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Oil companies worried about algeria's energy future

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  • Oil companies worried about algeria's energy future

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    Reference ID Created Released Classification Origin
    10ALGIERS157 2010-02-21 17:06 2011-08-30 01:44 CONFIDENTIAL//NOFORN Embassy Algiers
    VZCZCXYZ0000
    RR RUEHWEB

    DE RUEHAS #0157/01 0521706
    ZNY CCCCC ZZH
    R 211706Z FEB 10
    FM AMEMBASSY ALGIERS
    TO RUEHC/SECSTATE WASHDC 8463
    INFO RUCNMGH/MAGHREB COLLECTIVE
    RUEHHH/OPEC COLLECTIVE
    RHEBAAA/DEPT OF ENERGY WASHDC
    RUCPDOC/DEPT OF COMMERCE WASHDC
    C O N F I D E N T I A L ALGIERS 000157

    SIPDIS
    NOFORN

    DEPT FOR NEA/MAG - NARDI

    E.O. 12958: DECL: 02/21/2020
    TAGS: PGOV EPET ENRG ECON ETRD KCOR PREL PINS AG
    SUBJECT: OIL COMPANIES WORRIED ABOUT ALGERIA'S ENERGY FUTURE

    REF: ALGIERS 0111

    Classified By: Ambassador David D. Pearce. Reasons: 1.4 (b), (d)

    Summary
    --------

    ¶1. (C/NF) Leading foreign oil companies (FOCs) are concerned
    that the corruption investigation into Algeria's national oil
    company Sonatrach (reftel) has paralyzed company
    decision-making and could slow ongoing projects. Unless
    Sonatrach consolidates under new management and resumes
    normal contracting, gas and oil production will suffer --
    although no one will hazard a timeframe. Energy Minister
    Chekib Khelil is seen at the center of the rot in Sonatrach,
    and oil companies believe he remains the driver of Algeria's
    energy agenda and will not resign soon. However, the press
    reports that Prime Minister Ouyahia now signs off on major
    Sonatrach decisions. Some FOCs see this corruption
    investigation as a move against the influence of President
    Bouteflika's Western Algerian "clan." Embassy has no hard
    evidence to support this theory but notes that it enjoys
    widespread credence. Neither the corruption investigation
    nor any political conflict that may lie behind it will be
    resolved soon, in no small part due to President Bouteflika's
    slow and deliberate decision-making style. This scandal has
    further reduced the likelihood that Minister Khelil and
    Sonatrach will alert Algeria's leadership to the need for new
    investment to reverse the country's declining gas production,
    satisfy long-term export contracts, and meet rising domestic
    demand. End Summary.

    Sonatrach Scandal Could Hurt Operations
    ---------------------------------------

    ¶2. (C/NF) Ambassador met with BP Country Manager Akli Brihi
    (protect throughout) and with ConocoPhillips Director General
    Armando Gallegos (protect throughout) separately on February
    ¶11. Brihi told the Ambassador that Sonatrach leadership has
    been "paralyzed and decapitated" by the Sonatrach corruption
    investigation because interim managers are afraid to sign
    contracts necessary for ongoing oil company operations.
    Gallegos said that their projects had not yet been affected
    since they were the operator of their largest project. He
    conceded there have been slowdowns in customs processing of
    imports and said that other companies' operations were
    already experiencing slowdowns.

    ¶3. (C/NF) Neither was sanguine about the prospects for the
    mid or longer term. Both feared that, given the current
    climate of uncertainty in Sonatrach, it would be some time
    before a strong replacement management team was in place.
    Brihi termed the acting CEO, Abdelhafit Feghouli, "hopeless"
    but thought he would stay on to continue organizing the April
    LNG conference in Oran. Gallegos expressed concern about
    delays on the upstream side. He pointed out that there are
    many interim Sonatrach appointees in positions his company is
    not familiar with, positions they will retain for months or
    longer. Many decisions on upstream issues require signature
    by a Sonatrach VP, which these days are not forthcoming.
    However, Gallegos had good things to say about the interim
    Sonatrach VP for Upstream, Said Sahnoun, who retained
    responsibility for international business development, which
    was part of his previous position as Sonatrach head of
    partnerships. Gallegos saw Sahnoun as technically competent
    and a good English speaker; operations going through him
    would not be delayed.
    The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is.” Winston Churchill

  • #2
    Corruption Involves Service Companies, Not the Oil Majors
    --------------------------------------------- ------------

    ¶4. (C/NF) Brihi confirmed that the focus of the investigation
    into Sonatrach was the widespread use of no-bid, sole-source
    contracts. However, these were often necessary, and in any
    case were not forbidden by BP's contracts with Sonatrach. BP
    and Statoil, for example, had received "exemption" from this
    rule when they signed a sole-source contract with GE for gas
    turbines for their In Amenas gas project, since GE is the
    only company offering this kind of equipment. The company
    had carried out an internal investigation and cleared the
    deal. The across-the-board "dogmatic" prohibition against
    no-bid contracts now in place, Brihi maintained, would harm
    project development.

