Public Disclosure Authorized
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The World Bank
FOR OFFICIAL USE ONLY
Public Disclosure Authorized
Report No. 16104
Public Disclosure Authorized
PROJECT COMPLETION NOTE
THE HASHEMITE KINGDOM OF JORDAN
SEVENTH POWER PROJECT
(LOAN 2835-JO)
Public Disclosure Authorized
November 6, 1996
Private Sector Development and Infrastructure
Country Department II
Middle East and North Africa Region
Division
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.
FOR OFFICIAL USE ONLY
The World Bank
Washington, D.C. 20433
U.S.A.
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The loan for US$70 million was not signed and was withdrawn in May 1988 at the request of the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$1 15.5 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 documenthasa restricteddistributionand may be usedby recipientsonly in the performanceof their
officialduties.Its contentsmaynot otherwisebe disclosedwithoutWorldBankauthorization.
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, 1987. 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.
THE PROJECT COMPLETION NOTE
HASHEMITE KINGDOM OF JORDAN
SEVENTHPOWERPROJECTS
(Loan 2835-JO)
A. Backgroundand Project Objectives
1.
Jordan's modestenergyresources consistof oil shale deposits, some tar sands, a few low
temperaturegeothermalresourcesand a smallhydropowerpotential(87 GWh per year). No
commerciallyexploitablecoal, lignite, oil and natural gas reserves were knownto exist at appraisal.
Under the prevailingand futureprojectionsof oil prices, extractionof oil from shaledeposits wasnot
found to be economical. Out of the annualhydropowerpotentialof 87 GWh, only 4 GWh on the
Zarqa river couldbe developedand the balancepotentialof 83 GWh was hamperedby the issueof
riparian rights. Therefore, ignoringsmallcontributionby hydropower,the country dependedheavily
on importedfuel oil for electricitygeneration.
2.
In 1984, the beneficiary,Jordan ElectricityAuthority(JEA)developeda comprehensiveleastcost power generationdevelopmentplan up to the year 2000. The study concludedthat the extension
of the Aqaba thermalpower stationby additionof two dual fuel-fired(coal and fuel oil) units each of
130 MW capacitywith coal as the primary fuel was the least-costsolutionfor meetingthe future
electricitydemand. Followingthe 1986declinein fuel oil prices, JEA carried out sensitivityanalysis
which indicatedthat use of coal as a primary fuel was no longereconomical. Further, to reconfirmthe
results of the analysisregardingthe primary fuel to be used for the proposedextensionof the power
station, JEA invited bids for dual fuel-firedunits requiringthe bidders to quoteprices for the two
options. The first optionwas with coal as the primary fuel. The second optionwas with heavyfuel oil
as the initial fuel and with a provisionfor changingover to coal in future in case the fuel oil prices
increasedsubstantially. Based on the bid prices, JEA informedthe Bank that the secondoption was
more economical. The Bank's review indicatedthat there was no significantdifferencebetweenthe
two options, however, if fuel oil prices increasedin line with the Bank's projections,the first option
would be the least-costsolution. Accordingly,during negotiations,the Governmentagreed to continue
processingof the study for the coal unloadingjetty and to exchangeviews with the Bankregarding the
primary fuel to be used to ensure the most economicoperationof the Aqaba thermalpower station
extension.
3.
In this context, the project objectiveswere to: (i) meet the futuredemand for electricityin
Jordan at least-costto the economy;and (ii) potentiallyreduceJordan's dependenceon importedfuel
oil for generationof electricityby possibilityof substitutionof fuel oil by coal should the latter prove to
be more economical.
B. Project Scope and Project Cost
4.
The project consistedof the: (a) expansionof the existingAqaba oil fired thermalpower
stationby the addition of two 130-MWunits equippedwith boilers initiallyfiring fuel oil, and the
power stationlayout and design of boilersbeing suitable for future coal firing; (b) installationof the
facilitiesfor upgradingthe Aqaba and the AmmanSouth substationsto 400 kV; and (c) consultancy
servicesassociatedwith (a) and (b). The estimatedproject cost was US$242.5millionof which about
US$203.8millionwas in foreign exchange.
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
Kuwait Fund
Arab Fund
Islamic Development Bank
OPEC Fund
ExportlSuppliers Credit 48.5
The Government/JEA
Total
70.0
24.0
24.0
14.0
5.0
18.3
203.8
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).
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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 1987. 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
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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 1989. The Jordan Energy
Sector Study (Report No. 7984-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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