Breaking Jordan’s fuel market monopoly was seen by many as a bold and necessary move. But besides the appearance of some modern, pristinely maintained gas stations, when are motorists likely to see the other promised benefits of the sector’s liberalization?
By Dina al -Wakeel
The Ministry of Energy signed an agreement in November 2012 with French oil giant Total and Jordan’s Manaseer Oil and Gas, allowing them to distribute fuel to the Kingdom’s more than 350 gas stations alongside the Jordan Petroleum Refinery Company (JPRC), which had enjoyed a monopoly on the market for decades.
The historic deal, which also permits Total and Manaseer to import a limited amount of oil derivatives, aims to liberalize the market by 2019 and offer motorists better quality and possibly even cheaper fuel, as well as improved services. “At the end of the day, we will have a liberalized oil market where the customer can decide which gas station to buy from based on the price that suits them best,” Minister of Energy and Mineral Resources Mohammad Hamed told Venture.
Even though motorists may not have noticed competition over fuel prices yet, they have surely experienced a big improvement in services when filling up at one of Total or Manaseer’s gas stations. With their smartly-dressed employees, well-stocked mini markets and fast food counters, these gleaming gas stations are a world away from the traditional, independently-owned mom and pop operations that have long been a feature of Jordan’s highways and byways.
“We provided nicer looking gas stations, better service, and new gas pumps,” said Manseer General Manager Yasser al Manaseer, citing new electronic systems that they have introduced to the market, like the e-fill card and e-cash. Manseer has set up 35 gas stations so far around Jordan, and is building 10 more, which is quite an undertaking considering the small profit margins involved in the business.
Although currently the market is mostly dominated by Manaseer and Total, the government will allow other companies to provide their services in May 2016, further increasing competition. Simultaneously, they will also allow each gas station to choose its distributor. “When the three companies start importing, and in 2016 when other companies will enter the market, there will be greater competition in distribution and import,” explained Hamed.
However, one major clause in the agreement the distribution companies were not too keen on was the stipulation that they had to buy up the entire output of JPRC’s refinery, which is the sole refining facility in Jordan. Normally, its output of diesel, gasoline, and kerosene covers roughly 70 percent of the market’s needs, but due to the significant decrease in Egyptian gas which was used to generate electricity but has now been substituted with heavy fuel and diesel, the refinery’s production today only covers 50 percent of the total consumption.
According to the agreement, the three companies need to come to a consensus on a mechanism to import the remaining fuel and cover for the shortage, an arrangement they have yet to agree on. “We, as distribution companies, are ready [to start importing],” Manaseer said.
But for distribution companies, whatever share they ultimately get, it will unlikely prove lucrative. “The conditions that we signed into [limit our capabilities],” Manaseer said, adding that the distribution companies will only really be able to start selling cheaper and better quality fuel from 2019 when it’s free to import all their needs.
JPRC: Running on Empty?
Since 1958, the JPRC has enjoyed an exclusivity concession that has rendered it the sole player in a resource-poor country. It underwent three expansion plans in 1970, 1973, and 1982 to upgrade its facilities and increase the daily production capacity. Then in 2009, the refinery announced it had received interest from potential strategic partners to carry out its fourth expansion plan, a process that was suspended following corruption accusations regarding the tendering process.
Today, breaking the JPRC’s 50-year monopoly has put it under mounting pressure to invest in upgrading its facilities to allow it to compete on equal terms with its rivals. The private company, which is 20 percent owned by the Social Security Corporation, has been given until 2019 before the market is completely liberalized to embark on the major upgrade that would improve its production capacity and products, particularly diesel, which has long been criticized for being low grade.
“There’s no doubt that to improve the quality of our diesel the (JPRC) refinery should take measures and invest so that the refined diesel is of international standard,” said Hamed. According to experts, a unit of diesel produced by the JPRC refinery contains 1.2 percent sulfur, compared to the average international standard of 0.05 percent.
JPRC CEO Abdel Karim Alawin admitted his refinery needed to quickly up its game if it intends to remain a serious competitor in the market. He said a four-year expansion plan will boost the quality of the refinery’s diesel, as well as its production and refining capacity to meet consumption demand which is growing at 4 percent annually. The plan also aims to help the refinery convert the 1.5 million tons of fuel oil currently used to generate electricity into other products like diesel and gasoline, once Jordan is able to substitute heavy fuel with gas in producing power.
