Identifier
Created
Classification
Origin
07ALGIERS1694
2007-11-21 10:18:00
CONFIDENTIAL
Embassy Algiers
Cable title:  

RESOURCE NATIONALISM IN ALGERIA ON THE RISE

Tags:  ENRG EPET PGOV ECON EINV AG 
pdf how-to read a cable
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RR RUEHDE
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R 211018Z NOV 07
FM AMEMBASSY ALGIERS
TO RUEHC/SECSTATE WASHDC 4890
INFO RUEHHH/OPEC COLLECTIVE
RUEHMD/AMEMBASSY MADRID 8686
RUEHFR/AMEMBASSY PARIS 2412
RUEHRB/AMEMBASSY RABAT 2020
RUEHTRO/AMEMBASSY TRIPOLI
RUEHTU/AMEMBASSY TUNIS 6879
RUEHNK/AMEMBASSY NOUAKCHOTT 6104
RUEHNM/AMEMBASSY NIAMEY 1357
RUEHBP/AMEMBASSY BAMAKO 0304
RUEHCL/AMCONSUL CASABLANCA 3131
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L SECTION 01 OF 04 ALGIERS 001694 

SIPDIS

SIPDIS

PASS TO EEB/ESC/IEC/EPC GLENN GRIFFIN

E.O. 12958: DECL: 11/22/2017
TAGS: ENRG EPET PGOV ECON EINV AG
SUBJECT: RESOURCE NATIONALISM IN ALGERIA ON THE RISE

REF: A. SECSTATE 150999

B. ALGIERS 708

C. ALGIERS 628

ALGIERS 00001694 001.2 OF 004


Classified By: Deputy Chief of Mission Thomas F. Daughton;
reasons 1.4(b) and (d).

C O N F I D E N T I A L SECTION 01 OF 04 ALGIERS 001694

SIPDIS

SIPDIS

PASS TO EEB/ESC/IEC/EPC GLENN GRIFFIN

E.O. 12958: DECL: 11/22/2017
TAGS: ENRG EPET PGOV ECON EINV AG
SUBJECT: RESOURCE NATIONALISM IN ALGERIA ON THE RISE

REF: A. SECSTATE 150999

B. ALGIERS 708

C. ALGIERS 628

ALGIERS 00001694 001.2 OF 004


Classified By: Deputy Chief of Mission Thomas F. Daughton;
reasons 1.4(b) and (d).


1. (C) SUMMARY: Algerian official behavior since 2005, in
terms of the country's hydrocarbons law, tax systems,
contracting policies and customs enforcement, strongly
suggests a growing sentiment of resource nationalism.
Government actions indicate a conscious effort to gain
greater control of hydrocarbon resources and a greater share
of the revenues associated with those resources. Outdated
economic policies and a centralized, bureaucratic and
paranoid decision-making process also contribute to
stagnation in real economic expansion and frustration among
private stakeholders. As a result, some major American
companies in the oil and gas industry are seriously
rethinking their investments, which could leave Algeria with
an expanded stake in its natural resources but a lessened
capacity to exploit those resources. END SUMMARY.

GOA TAKES GREATER CONTROL OF HYDROCARBON RESOURCES
-------------- --------------


2. (C) We have previously reported Algerian government
efforts to expand national control over the country's
hydrocarbon deposits (refs B, C). Minister of Energy Chakib
Khelil told the Ambassador in May 2007 that the government
had made a political decision to slow the country's
development of petroleum resources in an effort to leave
natural resources in the ground for future generations to
exploit. He also said the government wished to recoup what
it considered to have been "unfair gains" made by foreign
partners in Algeria's oil projects in recent years (ref B).
A 2005 hydrocarbons law reformulated ownership interests in
Algeria's oil and gas deposits such that the state itself,
and not even its own oil company, is the sole owner of
hydrocarbons found within Algerian territory. According to

KPMG's 2007 Hydrocarbons Guide for Algeria, "(the law) is
unambiguous: investors are forbidden from ever claiming
ownership of the deposit that they discovered."

