Algeria's Khelil Opts To Stay The Course

In an interview with PIW in Algiers last week, Oil Minister Chakib Khelil made no apologies for high oil prices, attributing current levels to high fuel taxes and Mideast tensions-not Opec production cuts. In his three years as oil minister, Khelil has focused on boosting foreign investment and raising production capacity. As chairman of Sonatrach, he has worked on restructuring the state oil company into a commercially competitive entity and expanding its activities abroad

Q. Consumer nations are warning that global economic recovery will be jeopardized if Opec does not increase output in June, and that waiting until the fourth quarter might be too late. How do you respond to these claims?

A. Well, they should have told us to reduce Opec output when the price went down to $17 per barrel. We are within the Opec price band of $22-$28. Oil prices have no impact on the eco-nomic recovery. These are just things that people raise when-ever the price goes above $25. So I would say first, when it comes to the economic recovery, we're not talking about dou-bling the price, not even about increasing prices. Prices today are half what they were 20 years ago in constant 1973 prices, so nobody can tell me they are higher. Second, taxes on petroleum products are 80% [in Europe], so the best way to reduce prices is to reduce taxes on products. Why don't these countries reduce the taxes from 80% to 60% as soon as the price goes up to $30? This would not hurt them because they would still get the same revenues.

Q. But some of the tax proponents in consuming nations argue that the third quarter is the beginning of the driving season, especially in the US, and is the lead-in to winter.

A. This has nothing to do with us in Opec. As tong as the supply and demand are in balance, there's no reason to add more barrels to the market. I would suggest a solution to those who are com-plaining: Reduce the tension in the Middle East, then you'll gain $4 and that will have tremendous impact on inflation and eco-nomic growth. That's easier to do.

Q. Would you consider a pre-emptive step in June?

A. No, we'll preempt if we were talking about $28/bbl, but we're not there yet. The moment the price exceeds $28/bbl for 20 days, we'll raise production.

Q. So, unless the situation changes in June, you support maintaining the same quotas, at least through the third quarter?

A. We can't predict what the situation will be by the end of June. We would analyze the situation then, based on market fundamentals.

Q. Where do you put Algeria's capacity today?

A. Our capacity today is 1.1 million barrels per day and that includes both our fields and those operated in association with foreign companies. We are increasing this capacity by 75,000 b/d every quarter this year. The second quarter has not been added yet. Our aim is to bring our capacity to 1.5 million b/d by 2005.

Q. How can you convince foreign companies to invest in projects to increase capacity while the Opec quotas are restricting their production?

A. First, we don't hide it that we're members of Opec and people who want to work in Algeria have to abide by the rules. Second, the cuts are done pro rata and as far as I'm concerned Sonatrach is the biggest producer in Algeria. Until now we have 25% of our production coming from association contracts and 75% from Sonatrach. Sonatrach still controls 90% of the production. My question to the companies is: Where would oil prices be if we did not act within Opec? They can make their calculations, and they know that they are making money with us.

Q. In Algeria's last bidding rounds, most companies were interested in the Berkine Basin but not the frontier areas where they said they need better terms to go. Are you willing to offer them those terms now?

A. In the new hydrocarbon law we're trying to encourage people to go to frontier areas in two ways. First we're applying different royalties with different schemes for different areas and second, we're introducing postage-stamp pipeline tariffs, meaning the tar-iff will vary depending on the shipping distance.

Q. At what stage is the third round of bidding at the moment and how many contracts do you expect to sign?

A. It's in the data room phase. Companies are scheduling visits. We had 33 companies that showed interest directly in addition to a few more who expressed interest during presentations in London and Houston. I expect we'll have about 40 companies bidding in July. Last year I signed 10 contracts which is five times the average over the six years until 2000. This year we think we will sign at least 10 out of 15 on offer - five fields for development and 10 blocks for exploration - or 80% of the fields and 50% of the exploration blocks.

Q. The cabinet has not yet examined the new hydrocarbon law, and the upcoming elections will delay its approval again. Realistically, when do you think it's likely to be adopted?

A. The law was submitted to the secretary general of the govern-ment, and he circulated it among the ministerial departments for comments. The draft was amended in accordance with that. It should then have gone to the cabinet - but it has not because the elections have been called for May 30. It just came up at the wrong time. I expect it to be submitted to the new parliament by September or October. There are no reasons for further delays. I think we will have a new hydrocarbon law in place by fall.

Q. You want to streamline Sonatrach and remove some of its current authority, including the regulatory role it has played as a public sector company. How will Sonatrach's relationship with the government change under the new hydrocarbon law?

