Thursday, 25 December 2014

Saudi Arabia's Brilliant New Oil Policy, and why $60 Brent Crude is Here to Stay

On Nov 27th meeting of OPEC, the oil producers' cartel agreed to keep production levels unchanged, knowing full well that that decision will send the prices even further down, and indeed, Brent Crude benchmark fell from $80 per barrel to $60 by the end of December. Sparking much controversy and speculation about OPEC's end game, as most countries in OPEC have fiscal break even points for oil way above $60 per barrel, and keeping the production, and therefore prices, at the current levels would cause fiscal deficits for all these countries. Even though OPECs official statement was that this decision was based purely on business considerations, some people suspected political motives.

The first suspect was Russia, Vladimir Putin did not rule out that the current pricing policy is an American-Saudi conspiracy against Russia. It is true that Russia is very vulnerable to oil prices, with the US Energy Information Administration (EIA) reporting that oil and gas made up as much as 68% of Russia's export revenue in 2013. While the US is seen to profit marginally from lower oil prices. And indeed, during the month of December, the effects of the declining oil prices started to show, the ruble plunged to it's lowest point in 16 years by losing 37% of its value this year. In a poll by Reuters, economists forecast that Russia will fall deep into recession next year with the GDP to shrink by 3.6% in 2015, and face a double digit inflation in the same year.

Other people said that Iran was the target, which requires $131 per barrel to balance their budget due to the sanctions imposed on the country. Iran announced a much tighter budget for 2015, and they already unable to continue support for Basshar Alassad in the shadow war in Syria. Others also suspected that ISIS is the target, reducing their revenues from the black market oil they sell throughout Iraq and Syria.

Aside from the political consequences of oil prices. Yesterday, Saudi Arabia announced it's budget for 2015. And despite the low oil prices, and the fact that the budget was made based on an assumed average oil price of $60 per barrel in 2015, they increased expenditure by 0.6% from 2014, with an expected deficit of $39 billion, which would be covered by their foreign currency reserves. The reserves which stand currently at $736 billion can cover such a deficit for more than 18 years!

The assumption that the Saudi deficit would remain constant is based on the scenario of oil prices stabilizing around 60$ per barrel and production levels remain the same, which would result in constant oil revenues, and the fast growing non-oil sector would cover the extra expenditure, projected at a growth rate of an impressive 6.7% in 2015. But sustained oil prices of $60 per barrel will bring a lot of Shale Oil producers out of business, and with declining Shale production growth, and increased global oil demand, the prices might actually start increasing, at which point OPEC can increase production, bringing down the prices back to $60. This way, Saudi Arabia will manage to increase oil revenue and market share while still keeping oil prices low enough for many shale producers operations to be uneconomical.

Sunday, 30 November 2014

خمس فوائد للاقتصاد الارني من انخفاض اسعار النفط

اعلنت منظمة الدول المصدرة للنفط الاوبك في اجتماعها الاخير الاسبوع الماضي تثبيت انتاجها من النفط عند 30 مليون برميل نفط، مخالفة في ذلك مطالب بعض الدول لخض الانتاج لدعم اسعار النفط، في اشارة من اوبك انها تفضل الحفاظ على حصتها السوقية.

