Scandal envelops Sonatrach

27 January 2010

Management turmoil at Algeria’s state oil company could derail delicate negotiations on petrochemicals projects and delay the award of key refinery contracts

In the days following the suspension of almost the entire senior management team of Sonatrach in mid January, pending a judicial inquiry into alleged corruption, Algeria’s Energy Minister Chakib Khelil was quick to insist it will be business as usual at the country’s national energy company.

“Algeria’s hydrocarbons production and oil and gas export revenues will not be affected,” said Khelil at a press conference on 17 January. “There are 1,700 executives capable of managing the 170 projects in progress, some of which are worth more than $1bn.”

While it may be true that the company’s bloated workforce may be able to sustain the projects currently under way, the scandal has dealt another serious blow to Algeria’s faltering attempts to develop its downstream oil and gas industry.

Two of the company’s four vice-presidents are in prison, while its president, Mohamed Meziane, has been placed under judicial supervision, along with another vice-president and four directors with key positions in the company.

The executives have not been replaced, says Khelil, but cover has been brought in pending the resolution of the legal process. The head of downstream, Abdelhafid Feghouli, will take over Meziane’s responsibilities in the interim.

Corporate inertia

Few companies could expect to be unaffected by such a dramatic overhaul, least of all one that is renowned for a culture of prevarication and a reliance on senior management figures to take key decisions.

“The authority to make decisions is very tightly held,” says a senior executive at one international energy company with years of experience in the Algerian market.

A number of major oil and gas infrastructure projects are at a delicate stage of negotiations, and even before the scandal broke industry sources were raising doubts over their future. At the top of the list of major projects on which work is yet to get under way are a 1.4-million tonnes-a-year (t/y) ethane cracker, a 1-million-t/y methanol plant and a new 300,000-barrel-a-day (b/d) refinery.

In 2007, Algeria signed draft agreements with French oil major Total to build the ethane cracker, and with Algerian Methanol Company (Almet), an international consortium led by Japan’s Mitsui & Company, for the methanol plant. But there has been scant progress since those agreements were signed. In the absence of any news to the contrary, many in the industry now believe the estimated $1bn methanol plant has been shelved, although one source close to the project told MEED in early January that a deal is still under negotiation.

“A draft agreement for the methanol project was sent to the Conseil National de l’Investissement [National Investment Council] in late 2009,” says the source. “If it approves it, then the project can go ahead.”

“We do not know if the new regulation is affecting us and in what way, so we are awaiting clarification”

Spokesman for Total downstream division

However, it is unclear when any approval might be forthcoming as the next meeting of the council, which convenes on an ad hoc basis, has yet to be scheduled.

The ethane cracker, worth an estimated $4bn, is a more complex project. According to sources close to the deal, the talks between Sonatrach and Total faced serious obstacles from the start, with uncertainty over the availability of gas feedstock, the cost of ethane extraction, the foreign exchange risk for Total associated with the government’s insistence on financing the project in Algerian dinars, and the capacity of the local banking system to finance the deal.

Further barriers have emerged from the political sphere. In July 2008, President -Bouteflika announced new investment rules stipulating that foreign companies could take a maximum stake of 49 per cent in any local -venture, which was at odds with the draft agreements Total had signed which gave it 51 per cent.

One year later, in the 2009 supplementary budget, a new measure was introduced which obliged foreign companies to locally reinvest any savings arising from local tax breaks within four years. In Total’s case, this could amount to $1.8bn, according to a source close to the project.

Conflicting reports

Such was the weight of these problems that, by the beginning of 2010, there was increasing speculation among industry sources that talks had been broken off, and that the project was on the verge of being shelved.

Total denies reports that negotiations have been frozen.

“We are still in contact with Sonatrach,” a spokesman for the company’s downstream division told MEED in early January. “There are still some questions to be clarified, especially some that have to be answered by the National Investment Council. We hope these answers will come sooner rather than later, so we can continue [with the project].”

In persisting with negotiations for more than two years, Total has demonstrated its resolve to conclude a deal, but key issues are still outstanding. The company spokesman declined to comment on the status of negotiations over gas supply or financing structure, but admitted the issue of the project company’s shareholding remains unresolved.

