BOUTEFLIKA MULLS CHANGES TO 2005 HYDROCARBON LAW

UNCLAS SECTION 01 OF 03 ALGIERS 001315

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EPET TRGY AG
SUBJECT: BOUTEFLIKA MULLS CHANGES TO 2005 HYDROCARBON LAW

REF: ALGIERS 1247

SUMMARY
--------------


1. (SBU) President Bouteflika is reviewing proposed changes
to Algeria's 2005 hydrocarbon law, touted at the time as a
major step toward greater openness. The proposed changes
would slow down current rates of oil and gas exploitation
while limiting the expanded role for foreign energy companies
established in last year's legislation. Although details of
the changes are not yet confirmed, Bouteflika voiced his
support for the establishment of strategic energy reserves
that would benefit future generations of Algerians. Such
changes, while criticized by one Sonatrach executive as
imparting a negative image of Algeria to potential investors,
would nonetheless likely come as a relief to elements of the
Algerian public that were highly critical of the share
accorded to foreign investors under the 2005 law. The
amendments would also be a defeat for Energy Minister Khelil,
who was seen as the primary architect of the 2005
legislation, and a possible setback for economic reform. (End
Summary.)

PRESIDENT WOULD BYPASS PARLIAMENT
--------------


2. (U) President Bouteflika is reviewing proposed changes to
Algeria's 2005 hydrocarbon law that would limit the recently
expanded role of foreign energy companies in Algeria and
would establish strategic reserves to benefit future
generations of Algerians. By waiting until the parliamentary
recess, which began July 9, Bouteflika can pass the changes
as an executive order, thereby circumventing Parliament. He
would have until the first Tuesday of October, when
Parliament reconvenes, to sign his decision into law.

NEW AMENDMENTS WOULD AUGMENT SONATRACH'S ROLE
--------------


3. (U) While details of the proposed amendments are not yet
confirmed, Embassy contacts said the amendment would maintain
Sonatrach's right from before the 2005 law to hold 51 percent
of upstream projects. (The 2005 law lowered this figure to a
range from 20 to 30 percent while giving Sonatrach the choice
to join with foreign partners; the new amendments would make
Sonatrach's participation obligatory.) Although the 2005
hydrocarbon law was adopted by presidential decree in April
2005 and became law with its July 2005 publication in the
official gazette, Embassy contacts at Sonatrach confirmed
that the law was never officially implemented. Therefore, no
contracts subject to its sharing agreements have been signed.
(The last international licensing round of tenders for
upstream projects ended just prior to the adoption of the new
law, in March 2005.) Post has no details of the proposed
"strategic energy reserves," although one U.S. energy firm's
country manager told Econoff that he had heard rumors
Sonatrach was reserving some 60 exploration blocks for its
own exploitation.


4. (U) Embassy contacts in the U.S. business community note
that the new amendment is also expected to change the tax
structure for foreign firms, although the formula for doing
so is far from clear. Prior to the 2005 legislation, taxes
paid to the state were included in the 51 percent share
accorded to Sonatrach. Meanwhile, the reference price used to
calculate foreign firms' tax liabilities was locked in at USD
19 per barrel. In a press conference July 15, Minister of
Energy and Mines Chakib Khelil said that taxes for foreign
firms would increase as long as the price of oil exceeded USD
30 per barrel. The official government daily El Moudjahid
reported July 16 that this would translate into a 40 percent
tax hike for foreign firms (30 percent paid to the GoA and 10
percent paid to their country of origin),yet the calculation
for these figures is still not clear. Contacts in the U.S.
business community were equally perplexed. One country
manager for a U.S. energy company told Econoff that he and
his colleagues had no idea how the taxation structure would
change, such as whether taxes would be included in
Sonatrach's 51 percent (as before) or come out of the foreign
partner's 49 percent. He noted, however, he and his
colleagues were less anxious about the sanctity of current
contracts than the impact of the amendments on future
projects.


