REVIVING ALBANIAN OIL INDUSTRY MAY BE ATTRACTING RUSSIAN

UNCLAS SECTION 01 OF 02 TIRANA 000345

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR/SCE (ERIN KOTHEIMER AND YOULIANA IVANOVA)

E.O. 12958:N/A
TAGS: ECON ENRG EPET EINV AL
SUBJECT: REVIVING ALBANIAN OIL INDUSTRY MAY BE ATTRACTING RUSSIAN
INTEREST

REF: A) TIRANA 186, B) TIRANA 308

Summary
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1. (SBU) Albania, which possesses one of continental Europe's
largest oil fields and has seen promising new finds for additional
oil and gas reserves, is substantially expanding its oil production
through Western investment. Increased interest by foreign investors
in Albania's oil sector is marked by Western oil companies' moving
aggressively to revitalize Albania's once-declining production. It
has also brought renewed speculation that Russian interests may be
attracted to the upcoming privatization of the state-owned refining
company. End Summary.

Albania's Once and Future Oil Industry
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2. (U) Albania is endowed with considerable oil reserves which
have been tapped for extraction for the last ninety years. The
country's first oil well was drilled in 1918 near Vlore. In the
1920s, predictions that Albania was one of the best destinations for
oil exploration after the Middle East led several prominent oil
companies of the day to explore for oil in Albania, including
Standard Oil, Rusthon and the Anglo-Persian Oil Company. The oil
industry received substantial investment during the communist regime
and, although the technology employed was not the most up-to-date,
production expanded to more than 2 million tons per year in the
1970s, turning Albania into a net oil exporter. In the late 1980s,
despite production's dropping to 1.3 million tons per year, foreign
interest in exploring for oil in Albania was renewed. In 1990,
Albania was the first former communist country in Europe to open
itself to Western oil companies. A total of 105 companies applied
for off-shore concessions, including Chevron, Occidental, AGIP, OMW
and Shell Petroleum. However, exploration results were
disappointing, despite investments for both off- and on-shore that
amounted to almost USD 300 million. Political turmoil in Albania
and Kosovo in the 1990s, falling oil prices and the
then-less-desirable heavy crude quality of oil found in the country
all contributed to retard further investment. By 2000, oil
production had dropped to half a million tons per year, covering
only 25 percent of domestic demand.

A Small Company Prospers Where the Majors Failed
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3. (U) A total of six petroleum agreements have been signed over
the last four years for the rehabilitation of existing fields,
development and new exploration. Unlike before, most of these
companies are small to medium sized firms. However, they are
generally more aggressive risk-takers than the major oil companies
and also possess expertise in the development of small oilfields.
Work in the Albanian oil sector means dealing with an industry that
suffers from decaying conditions, is a source of staggering
pollution and is in desperate need of investment.


4. (U) One success story stands out. In 2004, Bankers Petroleum, a
Canadian oil company, was granted a 25-year Petroleum Agreement (PA)
for the development of the Patos Marinez oilfield in southern
Albania, which with 2 billion barrels of reserves is one of the
largest in continental Europe. The PA provides for equal production
sharing between Bankers and the state oil producer Albpetrol, once
the initial capital investment has been recovered. After a two-year
study phase, Bankers started production using modern technology and
extraction methods its Canadian engineers honed in Alberta's heavy
crude oil fields.

5. (SBU) According to Bankers, it has invested more than USD 70
million over the past three years to reactivate 160 existing wells.
By December 2007 the company had increased production to more than
5,300 Barrels Per Day (BPD) from 700 BPD when it arrived in 2006.
Bankers plans to invest up to USD 300 million to reactivate
additional wells and to develop new ones with the goal of eventually
increasing production to 25,000 BPD in the next two to three years.
Employing new production technology, Bankers aims to increase
commercially extractable oil reserves in Patos from 10 percent today
to 40 percent. The company has also set an impressive example for
environmental standards in its drilling operations. (Note: Embassy
representatives have visited the Patos field where Bankers' modern
drilling rigs operate side-by-side with Albpetrol's aging, 1930s-era
derricks. The contrast is startling and surreal. Bankers' rigs are
spotless and operate surrounded by gravel painted white to highlight
oil spills, of which none were in evidence. Albpetrol's derricks
are a dystopian vision of creaking, antiquated equipment in
tar-covered fields connected by six-foot deep canals filled with the
overflow of past oil spills.)
An Albanian Oil Boom?
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6. (U) Albania has estimated oil reserves of 429 million tons. In
2007, two new petroleum agreements were signed with the Canadian