A. The hydrocarbon law does not streamline Sonatrach. However, it does separate the role of the state, which is to define policy in the sector and regulate it, from that of the public enterprise, which is to focus on its commercial role. We are ending the confusion between the commercial role of Sonatrach and its role as repre-sentative of the government. That includes awarding contracts, which it does now but won't be able to do in the future. At the same time, Sonatrach will keep many of its privileges, like partici-pation in the discoveries and the option to take a share in a discov-ery even if it did not participate in the exploration. Sonatrach will also be involved in the marketing of gas, in all cases. We are taking away one more thing, which will make it stronger: its responsibility over the pipelines. Right now the law says the only entity in charge of planning, engineering, construc-tion, and operation of pipelines is Sonatrach. By not doing that, Sonatrach will save a huge amount of capital that it can put into high-return operations such as exploration and production.

Q. How do you respond to critics of the new hydrocarbon law who say Sonatrach won't be able to compete with foreign companies?

A. The argument that Sonatrach cannot compete with big oil companies and that it won't be able to win in a bidding process because it won't have the resources is not true. It will have those resources freed from other activities, such as pipelines, and in exploration you don't need $800 million but a few million dol-lars. If you don't want to invest $20 million over four years, you can invest 25% of that in partnership with other oil companies such as BP or Royal Dutch/Shell. And there's no reason BP should be better than Sonatrach in exploration in Algeria. If our national oil company cannot compete with BP in Algeria, then where in the world is it going to compete?

Q. From where will Sonatrach generate its resources?

A. One of the things we will give Sonatrach that it doesn't have at the moment is field contracts. Our oil fields are operated as part of the big black box [that generates funds for the government]. Sonatrach operates those fields, produces them, deducts the cost, and pays royalties from revenues - and that's it. There's no incentive now for Sonatrach to generate profit or be more efficient; the only thing that makes a company more efficient is sharing in the profit. It will also be provided with incentives to reduce costs. In addition, it will have a new [project] financing mechanism. It will also be able to enter into partnerships for specific areas.

Q. But will it be making money for itself or for the state?

A. The new treatment of Sonatrach like any other oil com-pany means that it will generate huge profits because what applies to it in terms of royalties will be what applies to all companies working in Algeria. In terms of specific contracts today, there's no similarity. Foreign oil companies pay 20% royalty and 30% tax. By contrast, Sonatrach is probably pay-ing 80% royalty on existing fields. But if it discovers a new field, it will be paying only 20% royalty and 30% tax. The dividends would still be paid to the government on a con-tract-by-contract basis and the existing arrangement will con-tinue on the old fields. But the new royalty and tax rates will apply on all new oil fields, and will help generate a lot of financial resources for Sonatrach.

Q. Will its stake in the new discoveries be limited to 25% or will it be increased to 50%, as sought by some in the company?

A. In the new system Sonatrach will not get the state's share, although it will still be able to market it. At present, it is manag-ing all the shares, including its own and the state's, but even now its share is 25%. We'll give it exactly the same thing; maybe increase it to 26% or 27% but not 50%.

Q. Is the US market included in your plans to expand your exports of liquefied natural gas (LNG)?

A. We're exporting 62 billion cubic meters per year now and we'll expand that to 85 Bcm per year by 2005. Of this increase, 5 million tons [7 Bcm/yr] will be LNG. The problem with the US market is the access to terminals and from there, the access to markets. The US claims it's a free and open mar-ket, but monopolies are on terminals and access is not guaran-teed. We are working on plans to export from here or from other areas where we are active, like Peru.

Q. What about plans for the 4 million ton/yr terminal at Arzew to supply the US as part of an integrated project?

A. It's still in the plans. We will be putting an integrated gas pro-ject up for bid next week. I cannot tell you whether this will be part of it, or independent of it.

Q. There is competition among gas producers including Qatar and Russia for markets, especially in Europe. How do you manage in this competition?

A. We have competition against gas substitutes rather than competition among producers. If another producer offers a discount, of course he's going to get the contract; but there is no gas-to-gas competition yet. Right now gas pricing is tied to the competitive energy sources - that's what we're competing against in our long-term take-or-pay contracts. If the market is expanding sufficiently at a rate higher than what we can offer, then there's no reason why we should compete.

Q. How do you expect the dispute with the European Union (EU) over the take-or-pay clause and the destination clause in the contracts to end?

A. The EU does not recognize the take-or-pay contract, and we producers are not going to build a plant to sell gas on the spot market. We'd be happy to compete on the market if it was open and competitive. But they don't have the same taxes throughout Europe, and I don't have access to the consumer market, nor am I treated equally in terms of their transport system. Furthermore, they don't have the regulatory agency in place. Until this kind of market exists, [the take-or-pay con-tract] is the agreement we're going to have. The destination clause is necessary because I will not agree to sell gas to a client for a certain price and he sells it in a different market for three times that price - unless we share the benefits. I cannot accept that a client makes a windfall profit without taking any risk. In our discussions with the EU we asked for a profit-sharing clause and they accepted. Now, we're discussing over what period of time it will apply.