5. (U) Advocates of the amendments insist that they do not

ALGIERS 00001315 002 OF 003


invalidate the main thrusts of the 2005 law and that they are
simply a recalibration in light of record-high energy prices.
Specifically, at this point, the amendments do not seem to
impact the role of Algeria's newly established energy
regulatory agencies (ALNAFT and ARH) and the end of
Sonatrach's monopoly ownership and management of pipelines.
(Under the amendments, Sonatrach would reserve the right to
hold 51 percent of rents derived from pipeline projects.) In
his July 15 press conference, Minister of Energy Khelil
stressed that "the state supports a fiscal system that
anticipates fees, superficial taxes, (and) revenue taxes as
much as it maintains an institutional system that supports
the separation of the role of the state from the commercial
activities of Sonatrach and the transfer of the public powers
to the hydrocarbon (regulatory) agencies."

POLITICAL PARTIES AND UNIONS BACK AMENDMENTS
--------------


6. (U) Algeria's main political parties and trade union
federation expressed strong support for the proposed changes
to the hydrocarbons law. In a communique issued July 11, the
three party presidential coalition backed the changes, noting
that they would "ensure a more important rationalization of
the country's wealth and give better chances to profit from
oil and gas revenues." Louisa Hanoune, the leader of the
far-left Workers' Party and the most strident critic of the
2005 law, hailed "this major political decision" as a "new
orientation towards the re-nationalization of the country's
natural resources." Likewise, a spokesperson for Algeria's
trade union federation, the UGTA, expressed July 13 "great
satisfaction" with the amendments.

SETBACK FOR ENERGY MINISTER KHELIL
--------------


7. (SBU) Such amendments come as a setback to Energy Minister
Khelil, whose strong advocacy of the 2005 legislation made it
come to be known in the Algerian press as "Khelil's law." It
is probably not by accident that the recent amendments to the
hydrocarbon law were submitted for the President's review by
Finance Minister Medelci while Khelil was traveling in China.
Aiming to downplay the modifications, Khelil told the
Algerian parliament prior to its recess that "the law has not
been changed, but amended." An Embassy contact working for a
U.S. energy company told Econoff that he and his colleagues
fully expected Khelil to be replaced.

COMMENT
--------------


8. (SBU) Louisa Hanoune's comments notwithstanding, the
proposed amendments to Algeria's hydrocarbon law seem less
inspired by Venezuela and Bolivia than by Norway and Kuwait,
countries that strategically guarded their energy assets for
the benefit of future generations. That being said, and
Minister of Energy Khelil's spin aside, Sonatrach's
obligatory 51 percent share of new projects as envisioned by
the amendments is unquestionably a step back from the spirit
of the 2005 law, which sought to transform Sonatrach into a
completely independent commercial entity that must compete
for Algerian energy projects as any other company.


9. (SBU) For his part, Bouteflika reportedly has long been
lukewarm about the increased share given to foreign oil
companies under the 2005 law. Record-high energy prices and
basic arithmetic are probably the driving forces behind the
recent changes. Foreign firms operating in Algeria earned USD
4.4 billion in 2005 and they are slated to earn between USD 5
and USD 6 billion this year under the same formulas. Lowering
the Sonatrach share to a maximum of 30 percent, while
maintaining such a low reference price for the sake of
taxation, as Khelil's 2005 law established, translates into
even higher revenues for foreign companies at the expense of
the Algerian treasury. Bouteflika's recognition of the slow
pace of economic reform (reftel) is another likely impetus
for amending the law. In a June 25 meeting with the nation's
walis (presidentially-appointed regional governors),
Bouteflika announced that "today it is our duty to establish
the right of future generations to benefit from natural
riches. We have come to the conclusion that our generation is
not in a position to create an alternative economy from that
of hydrocarbons." Establishing a strategic energy reserve
would serve as an important hedge against slow (or even
bungled) economic reform.


ALGIERS 00001315 003 OF 003



10. (SBU) The proposed amendments, while criticized by one
Sonatrach executive as imparting a negative image of Algeria
to potential investors, would nonetheless likely come as a
relief to elements of the Algerian public which were highly
critical of the share accorded to foreign investors under the
2005 law and consistently sensitive about the autonomy of
foreign energy companies in Algeria. (The Algerian press
regularly refers to the oil-producing areas of the south as
being like U.S. "states" that are off-limits to Algerians not
working for Sonatrach or a foreign oil company.) The
Sonatrach executive expressed a degree of shock that the
President would so "blindly grope" with such a strategic
pillar of the Algerian economy. Foreign oil companies, for
their part, appear to be holding their breath as they await
implementation of the amendments and their impact on the next
round of tenders, slated for the end of the year.

SIEVERS