Identifier
Created
Classification
Origin
07ALGIERS1096
2007-08-01 18:19:00
CONFIDENTIAL
Embassy Algiers
Cable title:  

SONATRACH GOES GLOBAL

Tags:  EPET ENRG EINV ECON PREL AG 
pdf how-to read a cable
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C O N F I D E N T I A L ALGIERS 001096 

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/01/2032
TAGS: EPET ENRG EINV ECON PREL AG
SUBJECT: SONATRACH GOES GLOBAL

REF: A. ALGIERS 00710


B. LAMELA-WOOD E-MAILS 7/31/07

C. PARIS 3237

Classified by: DCM Thomas F. Daughton; Reasons 1.4 (b)
and (d).

C O N F I D E N T I A L ALGIERS 001096

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/01/2032
TAGS: EPET ENRG EINV ECON PREL AG
SUBJECT: SONATRACH GOES GLOBAL

REF: A. ALGIERS 00710


B. LAMELA-WOOD E-MAILS 7/31/07

C. PARIS 3237

Classified by: DCM Thomas F. Daughton; Reasons 1.4 (b)
and (d).


1. (SBU) SUMMARY: As speculation mounts regarding the date of the next
international licensing round for Algerian exploration blocks,
Sonatrach has signaled that either downstream market access or
partnership in foreign projects will be a precondition for foreign
firms wishing to partake in Algerian investment projects. This
deal-making reflects Algeria's broader intent to fashion Sonatrach into
an internationally recognized energy company even as the parastatal
expands into a broad array of nontraditional, non-energy business
ventures. END SUMMARY.

EXPANDING INTERNATIONAL PRESENCE
--------------


2. (SBU) In a series of recent energy deals, state-run oil and gas
parastatal Sonatrach has demanded that potential foreign partners help
the company expand its international holdings as a precondition for
investment in Algeria. Minister of Energy and Mines Chakib Khelil
announced July 27 that partnership talks between Sonatrach and Gaz de
France had fallen apart for the time being because "French companies
did not make proposals to Sonatrach that would contribute to its
international development -- something that is a strategic goal for us,
as did Statoil and the Italian group ENI." (Note: Norway's Statoil
recently began an offshore exploration project with Sonatrach in Egypt.
ENI recently started working with Sonatrach on an exploration project
in Mali. End Note.) The leading energy journalist for the Algerian
daily El Watan told us July 31 that Energias de Portugal had similarly
struck a deal to build electric plants in Algeria in exchange for
downstream gas and electricity supplies to Portugal from Sonatrach.


3. (SBU) Algeria signaled in June that Spain would have to allow
Sonatrach greater access to downstream sales in Spain as a condition
for Spanish participation in future upstream development in Algeria
(ref A). Khelil held his ground while publicly hinting that the

billion-dollar Medgaz pipeline project between Algeria and Spain was in
jeopardy. On July 19, following Khelil's visit to Madrid, the Spanish
ministry of industry overruled a previous decision by the national
energy commission and lifted restrictions on the amount of gas
Sonatrach could sell to Spain, although details of the deal remain
murky (ref B).


4. (SBU) Since Khelil took the helm of Sonatrach and particularly since
the start of President Bouteflika's second mandate, Sonatrach has
developed exploration projects abroad -- but none with the sort of quid
pro quo apparent in recent deals. Sonatrach won exploration block 65
in Libya's 2005 licensing round in which it pledged to invest USD 13
million over five years. Also in 2005, it signed a USD 29.5 million,
12-year exploration contract with Niger. Enafor, a Sonatrach
subsidiary, received in 2004 a 5-year USD 50 million exploration
contract in Oman's Sahel Rawel field. Sonatrach acquired a 10 percent
share in the Camisea gas development project in Peru in 2003, adding to
its existing 21 percent share in the pipeline portion of the project.
(Note: Embassy contacts in the energy sector told us that Sonatrach's
involvement with Camisea dates to Minister Khelil's tenure at the World
Bank, when he was responsible for projects in Peru. End Note.)
Sonatrach CEO Mohammed Meziane announced in 2006 that Africa was a
priority area of investment for Sonatrach and that Algeria was
evaluating new development projects in Libya, Tunisia, Egypt, Niger,
and Mali. Meziane added that Sonatrach was also examining exploration
projects in Yemen.


