PANAMA: REFINERY ON HOLD DUE TO WORLD ECONOMIC

C O N F I D E N T I A L PANAMA 000122

SIPDIS

EEB/ESC/IEC/EPC MCMANUS

E.O. 12958: DECL: 02/05/2019
TAGS: ENRG EINV ECON EIND EPET PM
SUBJECT: PANAMA: REFINERY ON HOLD DUE TO WORLD ECONOMIC
CONDITIONS

REF: 2008 PANAMA 000790

Classified By: Ambassador Barbara J. Stephenson for reasons 1.4 (b) and
(d).


1. (U) This cable contains sensitive proprietary business
information concerning on-going negotiations. Please handle
accordingly.

SUMMARY


2. (C) Occidental Petroleum (OXY) and Qatar Petroleum (QP)
representatives privately informed the Ambassador their firms
are putting on hold (not canceling) the $15 billion proposed
Puerto Armuelles Refinery due to the lack of "viability"
stemming from global economic conditions. The reps stressed
that freezing the status of the refinery was not specific to
Panama or the Government of Panama (GOP),but motivated by
global economic conditions. The GOP was praised for its
receptiveness to the project.

NOT VIABLE DUE TO GLOBAL ECONOMIC CONDITIONS


3. (C) OXY executives Antonio D'Amico, Assistant General
Counsel, and Hasham Mukadam, Corporate Director of Midstream
Projects and President of OXY, along with Ali Al-Sidiky,
Director of Downstream Ventures of QP informed Ambassador
Stephenson on February 6 that OXY and QP just informed GOP
Minister of Commerce and Industry Gisela Porras that the
proposed $15 billion Puerto Armuelles Refinery is "not
viable" at this time due to global economic conditions. As a
result, OXY and QP will not proceed to the $100 million Front
End Engineering and Design (FEED) phase of the project. In
Summer 2009, OXY and QP made the identical decision not to
proceed from the pre-FEED to FEED phase. (See REFTEL for a
full description of the project and its relationship to the
PTP pipeline which will be in full reverse flow operation in
August 2009, according to a recent conversation with the
General Manager of PTP.)


4. (C) The OXY and QP reps explained the project could not
move forward due to the erosion of the profit margin caused
by the following factors:

A) The price of petroleum has fallen by over 60% since July
2008 highs.
B) The projected price to build the refinery escalated too
much during the recent commodity boom and construction prices
have not fallen in proportion to the fall in commodity
prices. In addition, the refinery construction also relies
on specialized materials which have not fallen in price.
C) Financing is either unavailable or prohibitively
expensive.
D) Demand for refined petroleum products has fallen in the
United States market (which is the primary market for the
products of the refinery). Additionally, Europe may be
selling excess gasoline to the United States market in the
future, because even more European gasoline powered vehicles
are switching to diesel.


5. (C) OXY and QP reps reaffirmed that the actions by the
Government of Panama (GOP) did not affect the project's
viability. The GOP was described as "eager" and relations
remain "friendly." The hold on the refinery is not public
while OXY and QP wait for the GOP to develop talking points
on the status of the project. Al-Sidiky also mentioned that
Qatar and Panama are in discussions to open Embassies in
their respective countries. Al-Sidiky is a member of the
government and reports directly to the Minister of Energy.

STATE OF QP PROJECTS


6. (C) According to Al-Sidiky, QP's economists are not able
to predict future economic conditions with certainty due to
the confluence of unprecedented bad economic events in every
region of the world. As a result, QP is re-evaluating
strategic priorities. Four to five major QP projects have
been canceled outright - some already had $200 million in
sunk costs. Additionally, other projects are being slowed
down and some, like the Puerto Armuelles Refinery, are on
hold.

FUTURE OF PUERTO ARMUELLES REFINERY


7. (C) On December 31, 2008, the Memorandum of Understanding
(MOU) between the GOP, OXY, and QP expired. The GOP must now
decide if they want to extend the agreement. OXY and QP
asserted the GOP wishes to extend it due to the benefits of
the refinery for Panama. During a brief conversation,
Minister Porras informed the ECON Counselor that the OXY/QP
decision was not unexpected and that the GOP has not yet
decided on whether to extend the MOU due the exclusivity
granted to OXY/QP. She mentioned other interested parties,
but did not specify further. OXY and QP plan to re-assess
the project next year. The re-assessment was characterized
as a normal procedure for all QP projects regardless of the
phase of negotiation or completion.
STEPHENSON