Algeria Shuns Repsol And Gas Natural

The story of a state-owned energy company throwing its Western partners out of a multi-billion dollar gas field may have a familiar ring to it, but this time it's happening not in Russia, but Algeria. The state-owned Algerian oil company Sonatrach announced late Monday that it would be removing Spanish energy firms Repsol and Gas Natural from a 5 billion euro ($6.8 billion) natural gas project at the country's Gassi Touil plant. Repsol held a 48.0% stake in the project, while Gas Natural owned 32.0%, and Sonatrach the remaining share.

The decision was not unexpected and follows months of protracted negotiations between the Spanish and Algerian governments. Repsol (nyse: REP - news - people ) was trading down 27 euro cents (37 cents), or 1.0%, at 26.18 euros ($35.60), while Gas Natural (other-otc: GASNF - news - people ) fell 65 euro cents (88 cents), or 1.7%, to 37.96 euros ($51.60) in morning trading in Madrid

Sonantrach has accused its two Spanish partners of causing delays and cost overruns to the construction of the gas terminal which was meant to start shipping liquefied natural gas in 2009.

Repsol said it would be appealing Algeria's decision to "illegally appropriate" the project through international arbitration. The companies have argued that the project has been held back by an excessively tight budget and that they have been hit by cost inflation in the oil and gas sector, including in the cost of building materials for the rigs.

Financially, the loss of the contract, which began in 2004, isn't a major blow to the companies, as the project is in its early stages. They have so far spent between 400 million euros ($543.7 million ) and 500 million euros ($679.6 million), a relatively small amount for Repsol and Gas Natural, which have market capitalizations of 32.3 billion euros ($43.9 billion) and 17.3 billion euros ($23.5 billion) respectively.

The loss of the project is far more concerning strategically. Both Repsol and Gas Natural have been hoping to top up their reserves and had been counting on the Gassi Touil project for future earnings.

In a note to investors Citibank analyst Alejandro Vigil downgraded his price target for Gas Natural to 37 euros ($50.29), from 38 euros ($51.65) a share, citing the Algerian gas project.

The development is also seen as a sign of where the Algerian energy sector is heading. The country boasts huge reserves that have had many a foreign energy company salivating. However the government recently passed a law requiring Sonatrach to have at least a 50% stake in all new ventures in the sector.

[Source: Forbes, Us, 04Sep07]

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