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