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28 January 2016

While Chinese policy in Jordan holds great economic potential, it also carries a degree of risk, Greg Everett writes.

At the 2015 China-Arab Expo, Jordan and China announced the signing of US$7 billion in investment agreements in what has been referred to as King Abdullah’s “Pivot to Asia”. Energy and transportation projects ruled the day, with the total package of agreements including a US$2.7 billion contract for the construction of a 900 MW shale-fired power plant and 1,000-megawatt renewable energy power plant, as well as a US$2.8 billion contract for a national railway network.

This is welcome news for both parties. Jordan’s reliance on foreign energy imports has come at considerable risk to its energy security and state budget, while a foothold in Jordan’s energy and transportation sectors represents another milestone in China’s One Belt, One Road initiative and a welcome success after recent Russian gains in the Jordanian nuclear industry.

Oil shale, not to be confused with the more commonly known shale oil, is fine-grained sedimentary rock that releases oil and gas when heated to a high enough temperature.  According to a report by the World Energy Council, total world oil shale resources are estimated at 4.8 trillion barrels—more than four times current crude oil estimates of 1.3 trillion barrels. Oil shale technology has long remained under the radar, however, as the extraction process was neither cost efficient nor environmentally friendly relative to its shale oil counterpart. While recent technological advances may be changing the environmental picture, the economic picture remains unclear with costs running anywhere between US$20 to $95 per barrel depending on a variety of factors such as the location of the shale, the technology employed, and the regulatory environment.

Even with such economic uncertainty, however, investment interest in Jordan’s oil shale sector is not waning. In 2006, the Jordanian government commissioned Enefit to undertake a feasibility study of the El Lajjun and Attarat oil shale deposits in Central Jordan. This study resulted in a concession agreement covering 70 square kilometres of the Attarat. In 2009, Shell Oil also signed an oil shale concession with Jordan that is expected to yield 300,000 barrels per day by 2022.

China’s US$2.2 billion power plant construction contract will be crucial to converting Jordan’s domestic oil shale resources into power for its burdened electricity grid. Indeed, Jordan’s decision to attract investment in the country’s oil shale sector indicates that the Hashemite Kingdom is prioritising reliable supplies and the development of local infrastructure over obtaining the lowest price for energy in an increasingly volatile region.

More on this: China’s partnerships could lead the way | Daniel Poon & Richard Kozul-Wright

While the exact details of Jordan and China’s construction contract are unknown, the Hashemite Kingdom’s policy priorities are evidenced by the Build-Own-Operate contract it entered into with Enefit for the construction of a 550 MW oil shale power plant. Under this contract, Enefit will provide the technical expertise to build and operate the power plant in exchange for a long-term fixed price on the energy it places on the grid. Such contracts makes it easier to obtain financing for upfront construction costs, while allowing Jordan to engage in long-term energy and budgetary planning, safe with the knowledge that it will receive a steady supply of energy at a fixed price.

While the recent US$15 billion gas deal between Jordan and Israel was viewed as a solution to Jordan’s long-running supply problems, the combination of increased investment in the country’s oil shale sector, coupled with Amman’s desire to cut energy subsidies, is pushing its energy policy toward a more domestic orientation. Such a change is necessary in a country where public debt stands at 83 per cent of GDP and foreign aid and remittances are required to maintain energy subsidies that stand at 15 per cent of GDP. The displacement of nearly 610,000 Syrians on Jordanian soil adds further strain to the budget. With overall unemployment and youth unemployment at 13 and 30 per cent respectively, the reduction of subsidies and development of local energy and transportation infrastructure is viewed by Amman as a viable path towards sustainable economic growth.

Jordan’s domestic policy orientation also extends to its growing nuclear industry. The Jordanian government plans to supply up to 30 per cent of its domestic energy needs with nuclear energy by 2030. Towards this goal, Amman recently signed a US$10 billion deal with Russia’s state-owned Rosatom for two 1,000 MW reactors in the north of the country. The first reactor is scheduled to come online in 2024 and the second in 2026. Russia’s success in in the Jordanian nuclear industry comes after an unsuccessful attempt by China to enter the field in 2008 and an increase in competition between Russia and China over the construction of nuclear power plants in the region at the conclusion of negotiations between Iran and the P5+1.

From the Suez Canal Zone, railroad projects, and military aid in Egypt to $20 billion infrastructure development and military sales in Algeria, China’s Middle East strategy has focused on utilising infrastructure and military aid to garner influence in the region. China’s policy in Jordan is following the same script. In addition to energy projects, King Abdullah also signed a military cooperation deal with China that includes the purchase of unspecified military equipment valued at $4.7 million. Finally, the $2.8 billion contract for the construction of a Jordanian national railway network is another step toward the development of a regional rail network that seeks to link Jordan to its Gulf neighbours.  Additional connections are being planned for Syria, Iraq, Turkey, and Europe. Such plans are consistent with China’s One Belt-One Road initiative, which seeks to develop an overland route from China to Europe via Central Asia.

While Chinese policy in Jordan holds great economic potential, it also carries a degree of risk. Bilateral trade between China and the Middle East currently stands at US$240 billion—the bulk of this trade favours China. Such a trade imbalance indicates a failure to deliver economic opportunity along with infrastructure investments. However, by harnessing Chinese and Russian economic competition in its energy sector, Jordan is taking proactive steps to fix its broken energy policy. Whether Chinese investment will also create economic opportunity in the Hashemite Kingdom, however, has yet to be seen. The silver lining may yet lie in the country’s national rail project, as Jordan’s lack of public transportation has had a negative effect on access to education while allowing extremism to gain a foothold in lessdeveloped areas of the country. With violence continuing next door in Iraq and Syria, whether the regional ambitions of Jordan’s rail network will ever come to fruition is an open question.

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Everett, Greg. 2017. "Jordan’S Pivot To China - Policy Forum". Policy Forum.