Document of The World Bank FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Private Sector Development and Infrastructure Country Department II Middle East and North Africa Region Document of The World Bank FOR OFFICIAL USE ONLY PROJECT COMPLETION NOTE THE HASHEMITE KINGDOM OF JORDAN SEVENTH POWER PROJECT (LOAN 2835-JO) November 6, 1996 Division Report No 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.

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3 The World Bank Washington, D.C U.S.A. FOR OFFICIAL USE ONLY Office of the Director-General Operations Evaluation November 6, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Hashemite Kingdom of Jordan: Seventh Power Project (Loan 2835-JO) The Project Completion Note (PCN) on the Hashemite Kingdom of Jordan Seventh Power project (Loan 2835-JO, approved in FY87) was prepared by the Middle East and North Africa Regional Office. The loan for US$70 million was not signed and was withdrawn in May 1988 at the request of the Government. The project objectives were to: (i) meet the future demand for electricity at least-cost; and (ii) reduce Jordan's dependence on imported fuel oil for power generation by replacing coal for oil. The project consisted of: (a) the expansion of the Aqaba thermal power plant by 260 MW through the installation of two units; (b) the upgrade to 400 kv of the Aqaba-Amman transmission line and its end substations; and (c) related engineering/ supervision services. The project cost estimate was US$242.5 million, which was to be financed by the Bank (US$70 million), four cofinanciers and export/suppliers credits (US$ million), and Jordan. The Government gave two reasons for withdrawing the loan: (i) eight months after loan approval, demand for electricity was lagging 15 percent behind appraisal forecast because of a sharp downturn in Jordan's economic growth; and (ii) natural gas discovered in the Risha area made it attractive to install small gas turbines using natural gas, which otherwise would have been flared. The expansion of the Aqaba power plant coal-fired units was postponed. Instead, two 30 MW gas turbines were installed at Risha without Bank participation. By 1993, however, electricity demand had recovered and exceeded appraisal forecasts, and the Government had decided to go ahead with the two 130MW units at Aqaba; these will be oil-fired, a gamble unless much more gas reserves are found and developed shortly. OED does not rate the project because it never became effective. Bank performance is rated as satisfactory, although Bank staff could have done a better job of monitoring and promoting gas exploration and development as it is doing now under the Energy Sector Adjustment Loan (Loan 3651-JO). One important lesson can be drawn: no effort should be spared to assess early on the availability of alternative fuel options for power generation and the risks associated with each one of them. The PCN is of satisfactory quality; it presents a good account of the events that led to and followed loan withdrawal. No audit is planned. 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.

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5 THE PROJECT COMPLETION NOTE HASHEMITE KINGDOM OF JORDAN SEVENTH POWER PROJECT (Loan 2835-JO) Preface This is the Project Completion Note (PCN) for the Seventh Power Project, Loan 2835-JO in the amount of US$70 million approved by the Board on June 16, The Loan, however, was not signed and withdrawn (telex of May 13, 1988) at the request of the Government which informed the Bank that with the discovery of natural gas reserves in the Risha area after the project appraisal, the Government contemplated using natural gas in combustion turbines instead of burning imported fuel oil in the boilers of the conventional thermal units for generation of electricity as proposed under the project. The PCN was prepared by Mr. Kashinath N. Sheorey, Consultant, MN2PI and reviewed by Mr. Alastair McKechnie, Division Chief, MN2PI and Gianni Brizzi, Project Adviser, MN2DR.

