Algeria and OPEC
ALGERIA AND OPEC
by Hocine Malti, February 2018
Algeria has been independent since July 5, 1962. It gained its independence, after conducting a war of liberation which lasted 7 and half years, after negotiations between the independence movement the FLN (National Liberation Front) and the French government. The war lasted so long, partly because oil was discovered in the Sahara in January 1956. Immediately afterwards, the French government put in place the legal provisions regulating oil exploration and exploitation. Following the example of Great Britain and the United States which had seized oil deposits in the Middle East after the First World War, the new French law allowed access to Saharan deposits to French companies only, or to a foreign company eventually in partnership with a French partner who had to be majority in the consortium.
Algeria becomes a member of OPEC:
Why so late?
At independence, some fifteen French companies, operating nearly 50 oil and gas deposits, were present on Algerian territory. The only exception was that of Sinclair Mediterranean Petroleum Company, a small independent American firm that held less than fifteen percent stake in the Rhourde El Baguel field. The French government was aware from the outbreak of the war of liberation that the conflict would lead to the independence of Algeria. That is why, when oil was discovered, it began to envisage the break-up of the country into two entities, the Sahara to the south, which would be erected into « Saharan zones of the French Republic » and the northern part of the country which would gain independence. These two actions, the Saharan oil reserved for French companies and the break-up of the country into two separate parts, demonstrate that in the eyes of the French government, if Algeria would cease to be a French territory, its hydrocarbons were to continue to belong to France. Yet it was necessary to convince the Algerians to admit such an antinomy. It took six years before the French head of state, General de Gaulle officially recognized that the Sahara was an integral part of Algeria. He did not, however, renounce the principle that Algerian oil belonged to France, a principle rejected by the Algerians. The compromise reached in Evian during negotiations between the FLN and the French government was to establish, in independent Algeria, a kind of Algerian-French co-sovereignty over its oil wealth. A joint body, responsible for « the development of the wealth of the Saharan subsoil » has been created and administered by a board comprising an equal number of representatives of the two founding States, each one of them having one vote. This body, with extensive powers, was responsible for supervising the exploitation of oil and gas deposits; he was the representative of the Algerian state in its relations with the companies. Two of the principles adopted at Evian show very clearly how the French negotiators had pre-empted in advance against any attempt by the future Algerian government to make any change to the established order. The fact of freezing in the Evian agreements « the right of the concessionary and his associates to sell and manage freely their production » guaranteed the supply of France with Algerian oil and did not allow Algeria to create commercial links with other partners. Another clause required the Algerian authorities to grant, for the next six years, in case of equal offers, the priority to French companies for exploration and exploitation permits, increasing then the number of French companies present in the Sahara.
These few examples show how much the ties between the two countries would remain entangled even if Algeria had ceased to be a French colony. Algeria found itself bound hand and foot, unable to take any initiative in the oil field without French consent. It could not take into account only its national interests while using such a strategic product (oil), even if this use allowed it to to achieve important vital, political, economic or social objectives.
In such a situation, joining OPEC was of no interest to Algeria since it had no means of implementing any decision that the organization would take, given that the treatment of oil matters did not fall directly under its authority. The hydrocarbons component of the Evian agreements has been renegotiated in 1965; a new Algerian-French agreement regulated hydrocarbon and industrial development issues in Algeria. The concept of co-sovereignty was again present throughout the text of this agreement which created an equal partnership between the Algerian and the French national company for the exploitation of Algerian hydrocarbons. The huge area reserved for joint exploitation meant that companies other than French were de facto excluded from oil exploration in the Sahara. Algeria was again in a tete-a-tete with the French oil companies only and beyond them with the French government. And again, adhering to OPEC was of no use, since the organization could not, in any way, interfere in relations between two sovereign states. This agreement had to be renegotiated in 1970. After months of discussions that yielded to no results, the Algerian government decided to implement the objectives it had set during the negotiations. It proclaimed on February 24, 1971, the nationalization of its oil industry up to 51% for oil fields, and 100% for gas fields and for oil and gas pipelines. It is only from this date that Algeria could acquire a freedom of movement, could diversify its partners and attract oil companies other than French. Membership in OPEC could then be considered. Algeria became a member of the organization in July 1969, since it was already clear on that date that the « divorce » from French firms was about to be consumed.