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company Sherwood International and the Greek company Stream Oil and
Gas, Ltd. for the development of another five oilfields in southern
Albania. It is expected that these investments will further
increase domestic production, although there are no production
projections available at this time. Both companies are expected to
start full operations by 2009.

7. (SBU) Last year Manas Petroleum Corporation, a Swiss-based oil
and gas exploration company, was awarded a license to explore for
oil and gas reserves in a four-block area covering approximately
780,000 acres, located along a geological fold in northwestern
Albania. In January a report prepared by Gustavson Associates, LLC
of Colorado was picked up by local media regarding the potential for
vast new reserves of oil and gas in the north of Albania. According
to the report's findings, unproven reserves hold up to 3 billion
barrels of oil, including more commercially valuable lighter grades
of crude, and 3 trillion cubic feet of natural gas. While the
report discussed potential, not proven, reserves and assessed only
preliminary data, expectations for further oil discoveries and
greater production in the future remain high. (Ref A)

Private Investment Leading Oil Sector Development
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8. (U) Albpetrol, through existing Petroleum Agreements with
various foreign oil companies, has farmed out almost 90 percent of
the country's oil extraction industry. This is part of an overall
government strategy to privatize the entire oil sector as the most
critical step for the development of the industry. The recent soar
in global oil prices is also increasing foreign interest in
Albania's hydrocarbon resources and facilitating the adoption of
advanced production technology to extract Albania's lower quality of
crude oil in greater volumes than was possible in prior decades.


9. (U) The increase of domestic oil production will improve the
economic viability of Albania's oil processing industry. After a
failed privatization attempt in 2004 due to a lack of investor
interest, the GOA has again launched an international tender for the
sale of 85 percent of the shares of the state-owned oil-refining
company ARMO and its primary assets of two outdated heavy crude
refineries and the country's wholesale oil distribution network.
The GOA is optimistic for a successful privatization of ARMO this
time. Fifteen potential buyers have expressed interest in
purchasing ARMO, due in part to the fact that ARMO's refineries are
uniquely suited to process heavy crude oil, which is increasingly
attractive to international refiners as lower grades of crude grow
more expensive and scarce on world markets.

Hungarian Proxy for Russian Lukoil?
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10. (SBU) Among the 15 companies which have expressed interest in
ARMO's privatization is the Hungarian oil and gas company MOL.
MOL's interest has raised eyebrows due to its reportedly close ties
to the Russian oil and gas company Lukoil. (Note: Citing Hungarian
media sources, an Albanian daily has reported that MOL formed a
50-50 joint venture several years ago with Lukoil (which has since
sold its share to Rosneft) in the Russian oil region of
Zapadno-Malobalik.) There is speculation that MOL enjoys the favor
of Energy Minister Ruli, a rumor that gained some credibility when
Ruli, who has long been dogged by unverified corruption rumors,
singled out MOL for public praise several weeks ago in connection
with the ARMO privatization. A prominent Albanian oil importer who,
in partnership with a U.S. refining company, will participate in the
ARMO bid joined the speculation. This Albanian oilman suggested
Ruli had already struck a deal with MOL, a deal he claimed has the
Prime Minister's blessing although not his fingerprints. He noted
that MOL is already in the Balkans, having sold its recently
acquired share in Croatia's INA refining company to Lukoil. Post
will closely track signs of Russian interest in ARMO's privatization
and whether the GOA is committed to a fair and transparent tender in
the sale of one of its last remaining state-owned enterprises. (See
also Ref B.)

CRISTINA