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