1969: Algeria in OPEC
The duration of the liberation war, led by men who had very few weapons, often dilapidated, ammunition in limited quantities, but with an iron will, facing one of the best armies in the world and the enormous sacrifices made by the Algerian people, constituted a set of factors that have earned this people the admiration of the whole world, that of other Third World countries in particular. Once the independence gained, the Algerians continued to defend the rights of the damned of the Earth, as Frantz Fanon called them, welcoming on their territory and helping all the movements which fought for the liberation of their countries, for the defense of their rights or for greater justice and equality between men. Its commitments in all these areas and the great fervor it showed when leading this fight earned Algeria the title of « Mecca of the revolutionaries ».
When it became a member of OPEC, Algeria continued to advocate the defense of these same values in the highly strategic sector of the oil industry and sought to inject OPEC with this revolutionary spirit. OPEC itself had begun to change. Few months after Algeria joined the organisation, Colonel Muammar Gaddafi came to power in Libya. One of the first steps he took was to start negotiations with the oil companies operating in his country in order to review the price of Libyan oil. He solicited the assistance of Algeria for the implementation of the strategy that would allow him to win the price battle. The Algerians had engaged in 1968 an arm wrestling with the French state enterprise CREPS on the conditions of exploitation of the field of Zarzaïtine. Considering that the high rate of production of the deposit had led to a waste of national resources and caused significant damage to the country’s oil economy, the Algerian administration had imposed on the French firm a significant reduction in the quantities produced by the closure of some twenty wells. After studying the operating conditions of a number of deposits, including that of Intissar by Occidental Petroleum and Zelten by Esso, the Algerian experts dispatched to Tripoli found that these two fields were exploited at very high rates and suggested to Libyans to impose a significant decrease in production rates, just as it was done for the field of Zarzaïtine. Colonel Gaddafi imposed then on the companies present in his country a decrease in production levels and promised to revise these quotas if they accepted changes in price and taxation. After nine months of give and take the Libyans won their arm wrestling.
The strategy suggested by Algeria was a winning one.
Just a few months after its accession to OPEC, Algeria had participated indirectly in the change in the balance of power that had prevailed so far in the oil companies’ relations with the host countries. This first victory of a member country of OPEC was at the origin of the enormous upheavals that took place later on the world oil scene. During this same year 1970, Algeria continued to be very active within OPEC. It recommended to the ministers meeting in Algiers in June, at the organization’s twentieth conference, to adopt as a model of relations between producing countries and oil companies the contract it had made with the American company Getty Oil. It proposed this same scheme a month earlier, during the meeting of what was called the « refusal front », namely the tripartite Algeria / Libya / Iraq meeting aimed at harmonizing the policies of the three countries. It is true that this contract was innovative in many areas. Getty Oil held a 5% stake in the Rhourde El Baguel oil field. During discussions with the Algerian government, the company sold 51% of this participation to SONATRACH and entered into partnership with it. Getty Oil agreed to raise the posted price by 20% and to revise the tax rate. It also undertook to place 75% of its sales’ income in Algeria. The most important provision, however, was not financial: the partners agreed that the role of operator would be delegated to SONATRACH for any future joint work. It was a precedent in the ranks of the OPEC countries, since for the first time, an oil company, an American one, awarded to the national company of a producing country the label of reliable and respectable partner, entrusting it the conduct of operations within the couple they had just founded. Another important step of Algeria’s policy within OPEC was the oil nationalization. Twenty years after the attempt to nationalize Iranian hydrocarbons, that of Algeria had gone well. In September 1971, the OPEC Ministerial Conference endorsed what was called the « qualitative request » of Algeria which proposed a resolution which committed the Member States to take stakes in oil companies present on their territories. That’s what Colonel Gaddafi did; he ordered the nationalization of British Petroleum’s activities in Libya in December of that year. In January 1972, the Gulf States (Iran, Iraq, Saudi Arabia, Kuwait) engaged negotiations in New York with the companies operating on their territories, involving the acquisition of majority stakes in their operations. Saudi Arabia took a 25% stake in Aramco on January 1973, Iraq nationalized IPC in June 1972, Kuwait increased its stake in companies operating on its territory to 60%, while Iran obtained the transfer of all the oil activity – from the well to the refinery – to the national company, NIOC.
