US embassy cable - 05ALGIERS1918

C O N F I D E N T I A L SECTION 01 OF 03 ALGIERS 001918 
 
SIPDIS 
 
E.O. 12958: DECL: 09/11/2015 
TAGS: ECON, ENRG, EPET, AG, Hydrocarbons 
SUBJECT: DEMARCHE DELIVERED ON RESPONDING TO ENERGY SUPPLY 
DISRUPTIONS 
 
REF: STATE 163206 
 
Classified By: Ambassador Richard W. Erdman, 
for reasons 1.4 (b) and (d) 
 
SUMMARY 
-------- 
 
1.  (C) Ambassador delivered reftel demarche concerning 
post-Katrina energy supply disruptions, as well as longer 
term conservation measures, to Minister of Energy and Mines 
Khelil September 11.  Khelil said the shortage of refining 
capacity was a large contributing factor to current petroleum 
shortages and that refining capacity would be not be 
sufficiently augmented in the near future.  Algeria was 
working to increase its refining capacity, but the bigger 
problem globally was that producers did not want to invest in 
new production because the rate of return was low, the risks 
were high, and they would not be able to refine the 
additional product.  Investments in exploration for new 
reserves have been slow to follow price hikes because 
suppliers have been thinking price spikes were temporary. 
Only now are they concluding significantly higher prices, 
compared to those of recent years, are here to stay.  Algeria 
expected to produce 1.4 million barrels of oil in 2005 and 
1.5 million in 2006.  Natural gas production exceeded 
targets. 
 
2.  (C) The new hydrocarbon law was having a positive effect, 
but the new independent regulatory agency was only now being 
set up and it would take about five years before new fields 
were explored under the new law's parameters.  Finally, 
Khelil noted Algerian dissatisfaction with the bidding 
process for new projects in Libya, which Khelil termed not 
credible and subject to corruption.  (End Summary.) 
 
3.  (C) Ambassador, accompanied by PolEc Chief, delivered 
reftel demarche September 11 on responding to energy supply 
disruptions in the aftermath of Hurricane Katrina to Minister 
of Energy and Mines Khelil.  Leaving behind a non-paper, 
Ambassador stressed the short-term actions the United States 
has taken to shore up supply and the long-term actions taken 
to promote energy conservation.  In response, Khelil said 
Katrina was a temporary problem that affected production 
facilities in the Gulf of Mexico and on shore.  The 
facilities would eventually come back on line.  The release 
of oil from U.S. strategic reserves and the additional 
provision of petroleum by the International Energy Agency 
(IAE) were "good calming influences" on the markets.  That is 
the reason reserves were set aside. 
 
SHORTAGE OF REFINING CAPACITY 
----------------------------- 
 
4.  (C) The lack of maintenance on refineries was a large 
contributing factor to the current shortage, said Khelil.  To 
keep pace with demand, refiners were postponing needed 
maintenance, leading to breakdowns.  The problem would likely 
be exacerbated as refineries began to produce relatively more 
fuel oil, and relatively less gasoline, for the winter 
months.  The postponement of maintenance in order to keep 
pace with demand for petroleum products was a problem three 
months before Katrina struck.  There would be a continued 
shortage of refining capacity for the foreseeable future, 
predicted Khelil. 
 
5.  (C) According to Khelil, Algeria was working to increase 
its refining capacity.  Construction of a new refinery at 
Adrar was almost finished; construction had just begun on a 
second at Skikda; and construction of a third refinery at 
Tiaret was planned.  The first two refineries would turn out 
100,000 barrels of oil per day, while the third would turn 
out three times that amount.  The issue was not one of 
production but rather one of refining capacity.  The 
constraints on refining erected a bottleneck in the 
distribution system.  Either refining capacity needed to be 
increased or global demand reduced to prevent continue 
increases in petroleum prices.  The latter was unlikely with 
economic growth in China, at 9.5 percent, stronger than had 
been predicted a year ago.  Despite Katrina, added Khelil, 
the U.S. economy was still strong.  Demand, therefore, would 
be maintained. 
 
PRODUCERS UNWILLING TO INVEST IN EXPANDING PRODUCTION 
--------------------------------------------- -------- 
 
6.  (C) Ambassador asked for Khelil's views on pricing in 
such a climate.  Khelil said refining constraints established 
the price, and breakdowns in equipment led to price spikes 
The current future market price of crude oil was $65 for 
delivery in March 2006.  The dilemma was that the cycle 
formed a vicious circle.  Producers did not want to invest in 
new production because they would not be able to refine the 
additional product.  At the same time, they did not want to 
invest in refining capacity because the rate of return in 
that sector was low.  Of course, the lack of refining 
capacity led to still higher prices for consumers. 
7.  (C) Investments in exploration for new reserves have been 
slow to follow price hikes, explained Khelil, because 
suppliers thought spikes were only temporary.  Five years 
ago, no one thought high oil prices were sustainable. 
Ambassador asked if the mind-set had changed.  Khelil thought 
companies were purchasing their shares of stock rather than 
investing in expanding production.  There was much rhetoric 
about increasing OPEC production, but with existing 
technologies there was cause for additional investments in 
production. 
 
