ENERGY MINISTER KHELIL: GOT GAS?

C O N F I D E N T I A L ALGIERS 000254

SIPDIS

SIPDIS

STATE FOR NEA/MAG (FLOWERS)
STATE PASS FOR USTR (BURKHEAD)
COMMERCE FOR ITA/MAC/ONE (NATE MASON) AND ADVOCACY CENTER
(REITZE)

E.O. 12958: DECL: 02/25/2018
TAGS: ENRG EPET EINV ETRD AG
SUBJECT: ENERGY MINISTER KHELIL: GOT GAS?

REF: A. 07 ALGIERS 1783

B. ALGIERS 102

CLASSIFIED BY: AMBASSADOR ROBERT S. FORD; REASONS 1.4 (B) AND (D).


1. (C) SUMMARY: ALGERIAN ENERGY MINISTER KHELIL TOLD OPIC
CEO MOSBACHER FEBRUARY 23 THAT ALTHOUGH ALGERIA CAN MEET
ITS CURRENT NATURAL GAS CONTRACTS AND INTERNAL CONSUMPTION
DEMAND, THE COUNTRY NEEDS TO FIND MORE GAS. IN ORDER TO
INCREASE GAS CAPACITY, KHELIL SAID THAT HYDROCARBON
PARASTATAL SONATRACH IS OFFERING 15 NEW BLOCKS FOR
EXPLORATION. IN ADDITION, SONATRACH IS WORKING ON A
PROJECT TO BUILD A PIPELINE FROM NIGERIA TO EUROPE AND WILL
COMPLETE PIPELINES TO SPAIN AND ITALY BY THE END OF THE
YEAR, HE STATED. ON FEBRUARY 24, ALGERIAN NEWSPAPERS
CARRIED STATEMENTS BY KHELIL, WHO CURRENTLY HOLDS THE OPEC
PRESIDENCY, DISCUSSING THE CREATION OF AN OPEC FOR GAS.
MEANWHILE, FOREIGN OIL AND GAS EXECUTIVES TELL US THEY WILL
SEEK TO EXPLORE THE NEW BLOCKS, NOT BECAUSE THEY ARE
ENAMORED WITH WORKING IN ALGERIA, BUT BECAUSE THE ENTIRE
MARKET IS DESPERATE FOR NEW GAS DISCOVERIES. END SUMMARY.

MORE NATURAL GAS NEEDED
--------------


2. (C) REFERRING TO ALGERIA'S NATURAL GAS CAPACITY,
MINISTER OF ENERGY AND MINES CHEKIB KHELIL TOLD OPIC
PRESIDENT AND CEO ROBERT MOSBACHER, JR., IN A FEBRUARY 23
MEETING THAT "NOT MUCH IS LEFT TO SELL," CONFIRMING
INDUSTRY SPECULATION (REF A). KHELIL NOTED THAT ALGERIA
HAS AN ADEQUATE SUPPLY OF NATURAL GAS TO MEET ITS CURRENT
CONTRACTS AND INTERNAL CONSUMPTION DEMAND, BUT ADDED THAT
ALGERIA NEEDS MORE. KHELIL SAID THAT THERE WERE 20 NEW
ONSHORE DISCOVERIES LAST YEAR AND THAT REPSOL, TOTAL AND
GAZ DE FRANCE ARE DEVELOPING A NEW GAS REGION IN REGGANE,
SOUTH OF ADRAR. KHELIL NOTED THAT SONATRACH IS OFFERING 15
NEW BLOCKS FOR OIL AND GAS EXPLORATION (REF B),WITH
COMPANIES NOW SUBMITTING EXPRESSIONS OF INTEREST TO
PREQUALIFY. ACCORDING TO KHELIL, THE EXPRESSIONS OF
INTEREST WILL BE EVALUATED ON THE BASIS OF EXPERTISE AS
WELL AS FOR OFFERS FOR SONATRACH PARTICIPATION. KHELIL HAS
PREVIOUSLY STATED THAT SONATRACH IS INTERESTED IN EXPANDING
ITS INTERNATIONAL OPERATIONS. THUS FAR, KHELIL STATED, 20
COMPANIES -- INCLUDING EXXON, SHELL, BP AND CONOCO-PHILLIPS
-- HAVE PRE-QUALIFIED, WITH ANOTHER MONTH LEFT IN THE
PROCESS.

