ALBANIA STRENGTHENS ARMO

UNCLAS SECTION 01 OF 02 TIRANA 000916 SIPDIS SENSITIVE DEPT FOR EUR/SCE JISMAIL E.O. 12958:N/A TAGS: EPET ETRD ENRG ECON AL SUBJECT: ALBANIA STRENGTHENS ARMO REF: TIRANA 345 Summary -------------- ¶1. (SBU) A ban on imports of D2 diesel fuel has given the recently-privatized petroleum refiner ARMO a monopoly over the market for cheap but dirty D2 diesel fuel, Albanians' diesel of choice. ARMO is Albania's only refiner, and has, by a decision of the Council of Ministers, until January 1, 2011, to upgrade its facilities to produce D1 to EU standards. But during the next two years, ARMO can produce D2, and all other Albanian oil companies will have to buy D2 from ARMO. According to industry sources, this will put most independent oil companies out of business since Albanian consumers are price sensitive and will not pay the additional cost of cleaner D1 if they have a choice. The Albanian partner of the consortium which now owns ARMO is Rezart Taci, owner of Taci Oil, one of Albania's largest retailers. End Summary. Oil Importers Being Squeezed -------------- ¶2. (SBU) Although the bulk of Albania's petroleum distillate demand is for D2, a heavy grade of diesel being phased out in Europe due to its higher level of pollution, as of January 1, 2009 importers will no longer be able to import, store, or sell D2 unless it is produced in Albania. According to Frident Kuqi, president of one of Albania's largest importers/distributors of petroleum distillates, the GOA has been trying to drive him out of business and, come January 1, may finally succeed. Kuci owns Europetrol Durres Albania (Elda),one of Albania's largest importers with 15 percent of the market. In 2008, Elda imported 82 million liters of distillates, 70 percent of which consisted of D2 (a heavy grade of diesel, generally used for heavy equipment, but widely used in Albania in all vehicles due to its lower cost). In March 2007, the Council of Ministers (COM) decreed that imported D2 may not be sold after January 1, 2009 to comply with EU anti-pollution standards. The cleaner but more expensive D1 must be imported instead. GOA inspectors will have the right to confiscate any imported D2 in storage or gas station tanks after January 1. ¶3. (SBU) Kuci complained that this could put all oil importers out of business. D2 represents 60 to 70 percent of their total business. Albania's oil consumers are very price sensitive and will not pay the additional 10-12 lek (appx. 8 cents) per liter for D1. Kuci added that many importers like himself were forced to build new storage facilities north of Durres at Porto Romano when the GOA decided to move the oil terminals out of Durres. Kuci took out loans of 15 million euro to finance the expansion of his company and the recent construction of the storage tanks. He says he will not be able to pay it back unless he is allowed to continue importing and selling D2. ... while ARMO Reaps the Benefits -------------- ¶4. (SBU) On November 27, a consortium consisting of U.S. oil trader Refinery Associates of Texas (RAOT),Swiss oil trader Anika Enterprises (owned by Albanian oil trader Rezart Taci) and Mercuria Energy group won a tender for state-owned oil company ARMO for 128 million euro. ARMO owns two refineries built by the Chinese 40 years ago to refine the heavy crude pumped from Albanian oil fields, as well as oil terminals and storage facilities. ¶5. (SBU) According to a July 30, 2008 COM decision, D2 refined from domestically produced crude oil can be sold until January 1, 2011. Since ARMO operates the only Albanian refinery, if other Albanian oil companies wish to sell D2, they must buy it from ARMO. As an effective monopoly, ARMO will be able to charge whatever they want for D2. Kuci finds it ironic that the D2 he imports from Russia has a much lower sulfur content than that which ARMO produces and consequently is much cleaner environmentally. ¶6. (SBU) Under state ownership, ARMO has historically operated at 50 percent of its capacity because the state-owned oil producer Albpetrol was not able to pump more. However, Canadian oil company Bankers Petroleum (BP) in 2004 bought the rights to take over Albpetrol's wells, and has greatly increased pumping capacity, exporting most of its production (reftel). Now ARMO will have a captive market for D2 and will be able to absorb more of BP's output. Cmet -------------- ¶7. (SBU) It is too early( totl o hswl lay out, but conspiracy thoit ilcamtatthis is obvious collusionbtenTaci and the GO to drive other importers out of business and bu up strategic gas stations and other assets frpnniees on TIRANA 00000916 002 OF 002 the dollar. Kuci has written the PM and Minister of Economy Ruli several letters, but he is afraid that more forceful action, such as a strike, will bring retaliation. On the other hand, it is not clear what such a de facto monopoly might do for Albania's economy. Once ARMO has upgraded the refineries to increase efficiency and reduce sulfur content, the cost of their products may be less than the cost of imports, possibly lowering the cost of fuels to Albanians, in addition to the positive effects of reducing Albania's balance of trade deficit and providing additional employment. In any case, the GOA is clearly in the driver's seat and will be able to strike deals on its terms with the importers. CRISTINA