Mohamed Meziane, the chairman and the chief executive officer of Sonatrach, discusses in an exclusive interview the downstream sector in Algeria and the opportunities it provides to foreign investors.
Mohamed Meziane, the chairman and the chief executive officer of Sonatrach, discusses in an exclusive interview the downstream sector in Algeria and the opportunities it provides to foreign investors.Algerian state energy company Sonatrach has launched plans to develop a comprehensive range of world scale facilities intended to put the country back on the petrochemicals map after years of decline. The early signs are very positive and the process of awarding projects is proceeding smoothly.
In a recent statement, Algerian energy minister Chakib Khalil said that his country is planning an investment of $28 billion in its petrochemicals industry over the next five years. The number is higher for the entire energy sector. "We aim to invest US$65bn in the energy sector in the next five years, $1.5 billion on average each year for the next five on exploration only," says Mezian.
The price of ethane feedstock is around one dollar. There is a specific formula we use to calculate the prices.
These investments aim to significantly increase oil and gas output. "Our target was to reach 1.5m bpd by 2005-2007, we have now capacity of 1.45m bpd, but our real production is around 1.2m bpd due to the OPEC quota. For gas, we have capacity of 150 billion cubic metres per year; for condensates, 13 to 14million metric tpa and 8.69m tpa of LPG. These production [levels] will be increased through the developments I mentioned earlier," he adds.
The country benefits from different advantages, such as its geographical location along with the abundance of ethane feedstock at competitive prices of around one dollar per million btu. "I don t have the exact figure, the figure is calculated according to the internal market, but the price is around one dollar. There is a specific formula we use to calculate the prices," says Mezian.
While others are struggling to secure loans to finance their projects, Sonatrach uses its own cash and rarely resorts to local banks. "The decision on projects is taken according to our financial situation. On the national level, we finance our projects using our cash flow or through Algerian banks, whereas for international projects, we also use our cash flow or banks, but generally we look case by case and we mainly use our own resources to finance our projects," says the CEO.
The cash windfall the company generates from high oil prices has allowed it to invest in many projects in upstream and downstream sectors outside the country. "We are investing in downstream in different countries. We are present in Spain through a petrochemical plant for dehydrogenation of propane with BASF in Paragon, and we are also present in gas distribution in Spain," says Mezian. "In the UK, we have gas reserve capacity of 5bn cubic metres, we are also trading oil products and gas, LNG and natural gas," he adds.
The presence of the company in the old continent is very strong, "In Italy, we have a distribution company. We also have a presence in Spain and Portugal. In Peru, along with an international consortium, we are producing some liquids and gas. The project is still in development. We are looking at other projects and opportunities that will generate excellent business," Mezian reveals.
Expressions of interest in investing in the petrochemical industry have flooded in from some of the biggest international players in the sector, and the wholesale changes promised by the new hydrocarbons law of July 2005 have helped to create a sense of optimism and forward momentum.
In July 2007, Sonatrach awarded a contract worth around $5 billion to France's Total to build an ethane cracker. The project encompasses the construction of an ethane cracker and three product lines. The cracker will have a capacity of 1.4 million metric tons per year. The cracker will produce around 1.1 million metric tons of ethylene per year, which will be processed into 410,000 metric tons of monoethylene glycol, 350,000 metric tons of high density polyethylene (HDPE) and 450,000 metric tons of linear low density polyethylene (LLDPE), mainly for export to international market.
"The ethane cracker in Arzew is linked to liquefied plant GNL 1 and 2, we did all the technical studies to supply ethane to the cracker," says Mezian.
The joint venture of Total and Sonatrach, which tendered the cracker work, has started the prequalification process for technology licensing and two front-end engineering and design (FEED) contracts, which were expected to be awarded in the second half of 2009. Only five companies have the technology to develop the ethane facility: the Germany's Linde; Paris-based Technip, the US' Stone & Webster, CBI Lummus and KBR Company.
The joint venture originally released tenders in January 2008, but the tender process was halted after contractors raised concerns in December 2008. These included an announcement in July by the Algerian authorities that the state was to take a majority stake in all downstream projects in the country. Total holds 51% of the project under its original contract.There were also concerns over the funding of the scheme after the government demanded that developers source local funding for their projects.
The joint venture is now in talks with the Algerian authorities to resolves the gas price issue and the status of the joint venture. "We are discussing the status of the company as the situation has changed a little bit on the economic side. We are still talking to our partner Total and the Almet consortium for the methanol project," says Mezian,"the same thing for the other projects such as naphtha steam cracking, the dehydrogenation of the propane and the polymerisation of propane for the production of the polypropylene."
"There is a clear decree about the price of the feed stock and there is a rule whereby Sonatrach or Algerian companies should take a stake of 51% in the joint venture company, with 49% for the foreign investor," reveals Mezian. "Things were clear from the begining and I don't know why they want us to change now," he says. "We are still in talks to resolve this issue," he adds.
We don’t face any problem with human resources. We concentrate our efforts on training and improve conditions.
The same situation faces the Almet consortium. Lurgi will be the lead engineering and construction contractor on the 3,000-tonne-a-day methanol project which worths $800m. Front-end engineering and design (FEED) works are expected to take up to eight months to complete, while construction work will take a further 32 months.
The other members of the Almet consortium are Japan's Mitsui & Company, Kuwait's Al-Qurain Petrochemical Company and the local Sotraco. Total and Almet won the contracts to build and operate the ethane and methanol plants respectively at Arzew, following the public opening of the commercial bids in July 2007.
Despite of the new ownership rules, Sonatrach is determined not to delay or freeze any project. "We are making every effort to maintain the progress of our investments. I have said many times that our budgets, projections and plans are on track and still in place; execution has been impacted by difficulties with the availability of engineers and the capability of equipment production," says Mezian.
Investment in the downstream sector in Algeria seems to be very buoyant, mainly in fertiliser production. Sonatrach has signed two joint ventures projects with Egypt's Orascom Industries to build 1.2m tpa of ammonia and 800,000 tpa of urea, and another JV with Omani Group Suhail Bahwan Group Holding to construct 2.1m tpa of urea and 1.21m tpa of ammonia.
A third project with the Spanish fertiliser producer Fertiberia is also in the process of selecting contractors. The project is to produce 1.2m tpa of ammonia. This trend in establishing fertiliser projects is due to their high potential to generate revenue. "There is big demand for fertiliser and we have enough gas to do it. The market is there and we had the opportunity to add value to natural gas by the production of ammonia and urea. The production is mainly for export to the international market," he says.
While other countries are struggling and facing big challenges in securing qualified human resources, Sonatrach is not concerned with the shortage. "We don't face any problem with human resources. We concentrate our efforts on training and hiring young people and we try to keep them by improving work conditions," says the CEO. "Also, Algerian universities provide us with excellent graduates and we have well educated people. We try to offer opportunities to fresh graduates to acquire the necessary expertise," he adds.
Foreign investments in the downstream sector in Algeria are more than welcomed in the country says Mezian. "The legislative hydrocarbon 005 and 007-2005 gave excellent umbrella for foreign companies in Algeria, I think the regulations are very good the conditions are well defined."
Algeria has awarded more than $10bn of EPC contracts in upstream and downstream, between January and May this year, close to the total value of projects awarded in the entire GCC.
The current situation is in the favour of Algeria, which became the new destination of skilled and experienced workers.
As part of its ongoing movement, the country is preparing for the biggest international "LNG 16" next April, "we are very confident that the LNG16 conference will be very successful event," he adds.