Can shale oil save the Jordanian economy?

Published: Fri 26 Jul 2013
A blog entry by Ruth Lux

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Ruth Lux
Strategic Analysis

Ruth Lux's Blog

Jordan currently suffers repeated disruptions in energy supply due to unrest in Sinai. Home to the 4th largest shale oil deposits in the world, shale oil might just be Jordan's way out of its dependency on energy imports. 

By Mesrob Kassemdjian, Researcher at Strategic Analysis
Jordan is the fourth smallest country in the Middle East and North Africa. The constitutional monarchy comprised of 6.4 million citizens has successfully managed to avoid becoming ensnared by the civil unrest and popular revolutions seen elsewhere in the region, attributable to the Arab spring. Although Amman possesses one of the largest proven oil shale reserves in the world, a lack of industrial development within the sector has left the kingdom in a state of energy dependency. The strategic vulnerability of the kingdom’s energy sector and related economic risks threaten the socio-political stability of the nation. 
The kingdom is experiencing an acute energy security dilemma. Energy imports account for 20% of gross domestic product (GDP), which translates to $4.8bn U.S. dollars (USD). Moreover, 80% of energy imports consist of Egyptian natural gas which is transferred via the over-ground Arab Gas Pipeline passing through the Sinai Peninsula.  In recent years this pipeline has been the subject of frequent attacks by Islamist militants residing in the Sinai. There have been 10 separate attacks on the pipeline infrastructure, predominantly focused around el-Arish, since the Egyptian revolution in February 2011. This has resulted in multiple disruptions and the temporary cessation of Egyptian gas to Jordan at present.
This has necessitated a shift to Saudi Arabian energy imports and the substitution of natural gas for expensive refined products, such as gasoline, diesel and primarily kerosene. The realignment has forced Amman to announce a planned increase in domestic energy prices, long subsidised, by at least 5% and possibly as high as 7.5% by next year. On 25 July 2013 the Gas Stations Owners Association (GSOA) predicted a price rise of 4% by as early as August.  Such a significant rise places the kingdom in economic risk. Jordan is already experiencing rising inflation; it is expected that this will be 7% in 2013, up from 4.8% in 2012. An energy price rise will have a knock-on effect across all sectors and on commodity prices within the Jordanian market, increasing inflation and reducing purchasing power. In a situation characterised by chronic poverty, where 14.2% of the population lives below the poverty line and 12.5% are unemployed, price rises increase the possibility of civil unrest. The materialisation of such a scenario would be disastrous for a market in which 77.4% of GDP is reliant on the service sector, and thus, wholly dependent on attracting regional and international tourists from the Gulf and the West.
These socio-economic risks are aggravated by Amman’s requirement to spent 10.7% of its budget on financing its public debt which stands at $23.7bn USD or 70% of GDP. The government continues to run an unsustainable budget deficit of $1.84bn USD per year. The kingdom receives $1.13bn USD in foreign direct investment to finance its public debt; this figure will rise to $1.41bn USD by 2015. Increased foreign reserves will simultaneously depreciate the value of the Jordanian dinar which is expected to further compound inflation as well as the risk of social unrest and political instability.
In spite of current energy insecurity and pervasive economic risks, Jordan’s recently discovered shale oil reserves have the potential to turn the kingdom from an importer to an exporter of energy.  Jordan has the 4th largest shale oil reserves in the world, with conservative figures approximating over 100 billion barrels of exploitable shale.  The annual cost of producing enough shale for the functioning of the Jordanian economy is estimated to be $1bn USD, 22% of the $4.8bn USD the kingdom currently spends on energy imports.  Additionally, shale supplies would be able to generate substantial revenues even if it was priced modestly at $60-70 USD per barrel, making production of shale oil an economically viable option for the recovery of the Jordanian economy as well as ensuring greater energy independence.  
Therefore, Jordan must develop its material capacity to extract, process and transport shale oil as soon as possible. In order to facilitate this, Amman will require private foreign direct investment focused on its oil and gas infrastructure rather than financing its debts in order to pay back its foreign creditors immediately. Cooperation with Israel on development of key technologies such as desalination facilities and reverse osmosis techniques would also support the precipitous production and export of shale oil and save its economy, as well as the regime’s security. Shale oil could be the saviour of the Jordanian economy; Amman must not squander this opportunity.
Strategic Analysis’ managing director Ruth Lux contributed to this article.