ENERGY MINISTER DETAILS DIFFICULTIES WITH SPAIN

C O N F I D E N T I A L SECTION 01 OF 02 ALGIERS 000710

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/21/2032
TAGS: ENRG EPET EINV ETRD ECON AG
SUBJECT: ENERGY MINISTER DETAILS DIFFICULTIES WITH SPAIN
OVER GAS DEALS


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

THIS CABLE CONTAINS COMPANY PROPRIETARY INFORMATION - PLEASE
PROTECT ACCORDINGLY.



1. (C) Minister of Energy and Mines Chakib Khelil told the
Ambassador May 21 about the difficulties Algeria was
experiencing with Spain regarding European market access.
He described how the Spanish gas authority CNE (Comision
Nacional de Energia) had decided to limit the amount of gas
Sonatrach could sell to Spain through the planned Medgaz
pipeline to one billion cubic meters per year. (Note:
Organized as a consortium, Medgaz is scheduled to begin
operation in 2009 and carry 8 billion cubic meters (bcm) of
natural gas per year from Algeria to Spain. Foreign
partners were to be allocated 5 bcm and Sonatrach 3 bcm.
The Spanish Economic Counselor, Maria Dolores Loureda,
confirmed to us in mid-April, however, that Spain was
attempting to limit Sonatrach's supply to 7 percent of the
Spanish market. End Note.) At the same time, according to
Khelil, onerous conditions would accompany Sonatrach's
ability to enter into shareholding agreements to market gas
directly in Spain, including minimum amounts that Sonatrach
would have to sell, or be penalized, according to its
contract. The net result, Khelil explained, was that the
Spanish were limiting the amount of gas the Algerians could
supply but then penalizing them if they did not supply
enough. This equation, the Minister concluded, "puts the
entire Medgaz project into jeopardy."


2. (C) Khelil said he felt that Spain's protectionism was a
growing problem. He asserted that many in Spain had been
unhappy about the recent purchase by a French firm of an 11
percent share of Gas Natural. He cited the example of the
Spanish/Italian firm Endesa as a case in which the Spanish
and Italian governments had blocked the sale to a foreign
bidder (in this case to Germany's E.ON). The minister
claimed that given such protectionism, and with
other European companies buying up shares of historically
Spanish-held companies, Sonatrach would best keep Spanish
companies Spanish because Sonatrach would always remain
Algerian. Thus, Khelil rationalized, companies that
partnered with Sonatrach would be secure in knowing that
Sonatrach would work alongside them, rather than seek to
take them over.


3. (C) Khelil's comments about Spain came in the course of
his discussion about possible preconditions for future oil
and gas projects (septel) in which he suggested that
companies wishing to get involved in Algerian exploration
and production might be obligated to offer downstream
market access to Algeria in return. On May 22 Andrew
Derman and Hassan Yassine, attorneys with Houston-based
Thompson and Knight, which represents numerous foreign oil
companies in Algeria including Conoco-Philips and Statoil,
described to the Ambassador the difficulties of arranging
such swaps. For Algeria to swap an upstream development
project with guaranteed access to a foreign LNG terminal,
for example, requires complex valuations of very different
assets. Derman equated it with trying to swap one house
for another. Moreover, Derman explained, such requirements
serve to exclude small-scale companies from exploration and
development because they are unlikely to possess equivalent
downstream assets.


4. (C) Comment: Algeria's treatment of Spain is a perfect
test case of Algeria's broader hydrocarbon development
policy. (Notably, Khelil has told the press here that
Sonatrach is also pondering how to enter downstream
projects in the USA.) By encouraging asset swaps,
Algeria is excluding small-scale investors and
developers, thus slowing down some hydrocarbon development
and leaving resources in the ground for future
generations. The clear presumption of Khelil's description
of Algeria's troubles with Spain was that Spanish firms
would have a difficult time in the next international
licensing round unless Spain made some concessions to
Algeria on downstream access. Another factor unlikely to
help Spanish firms is the disastrous Gassi Touil gas
project under development by Spain's Repsol, in which King

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Juan Carlos reportedly holds a share, and which recently
paid fines to Algeria for delays in its implementation.

FORD