و من الطبيعي، فان دولة مثل الاردن، اللتي تستورد حاليا 97% من حاجتها من الطاقة، ستستفيد بشكل كبير من نتائج هذا القرار، و هنا ملخص لاهم هذه الفوائد:
  1. خفض عجز الموازنة: عجز الموازنة الاردنية ازداد بشك مطرد بالسنوات الاخيرة لاسباب منها: الاعداد الكبيرة من اللاجئين السوريين القادمة للارن منذ عام 2011، والمقدر انها ستكلف الاردن 1.8% و 2.4% من الناتج القومي في عامي 2013 و 2014 على التوالي. انقطاع الغاز المصري و النفط المدعوم من العراق  ادى ايضا الى مفاقمة العجز. استطاعت الاردن خفض العجز المالي من 9.3% من الناتج العام في عام 2013 الي 8.3% متوقعة في العام الحالي. و قد توقع وزير المالية الاردني امية طوقان ان ينخفض العجز لنسبة 2.5% فقط في العام القادم نتيجة لانخفاض اسعار النفط.
  2. خفض العجز التجاري: ارتفع العجز التجاري الاردني بنسبة 8.6% بعام 2013 و 10.5% في النصف الاول من عام 2014، مدعوما بشكل اساسي بارتفاع فاتورة الطاقة بنسبة 16% بأول ثمانية اشهر من العام الحالي. و بالتالي، فان انخفاض اسعار النفط الخام سيؤدي الى انخفاض قيمة المستوردات على الاقل في المدى القريب، حتى تنخفض اعتماد الاردن على المستوردات النفطية لانتاج الطاقة وذلك بفضل محطات الطاقة المتجددة ال 16 المتوقع انشائها العام القادم، بالاضافة الى بدء تشغيل محطة الغاز الطبيعي المسال في العقبة بالصيف المقبل.
  3. خفض التضخم: ادى قرار الحكومة الاردنية تعميم اسعار المشتقات النفطية في بداية عام 2013 الى نشوء علاقة طردية بين اسعار النفط العالمية و اسعار المنتجات المحلية. على سبيل المثال، فان دول الاتحاد الاوروبي اعلنت انها قلقة من ان يؤدي انخفاص اسعار النفط الى انكاش مالي، وذلك بسبب التضخم المنخفض في تلك الدول المقدر عند 0.4% في العام 2013، بينما في الاردن فالنسبة هي 5.6%  لذات العام، وهي نسبة مرتفعة تحتمل الخفض.
  4. عودة شركة الكهرباء الاردنية للربحية: تعاني شركة الكهرباء الاردنية من خسائر كبيرة جراء ارتفاع اسعار النفط، و قد قدرت الخسائر عند 1.45 مليار دينار في العام الحالي. و قد كانت الاردن موجهة بالبرنامج الاصلاحي من منظمة النقد الدولي قد حددت ان تعود الشركة لالربحية في عام 2017، و ذلك من خلال الرفع التدريجي لاسعار الكهرباء الذي بدأ بالفعل في بداية العام الحالي. الارتفاع المقرر للاسعار في العام القادم بالاضافة الى انخفاض اسعار النفط قد يؤدي الى العودة للربحية في وقت اقصر.
  5. فرصة لرفع الدعم: بعد تعميم اسعار المشتقات النفطية في العام الماضي، استبدلت الاردن الدعم بتقديم دفعات نقدية للتعويض عن ارتفاع اسعار المحروقات، وذلك للعائلات ذات الدخل المنخفض. وكانت اعلنت الحكومة الغاء الدفعة الثالثة من الدعم في العام الحالي بسبب بقاء اسعار النفط دون ال 100 دولار للبرميل لاكثر من شهرين، مما سيوفر على الخزينة 70 مليون دينار في عام 2014، و 210 مليون دينار في العام القادم.

Friday, 28 November 2014

5 Ways Jordan will Benefit from Lower Energy Prices

OPEC announced on Nov 27th, the long awaited meeting, that it will keep their production unchanged at 30 mbpd, signaling to the other major oil producers that it will no longer risk losing market share to keep the prices in check.