SHELL COUNTRY DIRECTOR CAUTIOUS ON ALGERIA
--------------


3. (C) MICHAEL BLAHA, SHELL'S ALGERIA COUNTRY DIRECTOR,
TOLD AMBASSADOR ON FEBRUARY 13 THAT THE OUTLOOK FOR
ALGERIA'S ABILITY TO MEET CONSUMER DEMAND THREE TO FIVE
YEARS FROM NOW WAS GRIM WITHOUT NEW DISCOVERIES AND
PRODUCING FIELDS. CHIEF AMONG THE REASONS BLAHA LISTED WAS
A DRAIN OF HUMAN RESOURCE AND TECHNICAL EXPERTS FROM HASSI
MESSAOUD AND HASSI R'MEL -- BLAHA SAID THAT OVER THE PAST
YEAR SONATRACH HAD LOST 500 DRILLING STAFF TO HIGHER-PAYING
JOBS ELSEWHERE. BLAHA STRESSED THAT THERE WAS "NOT ENOUGH
DEVELOPMENT WORK" GOING ON, AND BECAUSE OF POOR MANAGEMENT
THE ENTIRE SYSTEM WAS NOT LIMBER ENOUGH TO ADJUST AND
RESPOND TO MARKET IMPERATIVES. ACCORDING TO BLAHA, KHELIL
AND THE SENIOR MANAGEMENT OF SONATRACH ARE AWARE OF THE
PROBLEM, BUT UNABLE TO DO ANYTHING ABOUT IT. THE RESULT,
BLAHA SAID, IS A DESPERATE STRATEGY TO PUMP AS MUCH OUT OF
THE GROUND AS POSSIBLE IMMEDIATELY, TO CAPITALIZE ON HIGH
OIL AND GAS PRICES, WITH LITTLE OR NO PRACTICAL
CONSIDERATION FOR THE FUTURE. WHAT FIELDS DO REMAIN IN
ALGERIA, BLAHA SPECULATED, ARE NEVER LARGE AND NEVER EASY
OR COST-EFFECTIVE TO DEVELOP.

NEW GAS INFRASTRUCTURE IN THE PIPELINE
--------------


4. (U) IN ADDITION TO THE NEW BLOCKS FOR EXPLORATION,
KHELIL OUTLINED FOR MOSBACHER SONATRACH'S PIPELINE
PROJECTS. KHELIL SAID THAT SONATRACH IS CURRENTLY WORKING
WITH SHELL AND CHEVRON ON A PROJECT TO BUILD A NEW PIPELINE
FROM NIGERIA. THE TRANS-SAHARAN GAS PIPELINE WILL CONNECT
NIGERIA TO EUROPE WITH AN ESTIMATED SPAN OF OVER 4,100
KILOMETERS. (ACCORDING TO ALGERIAN PRESS REPORTS, KHELIL
VISITED NIGERIA FEBRUARY 25-26 TO DISCUSS THE PROJECT.) IN
ADDITION, KHELIL NOTED THAT THE EXPANSION OF THE EXISTING
TRANSMED PIPELINE THROUGH TUNISIA TO ITALY AND THE PIPELINE
TO SPAIN WILL BE COMPLETED BY THE END OF THE YEAR. THE
PROJECT WILL EXPAND EXPORT CAPACITY BY SEVEN BILLION CUBIC
METERS EACH YEAR, ACCORDING TO KHELIL. BLAHA SAID THERE IS
"NO WAY" TO MIRACULOUSLY FINISH THESE INFRASTRUCTURE
PROJECTS ON THE TIMELINE KHELIL ADVERTISES IN PUBLIC.
BLAHA ACKNOWLEDGED THAT HIGH MARKET PRICES HAVE MADE THE
TRANS-SAHARA PIPELINE FROM NIGERIA COST-EFFECTIVE. THE
TRANS-SAHARA PROJECT SHOULD BRING SOME RELIEF TO EUROPEAN
CONSUMERS, EVEN THOUGH IT WOULD RENDER ALGERIA ESSENTIALLY
A TRANSIT ROUTE RATHER THAN A PRODUCING COUNTRY.

