pricing. As discussed above, it is necessary to continue to pursue the goal of economic energy and electricity pricing by eliminating both economic and financial cross-subsidies. In addition, conservation efforts should be actively pursued. Since 1984, MEMR has been involved in a program of energy conservation. This program includes energy audits of major industries, a well as a comprehensive study on how to iLAprove efficient energy use in the transport and household sectors. MEMR has also prepared an action plan which includes follow-up, detailed energy audits, and specific conservation measures for the industrial, transport and household sectors. The potential for energy savings through conservation efforts has been estimated to range from 7% to 30% of total energy consumption. G. Energy and Electricity Demand Proiections 2.22 Energy and electricity demand projections are updated on the basis of assumptions which take into consideration the trends observed in the growtl and pattern of ene gy and electricity consumption, the regional economic climate, Jordan's GDP and sectoral growth prospects, and the effects of pricing and conservation measures. The MEMR energy-economy model, developed in collaboration with MIT, was used to derive energy-demand projections based on the following assumptions. 2.23 Key Assumptions (a) GDP and Sectoral Growth Rate Projections were taken from the May 1989 Initiating Memorandum (Table 2.1). GDP is expected to grow at an average annual rate of 4.5% p.a. through 2000. Average sectoral growth rates are projected at 4% for agriculture, 5.5% for industry and 3.5% for services. (b) Energy Pricing and Conservation Policies. GOJ is expected to continue its policy of economic energy and electricity pricing to encourage consumers to conserve energy; to minimize the cost of petroleum imports on the balance of payments; and to reduce capital expenditures on additions to electric power generation capacity. The impact of pricing and conservation measures is expected to encourage changes in the structure of the economy from an energy-intensive base to a relatively less energy-intensive and more energy-efficient one. Energy efficiency is expected to improve over the longterm in response to government pricing and conservation measures. Consequently, the energy-GDP coefficient is expected to continue to decline over the longterm from a historical high of 1.9 to around 0.8 by the year 2000. The electricity-GDP co-efficient is expected to decline from around 2.4 to 1.4. Price elasticities over the longterm are expected to improve: -0.2 for energy and -0.3 for electricity. - 24 - 2.24 Based on the above assumptions, primary energy consumption in Jordan is projected to grow, on average, at 2.8Z p.a. to reach 4.5 Mtoe by the year 2000. Details are given in Table 2.6 below. Table 2.6: Primary Energy Demand Projections 1988-2000 (000 Mtoe) Actual Projections Annual Average 1987 1988 1989 ' 1990 2000 Growth Rate to 2000 (percentage) LPG 116 111 112 130 166 2.9 Gasoline 352 341 345 427 487 2.0 Kerosene 183 159 154 207 270 3.1 Fuel Oil 1,214 1,108 1,099 1,275 1,927 3.9 Diesel 769 792 804 921 1,099 2.5 Jet Fuel 191 190 233 233 265 2.0 Asphalt 127 135 113 155 176 2.0 Others I/ 76 -- 214 81 110 Total 3.020 3.044 3.074 3.420 4.500 ;t fi/Preliminary estimates Lf Includes refinery fuel and natural gas. 2.25 The system's peak demand is projected to grow at 6.1X p.a. between 1988-2000, increasing from a level of 525 MW in 1988 to 1,065 KW in the year 2000. Based on this forecast and assuming a 301 reserve margin, additional investment for a capacity expansion of 60 MW will be needed in 1993, rising to 520 MW by the year 2000. The medium-case forecast of energy sales shows a growth rate of 4.8Z, rising from 2,761 GWh in 1988 to 4,896 GWh in the year 2000. This is consistent with the declining trend observed in electricity consumption in recent years, i.e., a decline to 91 p.a. from 1984-88. Sectoral growth rates are also projeeted to slow down substantially to 5.11 p.a. for households, 3.4Z for industry, 7.11 for commercial, and 7.21 for water pumping. Lower growth rates in the domestic sector reflect the saturation of new hook ups, covering 971 of the population, and the completion of the rural electrification program. In addition to the sharp drop projected in new connections, the combined effects of lower GDP and per capita income, as well as pricing and conservation measures, are expected to reduce load growth rates in the future. With the conversion of existing diesel water pump sets to electric pump sets by end-1989, the water pumping load is expected to grow at the substantially low rate of 7.21 p.a. Details of electricity demand projections are given in Table 2.7 below: - 25 - Table 2.7: Electricity Demand Projections 1987-2000 (Gwh) Annual Average Actual Preliminary Projections /a Growth (%) 1987 1988 1989 1993 2000 1988-2000 Domestic 743 821 844 954 1,495 5.1 Commercial & Services 293 292 302 582 713 7.1 Industry 721 1,040 1,128 1,093 1,543 3.4 Water Pump 404 446 472 650 1,000 7.2 Streetlighting 66 77 90 97 145 5.4 Others 79 85 122 --- --- --- Totals 2.655 2.761 2.958 3.376 4.896 4.8 R Excludes private industry self-generation which is consistent withi JEA's medium scenario. Sensitivities to Demand Projections 2.26 Sensitivity analyses indicate that failure to implement effective pricing, demand management and conservation measures would increase energy and electricity consumption by one and a half times their base case levels. Such an increase would mean an additional foreign exchange requirement of about US$300 million per year to import petroleum products. In an uncertain environment characterized by sluggish GDP growth and sectoral growth prospects, the sensitivity factor has important implications for planning new generation capacity additions and capital expenditure requirements. GOJ strategy should be to conserve energy and promote its efficient use by continuing to implement energy conservation and demand-management measures, including economic energy pricing, and by improving load management and operational efficiency. Given that the peak load is likely to grow between 5% to 7.5% in the future, GOJ should also focus on how to meet this growing energy demand at the least costL1. The economic exploitation of Jordan's domestic energy resources is a major component of this least-cost strategy. III. DOMESTIC ENERGY RESOURCES DEVELOPMENT Background 3.01 Since the oil price increases in the seventies, Jordan has vigorously pursued a policy to explore and exploit oil, gas, oil shale and renewable domestic energy reso-urces in order to decrease it reliance on imported oil. Despite declining oil prices and the decrease in international exploration activity, Jordan was successful in promoting oil exploration by a number of / Background Paper 4 on Jordan's power sector review examines in detail the least-cost strategy and NEMR/JEA energy conservation efforts. - 26 - international oil companies. In parallel, the government agency, the Natural Resource Authority (PlRA), also continued to carry on exploration activities and has succeeded in making two small oil discoveries in the Azraq and Sirhan basins, and the first gas discovery in Risha, in 1987. GOJ has also initiated a number of studies to develop its oil shale resources and is currently executing several pilot projects to develop its solar and wind energy resources. This chapter assesses the efforts made thus far to assist GOJ formulate an .ppropriste domestic energy resource development strategy. It addresses four key issues: (i) the exploration and exploitation of oil and gas; (ii) planning for natural gas development; (iii) natural gas pricing; and (iv) the technical and economic feasibility of oil shale development. A. Oil and Gas Exploration Review of Exploration Activities 3.02 Jordan is approximately 96,500km2 with 78Z of its land (75,000km2) covered by possible oil-bearing rocks. Between 1946 and 1978 exploration activities by several foreign oil companies included geological and geographical surveys and the drilling of 14 exploratory wells. Although oil and gas shows were observed in several wells, no commercial oil and gas discoveries were made. The companies expecting to find large, m4ddle-east size oil fields were disappointed and abandoned their concessions. 3.03 While concerned about the loss of interest shown by the oil companies, the Government remained convinced that past exploration efforts were inadequate. Consequently, the Government decided to use its own technical and financial resources to explore for oil and gas. The Natural Resources Authority (NRA) has been in charge of all exploration since 1981. It first undertook a revision and reassessment of all past geological, geophysical and well data. This was followed by additional seismic surveys, the drilling of 49 wells, and a re-evaluation of Jordan's hydrocarbon resources. On the basis of its exploration efforts, NRA carried out extensive geophysical and geological evaluations of irs petroleum acreage. An IBRD loan, 2371-JO, assisted NRA in providing technical and financial assistance in the evaluation and formulation of an exploration strategy. Strateg~y for Oil and Gas Exploration 3.04 In view of the increasing burden imposed by oil imports, the GOJ strategy for oil and gas exploration emphasizes accelerating the exploration and the development of domestic hydrocarbon resources. The strategy consists of: (a) promoting private investment through an open-door policy to attract international companies. This policy resulted in contacts with more than 40 oil companies and the signing of production-sharing agreements with three international oil companies (AMOCO, Hunt and Petrofina); the NRA has also signed an assistance agreement with the Austrian OMV to explore the southern Sirhan area. In addition, the NRA has signed technical cooperation agreements with the PetroCanada International Assistance Cooperation (PCIAC) which began to promote the Risha area to international oil industries in 1989. A similar agreement with the Japan National Oil Company has been signed for the promotion of the northern Sirhan area; (b) dev'eloping oil reserves in the Azraq area; (c) Evaluating the