Needless to say, a country like Jordan, which imports 97% of its energy needs will gain the most out of the lower oil prices, here are direct benefits:
  1. Lower Budget Deficit: The Jordanian budget has been facing a huge deficit in the latest years for a number of reasons; first, the flood of Syrian Refugees since 2011, estimated to cost the country 1.8% and 2.4% of the GDP in 2013 and 2014 respectively. Also contributing to the deficit, the cut of the Egyptian Gas supplies and the Iraqi Subsidized Oil. Jordan managed to trim the deficit from 9.3% of GDP in 2013 to an expected 8.3% this year. Today, Jordan Finance Minister Umayya Toukan expected the deficit to go down to only 2.5% in 2015, thanks to the lower oil prices.
  2. Lower Trade Deficit: The trade deficit rose 8.6% in 2013 and a further 10.5% in H1 2014, this is mainly due to higher energy bill, which increased 16% in the first 8months of 2014, and increase commodity imports due to the increased population of Syrian refugees. Lower Crude Oil price will bring down the value of imports, at least until Jordan will become less independent on importing crude oil and derivatives in H2 2015, when a number of Renewable Energy projects will come online, and the LNG terminal in Aqaba begins operation.
  3. Lower Inflation: Jordan removed fuel subsidies in 2013, since then, lower oil prices will reflect on the local market and consumer prices, lower fuel prices cause dis-inflation, already, the EU is worrying about deflation with the recent news of OPEC meeting, but the EU have very low, and unhealthy, inflation rate of 0.4%, while the rate in Jordan was 5.6% in 2013.
  4. NEPCO back to profitability: The Jordan National Electric Power Company losses are expected to rise in 2014 to JD1.45 Billion ($2.1 billion), of the the targets of the IMF program is bring bring NEPCO back to profitability by 2017 by gradually raising electricity tariffs, the first increase was in the beginning of 2014. With the planned increase in 2015 combined with lower electricity generation costs, NEPCO might go back to profitability earlier.
  5. Remove Subsidies: Jordan removed fuel subsidies in 2013 and replaced it with cash payments for lower income households. As a result of the sustained lower crude prices below $100, Jordan cancelled the scheduled 3rd payment of fuel compensations for 2014, which will save the treasury JD70 million ($100 million) in 2014, further, in 2015, will save $300 million.

Tuesday, 18 November 2014

How will the campaign against ISIS affect the Jordanian Economy?

Iraq is Jordan's largest export market, but since the sudden loss of swathes of territories from north and west Iraq to the terrorist organization ISIS, the land export route that goes through the Anbar province was all but shut to any traffic.

Before the sudden expansion of ISIS in Iraq and the resulting deteriorated security condition, 70% of the exports originating from Jordanian Free Zones went to the Iraqi market. The factories in those Zones were making JD600 million a year, and were achieving double digit growth, driven mostly by Iraqi investors who prefer to operate from the safe Jordanian grounds. Jordan was also importing 12,000 bpd of crude oil from Iraq by the beginning of 2014. And Jordan and Iraq have agreed to construct a double oil and gas pipeline from Basra to the Jordanian port in Aqaba for export worth $18billion, carrying 2.25 million bpd, 150,000 bpd of which for local Jordanian consumption. Jordan and Iraq also agreed to construct a 420km rail link connecting Baghdad to Aqaba.

But in 2014 the trade and cooperation situation between the two countries deteriorated significantly because of the security situation in the Anbar province which connects Iraq to Jordan. In January 2014, the imports of Iraqi oil was halted due to the militants taking over Falluja. By June, ISIS overtook major Iraqi cities and the Anbar province, Jordanian exports to Iraq diminished, because the trucks had to go through Saudi Arabia, increasing the shipping costs 4-fold. And the future of the pipleline and the rail link were unknown.

The bleak security situation in Iraq was threatening to have serious effects on the Jordanian economy. However, the unparalleled notoriety that ISIS (a.k.a. Islam State or ISIL) resulted in an international military campaign against them in both Syria and Iraq that started August 2014, this campaign was focused on degrading ISIS ability to capture new territory. This campaign is expected to last years, however, the security situation might see improvement much earlier. In Iraq, ISIS already started losing territory to the Iraqi Army and the Kurdish Peshmerga, with the latest recapture of the city of Beiji by the Iraqi Army and the largest oil refinery in Iraq in November 2014. ISIS ability to launch attacks and hold territory degraded significantly because they would be easy targets to airstrikes.

In the coming months, the security situation on the export/import routes via Anbar province might start improving, even if it will take longer for the Iraqi Army to recapture these territories, ISIS will be struggling to hold territory and will avoid to work attack obvious shipping routes because it will present itself as an easy target to the coalition aerial attacks. The Jordanian-Iraqi pipeline is progressing; in September 2014, Iraq had shortlisted 12 companies for the construction of the pipeline, and construction can start in the Jordanian territories or the safer Iraqi territories in the south. However, the pipeline and the rail link would be a potential target for terrorist attacks upon completion in 2018.

