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