Although it was not at the origin of the event, OPEC found itself engaged in a torment, caused by the war unleashed by Egypt against Israel on October 10, 1973; this was called the first oil shock. Algeria played an important role in this turmoil. In solidarity with Egypt and in order to put pressure on the Western countries and thus lead them to exert pressure on their Israeli ally, the Council of Ministers of the Organization of Arab Petroleum Exporting Countries (OAPEC) decided on 17 October 1973 a program of progressive reduction of the oil production of the member countries. The resolution indicated that an immediate retention of 5% would be implemented, that it would be increased by the same amount each month, and that a total and immediate embargo was imposed on exports to the United States, the Netherlands, Portugal, South Africa and Rhodesia. The measure had the effect of an earthquake, the consequences of which are felt even today, including considerable repercussions on the development of competitive petroleum energy sources, on the North-South relations, on energy policy and energy economy of Western countries as well as on US policy in the Middle East. Among the other decisions adopted by the OAPEC Council of Ministers was the one that charged two ministers, the Saudi Ahmed Zaki Yamani and the Algerian Belaid Abdesselam, to undertake a tour of Western capitals in order to clarify the point of view of Arab countries. The two Ministers were received, during their visits to Paris, London, Washington, Madrid, Rome, Bonn, Brussels and Tokyo, by the Heads of State or Prime Ministers of the countries visited, by the President of the European Commission and by the Emperor of Japan. In order to closely follow the evolution of the situation thus created, the council constituted a commission of control of the embargo composed of Saudi Arabia, Kuwait, Libya and Algeria, Algeria was also designated as Supply Coordinator for African countries.
The permanent presence of Algeria on all the fronts in which the oil producers were engaged, but also the total success of the nationalization of the hydrocarbons pushed its prestige to the zenith within OPEC. Among the Gulf countries, the small emirate of Abu Dhabi did not have the human resources to take in hand the 25% of interest that the oil companies members of the cartel had accepted to transfer to him in conformity of the 1972 New York agreement. The Emir, Sheikh Zayed Ibn Sultan Al Nahyan asked Houari Boumediene, during a stopover made by the latter in Abu Dhabi in March 1974, the assistance of Algeria for the implementation of the New York resolution. SONATRACH then detached to the emirate a team composed of more than twenty oil executives. This mission lasted 13 years; it helped negotiate partnership agreements with multinationals, create a major oil industry and set up a national oil company, the Abu Dhabi National Oil Company (ADNOC), which will become later one of the most dynamic of the Middle East. As can be seen, Algeria played a pivotal role in many events since its accession to OPEC. It will even weigh significantly more in those who follow. It will be seen as a defender of the economic interests of the Third World countries and will therefore face, live in various international fora the world’s leading power, the United States.
Algeria and the New International Economic Order
In January 1974, as Arab countries ended their program to cut oil production, US President Richard Nixon proposed holding a conference of OECD countries in order to create a front of consumer countries that would meet the producers within three months. At the same time, instructions of the State Secretary Henry Kissinger were that American diplomats should undertake a lobbying action of representatives of the Third World countries and convince them that the tool the Americans were planning to create would serve to defend their interests as well. Such language was likely to be well received by these countries, since the retention measures imposed by the oil multinationals following the actions of OPEC member countries had mainly affected them. The American initiative came to fruition at a conference in Washington from 11 to 13 February 1974, during which the International Energy Agency (IEA) was created; the war machine wanted by Henry Kissinger was born. Few days before the conference, the American secretary of state threatened the producing countries with total war, in the event that they seek to « strangle » the industrialized world. This conference and the warlike atmosphere in which it took place provoked an uproar on the part of the producing countries, who had understood that the goal sought by the United States was not to find a solution to the problems of shortage of oil, but to enter into conflict with OPEC, wrongly accused of all ills.
