Identifier
Created
Classification
Origin
08ALGIERS626
2008-05-30 17:52:00
CONFIDENTIAL
Embassy Algiers
Cable title:  

OPEC CHIEF OPINES ON FUEL PRICES

Tags:  EPET ECON ETRD PREL AG 
pdf how-to read a cable
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RR RUEHDE
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ZNY CCCCC ZZH
R 301752Z MAY 08
FM AMEMBASSY ALGIERS
TO RUEHC/SECSTATE WASHDC 5914
INFO RUEHHH/OPEC COLLECTIVE
RUEHBP/AMEMBASSY BAMAKO 0582
RUEHEG/AMEMBASSY CAIRO 1041
RUEHMD/AMEMBASSY MADRID 8948
RUEHNM/AMEMBASSY NIAMEY 1628
RUEHNK/AMEMBASSY NOUAKCHOTT 6400
RUEHFR/AMEMBASSY PARIS 2745
RUEHRB/AMEMBASSY RABAT 2375
RUEHTRO/AMEMBASSY TRIPOLI
RUEHTU/AMEMBASSY TUNIS 7230
RUEHLO/AMEMBASSY LONDON 1802
RUEHCL/AMCONSUL CASABLANCA 3432
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 ALGIERS 000626 

SIPDIS

E.O. 12958: DECL: 05/27/2018
TAGS: EPET ECON ETRD PREL AG
SUBJECT: OPEC CHIEF OPINES ON FUEL PRICES

ALGIERS 00000626 001.2 OF 002


Classified By: DCM Thomas F. Daughton; reasons 1.4 (b) and (d).

C O N F I D E N T I A L SECTION 01 OF 02 ALGIERS 000626

SIPDIS

E.O. 12958: DECL: 05/27/2018
TAGS: EPET ECON ETRD PREL AG
SUBJECT: OPEC CHIEF OPINES ON FUEL PRICES

ALGIERS 00000626 001.2 OF 002


Classified By: DCM Thomas F. Daughton; reasons 1.4 (b) and (d).


1. (C) SUMMARY: Algeria's Energy Minister and OPEC
President Chakib Khelil told us May 28 that the high price of
fuel in the United States has less to do with OPEC production
caps than with the value of the dollar, oil speculation and
refining techniques associated with bio-fuel additives.
Khelil said that countries like Algeria and Iran currently
have crude oil surpluses, but he admitted that costs have
doubled or even tripled for exploration and production
projects in Algeria as material and equipment prices have
skyrocketed. Khelil also outlined Algeria's goals to
renegotiate its gas commitments with Europe in favor of
shorter-term contracts, its efforts to be a commercial gas
player in Spain, and its satisfaction with the developing LNG
spot market. END SUMMARY.

NOT OUR FAULT
--------------


2. (C) In a May 28 meeting at the Embassy, Energy Minister
and OPEC President Chakib Khelil asserted that OPEC supply
caps were not to blame for the rising price of fuel in the
United States. Rather, he lamented that the sub-prime
mortgage crisis fueled a weakened dollar, which in turn had
encouraged speculators to drive up the price of oil. He
claimed that at least USD 40 of the current cost of a barrel
of oil was the result of the weak dollar and trading by
speculators. He also attributed USD 10 per barrel of oil to
the increased use of bio-fuel additives in diesel fuel.
According to Khelil, the process of adding a bio-fuel
component to diesel fuel has reduced the efficiency of
refineries producing diesel, and consequently their
production capacities. This has resulted in higher demand
for the kind of oil that is refined easily into diesel, he
said, driving up the price per barrel across the supply chain.

TOO MUCH OIL?
--------------


3. (C) At the same time and for related reasons, Khelil
insisted, there is currently an oversupply of oil in some
areas. For example, he said, Algeria is having trouble
selling all its oil at current production capacity because
its oil is most suited for naphtha and gasoline and not in

demand for diesel production. He also said that Iran has so
much oversupply that it is currently storing crude in ships
because its storage facilities are completely full. High
fuel prices and any perceived market shortage, he said, lie
in refinery bottlenecks, not in crude oil supply.

HIGH COST OF DOING BUSINESS
--------------


4. (C) Khelil admitted that Algeria is burdened by the
skyrocketing cost of food and construction materials. He
noted that Algeria spends about five billion dollars on food
imports each year, and among the sectors within his purview
as Minister of Energy and Mines, he has seen the costs of
major projects double and even triple over the course of the
last few years. He noted that the cost of a new power
generation facility to be built by General Electric will
reach two billion dollars; an identical facility completed
just two years ago cost USD 860 million. He also lamented
the long delays in getting materials and equipment for
special projects. Khelil said the lead-time to construct an
LNG plant has increased from two to four years because of the
difficulty in getting the specialized construction materials
and equipment needed for such plants.

LOOKING SHORT-TERM
--------------


5. (C) Khelil noted strong interest in LNG in the U.S., where
currently Algeria is relying on a venture with Statoil to
market its product. Algerian oil parastatal Sonatrach is
exploring access to the U.S. market, he said, but terminal
operators are seeking long-term supply commitments. Khelil

ALGIERS 00000626 002.2 OF 002


noted that Algeria is doing well in the LNG spot market and
wants to capitalize on those opportunities. For example, he
said, Algeria can earn twice as much for LNG sold to Turkey
as for gas piped to Spain, and three times as much for sales
to Japan. Khelil said that Sonatrach wants to renegotiate
its pipeline gas deals in favor of shorter-term contracts.
He noted that while the traditional long-term contracts allow
for renegotiation of price when market prices rise
significantly, the renegotiation process is usually slow and
arbitration alone can take two years or more. Thus, he said,
it is advantageous for Algeria to enter into five-year
contracts and negotiate price according to current market
conditions.


6. (C) Khelil spent some time complaining about what he
called unfair treatment of Sonatrach by Spain. He reviewed
the history of several recent disputes between Algeria and
Spain over gas price and commercial market share, and
lamented the fact that Sonatrach has only achieved a
three-percent share of the Spanish consumer gas market
directly through its new commercial entity. He also
complained bitterly that even though Sonatrach has a
36-percent interest in the new gas pipeline to Spain, Spanish
companies are trying to prevent Sonatrach from exercising its
voting rights in the joint venture.

COMMENT: WEARING THE LOCAL HAT
--------------


7. (C) Khelil was relaxed and spoke rather freely with us
despite the fact that, as oil prices have continued to
ascend, access to him has been increasingly difficult to get
for both diplomats and corporate leaders. While he
acknowledged his role as OPEC president and spoke a bit about
general supply and demand issues, he was clearly most
interested in discussing Algeria's current situation in
relation to other producers, and its goals for future
development. He mentioned to us, as he has done in recent
speeches and press interviews, his interest in seeing more
investment in Algeria by American companies, particularly
outside of the hydrocarbons sector. But he offered few
assurances that American companies would find a welcoming
business environment in Algeria, and we expect that this
ambivalence, which we see across the Algerian government,
will only continue as the price of oil pushes higher.
FORD