A GAS OPEC?
--------------


5. (U) ON FEBRUARY 24, ALGERIAN NEWSPAPERS CARRIED
STATEMENTS FROM KHELIL REGARDING THE CREATION OF AN OPEC
FOR GAS. KHELIL, WHO CURRENTLY HOLDS THE OPEC PRESIDENCY,
STATED THAT THE CREATION OF SUCH A GROUP WOULD BENEFIT
ALGERIA. HE CONFIRMED THAT A WORKING GROUP COMPOSED OF
ALGERIA, RUSSIA, IRAN AND QATAR IS CURRENTLY STUDYING THE
IDEA AND WILL SUBMIT PROPOSALS AT THE JUNE OPEC MEETING IN
MOSCOW. ACCORDING TO KHELIL, THE CREATION OF A SIMILAR
ORGANIZATION FOR GAS WOULD FIRST NECESSITATE THE CREATION
OF AN INDEPENDENT MARKET FOR GAS, WHERE GAS PRICES ARE NOT
INDEXED TO OIL PRICES.

COMMENT: CAN SONATRACH KEEP UP WITH KHELIL?
--------------


6. (C) AS HYDROCARBONS EXECUTIVES HERE ARE QUICK TO NOTE,
CHEKIB KHELIL IS AN INFORMED EXPERT IN HIS FIELD, OFTEN TO
THE POINT OF ARROGANCE. IT IS CLEAR FROM OUR FEBRUARY 23
MEETING WITH HIM THAT THE ENERGY MINISTER IS AWARE OF THE
SUPPLY PROBLEM IN ALGERIA'S GAS SECTOR, AND HE PAINTS AN
AGGRESSIVE AND IDEALISTIC PICTURE OF THE WAY THINGS SHOULD
BE. AS WE HAVE REPORTED IN REF A, HOWEVER, THE CHALLENGE
FOR ALGERIA TO MAINTAIN GAS SUPPLIES TO EUROPE IS A BIG
ONE, ESPECIALLY IF BLAHA'S GUESS PROVES TRUE THAT FUTURE
GAS FINDS WILL BE SMALLER THAN THE LARGE HASSI R'MEL FIELD
NOW PROVIDING THE BULK OF ALGERIAN PRODUCTION. FOREIGN OIL
AND GAS EXECUTIVES TELL US SONATRACH IS BURDENED BY A
HEMORRHAGE OF QUALIFIED PERSONNEL COMPOUNDED BY CHRONIC
MISMANAGEMENT OF EXISTING OIL AND GAS FIELDS THAT CRIPPLES
ALGERIA'S ABILITY TO MATCH THE PACE KHELIL OUTLINES IN
PUBLIC AND PRIVATE. SONATRACH IS EAGER TO BE A MAJOR
PLAYER IN THE EUROPEAN MARKET, A BRAND NAME TO RIVAL
REPSOL, TOTAL AND AGIP, BUT ITS AMBITION HAS EXCEEDED THE
PACE OF EXPLORATION AND INFRASTRUCTURAL DEVELOPMENT WITHIN
THE DOMESTIC GAS SECTOR. FOREIGN OIL AND GAS EXECUTIVES
TELL US THEY WILL SEEK TO EXPLORE THE NEW BLOCKS BECAUSE
THE MARKET IS DESPERATE FOR NEW GAS DISCOVERIES. THE
OUTCOME OF EXPLORATION AND DEVELOPMENT OF THE 15 NEW BLOCKS
APPEARS TO BE KEY IN DETERMINING WHETHER ALGERIA WILL
REMAIN ONE OF THE WORLD'S TOP NATURAL GAS EXPORTERS INTO
THE 2020S.