Khelil says Sonatrach seeking major player status

Jan. 2, 2008
Chakib Khelil, Algeria's energy minister and current OPEC president, spoke to OGJ about his plans to position Sonatrach as a major international player.

Uchenna Izundu
International Editor

LONDON, Jan. 2 -- Chakib Khelil, Algeria's energy minister and the current president of the Organization of Petroleum Exporting Countries, spoke to OGJ about his plans to position Sonatrach as a major international player and to restore the credibility of OPEC in a rapidly changing and complex energy environment.

OGJ: When is Algeria's next licensing round?
Chakib Khelil: It will be in January. We will be offering 10-15 blocks. There will be prequalification of companies and only the qualified companies that can deal with the problems in those blocks will be selected. Those companies that can do swaps of assets elsewhere and they are willing to discuss the partnership of Sonatrach in projects other than Algeria will be selected. I can't say where the blocks will be in Algeria.

Sonatrach and the state will propose areas. Some are controlled by Sonatrach and there are areas which are not. There will be two types of blocks that will be offered but the same process will be applied to both. In terms of qualifications, we will wait until the bids will be announced and the companies will be informed of where those blocks will be.

OGJ: It would seem that Algeria is demanding a lot more from companies that are coming to invest.
Khelil: Algeria doesn't need money; Sonatrach has money, the know-how, and the technology. We need companies at first to increase the effort in particular areas and we don't have the level of resources to do all these things at the same time. We need also technology and so that's what we are going to be looking for. We want Sonatrach to become a more important international player. We're going to use this opportunity to achieve that objective also.

OGJ: What is the position now with Gassi Touil? Is Sonatrach saying it doesn't want any international partners, or are they going to hold another bidding round?
Khelil: Sonatrach has taken over. It will not offer another bidding round with Gassi Touil. Our interest was to accelerate the development and since that didn't happen we have decided to do it on our own. It poses too many problems to try and find a partner and start from scratch. The easy way to do it on time is to do it on our own.

OGJ: And when do you expect production to start from Gassi Touil?
Khelil: That will be in 2012 and we will have 4 million tonnes of LNG. We are building another LNG plant in Skikda and the contract was awarded to KBR so that will also be ready in 2011. That one is 4.5 million tonnes. In terms of exports, we are also building Medgaz which will add 8 billion cu m in 2009.

OGJ: What is the status of the price dispute with Medgaz?
Khelil: There is no price dispute. Price disputes deal with the gas that is signed through the Hassi R'Mel gas pipeline in Morocco. When we were dealing with Medgaz, which goes from Algeria to Spain, the Spanish authorities took certain decisions and went back on them. And we have arbitration on Gassi Touil with Repsol and Gas Natural.

There are two contracts with Morocco and Gas Natural. We have the right to increase the price. The contract was signed in 1995 and now we are in 2008; at that time oil was $15/bbl, now it's $90/bbl. So, definitely there has to be an increase in price.

The third issue is that Sonatrach cancelled the contract with Gas Natural and Repsol. We are under arbitration because we are seeking reparation for the fact that they didn't comply with the contract's terms. Gassi Touil was supposed to come onstream in 2009 and they came out saying it will come onstream in 2012. That's 3 years' delay and that's not complying with the contract. That's why it was cancelled.

OGJ: How does Algeria regard the restructuring of the European gas sector?
Khelil: We are always in favor because we have restructured our gas and oil sector. We probably have the most open gas sector; we have distribution companies and transportation companies and, of course, producing companies. We have regulatory authorities, so we are maybe better than some of the European countries in terms of reforms.

Now, in Europe, the problem is that every country has a different view on what they mean by a liberalized sector. The view of the European Commission is that the gas sector should be run by independent companies that don't have a conflict of interest in marketing the gas. But that's not the view necessarily of some European countries; they feel that their companies should have a major role in controlling some of those pipelines. So, in that respect it doesn't affect us because we're not interested in gas pipelines and trunk lines in Europe.

Second, we are going to be selling gas—whether it's an independent company or an operator, the only impact is going to be the consumer. So, if it's an independent, probably the consumer would enjoy the benefits of competition. If it's someone with a monopoly, then of course there is a price to pay by the consumer.

The other thing is the issue of reciprocity which is mentioned by the European Commission's directive. It doesn't affect Algeria; we are open and companies are operating there. In the upstream and in petrochemicals we do bidding, so it's open. We would like reciprocity ourselves: we did not have reciprocity with Medgaz. We were curtailed and of course we protested. [Spain's national energy commission], the CNE, decided that we could only distribute 1 billion cu m out of 3 billion cu m, so the question was, 'What do I do with the 2 billion cu m?' At the same time they made a decision to interfere with the Medgaz company and all of that was really very bad. It left a really bad feeling for producing countries that play the game and make investments.

