U.S. OIL WONDERS ABOUT ITS FUTURE IN ALGERIA

C O N F I D E N T I A L SECTION 01 OF 03 ALGIERS 001804 SIPDIS SIPDIS EEB/ESC/IEC/EPC FOR GLENN GRIFFIN E.O. 12958: DECL: 12/18/2017 TAGS: ENRG EPET PGOV ECON EINV AG SUBJECT: U.S. OIL WONDERS ABOUT ITS FUTURE IN ALGERIA REF: A. ALGIERS 1694 ¶B. ALGIERS 628 ¶C. ALGIERS 1783 ¶D. ALGIERS 708 ALGIERS 00001804 001.2 OF 003 Classified By: Ambassador Robert Ford for reasons 1.4 (d) and (e). THIS CABLE CONTAINS COMPANY PROPRIETARY INFORMATION NOT TO BE SHARED OUTSIDE USG. ¶1. (SBU) SUMMARY: Several U.S. companies have signaled their growing dissatisfaction with Algeria's oil sector. Windfall profit taxes, burdensome customs fines and practices, hiring difficulties and a general lack of cooperation by the Algerians have caused several large American oil producers and oil services companies to consider scaling back operations and even pulling out of Algeria altogether. Anadarko, the largest American investor and oil producer in Algeria, has decided to stop a huge new joint-venture project with the Algerians because of its perception that the profitability of the project has plummeted with new tax laws. A top Anadarko official recently told us that for the first time Anadarko is wondering whether it has a future in Algeria at all. Bechtel, which has done billions of dollars of business here in the past ten years, is likely to scale back or end all its activities. The Algerian government does not appear to see American retrenchment, or withdrawal, as a serious possibility, as it continues to court low bidders and focus on the diversification of the state-owned oil company Sonatrach. 2008 could be a watershed year. Embassy is working to sensitize the Algerian establishment to the problems, but the lack of Algerian understanding at the political level is remarkable. END SUMMARY. TAXES DRYING UP THE WELL -------------- ¶2. (C) Algeria's windfall profit tax (refs A and B) continues to be a major irritant for international oil companies doing business here. It is particularly onerous because once oil surpasses USD 30 per barrel, a 50 percent tax is charged against all revenues, rather than using a factor for the difference between market price and the USD 30 benchmark (ref B). American company Anadarko now has half of its liftings (from the Rhourd el-Bagel field in southeastern Algeria) taken by Sonatrach as payment of the windfall profits tax, at an annual cost of USD 450 million (ref A). Anadarko shared with us an internal company calculation that concludes that with the windfall profits tax, Algeria's taxation of oil profits is very close to that of Venezuela. Dick Holmes, President of Anadarko Algeria, told the Ambassador on November 6 that the net value profit (NVP) on the company's Algerian assets has decreased from USD 10 billion to USD 2 billion as a result of the tax. Anadarko is challenging Sonatrach in arbitration over the tax. Holmes said his company is also considering pulling out of its USD 5 billion share of the planned el-Merck project in southeastern Algeria, risking further legal action by Sonatrach (ref A). Holmes noted that quietly within Anadarko headquarters, for the first time top corporate management is wondering whether Anadarko has a future in Algeria. Much of their decision, he observed, depends on the outcome of these two disputes. ¶3. (C) Anadarko may be the worst-hit company, but according to BP president Gerry Peereboom, all foreign oil producers suffer under the windfall tax to some degree because of the record price of oil. Former Sonatrach Director Abdelmajid Attar told the Ambassador on October 30 that while he disagreed with the scope of the 2006 amendments to Algeria's hydrocarbons law, which scaled back the oil sector liberalization begun by Energy Minister Chakib Khelil in 2005 (refs A, B and D),he had no disagreement with the windfall tax since "many countries have one." Attar acknowledged the Ambassador's point that unilaterally changing the terms of a ALGIERS 00001804 002.2 OF 003 contract like Anadarko's was not good for Algeria's business reputation. Attar, however, echoed Khelil's comments from May (ref B) that Anadarko and the other international oil companies who entered the market here 20 years ago have made enough profit from Algerian oil and must now pay a fairer share to Algeria. Attar added that there was still plenty of interest in the oil sector here, especially among U.S. service companies and smaller, independent production companies. (He did not, however, offer any names as proof.) ¶4. (C) Conoco-Philips has also had a very bumpy introduction to Algeria after buying up Burlington in the U.S. and thus acquiring Burlington's Algerian field assets. Conoco-Philips thought it had a deal with the Algerians about the amount of a new, unexpected "transfer tax" that the Algerians demanded that would cost the company roughly USD 90 million. A company rep told the Ambassador on December 13 that the negotiated agreement has fallen through and the two sides are again arguing. BYE BYE BECHTEL? -------------- ¶5. (C) Construction company Bechtel is also re-considering its work in Algeria. Excessive fines related to customs disputes significantly threaten Bechtel's profit margin. (Ambassador's intervention with the Finance Ministry in October has still generated no response or action from the GoA on the Bechtel customs problems.) The company also finds itself consistently under-bid by new players in the oil and gas construction sector, as the Algerians continue to reward