Identifier
Created
Classification
Origin
07ALGIERS708
2007-05-23 08:45:00
CONFIDENTIAL
Embassy Algiers
Cable title:  

ENERGY MINISTER UNMOVED BY CRITICISM OF CHANGES TO

Tags:  ENRG EPET ECON EINV AG 
pdf how-to read a cable
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INFO RUEHHH/OPEC COLLECTIVE
RUEHLO/AMEMBASSY LONDON 1621
RUEHMD/AMEMBASSY MADRID 8569
RUEHMO/AMEMBASSY MOSCOW 0163
RUEHFR/AMEMBASSY PARIS 2196
RUEHRB/AMEMBASSY RABAT 1772
RUEHTU/AMEMBASSY TUNIS 6612
RUEHCL/AMCONSUL CASABLANCA 2973
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
C O N F I D E N T I A L SECTION 01 OF 04 ALGIERS 000708 

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/19/2032
TAGS: ENRG EPET ECON EINV AG
SUBJECT: ENERGY MINISTER UNMOVED BY CRITICISM OF CHANGES TO
HYDROCARBON LAW

REF: A. 06 ALGIERS 01769

B. ALGIERS 00628

C. WILLIAMSON - FORD EMAIL MAY 7

Classified By: Ambassador Robert S. Ford; reasons 1.4 (b),(d).

THIS CABLE CONTAINS COMPANY PROPRIETARY INFORMATION NOT TO BE
SHARED OUTSIDE USG.

C O N F I D E N T I A L SECTION 01 OF 04 ALGIERS 000708

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/19/2032
TAGS: ENRG EPET ECON EINV AG
SUBJECT: ENERGY MINISTER UNMOVED BY CRITICISM OF CHANGES TO
HYDROCARBON LAW

REF: A. 06 ALGIERS 01769

B. ALGIERS 00628

C. WILLIAMSON - FORD EMAIL MAY 7

Classified By: Ambassador Robert S. Ford; reasons 1.4 (b),(d).

THIS CABLE CONTAINS COMPANY PROPRIETARY INFORMATION NOT TO BE
SHARED OUTSIDE USG.


1. (C) Summary: Minister of Energy and Mines Chakib Khelil
told Ambassador May 19 that the new hydrocarbon amendments
were intended to slow oil development to maintain natural
resources for future generations while redressing "unfair
gains" made by foreign partners on certain contracts. He
signaled that Algeria intended to hold the next international
licensing round by the end of 2007 but that it might demand
undetermined conditions on such bids, possibly to include
technological requirements or guaranteed downstream market
access. The Ambassador cautioned that U.S. companies were
finding the business climate more difficult. If the Algerian
goal was to attract more investment and technology transfer
the government is going in the wrong direction, he warned.
The Ambassador said the way to start improving the business
climate was for a simpler and more regular dialog between the
government and the U.S. firms. Khelil detailed the disputes
Algeria was currently having with U.S. firms Anadarko and
Conoco-Philips at one point musing that relations could
hardly get any worse than they are now. The minister seemed
to acknowledge that bureaucratic hurdles facing foreign
investors in Algeria did not contribute to a healthy
investment climate but he was loath to recognize that
Algeria's policies might be detrimental to Algeria's
long-term hydrocarbon development. End Summary.

LEAVE RESOURCES IN THE GROUND AND DON'T OVERPAY
-------------- --


2. (C) Khelil explained a dual rationale for the new
hydrocarbon amendments. Highlighting the country's weak
administration, the minister cited the risk of wasting
Algeria's natural resources as the primary motivation for
amending the hydrocarbon laws. With little capacity for
Algeria to invest its hydrocarbon largesse in Algeria or

abroad, Khelil said that a political decision had been made
to slow down the pace of the country's energy development in
order to leave natural resources in the ground for future
generations. The minister noted that this decision was
intended to postpone the development of small fields in
particular, since the new requirement that Sonatrach take a
51 percent share of new projects would make them undesirable
for foreign bidders. The required Sonatrach investment would
be a boon for foreign investors on bigger projects, Khelil
explained, because it equally required Sonatrach to pony up
51 percent of all major projects' investment.