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7 THE PROJECT COMPLETION NOTE HASHEMITE KINGDOM OF JORDAN SEVENTH POWER PROJECTS (Loan 2835-JO) A. Background and Project Objectives 1. Jordan's modest energy resources consist of oil shale deposits, some tar sands, a few low temperature geothermal resources and a small hydropower potential (87 GWh per year). No commercially exploitable coal, lignite, oil and natural gas reserves were known to exist at appraisal. Under the prevailing and future projections of oil prices, extraction of oil from shale deposits was not found to be economical. Out of the annual hydropower potential of 87 GWh, only 4 GWh on the Zarqa river could be developed and the balance potential of 83 GWh was hampered by the issue of riparian rights. Therefore, ignoring small contribution by hydropower, the country depended heavily on imported fuel oil for electricity generation. 2. In 1984, the beneficiary, Jordan Electricity Authority (JEA) developed a comprehensive leastcost power generation development plan up to the year The study concluded that the extension of the Aqaba thermal power station by addition of two dual fuel-fired (coal and fuel oil) units each of 130 MW capacity with coal as the primary fuel was the least-cost solution for meeting the future electricity demand. Following the 1986 decline in fuel oil prices, JEA carried out sensitivity analysis which indicated that use of coal as a primary fuel was no longer economical. Further, to reconfirm the results of the analysis regarding the primary fuel to be used for the proposed extension of the power station, JEA invited bids for dual fuel-fired units requiring the bidders to quote prices for the two options. The first option was with coal as the primary fuel. The second option was with heavy fuel oil as the initial fuel and with a provision for changing over to coal in future in case the fuel oil prices increased substantially. Based on the bid prices, JEA informed the Bank that the second option was more economical. The Bank's review indicated that there was no significant difference between the two options, however, if fuel oil prices increased in line with the Bank's projections, the first option would be the least-cost solution. Accordingly, during negotiations, the Government agreed to continue processing of the study for the coal unloading jetty and to exchange views with the Bank regarding the primary fuel to be used to ensure the most economic operation of the Aqaba thermal power station extension. 3. In this context, the project objectives were to: (i) meet the future demand for electricity in Jordan at least-cost to the economy; and (ii) potentially reduce Jordan's dependence on imported fuel oil for generation of electricity by possibility of substitution of fuel oil by coal should the latter prove to be more economical. B. Project Scope and Project Cost 4. The project consisted of the: (a) expansion of the existing Aqaba oil fired thermal power station by the addition of two 130-MW units equipped with boilers initially firing fuel oil, and the power station layout and design of boilers being suitable for future coal firing; (b) installation of the facilities for upgrading the Aqaba and the Amman South substations to 400 kv; and (c) consultancy services associated with (a) and (b). The estimated project cost was US$242.5 million of which about US$203.8 million was in foreign exchange.

8 2 C. Financing Plan 5. Two co-financiers meetings (the first before and the second after the bid opening) were held in Amman in May 1985 and April 1987 for finalizing the financing plan. The total foreign exchange requirement of US$203.8 million was to be shared by the co-financiers as follows: Co-financier US$ Million IBRD 70.0 Kuwait Fund 24.0 Arab Fund 24.0 Islamic Development Bank 14.0 OPEC Fund 5.0 ExportlSuppliers Credit 48.5 The Government/JEA 18.3 Total In addition, the Government/JEA were to cover the local currency project requirement of US$38.7 million and the foreign exchange requirement of US$15.3 million for interest during construction. D. Enviromnental Matters 6. JEA submitted to the Bank in November 1986, a copy of the environmental report for the extension (stage II) of the Aqaba power station. The power station design took into consideration the permissible concentration of pollutants at the ground level and to ensure that the ambient air quality is within the acceptable limits the stack height was kept at 175 meters. In addition, in the event of the boilers being converted for coal firing, the station design had provided for installation of electrostatic precipitators to control particulate matter emission from the stacks, and for the installation of the dust control equipment for handling of fugitive dust arising during the coal handling and storage activities. Further, the effect of thermal impact on coral reef and marine life in the Gulf of Aqaba due to discharge of the warm condenser cooling water was taken into consideration and the temperature of cooling water discharge at the edge of the thermal plume was kept within the allowable limit. Prior to and after the Board's approval of the loan, two questions were raised regarding the (i) transnational environmental effects due to the stack height of 175 meters and (ii) discussions, if any, carried out by the Bank with the neighboring countries in view of the proximity of the power station to the border of Saudi Arabia, and to tourist areas in Israel, Egypt as well as Jordan. E. Project Risk 7. Except for the risk associated with the economics of use of coal or oil as a primary fuel for the proposed power station extension, and the possible delays in converting the power station equipment to coal firing, no special risks were contemplated. F. Financial Matters 8. The financial covenants regarding self-financing level, accounts receivable and debt service requirements were same as agreed under the Sixth Power Project (Loan 2710-JO).

