Entreprise Nationale Sonatrach

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Entreprise Nationale Sonatrach

10, rue du Sahara
Hydra
Algiers 16.035
Algeria
60 70 00
Fax: 60 70 37

State-Owned Company
Incorporated: 1963 as Société Nationale de Transport et de Commercialisation des Hydrocarbures
Employees: 31,678
Sales: DA132.90 billion (US$10.91 billion)

Entreprise Nationale Sonatrach (Sonatrach) is the Algerian state-owned oil and gas company. It has control—both direct and indirect—over all aspects of the country’s hydrocarbons, and has guided Algeria toward its present status as one of the world’s major suppliers of liquefied natural gas. The importance of the company to the Algerian economy can be seen in the fact that it accounts for over 90% of all Algerian export income, and is thus by far the most important element in the national economy.

The original governmental decree of December 31, 1963, which created the Algerian state oil company gave it the title Société Nationale de Transport et de Commercialisation des Hydrocarbures. This was the origin of the acronym Sonatrach. The role of transportation and marketing was given to the company at the date of its creation, and was extended on September 22, 1966, making the title of the company still longer in an attempt to summarize all its activities: Société Nationale pour la Recherche, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures. In other words, it was a state-owned company with responsibility for all oil activity in Algeria. This responsibility grew during the 1960s and 1970s, with the nationalization of many of the country’s foreign-held oil assets, though the adoption in July 1981 of a rather less cumbersome title—Entreprise Nationale Sonatrach—coincided with a reduction in the company’s direct control over these assets. Sonatrach continues to be responsible for the central features of the Algerian oil and gas industry, but it has effectively spun off certain of its operational areas to a number of subsidiaries, though Sonatrach retains overall coordination for their activities.

The three decades of Sonatrach’s existence divide neatly into three stages of development. The 1960s saw the establishment of the company, with the nationalization of foreign interests and the acquisition of much of the necessary infrastructure,, such as pipelines. The 1970s was a decade of consolidation, with Sonatrach embarking on several joint ventures with foreign partners in an effort to increase its exports of liquefied natural gas (LNG). The 1980s saw the company entering into full bloom, reaping the rewards of its previous labors and becoming one of the world’s major suppliers of LNG.

When the original Sonatrach was established in 1963 by the government of the newly independent Algeria, its role was essentially limited to building a third export pipeline from Hassi Messaoud to the Arzew oil terminal on the Mediterranean. However, the gaining of political independence had thrown up the question of how far the economic ties with France should be maintained, and Sonatrach came to play a central role in the course of these discussions. The result of the protracted negotiations was the Franco-Algerian Oil Agreement of 1965, the two main provisions of which provided for the Algerian state to take effective part in the exploration and exploitation of the country’s hydrocarbons, while also raising the income tax on oil from 50% to 55%, thus effectively gaining for Algeria a substantial increase in revenues from its oil and gas operations. In recognition of the part played by Sonatrach’s representatives in these negotiations, the company’s role was extended by a new decree in September 1966 to cover all aspects of the Algerian oil industry.

Over the next two years Sonatrach turned its attention toward those U.S.-owned companies that had petroleum interests in Algeria. In August 1967 the company took over the Algerian assets of the Esso and Mobil companies and in October 1968 it acquired a 51% participation interest in the Getty Oil Company. Sandwiched between these two events was the nationalization in May 1968 of all foreign interests in the Algerian distribution sector, thus establishing a monopoly for Sonatrach in this field.

One of the effects of these decisions was that Sonatrach’s share in the Algiers refinery, in which Esso and Mobil had originally held 40%, Compagnie Française des Petreles (CFP) 32%, and Shell 24%, rose from 4% in early 1967 to 56% in 1968. The Esso and Mobil interests were taken over in 1967 and the others bought out by 1969. In addition to establishing an infrastructure by nationalizing existing foreign-held assets, Sonatrach also acquired majority stakes in three major oil and gas pipelines between 1963 and 1965. While Algeria’s oil fields became the exclusive preserve of Sonatrach, the company also acquired majority participation interests in foreign companies engaged in businesses allied to its central activities, for example, drilling, construction, geophysics, and pipe-laying.

However, relations with France worsened steadily in the second half of the decade, though France was still buying over half of all Algerian oil output. The tension came to a head in 1971 when, on February 24, the government completely nationalized all natural gas fields and allied installations and took over all rights to the associated gas—natural gas that overlies and contacts crude oil in a reservoir—from producing oil wells. It brought under state control 51% of all the activities of French petroleum companies, namely 51% of the shares, rights, and interests in Algerian oil concessions belonging to these companies. At the same time, it brought its stakes in other foreign companies up to 51%. All pipelines which did not already belong to Sonatrach were also nationalized. The French retaliated by banning all imports from Algeria, although this action did not have the expected effect on the Algerian economy, since rising world energy demand had sufficiently opened markets elsewhere.

