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 ALGIERS 00000710 002 OF 002 Juan Carlos reportedly holds a share, and which recently paid fines to Algeria for delays in its implementation. FORD