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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 
-------- 
 
¶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