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
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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
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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
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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