GROWING ANGST OVER CHANGES TO ALGERIA'S

C O N F I D E N T I A L SECTION 01 OF 03 ALGIERS 001595

SIPDIS

SIPDIS

DEPARTMENT FOR INR/B
CIA FOR OTI/ESG

E.O. 12958: DECL: 09/06/2016
TAGS: ENRG EPET TRGY AG
SUBJECT: GROWING ANGST OVER CHANGES TO ALGERIA'S
HYDROCARBON LEGISLATION

REF: A. ALGIERS 01315


B. ALGIERS 00781

ALGIERS 00001595 001.2 OF 003


Classified By: DCM Thomas F. Daughton for reasons 1.4 (b, d).


1. (C) SUMMARY: The Algeria country director of a major U.S.
oil servicing company (strictly protect) told us September 3
of the growing concerns among expatriate oil servicing
companies in Algeria related to the proposed changes to the
2005 hydrocarbon law. Sharing the minutes of a meeting
recently held with his counterparts, the country director
reported that President Bouteflika had already signed the law
but that no "text of application" had yet been issued. He
stated that the prevailing wisdom among foreign energy firms
in Algeria was that Bouteflika had sideswiped Energy Minister
Khelil's long-running efforts at reform in the energy sector
in an effort to court labor unions and sell the general
public on proposed changes to the Algerian constitution that
would give him a third term in office. As echoed in
discussions with other U.S. energy companies, the country
director revealed that the proposed changes, as they are
understood at this point, would seem to have the greatest
impact on three contracts dating back to the late 1980s. The
contracts lack "ecremage" (price cap) clauses, which
stipulate additional compensation paid to the GOA when world
oil prices pass a certain threshold. In our view, the lack
of GOA transparency in the amendment process has probably
adversely affected potential foreign investment as much as
the law itself. END SUMMARY.

LAW REPORTEDLY SIGNED BUT AMBIGUITY REMAINS
--------------


2. (C) In a September 3 meeting, the country director of a
major U.S. oil servicing company (strictly protect) shared
with Econoff the minutes of his recent meeting with
counterparts to "compare notes" on proposed changes to
Algeria's 2005 hydrocarbon legislation. He said that
President Bouteflika had already signed the presidential
decree modifying the law (bypassing parliamentary debate),
although the GOA had not yet issued a "texte d'application"
detailing how and when the law would be implemented. The
country director told us that foreign energy companies remain
anxious about the proposed changes regarding production
sharing and taxation. According to a draft copy of the new
law we obtained, Algerian petroleum parastatal Sonatrach
would retain its right under the 1986 hydrocarbon law to "at
least 51 percent" of output in all hydrocarbon projects (ref
A). By automatically granting Sonatrach a majority stake in
all projects, the new legislation would essentially
invalidate the spirit of the 2005 law, which sought to mold
Sonatrach into an independent, commercially viable competitor
to foreign energy firms.


3. (C) Regarding taxation, the draft calls for a windfall
profits tax for contracts lacking an "ecremage" (literally
"skimming," but used to refer to price caps) clause, which
Sonatrach began including in contracts in the early 1990s to
ensure that foreign firms' revenues were capped when world
oil prices hit a specified ceiling. This retroactive tax (as
of January 1, 2006) would range from 5 to 50 percent of the
foreign firm's production when world oil prices exceed USD 30
per barrel. The second major taxation concern, notably
lacking any detail in the draft amendments, calls for foreign
firms to pay for the tax revenues out of the production share
accorded to them. For example, Sonatrach informed U.S. firm
Anadarko that it will henceforth be responsible for paying
its taxes out of its 22 percent production quota, whereas
these taxes had previously been included in the 78 percent of
production taken by Sonatrach.


4. (C) Other clauses in the draft detail the responsibilities
of Algeria's new hydrocarbon regulatory agencies, ARH and
ALNAFT. The primary function of ARH, Embassy contacts note,
will be to manage health and safety issues, as well as other
downstream projects. ALNAFT will be responsible for awarding
energy-related contracts. The proposed law emphasizes that
ALNAFT employees must not have any conflicts of interest with

ALGIERS 00001595 002.2 OF 003


energy firms and notes that the regulatory body's management
will be appointed by the Minister of Energy and approved by
presidential decree. A separate clause mandates, without
specificity, that foreign companies will be obligated to
market their gas outside of Algeria jointly with Sonatrach.

