ALGERIA: THE IMPORTANCE OF THE OIL INDUSTRY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030147-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: October 28, 2011
• Sequence Number: 147
• Publication Date: October 1, 1970
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Algeria:. $he Importance Of The Oil Industry
f ,
ER IM 70-146
October 1970
Cody No-47
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
October 1970
INTELLIGENCE MEMORANDUM
Algeria: The Importance Of The Oil Industry
Introduction
The oil industry is extremely important to
Algeria; it provides about 25% of government reve-
nues and 70% of exports. Largely a creation of
the French, the industry expanded rapidly in the
years immediately following independence in 1962,
and, although Algeria has increasingly asserted
control over its own oil resources, French interests
are still considerable. Probably because of the
French role, Algeria received less revenue per
barrel of oil produced than any other major pro-
ducing country in the Middle East and North Africa
until 1969. The French/Algerian oil relationship
is now under a complete and somewhat contentious
review by the two governments.
This memorandum sketches the development of
Algeria's oil industry and describes the French
role, the changes that have taken place in recent
years, and those that are now being negotiated.
it discusses the industry's place in the economy
and the outlook for the next few years.
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
Intelligence.
CONFIDENTIAL
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Background
1. in 1970, Algeria will produce about one
million barrels a day of crude oil; production has
almost doubled in the past six years. French com-
panies produce 70% of the total; US firms 3%; and
the Algerian government the remaining 27%. About
60% of Algerian oil exports go to France and the
remainder goes mainly to other West European coun-
tries (see Figures 1 and 2).
2. Algeria began producing small quantities
of oil in 1894, but large-scale output dates only
to about 1961. The impetus to develop the industry
came from France shortly after World War II when,
faced with both a rising demand for fuel and a
shortage of foreign exchange, Paris anxiously
sought an assured supply of franc-zone oil. De-
velopment efforts were concentrated in three com-
panies* formed by the French government, the French
administration in Algeria, and private interests.
In 1956, Algeria's two major oil areas were
located -- Hassi Messaoud in north central Sahara
and Edjele on the Libyan border -- and by 1958
they were in limited production. Even today, these
two fields produce the bulk of Algerian output.
3. To encourage and support their effort in
Algeria, the French enacted the 1958 Saharan Code,
which allowed deferring 27.5% of taxable income
(if a similar amount was reinvested in the industry),
arid provided liberal amortization schedules. Be-
cause Algeria was then a part of France, its oil
export prices to the French market were fixed well
above the world average. Initially, crude oil
imports from outside the franc areas were limited
to the difference between domestic demand and
franc-zone supplies (mainly Algerian); subsequently,
French refineries were required to buy 55% of the
crude oil they refined for domestic consumption
from franc*.zone suppliers. Exploration permits
and producing concessions in Algeria were restricted
largely to French companies or companies dominated
by French holdings.
Compagnie Francaige des Petrotes (CFP), Compagnie
de Recherches et d'Exptoitation des PetroZes en
AZgerie (('REPS), and S.N. RepaZ.
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CONFT,DENTIAL
Figure 1
Estimated Algerian Oil Production, by Companies
'SONATRACHI production Includes state production that was Incorporated Into SONATRACH
when 11 was created In 1903.
Geographic Distribution of Algerian Oil Exports
Figure 2
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4. Stimulated by these incentives, investment
in the Algerian oil industry during 1956-62 totaled
more than $1.3 billion (including construction of
two pipelines), and output rose from 10,000 barrels
per day (b.p.d.) in 1958 to 435,000 b.p.d,, in 1962.
At independence in 1962, Algeria was supplying
almost 40% of French oil imports, and Metropole
interests controlled 72% of Algeria's crude oil
output.
5. Initially, independence had little impact
on French oil interests. Under the Evian Accords,
which formalized the transition to Algerian con-
trol, Algiers recognized all French-granted explora-
tion and producing concessions, including their
terms and conditions, and promised French interests
priority in granting new concessions, provided their
bids were equal to those of other competitors. An
oil policy advisory body (Organisme Sahara), set up
with 50% French participation, gave Paris some
continuing control over Algerian oil policy. For
its part, Algeria would pose no restrictions on
profit repatriation, while the French would con-
tinue to provide a protected market for Algerian
crude oil at high fixed prices. Both countries
accepted the 1958 Saharan Code as it applied to
tax deferrals, payment of royalties and income
taxes, and amortization rates. At independence,
Algeria became sole owner of all subsoil minerals
and acquired a 41.5% interest in the French company
S.N. Repal.
Franco-Algerian Accord of 1965
6. The arrangements agreed to at Evian re-
sulted in relatively low oil revenues for Algeria.
The government's share of oil revenues was limited
to only about 28 cents a barrel, compared to be-
tween 75 cents and 90 cents a barrel in other Middle
Eastern and South American countries.* Consequently,
the Ben Bella government, faced with economic de-
cline, massive capital outflows, and rapidly in-
creasing government spending, quickly became dis-
satisfied with the Evian arrangements. Moreover,
Unlike other oil producing states, Algeria con-
tinued to calculate royalty payments and income
taxes using realized oil prices rather than with
higher artificial "posted prices."
