ALGERIA - Abdelaziz Bouteflika.

The President of the Republic, Bouteflika was first elected in a one-man poll on April 15, 1999, to succeed Gen. Liamine Zeroual who had retired in February of that year. Bouteflika was re-elected to a second term on April 8, 2004, with a crushing 84.99% of the vote - while his rival, former prime minister Ali Benflis, got a mere 6.42% and moderate Islamist Abdallah Djaballah came third with just over 5%. It was the third multi-party presidential vote since 1995 in a country which has battled an Islamic insurgency since early 1992.

The president's involvement in petroleum is limited to general guidance through the National Council of Energy (CNE), of which he is the chairman. Set up in February 1997, the CNE is the highest policy making body for the energy sector and related industries. Its members include the key ministers and the heads of Sonatrach and other state-owned or controlled companies.

The importance of Bouteflika to the petroleum sector lies in his support for Energy and Mines Minister Chakib Khelil - a reformist but whose reforms have been turned down by socialists in parliament, the Sonatrach management and the powerful trade union. But although Bouteflika has consolidated his grip of power by taking control of the ruling National Liberation Front (see Gas Market Trends of this week), he may no longer be in position to back all the reforms proposed by Khelil.

With crude oil prices having average about $65/b, these have ensured a strong performance for the Algerian economy in 2006. GDP growth rise to 4.6% from 4.3% in 2005. Algeria is estimated to have earned more than $50 bn in oil and gas revenues in 2006, boosting export earnings by 18.5% to $45 bn and foreign exchange reserves up to $75 bn from $56 bn a year earlier. A combination of strong earnings and tight fiscal management enabled the country to pay off billions of dollars in foreign debt ahead of schedule, slashing external debt to $4.7 bn from $15.5 bn.

An even stronger performance is seen for 2007, with Standard Chartered Bank forecasting GDP growth of 6.2%. MEED on Jan. 12 quoted the bank's Algeria analyst Abah Ofon as saying: "Oil prices are set to remain at about $60 a barrel in 2007, and Algeria will see even higher growth due to the multiplier effect created by the economic reform programme and the opening up of the economy to foreign participation". The petroleum sector in 2006 accounted for close to 98% of export revenues, with the non-hydrocarbons economy raising only $1 bn.

In a speech in early December 2006, President Bouteflika criticised the poor contribution of other industrial sectors to Algeria's economy, pointing to the inadequacy of export volumes in these sectors compared with their economic potential. Algiers has since said its key economic priority for 2007 as for the last two years will be the Programme Complementaire de Soutien a la Croissance (PCSC), under which the government to invest a minimum of $60 bn in infrastructure. The government hopes the programme will bring local infrastructure up to developed world standards and address its huge unemployment problems.

Although the official unemployment rate is about 11-12%, the figure rises to about 30% when such factors as youth unemployment and disguised unemployment are taken into account. A major privatisation will see introduction of either private equity participation or private management to more than 1,000 state companies. About 400 companies have already been privatised and officials insist the process will now be accelerated. About 15 public companies will be proposed every fortnight to state privatisation agency Conseil des Participations de l'Etat to ease privatisation of 300 firms. Although firms like state-owned Sonatrach and Air Algerie have been designated as strategic and exempt from privatisation, the impact of private investment in other sectors of the economy should not be under-estimated.

Ofon said: "Lots of companies are still waiting for the country to prove itself before committing investment. If the privatisation process is successful, it could be a springboard". Reform of the banking sector will be crucial to the country's ability to attract increased foreign investment into non-hydrocarbons sectors. State banks hold more than 90% of all banking assets in Algeria, and their lack of accountability has meant the sector is characterised by a high proportion of non-performing loans.

For the foreseeable future, Algeria's prospects are reliant on the performance of its hydrocarbons sector. A favourable outlook for oil prices is likely to ensure that for the rest of the decade at least, these prospects are rosy.

Chakib Khelil: The Minister of Energy and Mines since Dec. 24, 1999, and acting CEO of Sonatrach from early March 2001 to mid-May 2003, Khelil is the man in charge of the petroleum and mining sectors. But the decisions for the petroleum sector are taken at cabinet level; and any major move must be approved by parliament, in which old-guard socialists are opposed to ending Sonatrach's status as a "state within the state".

There are signs that Khelil, hehind the original investor-friendly version of Algeria's hydrocarbon law whose main incentives have been reversed in favour of Sonatrach and to the detriment of IOCs, may no longer count on strong support from President Bouteflika who had brought him to government in 2000. Khelil's protege Mohamed Mezziane may be replaced as CEO of Sonatrach. Candidates for the top Sonatrach post include its Vice-President for Sales Chawki Rahal. But Ali Hached, Rahal's predecessor sacked in mid-2006, is also a contender for the top post.