gas discovery in the Risha area by defining the limits of the reservoir and estimating reserves; (d) preparing gas development - 27 - development and utilization plans on the basis of proven reserves and sustainable gas production profile from the Risha Reservoir; (e) strengthening NRA/NENR technical expertise by providing: (i) training abroad in state-of-the art exploration, production, gas utilization and planning techniques; and (ii) establishing facilities within NRA for advanced geological, geophysical, geochemical, reservoir, and gas engineering staff. Review of Current Status and Recommended Future Approach 3.05 GOJ's strategy for oil and gas exploration is basically sound. NRA undertook a reassessment of Jordan's hydrocarbon resources at a time when international oil companies (IOC's) showed little interest in exploring in Jordan. Between 1975-88, NRA has spent about US$220 million in oil and gas exploration activities. NRA efforts have established that Jordan's petroleum geology is favorable to the generation of hydrocarbons. The first oil and gas discoveries, despite being small, have generated IOC's interest. NRA experience has also shown that oil traps found in the Azraq basin are small and difficult to locate. Similarly, the Risha gas reservoir is known to be of complex stratigraphic traps, making it difficult to determine the size of gas reserves and the rate of sustainable production. The complexity of structures, as well as reservoir conditions, require the use of state-of-the art techniques in future exploration and development activities. 3.06 NRA has recognized these difficulties and has taken a number of steps to overcome them. These include improving data quality by undertaking extensive seismic surveys using vibroseis techniques, and reprocessing and reinterpreting the data from the Risha region with the cooperation of PetroCanada. NRA has also set up working groups to integrate and evaluate all data from Risha and Sirhan in order to reach a better understanding of the geological complexities of these areas. However, considering the extent of the sedimentary basins with potential hydrocarbon prospects, a methodical step-by-step approach using the latest seismic, drilling, testing and evaluation techniques would be needed to fully assess the hydrocarbon potential. It is, therefore, important for GOJ to recognize that hydrocarbon development activity has a lead time of seven to ten years, even in the case of the most profitable discoveries. Any commercial exploitation of gas or oil in Jordan with difficult stratigraphic and complex reservoir conditions would be longer than the industry average of seveu. to ten years. It would, therefore, be prudent for GOJ/MEMR/NRA to take into consideration the following recommendations in formulating a rational policy for oil and gas exploration and development: (a) Expand the strategy for attracting IOCs in oil exploration and development to include these areas where only NRA is involved at present. This will spread the risk of major capital investment and allow NRA to share in the latest technologies; (b) Defer future investment in the Risha gas field until comprehensive diagnostic studies have been completed and the reserves are evaluated. Long-term production testing of Risha wells 3, 6, and 8 should be completed as well, preferably with the assistance of independent consultants; - 28 - (c) Strengthen the NRA role in monitoring the activities of IOCs and develop NRA institutional capabilities to formulate long-term planning for the development of Jordan's hydrocarbon resources by providing on-the-job training to Jordanian staff; and (d) Undertake the institutional restructuring of NRA with a commercial focus to make the efficiency of oil and gas operations comparable to international petroleum industry standards. B. Natural Gas Development and Utilization 3.07 The first use of natural gas in Jordan's energy sector started in March 1989 with the use of Risha gas for electric power generation. Natural gas development and its utilization in Jordan are influenced by three main factors: (a) the unknown nature of the natural gas reserves; (b) the potential demand for natural gas as a substitute for oil in power generation and other uses; and (c) the pricing of natural gas. Uncertainty of Gas Reserves 3.08 Planning for natural gas development is entirely dependent on the size of recoverable gas reserves. At present, there is a great deal of uncertainty about the size of possible gas reserves in Jordan; even the extent of the reserves in the already discovered Risha gas field is not known. In the medium term, planning for gas development and utilization is dependent on the size of the Risha gas discovery. Risha wells 3, 6, 8 and 16 are found to be productive. However, the areal extent of the producing sands is not known. The first estimate of recoverable reserves is expected by mid-1990, but this reserve figure will be subject to periodic revisions until the entire Risha field is delineated. Gas Utilization 3.09 Although vital information about the size of natural gas reserves is still lacking, this in no way diminishes GOJ's need to formulate a strategy for gas utilization. GOJ's main strategy is to substitute gas for fuel oil in power generation. Based on the present consumption pattern, natural gas can be substituted for fuel oil in electric power generation, and in the cement, phosphate, potash and fertilizer industries. Preliminary studies conducted by MEMR estimate potential gas demand both in the power plants and industries to be about 350 MKScfd. This is based on the assuxzption that the conversion of all steam and gas turbine power plants and industrial facilities would represent a maximum possible peak natural gas demand of 350 MScfd. This demand exceeds even the envisioned maximum reserve; a trillion cubic feet, and the production scenario for Risha gas of 200 MKScfd. 3.10 On the basis of the available information, GOJ has made a preliminary assessment of the Risha gas reserves at 58 BCF, with a profile of 20 MM Scfd of production for at least three to four years. GOJ completed the construction of 334 km of 132 kv transmission line from Amman to the Risha gas field and, in March 1989, installed and commissioned 2 x 33 mw gas turbines. GOJ's objective, to make use of natural gas in power generation without flaring it during the long-term testing period, is sournd. However, this decision entails certain risks, namely, drops in pressure and the difficulty - 29 - in sustaininf, gas production. If the long-term test results confirm the commerciality and sustainability of the reserves, the plans to increase the number of gas turbines until the transmission capacity is reached. Recommended ARproach for Gas Development and Utilization 3.11 Given the uncertainty associated with both the size and the rate of sustainable natural gas production, GOJ should proceed with caution and adopt a scientific approach in planning investments in natural gas development and utilization. GOJ has a pressing economic need to substitute domestic oil and gas for imported oil. However, it is important to understand that hydrocarbon exploration and development is highly risky, capital intensive, and has a long lead time. It is, therefore, recommended that GOJ proceed in three phases while planning natural gas development and utilization. Phase I includes a rapid assessment of the Risha Reservoir covering all its stratigraphic and reservoir problems. Followiag the long-term testing of the Risha Reservoir NRA intends to undertake a comprehensive diagnostic study of all available geological, geophysical, well test and long-term production test data in cooperation with PCIAC. The draft report is expected to be submitted to GOJ in April 1990. (The Terms of Reference for such a study is given in Annex 1.10 of Background Paper (1)). Additional investments for further field appraisal and the development of the Risha field should be considered only if the Risha field assessment study is found favorable. Such an evaluation could lead to the formulation of a Risha field delineation and development plan. Phase I could be completed in 18 to 24 months. 3.12 Phase II could be completed in two to three years and would consist of (a) the delineation and development of the Risha field; and (b) a complete identification of gas resources. Only when the recoverable gas reserves reach more than 500 Bcf, with a production profile of more than 100 MMScfd, does GOJ plan to consider the construction of a pipeline to bring gas from Risha to users at Zarqa and Amman. (Phase II would also consider other gas supply options from domestic sources currently under exploration, as well as potential external sources); and (c) the first phase of a gas utilization study which would include demand forecasts for natural gas and substitution possibilities. 