OIL COMPANIES WORRIED ABOUT ALGERIA'S ENERGY FUTURE

C O N F I D E N T I A L ALGIERS 000157

SIPDIS
NOFORN

DEPT FOR NEA/MAG - NARDI

E.O. 12958: DECL: 02/21/2020
TAGS: PGOV EPET ENRG ECON ETRD KCOR PREL PINS AG
SUBJECT: OIL COMPANIES WORRIED ABOUT ALGERIA'S ENERGY FUTURE

REF: ALGIERS 0111

Classified By: Ambassador David D. Pearce. Reasons: 1.4 (b),(d)

Summary
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1. (C/NF) Leading foreign oil companies (FOCs) are concerned
that the corruption investigation into Algeria's national oil
company Sonatrach (reftel) has paralyzed company
decision-making and could slow ongoing projects. Unless
Sonatrach consolidates under new management and resumes
normal contracting, gas and oil production will suffer --
although no one will hazard a timeframe. Energy Minister
Chekib Khelil is seen at the center of the rot in Sonatrach,
and oil companies believe he remains the driver of Algeria's
energy agenda and will not resign soon. However, the press
reports that Prime Minister Ouyahia now signs off on major
Sonatrach decisions. Some FOCs see this corruption
investigation as a move against the influence of President
Bouteflika's Western Algerian "clan." Embassy has no hard
evidence to support this theory but notes that it enjoys
widespread credence. Neither the corruption investigation
nor any political conflict that may lie behind it will be
resolved soon, in no small part due to President Bouteflika's
slow and deliberate decision-making style. This scandal has
further reduced the likelihood that Minister Khelil and
Sonatrach will alert Algeria's leadership to the need for new
investment to reverse the country's declining gas production,
satisfy long-term export contracts, and meet rising domestic
demand. End Summary.

Sonatrach Scandal Could Hurt Operations
--------------


2. (C/NF) Ambassador met with BP Country Manager Akli Brihi
(protect throughout) and with ConocoPhillips Director General
Armando Gallegos (protect throughout) separately on February

11. Brihi told the Ambassador that Sonatrach leadership has
been "paralyzed and decapitated" by the Sonatrach corruption
investigation because interim managers are afraid to sign
contracts necessary for ongoing oil company operations.
Gallegos said that their projects had not yet been affected
since they were the operator of their largest project. He
conceded there have been slowdowns in customs processing of
imports and said that other companies' operations were
already experiencing slowdowns.


3. (C/NF) Neither was sanguine about the prospects for the
mid or longer term. Both feared that, given the current
climate of uncertainty in Sonatrach, it would be some time
before a strong replacement management team was in place.
Brihi termed the acting CEO, Abdelhafit Feghouli, "hopeless"
but thought he would stay on to continue organizing the April
LNG conference in Oran. Gallegos expressed concern about
delays on the upstream side. He pointed out that there are
many interim Sonatrach appointees in positions his company is
not familiar with, positions they will retain for months or
longer. Many decisions on upstream issues require signature
by a Sonatrach VP, which these days are not forthcoming.
However, Gallegos had good things to say about the interim
Sonatrach VP for Upstream, Said Sahnoun, who retained
responsibility for international business development, which
was part of his previous position as Sonatrach head of
partnerships. Gallegos saw Sahnoun as technically competent
and a good English speaker; operations going through him
would not be delayed.

Corruption Involves Service Companies, Not the Oil Majors
-------------- --------------


4. (C/NF) Brihi confirmed that the focus of the investigation
into Sonatrach was the widespread use of no-bid, sole-source
contracts. However, these were often necessary, and in any
case were not forbidden by BP's contracts with Sonatrach. BP
and Statoil, for example, had received "exemption" from this
rule when they signed a sole-source contract with GE for gas
turbines for their In Amenas gas project, since GE is the
only company offering this kind of equipment. The company
had carried out an internal investigation and cleared the
deal. The across-the-board "dogmatic" prohibition against
no-bid contracts now in place, Brihi maintained, would harm
project development.


5. (C/NF) Brihi maintained that Sonatrach concluded corrupt
deals not with the majors but with service companies such as
the Italian firm Saipem. The service company would submit an
inflated bid and then pay off Sonatrach insiders. It was the
common belief that this had happened with the USD 1-billion
sole-source contract Saipem had concluded with Sonatrach
related to the Arzew LNG project. The Canadian company
Lavalin's deal to build a new town ("La Nouvelle Ville") near
the Sonatrach production center of Hassi Messaoud was
tainted, and put on ice, he had heard, by a similar
arrangement. The manager of that project, Mourad Zeriati,
was now in jail. Brihi thought that it was not inconceivable
that U.S. companies had been involved in such deals, but he
had never heard concrete information. The Ambassador
reminded Brihi that U.S. companies were under the tough legal
constraints of the Foreign Corrupt Practices Act.