Thursday, 13 November 2014

Jordan to achieve 14% of Electricity from Renewable Energy in 2015

اقرأ هذا المقال باللغة العربية

Jordan Energy Minister Mohammad Hamed declared that 1800MW of renewable energy plants are to slated to be connected to the Grid by 2018, 500MW of which next year, with a current grid capacity of 3200MW, of which 10MW are from renewable energy, the share of renewable energy from installed capacity would rise dramatically from less than 1% in 2014 to 14% in 2015, making Jordan the leader in solar and wind energy generation in the middle east.

The Ministry of Energy and Mineral Resources of Jordan, which imports 97% of its energy needs, have set a target to obtain 7% of primary energy from renewable in 2017 and 10% in 2020. After the interruption of Egyptian gas for power generation, and the high oil prices, Jordan accelerated a number of energy projects to raise the share of local energy production from oil shale, nuclear energy and renewable.

In 2012 renewable energy law paved the way for a number of RE investments, the following year was the year for the first pre-qualification rounds and the signing of MOUs for multiple RE projects. In 2014, these projects moved ahead with signing of PPAs and awarding of construction contracts, and the second half of 2014 is seeing the financial closure for many of these projects with financing from international institutions such as the $208 million IFC package to fund 7 solar power plants.  

2015 is the year of these projects start bearing fruit, the table below summarizes the solar and wind power plants currently in progress. H1 of 2015 will see the start of construction of most of these projects, Tafila Wind (117MW) a Philadelphia Solar (10MW) projects already under construction. Most of the projects have already achieved financial closure, and will start operation during H2 2015. 

Plant Name
Capacity (MW)
Expected Finish Date
Value ($million)
Vestas V112-3.0 MW turbines
Early 2016
Gamesa G97-2.0 MW turbines
Q4 2015
Funded by GCC $5billion grant
Early 2016
First Solar
H2 2015
10MW Oryx Plant and 2 others
Q3 2015
Financed by ERBD and OPIC
April 2015
Funded by IFC
H2 2015
Falcon Ma’an
Funded by IFC
Q4 2015
Arabia One
Funded by IFC
3 10MW plants
Q3 2015
AMP Solar
Q3 2015

Tuesday, 11 November 2014

Jordan's tourism revenue up 9%, arrivals 3% despite region

Despite the ongoing unrest in the region, Jordan reported an uptake in both overnight visitors 3% ytd until September, and tourism revenue 8.9% ytd ($3.4 billion this year compared to $3.1 billion). Reversing the downwards trend in arrivals last year, when tourist arrivals to Jordan decreased in 2013 by 14% (5.4 million in 2013, 6.3 million in 2012). A sign of confidence in Jordan's stability and immunity to regional unrest.

First thing to note is the disparity between the arrivals and revenue increase, this can be explained by a number of factors, the first is inflation, which stood at 3.1% yoy in September 2014. The second factor is the nature of the tourist groups arriving Jordan, which, before the regional unrest, Jordan used to be only one stop in regional tourism packages, but since the war in Syria, the insurgency in Iraq and the multiple revolutions in Egypt, those packages declined sharply, explaining the declined tourist arrivals in 2013. To address this problem, the Jordan Tourism Board started marketing Jordan as a single destination, where tourists would visit multiple destinations in Jordan and spend more nights.

This trend can be seen by the number of visitors to different tourist attractions in Jordan, see Table below. As you can see, the tourism arrivals to Petra (Jordan's main attraction, and one of the world new seven wonders) only marginally increased by 1%, while other attractions increased more significantly, these numbers clearly show the success of the JTB's campaign. It's also worth mentioning the small number of visitors to the dead sea (despite big growth), this is because the area is currently only serviced by a handful of 5 star hotels, with no budget solutions. budget travelers opt to stay overnight in Amman or Madaba (1 hour drive). 

Visitors Jan-Sep 2013
Visitors Jan-Sep 2014
Change %
Mount Nebo
Baptism Site
Dead Sea
Desert Castles