3.13 Phase III would consist of the preparation of a national gas development plan based on the gas utilization, demand forecast and gas pricing studies completed in Phase II. This plan would reflect the GOJ's policy for gas utilization and pricing and would identify gas investment projects. It would also include the preparation of a financing plan and the preparation of feasibility and engineering studies for approved gas investment projects. In all three phases, a well-integrated approach linking gas supply options, gas utilization and natural gas pricing is seen as the prerequisite for a rational approach to gas development and its utilization. C. Natural Gas Pricing 3.14 An appropriate strategy for natural gas development should be to maximize the net benefits of exhaustible gas resources. This objective has three important dimensions, each of which implies certain pricing principles. First, there must be incentives to promote the efficient use of gas. Gas prices must neither be so high as to inhibit consumption (especially where the - 30 - users must incur some cost to switch from other fuels), nor so low as to encourage wasteful use. Second, there must be adequate incentives to explore for and produce gas. Particularly in cases where governments may be able to attract foreign capital to assist in gas development, the provision of an appropriate pricing and contractual framework is essential. Finally, the growth rates of both supply and demand for gas should be rapid and should op.imize gas resource development. Formulation of Gas Tariffs 3.15 Gas produced in the Risha field will be the first Jordanian gas sold. Tariffs could be formulated according to the following principles: - Domestic gas prices would be compatible with production-sharing agreements (PSAS) with international oil companies to provide incentives to the oil companies to develop gas fields. A gas price formula has already been adopted with AMOCO and Petrofina; gas prices for producers are set at 0.85 of the international market price of heavy fuel oil with equivalent thermal value. In the shoct term, when the size of the gas reserves found is small and gas is substituted for imported fuel oil, domestic gas prices would be linked to the economic costs of imported fuel oil. - In the medium to long term, should Jordan discover large gas reserves, delivered prices could be set not lower than the longrun marginal cost of supply plus the depletion allowance. With the opportunity cost of imported fuel as the upper limit, and LRMC plus depletion allowance as the lower limit, a range of gas tariffs could be formulated for different classes of consumers, e.g., industrial/export-oriented industries, intermediate goods industries, commercial and household sectors. D. Oil Shale A Review of Efforts in Exploration and Development 3.16 Jordan has potentially very large oil shale reserves of over 40 billion tons. The major deposits of commercial-scale interest known so far are estimated at about 1.1 billion tons at El-lajun, 1.2 billion tons at Al-Sultani, and 8 billion tons at Jurfed-Dawarish. The average oil content of Jordanian oil shale is 10 by weight, which is good quality shale, comparable to the higher quality shales found in the US and elsewhere. All these deposits are located south of Amman in central Jordan and are easily accessible from the desert highway from Amman to Aqaba (see map No. 21349). NRA has done a detailed survey, drilled core holes and performed laboratory work to determine proven geological reserves, and the quality, oil content and calorific value of the El-lajun and Sultani deposits. Based on the favorable results from oil shale analyses of these deposits, JEA commissioned three studies by Brown Baveri Company (BBC) of Switzerland, Lummus Combustion Engineering of Canada and Bechtel/PyroPower of USA to investigate the techno- economic feasibility of exploiting oil shale deposits. BBC, Canadian (CIDA) and USAID grants financed the foreign exchange cost of these studies, respectively. GOJ/JEA funded the local cost. - 31 - 3.17 Kloeckner/Lurgi investigated the feasibillity of using El-lajun oil deposits for constructing an oil shale retorting project to produce 50,000 b/d of syncrude and generate 350 MW power from the spent shale by fluidized bed combustion (FBC). Kloeckner/Lurgi completed their study in two phases and submitted their final report to NRA in April 1988. L mmus Combustion Engineering and Bechtel/Pyropower have investigated the techno-economic feasibility of the direct combustion of Sultani oil shale, using FBC technology, to install a 25 MW demonstration pilot power plant. Bechtel-Pyropower has also investlgated FBC technology for constructing 50 and 100 MW power plants. The report by Lummus was submitted to JEA in October 1988. The Bechtel/Pyropower report was submitted in February 1989. These prefeasibility studies concluded that the exploitation of oil shale is technically viable, both for the extraction of shale oil and as a fuel for direct combustion in power generation. Recommended Strategy for Ol Shale E,sp itatioon 3.18 In view of the need to reduce the foreign exchange cost imposed by the oil import bill and given the sulperior quality of 4s oil shale, the Government is justified in trying to determine if oil shale exploitation can meet part of the future demand for energy. However, decisions on whether oil shale exploitation is a viable energy supply strategy, either for the production of shale oii and/or in electric power generation, should evaluate the technical, economic and financial risks of commercial oil shale exploitation. In addition, in forwulating a long-term oil shale exploitation plan from a national perspective, the Government should address the issues of water resource availability, ash disposal and environmental protection. 3.19 Assessments of the feasibility studies and investigations completed thus far indicate that, despite the experience gained in the laboratory tests and mini-research facilities, the viability of commercial-size retorting plants and FBC power plants is still questionable. Since oil shale has not been used directly as a fuel in any commercial-based retorting or FBC-based plant, the technical and financial risks are substantial. In fact, with oil prices declining since 1985 and probably continuing to do so into the nineties, plans to construct commercial-size plants in the industrialized countries have either been abandoned or delayed. The economic assessments are preliminary and need to carefully analyze basic plant design, operating costs, the costs of mining and water resources, and the experience of operators of similar syncrude plants around the world. Taking all these factors into consideration, using oil shale, either for producing syncrude and/or in power generation, seems to be uneconomic. The Government should postpone, at least until 1995, investing its scarce resources to build commercial size oil shale exploitation plants for either retorting or power generation. 3.20 Beyond 1995, even if oil shale exploitation elsewhere is proven to be economically feasible, determining optimal water requirements and availability is essential before considering investing in an oil shale exploitation plant in Jordan. Studies on water resources availability have demonstrated that water requirements of 22 million/m3 per year for even one oil shale complex cannot be met from existing shallow aquifers in Jordan. Consultants have indicated alternative water requirements would be about 5 million in per year if air cooling were used. However, the application of air cooling in such a - 32 - plant, and its effectiveness in reducing the temperature of massive amounts of spent shale, has not been analyzed. So that Jordan is prepared to take appropriate decisions whenever commercially feasible oil shale exploitation options become available, the Government should continue to assess groundwater contamination risks, dust health hazards, water resource constraints, the comparative efficiency of air cooling versus water cooling, and tle potential long-term environmental impact from waste disposal and emission. E. Renewable Energy Resources 3.21 Solar, wind and biogas constitute the main renewable energy resources in Jordan. Jordan is endowed with a high radiation intensity averaging 5 to 7 KWh/m; this is one of the highest solar energy intensities recorded anywhere in the world. Jordan has a potential wind regime suitable for electricity generation for water pumping. Biogas from animal and domestic wastes is estimated to substitute about 130,000 toe per year. 3.22 Ongoing Activities in Renewable Energy. Current activities in renewable energy consist of a set of separate projects which are being carried out mainly through bilateral assistance. These activities include: solar water desalination, solar water heating, photovoltaic applications, the use of wind energy for water pumping, and the implementation of a pilot biogas system. At present, a total of 100,000 solar water heater (Swh) units have been installed in approximately 26Z of Jordan's households. Currently, over 50 manufacturers are producing solar hot water systems in Jordan. The industry has a capital outlay of about $5 million, employs over 500 technicians, and has an annual production capacity of about one million square feet of collector area (equivalent to about 28,000 household units). The Wind Farm in Jordan (4 wind turbines X 80 kW each), financed from a World Bank Loan (2371-JO), estallished the technical feasibility of wind pow-er generation. 3.23 These ongoing activities have afforded access to excellent data, processing equipment, adequate laboratory facilities, and a pool of competent staff. In addition, research and development efforts undertaken by MEMP and the Royal S;Aentific Society, in collaboration with bilateral and multilateral agencies and governments, have established Jordan as a regional center for testing, developing and disseminating Renewable Ener&y System (RES) technologies. Its selection among 60 candidate countries for the design, construction and implementation of a 30 IMWe solar thermal power plant has also established Jordan as the regional center for solar energy development. MEMR has formulated an action plan to establish the efficiency of various renewable energy technologies. The action plan includes: (a) assessing climatic data; (b) establishing the efficiency of RES; (c) improving the cost effectiveness of RES; and (d) increasing the rate of dissemination of established and reliable systems. The action plan, when implemented through ongoing and potential activities in solar, wind and biogas exploitation, is projected to supply up to 1OX of Jordan's energy needs by the year 2000. MEMR should continue to evaluate ongoing activities, coordinate the fragmented responsibilities across different agencies and prioritize specific implementation tasks in the development of RES. - 33 - IV. ENERGY SECTOR INSTITUTINS AND OPERATIONAL EFFICIENCY Introduction 4.01 This chapter examines two sets of issues: the adequacy of sector institutions to undertake energy sector development activities; and the need to restructure energy enterprises to improve efficiency. It evaluates MEMR's current organizational setup and its role as a central agency for carrying out sector planning, coordination and regulatory functions; the chapter also examines the need for strengthening MEMR as the central agency responsible for comprehensive planning, policy formulation and the regulation of energy sector activities and operations. The chapter evaluates the scope for potential efficiency improvements and recommends measures to improve the institutional, technical, managerial, financial and operational efficiency of energy enterprises in the petroleum and power subsectors. A. Institutional Setting 4.02 Several agencies are concerned with the operation and development of Jordan's energy sector. At the ministerial level, planning, coordination and policy formulation involves the Ministry of Planning (MOP) and the Ministry of Energy and Mineral Resources (MEMR). 