    ¶5. (C/NF) Brihi maintained that Sonatrach concluded corrupt
    deals not with the majors but with service companies such as
    the Italian firm Saipem. The service company would submit an
    inflated bid and then pay off Sonatrach insiders. It was the
    common belief that this had happened with the USD 1-billion
    sole-source contract Saipem had concluded with Sonatrach
    related to the Arzew LNG project. The Canadian company
    Lavalin's deal to build a new town ("La Nouvelle Ville") near
    the Sonatrach production center of Hassi Messaoud was
    tainted, and put on ice, he had heard, by a similar
    arrangement. The manager of that project, Mourad Zeriati,
    was now in jail. Brihi thought that it was not inconceivable
    that U.S. companies had been involved in such deals, but he
    had never heard concrete information. The Ambassador
    reminded Brihi that U.S. companies were under the tough legal
    constraints of the Foreign Corrupt Practices Act.

    Energy Minister Behind Culture of Corruption
    --------------------------------------------

    ¶6. (C/NF) Brihi believed that Minister of Energy and Mines
    Chakib Khelil was responsible for the culture of corruption
    in Sonatrach. He echoed reports Embassy has heard from other
    companies (reftel) that a Khelil relative (whom Brihi said
    was a nephew but whom others have said is a cousin) former
    Sonatrach Chief of Staff Reda Hemche, was the man behind the
    corrupt deals. Working on behalf of Khelil, Hemche would
    advise Sonatrach CEO Meziane on contracts to sign, making
    Meziane legally accountable and leaving Hemche out of legal
    reach. Brihi believed that Meziane had signed many such
    contracts under duress. Brihi said that Khelil had done an
    excellent job as minister until the passage of the 2006
    hydrocarbon law, imposed against Khelil's will by "economic
    nationalists," which mandated Sonatrach majority
    participation and higher taxes on all Sonatrach contracts
    with FOCs. Stressing that he was providing his personal
    speculation, Brihi suggested that perhaps Khelil, faced with
    the defeat of his plans to change the system and liberalize
    the energy sector, may have decided that, if he could not
    change it, he would join it. He noted that it was after
    2006 that Khelil installed Hemche and began replacing
    Sonatrach's most capable senior experts with "yes-men." He
    said the corruption investigation had drastically undermined
    Khelil's credibility, but predicted that the minister would
    not resign.

    Political Backdrop
    -----------------

    ¶7. (C/NF) Brihi interpreted the anti-corruption investigation
    against Sonatrach by the DRS (Department des Renseignements
    et de Securite, the intelligence service formally under the
    military but in fact reporting directly to President
    Bouteflika) as a response to excessive influence by President
    Bouteflika's Western Algerian "clan." Brihi did not think
    this conflict would be resolved soon. He thought that
    Bouteflika would be inclined to keep Khelil, a childhood
    friend, in place. He would take his time to resolve the
    situation.

    Algeria's Gas Future Imperiled
    ------------------------------

    ¶8. (C/NF) Brihi said the scandal had come at an especially
    bad time, because Sonatrach and the political leadership of
    Algeria had not awoken to the fact that Algeria faces
    declining gas production and the potential inability to
    satisfy export obligations and rising domestic demand as
    early as 2015. Sonatrach was not on track to realize
    Khelil's publicly stated goal of raising gas production from
    60 to 80 billion cubic meters per year. Gas production was
    falling due to depletion of Algeria's easily accessible
    conventional gas reserves. Algeria needed to develop
    non-conventional gas. This included shale gas, reserves of
    which major oil companies believed were massive but whose
    exploitation required sophisticated know-how and large
    investments for development. Brihi said there were only
    three companies that had the technology and financial
    resources to do this: Exxon, BP and Shell. It would take
    time and up to USD 50 billion to develop the necessary
    infrastructure (including bringing large amounts of water to
    remote desert drill sites). Brihi believed that Algeria
    should also invest far more in solar energy and sell it to
    Sonelgaz. This would free up for export some of the large
    quantities of gas Sonatrach currently provided at low,
    subsidized prices to Sonelgaz for domestic electricity
    production.

    ¶9. (C/NF) Asked how high up knowledge of this future
    export-shortage dilemma extended, Brihi said Khelil
    understood but that he had not presented this "explosive
    dossier" to Prime Minister Ouyahia or President Bouteflika.
    Asked why the leadership had not focused previously on this,
    Brihi said Bouteflika was very intelligent but not a good
    listener and that energy in any case lay outside his main
    interest, which was politics. He left energy matters to
    Khelil, who remained the driver of Algeria's energy policy.
    While Sonatrach experts had known for years of this looming
    vulnerability, Khelil had moved many of them out or aside,
    and Khelil himself had not become fully aware of the issue
    until about a year ago. Brihi thought the corruption
    investigation would further delay the Algerian leadership's
    understanding of this looming crisis and complicate its
    ability to take the necessary decisions in time.

    Comment
    -------

    ¶8. (C/NF) We still lack sufficient information to confirm the
    theory of clan warfare, but it enjoys greater credence here
    than the belief that the investigation into Sonatrach is a
    simple outgrowth of President Bouteflika's publicly stated
    determination to root out corruption. We anticipate that
    this affair will play out and continue to overshadow
    Algeria's energy industry for a considerable period,
    including the Sonatrach-organized LNG conference in Oran
    scheduled for 18-21 April. Energy Minister Khelil has been
    weakened, perhaps fatally. He faces a lose-lose situation,
    i.e., be blamed for either tolerating or being ignorant of
    corruption in the enterprise that is the crown jewel of his
    ministerial portfolio. One press report of February 17 said
    that Prime Minister Ouyahia now signs off on important
    Sonatrach contracts. However, we see no indication Khelil
    intends to resign or that President Bouteflika intends to
    replace him.
    PEARCE
    The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is.” Winston Churchill

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