On the other hand, Algerian President Houari Boumediene, acting as President of the Non-Aligned Movement, wrote a letter in January 1974 to the Secretary-General of the United Nations, proposing the holding of a special session of the General Assembly on commodities and development. To the tendency of Americans to want to make non-oil-producing Third World countries allies in the battle they were going to wage against OPEC, Houari Boumediene answered with an obviousness: oil was only one of the many natural resources of which the Third World was so rich and thus the fight against the plundering of these resources did not concern only oil, it was global. By mid-February, all members of the United Nations had endorsed the proposal and on 9 April 1974 began the work of this extraordinary General Assembly in New York. It ended with the adoption of two resolutions; the first one admitted the urgency of the establishment of a new international economic order (NOEI), while the second recommended the need for aid to poor countries. Despite the decisions taken by the United Nations, the United States persisted in saying that the conference that would deal with the NIEO, which had been scheduled in Paris for the first quarter of 1975, should focus only on energy and energy issues and therefore only the representatives of IEA and OPEC should participate. To face the powerful America, Houari Boumediene called on the gathering of all the countries of the south of the planet. Firstly, at the initiative of Algiers, there was the meeting in Dakar in February 1975 of the « Group of 77 ». In the communiqué adopted at the end of this meeting, the participants recalled the right of the Third World countries to control their natural resources and that the members of the group would not participate in the Paris conference if the prices of raw materials other than the oil were not on the agenda. Then in March 1975, took place in Algiers the first summit of the OPEC countries; it was a big success for the organization, for Algeria and for its president. The recommendations of the summit, which later constituted OPEC’s demands at the Paris conference, fully echoed the points made by Houari Boumediene in his inaugural address, namely the establishment of a more equitable international monetary system, the stability of the principal currencies necessary for the development of all the countries of the planet, the dollar in particular, and the fall in oil prices in return for a similar effort on the part of the industrialized countries on the prices of manufactured products. Boumediene managed another coup at the summit; he succeeded reconciling the two enemy brothers, Iran and Iraq, both OPEC members, which opposed a dispute over the course of their common border at the level of Chat El Arab.
The intense negotiations between the two sides of the NOEI negotiations, led by Algeria on the one hand, and the United States on the other, on the list of participants, which took then place actually reflected the agenda. The conference began on December 16, 1975, after that an agreement was reached to create four commissions dealing with four key topics: energy, raw materials, development and financial issues. The work of the conference lasted two long years, 1976 and 1977, and did not result in any notable results. Much later, the fall of the Berlin Wall, the advent of a unipolar world, resulting in unbridled free trade and the creation in 1995 of the World Trade Organization (WTO), showed that the very principles underlying the notion of a new international economic order became obsolete.
The very first step taken by the new Tehran regime in the aftermath of Imam Khomeini’s rise to power in January 1979 was to stop crude oil exports. The traders who sold the quantities made available to them by the majors resold them in spot at more than twice the official price. This speculation was to be at the origin of the second oil shock, the consequences of which on the economy of the developed countries were however less than those recorded during the 1973/74 shock, mainly because of OPEC’s commitment against soaring oil prices. In September 1980 began the Iran-Iraq war, which led to a further rise in prices. Five years after the reconciliation between the two countries following the efforts of President Houari Boumediene, who died in the meantime, Algeria launched a new mission of good offices to put an end to this fratricidal confrontation. His foreign minister, Mohamed Benyahia made then a series of trips between Baghdad and Tehran in order to bring the points of view closer. He died during one of these trips, his plane has been shot down by an Iraqi missile as he headed for Tehran.
The decline of Algeria’s pioneering role and US take over
When it was first established in 1974, it was said that the main objective of the International Energy Agency was to defend the interests of its members, and in particular to fight against the rise in prices that was systematically attributed to OPEC. This is not exactly what happened throughout the two decades of 1980 and 1990, when OPEC lost the power that it had on the oil market, which was taken over by the IEA. This transfer was symbolically formalized in 1984 when Brent from the North Sea replaced the Arabian Light as a crude benchmark on the market.