But the JPRC can’t embark on the plan without a strategic or financial partner. It’s saddled with a debt of around JD1 billion to banks and oil importers, and a similar amount is owed to them by companies like the National Electric Power Company (NEPCO), which is heavily in debt and owes the JPRC nearly JD700 million, and Royal Jordanian. “It could be discouraging for an investor or a financier to invest in an entity that has a lot of debts,” Alawin said. “The refinery’s expansion relies heavily on the feasibility, but we would’ve been in a much stronger position had we been in a better financial situation.”
Alawin added that the JPRC has appointed a technical advisor who is currently examining the expansion project while taking into consideration the possibility of receiving fuel through an intended Iraqi oil pipeline, or Saudi oil, for 100,000-150,000 bpd. This would enable the refinery to provide not only the local market with oil derivatives, but also to export to other countries in the region. In parallel, they have also sought the opinion of a financial advisor who will assess the potential funding alternatives; raising the company’s capital, a strategic partner, bank loans, or other options.
The results of both of these studies are expected in 10 months, and Alawin is confident of a positive outcome. “The expansion is a vital issue,” he said. “We were approached by so many entities … but we cannot jump into a JD1 billion [four year] expansion plan without taking into consideration all the basic requirements, including the assessment plans.”
Alawin referred to other activities the refinery is currently engaged in, including the production of Liquefied Petroleum Gas and a profit-making Lube Oil Blending plant.
Still the clock is ticking, and if the JPRC fails to achieve its aims within the set time frame, it could find itself in serious trouble. “If we reach 2019 and the refinery doesn’t take any action, then I don’t think it will be in a good place,” said Hamed.
Perhaps unsurprisingly, the JPRC hasn’t been a big cheerleader of the liberalization from the very start. Alawin feels his company has come in for some unfair criticism, and, moreover, he predicts that fuel prices will actually increase once the market is fully freed up due to higher import costs in terms of shipping, taxes, storage, and transportation. “I don’t think it was a major accomplishment to liberalize the market … you will see that things won’t be as bright as was talked about,” he said. The liberalization plan is also hampered by the fact that the Jordanian market is also limited in size, he added, with a relatively small consumption of 100,000 bpd, or 4 million tons per year. “We are not France or the UK, where there are many companies … Since it’s a limited market, the ability to compete is also limited,” he said.
Despite Alawin’s warnings, the market remains upbeat about the prospects of greater liberalization, especially in terms of more transparent pricing mechanisms. Over recent years, the government has adopted a monthly pricing formula for oil derivatives which has been widely criticized as opaque at best, and disingenuous at worst.
Hamed stressed that pricing is based on international crude oil and derivatives prices. Add to this price: shipping fees, storage fees, transportation fees from Aqaba, as well as taxes, and you get the final price, he said. While the JPRC’s Alawin said a monthly, rather than weekly pricing method, had ensured that the price of diesel in Jordan had remained between 660 and 680 fils per liter since 2012.
But Khalid al-Wazani, chief economist at Issnaad Consulting, remains unconvinced. “It’s clear that there is a distortion [in pricing],” he said. “Even officials find it difficult to try to explain the formula. If you say that you base the prices on Brent crude oil, although we don’t import Brent, then there’s something wrong.”
He strongly believes that liberalizing the market is a way to lift this alleged distortion off the supply side of the prices, adding that the agreement with the three companies was a step forward. The economist even said the agreement will ultimately be to the refinery’s benefit; if it is able to produce better quality products, then it would be more feasible for the other companies to buy their derivatives from a local supplier rather than importing their own, and paying for their shipment and other costs.
To prepare for the market’s liberalization, the government and private companies have started laying out plans for expansion and better storage facilities. The minister referred to a recent tender to create storage spaces in East Amman with 350,000 tons capacity for a strategic reserve that would last up to 65 days. Manaseer said that besides plans to eventually establish 100 gas stations across the Kingdom, they will also build their own storage facilities in Aqaba.
Whether or not the refinery carries out its planned expansion scheme, the decision to liberalize the market has already been taken and there’s no going back. But besides a better customer experience and cleaner gasoline, Jordanians will not feel the financial effects of the decision—if at all—for a good few years.