The main problem that remained, however, was exploration. Since foreign companies were understandably reluctant to invest in exploration when they might not be allowed to reap the rewards, they stayed away, and Sonatrach had not yet built up a stock of technical expertise in its indigenous work force to do the work itself. The impasse was settled when Sonatrach decided that since the concession agreements had now lapsed a new set of rules would have to be introduced, which would once more encourage foreign companies to put their money and their expertise back into Algerian exploration.

The result was the Fundamental Law on Hydrocarbons, which was promulgated by the Algerian government on April 12, 1971. This law had two main purposes. The first was that it formally abolished the system of concessions, and established that all mining titles, as well as the control of all petroleum reserves that might be discovered in the future in any part of Algeria, were transferred to Sonatrach. The second was that it made provision for foreign companies to enter into service contracts or joint ventures with Sonatrach, provided that 51% of the assets were held by the state company.

The area in which joint ventures were to be particularly encouraged was exploration, and many foreign companies soon entered into such agreements, notably CFP and Elf Aquitaine of France, Amoco and Sun Oil of the United States, Hispanoil of Spain, Petrobras of Brazil, and Deminex of West Germany.

In addition to the requirement that 51% of the share capital be held by Sonatrach, the other conditions under which the joint ventures were signed were fairly straightforward. All gas found was to belong to Sonatrach. If oil was found, 15% of the foreign company’s exploration costs would be refunded, and Sonatrach would become responsible for 51% of future development costs. Foreign partners would be entitled to 49% of the crude output after paying taxes, royalties, and other duties, though their term of exploration was limited to 12 years.

In the 1970s, having established its dominant role in the Algerian oil and gas sector, and having come to terms which were acceptable to its joint venture partners, Sonatrach formulated a guiding policy for its development. It saw its future prosperity lying in the exploitation of its natural gas, and thus set itself the task of developing these resources: this would involve subduing foreign demand for crude oil and persuading its clients to purchase its gas instead, while also requiring a great deal of exploration work to be done in the country. Such thinking was based on the fact that Algeria has the fifth-largest gas reserves in the world, compared to relatively small and shrinking reserves of oil.

The achievement of the second of these aims, increased exploration activity, has continued to elude Sonatrach. For example, of the 447,600 meters drilled in 1977, only 25% was for exploration; the main reason for this was the continuing diversion of resources to the development of the two major Saharan drilling fields, the Hassi Messaoud oil and Hassi R’Mel gas fields.

On the other hand, Sonatrach was managing to agree terms with foreign buyers for its natural gas, and by 1977 several major supply contracts were already in place. The single most important of these was the contract signed in October 1977 with Ente Nazionale Idracarburi (ENI) of Italy, which provided for the export to Italy of some 12 billion cubic meters per year (cm/year) of gas over 25 years through the Trans-Mediterranean pipeline. The cost of the project was estimated at US$2.5 billion, and deliveries through the pipeline—which was to run some 1,770 miles from Hassi R’Mel to Bologna in northern Italy—were expected to commence some four years from the signing of the contract.

Another consideration borne in mind by Sonatrach was that Algerian oil reserves, though scarce, were cheaper and easier to export than gas, and so the Algerian government began a policy in the 1970s of using gas wherever possible in its industrial infrastructure, involving the conversion of factories and hospitals to the use of gas. Two other policies initiated by the government—to bring electricity to every home by the year 2000, and to construct a substantial gas grid to supply these homes with gas—have also fitted in well with Sonatrach’s own aims, since the power stations which supply the Rural Electrification Project are gas-fired. By 1986 it was reported that 83% of Algerian homes had electricity, and 35% gas.

Sonatrach’s declared exploration and production policy was not successful in practice. Sonatrach consolidated its position in refining. By 1980 it controlled the Algiers refinery, and during the 1980s it developed facilities at Hassi Messaoud, Arzew, and Skikda, making full use of foreign technical expertise, mainly Italian and Japanese. By developing refining capacity Sonatrach was able to reduce the amount of crude exported and to increase the value of the country’s trade. By 1984-1985, export revenues from oil and gas provided Algeria with US$13 billion and accounted for 95% of total export earnings.

After 1985, when the shape of the oil and gas markets worldwide altered dramatically, Algeria revised its energy policy in favor of reducing dependence on oil reserves—which, as we have seen, are diminishing—and focusing instead on its natural gas reserves, reckoned to be two-thirds of Algeria’s total energy resources.

Until the mid-1980s Algeria found itself in difficulties with respect to its pricing policies, insisting on maintaining contract prices which were way in excess of current market prices, especially Soviet and Dutch prices. Until late 1987 the government insisted that LNG prices be related to crude oil prices— not products as in most other cases. This worked reasonably well until the price of crude collapsed in early 1986, after which Algeria found itself in dispute with a number of its contract customers. At the same time it saw its revenues falling.