In late 2006 Algiers signed into law a tax system which will make IOCs pay more of their gains, should oil prices remain high. As a result, Houston-based Anadarko Petroleum reported that in the fourth quarter of 2006 it had to set aside about $100m to pay the exceptional profits tax, which is imposed on oil producers when the monthly average price for dated BFO rise above $30/b. The tax is being levied not just on new output, but also retroactively to Aug. 1, 2006.

Analysts predict such demonstration of resource nationalism may backfire as IOCs would be less interested in investing in Algeria. Shell, BP, and ENI together with Anadarko are some of the biggest investors tapping into Algeria's petroleum, having committed considerably to exploration in as well as distribution systems from Algeria.

Anadarko is to seek international arbitration over the new profits tax, which could cost it $450m a year. The tax applies to all contracts signed under the 1987 hydrocarbons law. The tax will be paid as a share of production to Sonatrach, with payments expected to begin in March. Anadarko's CEO Jim Hackett was recently quoted as saying: "We have the contractual right to international arbitration. We believe the sanctity of this agreement will ultimately lead to the recovery of any monies withheld".

Anadarko said it had about 110m barrels of proven undeveloped reserves in Algeria. Anadarko estimates that BFO prices will average $60/b in 2007. Anadarko warns that it if the tax is applied to the full value of production rather than to the value over $30/b for dated BFO crude oil, the cost would double to $450m.

Parliament voted in October to tax between 5-50%, depending on output, and Khelil then said the tax system was to be a "gain for the public good as that will reinforce the state's role in monitoring the sector". Yet while the move may be welcome locally, there is concern among IOCs that Algeria might not be as good a place to do business.

Another concern Anadarko voiced was about what steps Sonatrach might take, as it suggested it will begin collecting current and past tax by retaining a portion of the crude oil to which Anadarko was entitled. Parliament in 2006 voted that Sonatrach should have a greater role in exploring and securing refining contracts as Algiers aimed to bolster its crude oil output from 1.45m b/d to 2m b/d by 2010.

Hackett was on Feb. 6 quoted as saying: "We believe that the sanctity of our contract's stabilization provision will be upheld and thus will preserve the value of our Algerian asset base. Although we expect a favorable outcome to this matter, ultimate resolution may be more than a year away". At a news conference, the head of Anadarko's Algerian unit Dick Holmes on Feb. 5 said the company hoped to "resolve this amicably to the mutual benefit of Algeria, Sonatrach, and Anadarko so that we can continue our relationship, which has been very good for 20 years". But he added that "if we cannot resolve our disputes amicably between ourselves then there is a process that we can follow, which ultimately leads to international arbitration".

All IOCs in Algeria are reviewing their positions in the country. BP Algeria President Gerry Peereboom in late 2006 said: "We are calculating the new level of tax on a contract-by-contract basis. All companies will be affected differently but essentially, the more favourable the contract, the more you will pay under the new legislation". The new amendments will apply retrospectively to profits from Aug. 1, 2006. State oil revenues are expected to increase by $1 bn in 2007.

Khelil said IOCs could abandon their projects if they wished. But Peereboom said: "I do not think the Algerian government wants to drive away foreign investors, but it is a high-price environment and other countries, particularly in Latin America, have tightened up their tax systems".

Algeria's third international energy conference hosted at the end of November 2006 in Oran to showcase its hydrocarbons, mining sector and power industry potential attracted people from more than 170 firms and 30 countries. At the conference Khelil announced: "Partnership and foreign investment are crucial to our growth strategy", pointing to the fact that foreign investment contributed $3 bn of the $6.5 bn in the energy and mines sectors in 2005. He said: "Our focus now is on raising the last obstacles to investment and improving the efficiency and competitiveness of the country".

One of the main objectives of Khelil's appointment as minister by President Bouteflika in late 1999 was to change the legal and regulatory framework for both the petroleum and minerals sectors and privatisation. Thus, in mid-July 2000 Khelil presented to the cabinet draft laws for gas distribution and power generation. When another government was formed in June 2002 under Ali Benflis, Khelil was kept in his post at the insistence of President Bouteflika - though Benflis wanted to have him replaced by someone favouring Sonatrach. But later Benflis was replaced by another prime minister after a power struggle with Bouteflika (see down8AlgWhoFeb21-05 and gmt8AlgWhoFeb19-07).