4.03 MOP reviews the energy sector plans and incorporates them within the g national planning process. It also coordinates the foreign borrowing requirements for development projects. Funds borrowed are onlent, usually on commercial terms. MOP actually executes foreign loans and coordinates technical assistance from overseas development assistance agencies. MOP also coordinates the supervision of energy projects financed under bilateral and multilateral funding agencies. 4.04 MEMR, formed in November 1984, is entrusted with a varied mix of planning and operational functions. T'hese include undertaking energy planning and policy formulation; handling oil imports and exports; developing renewable energy resources; improving energy efficiency and conservation; and overseeing the operation of the petroleum refining company and power utilities. 4.05 The main energy sector operating agencies include: NRA, responsible for the exploration and development of domestic primary energy and mineral resources; the Jordan Petroleum Refining Company (JPRC), responsible for the refining, storage, transport and distribution of petroleum products; JEA, responsiblk for the generation and transmission of the public sector electricity supply and the distribution of electricity in the areas of its jurisdiction; the Jordanian Electric Power Company (JEPCO), responsible for electricity distribution in Amman, Zarqa and the Balqa governorates; and the Irbid District Electric Company (IDECO), responsible for electricity distribution in the Irbid and Mafraq governorates. 4.06 The private sector plays an izn'ortant role in Jordan's energy sector. Private sector participation currently is in all phases of energy activity from the exploration of oil and gas to the refining, storage, transport and distribution of petroleum products and electricity distribution. - 34 - 4.07 The unique feature of Jordan's energy sector is that, although both public and private agencies are involved in the operation and management of sector activities, they are all fairly well staffed and capable of executing their responsibilities at standards that are substantially higher than those found in the area. By contrast, the central agencies responsible for the overall planning and coordination are either over-extended (HEMR) or understaffed (MOP) and are, therefore, unable to effectively discharge their planning, coordination and regulating functions. As a result, Jordan does not have a comprehensive lorg-term national plan for energy development consistent with a set of macroeconomic objectives. 4.08 At present, MOP is responsible for coordinating sectoral plans, selecting projects for national development plans, and mobilizing foreign and domestic financing for these plans. However, its coordinating function is basi"ally limited to convening a committee to prepare the energy chapter of the five-year plan. In fact, this chapter is independently drawr. up by the enterprise or agency responsible, without any assurances that it is part of the overall, least-cost strategy for sector development. At present, MOP's staff is over-burdened because its wide responsibilities cover all sectors of the economw. Given the need for addressing the financial viability of energy enterprises and the importance of mobilizing domestic and external financirg sources for energy sector investment, MOP needs to strengthen its position to ensure that all sectoral plans are consistent with overall five-year plan priorities. 4.09 According to its mandate, MEMR is responsible for carrying out planning policy formulation, energy conservation, renewable energy development, and the importing of crude oil and petroleum products. MEMR has successfully formulated an energy strategy for Jordan. The main elements of this strategy focus on: (i) reducing the country's dependence on imported oil by developing domestic energy resources and increasing energy efficiency through conservation, demand manegement and pricing measures; (ii) providing economic and diversified energy supplies; (iii) adopting pricing policies to ensure the economic efficiency and financial viability of energy sector entities; and (iv) protecting the environment by reducing emissions and the pollution caused by the implementation of energy projects. 4.10 Since its creation, MEMR has sensed the need for a more systematic analysis of the interelationship between energy and economic growth and has moved to fill this gap by commissioning several energy planning, pricing and conservation studies. MEMR has supervised studies on industrial energy audits; successfully undertaken the survey of energy conservation in small industries; and completed a study on energy conservation in the transport sector. MEMR has also launched effective campaigns to encourage household energy conservation and to control dampness in buildings. MEMR has developed renewable energy projects for using solar and wind energy resources. In addition, MEMR continues to handle effectively its role as the importer of crude oil and petroleum products. To enhance the capability of its staff to handle its planning, conservation and operational functions, MEMR has provided both on-the-job training with consultants, funded by bilateral financial assistance programs, anw sent its staff abroad for training in energy planning and operations. Although the list of MEMR's achievements in the last four years is impressive for a newly established institution, its present institutional structure is inadequate to effectively undertake all its - 35 - sector planning, coordinating and regulating functions. 4.11 The main constraint to HE1R's ability to formulate a comprehensive national energy plan is the fragmentation of its functions among several sector agencies. In addition, MEMR staff are over-burdened because of their many responsibilities, including energy conservation, renewable energy projects and the handling of oil import operations; the time devoted by MEMR for the preparation of the national energy plan is fairly limited. There is a clear need for the Government to consolidate expertise in a single centralized agency which directs the energy planning, coordination and regulatory functions of the sector as a whole. MEMR therefore needs to strengthen its capabilities in the areas of planning, demand forecasting, project analysis, and regulatory work. Recognizing the need to reinforce its institutional structure, MEMR made a few changes in its organization in September 1989 (soe Chart 43931B). However, the issues discussed above require that MEMR reorganize its organizational structutre, as recommended in the proposed organizational chart (Chart 445C3B). 4.12 Although MEMR has successfully commissioned studies on energy planning and has acquired a number of demand forecasting models, it still needs to develop the capability to undertake in-depth energy demand analysis. Such an analysis should be a coordinated effort between MOP, energy enterprises, and energy users. MEMR should not only develop the capability of running the demand models but should also develop the analytical capability to evaluate the energy-economy linkage. It is important for MEMR to develop refined insights into the factors affecting the demand for energy and electricity. The demand analysis group should be staffed with an econometrician, who would be responsible for forecasting, and at least two people with an engineering, statistical, operaLional research, and economic background. This group should work closely with those responsible for energy efficiency and conservation. To prepare a rational energy sector investment plan consistent with the macroeconomic priorities, MEMR should develop its capabilities to evaluate project feasibility studies prepared by line agencies, as well as those initiated under its own supervision. Development of this capability within MEMR would enable Jordan to screen economically viable projects for inclusion in the five-year plan. 4.13 As the central agency for the promotion of energy sector development, MEMR should strengthen its capabilities to coordinate, monitor and regulate energy enterprises and their operations. At present, the relationship between MEMR and the energy enterprises is very healthy. These agencies carry on their day-to-day activities without unnecessary intervention from the central agency. However, Jordan's changing energy sector requires MEMR to take a more active role at the ministry level by undertaking certain regulatory functions such as establishing revised regulatory arrangements, ensurkag greater performance accountability from energy enterprises, and monitoring compliance with government policies. In addition, given the scarcity of investment resources, Jordan needs to develop incentives for greater private sector participation through Build, Own and Operate (BOO) and Build, Operate and Turnover (BOAT) programs. MEMR, in turn, would need to design appropriate regulatory mechanisms and introduce standard industry safety practices, codes, and appropriate regulatory framework for encouraging private sector participation. In this regard, an important consideration is the perceived conflict of interest of NEMR's role as the shareholder and the regulator. - 36 - Any reorganization or restructuring of MEMR's functions should carefully evaluate the need to safeguard the fairness of the regulatory mechanism and the confidence of investors. 