Algeria’s Sonatrach scandal is a test case for new president

The Algerian people have been robbed blind and, if the country’s new leaders do not come clean on this shadowy affair, then their political credibility will be severely damaged.
Sunday 02/02/2020
The logo of the state energy company Sonatrach is pictured at the headquarters in Algiers, Algeria November 20, 2019. (Reuters)
The logo of the state energy company Sonatrach is pictured at the headquarters in Algiers, Algeria November 20, 2019. (Reuters)

Many voices are being raised in Algeria calling for light to be shed by the new Minister of Energy Kamel Eddine Chikhli on the Augusta affair. The issue could be a test case for the credibility of Algeria’s new government and that of President Abdelmadjid Tebboune.

On December 1, 2018, the CEO of Algeria’s state oil company, Sonatrach, finalised a deal worth an estimated $725 million to buy the Augusta refinery near Catania, in Sicily. Its owner ExxonMobil had been trying to sell this loss-making 70-year-old oil refinery for years.

In addition, there are commitments that need to be honoured, not least immediate expenditure for compliance with environmental standards. The total cost to Sonatrach, which is structurally loss-making, the weekly Petrostrategies newsletter reported, is more than $1 billion.

It speaks of an acquisition that “is raising a lot of questions… the haphazard management (to say the least) of Algeria’s oil and gas sector over the last few years can be summed up by (this) one shining example,” Petrostrategies said.

The Augusta affair was in the news last April when Sonatrach’s then-CEO Abdelmoumen Ould Kaddour was sacked but allowed to leave Algeria. It initially surfaced during negotiations between Sonatrach and ExxonMobil in 2018 and provoked questions in private among Algeria’s elite — even in government — as to its wisdom.

Many in Algiers thought the decision to buy Augusta and the price paid were at odds with the needs of Sonatrach. Senior company officials considered their CEO to be incompetent and a crook. He had been sacked a decade earlier from his job of running a joint US-Algeria oil services company Brown and Root Condor, among whose shareholders was former US Vice-President Dick Cheney. Ould Kaddour was condemned for sharing intelligence with the enemy (the United States) and served time in prison.

He was appointed to that job by Chakib Khelil, who was Algeria’s all-powerful energy minister for the decade following Abdelaziz Bouteflika’s election to the presidency in 1999.

During those years tens of billions of dollars were siphoned out of Sonatrach accounts, in what is the biggest scandal since Algerian independence in 1962, for the benefit of Bouteflika’s family and business cronies.

Khelil was sacked after the forceful intervention of the head of security Mohamed Mediene and fled to Washington where he lived for two decades before 1999 and had powerful protectors. Ould Kaddour splits his time between Doha, the United Arab Emirates and Paris, where his family resides. Both should be tried for corruption and high treason, said a retired senior colonel in security, whose views are widely shared in Algiers.

If the new government and Tebboune fail to come clean, they are unlikely to convince Algerians they want to give the country a new start and promote a more competent, less corrupt form of government.

Petrostrategies had pointed questions about the industrial logic that presided over the Augusta transaction and of its consistency with Sonatrach’s refining policy at the time.

To justify the transaction company officials highlighted the fact that Algeria was importing 3 million tonnes per year of refined products and “claimed that the Augusta plant would make up for the deficit by refining Algerian crude…

“The problem is that Augusta was designed for crude oil of medium and heavy grades and not for the light crude oil of the type produced by Algeria. As a result, these crudes had to be bought from third parties as the plant could not process Algerian oil,” Petrostrategies reported.

“This was compounded by the fact that Sonatrach had made a commitment to ExxonMobil that the Augusta plant would supply the latter with a given volume of base lubricants for a period of ten years. In short, the new operator is not free to operate the plant’s facilities according to its own needs or those of the market, as the refinery has to calibrate its installations to fulfil this ten-year commitment.”

This brings us to what is arguably the most important consideration: the transactions’ political logic. Petrostrategies points out that “by the time Sonatrach was negotiating the acquisition, it had already completed a renovation programme for its existing refineries and was planning to build a new refinery.

It knew that its product import requirements would decline and fade away. This fall had started as a result of rising pump prices, which were dampening demand for refined products in Algeria.”

The refurbishment of Algerian refineries increased gasoline output by 50% and diesel production by 25%. When the new refinery that Sonatrach is building in Hassi Messaoud enters service in 2024, Algeria will once again become self-sufficient in road fuels.

Why then did Sonatrach and its true master the Algerian government “gamble on a losing investment when they could have made up for the shortage by importing products and/or by processing crude oil abroad”?

The transaction makes no economic sense. Was the Algerian government trying to curry favour with ExxonMobil and why? With the US government? Or was this another exercise in siphoning money out of the country?

No matter what, the Algerian people have been robbed blind and, if the country’s new leaders do not come clean on this shadowy affair, then their political credibility will be severely damaged as will their capacity to usher in bold economic reforms.