3. (C) The second key change in the legislation, the minister
said, was to impose a windfall profits tax on existing oil
contracts that were not previously subject to
profit-limitation clauses (ref A). (Note: In practice, this
change only impacts Anadarko Petroleum and its partners, ENI
and Maersk, under their existing production sharing contracts
for oil. BHP Billiton, the only other original contract from
the 1980s that would have been hit by the windfall profits
tax, recently renegotiated its contract with Sonatrach. The
windfall profits tax will not apply to new contracts, which
are likely to have profit-limiting clauses embedded, nor to
existing gas contracts, such as those with British Petroleum.
End Note.) The minister explained that the affected
contracts had been signed at a time when oil was USD 15 per
barrel. Given the fact that these companies had already
recouped their investments, and in the context of socialist
politicians, such as opposition leader Louisa Hanoune,
leaning in the direction of outright nationalization, Khelil
said that Algeria sought to redress the "unfair gains to
foreign partners." He noted that the formula had been
determined so that the foreign partners received roughly the
same return on investment as when they signed their
contracts. He conceded that "maybe it was our fault" that
Algeria did not insert profit limitation clauses in the
original contracts, but the current price of oil now required
Algeria redress this oversight. He claimed other countries,
such as the UK, had recently amended their policies regarding

ALGIERS 00000708 002 OF 004


depreciated investments.

POSSIBLE CONDITIONS ON NEW BIDS
--------------


4. (C) Khelil said that the most recent Council of Ministers
meeting, chaired by President Bouteflika, had approved the
long-awaited implementing regulations for the hydrocarbon
amendments. By formalizing the relationship between
Sonatrach and the new regulatory agencies ALNAFT and ARH,
Algeria would be ready to move ahead with the next
international licensing round, hopefully by the end of 2007.
The bidding process would occur differently than before in
that conditions might be set for winning bidders, although he
added that these had not yet been determined and were still
under discussion. The first condition, Khelil explained,
might be that winning bidders bring certain types of
technology or technical know-how to Algeria. Khelil did not
specify the second possible condition, but launched into a
discussion of Algeria's current troubles entering the Spanish
market (septel),suggesting that downstream market access
might be a precondition for future upstream developers.
(Note: Khelil also alluded at this time to Russia, which had
recently rejected Sonatrach's bid to build an LNG project in
the Baltic Sea. He said he had told Energy Secretary Bodman
during his recent visit to the U.S. that GAZPROM could face a
similar situation in Algeria. Moreover, this follows
Khelil's public expression of interest during the visit for
Sonatrach to develop downstream projects in the U.S. End
Note.)

NOT ALL U.S. COMPANIES ALIKE
--------------


5. (C) The Ambassador told Khelil that if Algeria's intention
was to continue to attract U.S. investment and technology
transfer, it was incumbent upon Algeria to establish a
positive business climate. The Ambassador said that he did
not want to go into the specifics of individual commercial
disputes, which were more appropriately handled through
business rather than official channels. That said, the
Ambassador stressed that the overall sense in the American
business community was that Algeria's recent actions had been
unhelpful to attracting new and sustained investment. The
minister interjected that he would very much like to discuss
the individual cases to show the Algerian perspective.


6. (SBU) Khelil claimed that Anadarko had violated its
"gentleman's agreement not to go to litigation" and from that
point he had personally "lost faith" in them. The Ambassador
clarified that, according to Anadarko, the company had
entered into conciliation, which was a precursor to
arbitration or litigation. The Minister blurted that "they
sued us" and said he considered Anadarko's conciliation to be
the same as litigation. (Note: Anadarko representatives in
Algiers confirmed to us May 22 that it was Sonatrach, not
Anadarko, that had initiated the conciliation process, not
the other way around. This process concluded in February
without a resolution and thus remains at a stand-still. End
Note.) Khelil noted that he was further irritated with
Anadarko for "leading the pack" and "blocking its partners
from investing in Algeria unless Anadarko gets a piece," thus
limiting some otherwise interested companies from entering
the Algerian market. Khelil was personally insulted that
Anadarko apparently had gone around him to raise the taxation
issue with the Algerian Finance Ministry. (Note: Anadarko
representatives in Algiers told us May 22 that at no time had
the company approached the Ministry of Finance regarding the
new taxes. End Note.) The Ambassador cautioned that
unilateral Algerian actions had caused major financial losses
to the American company which had had a signed contract. The
Ministry's reluctance to clarify what it was doing and where
it was going had significantly hurt the company financial
situation. More than ever, he noted, serious dialogue was
needed between the government and the company. Khelil
indicated he had no intention of putting anything new in
front of Anadarko, but he later said he would receive the
company president if he came to Algeria.


