KHELIL ON PROGRESS IN ALGERIAN ENERGY SECTOR

UNCLAS SECTION 01 OF 03 ALGIERS 001844

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ENERGY FOR EIA
CIA FOR OTI/ESG

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TAGS: ENRG EPET EINV TRGY AG
SUBJECT: KHELIL ON PROGRESS IN ALGERIAN ENERGY SECTOR


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1. (U) SUMMARY: Minister of Energy Chakib Khelil gave a
public overview October 8 of the Algerian energy and mining
sector's successes over the last five years. He probably
underestimated the true long-term impact, given the long
gestation period of energy exploration projects. According
to Khelil, Algeria's growth in new energy extracts outpaced
growth in its exports from 2001 to 2006. As the share of
domestic energy consumption holds steady at around one-fifth
of Algeria's total energy output, Khelil's data suggest that
Algeria will need to forge swiftly ahead with its various
transit projects -- including new gas pipelines, undersea
electricity cables bound for Europe, and enhanced LNG
infrastructure -- to meet the demands of present and future
upstream development. Slow expansion of Algeria's
electricity production capacity compared to consumption
underscores the need for new power plants slated to come
online in the next three years. Khelil also reported the
completion of a feasibility study for a trans-Sahara gas
pipeline and speculated that North American gas prices would
soon converge with those in Asian and European markets. End
summary.

EXTRACTION EXCEEDS EXPORTS; POWER DEMAND OUTSTRIPS CAPACITY
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2. (U) In an October 8 press conference, Minister of Energy
and Mines Chakib Khelil offered a broad overview of progress
in the Algerian energy and mining sector since 2000. (Note:
He offered no new details on the new hydrocarbon legislation
or its anticipated implementing regulations. End note.)
From 2000 to June 2006, Algeria signed 43 exploration
contracts, realized 62 gas and petroleum discoveries (12 this
year),and saw USD 24 billion of investment in the sector
(USD 13 billion of which was for projects with foreign
partners). The total quantity of hydrocarbon extracts grew
roughly 4 percent per year between 2000 and 2005, from 152
million tons of petroleum equivalent (TEP) in 2000 to 180 TEP
in 2005. In comparison, the volume of Algeria's hydrocarbon
exports grew about 3 percent per year, from 124 TEP in 2000
to 145 TEP in 2005. The value of these exports from 2000
until June 2006 totaled USD 186 billion, of which USD 27
billion has been earned this year. Of these revenues, the
Algerian treasury received USD 132 billion; some USD 20
billion of these receipts are from the first half of 2006
alone. Khelil added that the Algerian energy sector employs
207,000 workers, of which 41,000 are in the private sector.


3. (U) Khelil said that national energy consumption grew from
30 million TEP to 35 million TEP from 2000 to 2005, reaching
18 million TEP in the first half of this year. This includes
petroleum products (11.6 million tons in 2005, up 6 percent
per year since 2000); natural gas (up 7 percent per year
since 2000),and electricity consumption (reaching 27.3
terawatt hours in 2005, up 6 percent per year since 2000).
Khelil's figures reveal that Algeria consistently allocates
about one-fifth of its hydrocarbon production to domestic
consumption and four-fifths to export. The minister also
touted the country's success in supplying utilities to rural
populations. From 2000 to 2005, Algeria installed 22,500
kilometers of electric lines, connecting an additional
270,000 households. As of June 2006, 5.7 million total
households (96 percent) benefit. Similar progress has been
made with gas distribution: today 2.1 million households (36
percent) have a gas connection, compared to 29 percent in

2000.


4. (U) Khelil's data reveal that Algeria's demand for
electricity outstripped the growth in new capacity,
underscoring Algeria's critical need for additional power
generation. He noted that Algeria's electricity output grew
6 percent per year (from 25 to 34 terawatt hours) while its
generating capacity expanded 4 percent per year (from 5900
megawatts to 7100 megawatts as of June 2006). (Note: The
chief executive of Sonelgaz, Algeria's state-run electricity

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provider, announced in early October that the country's
generating capacity was slated to increase 3,800 megawatts in
the next three years as seven new power plants come online.
End note.)

NIGERIAN PIPELINE PLANS
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5. (U) Khelil signaled progress on the planned
4,100-kilometer, trans-Sahara gas pipeline that would cross
Algeria and Niger to supply Nigerian gas to European markets.
Embassy contacts informed us that the UK firm Penspen
presented a feasibility study on September 19 to the
Algerian, Nigerian and Nigerien energy ministers detailing
the prospects for the USD 10 billion project. The pipeline
would have a capacity of 20 to 30 billion cubic meters of gas
per year and come online by 2015. Khelil asserted that the
project would be good for the environment by limiting gas
flaring, presumably in Nigeria. He also remarked that it
would help supply gas to the traversed countries (i.e. Niger
and Algeria) and offer "synergies" for unspecified road and
fiber optic cable projects along the same path.

MINING SECTOR IS ALGERIA'S HIDDEN GEM
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6. (U) Khelil also detailed Algeria's successes in the
often-overlooked mining sector, reporting that the sector
grew an average 10 percent per year since 2000, fueled by
production of gold, iron and other aggregates. Australian
and Indian firms, as well as the Egyptian consortium Orascom,
had invested in various projects in the USD 10 million range.
He said that Algeria recently signed a protocol of agreement
with China's Hunan Province for a USD 17 million zinc project
in El Abed. Khelil described how the 2001 mining law had
successfully opened up the industry to the private sector.
Since then, Algeria has granted 581 mining licenses for small
and medium-sized mines in 18 auctions, generating USD 36
million in royalties for the state. Some of the strongest
growth has been Algeria's production of mining aggregates,
such as clay and sand, which are used in the booming
construction sector. Output of aggregates grew 21 percent
per year since 2000 and is expected to grow an additional 36
percent by the end of the year, for a total output of 30
million cubic meters. Aggregates, the minister added, have
created 27,000 jobs, of which 17,000 are in the private
sector.

OPEC VP KHELIL ON INTERNATIONAL MARKETS
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7. (SBU) Khelil, who was elected vice president of OPEC in
September, described the 17-dollar drop in oil from its
record high as due to replenished spare capacity, a
perception of improved geopolitical stability, and mild
meteorological conditions. In contrast to crude oil markets,
he claimed, "the commerce of natural gas does not take place
in a globalized market." Khelil described the Asian,
European and North American gas markets as operating
semi-autonomously. In the Asian and non-UK European markets,
the vast majority of gas trade was based on long-term
contracts for which the price of gas was indexed to the price
of oil or petroleum products, "though with a gap of generally
3 to 6 months." He characterized the American and UK
markets, which are driven by spot and commodities markets, as
significantly more volatile. Khelil opined that in the near
future the price of gas in all three continents would reflect
the price of crude, which remains the "driving price of
energy on the global level," except for seasonal shortfalls
and short-term disequilibria.

COMMENT
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8. (SBU) Khelil did not explain why he thought the behavior
of American and European/Asian gas markets would converge.
Nor did he explain why he chose the 2000-2005 window for his
discourse on Algeria's energy sector development. The
timeframe corresponds roughly, however, with the broad
opening of the sector to foreign investment that started when
Khelil was CEO of Sonatrach. Khelil's rendition of the
successes his sector has achieved may have been intended to
allay rumors recently bruited by Algeria's Arabic-language
press that he could lose his job as part of a future cabinet
reshuffle. Those rumors have abated somewhat since Khelil's
election as OPEC vice president. It would presumably be seen
as embarrassing for Algeria were President Bouteflika to take
away his energy portfolio just as he is beginning his OPEC
tenure.
DAUGHTON