THREE CONTRACTS SINGLED OUT
--------------


5. (C) In discussions with various U.S. energy firms, it
appears that the hydrocarbon law amendments would have the
most profound impact on three major contracts (involving four
major firms). The three, which lack "ecremage" clauses, were
signed early in Algeria's hydrocarbon development. They
include deals signed by Italy's ENI and the
British-Australian firm BHP Billiton. The U.S. firm
Anadarko, which has invested some USD 2 billion in Algeria
since the late 1980s, is perhaps the most at risk. (Anadarko
has held a production sharing agreement with Sonatrach since

1989. It currently holds a 50-percent share in its original
fields, having sold 25 percent to the Danish firm Maersk and
25 percent to Italy's ENI.) Anadarko's country manager
(strictly protect) told Econoff that the cumulative impact of
the windfall tax and the requirement that Anadarko share its
tax burden could cause the value of the firm's investment to
drop an estimated 30 to 40 percent. As a result of the
proposed changes, Anadarko has entered into a process of
"conciliation" (a non-binding precursor to arbitration) with
Sonatrach. In contrast, France's Total would benefit from
the clause, as its current price ceiling is set at USD 24 per
barrel.


6. (C) While the proposed changes would seem
disproportionally to target a few companies, other firms
nonetheless expressed concern about the law's impact on
future investment decisions. Total noted that it was in the
second phase of two contracts and that, depending on how the
new law was applied, it might be forced to withdraw from
exploration and relinquish its blocks. Conoco Philips, which
continues to operates as Burlington Resources in Algeria,
reportedly stated that its management viewed the move as a
"disincentive to investment."

KHELIL SIDESWIPED
--------------


7. (C) The consensus among U.S. energy firms, based on
sensitive emails shared with us, is that President
Bouteflika, in courting Algeria's labor unions and selling
the general public on a proposed amendment to the
constitution that would grant him a third term. In doing so
he sideswiped Energy Minister Khelil, who has pushed for
changes to Algeria's hydrocarbon legislation for the last
several years. The president and Khelil's falling out
reportedly came to a head two months ago. A reliable
industry source noted that during Bouteflika's July visit to
London, Khelil was relegated to a back seat in the auditorium
and walked out before the president had finished speaking.


8. (C) No obvious candidate is waiting to fill Khelil's
position should he be asked to step down. The Algerian press
has seized upon Finance Minister Medelci, who submitted the
amendments to the 2005 law for Bouteflika's review while
Khelil was traveling in China. The dark horse candidate is
former Sonatrach VP for Commercialization Ali Hached, a savvy
Sonatrach insider recently driven out of his post of a dozen
years because of a personal clash with Khelil (ref B).
(Hached, who hails from the Kabylie area east of Algiers, is
not a part of the Tlemcen-centered circles of Algerian
politics that include Bouteflika and Khelil.)

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


9. (C) The lack of transparency, indecisiveness, and overall
disjointed coordination with which the GOA has gone about
amending its hydrocarbon legislation has probably had as much
of an adverse affect on potential foreign investment as the

ALGIERS 00001595 003.2 OF 003


changes to the law itself. Foreign oil companies are clearly
upset that the GOA is seeking to take a larger cut, but given
their record revenues of recent years and soaring oil prices,
it should not come as much of a surprise. (Sonatrach's
foreign partners earned USD 4.4 billion in 2005 and are
slated to earn between USD 5 and 6 billion this year.) What
appears to trouble foreign energy firms more is the sanctity
of current contracts, the application of a retroactive tax
(of questionable legality),and the perception that their
bottom line is nothing but a gambling chip in Bouteflika's
bid to remain in office past his current term.


10. (C) Direct financial ramifications aside, foreign firms
are frustrated that the new law, rather than streamlining
energy development in Algeria, has added new layers of
complexity to Algeria's already dense bureaucracy. In the
short term, there is a general confusion about whom in the
GOA to deal with. As one head of a foreign oil company in
Algiers put it, "there is nobody in either Sonatrach or
ALNAFT and Khelil is likely out!" Longer term, the
restoration of Sonatrach's role under the 1986 law -- rather
than its reincarnation as an independent commercial entity,
as called for by Minister of Energy Khelil -- raises the
specter of confusing, bureaucratic haggling between it and
ALNAFT. As one informed industry source remarked, while it
is obvious the price of oil has gone up, the price of doing
business in Algeria has gone up even more.
FORD