Feb 11 2010

Algeria: Sonatrach may emerge stronger from scandal

Event: Energy Minister Chakib Khelil on February 8 accused the media of amplifying the significance of allegations against state-owned hydrocarbons company, Sonatrach .

Significance: Sonatrach was dealt a major blow last month when it was announced that its most senior management was being investigated over corruption allegations. Aside from the company's reputation, these developments could affect important business decisions and Algeria's attractiveness as an investment destination.

Analysis: Sonatrach accounts for 97% of the country's total exports, and is an important supplier of energy to Europe. On January 13, 15 of its senior officials, including Chief Executive Mohammed Meziane and three of the company's four vice-presidents (in charge of upstream, pipeline and marketing operations), were placed under 'judicial control' and in some cases remanded into custody by a court in Algiers. Downstream Vice-President Abdelhafid Feghouli has been appointed interim chief executive and other replacements have also been made.

Charges. The prosecutor's main allegations relate to irregularities in the award of consulting and procurement contracts through non-competitive, directly negotiated tenders. Media reports suggest that the deals in question involve international companies in which two of Meziane's sons have a direct commercial interest, although this has not yet been proved. Although the earlier part of the 2000s saw Sonatrach abandon its traditional tendering procedures of closed negotiations between the licence-holder and contractor in favour of standard competitive bidding, its continued ability to award negotiated contracts in exceptional cases has invariably been seen as a systemic loophole open to abuse.

Timing. This is the first time in 30 years that Sonatrach has faced a corruption scandal of this magnitude. A number of clues point towards three possible reasons why these particular allegations have been launched despite an opaque political system which creates the impression that other wrongdoing can take place and why the investigation is happening now:

Anti-corruption campaign. Some see this investigation as the implementation of President Abdelaziz Bouteflika's 2009 election pledge to deal with corruption and leave a legacy of genuine reform. The arrests in the first half of 2009 of a number of civil servants and public company executives outside the energy sector seem to lend credence to this explanation.

However, the recent Sonatrach arrests have targeted officials closely identified with Bouteflika and strongly linked to his trusted energy minister, Chakib Khelil. Since taking charge of the Energy and Mines Ministry in 2000, Khelil has been the architect and driver of policy, while Meziane and his team have worked on delivery. Thus, if anything, the fallout of this scandal could have a damaging effect first and foremost on Bouteflika's immediate circle.

Factional politics. A more widespread view sees in this case signs of a power struggle between Algeria's powerful military and Bouteflika's government. The fact that it is the Department of Intelligence and Security -- attached to the Ministry of Defence -- that is leading the investigations is widely believed to indicate that the real target of this campaign is Khelil and, indirectly, Bouteflika himself. This would be an early indicator of the looming succession battle that rival factions within the regime are preparing for. While a November 2008 constitutional amendment allows Bouteflika to stand for an indefinite number of terms, he still faces an election in 2014, and besides, is now 72.

Khelil's reaction to the eruption of the scandal seems to reinforce this perspective. He denied any knowledge of the details of the investigation beyond what has been reported in the Algerian press. He also insisted that the accused are innocent until proven guilty and that he would not resign over the affair. However, many believe that the recent developments have thrown Khelil's position into question.

An important pointer will be the eventual composition of Sonatrach 's new permanent management. They may be chosen by Khelil and focused on delivering his writ, or may include Sonatrach managers sidelined by Khelil early in his tenure. Khelil himself could be removed, or remain a figurehead but stripped of the absolute authority he has hitherto enjoyed.

Policy change. A perhaps more compelling argument is related to the fact that many in the industry consider Khelil's management of Algeria's energy policy to have caused more harm than good to the hydrocarbons sector in general and to Sonatrach in particular. After his failed attempt to liberalise the sector through the 2005 Hydrocarbon Law, he failed to propose a 'plan B' and seemed content with the resulting awkward investment framework. Not only did this flawed reform process generate penalising discrepancies between the upstream and downstream segments of the industry, but it also caused deeper rifts within the national oil and gas company.

In the absence of public space for open policy debate, opponents of Khelil's policies may have felt that only a change of personnel at the helm of Sonatrach and possibly the Energy Ministry would permit a positive policy turn to take place. Those alienated by his unsuccessful reform efforts may therefore have pressed for a judicial investigation, hoping that a change could allow Sonatrach to move forward.

Potential implications. Khelil has been keen to maintain a front of normality, saying that the probe will have no impact on Algeria's hydrocarbon output and that "120 projects, some of which are worth billions of dollars, remain underway". However, the impact on important projects that have yet to be sanctioned is not yet clear.

Lower-level business is reportedly proceeding normally as technical contractual decisions, which are largely independent of political direction, are going ahead. Sonatrach , which holds an automatic 51% share in all new energy projects, is known for being bureaucratic, inefficient and under-resourced. Although a number of upstream gas development projects, which are crucial for Algeria's domestic and export requirements, have recently been awarded, the ability of Sonatrach to satisfy its commitments in a timely fashion is likely to be hampered further by this case.

The allegations come amid a series of setbacks for Sonatrach , including subdued results in the last two upstream bidding rounds in 2008 and 2009. Recent events may have a further knockdown effect on the confidence of the company's employees and on foreign investment interest. Beyond Sonatrach and the energy sector, this corruption affair will send the wrong signals about Algeria as a destination for foreign investment and reinforce the view that the recent 'nationalist' economic decisions reflect broader political trends within the country.

Conclusion: Meziane, who was already due to retire as chief executive of Sonatrach , is unlikely to return to his post regardless of the outcome of the investigation. Khelil will emerge weaker as energy minister, if he survives at all. In the short term, Sonatrach 's reputation will suffer, but it has the potential to come out of the affair in stronger shape. Hydrocarbons are vital for Algeria's economic and political future, and decision-makers are keen to safeguard this sector and preserve Sonatrach 's role as a major, reliable energy supplier to Europe.

© Oxford Analytica 2010

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