9 -3- G. Reason for Loan Withdrawal 9. The Board approved the loan on June 16, 1987, however, the loan signing was delayed by the Government. The Bank, therefore, proposed (telex of November 9, 1987) that the Government consider signing of the loan in December The Government in response requested that the loan signing be postponed till May 1988 to enable JEA to finalize its bid evaluation. The Bank's first supervision mission for the project in February 1988 was informed about the possible postponement/ cancellation of the project in view of the downward revision of the demand forecast for electricity (actual demand of 500 MW compared to the SAR forecast of 587 MW), recent discovery of natural gas reserves in the Risha area, and consequential revision of JEA's least-cost generation expansion program. On March 8, 1988, the Government informed the Bank that JEA is revising its generation expansion plans in view of the recent discovery of natural gas reserves in the Risha area and that JEA has awarded contracts for two combustion turbines each of 30 MW capacity. Accordingly, the Government decided to postpone the implementation of the proposed Aqaba power station extension and on April 13, 1988, the Government requested the Bank to withdraw the loan. The Bank accepted the Government's request and on May 13,1988, informed the Government that the loan had been withdrawn. H. Lessons Learned 10. Four important lessons were learned during processing of the project. The first lesson learned was that information on subsectors that has an impact on the project should be updated at regular intervals. Availability of natural gas had an impact on the withdrawal of the loan for the project. The Jordan Sector Study (April 1984) discussed about exploration of oil and natural gas and possible four attractive areas in the country for petroleum exploration; and Risha was one of the area having high probability of presence of oil and natural gas. However, SAR did not indicate any possibility of commercially exploitable reserves of natural gas in Jordan. Depending on the complexity of the reservoir, commercial exploitation of oil or natural gas has a lead time of about seven to ten years. Analysis of the project risk in the Staff Appraisal Report (SAR) discusses possibility of changing over from fuel oil to coal for electricity generation. However, there is no mention of the possibility of use of natural gas as a fuel for electricity generation and consequential modifications to the project design. Therefore, from the available documentation it is not clear why the Bank was not aware of this development or how the Government/JEA could take a sudden decision of commercial exploitation of natural gas for generation of electricity. Alternatively, the Government might have taken a calculated risk in its decision of installation of combustion turbines in the Risha area without completion of diagnostic studies, evaluation of reserves and production testing of wells. The proposal of withdrawal of the loan submitted to the Bank's management is silent on this issue. 11. The second lesson learned was that even though good quality power system planning was undertaken consistent with best practice at the time, changes that occurred in oil and coal prices, electricity demand and fuel availability (natural gas) indicates that more formal analysis of risks and their impact on project design might have led to better investment decisions. In retrospect though, it seems that the most appropriate investment decision was taken, fortunately the decline in projected electricity demand enabled more time to evaluate the gas alternative. 12. The third lesson learned was that it is essential to address, well in advance, transnational environmental issues in case a polluting source, such as a power station, is close to the border of the

10 - 4 - country. In case of this project, there is no documentation available to indicate if the issue was addressed or discussed with the neighboring countries of Saudi Arabia, Israel or Egypt. However, the geo-political situation at that time might have made such discussions difficult. With the withdrawal of the loan this became a non-issue. In future care would have to be taken that the environmental issues are discussed and resolved with the stakeholders well in advance of the Board presentation of the project. 13. The fourth lesson learned was that it is important to maintain continuity, at least for one year, of the appraisal team, especially, the task manager, for follow-up actions after the approval of the project by the Board. In this case, unfortunately, the Bank's reorganization in June 1987 which resulted in major relocation of the Bank staff exacerbated the situation. From the records, it appears that the next Bank power supervision mission after the June 1986 appraisal mission was only after a period of 20 months, that is, in February 1988 when the mission learned about the invitation of bids and placing of orders for the combustion turbines as a result of the discovery of natural gas reserves in the Risha area. Since it generally takes at least six to eight months from bid preparation to award of contracts for the combustion turbines, a follow-up mission after the Board approval of the project would have been able to raise the flag earlier than March 8, 1988 when the Government informed the Bank about contract award for the combustion turbines. 1. Postscript 14. JEA commissioned combustion turbines in the Risha area in March The Jordan Energy Sector Study (Report No JO) mentions that the main objective of the Government in commissioning of combustion turbines was to avoid flaring of natural gas during the long-term testing period. To determine the size of recoverable gas reserves the Government, under the Energy Sector Adjustment Loan (Loan 3651-JO) approved by the Board in September 1993, agreed to complete longterm testing and evaluation of the existing gas field. In 1993, to meet the future demand for electricity, the Government decided to go for the extension of the Aqaba thermal power station (two units each of 130 MW capacity) to be commissioned by the end of 1996 and requested for the Bank's participation in financing the project. The boilers for the extension would use fuel oil. The Bank indicated to the Government/JEA the environmental assessment and other issues in the power sector that need to be addressed to enable the Bank to participate in the proposed project. In the meantime, JEA went ahead with procurement activities for the project. With the advanced stage of the project, compliance with the Bank's procurement guidelines and requirements regarding environmental assessment reporting became difficult. Accordingly, the Bank's participation in the project was not considered to be possible. In April 1995, the Government confirmed its desire for reactivation of the Bank's participation in the project with a loan amount of about US$10 million equivalent. However, since a number of issues related to procurement could not be resolved, the Bank was unable to finance the project. According to the latest information, evaluation of the existing gas field is yet to be completed and the Government/JEA has decided to extend the existing Aqaba thermal power station by addition of three units each of 130 MW capacity instead of two units.

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