SKIKDA RAMPING UP REFINING, LNG CAPACITY WITH EYE

C O N F I D E N T I A L SECTION 01 OF 03 ALGIERS 001961

SIPDIS

SIPDIS

ENERGY FOR EIA
CIA FOR OTI/ESG

E.O. 12958: DECL: 11/10/2016
TAGS: ENRG EPET EINV AG
SUBJECT: SKIKDA RAMPING UP REFINING, LNG CAPACITY WITH EYE
ON EUROPE

REF: A. 05 ALGIERS 02055


B. 05 ALGIERS 02091

C. ALGIERS 01844

ALGIERS 00001961 001.2 OF 003


Classified By: DCM Thomas F. Daughton; reasons 1.4 (b) and (d).


1. (C) SUMMARY: The Skikda industrial zone, some 300
kilometers east of Algiers, boasts Africa's largest oil
refinery and what was the country's second most important LNG
terminal until half of it was destroyed in an industrial
accident in 2004. Officials of the Algerian pertroleum
parastatal Sontrach told us that they are on track to
increase by 20 to 25 percent the refinery's capacity by 2009.
This increase in production is geared for European market
and environmental demands, as well as to compensate for the
doubling in the last five years of Algerian domestic
consumption of Skikda's refined products. Plans for
Halliburton's KBR to replace Skikda's three destroyed LNG
trains by 2010 with one "megatrain" appear to have lagged
following President Bouteflika's demand for a corruption
investigation into a separate Algerian Halliburton
subsidiary. Skikda's petrochemical infrastructure, in
comparison to refining and LNG, has witnessed virtually no
expansion since the 1970s. End summary.

INDUSTRIAL ZONE OVERSHADOWS CITY
--------------


2. (U) In mid-October Econoff and Embassy commercial
specialist visited the Skikda industrial zone in eastern
Algeria. First opened in 1970, the state-owned and -managed
compound encloses some 1270 hectares, of which 40 percent is
currently occupied. Skikda's wali, the
presidentially-appointed equivalent of a governor, told us
that the industrial zone covers an area larger than the
surrounding city of 150,000 residents. The zone employs an
estimated 12,000 workers, two-thirds of whom work directly
for Sonatrach or its subsidiaries.


3. (U) Three pipelines furnish the zone. Two gas pipelines,
spanning 575 kilometers, carry gas from Algeria's primary gas
producing zone at Hassi R'Mel. Sonatrach built the first gas
pipeline in 1972 with a capacity of 13.5 billion cubic meters
per year. In 1998, it put into service a parallel pipeline
with a maximum capacity of 13.7 billion cubic meters per
year. Each gas pipeline contains five pumping stations along
the route. A separate 645-kilometer oil pipeline with a
capacity of 30 million metric tons per year traces a more
southeastern path from Haoud el-Hamra and the oil producing
epicenter of Hassi Messaoud.

AFRICA'S LARGEST OIL REFINERY TO GROW 20-25 PERCENT
-------------- --------------


4. (U) According to Sonatrach officials, the Skikda refinery
is the largest in Africa, with a capacity of 15 million tons
of crude oil per year. Skikda accounts for approximately
three-quarters of Algeria's refining capacity, with the
remainder in Arzew (2 million tons per year),Algiers (2
million tons per year),and Hassi Messaoud (less than 1
million tons per year). Chinese contractors plan to finish
another refinery later this year in the southern town of
Adrar, with an anticipated capacity of 600,000 tons per year.
Built by an Italian firm starting in 1974, the Skikda
refinery started production in 1980. Nearly all of the oil
processed at the refinery arrives by pipeline from southern
Algeria. The Skikda industrial zone also imports 277,000
tons per year of heavy-grade crude from Gulf countries and
Venezuela to produce asphalt.


5. (U) The Skikda refinery has processed some 280 million
tons of oil since coming online in 1980, of which 226 million
tons (or four-fifths) has been exported. This ratio, as well
as the refinery's total output of 15 million tons per year,
remained constant from 1985 until 2001. Since then, while
output remained unchanged, the share of refined products
going to the Algerian market has doubled, now accounting for
40 percent of production. Sonatrach officials attribute this

ALGIERS 00001961 002.2 OF 003


increase to Algeria's economic growth and infrastructure
development under President Bouteflika. Of its refined
exports, Sonatrach told us that 44 percent go to North
America, 37 percent to Europe, and 19 percent to other
markets. A small fire sparked during electrical repairs in
October 2005 damaged some of the refinery's storage tanks but
did not have any impact on output (ref A).


6. (U) Sonatrach officials described their ambitious plans to
rehabilitate and expand the Skikda refinery in the coming
years. Noting that the quality of the refinery's production
had diminished in recent years due to the age of its
infrastructure, they said Sonatrach intended to increase
capacity between 20 to 25 percent by 2009. Other projects to
be completed by 2011, for which Sonatrach has begun to
solicit foreign bidders, include electrical upgrades,
modernization of the refinery's instrumentation, and
improvements to the refining process. The officials told us
that Skikda's gasoline output would have higher octane by
2009 to better meet the demands of European customers, while
a USD 1.5 billion upgrade would bring the sulfur content of
diesel down to approximately 10 parts per million -- well
within international standards. In addition to improvements
of the existing refinery, in 2005 Sonatrach selected a
Chinese firm to build a USD 390 million condensate refinery
with a projected output of 5 million tons per year in the
Skikda industrial zone. The plant, when it is completed in
July 2008, will produce European-grade diesel, butane,
naphtha (an industrial solvent used to make paint and dry
cleaning fluid),and jet fuel.