5. (SBU) In addition to exploration projects, Sonatrach has
increasingly diversified into global downstream and transportation
projects. Khelil reaffirmed July 29 that Algeria was planning to move
forward with the Trans-Sahara Gas Pipeline. The project would fall
under the auspices of the New Partnership for African Development
(NEPAD) and link Nigeria's Warri gas field to Algeria's Beni-saf field
en route to Algeria's existing sub-Mediterranean pipeline networks. In
March 2006, Sonatrach announced an oil stockpiling project with South
Korea to strengthen its position in Asian markets. British Petroleum
and Sonatrach embarked on a joint venture in an LNG terminal on the
UK's Isle of Grain. This follows Sonatrach's purchase of 10 percent of
the Reganosa LNG terminal in Mugardos, Spain. Sonatrach established in
2005 a joint venture with Germany's BASF in a Spanish petrochemical
plant. Press reports indicate Algeria has eyed a share of Tunisia's
oil distributor, SNDP-AGIL, as well as LNG terminals in Indonesia.

NON-TRADITIONAL ENTERPRISES
--------------


6. (SBU) Sonatrach is progressively venturing into a wide range
businesses that are often only marginally affiliated with the energy
sector. Sonatrach bought out its former partner Air Algerie in May to
take control of Tassili Airlines, which currently consists of four
airplanes and is slated to acquire 41 additional aircraft in the next
few years at the cost of an estimated USD 1 billion. As a first
tranche, Tassili plans to take possession of four 70-passenger jets
from Canada's Bombardier by October. The airline will fly some
oil-sector routes to remote parts of southern Algeria but will also
compete with the national carrier Air Algerie on domestic and
international routes. In another new venture, Sonatrach announced in
June its intention to launch a fiber-optic telecommunications company.
This follows reports of the company's interest in starting an Algerian
business television station.


7. (SBU) While airlines and television stations are a marked shift,
Sonatrach has long stepped outside the traditional bounds of an energy
company. During the decades of Algeria's socialist experiment and the
ensuing "black decade" of terrorism, Sonatrach was the only government
agency capable of executing big-ticket investment projects. A project
finance director for the Overseas Private Investment Corporation (OPIC)
told us that her early discussions to finance the Hamma desalination
plant in Algiers Bay quickly drew her to the conclusion that Sonatrach
was the only Algerian government agency with the technical ability,
familiarity with international financing, and relative transparency to
execute a multi-million dollar project. (Note: OPIC and Citigroup
ultimately contributed the bulk of financing to the General
Electric-built Hamma project, now nearing completion. OPIC's primary
Algerian government interlocutor in the later stages of the project
has been the Algerian Energy Commission, a joint venture between
Sonatrach and state-run utility provider Sonelgaz that promotes
energy-sector private investment in Algeria. End Note.)

COMMENT: CHASING THE PETRONAS DREAM
--------------


8. (C) A former Sonatrach CEO recently told us that the company's
efforts to mold itself into a global energy conglomerate comes under
clear directive from President Bouteflika. In doing so, the president
appears intent on gaining points domestically while bolstering
Algeria's role on the world stage. Sonatrach has long served as
Algeria's "state within a state." It is the only government agency
Algerians put much confidence in and that youth actively seek to work
for. As such, Sonatrach may be the government's best bet to show an
increasingly dissatisfied Algerian population that the GoA can deliver
concrete improvements spanning from clean water and transportation to
telecommunications. Sonatrach's new overseas ventures, most of which
are in Africa, meanwhile give Bouteflika credibility as the driving
power of NEPAD, one of the president's pet projects in his efforts to
play a leading role in African development.


9. (C) Such expansion does not come without its risks or limitations.
Sonatrach's snubbing of Gaz de France may provide Algerians with some
short-term solace, particularly in the wake of Sarkozy's recent efforts
to move past any French "repentance" for colonial-era sins (ref C),but
future Sonatrach efforts to "carry a big stick" with its European
energy buyers will ultimately be constrained by the symbiotic nature of
pipeline-born gas trading. At the same time, as one oil and gas
attorney who advises numerous global energy firms with operations in
Algeria told us, Sonatrach becomes increasingly susceptible to
fly-by-night investments as it strays too far from its core businesses.
With little experience in offshore exploration, for example, Sonatrach
may soon find itself well beyond its depth in foreign-based projects.
Moreover, without shareholders demanding some accountability for such
risks, as is the case with Malaysia's Petronas or Norway's Statoil,
Sonatrach may also be setting itself up for another Brown Root Condor

affair, in which employees of a Sonatrach subsidiary looted millions
from domestic infrastructure projects.

FORD