4.14 Strengthening MEMR's coordinating role would help improve the financial planning and management across the energy subsector. MEMR could then oversee the planning process as performed by implementing agencies, ensuring consistency and balance with overall policy objectives. The reorganization of MEMR would strengthen the institution, improve the capabilities and skills of the staff, and provide dhe right direction and focus for the energy sector. B. Energy Enterprises - Institutional Arrangements and Onerational Efficiency 4.15 Energy enterprises in Jordan generally operate efficiently, far above the norm for the region. However, these enterprises are now facing a scarcity of available investment resources. This challenge makes it neces".ary to strengthen the organization of energy enterprises and to reduce funding requirements by improving technical, operational, financial and managerial efficiency. 4.16 The Natural Resources Authority (NRA) is a government agency responsible for all activities relating to the exploration and development of minerals and hydrocarbons. NRA is organized in five technical directorates and three service directorates: petroleum exploration, geological survey, mining, geophysical survey and laboratories. The petroleum department of NRA oversees all hydrocarbon-related activities in Jordan, which among other things includes geological surveys negotiations with foreign firms for undertaking exploration and drilling. The department of geology at NRA supervises the studies dealing with the development of oil shale. NRA has carried out its designated functions in a satisfactory manner and has contributed to improving of the hydrocarbon generation prospects in Jordan. NRA efforts to establish hydrocarbon prospects were instrumental in attracting IOCS who earlier showed little interest in investing in oil exploration activities in Jordan. 4.17 NRA is guided by the Government's need to substitute oil imports domestic production. The agency tends to fulfill bureaucratic planning targets (as to the number of wells drilled and the number of km of seismic surveys undertaken) rather than follow commercial industry practices. This often results in costly and inefficient operations, such as drilling wells before evaluating the results of earlier exploratory activities and undertaking productiorn activities before evaluating testing and reservoir conditions. Although the operating agencies in Jordan are subjected to fewer bureaucratic constraints than elsewhere in the r-gion, NRA's present organizational set up lacks a commercial orientation. Operations are often piecemeal, disjointed and inflexible. This may be the result of trying to meet unrealistic expectations. Again, it is necessary to titress that oil and gas activities are inherently risky, have a long lead time, and require complex technical capabilities for efficient operation. Efficient oil and gas operations require rational planning, a flexible approach, and the availability of optimum, least-cost options. - 37 - 4.18 NRA needs to improve its present organizational structure which it could do in several ways. First, it could undertake a review to: (i) redefine its objectives and role; (ii) examine the need for a petroleum law which would attract IOCs; (iii) restructure the petroleum directorate of NRA on a commercial basis and (iv) formulate an implementation schedule. Next it could increase its technical and operational efficiency by (i) developing tight-gas-reservoir evaluation techniques; (ii) undertaking advanced seismic interpretation; (iii) integrating various geological, geophysical and well test inputs; (iv) conducting reservoir evaluation studies; and (v) developing the capability to monitor IOC activities. NRA could also improve its financial and management efficiency by installing and implementing a commercial accounting system. At present the accounting system is on a cash basis and all costs are expensed. No revenues are entered in NRA's books. Production wells are not capitalized as fixed assets or amortized based on depletion rates. Problems are experienced in the allocation of costs between exploration and production. A commercial accouating system, including procedures for auditing costs of oil companies involved in production sharing agreements, is necessary for the effective management of NRA's current and future operations. NRA is currently mounting such a system. 4.19 The Jordan Petroleum Refining. Storage. Transportation and Distribution Comnany (JPRC). JPRC is responsible for the downstream phase of petroleum activities such as oil refining, storage, transportation and distribution. JPRC is a privately-owned company in which the public sector holds 12X of the total shares. JPRC's operations are regulated by MEMR in accordance with a concession agreement which ensures the company a fair return on investment. JPRC operates the only refinery in the country, located 35 km northeast of Amman at Zarqa. The Zarqa refinery is also the only distribution center for petroleum products. Although petroleum downstream activities are privately owned and staffed with skilled personnel, much remains to be done to reduce costs and optimize operating and investment decisions. The current system provides the refinery with a cost plus guaranteed income which eliminates all potential incentives for the refinery to operate efficiently. The present approach of combining the refinery prices with product taxes in the sales prices, and making the refinery the tax collecting agency for the Government, is unsatisfactory as a basis for commercial refinery operations. Ex-refinery prices of petroleum products should be set at international levels so that refineries are encouraged to improve efficiency. A revised remuneration formula should separate refinery prices from taxation and other retailing activities such as storage, transport and distribution. It should also incorporate clear guidelines on future investments, capital structure and dividend policies. A restructuring of downstream operations would require setting up separate cost centers for refinery, storage, transport and distribution activities. Such a restructuring of JPRC's activities could attract additional private investment. 4.20 To meet the increasing demand for petroleum products, the storage, transport and distribution system needs to be reevaluated. At present, there is a total of 85,000 tons of storage capacity in the country. An additional 200,000 and 700,000 tons of storage will be needed by 1990 and 2000, respectively. Before additional storage facilities are selected, alternative options such as a second refinery, the rationalization of the existing refinery, and the possibility of substituting natural gas for fuel oil need to be considered. All petroleum products are now transported by truck. - 38 - Transport by product pipeline is an economic alternative which should be considered to (a) improve congestion of road traffic; (b) reduce investment in new road construction and maintenance costs; and (c) save on the gas oil used by road tankers. Bssed on a feasibility study to determine the least-cost solution, GOJ should consider financing options including ways to attract the private sector to help expand the infrastructure system. Power Enterpcrises 4.21 The principal operating entities in the electricity sector are JEA, which is an administraitively autonomous government-owned utility, and two semi-private distribution companies: JEPCO and IDECO. JEA was established in 1967 under a general electricity law (amended in 1976 and again in 1986) to manage, administer, construct and operate the electric power system in Jordan. It has sole responsibility for the generation and transmission of electric power. Distribution, however, is carried out in two major concession areas by JEPCO in the Amman and Zarqa governorates; and by IDECO in the Irbid and Mafraq governo,ates. 4.22 In 1988, a new civil service law was imposed on all public enterprises. It was designed to curb the excessive spending which had begun to create financial problems for the Government. Under the new code, all government enterprise staff are subject to civil service conditions and autonomy is severly restricted. JEA has unsuccessfully sought exemption from the new law. However, the new code will not become effective for JEA until 1991. 4.23 That existing regulatory arrangements are not effective is principally because MEMR is inadequately staffed. More regulation is not likely to lead to improved efficiency because the management and staff of JEA are competent and well experienced. If the Government proceeds with its intention of requiring JEA to conform to the new civil service code, morale, efficiency and performar.^e will be severely eroded. In effect, JEA would become a government department. The current advancements by JEA in corporate planning and management information systems, and in the extension of its consultancy and manufacturing activities, could be stifled. 4.24 Operating the electric power industries through government departmental structures has been shown to be less thar, efficient. Government-owned corporations, which have been given autonomy over their own day-to-day management, are more easily held accountable for their performance through their boards of directors and their management. In Jordan, the electric power system has proven itself to be an efficient and reliable electricity supply industry. Its growth and development have been consistent with successful international utilities operations. 4.25 Several alternatives to increased government control over JEA, JEPCO and IDECO are: (i) to establish a completely new national power corporation comprising JEA, JEPCO and IDECO; or (ii) to establish JEA as a wholly-owned government corporation responsible - 39 - for generation and transmission and to merge JEPCO and IDECO into a single distribution company incorporating JEA's distribution areas. 