SUB-MEDITERRANEAN GAS DEALS ARE UNDERCURRENT OF

C O N F I D E N T I A L ALGIERS 002019 SIPDIS SIPDIS ENERGY FOR EIA E.O. 12958: DECL: 11/19/2016 TAGS: ENRG EPET PREL EINV IT AG SUBJECT: SUB-MEDITERRANEAN GAS DEALS ARE UNDERCURRENT OF PRODI'S VISIT REF: ALGIERS 01844 Classified By: DCM Thomas F. Daughton; reasons 1.4 (b) and (d). ¶1. (U) Speculation about the details of future energy cooperation between Algeria and Italy swirled in Algerian business circles following the November 14-15 visit to Algiers by Italian Prime Minister Romani Prodi. The state-owned French-language daily El Moudjahid focused on Prodi's discussions with President Bouteflika and Prime Minister Belkhadem regarding Italy's promotion of small and medium enterprises in Algeria; the implementation of a 2003 friendship treaty between the two countries; and the opening of a school for Italy's thousand-odd expatriate community in Algeria. The buzz in the business community, however, squared on the parallel discussions between Italian energy firms and the Algerian state oil and gas parastatal Sonatrach. ¶2. (U) As a result of these meetings, Sonatrach assured the construction of the long-planned, 8 billion cubic meter per year (bcm) GALSI pipeline, which will link Algeria to Italy via Sardinia. Sonatrach verified that it signed marketing agreements with five Italian firms to supply 6 bcm for 15 years starting in 2011, while an Italian subsidiary of Sonatrach will receive and market separately an additional 2 bcm. While Sonatrach officials suggested that the pipeline could be finished as early as 2009, an Embassy contact working for a major U.S. oil firm said construction was more likely to start in 2008 and finish by 2011. The CEO of one of the Italian companies involved in the deal announced publicly that the "project is an important contributor to security and flexibility for Italy's gas system." ¶3. (U) Separately, the Italian embassy in Algiers indicated after Prodi's visit that the timeframe had been moved up for an expansion to the TransMed pipeline, which currently supplies 27 bcm to Sicily and mainland Italy by way of Tunisia. According to the embassy, phase one of the expansion, which was slated to increase the pipeline's export capacity to 30.2 bcm by 2008, remained on track. A second phase, which aims to then ramp up exports an addition 3.3 bcm, could be accomplished by 2009. Engineers previously anticipated this expansion would be completed by 2012. ¶4. (C) COMMENT: That Prodi chose Algeria as the place to make what was reportedly only his second visit abroad since coming to power fueled speculation here that energy security was the driving force of the visit. Italy is the second-largest hydrocarbons client of Algeria after the U.S., importing nearly USD 7 billion worth of hydrocarbon products in 2005 and accounting for some 40 percent of Italy's gas consumption. With the international press touting as yet unconfirmed rumors that Algeria and Russia are teaming up to create an international gas cartel, the Algerians are exploiting European nervousness to encourage Italy to diversify its energy imports. This boosts Algeria's efforts to ramp up its hydrocarbons export capacity (reftel) -- by securing the construction of GALSI and speeding up the expansion of TransMed -- while winning it long-term access to European markets in the process. In addition, carving out a quarter of GALSI's output for Sonatrach to market by itself fits with Energy Minister Khelil's long-term strategy to expand Sonatrach's reach downstream into marketing and trading operations. FORD