WINDFALL PROFITS TAX...
--------------


3. (C) The most prevalent example of Algeria's attempt to
"secure a larger share of the revenue" (ref A) from its
hydrocarbons sector was the implementation in 2007 of a
windfall profits tax. This was a brazen move to take a
greater share of revenues gained from the soaring price of
oil. The law allows the government to set a special tax rate
for oil and gas production when market prices exceed certain
benchmark prices. So far, the tax has been assessed only
against oil producers, and has been applied at a rate of 50
percent of all revenues when oil surpasses $30 per barrel
(ref C). Because most contracts negotiated within the last
ten years have included profit caps for private producers,
the impact of the tax fell most heavily on a few
international producers who entered the Algerian market
during its dark years of civil strife and terrorism that
began in the late 1980s and early 1990s. American company
Anadarko, noted for having been willing to map, explore and
drill for oil in Algeria even in the worst years, now has
half of its liftings taken by the Algerian government as
payment of the windfall profits tax, at a sum total of $450
million per year. Dick Holmes, President of Anadarko
Algeria, told the Ambassador on November 6 that the net value
profit on the company's Algerian assets has decreased from
USD 10 billion to USD two billion as a result of the tax.
After failed attempts to nullify the tax and to negotiate a
more reasonable tax rate, Anadarko has chosen to seek redress
under the conciliation and arbitration clauses in its
contract with Algeria's national hydrocarbons company
Sonatrach.

...AND OUTRIGHT BULLYING
--------------

ALGIERS 00001694 002.2 OF 004




4. (C) Other international oil companies affected by the
windfall profits tax have negotiated settlements rather than
challenge the GOA. According to Dick Holmes, Anadarko
partner ENI of Italy acquiesced to the tax after the
Algerians indicated they might not renew several of ENI's
concessions. Holmes described this as a new hardball
negotiating tactic for the government, as well as an attempt
to extract a greater share of a pipeline project to Italy.
Italy imports almost a trillion cubic feet of natural gas
from Algeria per year, and ENI found itself forced to accept
a significant windfall profits tax to avoid an interruption
in Italy's gas supply.

LUMP SUM CONTRACT TERMS
--------------


5. (C) American company Bechtel, another long-term player in
Algeria, has recently found itself priced out of the Algerian
oil and gas construction market by the government's
inflexible contracting terms, which foist the risk of rising
construction prices upon the companies that contract with
Sonatrach. Bechtel told us that the government insists on
"lump sum" contracting for its large construction projects.
Under a lump sum contract, a prime contractor like Bechtel
agrees to complete a project for a specified contract price
inclusive of all survey, goods, equipment and labor costs.
Bechtel tells us that when it wins a contract in most other
markets, the company acquires goods and services on behalf of
the contracting government agency, passing those costs
directly to the agency. Bechtel then charges a negotiated
service fee for its management of the project. Under the
Algerian lump sum contract, rising parts and labor costs over
the life-cycle of a large project become the liability of the
contractor, which can recoup no more than the total price
offered at the outset. Furthermore, over the last several
years the Algerians have been awarding construction contracts
solely on the basis of the lowest bid, and generally Bechtel
cannot beat the low prices offered by some up-and-coming
firms from the Arab Gulf states.


6. (C) Accordingly, Bechtel tells us it will likely not bid
on the large El Merck project, for several reasons: it would
have to spend nearly $4.5 million in survey costs just to
prepare its bid, which cannot be recouped if the bid is not
accepted; it has no confidence of winning the bid against
other companies with histories of low-balling their bids; and
even if it were to win, the cost of goods and labor would be
certain to increase over the four years or more of the
project, which Bechtel would not recoup under the Algerian
lump sum contract, leaving it with marginal profits at best.
A Bechtel VP told us in early November that Sonatrach was
pushing hard for the company to bid on El Merck, in part
because of promises Sonatrach had made to the Algerian
political leadership about the expected number of bidders.
Bechtel responded, the VP said, by saying they would be
willing to bid if Sonatrach underwrote the survey costs.

