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Financial Times: Repsol runs into the sand in Algeria

By Mark Mulligan in Madrid and Dino Mahtani in London
Published: September 4 2007 22:17 | Last updated: September 4 2007 22:17

Repsol YPF was on Tuesday reeling from its latest run-in with a national oil company, but Spain’s biggest energy group could at least take solace from the fact that it is not alone.

The decision by Sonatrach of Algeria to expel it, and related utility Gas Natural, from a €5bn ($6.8bn) gas development and liquefaction project is just the latest sign of the growing assertiveness of countries rich in oil and gas.

Earlier this month, Kazakhstan suspended work on the giant Kashagan field following a dispute over spiralling costs with a consortium led by Eni of Italy.

At the end of last year, Gazprom, with the help of the Russian government, wrested back 50 per cent plus one share of Royal Dutch Shell’s giant Sakhalin-2 gas project.

Now Repsol faces the same fate because of anger within the Algerian government over spiralling costs and delays.

“As an international oil company you cannot [afford to] put a foot wrong at the moment as the resource holders [host governments] and local national oil companies are acutely aware the macro-environment has fundamentally changed over the last few years,” says Jason Kenney, head of European oil and gas research at ING.

“If there is any chance contracts could be contravened, the host nations will step in and look to renegotiate contracts, or seize control,” he says

Repsol and Gas Natural announced late on Monday that Sonatrach had done just that, by “illegally appropriating” a project involving the extraction of gas from the abundant Gassi Touil fields in the east of the country for liquefaction in a plant planned for the Mediterranean coast.

The original agreement, signed in 2004, was hailed as a landmark deal because of Algeria’s apparent openness to foreign control of its hydrocarbons sector.

However, Sonatrach’s relationship with the Spaniards began to change last year as the country increased taxation on foreign companies and signed a co-operation agreement with Gazprom. Higher steel and engineering costs blew an original €2.5bn budget out to €5bn, forcing delays that led to claims of mismanagement against Repsol. As tensions grew, analysts pushed back estimates of a start-date by three years to 2012.

To complicate matters, Repsol became entangled in a dispute between Madrid and Algiers over Algerian access to the Spanish energy market. This was recently resolved, meaning the Spanish government is unlikely to press too hard for Sonatrach to rethink its rescission of the Gassi Touil deal.

Joan Clos, Spain’s energy and industry minister, said on Tuesday he was “worried and upset” by the move. But he added that would also have to take into account its “long-term relations” with Algeria, a country that currently supplies Spain with 30 per cent of its natural gas.

Repsol, meanwhile, says it will take the case to international arbitration, in an effort at least to recover the estimated €300m already spent on the development.

Analysts, however, on Tuesday played down the financial implications of the deal’s collapse, worrying instead about “collateral” damage on a company with one of the slowest reserve replacement rates in the industry.

Already weakened by its heavy upstream dependence on Latin America – where it was last year forced to write down 25 per cent of booked reserves – Repsol has been desperately seeking to diversify away from the political populism sweeping the region. Algeria was supposed to be part of the solution, not another problem.

Additional reporting by Leslie Crawford in Madrid and Andrew England in Rabat

Copyright The Financial Times Limited 2007

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