LNG OUTPUT STILL DOWN SINCE 2004 EXPLOSION
--------------


7. (U) Sonatrach established the Skikda liquefaction plan in
1971 as part of a joint venture with the French firm ERAP.
It completed three LNG trains by 1973, and three more between
1978 and 1981. Around this time, Sonatrach built a GPL
train, with a capacity of 350,000 tons per year, to create
propane and butane for domestic consumption. Skikda's LNG,
in comparison, goes entirely to foreign markets, including
France, Italy and Turkey. Sonatrach officials told us that
the LNG bound for U.S. markets originates in the western
Algerian city of Arzew.


8. (U) A 2004 explosion at the LNG facility caused by an
industrial accident completely destroyed three of the LNG
trains. As a result, output fell by more than half, from
13.35 to 6.5 million cubic meters per year. Sonatrach
officials explained that prior to the explosion, Skikda
provided one third of Algeria's LNG exports. This fell to
one sixth following the explosion, although Arzew ramped up
production shortly thereafter to ensure that the country's
total output remained steady. (Note: As of 2004, LNG
accounted for 42 percent of Algeria's total gas exports.
Pipeline exports made up the remaining 58 percent. End
note.) We toured the charred remains of the trains, which
give new meaning to Skikda's ancient Phoenician name,
Rusicade, meaning "promontory of fire." Following the
explosion, the U.S. firm KBR repaired the remaining three LNG
trains. Sonatrach officials told us they remain in
"exclusive discussions" with KBR to build by 2010 a USD 3
billion "megatrain" to replace those lost in the accident.
While KBR would take the lead, other companies would
contribute, including Honeywell for instrumentation.
Sonatrach officials opined that following the completion of
the "megatrain," Skikda would once again account for a third
of the country's LNG output.


9. (C) An embassy contact in the oil and gas sector was much
less optimistic about the timeframe for the "megatrain"
project due to an anti-corruption inquiry recently launched
by President Bouteflika into a separate KBR subsidiary in
Algeria. Our contact told us that all projects by Brown Root
& Condor (BRC) -- a joint venture between Sonatrach (51
percent) and KBR/Halliburton (49 percent) -- were recently
frozen until a forensic financial investigation could be
completed. Some 100 civil servants, including Sonatrach

ALGIERS 00001961 003.2 OF 003


board members, have been questioned as part of the inquiry.
Oil industry sources tell us that the BRC chairman, Ould
Kaddour, who hails from Tlemcen, is close to President
Bouteflika and Energy Minister Khelil. Although BRC is an
independent entity, Embassy contacts suggest it may be
tainting other KBR work in Algeria, including the Skikda deal.

WALI WANTS MORE PETROCHEMICALS
--------------


10. (U) Skikda's wali stressed to us his desire to see more
petrochemical investment and development in Skikda. Most of
the petrochemical infrastructure in the zone dates to the
1970s. This includes a polyethylene plant that creates
130,000 tons of products per year, ranging from high-density
plastic pipes and cosmetic cases to low-density products such
as cellophane. Algeria has historically consumed 30 percent
and exported 70 percent of these products. While
petrochemicals remain underdeveloped, officials proudly
enumerated a list of other recent expansions. Sonatrach
completed in May the construction of a 6 million cubic foot
per year helium plant with Germany's Linde; an 800-megawatt
power plant with Canada's SNC Lavalin; and upgrades to its
crude and condensate loading infrastructure. Sonatrach is
also building a 100,000 cubic-meter-per-day desalination
plant.

STRONG SECURITY POSTURE
--------------


11. (SBU) Sonatrach recently installed a video surveillance
system that covers the entire industrial zone. The head of
the petrochemical division gave Econoff a virtual tour of the
compound from his desktop, zooming in with a mouse click on
our armored vehicle parked outside and rewinding the digital
footage to show our entry onto the compound. Sonatrach
officials stressed to us that they experienced hardly any
security incidents throughout the 1990s due to the compound's
safe distance from the surrounding mountains; double-layer
walls topped with concertina wire; powerful lighting; and
plentiful observation posts (ref B). Sonatrach officials
told us that all of the pipelines that furnish the Skikda
industrial zone are completely buried with the exception of
their pumping stations, which are ensconced in briar patches
of barbed wire and flood lights that mimic the industrial
zone. Officials added that Sonatrach regularly surveys its
pipeline networks by helicopter.

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


12. (U) After running the Skikda refinery and LNG terminal on
auto-pilot since the 1970s, the LNG train explosion in 2004
and the 2005 refinery fire appear to have kicked Sonatrach
into gear to upgrade its facilities. This is all the more
important given the future stresses on processing and loading
infrastructure that we expect as a result of Algeria's
current and future upstream development (ref C). While
Sonatrach officials voiced their interest in American
investment, the expansion underway -- from LNG bound for
France and Italy to EU-grade automotive fuels -- suggests
Sonatrach has a clear eye on expansion in European markets.


13. (U) Tripoli minimize considered.
FORD