POTENTIAL FOR GREATER U.S. ACTIVITY IN ALGERIA'S

C O N F I D E N T I A L SECTION 01 OF 02 ALGIERS 001030 SIPDIS STATE FOR NEA/MAG (MCNICHOLAS) COMMERCE FOR ITA (DAVID ROTH) ENERGY FOR GINA ERICKSON E.O. 12958: DECL: 05/21/2015 TAGS: ECON EINV EPET BEXP AG SUBJECT: POTENTIAL FOR GREATER U.S. ACTIVITY IN ALGERIA'S DOMESTIC AND EXPORT ENERGY MARKETS REF: A. ALGIERS 564 ¶B. ALGIERS 510 Classified By: Ambassador Richard W. Erdman, reason 1.4(b). CONTAINS PROPRIETARY INFORMATION SUMMARY -------------- ¶1. (U) The first half of 2005 has witnessed a small boom in U.S. interest in the Algerian domestic energy supply sector, with one U.S. firm, General Electric, pressing for participation in a new power plant and two other firms looking for opportunities in the market. According to GOA officials, including Energy Minister Chekib Khelil, Algeria will require a new 1200 megawatt plant every three years to meet growing energy demands as the nation expands its industrial and residential infrastructure. Embassy conversations with the three U.S. firms reveal that they are carefully examining market opportunities and the electricity regulatory environment in Algeria. On the energy export side, foreign participation in domestic hydrocarbons production is expected to increase as the new hydrocarbons law, passed in March, begins to take hold. Sonatrach officials have expressed specific interest in seeing greater U.S. participation in hydrocarbons projects, and Sonatrach CEO Mohamed Meziane is optimistic on the hydrocarbons law's intended effects, namely that it will increase the state's revenues, not reduce them. U.S. multinational BP fared well early April in the last exploration bidding round, winning three contracts. End Summary. GENERAL ELECTRIC COMPETING FOR SHARE OF 1200 MEGAWATT PLANT -------------- ¶2. (SBU) U.S. interest in Algeria's domestic energy market has intensified in the first half of 2005. In a May 18 telephone call, General Electric Regional Director Kamal Kassis briefed Ambassador on the results of G.E.'s early May visit to Algeria and their activities in the country. Kassis expressed his deep appreciation for Embassy assistance in setting up a May 11 meeting between visiting G.E. International CEO Ferdinando Beccali-Falco and Prime Minister Ahmed Ouyahia. Beccali-Falco was pleased with the meeting, describing it as the "best such meeting in the past six months." Kassis also said that G.E. was now a finalist, along with Siemens, for the construction of the 1200 megawatt 
(MW) Hadjret Ennous gas-powered plant near Cherchell, about 100 km west of Algiers. He said the final decision would be made in early September. G.E. is partnering with Canadian firm SNC Lavalin on the project, which would be G.E.'s first-ever equity participation in Algeria. (Heretofore, G.E. has supplied turbines through commercial sales channels.) The total value of the Hadjret Ennous project is estimated at over $800 million, with G.E. and the local builder each claiming 25% shares and Sonatrach-Sonelgaz hybrid firm Algeria Energy Company (AEC) taking 50%. Ambassador said that G.E.'s investment in the project would be an important step and recalled that, at the signing of the 2003 Ex-Im guarantee for the Skikda LNG power plant (awarded to SNC Lavalin),Energy Minister Khelil announced Algeria would need a new 1200 MW plant every three years, and that Algeria was looking for foreign participation in these projects. ¶3. (SBU) There has been a convergence of interest in the gas-powered energy sector in Algeria in recent weeks. Virginia-based AES has announced a visit to Algiers in early June, and Caterpillar Power Ventures Swiss-based office phoned the Embassy for discussions on the energy market. AES is targeting the same large-scale power plant market as G.E. (1200 MW),while Caterpillar is looking to construct smaller plants between 20 and 100 MW that utilize gas from flares to produce electricity, a technology they have used in Tunisia. SONATRACH SEEKS INCREASED U.S. PARTICIPATION -------------- ¶4. (C) U.S. interest in Algeria's domestic energy sector is likely to increase over coming months as the hydrocarbons reform legislation passed in March begins to take hold, liberalizing the energy sector by letting foreign firms maintain majority control of their investments (Ref A). According to Sonatrach Financing Director Kouider Benaouda in an April 12 meeting, during the visit of Commerce's ITA Advocacy Center Director Daniel Bloom and adviser Stephen Madden, Sonatrach wants to double the number of U.S. hydrocarbons service firms in the sector from 50 to 100 in order to meet its increased production goals. Ministry of Energy officials have stated (Ref B) that their production goal is 1.5 million barrels per day by early 2006, and 2 million barrels per day by 2010. As of yet, Algeria has not made a concerted effort to attract U.S. service firms not already active in the local market. Its main tender dissemination tool, Baosem-dot-com, offers documents almost entirely in French, a technical barrier for some U.S. firms that is exacerbated by the short submission deadlines. However, former Baosem and Central Audit Group Director Mohamed Chekired, now Sonatrach Vice President for Transport, told Bloom and Madden in the April 12 meeting that Sonatrach would begin to translate more tenders into English more frequently. Chekired did not give a date for beginning the work, but said it would be a serious effort. ¶5. (U) On April 9, just days prior to the meeting with Benaouda and Chekired, Sonatrach announced the winners of in the sixth round of bidding on new exploration blocks. U.S./British company BP won three contracts, indicating continued competitiveness of U.S. multinationals in an increasingly crowded field. Sonatrach awarded 9 of the 10 available blocks in this round, an improvement over the fifth round when only 8 of 10 blocks were awarded. Shell, BHP and Gulf Keystone were awarded two blocks each. The sixth round was the last round that would be jointly managed by Sonatrach and the Ministry of Energy and Mines before the new hydrocarbons reform law goes into effect. SONATRACH CEO COMMENTS ON HIS COMPANY'S NEW ROLES -------------- ¶6. (SBU) Sonatrach CEO Mohamed Meziane told Bloom and Madden during an April 12 dinner that Sonatrach would not automatically exercise its guaranteed 20-30% participation option under the new hydrocarbons legislation. Projects would be evaluated on a case-by-case basis. Asked if the GOA was concerned about loss of revenue with Sonatrach's new position as tax-paying entity (and no longer automatic state cash cow),Meziane confidently replied that the new arrangement would actually increase revenue to the state's coffers. Sonatrach's restructuring under the new legislation could take up to six months until September 2005, by which time new directors would be named for the tender-issuing and resource management authority, Alnaft, and the corollary industry regulatory authority. ERDMAN