Khelil on Dec. 24, 1999, took over the energy and mines ministry from Youcef Yousfi who then was made foreign minister. Yousfi had been energy and mines minister since June 25, 1997 and years earlier had headed Sonatrach. But he lost the foreign affairs portfolio in September 2000, when President Bouteflika made Ali Benflis prime minister and Abdulaziz Belkhadem foreign minister (see Gas Market Trends).

Khelil was until mid-1999 a high-ranking economist at the World Bank in Washington. His friendship with Bouteflika went back to the late 1960s, when Khelil was working for Sonatrach. In mid-1999 Bouteflika made him adviser on petroleum affairs at the presidency, while the presidential office had ex-Sonatrach CEO Abdelhak Bouhafs as a parallel adviser with a focus on natural gas. In December 1999, while he made Khelil energy and mines minister, Bouteflika appointed Bouhafs as Sonatrach CEO.

In his 1960s, Khelil worked for the World Bank in Latin American countries for many years. Fluent in Spanish, French, English and Arabic, he played a key role in the restructuring of Latin American economies under World Bank financed programmes. He had a role in the Latin American countries' energy sector as well. Thus he worked with governments and energy decision makers from Mexico down to Argentina.

Khelil developed friendships in Latin America and these have helped him direct Sonatrach investment to Peru. Thanks to Khelil's lobbying, in mid-2001 Algeria became a member of the Latin American Energy Organisation (Olade). Khelil said this was to enable Sonatrach to take part more easily in that area's energy projects, as well as taking advantage of the training programmes which Olade offered to member-countries. He said Algeria was intending to "create a link between Olade and the future African Energy Commission" (AEC). That was because he wanted Sonatrach to invest in Latin America and Africa, apart from its investments in Europe and the Arab world (see omt8AlgOversFeb19-07).

Hardliners in Sonatrach, however, have not been impressed by Khelil's ideas and Latin American links, although President Bouteflika appreciates his connections. They have been particularly opposed to his plans to de-monopolise Sonatrach and make it more international. That was one of the reasons why Bouhafs resigned as Sonatrach CEO in late February 2001.

In early 2000, shortly after becoming minister, Khelil made statements which the press took to mean Sonatrach would be privatised. Oil workers' unions backed by FLN hardliners and Sonatrach's management, alarmed a big change could affect them, expressed dismay at these statements. Khelil explained in an interview with the London-based daily al-Hayat, published on March 28, 2000, that his statements should not imply Sonatrach will be privatised. He has had to make more such statements since then.

As a presidential adviser, Khelil headed a Sonatrach delegation to a Tehran petroleum conference in November 1999 and, through efforts by APS Energy Group President Pierre Shammas, established a good rapport with the Iranian government which he followed up after becoming minister. That led to a resumption of diplomatic relations between Algeria and Iran in September 2000. The move came a few days after President Bouteflika met with then Iranian President Mohammed Khatami in New York, as both were there for the Millennium Summit. (Diplomatic relations between Tehran and Algiers were severed in the mid-1990s, after Algeria accused Iran of actively supporting attempts by the Islamic militants to overthrow Zeroual's government). Relations between Bouteflika and Khatami developed into a friendship during OPEC's summit meeting in Caracas in late September 2000, thanks to Khelil's efforts. The idea was that, for the sake of OPEC unity to keep defending oil prices, Algeria should develop close ties with all the OPEC members and with the non-OPEC oil exporting states.

Soon after Khelil became energy minister, he and then Iranian Oil Minister Bijan Namdar Zanganeh developed a close relationship. Now Khelil's ministry and Sonatrach assist the Iranian oil ministry and NIOC in the natural gas business, particularly in the field of LNG as Iran has embarked on a major LNG programme for export.

In mid-2000 he proposed to Dr. Rilwanu Lukman, then the top petroleum adviser to Nigerian President Abasanjo, that Algiers and Abuja examine the feasibility of a gas pipeline linking the two states. The pipeline, as Khelil proposed, would then link up with a direct marine gasline to Spain so that Nigerian gas can reach the European markets (see gmt7AlgerGasExprtFeb12-07).

Mohamed Mezziane: The CEO of Sonatrach since late 2003, Mohamed Mezziane took over from Djamel Eddine Khene, who headed the company from mid-May of that year. Mezziane is a protege of Khelil. Both are said to be among targets for personnel changes later this year.

Sonatrach CEO for International Affairs Mohamed Ben Hamo heads the group's overseas E&P division, Sonatrach International Petroleum Exploration and Production (Sipex).