SONATRACH: The Gas Heist!

• Sonatrach’s CEO Mr. Toufik Hakkar expropriated a multi-billion-dollar gas field from leading Western and Middle Eastern investors
• A phony Saudi investment threat used to justify the move in front of the Algerian leadership
• Legal battle that can cost the Algerian people well over US $1 billion is set to commence shortly

This month Algeria’s national oil & gas company Sonatrach surprisingly announced that it has terminated its Production Sharing Agreement with a UK-based Sunny Hill (formerly known as Petroceltic) with respect to the Ain Tsila Gas project. With a reserve base of over 20 TcF of natural gas, the entire project is valued at over US $ 6 billion. Ultimately it would have increased Algeria’s exports by around 15% and bring critical additional revenue to the Algerian state. Commenting on the termination, Petroceltic called Sonatrach’s move ‘aggressive and irrational’. Sonatrach however failed to provide any details or for that matter any convincing argumentation as to why it took such a drastic move, so a further investigation into the matter seems warranted.

The surprising element in Sonatrach’s announcement is the attempt to blame Petroceltic for a delay in the project. It is unclear as to why such a claim was not directed at the EPC contractor Petrofac. As it is customary in such Productions Sharing Agreements after the brilliant initial discovery, Petroceltic’s role would have been reduced to mainly writing checks every month. It is not clear how Petroceltic caused a delay in the project and Sonatrach conveniently did not provide the link. Could it be that someone in Sonatrach confused the names Petroceltic with Petrofac?

Accusation for a delay coming from Sonatrach is a surprise, especially if one looks at the history of the project. In 2018 it was Petroceltic who took Sonatrach to arbitration seeking over $50 million in damages for delays to the project caused by Sonatrach, mainly to do with refusing to organize on time the tender for the Engineering and Procurement Contract (EPC). The dispute was eventually settled and Sonatrach got back on track and proceeded with the EPC tender procedure. Looking at the recent press history, Petroceltic made a lot of positive statements committing to accelerating the construction of the facilities and aiming to achieve first gas sooner, even despite COVID-19 delays that plagued Sonatrach’s Contractor operations. Having in mind that Petroceltic’s profit would have been greater the sooner first gas milestone has been reached, it made no economic sense for Petroceltic to delay the project. The financial position of Petroceltic could not have been an issue since our sources indicated that the company is backed by some of the largest global money management institutions with capital in excess of $1 trillion.

So why would then Sonatrach take away the asset from its only partner Petroceltic, who over the years loyally supported the progress of the project? The only other participant in the project – Italian company ENEL bailed last year and exited Algeria leaving Sonatrach to pick up the tab for the remaining financing of of ENEL’s interest in Ain Tsila.

There must be another explanation why Sonatrach has acted in such ‘irrational and aggressive‘ way, since a flawed delay argument does not seem to explain it. One explanation is of course that, having realized the true value of the asset discovered by Petrocletic’s exploration efforts some years back, Sonatrach decided to look for superficial reasons to terminate the agreement between itself and Petroceltic in order to effectively ‘steal’ the asset without having to pay a compensation. One may ask, then why not terminate the agreement with other IOC’s and take their assets without compensation? Why exactly this one? Not easily done – all other IOC’s in Algeria are major international strategic companies with huge political backing. Petroceltic is a small independent company with a small footprint and easy to attack.

While Sonatrach’s existing projects are struggling with profitability and volume of production, Petrocletic’s Ain Tsila is a trophy asset with an incredible yield by global standards. We understand by speaking to sources in Algeria that Petroceltic’s designed and funded well drilling and testing program has yielded better than expected result. These results are not yet public, but when published they would have resulted in a significant uplift of the proven reserves numbers. So ultimately, by taking away without compensation Petrocletic’s stake in the Ain Tsila project, Sonatrach and indirectly its management and its shareholder the Algerian state would have made billions.

It is not yet clear how Sonatrach and the Algerian state will get out of the difficult situation they got themselves in having effectively stolen Ain Tsila asset from some of the largest US and Middle Eastern financial institutions backing Petroceltic / Sunny Hill. It is expected for the situation to turn into a massive legal case with long term negative political and financial implications for Algeria.

It is understood that Sonatrach CEO Hakkar and his cronies came up with an additional excuse why they acted in such an aggressive way, so that could provide answers to questions coming from government ministers and the President’s office. What they came up with in order to justify their poorly thought termination exercise internally is that Petrocetic is bringing in Saudi money to finance the Ain Tsila project. Even if that was true, it is not clear why an investment from Saudi Arabia would actually represent a threat to the Algerian state. It may be that this threat was mentioned or discussed in some government meetings. However, Saudi Arabia is not on any official sanction list in Algeria and is one of the wealthiest investors in gas projects globally. We asked Petroceltic to comment on why the Saudi money was so unwanted by Sonatrach, but sources within Petroceltic could not come up with a plausible explanation. Instead, they blamed this excuse on the Algerian state independence paranoia. Petroceltic denied having seen any interest form Saudi entities for its assets so it seems that the whole ‘Saudi threat’ was a carefully crafted argument to be used by the Algerian side to justify its predatory move on Petroceltic’s assets.

The international outcry in response to the Ain Tsila asset grab is already starting to show itself. Algeria has downplayed the international business community’s grave concerns by claiming the situation is specific to Petroceltic / Sunny Hill. Without providing any meaningful argumentation as to why it took such a valuable asset away from a UK company, the move by Sonatrach could force companies already active in Algeria or potentially interested in Algeria to suspect that the Sunny Hill situation is NOT specific to Sunny Hill and it could be the beginning of a damaging expropriation trend in Algeria.