“We do not know whether [the new regulation capping it at 49 per cent] is affecting us and in what way, so we are waiting for clarification,” says the spokesman, admitting that talks could continue for several months.

Others say the decision has already been made. “Algiers has told them they have to reduce their stake,” says a source close to the project.

Total’s options for reducing its stake include allowing Sonatrach an increased share in return for financial compensation, or the sale of a minority stake to another international developer or a state-owned local bank, says the source.

It is also likely that a deal can be struck on the financial aspects of the project. “What keeps these foreign companies negotiating is one figure and that is the internal rate of return,” says the project source. “Given the cheap gas here in Algeria, even if the construction costs are expensive they will still make a profit. Sonatrach claims Total can make a return of 25-30 per cent.”

Solo development

The shortage of gas in the country, however, could still be a problem, with a recent slowdown in incremental gas production coinciding with a rapid increase in domestic demand.

“People at the state electricity regulator say they expect Sonatrach to tell them that some downstream projects will at least be delayed,” says Hakim Darbouche, a specialist in Algeria’s energy market at the Oxford Institute for Energy Studies in the UK.

“Algeria is doing all it can to delay its petrochemicals projects,” says the project source.

For all the delays, the methanol and ethane cracking projects are still the most advanced of seven projects proposed by Algiers in 2005 in a petrochemicals programme that at the time was expected to be worth about $15bn.

Plans for a linear alkyl benzene complex and an integrated purified terephthalic acid and polyethylene terephthalic facility were scrapped in 2006 due to a lack of interest from the market, while three other schemes were put on hold after feasibility studies by a UK team of HSBC and Jacobs -Consultancy established that the ethane cracker and methanol plant were more viable.

According to a source in Algeria, Sonatrach has now decided to develop one of the three remaining projects – a fuel oil cracker at Skikda – without a foreign partner, while the other two – a naphtha cracker and an integrated propane dehydrogenation and polypropylene production plant – are still on hold while the state company assesses development options. Even so, little progress can be expected with any of these schemes while negotiations on the other projects are ongoing.

Algeria is doing all it can to delayits petrochemicals projects”

Ethane cracker project source

Alongside the gas-based petrochemicals plans tabled in 2005, Algiers also proposed a 300,000 b/d grassroots oil refinery at Tiaret. The viability of the project has long been questioned due to its inland location and a lack of natural water supply. “It is a project that does not make a great deal of commercial sense,” says Alan Gelder, downstream expert at thess UK consultant Wood Mackenzie.

“They were talking about it being an export refinery, but it is 200 to 300 kilometres from the coast. The project is founded on social/industrial policy rather than a strictly commercial business decision.”

Others agree. “It was a surprise to many that it got as far as it did,” says a source close to the market.

Despite the doubts, the project took a major step forward in October 2009 when four companies were shortlisted for the main front-end engineering and design (Feed) contract on the estimated $6bn refinery. But, even before the recent scandal, the bidding process was making slow progress. In early January, sources at companies bidding for the contract told MEED technical clarifications were being made, but that they had no details of the deadline for commercial bids beyond a vague expectation that they would be submitted by early in the second quarter.

“It needs to be awarded fairly quickly if they are going to keep to schedule,” says a source at one contracting company active in the country. “There is a lot of political pressure for it to go ahead, so I expect it to do so.”

Increasing scrutiny

An upgrade to an existing refinery, a 58,000‑b/d facility in Algiers, is also at a -critical stage in the bidding process. Eight -companies have been shortlisted for the Feed contract on the plant, but are similarly in the dark as to when commercial bids are expected.

“There will possibly be an award in the second quarter of the year, but there is no specific news,” says a source at one of the bidders.

The increased scrutiny of contract awards that will inevitably result from the Sonatrach corruption scandal may entail yet further delays to the two refining projects, but there is still hope that their relatively advanced progress will give them sufficient momentum to survive the turmoil in the company’s upper management. The prospects for the imminent resolution of the already delicate negotiations for the methanol and ethane cracker projects, however, can only have receded.

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