One of the consequences of this was a restructuring of the law governing energy policies at the end of 1986, considerably liberalizing the terms under which foreign companies could participate in exploration projects. The old laws dictated that foreign companies could form joint ventures, but, as we have seen, Sonatrach held the majority stake and furthermore held title to the oil or gas. The foreign companies had “operator only” status. If gas was found it was treated as the result of an unsuccessful search for oil, and Sonatrach took 100% of the field. One of the consequences of this was that companies of the standing of Texaco and Amoco ceased exploration activities in Algeria.

This kind of intransigence was reflected in the way in which Sonatrach negotiated its major contracts. Despite the need for supplies of LPG (liquefied petroleum gas) and LNG by a variety of countries, including Italy, Yugoslavia, and the United States, contracts repeatedly hit problems in the late 1980s as Algeria attempted to maintain its upper hand in a falling market.

This led to what was seen as a fundamental reversal in Algerian export policy. By the end of 1987, a number of changes were becoming apparent. The most interesting was reflected in a contract finally signed with the U.S.-registered Trunkline LNG Company, a subsidiary of Panhandle Eastern Corporation, in which Sonatrach holds a 12% stake, which is understood to have incorporated the most flexible terms seen out of Algeria. In effect there was no contract price: rather, prices were to be determined on the basis of conditions in the end-use markets with the proceeds being split on a predetermined basis between Sonatrach and Trunkline. To a large extent, this deal can be seen as evidence of Sonatrach’s deep concern over its position in the international gas market, its substantial surplus in LNG capacity, and its desire to develop new markets to utilize this spare capacity more fully.

By 1988 there was a widespread belief that Algeria had decided to accept commercial reality after years of sticking to a high price strategy, which had resulted in the loss of markets. Early that year it became apparent that the country was going to be marketing LNG on a worldwide basis and with some intensity. One consequence of this has been the opening of branches in the United States and London, as well as the development of the Tokyo office.

Until the summer of 1988 more than half its LNG capacity of 30.8 billion cubic meters a year was idle as a result of difficulties with export contracts. Since then Sonatrach has dropped its insistence on treating existing customers less favorably than new ones, a practice that caused a long dispute with Boston-based Distrigas, and revived exports to the United States at competitive prices. Sonatrach also re-opened the world’s first commercial LNG trade, between Algeria and the United Kingdom, with spot cargoes—cargoes sold at the going rate, not a forward price. It developed a new and potentially exciting relationship with Japan and redefined its relationship with its largest customer, Gaz de France.

The government appointed a new head of Sonatrach, Sadek Boussena, in summer 1988—appointed minister of energy as well in November 1988—and his influence has been felt in the new methods noted in negotiations. Part of this change of policy has—as always in Arab nations—a political basis. With LNG grossly overpriced, a number of customers—including U.S. utilities and Gaz de France itself—simply paid some US83C per million British thermal units less than they were invoiced, arguing that they would not pay over the accepted market price. The 1988 riots in Algiers underlined the high price the country was paying for the austerity induced by the sharp decline in its foreign income—more than 90% of which derives from its oil and gas income.

Since then, the Algerians have managed to restore a number of crucial relationships in the United States and Europe and seem set on a course of action which will make Sonatrach a crucial element in several nations’ LNG stockpiles. During 1989 Sonatrach exported a record 17.2 billion cubic meters (cm) of gas as LNG, or about 12.3 million tons. Export capacity presently stands at around 25 billion cm, but Sonatrach’s deputy general manager, Mustapha Faid, announced that this is to be substantially expanded during the 1990s, to 33 billion cm by 1992, and to between 60 billion and 80 billion cm by the end of the decade.

By the end of 1990 Algeria had about 3.25 trillion cm of natural gas reserves, placing it among the top seven in the world. As part of this expansion Sonatrach plans to construct a new LNG unit of about five billion cm capacity. Meanwhile, it will also be expanding the country’s liquefied petroleum gas capacity to allow exports of seven million tons annually, up from the present level of about four million tons. In addition, a new, fourth pipeline to mainland Italy via Tunisia and Sicily was being planned, while there was a more tentative plan to build a pipeline through Morocco and across the Strait of Gibraltar to the Iberian Peninsula.

Faid also announced impending contracts with U.S. and French companies to refurbish and expand gas liquefaction plant at the ports of Arzew and Skikda. In February 1990, a cooperation agreement was signed between Sonatrach and Total Compagnie Francaise des Pétroles (formerly CFP) covering upstream and downstream work, while in November 1989 these companies signed two production-sharing contracts for liquid hydrocarbons at the same time as Shell and Sonatrach signed a deal to study cooperation in the natural gas sector. However, the main thrust of Sonatrach’s present expansion plans became apparent in 1991, with Sonatrach running a campaign to attract both producing and consuming companies to participate in joint ventures for the production and separation of around four million tons a year of LPG, which, as we have seen, would double the present production capacity.