Issue 121 • 7 September 2007

Resource nationalism and flawed bidding: why Gassi Touil failed

Sonatrach’s decision to rescind the contract awarded to Spain’s Repsol YPF and Gas Natural (GN) to develop the massive Gassi Touil-Rhourde Nouss QH LNG Integrated Project was taken by many commentators as another expression of the growing world-wide‘resource nationalism’. Hugo Chavez’s Venezuela and Vladimir Putin’s Russia have been the leading exponents of this trend, but the list of ‘nationalist’ actions ever lengthens: the forcing through of the Gaz de France/Suez merger is, after all, intended by President Nicholas Sarkozy to create a French ‘national champion’. Algeria is ostensibly a globalising economy, but President Abdelaziz Bouteflika’s administration too has displayed resource nationalist tendencies, most publicly with the decision in 2006 to revise Energy and Mines Minister Chakib Khelil’s widely praised (by the international industry) revised Hydrocarbons Law of 2005 (AE 105/6).

Analysts were quick to identify Sonatrach’s decision to remove the Spanish group from the troubled Gassi Touil scheme as another reassertion of resource nationalist tendencies. Sonatrach and its political masters have always liked to control things, and taking back a scheme in which the state company held only 20% of the equity shows Algeria has no intention to relinquish its domination. The Financial Times reported that the developer group’s relationship with Algiers began to change in 2006, “as the country increased taxation over foreign companies and signed an agreement of co-operation with Russian gas group Gazprom.” It noted that the revised law gave Sonatrach a 51% stake in new ventures – the minority stake in Gassi Touil stood out. The move came after a trying time in Hispano-Algerian relations, which had arguably reached an all-time high when the Repsol/GN group committed to their E5bn Gassi Touil investment in 2005. Its foreign reserves already bulging from the oil price windfall, a more assertive Algeria has been trying to recoup funds from past projects in believes it gave away too cheaply. As well as the retrospective windfall tax, which will recoup an estimated $7bn, mainly from a handful of companies with old contracts – Anadarko Petroleum Corporation, Eni and Maersk are worst affected, according to Edinburgh-based consultants Wood Mackenzie – Algiers has been battling Madrid to revise longstanding LNG supply contracts with GN. After much rancour, an agreement was finalised in August giving Sonatrach an increase in the price (reportedly 10-12%) and amount of the gas it can sell in Spain; in return, GN was allowed into the Medgaz pipeline consortium.

El Pais said the deal removed “the spectre of a conflict which would have ended in scandalously higher prices for Algerian gas sold in Spain or with tension in supply.” But, the Madrid daily moaned, Jose Luís Rodríguez Zapatero’s government was out-manoeuvred by Khelil over the extent of Sonatrach’s control over the Spanish market: Algeria had “played a stronger hand”. Then on 3 September came the Gassi Touil announcement – another flexing of Algeria’s nationalist muscles surely?

Up to a degree, but Gassi Touil also showed up weaknesses in Algeria’s liberalised system that help to explain why the project failed. The contract was awarded to GN/Repsol after a hotly contested tender. As African Energy has noted before, several competitors cried foul, claiming the Spaniards bid very low knowing they would have to renegotiate afterwards; they subsequently complained that spiralling engineering and other costs had made their original bid untenable. EPC prices have spiralled, but critics argue that even the original bid’s calculations were deemed unacceptable by the main EPC contractors working in Algeria, led by Kellogg Brown & Root and JGC Corporation.

Competitive bidding was introduced by Khelil to help stamp out corruption in deals of all sizes. This has been an admirable step, but for projects like Gassi Touil – and the stalled Tinhrert gas-to-liquids scheme – it has proved too crude an instrument. GN/Repsol played that system and seemed to have won – until the Algerians lost patience.

Many analysts believe the project has now died, although its potential reserves will not be ignored as Algeria continues its dash for gas. Spanish Energy and Industry Minister Joan Clos was “worried and upset” by the move, but said Madrid would have to take into account its “long-term relations” with Algeria. Khelil has shown he can be a genuine Algerian tough guy, far removed from the globalising World Bank official who returned to Algiers with Bouteflika in 1999. Algeria today, one major’s regional business development manager told AE, is “chalk and cheese” compared to only two years ago; IOCs are becoming discouraged despite the country’s reserves potential.

A key test of Algeria’s continued attractiveness will come when IOCs are asked to bid in the seventh licensing round on Khelil’s watch, expected in December (although not certain). This will be the first to be supervised by the regulator Alnaft, with Sonatrach able to compete and anyway have the option of taking up to 51% of any license. Meanwhile, Algiers and its partners will have to rethink the way mega projects are transacted.

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