Opportunities and risks in Jordan’s energy market

By Wang Jihong and Steven Wu, Zhong Lun Law Firm

Since the China-Arab States Co-operation Forum was founded in 2004, China and the Arab states have increasingly deepened their co-operation on all fronts, including political, economic and security fields. As one of the 22 member states of the Arab League, Jordan manifests a rising position and significance, both in China-Arab co-operation and in the Belt and Road Initiative (BRI), due to its privileged geographical location and stable political environment.

In 2019, China became the third-largest trade partner and the second-largest supplier to Jordan, and the bilateral trade amount has exceeded US$4.1 billion, up 29.2% from one year ago. Chinese companies’ investment in Jordan has also hit record highs.

Huge potential in the energy market

Wang Jihong
Zhong Lun Law Firm

To boost its economy, the Jordanian government has continuously improved the business environment and issued stimulus policies in the hope of attracting more foreign investment. Especially in the energy sector, as 96% of its energy demand is met by imports, the Jordanian government has implemented energy strategies, issued the Renewable Energy and Energy Efficiency Law, and eased restrictions on foreign investment, successively, in the past decade to vigorously develop its domestic energy industry.

In 2019, Jordan’s renewable energy generation capacity reached 1,500MW, accounting for about 15% of its gross generating capacity, up from 1% in 2014, and it is estimated that the percentage will further rise to 20% in 2021.

In addition, Jordan has signed nuclear energy co-operation agreements with China, Russia, France and Japan, actively preparing for the construction of two small modular nuclear reactors with a combined capacity of 220MW. After many years of development, Jordan has become a pioneer in the new energy field, ranking first in the Middle East and North Africa, and third worldwide, by the legislative environment and investment attractiveness in the new energy sector.

However, it is necessary for investors to be fully aware of the risks in the Jordanian energy market while seeking huge business opportunities. Based on a comprehensive analysis of Jordan’s policies, laws, regulations and past cases, the author advises investors to note the following main risks in investing in Jordan’s energy market, and corresponding countermeasures.

Risk in law and policy changes

Steven Wu
Zhong Lun Law Firm

Jordan’s government has been reshuffled frequently in recent years due to poor domestic economic performance. Moreover, each newly shuffled government launches new economic stimulus measures, adding to the instability of laws and regulations, and more than likely having a negative impact on foreign investment. For example, the Income Tax Law, as revised in 2018, requires companies registered in Jordanian free zones to pay their income tax at normal rates. This new rule goes against the exemption granted to eligible companies by the 2014 Investment Law, and also conflicts with the preferential investment policy issued earlier by the cabinet, seriously impairing the interests of foreign investors operating in Jordan’s free zones.

Given such risks, investors are advised to make sure that their agreements with the government set out the preferential policies granted by the cabinet or other authorities, and also explicitly state as follows: “Any law or policy change that may impair the exemption status or interests of the investor shall not apply to the investor; otherwise, the investor is entitled to claim damages for the breach of contract.” Also, foreign investors are advised to strengthen communication and negotiation with the local governments in Jordan to be aware in advance of any national development plan, or any law or policy change, which may affect relevant investment projects.

Regional political risk

Thanks to the stable political setting of Jordan, foreign investors usually do not find their business activities at risk of local political turmoil. However, investors have to comprehensively consider factors like the complicated and sensitive political situation in the Middle East, and protracted warfare and conflict in Syria and adjacent countries.

In particular, after the US recently released its “Middle East Peace Plan”, the conflicts between Arab states and Israel have escalated. Anti-Israel sentiment has been fuelled in Jordan, igniting a number of large-scale public demonstrations. As a result, Jordan’s house of representatives passed a law to ban imports of Israeli natural gas in January 2020.

It is reported that Jordan may have to pay a US$1.5 billion penalty for breach of contract, and foreign investors contracted to build and operate Israeli natural gas pipelines in the country will also suffer a massive financial loss due to the discontinuation of their projects.

Because of such risks, investors are first advised to purchase overseas investment insurance in advance to cover the government’s default risk caused by unexpected political events in the host country. Next, upon signing the project contract with the government, investors are advised to include in the contract clauses that protect and hold investors safe from political risks. Finally, investors are advised to strengthen safety precautions during project construction and operation, and make sure to take necessary security measures in case of terrorist attacks or public riots.

Against the strategic background of the BRI and a deeper China-Arab co-operation, there is a rising number of Chinese companies entering the energy markets in Jordan, and other Middle East countries. Overseas investors’ ability to accurately identify and manage risks will make a difference in their investment.

As the current legal system of Jordan is jointly shaped by the law of the former Ottoman empire (based on French law), the law enacted during the British Mandate period, and Shariah law, its legal environment is complicated and relatively strange to foreign companies. Promptly after deciding to invest in Jordan, Chinese companies are advised to hire professional consulting agencies to conduct in-depth due diligence about the host country and the proposed investment project, and thoroughly assess the project’s deal structure and the legal risks in construction and operation stages, thereby ensuring the smooth implementation and final success of the investment project.

Wang Jihong is a partner and Steven Wu is a lawyer at Zhong Lun Law Firm.

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