Point of View: More change in prospect for reorganized Sonatrach

Chakib Khelil, Algeria's minister of energy and mining resources, is managing an overhaul of the state-owned oil and gas company and expecting further change.

Proposed legislation would fulfill a goal only partly achieved by a reorganization of Sonatrach that began last December. The goal, Khelil explains, is "to separate the role of the state from the role of Sona- trach as a commercial enterprise."

The minister, who also serves as Sona- trach's president, acknowledges that until the law is in place, the company's role might confuse outsiders.

"Sonatrach is awarding contracts and at the same time seeks partnerships with those companies to which it awards the contracts," he says. "So there is a conflict of interest which is going to be clarified by the new proposed law."

But he adds: "That is all it does. It does not intend to privatize or to restructure Sonatrach. It helps Sonatrach to become more efficient."

Efficiency of the state oil company is crucial for a country in which exports of oil and natural gas account for 30% of gross domestic product and more than 90% of total exports.

Changes for Sonatrach

The energy minister says the new law will relax some of Sonatrach's current obligations.

For example, the company now builds all pipelines in Algeria. Under the new law, Khelil says, "Sonatrach will be free to do these investments or not."

Relieved of the burden of obligatory investment, the company will be able to concentrate on projects offering higher returns-mainly exploration and development.

The new law will make Sonatrach a competitor for exploration blocks in Algeria, subject to the same conditions as foreign bidders and able-unlike at present-to retain profits from upstream operations.

"Sonatrach basically will have a better financial return than it has right now and will be able to dedicate more capital to more exploration nationally and internationally," Khelil says.

The reorganization of the past year enables Sonatrach to focus on its core business: "to produce and to market petroleum, petroleum products, and other hydrocarbons, including gas, for the highest return possible for Sona- trach and, of course, for its main shareholder, which is the state."

After the reorganization, the company has four vice-presidents in charge of exploration and production, transportation, marketing, and refining and liquefaction. Before the reorganization there were 13 vice-presidents.

Activities such as finance, human resources, environmental protection, planning, legal services, and business development now support the operating units.

Among other changes due for Sonatrach is expansion of international operations.

At present, about 10% of the company's assets are outside of Algeria. Khelil expects the non-Algerian share to increase to 30-40%.

The company has offices in London and The Hague for trading and marketing.

Its main international exploration and production venture is a joint venture in Yemen with Agip Yemen BV involving offshore Block 3, where an exploration program is under way. Sonatrach has other E&P interests in Mali, Niger, and Sudan.

Downstream, Sonatrach is minority partner in a joint venture with Germany's BASF AG, building a propylene plant in Taragon, Spain. And it is part of a consortium laying pipelines to carry production from the Camisea natural gas fields under development in Peru.

Capacity expansion

Algeria's crude oil production capacity recently reached 1.1 million b/d and will climb to 1.5 million b/d soon, Khelil says.

Recent production levels were unofficially reported as 845,000 b/d of crude, 430,000 b/d of lease condensate, and 190,000 b/d of natural gas liquids.

The country's quota as a member of the Organization of Petroleum Exporting Countries is 693,000 b/d of crude. Khelil has requested an increase.

Most of the recent and imminent capacity increases come from two oil fields: Hassi Berkine South, in which Anadarko Petroleum Corp. is Sonatrach's main partner, and Ourhoud, in which Spain's Cepsa is the chief international partner.

"The 1.5 million b/d (capacity target) is not a hope or something we are dreaming of," Khelil says. "It is a reality. It is just a question of completing the surface facilities, so it is not reserves that need to be found."

Sonatrach continues to form production sharing agreements with international operators. It signed 10 contracts last year, a record Khelil hopes to duplicate this year and next.

Gas, LNG projects

The energy minister notes an untraditional offering this year in Algeria's important gas industry.

Covering Gassi Touil gas field 150 km southeast of Algeria's biggest oil field, Hassi Messaoud, it's what Khelil calls an integrated project.

Companies are bidding not just to develop reserves but also to lay a pipeline and expand liquefaction facilities.

Algeria exports about 6.2 bcfd of natural gas through its four LNG plants and two pipelines across the Mediterranean Sea to Europe. With expansion planned for both means of export, Khelil thinks gas exports can reach 8.5 bcfd by 2005.

LNG accounts for about 3.3 bcfd of Algerian gas exports, Khelil says. Most of the gas goes to Europe.

The rest of the exported gas flows through the 667-mile Enrico Mattei pipeline (formerly Trans-Mediterranean) to Italy via Tunisia and the 1,013-mile Pedro Duran Farell pipeline to Spain via Morocco.

Two other gas pipelines crossing the Mediterranean to Europe are in prospect.

One of them would transit Sardinia en route to Italy. Sonatrach entered an agreement last year with Enel SPA of Italy and Wintershall AG of Germany to consider the project.

Khelil says a feasibility study will begin when an agreement is completed with a company in Sardinia.

Feasibility studies have begun on a second gas line to Spain. In that project, Sonatrach is working with a consortium of European companies.

Sonatrach also is working in a joint venture with Nigerian National Petroleum Co. to study a land pipeline to carry gas now flared in Nigeria to Algeria for export to Europe. But it's a long-term project.

"We are not seeing the Nigeria project for tomorrow," Khelil says. "We are seeing it in 10 or 15 years."

OPEC relations

Khelil foresees no major change in OPEC's goal, which in his words is "to help stabilize the oil market and ensure adequate and reasonable cost of supply to the consuming countries."

By that standard, he says, the exporters' group has performed well during the past 3 years.

The main change he expects is increased cooperation between OPEC and non-OPEC countries and companies.

"There will be situations where OPEC is not going to be able to stabilize the market," he explains. "It needs the help of all the producers to do this."

Better information, he adds, would help market stability.

"Information on the world supply and demand situation should be transparent on both the producing side and the consuming side, including information from oil companies, to allow different parties in the oil market to play their role in the stabilization of the market.

"Right now, the volatility in the oil market is due to the lack of information."

With natural gas, Khelil sees opportunity for all suppliers.

"The European market is a huge market," he says. "We see the demand doubling within the next 20-25 years. So there is room for all producers, not only for Russia and Algeria but also for newcomers like Qatar, Egypt, and others."

He expects gas to remain linked to oil for pricing. "It is going to take a long time before we see a competition, if we ever see a competition, between gas and gas."

Suppliers can't produce gas at a loss, he notes, which is why projects such as the Nigeria-Algeria pipeline and long-distance systems such as pipelines from Russia won't materialize quickly.

Khelil calls for "harmonization" of European energy taxation and environmental goals.

"We see, for example, taxation of gas but no taxation of coal," he says. "If coal is dirtier it should be taxed more, but that is not the case."

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