4.26 Under both proposals, JEA would be corporatized and would operate on a commercial basis, paying corporate taxes and dividends. It would conform to government policies and be responsible for achieving the agreed performance targets set out in its corporate plan. The Government, in turn, would permit JEA to undertake its own borrowing and to set tariffs to achieve its performance targets. Private sector participation could be maintained by transferring the equity of existing shareholders of JEPCO and IDECO to the restructured JEA. In due course, JEA could seek additional equity investors by issuing shares. These new arrangements would remove the electricity subsector's dependence on the Government for borrowing and for the monitoring of its day-to-day operations. Personnel policies, procurement and budgetary matters would be independent of government procedures. JEA, of course, would be able to pursue opportunities for expanding its consulting and manufacturing activities. These would, however, be established separately as subsidiary functions to ensure that they did not impose any financial burden on consumers. The unification of all three existing entities in a single corporation, with one management structure and information system would facilitate more economic operations. 4.27 Under the second proposal, distribution functions would be combined under a single corporation. This would facilitate uniform distribution policies and separate the cost of distribution from generation and transmission. The interests of the private shareholders of JEPCO and IDECO might be better served by this proposal. 4.28 If either of the proposals for the re-organization of the subsector were to be adopted, it would be necessary to review the role of thr Government, especially NENR's role, in regulating the sector. This would require giving greater autonomy to the new entities and revising regulatory procedures to ensure greater accountability and compliance with government policies. At the same time, the existing legislation (i.e., JEA's electricity law of 1986) and concession agreements would need to be renegotiated. 4.29 The Imnact of Currency Devaluation on the Financial Viability of Power Sector Entities. As a result of the adverse financial impact of the 1988/89 devaluation of the Jordanian dinar, the power utilities are facing a severe liquidity constraint in meeting their debt service payments and in financing their operations and construction. The debt service commitments of JEA, JEPCO, and IDECO on existing foreign loans have increased by about JD 70 million for the duration of the repayment period. The Government is considering short-term relief measures such as postponing loan repayments for three years, rescheduling outstanding loans, and increasing tariffs from 1990 onwards. A tariff increase of 152 in real terms is urgently required in 1990 to help address electric utilities' financial problems. In addition to these proposals, other short-term options that might be considered include: (i) converting some existing loans to equity (or capital); (ii) treating the revaluation losses, as they are realized, as equity contributions; (iii) refinancing existing debt service commitments by rollover loans or new borrowing; (iv) temporary exemption from corporate taxes for JEPCO and IDECO; and (v) tariff increases to eliminate cross-subsidies in water pumping, hotels - 40 - and street lighting categories. In the long-term, more permanent solutions may be needed to restore the liquidity and financial viability of the sector. These include: (i) new borrowing to restructure the finances and capital of the companies; (ii) the revaluation of fixed assets to increase depreciation and cashflow; (iii) increases in the structure and level of tariffs to restore long-term financial viability and remove existing tariff distortions; (iv) the development of a foreign currency risk management program, including proposals for monitoring debt service commitments to minimize losses from future movements in foreign exchange rates; and (v) the institutional restructuring of power utilities, as discussed above. C. Operational Efficiency in the Electric Power Sector 4.30 Electric power enterprises face the twofold challenge of continuing to provide good quality service to present customers while expand the system to accommodate new demand. The power sector in Jordan has grown very rapidly during the last two decades. An installed generating capacity of about 30 mw in 1970 has grown to 960 mw. system load factor tne gross, including private generation, has stabilized at about 62X in recent years. Total system losses have gradually declined from 15.4% in 1981 to 12% in 1988. The expansion of the national transmission and distribution system has kept pace with the growth in electricity demand. In addition, under a planned rural electrification program, the national grid has been extended to most rural areas. Approximately 97% of the rural population has access to electricity. 4.31 While all three utilities should be commended for handling the phenomenal growth of the electric power sector, it is important to recognize that continued improvements are still required. JEA, JEPCO and IDECO have already completed a number of studies to improve operational efficiency in the generation, transmission and distribution system. These studies identify three main types of efficiency improvements: (a) minimizing production costs by reducing system losses; (b) maximizing utilization efficiency to reduce investments; and (c) optimizing system performance and reliability. 4.32 To minimize production costs, system losses need to be reduced without endangering system reliability. Transmission losses at 1.4%-2% are somewhat lower than expected, and distribution losses at 10% are greater tharn expectel. Transmission losses are low because the system is loaded below design capacity. Losses on the distribution systems are aggravated by poor voltage regulation but are mainly due to long and heavily loaded circuits, particularly in the rural areas. 4.33 The main measures to reduce system losses include: (i) improving system voltage by various management procedures; (ii) developing inter-utility distribution standards and practices; (iii) implementing an optimal load flow program (i.e., developing a station thermal efficiency program [STEP]); (v) enhancing transmission reactive compensation; (vi) computerizing short-term load forecasting; and (vii) enhancing economic dispatch methods. 4.34 To maximize utilization efficiencies, overall energy requirements need to be reduced. This can be accomplished by: (i) implementing HTPS performance improvements; (ii) improving generation maintenance planning; (iii) improving long-term demand forecasting techniques; (iv) developing a - 41 - medium-term forecasting model; (v) developing and implementing a load research program; (v) modifying the tariff design; (vi) implementing street lighting standards; (vi) encouraging effective consumer lighting; (vii) developing and implementing risk analysis methods; (viii) implementing water pumping control; and (ix) coordinating self-genera ion. 4.35 Certain measures would help optimize system performance and reliability. These include: (i) introducing transmission planning and operation criteria, such as transmission testing and preventive maintenance; (ii) improving the transmission fault reporting and investigation system; (iii) implementing an energy management system; (iv) improving distribution planning and operating criteria; (v) updating consumer safety codes and service standards; (vi) improving distribution outage classification and reporting; and (vii) developing transmission design standards. Recommended Action 4.36 Based on the studies completed thus far and the areas of improvements outlined above, the next step is for the utilities to develop an implementation plan. This plan should: (a) identify critical indicators of operational efficiency; (b) define priorities and set specific target measures; and (c) monitor results as plans are implemented and targets achieved. V. ENERGY SECTOR INVESTMENT STRATEG Introduction 5.01 The austerity program announced by GOJ in October 1988 is expected to cut deeply into planned capital expenditures in the current 1986-90 five-year plan, as well as into future investments. Against this background, the major issue is how GOJ could develop a rational investment strategy in an environment of scarce investment resources, while promoting sector development and triggering economic growth. This chapter reviews the investment program for sector development for 1986-90 and develops a core program of future energy sector investment and financing options. A. Planned Energy Investment During 1986-90 5.02 Jordan's planned total investment in the energy sector during the current plan period (1986-1990) amounts to JD 237 million V (US$677 million). The program reflects the emphasis on improving the efficiency of energy use, while continuing efforts to increase energy supplies at least-cost. 5.03 As in the past, power subsector investment accounts for a major share, about 68X, of total sector investment; this includes investmen-. in additional generating capacities, transmission, and distribution facilities, as well as the rehabilitation of existing distribution systems and rural electrification. About 300 villages are to be electrified during the plan period. The .L/ In 1985 prices. - 42 - allocation for oil exploration accounts for 19% of all planned investment. Oil exploration expenditures have resulted in the small oil discoveries at Hamza and Sirhan and the gas discovery at Risha. Retrofitting, to improve energy efficiency, will be carried out by the individual entities at an estimated total cost of JD 9 million (US$24 million), which is about 3X of total planned sector investment. Research and studies on oil shale development account for 1X of total sector investment (JD 2.7 million). Table 5.1 below shows Jordan's energy sector investment in the current plan period (1986-1990). Table 5.1: Jordan's Energy Sector Investment (1986-90) (1985 prices) Total 1986-90 JD Million Percent of Total Petroleum exploration 45.8 19.3 Oil shale development 2.7 1.1 Geothermal exploration 1.8 0.8 Transport, storage, and distribution of petroleum products 16.0 6.7 Energy conservation in industry and the refinery 9.0 3.4 Renewable energy 1.0 0.4 Energy planning studies 0.8 0.3 Power generation 92.0 38.8 Transmission 13.0 5.5 Distribution and rural electrification 55.1 23.7 TOTAL 237.2 100.0 The Financing of Energy Sector Investment 5.04 The financing of the energy investment shows the Government's efforts to increase the participation of the private sector, both local and foreign, especially in petroleum exploration, refining, and petroleum products distribution. The private sector is expected to contribute about 25X of the total funding requirement, compared to about 32 during the last plan period. About 802 of the expected private sector investment of JD 52 million (US$149 million) would be contributed by the domestic private sector; the rest would be direct foreign investment, mainly in oil exploration. Government budgetary support for financing, as in previous plans, would continue to be significant. Foreign loans and grants, which represent an important resource transfer to Jordan, cover about 47X of total funding requirements. The total expected contribution of power subsector entities from their internal sources, estimated at JD 61 million (US$165 million) over the plan period, represents 262 of the financing of the sector investment program. DurV.g 1986-88, the power subsector's internal cash generation financed about 24% of all investments. A summary of financing sources is provided below in Table 5.2. 