Energy Minister Behind Culture of Corruption
--------------


6. (C/NF) Brihi believed that Minister of Energy and Mines
Chakib Khelil was responsible for the culture of corruption
in Sonatrach. He echoed reports Embassy has heard from other
companies (reftel) that a Khelil relative (whom Brihi said
was a nephew but whom others have said is a cousin) former
Sonatrach Chief of Staff Reda Hemche, was the man behind the
corrupt deals. Working on behalf of Khelil, Hemche would
advise Sonatrach CEO Meziane on contracts to sign, making
Meziane legally accountable and leaving Hemche out of legal
reach. Brihi believed that Meziane had signed many such
contracts under duress. Brihi said that Khelil had done an
excellent job as minister until the passage of the 2006
hydrocarbon law, imposed against Khelil's will by "economic
nationalists," which mandated Sonatrach majority
participation and higher taxes on all Sonatrach contracts
with FOCs. Stressing that he was providing his personal
speculation, Brihi suggested that perhaps Khelil, faced with
the defeat of his plans to change the system and liberalize
the energy sector, may have decided that, if he could not
change it, he would join it. He noted that it was after
2006 that Khelil installed Hemche and began replacing
Sonatrach's most capable senior experts with "yes-men." He
said the corruption investigation had drastically undermined
Khelil's credibility, but predicted that the minister would
not resign.

Political Backdrop
--------------


7. (C/NF) Brihi interpreted the anti-corruption investigation
against Sonatrach by the DRS (Department des Renseignements
et de Securite, the intelligence service formally under the
military but in fact reporting directly to President
Bouteflika) as a response to excessive influence by President
Bouteflika's Western Algerian "clan." Brihi did not think
this conflict would be resolved soon. He thought that
Bouteflika would be inclined to keep Khelil, a childhood
friend, in place. He would take his time to resolve the
situation.

Algeria's Gas Future Imperiled
--------------


8. (C/NF) Brihi said the scandal had come at an especially
bad time, because Sonatrach and the political leadership of
Algeria had not awoken to the fact that Algeria faces
declining gas production and the potential inability to
satisfy export obligations and rising domestic demand as
early as 2015. Sonatrach was not on track to realize
Khelil's publicly stated goal of raising gas production from
60 to 80 billion cubic meters per year. Gas production was
falling due to depletion of Algeria's easily accessible
conventional gas reserves. Algeria needed to develop
non-conventional gas. This included shale gas, reserves of
which major oil companies believed were massive but whose
exploitation required sophisticated know-how and large
investments for development. Brihi said there were only
three companies that had the technology and financial
resources to do this: Exxon, BP and Shell. It would take
time and up to USD 50 billion to develop the necessary
infrastructure (including bringing large amounts of water to
remote desert drill sites). Brihi believed that Algeria
should also invest far more in solar energy and sell it to
Sonelgaz. This would free up for export some of the large
quantities of gas Sonatrach currently provided at low,
subsidized prices to Sonelgaz for domestic electricity
production.


9. (C/NF) Asked how high up knowledge of this future
export-shortage dilemma extended, Brihi said Khelil
understood but that he had not presented this "explosive
dossier" to Prime Minister Ouyahia or President Bouteflika.
Asked why the leadership had not focused previously on this,
Brihi said Bouteflika was very intelligent but not a good
listener and that energy in any case lay outside his main
interest, which was politics. He left energy matters to
Khelil, who remained the driver of Algeria's energy policy.
While Sonatrach experts had known for years of this looming
vulnerability, Khelil had moved many of them out or aside,
and Khelil himself had not become fully aware of the issue
until about a year ago. Brihi thought the corruption
investigation would further delay the Algerian leadership's
understanding of this looming crisis and complicate its
ability to take the necessary decisions in time.

Comment
--------------


8. (C/NF) We still lack sufficient information to confirm the
theory of clan warfare, but it enjoys greater credence here
than the belief that the investigation into Sonatrach is a
simple outgrowth of President Bouteflika's publicly stated
determination to root out corruption. We anticipate that
this affair will play out and continue to overshadow
Algeria's energy industry for a considerable period,
including the Sonatrach-organized LNG conference in Oran
scheduled for 18-21 April. Energy Minister Khelil has been
weakened, perhaps fatally. He faces a lose-lose situation,
i.e., be blamed for either tolerating or being ignorant of
corruption in the enterprise that is the crown jewel of his
ministerial portfolio. One press report of February 17 said
that Prime Minister Ouyahia now signs off on important
Sonatrach contracts. However, we see no indication Khelil
intends to resign or that President Bouteflika intends to
replace him.
PEARCE