US embassy cable - 05ALGIERS1325

C O N F I D E N T I A L ALGIERS 001325 
 
SIPDIS 
 
ENERGY FOR GINA ERICKSON 
 
E.O. 12958: DECL: 07/01/2015 
TAGS: EPET, ECON, AG, Hydrocarbons 
SUBJECT: KHELIL SAYS OIL PRICES TO STAY HIGH AS ALGERIA 
LOOKS TO EXPAND REFINING CAPACITY 
 
 
Classified By: Ambassador Richard W. Erdman, reasons 1.4(b)(d). 
 
SUMMARY 
------- 
 
1. (SBU) Energy Minister Chakib Khelil in recent comments 
expressed confidence that oil prices would not drop below $50 
per barrel, and he did not rule out barrel prices of $80 or 
even higher, which he said the international economy could 
withstand.  Algeria's windfall oil revenue topped $17 billion 
in the first five months of 2005.  Khelil confirmed to 
Ambassador that Algeria would increase its own refinery 
capacity in response to current supply constraints on the 
market, but the health of the U.S. market was another 
important factor in the direction of oil prices.  Clarifying 
his unexpected June 4 caution to a U.S. oil company during a 
trade fair event speech, Khelil claimed that an unnamed firm 
had engaged in anti-competitive practices in oil field 
bidding. End Summary. 
 
OIL PRICES TO STAY ABOVE $50/b 
WITH NO HARM TO GLOBAL ECONOMY 
------------------------------ 
 
2. (U) Energy Minister Khelil said in public comments June 25 
that oil prices would not go below $50 per barrel this year 
due to lack of refinery capacity, continued capacity 
pressures during the summer, and the need for refineries to 
prepare stocks for winter.  Responding to a reporter's 
question about whether the price of crude oil could attain 
$100, Khelil said, "Everything could happen."  China's 
continued growth would put further pressure on oil prices, 
while OPEC's decision to increase production would not affect 
prices because of the refining constraints. 
 
3. (U) Khelil earlier said June 23 that rising oil prices 
have not hurt the international economy, and the market could 
withstand prices of $80/barrel or even $100/barrel, since 
these increases were not accompanied by inflation or an 
economic crisis.  Oil consuming regions also had different 
perspectives on pricing.  China's reliance on capital and 
labor, he noted, made energy matters a secondary concern for 
the Chinese.  For its part, the EU was paying the Euro 
equivalent of $35 per barrel, and as long as the Euro 
remained strong the EU would not feel any changes in the 
market.  Khelil commented that high oil prices led to 
Algeria's massive $17.2 billion in oil income for the period 
January through May 2005. 
 
ALGERIA TO INCREASE REFINERY 
CAPACITY OVER NEXT 2-3 YEARS 
---------------------------- 
 
4. (SBU) In a June 25 conversation with Ambassador, Khelil 
noted that Yukos' difficulties were reducing supplies to the 
market.  In response to this and other market supply 
pressures, Algeria would bring new refinery capacity online 
in two to three years, including a 300,000 bpd refinery for 
which a tender had just been announced.  This increased 
capacity would significantly increase Algeria's refined oil 
exports.  Until then, limited refinery capacity would 
continue to be a serious constraint, and the health of the 
U.S. market would continue to play a role in pricing.  A 
recession in the U.S., Khelil acknowledged, would lead to a 
drop in Chinese demand for oil, implying a potential drop in 
prices. 
 
U.S. COMPANY CITED IN 
ANTI-COMPETITIVE PRACTICES 
-------------------------- 
 
5. (C) Ambassador inquired June 25 with Minister Khelil about 
his remarks at the June 4 U.S.-Algeria Business Council 
"Energy and Water Symposium," in which he mentioned 
unspecified, objectionable practices by an unnamed foreign 
energy firm.  Khelil confirmed to Ambassador that his 
intention had been to caution a firm that was acting to 
restrict competition by forbidding its non-U.S. partners to 
submit bids for oil block tenders.  Sonatrach had uncovered 
this pressure tactic while questioning some firms about why 
they had not participated in the bidding.  In a subsequent 
conversation with a U.S. energy firm, Ambassador was told 
that a partnerships agreement gave the partnership first 
right of refusal in making a bid jointly, but that individual 
partners were free to go ahead and tender a bid if the joint 
partnership declined to do so. 
 
ERDMAN