43 - Table 5.2: Source of Financing Energy Investuent Program (1986-90) (1985 prices) Total 1986-90 JD Million (1985 Prices) Percent of Total General budget 33.5 14.1 Domestic private sector 42.3 17.8 Direct foreign investment 9.7 4.1 Internal sources of power subsector entities 61.2 25.8 Foreign grants 6.7 2.8 Local loans 3.8 1.6 Foreign 80.O 33.8 TOTAL 237.2 lOO.O 5.05 Actual expenditures between 1986-88 covering the first three years of the current plan period account for 70X of the total planned expenditures or JD 160 million. Oil exploration, studies related to oil shale development, renewable energy, transmission, distribution, and ru al electrification activities are proceeding as planned. In view of t}a slowdown in the rate of growth of electricity consumption, major investment in the next power generation plant is postponed to the next plan. ' wever, investment in the range of US$40 to US$50 million dollars have been made for the installation of 2 x 33 MW gas turbines and associated transmission facilities. Planned expenditures for energy conservation in industry and refinery activities in the private sector are expected to be fulfilled in the current plan period. B. Future Investment Planning and Financing Strategv 5.06 Given the scarcity of public investment resources and the Government's need to reduce the debt servicing cost, GOJ faces the challenge of developing a rational investment strategy to promote optimum sector development and thereby meet the minimum energy demand requirements in the next decade. As a first step, a core investment program should be formulated to include investments in: maintaining and rehabilitating the existing energy supply system; expanding the required energy supply and associated infrastructure facilities; and improving efficiency in energy use through conservation. The following sections delineate a core program of energy investment in oil and gas, refining, storage, transportation and electric power to the year 2000 and include financing options. Investment in Oil Explorations and DeveloDment 5.07 A core program of public investment by NRA in the oil and gas sectors includes: (a) expenditures for continuing oil production in the Hamza field; (b) the completion of long-term testing and the evaluation of the Risha gas field; (c) expenditures on consultancy services for undertaking well services and technical studies; ar.d (d) the continuation of NRA's seismic and exploratory activities in the open areas not under IOC concession. NRA's - 44 - planned investment in seismic and drilling activities is estimated to be around US$15 million per year; planned investment in development and production activities is estimated to be around US$5.0 million. The program includes: (a) a $2.5 million investment in infrastructure to build a small gathering station and a camp at the Hamza oil field to continue oil production (about 500 bbl/day); and (b) $2.5 million to construct gas gathering facilities and a gas treatment plant for the Risha area to supply the power station with gas from three production wells. 5.0 8 Overall, NRA's planned investment program is reasonable. It limits its own efforts in exploration and drilling in open areas while continuing to interest foreign companies in oil exploration and development activities. Jordan has already signed technical assistance contracts with such foreign national oil companies as PCIAC and JNOC. PCIAC will provide technical assistance to NRA in the evaluation of the Risha gas reservoir. In addition, PCIAC and JNOC plan tz invest about US$30 million to carry out extensive seismic surveys and evaluations of both the Risha an'l Sirhan areas. Following this evaluation, GOJ plans to promote these areas to international oil companies to accelerate exploration activities. At present, IOC planned investments in oil exploration in Jordan are estimated to be US$10 million per year over a period of seven years. Exploration activities include geological, geophysical and geochemical surveys and the drilling of twelve exploratory wells between 1999-1995. If a hydrocarbon discovery is made, plans for development will entail more investment. 5.09 The investment program outlined above is based on the current plans for seismic and exploratory drilling activities. Additional new investment requirements in oil and gas will depend on the acceleration of exploration activities, the success rate of ongoing explorations, and any new discoveries. Given the uncertainties about reserve assessments, the long lead-times in project implementation, and delays in exploration and development programs, there could be changes both in the investment program and its priorities. Because of the inter-linkages of natural gas with power, refining and other industrial activities, natural gas discoveries affect investment priorities. If natural gas reserve assessments from Risha and other potential discoveries show plentiful gas reserves, it would be economical to substitute natural gas for fuel oil in power generation. If the present exploration efforts succeed in finding oil with associated gas or non-associated gas fields, integrated gas supply and utilization studies should be undertaken to prepare a long-term gas development plan. The economic evaluation of the planned investment should be made and related gas prices and other issues addressed. OiL Shale 5.10 No capital expenditure is planned for oil shale development in the public investment program. However, limited expenditures could be made for undertaking selective studies, particularly concerning water resource availability, ash disposal and environmental protection. Such expenditures should be included in NRA's budget for technical studies. Refinin. StoragS and Transportation 5.11 The core program in the refining subsector is estimated at about US$50 - 45 - million through the year 2000. These investments are only for repairs and rehabilitation and efficiency improvements. There will be no new refinery construction or additions to capacity in the Zarqa refinery unless significant oil and/or gas discoveries are made. 5.12 The present storage and transportation facilities need considerable expansion to handle the increasing volume of petroleum products, from the present 3.0 million tons to 4.4 million tons by the year 2000. If petroleum products continue to be transported by road tankers, an additional investment of $62.5 million in the next ten years will be required to purchase new trucks. Should the volume, distribution pattern and location of future demand justify the feasibility of pipeline transport, investment requirements wo!.,ld have to be revised. 5.13 To handle the projected demand for petroleum products and maintain about 4 months of strategic in country storage, an additional storage of 712,000 tons would be required. Since most of the existing storage is located at Zarqa, it would be economical to locate any additional storage nearer the main users. 5.14 Investments for additional storage, estimated at about $88.5 million would be shared by both the public and private sector. This would include: (a) Increased storage at Zarqa 33.9 (b) New tankage at Mafraq 18.2 (c) Product storage at Aqaba 24.3 *d) Product storage at existing industrial locations 7.3 (e) LPG storage at Zarqa 4.8 S88.5 Electric Power 5.15 Assuming the implementation of economic pricing, energy conservation and operational efficiency measures, the rate of growth in peak demand is estimated to be 6.1X p.a. between 1988 and 2000. To meet this demand, JEA plans to add 60 MW and 520 MW of new capacities by 1993 and 2000, respectively. Table 5.4 below shows the capacity balance to the year 2000. Table 5.4: Summary: Capacity Balance NW (1988 - 2000) 1988 1989 1993 2000 Peak Demand 525 570 729 1,065 Available Capacity 875 875 923 939 New Additions - 60 60 520 Total 875 935 983 1,459 5.16 The core investment program in the power sector for JEA's planned capacity addition, with a 30X-45X reserve margin, is estimated to be about US$530 million. The planned investment program is based on the results of the - 46 - least-cost investment analysis using the Wien Automatic System Program (WASP). The least-cost generation expansion program assumes Jordan's access to the output of the 130 MW oil burning plant on completion of the interconnection with the Egypt grid. The "core program" in power generation expansion consists of two 30 MW gas turbines in 1993 and additional 130 MW steam oil units in 1996, 1997, 1999 and 2001, for a total addition of 580 MW. 5.17 Since the Jordanian population is concentrated along a major north-south axis and since transmission lines have been constructed between Aqaba, Amman and Risha, the future transmission program is estimated to include mainly extensions and reinforcements. The investment program for transmission and distr'bution by JEA and the investment programs for 4istribution by JEPCO and IDECO were reviewed and found to be reasonable and effective. The total investment in transmission and distribution is estimated to be about US$270 million between 1991 and 2000. Of the total $800 million investment program, generation accounts for 65X and transmission and distribution together account for 35X. The balaice among the planned expenditures in generati)n, transmission and distribution appears to be correct, given the present status and future demands on the system. 