Boumediene died in December 1978. The struggles for power that took place in Algeria when that happened had as a consequence that its role as a pivotal state within OPEC declined sharply. The new President Chadli Bendjedid and the new teams that took the country’s destiny into their own hands were then committed, first and foremost, to sacking all the leaders they had succeeded and strengthening their own power. Among others, the deleterious atmosphere in the Algerian energy sector, in addition to the disorder in the ranks of OPEC, stopped the ??active participation of Algeria within the organization. It’s pioneering role within OPEC ceased even to exist when George W. Bush came to power some ten years later. In fact his presidency was a big blow for all OPEC countries. The first task he tackled upon his arrival at the White House in January 2001 was to establish a new American doctrine in the energy sector. The main purpose of this doctrine was to ensure that US oil companies take possession of maximum reserves in the world’s major oil regions. With regard to MENA (Middle East North Africa), the working group that had worked on the issue recommended encouraging attempts to open foreign investment in the oil sectors of several countries, including Algeria, the goal being to eventually achieve the total privatization of their oil industries. That meant the return to the concession system of the 1950s and the disappearance of OPEC. At that time, Algeria was living a special situation. Because of the thirst for devouring power that inhabited, him but also because he was looking for support to face the military nomenklatura that had brought him to power, Abdelaziz Bouteflika who had just been elected President, had planned to establish very dense political and economic relations of his country with the United States and to acquire, in a personal capacity, the confidence, even the friendship of the American president. He named his childhood friend, Chakib Khelil, Minister of Energy. Khelil was American citizen and had lived for thirty years in the United States. He post-graduated at an American university and worked in several oil companies, as well as at the World Bank. He had then the necessary connections that would allow Bouteflika to establish the relationship he wanted with George W. Bush and his administration. Of course, to get access and the support of the president of the United States has a cost. George W. Bush asked the Algerian president to hand over control of Algerian hydrocarbons to American oil companies, which he accepted. The task of Chakib Khelil was to prepare a new petroleum law that would be fully in line with the new US energy policy. That law provided that any foreign company wishing to explore for oil in Algeria could do so either alone or in partnership with the national oil company which may hold up to a maximum of 30% stake. The consequence of such conditions were that all Algerian oil and gas reserves would have been transferred to foreign companies after a few years. The other great danger of this law is that it sets a precedent in the ranks of OPEC. It is certain that other countries would have adopted the same approach; some because they were predisposed to take such a step, to the extent that someone else did it before them; other countries would have been pressured to emulate Algerians. A wave of protest arose through across Algeria. The saga lasted 5 years (from 2001 to 2006). The opposition was so strong that Bouteflika, fearing that he would not be re-elected for a second term, freezed the law in 2003. Once re-elected, he adopted it by ordinance, before deleting in 2006, the most disputed provisions of the law. Algeria and OPEC must pay tribute to Venezuelan President Hugo Chavez, whose intervention was decisive. During a visit to Algiers specifically scheduled for this purpose in May 2006, he convinced his Algerian counterpart to change his mind, given the immense damage his initiative would cause to all oil-producing countries. Glory and decadence of Algeria, which was once the great defender of the Third World peoples’ interests and which would have sold off its own natural wealth to satisfy the ambitions of a man. The soaring prices of oil since the beginning of the 21st century accelerated the decline of OPEC. The producing countries have ceased to be a major partner of the world oil scene. The market on the one hand and American oil and shale gas producers on the other hand « did the job » for them since high prices were needed for shale oil to become profitable. The barrel of oil to more than $ 100, or even close to $ 150 made the OPEC countries happy; but they did not see the danger that awaited them. When they realized that American shale oil producers had nibbled their market shares, it was too late. Despite the efforts and sacrifices that they did during the last three years, they still could not recover the market share they once controlled, nor have they been able to raise the price of a barrel of oil to a relatively good level.
Algeria has never been as rich as since the beginning of the 2000s; shop fronts and displays in Algiers or elsewhere in the country are full of goods and products of all kinds, while people don’t have the necessary income to meet their needs. The oil rent of the country has caused a certain laxity of the government and of the citizens: why create another wealth if oil can make life easy for the population? However, oil sales represent 98% of the country’s foreign exchange earnings, which imports almost everything that Algerians consume. The sharp fall in prices from the ceiling reached in 2008 has dug a huge hole in the budget of the state and of the citizens. This pushed the Algerian energy minister to demonstrate activism within OPEC as seldom in the last 20 years. He has been touring the capitals of the member countries of the organization, went to Moscow and tried to convince the Russians to participate in a joint action with other producers hoping to raise again the oil price. The government seeked to develop the production of shale gas and faced the anger of the population of the small town of In Salah throughout the year 2015. However, all these initiatives didn’t reach the expected results.
However, regardless of Algeria’s role in OPEC, the big question concerns the organization as a whole: will OPEC survive the great crisis it is going through now?