contracts to lowest bidders with little consideration given to quality or capacity. Further undermining Bechtel's bidding position is the onerous nature of Algeria's lump-sum contracting terms (ref A),which shift the risk of rising prices and materials shortages away from Sonatrach and the Algerian government and onto the contractor. ¶6. (C) Bechtel's Senior VP of upstream projects in the region, Jim Illich, told us on November 11 that he is under significant pressure from his colleagues to shed the Algeria portfolio. He said his company can make the same or better profits in other markets where contracting and bureaucracy are easier, pointing to the growing opportunities in Libya as an example. Bechtel's immediate future, like that of Anadarko, currently rests on work in the big el-Merck project. Bechtel estimates that preparation for the bid alone would cost USD 4.5 million, and has indicated to the government that it is likely to bid only if it is reimbursed for the bidding costs. If Bechtel does not win a contract for a mining project currently under consideration, it soon may find itself with no remaining stake in Algeria, and could pull out by mid-2008 (ref A). The company has no plans to replace the VP who currently acts as de facto country manager when he leaves at the completion of the company's current gas refinery project, perhaps by the end of 2007. TRAINING AND RETAINING GOOD FIELD HANDS -------------- ¶7. (C) Nabors Drilling, a smaller services operator, also faces significant customs fines that would erase most of its profits in Algeria (ref A). This alone could force the company to rethink its operations here, but company reps also tell us that they are plagued by hiring and retention problems. Executives complain that they cannot find enough qualified and trained Algerians to run rig operations in the desert. The Algerian bureaucracy requires them to use the local labor office to fill specific jobs, and often the candidates provided by the government are completely unskilled. Further, Nabors finds that new employees frequently jump ship after receiving extensive company training to take jobs with competitors for only slightly higher wages. Often these employees attempt to return to ALGIERS 00001804 003.2 OF 003 Nabors after realizing that Chinese and other firms do not offer the same quality of life and work safety precautions as the American firms. Nabors is struggling to establish hiring practices to attract and retain well-trained workers, but the competition for these riggers is high and Nabors executives told us they feel that the Algerian laborers lack a sense of company loyalty and do not value long-term wages and benefits. ¶8. (SBU) Embassy Consular officers noted a continued effort in 2007 by U.S.-based oil services companies to send Algerians to the U.S. for training. They also note that wages paid to some skilled workers in the sector, particularly those based in Hassi Messaoud and other desert operations centers, are far superior to the average salaries paid to Algerian civil servants and even those in white-collar professions such as doctors. COMMENT: SONATRACH'S DREAMS AND ALGERIA'S REALITY -------------- -------------- ¶9. (SBU) As we reported on the gas sector (ref C),one of Algeria's main goals in hydrocarbons is to use today's high oil profits to diversify parastatal Sonatrach quickly and transform it into an international player in both upstream and downstream enterprises, rather than using the profits to expand domestic production capacity. Sonatrach is currently pursuing onshore and offshore oil production deals in central Africa and Egypt, as well as in other parts of the world. The Algerians have made clear to us their belief that the international oil companies have profited sufficiently from Algeria's oil over the last two decades and therefore must today pay a premium for access to that oil when its price has reached record highs (ref D). The increasingly unfavorable treatment of oil companies, coupled with Algeria's stagnant business climate, has diminished the interest of several large American oil producers and oil services companies in the Algerian market. Their executives have told us that maintenance of existing wells is likely, but expansion into new projects is less so. In fact, an executive of one American producer recently told us that his company secretly hoped that an exploratory well being drilled would come up dry so the company would have an excuse to limit its Algerian investment to current projects. Even former Sonatrach chief Attar admitted that, because of these difficulties, the 15 new blocs currently slated for bidding would likely attract little interest from major Western oil companies. ¶10. (C) While specialists on the hydrocarbons sector here in Algiers have a reasonably good sense of the unhappiness among American companies, the broader Algerian political elite has none. Their perception is that the American firms are fat and happy. Each time the Ambassador and emboffs raise the poor business climate with parliamentarians, ministers and journalists, they express surprise but evince little sense of urgency. The energy ministry is now basically closed off from foreign embassies on instruction of Minister Khelil. Thus, we are actively looking for other avenues to get the message to the Presidency and other elements of the political establishment here that Algeria is going in the wrong direction if it really wants more American investment and technology in its energy sector. FORD