We talk about security of demand; you hear about security of supply, but our concern is security of demand. The first problem we had was trying to export gas to the US in 1970 and we had a long-term contract and suddenly from one day to another, after doing huge investments, the market wasn't there. We had to renegotiate the whole thing and find other uses for our gas.

OGJ: How do you see cooperation with Gazprom evolving?
Khelil: It's not developing: we don't have any cooperation. We signed a [memorandum of understanding] with them; we signed one with Shell and Statoil. We are not in any discussions with them [Gazprom] at all about projects.

OGJ: How is Sonatrach's international investment program going?
Khelil: Over the long term we are planning to have at least 30% of our production coming from outside by 2015. Part of it is the Algerian licensing round and we are being aggressive ourselves by bidding in other countries as well. Whenever we offer blocks in Algeria we'd like to use this to leverage our participation outside because most of these companies have that.

OGJ: There has been a lot of criticism of Algeria on resource nationalism. What is your response to that?
Khelil: Resource nationalism is not particular to Algeria. It's also with the US: there was the Unocal affair, which was not an Algerian affair. Spain not letting a German company take over a Spanish one is not Algerian. French companies not letting non-French companies take over their companies is not Algerian. I don't see what they call resource nationalism.

We imposed tax on exceptional profits which is not considered to be resource nationalism. It just takes into account that when the contracts were signed in the 80's the oil price was at $15/bbl, now the oil price is at $90/bbl. Some of these contracts didn't include the mechanism by which the state would receive a fair share when the oil price would go that high. The state of Algeria has taken the decision that it would get a fair share and that is not specific to Algeria. Even Alberta has put tax on royalties and the US has put on taxes on offshore assets in the Gulf of Mexico.

It's just a matter of tremendous changes in the market and to avoid upheavals. Our demands are based on logic: if you sign a contract based on $15/bbl you expect a certain return. But if you get $90/bbl you are getting more than what you expected. In any case it is the same company that is making very good returns. They have a choice not to come to Algeria: we are not forcing them. They are free to go to Libya and to any other country that offers them better conditions.

OGJ: But Gassi Touil has been given as an example where Algeria has seized back a project that was meant to have international partners.
Khelil: That's not the issue. It doesn't have anything to do with resource nationalism. If the companies had met their contract commitments I don't think that anything would have happened. They wanted to renegotiate, but we are in arbitration and that will determine if we did the right or the wrong thing. We are asking for reparations because we lost a lot in this process. This project was done by bidding: it was not negotiated. You can't go back to the second bidder; it's too late.

OGJ: Can you tell me how much you're seeking and how much you've lost?
Khelil: I can't tell you. That's part of the arbitration. The minister of Spain's foreign affairs said that this is a commercial issue. It's not about politics.

OGJ: Can Sonatrach still make money in refining when oil is being sold at $90/bbl?
Khelil: Sonatrach is an integrated company and it has to look at it long term. We are going to build a new refinery. We have finished a small refinery of 16,000 b/d in the south with the Chinese and they have 70%. It started operations earlier this year. We are finishing a 100,000 b/d condensate refinery in Skikda built by the Chinese also which will be finished next year. We are building a new 300,000 b/d refinery south of Algiers and that is still under bidding for the EPC. It will probably be ready by 2013.

OGJ: Have you started discussions with Brazil about joining OPEC?
Khelil: No, we haven't and their president said that they might become members of OPEC. I don't know whether it's true or not, but it's been reported by the press. Apparently Petroleo Brasileiro SA (Petrobras) has discovered large reserves and by the time they are able to develop those reserves and by the time they can increase production to the level of being exporters, instead of net importers, that will be at least 4 or 5 years. What I'm saying is that we will welcome any country for that and we have Sudan as one observer status and Equatorial Guinea as another as it's a net oil exporter.

OGJ: What kind of initiatives do you want to implement to turn around the credibility of OPEC?
Khelil: Credibility is what we did in 2001 when I was president: whatever we say, we do and not to say something and do something else. We want to have credibility with the consuming countries and I think the other thing we mentioned was to improve the dialogue with consuming nations, the International Energy Agency, with whom we have good relations. We are working on an information databank to make all the data about the oil market transparent.

But we need to work more on the financial markets because financial markets as you know have a tremendous impact on the oil markets through the speculation of operators. We need to understand and the cooperation of this mechanism which impacts the oil market. We need to work with the consuming nations to see how the financial markets could be improved, either through regulations or more transparency of various operations so as to have less impact on the oil market. As you know speculation has tremendous impact on the market.

OGJ: Do you have an oil price forecast?
Khelil: No, but all I can say is that oil prices will remain at this level. It will maybe strengthen in the first quarter of 2008 because some people say there will be some bad weather. But in the second quarter I think there will be some relaxation on the oil price because of lower demand.

Contact Uchenna Izundu at [email protected].