JPRC EXPANSION PLANS MOVING SLOWLY

C O N F I D E N T I A L AMMAN 004833

SIPDIS

SIPDIS

E.O. 12958: DECL: 06/26/2016
TAGS: EPET KPRV ECIN ECON JO
SUBJECT: JPRC EXPANSION PLANS MOVING SLOWLY

Classified By: CDA Daniel Rubinstein for reasons 1.4 (b) and (d).


1. (C) SUMMARY: The future of Jordan Petroleum Refinery
Corporation (JPRC) - operator of Jordan's sole refinery -
remains unclear as its 25-year concession over production,
distribution, and marketing of petroleum products draws to an
end in 2008. JPRC, a semi-public corporation, hopes that it
will be able to draw $700-900 million from a strategic
partner that will allow for the expansion and upgrade of the
refinery. The Ministry of Energy's cautious approach in
determining the environment the GoJ would like to create for
the petroleum industry has drawn the irk of the JPRC CEO who
feels that time is of the essence, and that a decision by the
government laying out the post-concession regulatory and
legal framework is long overdue. Depending on what type of
framework the government spells out, Jordan's oil sector
could see substantial change in the coming decade. END
SUMMARY.


2. (SBU) BACKGROUND: Jordan has a relatively inefficient
process of receiving, refining, and distributing petroleum
products. With no active pipelines in operation, all crude
oil is trucked from the port of Aqaba to Jordan's sole
refinery in Zarqa, east of Amman. Operated by JPRC, the
antiquated refinery in Zarqa is capable of producing only
diesel, leaded, jet, and bunker fuel. Private-sector buyers
purchase the petroleum products in bulk, and JPRC then
distributes it (via truck) at a delivery price fixed by the
government. In the case of products that it is unable to
produce (e.g., unleaded fuel),JPRC has the sole authority to
purchase and distribute the refined product from the world
market.


3. (SBU) As part of the JPRC concession, the GoJ purchases
all crude petroleum products for Jordan and delivers it to
JPRC for refining and distribution. The GoJ made a decision
in April 2005 that this concession would not be renewed in
2008, and made clear that the business end of distributing
refined product (i.e., competitive retailing) would be opened
to the private sector. NOTE: We expect that opening up the
market will see three operators (not including JPRC) enter
this end of the sector in which they run and manage the
entire distribution supply chain. END NOTE. Whether the
government will allow open competition in the import and
refining of crude oil remains an open question. END
BACKGROUND.


4. (C) In a June 21 meeting with EconOffs, JPRC CEO Ahmed
Alrefai lamented that the GoJ's failure to endorse his plan
to bring in a strategic investor will delay the start of a
much-needed upgrade of the Zarqa refinery. Referring to
presentations that he and the Minister of Energy and Mineral
Resources (MEMR) made to the Cabinet in a June 4 session,
Alrefai expressed his frustration that the "Minister's
strategy was in conflict with my vision." JPRC hired
Citigroup in late 2005 to be a financial consultant and
solicit a possible strategic partner. Citigroup's own
analysis shows that a government decision on what the
regulatory and legal framework for the sector will look like
after the concession ends is a requirement to drawing any
investment interest. An MEMR study which would aid a
government decision on whether to support the Zarqa refinery
upgrade or open the sector to private interests will not
conclude until mid-2007, a date Alrefai calculates will delay
Jordan's ability to improve its oil-refining capabilities
until at least 2010.


5. (SBU) Contrasting visions between the Minister of Energy
and JPRC's CEO on the extent of future government support for
JPRC, reflect broadly a difference between Jordanians who
believe that a company with an antiquated refinery and few
other assets should be scrapped, and those who believe that
fostering market conditions that favor JPRC will lead to a
more efficiently-run sector, and at the same time, maintain
Jordan's energy sovereignty. For the GoJ, supporting the
Zarqa refinery upgrade would mean that the GoJ continues to
allow JPRC to operate alone, and in turn, provide the
catalyst for investor interest in fulfilling Alrefai's vision
of a "combined refinery expansion and Aqaba-Zarqa pipeline"
project. On the other hand, opening up the market to other
players could result in a variety of scenarios: an RFP to
build a new, 21st-century refinery in or near to the Aqaba
port, or a potential pipeline project to bring in crude from
a number of regional countries.

6. (C) In the event that the Zarqa refinery is kept going,
constructing a pipeline to bring crude from the port of Aqaba
to Zarqa will become a necessity as the government's
obligation to truck crude will no longer exist. More
ambitious plans to resurrect currently-unused pipelines in
the region could, in the future, follow construction of the
Aqaba-Zarqa pipeline. In that case, the flow would be
reversed and crude would be pumped from Iraq to Aqaba (with a
drop-off point in Zarqa) and out for export to Asia. If the
government chooses to drop import barriers on crude petroleum
products and create a regulatory environment that encourages
private-sector involvement, Kuwaiti investors in Jordan have
reported an interest in developing a refinery in Aqaba and
trucking refined petroleum products north. Depending on what
type of regulatory and legal framework the government sets
up, a third possibility of importing all required refined
product with no operating refinery in Jordan is also tenable.
In that case, according to investors, refined product would
most likely travel via the Yanbu (Saudi Arabia)-Aqaba
shipping channel.


7. (C) COMMENT: The GoJ's decision on whether or not to
encourage the refinery upgrade will have major impacts on the
oil sector in Jordan. Though the establishment of a modern
process in receiving, refining, and distributing petroleum
products would ultimately lead to lower costs to the
consumer, closure of the refinery in Zarqa could result in
major political fallout as the loss of jobs (approximately
300) and backward linkages in the economy would be felt.
Additionally, there is no doubt that the loss of JPRC, a
semi-public corporation in which the GoJ's Social Security
Corporation (SSC) is the primary stakeholder, would raise a
public outcry and lead to accusations that the government has
endangered national security by allowing a foreign
company/country to enter the business of oil refining.
Regardless, Alrefai's main point that the GoJ needs to make a
decision soon is valid. With a minimum three-year time
period required for a refinery upgrade or construction of a
new refinery/pipeline, the slow approach advocated by the
MEMR will mean even more delay in introducing improved oil
refinery capabilities.
Rubinstein