EXCESSIVE CUSTOMS FINES
--------------


7. (C) Bechtel and U.S. company Nabors Drilling both are
facing excessive fines imposed by Algerian customs for
bureaucratic mistakes associated with the temporary
importation of equipment. The rules for temporary imports
are onerous, requiring customs service approval before an
item can be moved from one project to another. Companies
face pressure from several fronts in this regard. First, a
piece of equipment that entered Algeria without tariffs must
be exported back out of the country within 90 days of the
completion of the work for which the equipment was
designated. A piece of equipment may be transferred to
another site upon application and customs approval, but that
approval process frequently takes more than the 90 days
allowed under the temporary import rule. Further,
subcontractors need to be able to quickly move equipment from
one project to another in order to maintain their various
contract timelines, and the typical three- to six-month delay
in customs approval interferes with the business necessity of

ALGIERS 00001694 003.2 OF 004


these contracts.


8. (C) On the advice of their customs agents, both companies
eventually adopted the common practice of applying for
customs transfer approval after already moving a piece of
temporary equipment to a new site. Today, each company faces
penalties mounting into millions of dollars based on the
original value of the equipment, rather than the standard
penalty for faulty application filing of roughly $80 per
transaction (in each case, there would be over 100
transactions at stake, and each company is willing to pay
such a fine). Both companies have faced myriad hurdles
negotiating the customs bureaucracy -- with the Ambassador's
assistance in the case of Bechtel -- but even meetings with
the customs agency chief has not resolved the issues that
originated from a field office in the oil patch.

CLOSED DOOR POLICIES
--------------


9. (C) Algerian bureaucracy also poses significant challenges
to companies doing business in hydrocarbons and other natural
resources. Major oil companies continue to report problems
gaining access to decision-makers at the Ministry of Energy
and at Sonatrach (ref B). Anadarko's Dick Holmes told us
that his company's decision to seek conciliation and
arbitration on the windfall tax stemmed in part from the
government's refusal to negotiate. Indeed, he said, Anadarko
could not even find anyone who admitted the authority to
negotiate. In September, Energy Minister Khelil told
Anadarko CEO James Hackett that he could not talk about the
tax issue because his ministry could not interfere with the
sanctity of Sonatrach contracts. Meanwhile, Sonatrach
executives told Hackett that they could do nothing regarding
the tax because the parastatal could take no action that
would have a negative impact on the nation's revenues. More
recently Khelil has been seen as outright hostile toward
corporate executives, often refusing meetings unless a very
specific topic that cannot be handled by the bureaucracy is
identified in advance (ref B).

PULLING UP STAKES
--------------


10. (C) These problems and their impact on the profit margins
of private companies are causing major players in the
industry to rethink their investments and their very presence
in Algeria. Both Anadarko and Bechtel have told us that they
are not bidding on any new oil and gas projects in the near
future. In fact, Bechtel faces a watershed decision in
Algeria at the conclusion of its current outstanding project.
If it does not win a contract for a mining project for which
it is currently considering a bid, Bechtel will have no
remaining stake in Algeria, and may pull out by mid-2008.
The company has no plans to replace the VP who currently acts
as de facto country manager in Algeria when he leaves at the
close of the company's current gas refinery project (slated
for the end of 2007). Dick Holmes of Anadarko told the
Ambassador that his company is likewise considering pulling
out of the el-Merck project, risking legal action by
Sonatrach that Holmes is confident his company would win. If
that happens, and depending on the outcome if the arbitration
over the windfall profit tax, Anadarko could also be in a
position to leave Algeria altogether before the end of 2008.

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


11. (C) Algerian behavior in the last year suggests officials
believe that, with oil at $98 a barrel and Europe in constant
need of gas, they can buy their way out of almost any problem
and can take this opportunity to increase the country's stake
in its own natural resources. Yet recent history has shown
that the rush by the Algerian government and its parastatals
to greet low bidders on major contracts -- even at the cost
of alienating U.S. and other major foreign players -- has
produced projects that face crippling delays, cost over-runs,
and even deadly accidents. If major U.S. firms do decide to
avoid new projects in Algeria, we would expect the challenges

ALGIERS 00001694 004.2 OF 004


to resource exploitation here to increase. Decision-making
on major contracts appears to be driven from the very top in
a highly centralized and hierarchical manner. Accordingly,
any USG effort to influence the trends noted here will have
to be made at the upper levels of the Algerian government,
through direct contact with ministers and the presidency.
FORD