French oil giant Total is confident it can stay at the forefront of the far-reaching liberalization drive underway in Jordan’s fuel market.
By Dina Al-Wakeel
With the entrance of international companies like Total breaking the Jordan Petroleum Refinery Company’s (JPRC) long-held monopoly, Jordan’s fuel market has undergone significant change over the past decade.
Increased competition has also led to substantial upgrade in the quality of services provided to customers at service stations across the Kingdom. A 2012 agreement between the Ministry of Energy, Total and Manaseer allowed the two companies to distribute fuel to more than 350 service stations alongside the JPRC.
Looking back at the past decade Total Jordan Managing Director Adil Ouriaghli said despite some obstacles they have faced in the limited local market, including small margins, his company’s investment here is for the long-term.
Ouriaghli spoke with excitement about the first diesel shipment they’ve imported this month, a joint venture with the competition, Manaseer, to build an import terminal in Aqaba, and a commitment to invest in a more diversified energy basket, including renewable energy.
You entered the Jordanian market in 2007, and opened your first service station in 2009. How much have you invested so far and how satisfied are you with this investment?
We have invested a great deal of effort and over $150 million of capital expenditure as of 2015 year-end, mainly in retail network construction, and improvements and transportation through our partners. We intend to invest $200 million over the coming years in diversifying our energy offers, increasing our footprint in retail, in B2B, and in the supply chain through the import terminal project in Aqaba that we are carrying out with Manaseer. This strategic logistic project is currently under evaluation and construction will likely begin at the end of 2016, with operations expected to start by the end of 2018. Investing in the downstream sector is a long-term journey, so for the time being, we have been consistently working on developing our retail network presence across the Kingdom. We are a customer oriented business and our commercial performance is a tribute to service and safety standards that we are trying to raise for a better customer experience. We are proud to say that Total’s presence in Jordan set the momentum for the whole industry.
What are some of the main challenges you face in the Kingdom?
We have high expectations with regards to the government addressing key issues for the petroleum products distribution sector like margins revisions, regulation, and fair competition. The government will have to move forward on the logistics activity carve-out from the refining industry still run by JPRC. In fact, the license agreements signed with the government provided for a segregation of these activities as a major step towards the downstream sector liberalization. We have been informed of the legal creation of a new Jordanian logistics company, but assets have not yet been transferred to it and operations have not started.
The distribution margins are among the lowest in the region and the oil marketing companies are struggling with the low returns on their investments. We operate in a regulated market and the government committed to review the margins on a yearly basis but this hasn’t happened since we started back in May 2013.
We addressed this specific issue many times with the government. In our recent meetings with the Ministry of Energy and Mineral Resources, Total stated it was expecting positive feedback from the government to keep investing in Jordan. The margin for oil marketing companies in Jordan is 12 fils per liter, while the regional benchmark is around 20 to 25 fils per liter.
The station dealer syndicate requested a 5 fils per liter margin increase. The retail margin is 15 fils per liter, and represents 2 percent of the pump price, while the regional benchmark is around 5 to 7 percent. There is clearly a significant gap in margins that needs to be filled in the mid-term in order to make the petroleum products distribution sector sustainable. Total acts as a long-term investor and we believe in the Jordanian market fundamentals. Although we are facing challenges in the short-term, we are confident that constant dialogue with the government and other stakeholders will lead to a positive outcome for the benefit of the customer and the industry as a whole.
How are locations for service stations selected in Jordan?
A service station, rather than a gas station, is a key component in the urban landscape. The authorities should carefully select these locations in consistency with their urban planning.
On one hand, there are awkward situations where adjacent service stations have been licensed. On the other hand, investments in long-needed stations in some areas are delayed because of complex and unpredictable administrative procedures.
Regulations should be revisited for more clarity and consistency. For example, there should be a one-stop shop for investors to obtain their permits, a minimum distance between service stations or a consistent ratio of service stations per capita, as well as more stringent environmental, safety, and technical requirements for service stations with larger storage capacities than industry practice.
Do you think there’s still room for small, independent service stations in the market?
We will witness a shift of concepts from “gas station” to “service station” with small shops, a little café or bakery, car care and other services, as well as a supermarket. This is where we think the market will lean towards and what we advocate for. The key differentiator will be customer service, regardless of size. We have seen successful small village stations and failing big highway stations.
Do you think the market should be opened up to even greater competition?
The Jordanian market is rather small in size and the existing number of actors is fairly adequate to cater for the market supply in a competitive manner. An oil marketing company needs to reach a critical size to be able to operate in a low-margin market such as Jordan, while maintaining discipline over operating costs. Again, customer focus is key in our industry where prices are regulated and the service is the key differentiator. Adding new players to the market will lead to a costly and lengthy consolidation process in order to reach that critical size again, often at the expense of the end consumer. However, we might see the emergence of sizeable dealers to consolidate service stations management and improve customer service.
Jordan has long planned to expand and upgrade its refinery. Do you think this is necessary?
