Sonatrach: CEO Hakkar kills the golden goose!

• Ill-conceived plan by Sonatrach CEO Hakkar to expropriate Petroceltic is pointing to a hidden agenda to further enrich Sonatrach’s officials at the expense of the Algerian people
• Termination of Petroceltic caused the automatic dissolution of the JV Groupment Isarene, which was the counterparty to contracts including the EPC with Petrofac, effectively making them null and void
• With no legal way to pay contractors, Ain Tsila / Isarene project will stall for years

Sonatrach CEO Mr. Toufik Hakkar finally got his way with the Isarene project. It seems that according to press reports from early 2021 he has been contemplating the move to expropriate this multi-billion-dollar project from Petroceltic / SunnyHill for a long time. Sources have reported that Mr. Hakkar has made this decision as early as November or December last year. What he did not expect though is that a leak of the recorded conversation would be circling around that shows the discussions of a move against Petroceltic. If that proves to be correct, Sonatrach would have difficult time proving that it acted in good faith when it terminated Petroceltic and will certainly will lose the argument in an arbitration case. By cancelling the agreement with Petroceltic without a valid reason, Mr. Hakkar is not only exposing Sonatrach and Algeria to a USD $1 billion plus legal liability and other possible international actions by the West, but more importantly is killing Algeria’s only promising project which would have boosted Algeria’s exports by around 15%.

Apart from negative mid- and long-term implications for Algeria, the ill-conceived move by Mr. Hakkar caused an immediate chaos within Ain Tsila / Isarene project. Namely, due to a nature the Production Sharing Contract (PSC) is regulated, all of the contracts (including labor and construction) are signed between third parties and Groupment Isarene (the JV between Sonatrach and Petroceltic). With the termination of Petroceltic, Sonatrach effectively caused the dissolution of the Sonatrach – Petroceltic partnership, hence Groupment Isarene ceased to exist automatically. The reason is quite simple – by definition Groupment cannot exist if one of the parties has been terminated. Like any other Joint Venture in the world, Groupment cannot not be run as a single-partner entity. This means that all contracts related to Ain Tsila / Isarene, including the EPC contract with Petrofac have been automatically cancelled.

That poses a massive problem for Sonatrach and the contractors. Post the dissolution of Groupment Isarene, the only remaining party to the Production Sharing Contract, Sonatrach needs to re-sign all the contracts with contractors so that there is legal basis for making payments. This could take a long time, but more importantly contractors can demand new terms and new prices. The most important of all contracts is the EPC contract awarded to Petrofac. That one has also been automatically invalidated with the Groupment dissolution. For a new contract to be signed, Sonatrach needs to hold a new tender as the Algerian law requires it to do so. The new tender procedure would certainly take more than a year, Petrofac cannot legally be paid in the meantime, which will cause a massive problem with project.

Petrofac has always complained that they have bid too low for this contract leaving them no margin, which was echoed by other contractors. Having this in mind, it could be that this new situation is a craftily devised hidden agenda to invoke a re-writing of the contracts with better terms for some contractors (and worse for Algeria) in exchange for paybacks to Sonatrach’s officials. Otherwise, why do it?

It is interesting to find out if there is evidence that any of this has been driven by Petrofac. In such possible scheme, the firing of Petroceltic maybe have been agreed between Sonatrach and Petrofac specifically to evoke the signing of a new contract that will result in kickbacks to Sonatrach. We shall investigate this thought further.

Sources inside Sonatrach have confirmed to us that the national gas company has been trying to bully Petroceltic into agreeing to transfer some of the contracts to Sonatrach, but Petroceltic is not the party to these contracts so does not make sense to transfer something they don’t own. Unofficial sources within Petroceltic confirmed that the Groupment agreements do not contain any obligation to transfer anything. It is not clear why Mr. Hakkar did not think this trough properly before terminating Petroceltic and acted in a way reminiscent to totalitarian dictators.

So Sonatrach seems totally stuck with no clear legal path how to proceed with the Ain Tsila / Isarene project’s contracts. The way we see it there is no legal justifiable way for the project to continue without a new tender for EPC. Our expectation is that Isarene project will stall for years and Sonatrach has only itself to blame for this.