7. (SBU) On Conoco-Philips, Khelil claimed that an
operational error resulting from "human mismanagement at
Burlington Resources" had caused production to stop and

ALGIERS 00000708 003 OF 004


Algeria to lose revenue. He said this was not a standard
catastrophic loss, but the result of "error in management."
By demanding Conoco-Philips to pay for this loss as a
condition of its transfer of ownership from Burlington,
Khelil said that Algeria was merely demanding conformity with
Algerian law. He further asserted that Algeria had a right
to demand a fee which corresponded to a percentage of the
assessed value. In contrast to the problems with
Conoco-Philips and Anadarko, the minister cited Hess as a
company with which the Algerians had a "wonderful"
relationship. He added that he had seen company chairman
John Hess during his recent visit to the U.S. and that Hess
signaled an interest in increasing the company's position in
Algeria. (Comment: the Hess assets in Algeria are
considerably smaller than those of either Anadarko or
Conoco-Philips. End Comment.)

ACCESS PROBLEMS
--------------


8. (C) Ambassador pointed to the Conoco-Philips example and
highlighted to Khelil that numerous energy companies,
American and other, had complained about the difficulty of
getting meetings in Algeria with officials in Sonatrach or
the Ministry of Energy who were empowered to make decisions.
If power was concentrated in the office of the minister,
Ambassador continued, it should come as no surprise that
companies were going to request meetings with the minister.
(Note: Khelil reportedly had convoked the heads of the major
energy companies operating in Algeria to his office last fall
to tell them that he was not interested in meeting with their
visiting senior management unless they had an explicit reason
to see him. End Note.) Khelil responded that the companies'
counterparts were either Sonatrach (for existing production
sharing contracts) or the new regulatory agency ALNAFT (for
contracts signed in the future). But as with any
state-operated entity, the minister added obliquely, both
were ultimately subject to politically driven decisionmaking.


COMMENT: DEALING WITH MINISTER KHELIL
--------------


9. (C) While Khelil was once the advocate of broader openness
of the Algerian market to foreign participation, he has now
accepted the political reality of the changes and is
enforcing them outright, even if it goes against what are
probably his better instincts. The minister's view that
foreign oil companies such as Anadarko, now having recouped
their initial investments, are just sitting back and watching
their bank accounts grow does not take into account such
firms' plans for future investment. (Anadarko, for one, is
unlikely to proceed with its estimated USD 4 billion
investment in the Merck fields or further develop its other
existing blocks under the status quo.) The minister appeared
to swallow that Algeria's actions had hurt the business
climate and he did not seem to care. Having established gas
development as its strategic priority, the Algerian
leadership apparently believes it can ignore -- and even
punish -- petroleum producers with impunity. Numerous
foreign petroleum companies have told us that Khelil has a
take it or leave it attitude in negotiations. With the
implementing regulations signed and the taxation formulas
drawn up, Khelil appeared to dismiss any concerns expressed
by foreign oil companies as simple non-compliance with
Algerian law and regulations.


10. (C) As the discussion of the Anadarko case demonstrated,
Khelil voiced more the fiercely nationalistic logic that
currently appears to be driving Algerian economic policy than
the pragmatism of a technocrat with two decades of experience
at the World Bank. The minister's reluctance to meet with
energy officials below his rank reflects could be interpreted
as the leadership style of a manager seeking to empower
lower-level decisionmakers (in this case the Sonatrach or
ALNAFT officials responsible for overseeing individual
contracts). We have seen little delegation of authority,
however. Instead, Khelil's stance appears to reflect the
Algerian attachment to protocol above all else. The
minister's quip about Anadarko going behind his back to talk
to the Finance Ministry, which Anadarko denies, also rang a
petulant tone. For now, the logic of Khelil the politician

ALGIERS 00000708 004 OF 004


has overpowered that of Khelil the energy-sector technocrat.


11. (C) Our sense is that the meeting between Secretary
Bodman and Minister Khelil in Washington on May 7 (ref C) for
the first time put U.S. concerns to Khelil directly. The day
after that meeting in Washington the Algerian government
after four months wait set up the Ambassador's meeting; they
suddenly decided they needed to engage us, and we delivered
the message about a deteriorating business environment rather
bluntly. With world oil prices high, the Algerians may well
not be interested in attracting much new investment into
their oil sector. As we think about how to help our own
firms, and improve the broader business climate, we need to
find opportunities to accent that Algeria will not secure the
technology transfer it seeks if it adopts such aggressive
tactics against foreign companies. We should not exaggerate
the problems - some U.S. energy firms, such as Hess, having
dodged a bullet with the recent changes to the hydrocarbon
amendments, are operating quietly and, for the most part,
contentedly. Neither should we leave the Algerians with the
mistaken impression that doing business here is just as easy
as in other major energy exporting countries. Given Khelil's
concentration of power in his hands, if he stays in the
Energy Ministry it is to him personally that we have to drive
home our message.
FORD