The refinery upgrade project has been under evaluation for many years and no investment plan has been initiated so far. Economically speaking, a refinery upgrade project could make sense with a competitive access to crude oil, but this is unfortunately not the case in Jordan. Crude oil supply and delivery by truck from Aqaba to Zarqa is a costly operation and the refining industry existence heavily depends on government subsidies.
The Middle East has spare refining capacity. We recommend that Jordan leverage its excellent relationship with neighboring countries to source refined petroleum products and rethink its strategic storage around the main regions of the Kingdom.
According to the agreement between the distribution companies and the government, the market should be fully liberalized by 2019. What point have we reached in this process?
The downstream liberalization is underway, and the first step the government took was to bring in new oil marketing companies. Refined petroleum products will now be imported by these companies in addition to JPRC supply. Petroleum products prices will still be regulated by the government. A gradual liberalization will necessitate the existence of an autonomous regulatory body.
The three-year exclusivity distribution agreement with the government just ended. What will happen next?
We supply 173 stations. The exclusivity period ended in April, and there should be minimal changes in supply contracts portfolios. We enjoy strong ties with our partners and do not anticipate major changes in our operations. The three oil marketing companies supply the same products at regulated prices. We at Total go beyond mere supply contracts. We enjoy working with our dealers on customer service, safety standards, operational excellence, and marketing plans for the Total retail network as a whole. There is no difference between Total-operated stations and dealer-operated stations. We have custody over the brand and we therefore ensure consistency at all levels when it comes to representing the Total brand.
Also under the agreement the three distribution companies were allowed to start importing their own diesel shipments to cover for the deficit in the market. But you are only about to import your first shipment now, why did it take so long?
According to the license agreement, the oil marketing companies are primarily supplied by the refinery for a minimum period of three years, ending on April 30 of this year. Should the refinery initiate the upgrade project within this period, the companies will commit to procure the entire production and will import the refining deficit. There’s already a refining deficit in the market and the companies signed an agreement with the government in January of this year in order to import diesel during a trial period of six months with the first cargo expected this month. Starting in 2017, the whole refining deficit in diesel and gasoline will most likely be imported by the oil marketing companies. Total is coordinating the import trial phase by shipping in 48,000 tons monthly cargos of diesel over the coming six months. The three companies will uplift 16,000 tons each to be supplied from Aqaba to their respective customers.
One of the reasons behind importing diesel was also to bring into the local market a cleaner alternative. What’s the difference between the local and imported diesel?
The refinery is still producing high sulfur diesel at 10,000 parts per million (ppm), whereas diesel imports by the oil marketing companies will meet the Jordanian specifications which provide for lower sulfur content at 350 ppm. Many countries are engaged in imposing more stringent specifications, including—but not limited to—sulfur content. Most European countries and the U.S. adopted 10 ppm. What will happen over time is that the international market will gradually be offering higher quality diesel and the Jordanian market will seize the opportunity to import 50 and 10 ppm diesel. There will be a transition phase with the coexistence of local hi-sulfur and imported low sulfur diesel. The customers will start demanding cleaner fuel and that will either trigger a quick move into the refinery upgrade project or lead the oil marketing companies to import the entire market needs in higher quality refined petroleum products. In any case, the outcome will benefit the end customer.
When will you start importing other oil products as well?
This trial phase will be subject to an assessment, but I am confident that the oil marketing companies will start importing the refining deficit starting in 2017. We have very good interlocutors on the government side, but it definitely needs to build-up momentum to speed up the decision making process.
Total is also seeking to invest in renewables in Jordan. What will this involve?
We have multiple ambitions in renewables in 20 years’ time. We want to be in the top three in solar power, expand in electricity trading and energy storage. Our ambition is to create a new business that will help make Total the responsible energy major.
Total Jordan will be the Total Group arm to invest in solar farms for industrial and commercial customers and utilities companies. Residential offers could also be developed depending on market conditions. We are currently installing solar panels in three of our stations. We will learn from this pilot phase how to transition into a full fledge solar power generation for the entire Total operated network and head-office. We aim to have at least 200 MW of solar power capacity in our portfolio within the next 10 years. Total Jordan will prepare to offer its customers energy mix solutions, including fossil fuel and renewable energy sources, hybrid and decentralized systems with batteries for energy storage.
How big is Total today in the Jordanian market and what do you think the company should work to improve?
I think that Total brand awareness is greatly increasing over time. However, we are perceived as a gas stations network brand. We are working on service diversification and our lubricants offering.
Safety is a value that we are constantly working to improve for us and for our partners and contractors. We also aim to lead the market in terms of customer service and satisfaction. This is not merely wishful thinking, but a quality process that we call “Top Service” which consists of customer service evaluation by an independent entity.
Also as part of Total’s support to the local community, the company launched the Young Graduate Program in Jordan about three years ago to give young graduates from the Jordan University of Science and Technology an opportunity to discover working life through a genuine hands-on experience and gain an insight into how an international company operates … The company has also partnered with the Hashemite University whereby we give educational content and share experiences through workshops and seminars.