ALGERIA A YEAR BEHIND OIL PRODUCTION TARGET, AHEAD IN GAS 
--------------------------------------------- ------------ 
 
8.  (C) Ambassador asked the Minister if Algeria was on 
target for its own production goals.  Khelil said Algeria was 
producing 1.4 million barrels of oil this year and was on 
track to produce 1.5 million barrels in 2006.  Algeria was 
one year behind in attaining its oil target.  In natural gas, 
however, Algeria had exceeded its targets in production 
capacity.  A new underwater pipeline to Spain was expected to 
be usable in 2008.  The Tunisians were looking to expand the 
capacity of the pipeline to Italy, and the Government of 
Tunisia had given its okay to approve shipping contracts to 
Italian companies.  Construction contracts had been finalized 
for a pipeline from Tunisia to the Italian mainland via 
Sardinia.  Italy imported about 25 percent of its natural gas 
from Algeria. 
 
IMPLEMENTATION OF RECENTLY PASSED HYDROCARBON LAW 
--------------------------------------------- ---- 
 
9.  (C) Ambassador asked Khelil if the implementation of the 
new hydrocarbon law had affected Algerian behavior.  Khelil 
said the state-owned energy company, Sonatrach, had already 
made adjustments in the way it did business.  It had, for 
example, identified what clearances were needed for new 
pipeline routes.  Obtaining the clearances caused the 
Government to delay publishing the law until the pipeline 
routes were established, but the new procedures in the long 
run would increase efficiency and government revenues. 
President Bouteflika had been asked to approve the 
establishment of five regulatory agencies:  two for mining, 
two for hydrocarbons, and one for electricity/gas.  It would 
take 3-4 years to make the system work efficiently and 4-5 
years before new fields were explored under the parameters of 
the new law. 
 
10.  (C) Asked by Ambassador for additional impacts on 
Sonatrach, Khelil explained that the state-owned firm would 
need from now on to sign a contract for each field just like 
any other company.  It would be held accountable for costs 
and profits from each field rather than from total 
production.  Sonatrach would no longer be able to cover 
losses in some fields from profits in others.  This would 
increase both efficiency and tax revenues.  Asked if recent 
suspensions of Sonatrach personnel for alleged corrupt 
activities had a positive impact, Khelil said the suspensions 
were not the first of their kind.  Since the Government was 
suing companies found not to have followed established 
procedures and such matters were before the courts, Khelil 
declined to provide additional information. 
 
U.S. HUMANITARIAN PROJECT IN OUARGLA GOOD FOR ALL 
--------------------------------------------- ---- 
 
11.  (C) Ambassador briefed Khelil on a project approved by 
U.S. authorities (note: EUCOM) for which the Embassy was 
waiting for $500,000 in USG funding that we hoped to leverage 
with private sector money for humanitarian purposes.  The 
project, explained Ambassador, had the support of the wali of 
Ouargla and called for the construction of a community center 
that would increase the skills of area workers and help to 
alleviate unemployment.  Microsoft would train instructors 
for the unemployed; Anadarko would furnish equipment and 
contribute toward the start-up costs; and Nabors Drilling 
would contribute to covering the personnel costs.  The goal, 
explained Ambassador, was to increase the pool of employable 
people by teaching English and computer skills.  This would 
benefit the people and the oil companies, which needed 
speakers of French and English.  We envisioned the 
establishment of a fitness center, library, and Internet 
center. 
 
12.  (C) Khelil praised the idea and noted that the GOA was 
focusing on educating girls in the south of the country.  The 
emphasis was on educating girls, explained Khelil, because 
they were disadvantaged compared to boys.  Ambassador 
commented that he had been struck that the best workers were 
often women but that, for cultural reasons, it was hard to 
reward the added productivity of female workers with higher 
salaries.  Khelil agreed that rewarding efficiency was a big 
problem in the Algerian economy, which continued to have an 
egalitarian cultural outlook.  This was true in Sonatrach, 
where a new system was being implemented to reward group 
performance.  Each work group competed with others and was 
rewarded as a group based on performance.  This added a 
powerful incentive to team leaders, not to mention the 
workers themselves. 
 
COMPLAINTS ABOUT HYDROCARBON PROJECTS IN LIBYA 
--------------------------------------------- - 
 
13.  (C) Asked by Ambassador about doing business with Libya, 
Khelil complained that the bidding process for projects in 
Libya was not credible.  Occidental recently won 9 blocks 
with one partner; Algeria one block; and none for the 
Europeans.  Khelil made clear he was not criticizing U.S. 
companies but rather the lack of credibility in the Libyan 
bidding process.  The rules were not equally applied. 
Sonatrach, for example, was forbidden from bidding in 
conjunction with a foreign partner because, the Libyans had 
explained, Algeria was an Arab country and could not bid with 
"foreigners."  Paying off key people was sufficient to have a 
block rewarded.  Sonatrach did not play that game, stressed 
Khelil.  Nor by U.S. law could U.S. firms, added Ambassador. 
 
14.  (C) Ambassador inquired about Algerian participation in 
the Libyan natural gas sector.  Khelil said Algeria held an 
11 % stake in new upstream investments, 22% in pipelines.  In 
addition, Algeria was making money from existing operations 
in Libya. 
 
ERDMAN