5.18 Energy Conservation. Investments in energy conservation include the cost of undertaking detailed energy audits, and the implementation of energy conservation measures in specific industries, as well as in the transport, commercial, agriculture and household sectors. The total investment is estimated to be about $100 million. Table 5.5 provides the projected core program of investment in the energy sector to the year 2000. able 5.5: Energy Sector Investment (1991 - 2000) (1989 Prices) (US$ million) Core Program Annual Average 1991 - 2000 Oil and gas exploration and development 350 35 Oil refining, storage 200 20 and transportation Energy conservation 100 10 Power generation, transmission and distribution 80 Total 1,450 145 - 47 - Financing 0otions 5.19 Given the constraints on public investment, there are three possible ways of reducing public funding for energy sector operations. These include (i) increasing the self-financing capabilities of energy enterprises by improving operating efficiency; (ii) creating strong incentives for energy enterprises to design economically efficient investment programs; and (iii) finding new sources of funding. These options are not mutually exclusive. On the contrary, they complement one another, and, in most cases, the most effective ways to reduce public funding will be some combination of all three. 5.20 The scarcity of public investment resources, and GOJ's need to minimize the cost of debt servicing, requires increasing the share of internal cash generation to finance power sector investments. Thus far, Jordan's electric utilities self-financing record is quite commendable. About 24X of the subsector's investment requirements between 1984-88 was financed by funds generated from internal sources. However, the depreciation of the JD. and the consequent increase in debt service obligations in dinars, considerably affects the self-financing capabilities of power utilities. Nevertheless, continued efforts to improve operational efficiency should improve productivity, reduce the size of capacity expansion and additional investment requirements, and thus improve self-financing capabilities. MEMR/JEA are already making efforts to reduce capaci-y expansion requirements by interconnecting Jordan's grid with those of Egypt, Syria, Iraq, and Turkey. The five-country grid interconnection, when completed in 1995-96, is expected to reduce the requirement of the reserve margin from 302 to 20% and save about $100 million in investments in additional generation capacity. Despite these efforts, new investments still have to be made and new sources of funding found. It is precisely here that the role of the private sector in energy financing becomes so important. 5.21 Jordan has since recognized that there are advantages to private sector participation in the energy sector. Private enterprises already co-exist with public enterprises in every phase of energy activity. In oil exploration, the Government's policy to attract IOC has resulted in a number of private companies undertaking oil and gas exploration. In the oil industry's downstream phase, JPRC operates petroleum refining, storage, transport and distribution activities. In the electric power subsector, private companies operate distribution activities. Only large scale power generation and transmission remain the sole responsibility of JEA, a public utility. However, an even greater role for the private sector in the energy sector would help reduce the burden of energy investment on public expenditure, ease implementation and manpower constraints, improve operational and managerial efficiency, and shift risks from the Government to private enterprises. 5.22 In this context, the corporatization of JEA, currently under consideration, should be further examined to reduce public funding requirements in power generation. This would involve JEA operating on a commercial basis, paying corporate taxes and dividends. JEA should be fully accountable to the Government and conform to its policies, responsible, as well as be through its board and management, for achieving the agreed performance targets set out in the corporate plan. The Government, in turn, should permit JEA to undertake its own borrowing and allow JEA to set tariffs - 48 - to achieve performance targets agreed with the Government. This could be done in conjunction with the financial restructuring to restore viability. Private sector participation could be maintained by transferring the equity of existing shareholders in JEPCO and IDECO to the restructured JEA. In due course, JEA could seek additional equity investors through issuing of shares. 5.23 Several policy reforms may be introduced to expand the scope for private sector activities. In the power subsector, an innovative experiment, known as the Build, Operate and Turnover (BOAT) is currently underway in Turkey and Pakistan. Under this arrangement, the private sector will build, operate and finance the facilities and eventually transfer these to the public sector. With increased private sector participation, Jordan would need a regulatory system. There must be no mistake about the rate of return the private investor can expect; this return should be on a par with the return the same capital would earn under similar conditions of risk in a commercial venture. The country gains little or no advantage if the private sector demands guarantees that eliminate the commercial risks it normally assumes. A basic regulatory instrument should also cover (a) tariffs payable by power consumers; (b) tariffs payable to power suppliers; (c) minimum guarantees on capital (including allowable profit margins); (d) entry into and exit from the sector; (e) guarantees to ensure that sector development plans focus on achieving maximum benefits for the country as a whole; and (f) expansion of service to less favored areas of the country. 5 24 Expanding the role of private capital in the energy sector has several advantages: (a) it introduces competition and improves efficiency by making use of widely accepted management performance indicators; (b) it reduces public funding requirements by allowing the private sector to build generating facilities and sell their power to the network; it often lowers kwh tariffs due to lower construction costs and shorter project execution periods; and (d) it expands capital markets, surely one of the essential components of the development process. The ability to raise at least a proportion of the requirements in local markets also eliminates the problems of repatriating dividends and converting of local currencies. Bank's Role in Sector Development 5.25 The Bank has been instrumental in helping GOJ develop a comprehensive strategy for energy sector development. While significant progress has been made, more remains to be done. GDP growth prospects are expected to be less robust than in the past, and public investment resource constraints pose major challenges to the efficient use of available resources. The analysis so far suggests that the Bank's objectives should be to: (a) promote greater efficiency in energy use, investment and sector operations, particularly in the areas of pricing and investment decision-making so as to reduce capital requireme:ts to an economic level and optimize energy imports; (b) continue to support sector adjustment through economic pricing, development of indigenous energy where appropriate, and economic interfuel substitution; (c) encourage efficient sector and enterprise management and operations, notably by institutional strengthening and the clear definition and demarcation of the respective roles of governments and enterprises, whether the latter be privately or publicly owned; (d) mobilize additional private sector resources for energy investment, including co-financing and portfolio investment where - 49 - this is appropriate; and (e) provide technical assistance through the transfer of technology and management techniques. These objectives essentially represent a continuation of present Bank policies in the energy sector. However, a greater recognition of the need for appropriate policies as a basis for the efficient development of the sector must be emphasized. At the same time, it is important that the Bank Group continues to assist the government strengthen its energy planning, organization and institutions; improve sector operational efficiency; and mobilize alternative sources of financing. - 50 - ANNEX I Table 1 JORAN Enoray Sector Study Enersv and Electxicitv Conuslmtion Total Energy ConDunption Total Electricity Percapite Percapito Electri- 003 ton of oil , Nuvalent ConsuznDtion Gah Enerxv Cons. (kRoe) cttv Cons. KWH 1970 440 173 292 115 1075 868 356 479 197 1980 1,821 877 821 395 1983 2,587 1,623 1.037 650 1984 2.761 1,944 1.064 749 1985 2,819 2,151 1.046 798 1988 2.871 2,323 1,027 831 1987 3,020 2,655 1,042 917 1988 3,044 2,761 1,017 920 1989 3,074 2,958 1,025 956 LI Preliminary estimates - 51- ANNEX 2 lable2 JORDIiN Energy Sector Study Percentage Shares of Oil Import Cost GDP Exorts Imorts 1975 8.0 63 11 1980 12.4 102 17 1983 14.6 129 19 1984 13.7 79 19 1985 12.1 76 18 1986 6.8 49 13 1987 8.8 60 16 1988 8.9 50 15 - 52 - ANNEX 3 Table 3 JflBA Energy Sector Study Energy Consumption by Sectors (1988) Transport Industry Electricity Domestic Others Total LPG 0.0 2.2 0.0 97.9 11.1 111.3 Gasoline 341.1 0.0 0.0 0.0 0.0 341.1 Avtag 19.6 0.0 0.0 0.0 0.0 19.6 Avtur 170.9 0.0 0.0 0.0 0.0 170.9 Kerosene 0,0 3.2 0.0 149.2 6.3 158.7 Gas Oil 536.2 118.3 12.0 39.4 94.6 800.5 Fuel Oil 0.0 269.7 838.0 0.0 0.0 1,107.7 1,067.8 393.4 850.0 286.5 247.2 2,844.8 37.44X 13.83% 29.88% 10.07% 8.69% Table 4 JORDAN Energy Sector Study "24M $Tfus a0 m ~~~~~~~~ . .".. .... . &u1 4110 m91e t 41, Dtm U. s u "t seamS a m'm em sueIs Ca"S 026 .0 a e cia ie *9 *n *n. i. *ni It.. 4- .J i*. .a". ." 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Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Jordan - Energy sector study (Vol. 1 of 2) : Main report
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Pre-2003 Economic or Sector Report
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Banque mondiale