In a move that has been a long time coming, Algeria‘s energy minister wants to separate the state from Sonatrach, eliminate all government guarantees of Sonatrach loans, and set up two independent industry arbitors. The refoms involved will transform the sector for good.

A common theme in Algeria is that state-owned Sonatrach and its subsidiaries, which collectively make up the country‘s hydrocarbons industry, kept Algeria‘s metaphorical head above water during the period of civil crisis. When investors fled the country and local industry closed down or severely cut production to weather the storm, Sonatrach – the country‘s largest company – kept the pump primed, maintaining an uninterrupted flow of oil and gas to Europe and its other export markets, and bringing in the country‘s only hard currency.

But this strong performance, says Algeria‘s Minister for Energy and Mines, Dr. Chekib Khelil, occurred against the odds. Sonatrach, he says, has never reached its full potential because it has never been separated from the state. “Basically, Sonatrach is still a government entity, which means that for a long time it has operated under a system that did not provide any incentives to improve. It just produced the product, which cost a certain amount of money, and what was left was transferred to the government, meaning there was no incentive to minimize their costs.”
At the same time, he argues, as a state body, Sonatrach was subject to the annual uncertainties of the government budget. Unlike BP-Amoco or Shell, which map out their development and investment strategies 30 years ahead, Sonatrach couldn‘t plan for the long term because it was unsure what resources would be made available to it from year to year. “In the hydrocarbons sector,” says Dr. Khelil, “you can‘t do that.” There is also the issue of wages. Compared to other large international oil companies, the difference in salaries is “day and night,” he says. “So you can‘t expect to keep the talented, experienced, and quality people for a long time. As soon as they get experience, they go to the private sector or leave the country. So Sonatrach has had all these impediments and constraints, and yet is has still done a marvelous job. They have increased production, have a trading company in London, a petrochemical firm in Spain, a concession in Yemen, and are negotiating concessions in Iraq and Peru. So imagine what they can do if I make them just like BP or Exxon.” 

This is the minister‘s plan. Envisaging a total overhaul of the administrative setup of the sector, Dr. Khelil is intending to separate the role of the state from the role of Sonatrach. “I want Sonatrach to become a purely commercial enterprise.”
The plan comes in several stages. Sonatrach, which is still something of a sacred cow in Algeria, is not in danger of being transferred to private hands. But the first stage of its reform will be to strip the company of responsibilities that should be performed by the state. The most important step will be to establish two independent agencies, the first of which will exist to award contracts and be in charge of regulation, taxation, and monitoring, while the other ensures the implementation of environmental, health, and security regulations. Sonatrach presently performs both these roles, which creates a conflict of interest. Given that foreign oil companies are obliged by law to work in partnership with the state-owned company, is Sonatrach an owner guarding its resources or a partner to do business with? 
Besides putting Sonatrach on equal footing with other oil companies in Algeria, the reform will place Sonatrach on a much more sound commercial basis. Since Sonatrach‘s revenues will be contractually based, it won‘t be forced to haggle with the government‘s budget committee each year, allowing it to plan for the long term. Second, the minister believes that subjecting Sonatrach to operating under contract will motivate the firm to improve its cost effectiveness, especially since it will be subject to taxation. “This is very important to the state,” Dr Khalil says. “Through the tax system I‘m going to make them more efficient by giving them an incentive to increase profits.” 

The minister means to make these agencies effective by giving them financial independence from the state. The key reform will be to allow them charge fees from the companies they serve. Financial autonomy will not only save the government money, it will give the agencies the ability to hire expert human resources in order to make them effective organizations, and will allow enough independence to enforce regulations. One further step will be the partial privatization of Sonatrach. Although Dr. Khelil makes it clear that the state still intends to maintain a majority share, the minister wants to make it possible for Sonatrach to list its shares on the international equity markets. “This means that instead of going out and indebting the government, Sonatrach can use the capital that has been sitting there for the last 40 years and that nobody has thought of using up until now. So tomorrow, if Sonatrach want to perform any operation, it has all the instruments that a private company has – it can sell shares, it can issue bonds, or it can adopt any other financing mechanism,” Dr. Khelil says.

 The beauty of this, as far as the minister is concerned, is that the ministry will be able to eliminate all government guarantees of Sonatrach loans. “Forty percent of the oil and gas exports go toward paying the debt service, so this gives you the reason why I don‘t want the government to guarantee any financing in my sector. If you want to lend to Sonatrach, you lend without government guarantee. And all the people who used to work for Sonatrach as service providers or builders, I tell them no more of service providers, you go as partners, you bring your money, you do projects with Sonatrach. We want you to come, you could be Canadian, Japanese, or whatever, put your money with Sonatrach, do a project together, and be paid out of the fruits of that project.” 
The reform process will also encompass the Sonatrach group of companies. Sonatrach has a total of eight affiliates which cover all aspects of the oil and gas business that the company itself does not perform, from refining and distribution to oil and gas infrastructure construction, drilling, surveying, and petrochemicals. Either 100% or 51% owned by Sonatrach, its affiliates are nevertheless commercially independent entities that are seeking to expand their operations and are open to investment or partnership opportunities. 
One such example is Sonatrach‘s main drilling affiliate, Entreprise Nationale de Travaux aux Puits (ENTP). Originally a Sonatrach department, ENTP was spun off in 1983 and now successfully operates in Algeria‘s competitive drilling market. Besides ENTP, another state-owned drilling company, ENAFOR, exists, while a range of foreign drilling outfits have entered the market, such as America‘s Setco-Forex, Italy‘s Saïpem and France‘s Forasol. Drilling both for Sonatrach and foreign oil companies operating in Algeria, such as Anadarko Petroleum, BHP, Cepsa, and Agip, ENTP owns and operates 40 drilling rigs and has an approximate 40% to 45% market share. The company has also entered into partnership with the German firm DEUTAG, with which it has formed a joint-venture, DECO.
“But,” says CEO Mr. Abdelaziz Krissat, “competition in this market is getting increasingly fierce.” His strategy to move forward is to reinforce its joint venture with DEUTAG via increased investment, extend the spectrum of ENTP‘s drilling services to meet the requirements of its clients, and subsidiarize its transportation and catering activities, giving the company more time to focus on its core business. Additionally, its shareholders are considering privatization, with the initial objective to list 20% of the compnay’s shares. “I think privatization has to be considered in our sector because drilling requires a huge investment,” says Mr. Krissat. From now until 2005, ENTP will invest AD12 billion ($166 million) to upgrade its equipment and expand its services.