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CONFIDENTIAL
anxious to participate more directly in the in-
dustry and denied partnership by private firms,
Algeria set up its own oil company -- Societe
Nati'nal du Transport et de Commercialization des
Hydrocarbures (SONATRACH), whose first task was to
build a third crude oil pipeline. in 1964 Algeria
unilaterally required foreign firms to retain 50%
of their gross export earnings in the country.
7. These actions were clear violations of the
Evian Accords and led to negotiating the 1965 Oil
and Aid Accord, which established the framework for
the industry as it exists today. The agreement
provided Algeria a larger share of oil industry
earnings and both the means and the legal justifi-
cation for a much greater participation in operating
the industry. In summary, the principal changes
and provisions embodied in the Accord included:
A thx reference price of $2.08 to
calculate royalty payments and income
taxes,*
Partial expensing of royalty payments
so that the proportion of these payments
that could be credited against income tax
payments gradually decreased to 45% by
1968,
Raising income tax payments from 50%
to 55% of earnings by 1968,
Eliminating the right of companies to'
defer taxes due,
Rescheduling amortization payments to
prevent large and rapid tax writeoffs, and
" By increasing the tax reference price, revenues
paid directly to the Algerian government were
raised. Originally equal to a weighted average of
the price of oil marketed in France and elsewhere
by French companies, this price subsequently has
been raised and now is the subject of heated uni-
lateral demands by Algeria for a major raise. This
tax reference price in Algeria serves the same pur-
pose as a "posted price" in nearly all other oil
producing countries.
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Creating the 50/50 French-Algerian
owned Association Cooperative (ASCOOP) to
explore and develop 45 million acres of
Algeria's most promising oil land.*
France also agreed to provide $80 million annually
to Algeria for five years in loans, grants, and
supplier credits.** The forced retention of 30%
of gross earnings in Algeria (based on actual
export prices) was not formally recognized; French
companies nevertheless complied. Although initially
this restriction probably impeded repatriation, it
no longer poses an impediment, because taxes and
local costs exceed 50% of gross earnings. Algerian
crude oil was guaranteed continued access to the
protected French market, and Paris raised import
prices from $2.08 to $2.12 to compensate French
firms, at least in part, for the Accord concessions.
The practical effect of the Accord was to raise the
average return to Algeria per barrel of oil from
31 cents in 1962-64 to 49 cents in 1965 and to
foster SONATRACH's rapid expansion.
8. Beginning in 1965, government revenues per
barrel have continued to increase rapidly, reaching
98 cents in 1969 for all oil companies and 89 cents
for French companies. For French companies the
rise in government revenues is attributable to a
sharp decline in production costs (see Figure 3).
As production increased, fixed cost per barrel de-
clined. in addition, application of the 1965
Accords reduced the high amortization rates that
had formerly been a major source of company cash
receipts. The fall in production costs was so
large (almost 50%) th,e,t net company profits actually
increased. However, earnings available for repatria-
tion almost certainly declined.
* Although the ASCOOP territory encompassed all
known oilfields, existing production concessions
continued to be honored. However, French firms were
required to transfer all exploration permits to
ASCOOP. French interests in ASCOOP were assigned
to the French company SOPEFAL and Algerian interests
to SONATRACH. SOPEFAL was to supply 80% of all
investment funds expended.
** This sum actually represented a decrease in
French aid over previous years.
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FIgure 3
Di positlon,of"Franeh? Company Oil
Earnings Per; Barrel of Algerian Oil
9. Assured of large revenues from the dominant
French companies, Algeria has been in a strong
position to squeeze the other foreign companies.
The government has tried to force all non-French
producing firms into joint venture arrangements
similar to the one negotiated with the Getty Oil
Company that called for a tax reference price of
$2.21 per barrel, required 75% of gross earnings to
be retained in Algeria, and provided for a large
investment guarantee by Getty. Despite great pres-
sure, however, none have accepted the Getty formula,
and Algeria has reacted by imposing punitive terms
and by gradually taking over their assets. Their
tax reference price was raised gradually from $2.26
in 1965 to th-. present $2.65 (far above the price
applicable to French companies) and since 1967 they
have been required to keep all their earnings in
7
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Algeria. By 1969 all but two of these companies --
Mobil and El Paso Natural Gas Company -- had been
nationalized. Thus far, Algeria has not attempted
to develop Getty-type joint ventures with French-
owned firms. This type of arrangement is preferred
by the Algerians, however, and similar demands on
French companies are expected in the future.
SONATRACH's Expanding Role
10. In the five years since the Accord was
signed, SONATRACH has developed into one of the most
important state-owned oil, firms in the Arab World.
Originally created to build and operate an oal
pipeline, this company has since become a me,,
crude oil producer and exporter, a refiner az,~
marketer of petroleum products, and a supplier of
services to the petroleum industry. The company
now is constructing petrochemical plants and
facilities for producing, processing, and exporting
natural gas. Some operations the company conducts
alone and others are joint ventures with foreign
firms.
11. By mid-1970, SONATRACH was producing about
260,0:0 b.p.d. 27% of Algeria's total crude oil
output. Under the 1965 Accord, SONATRACH increased
its ownership of French-owned S.N. Repal to 50%.*
With the outbreak of the Arab-Israeli war in June
1967, non-French firms were placed under Algerian
administrative control. In 1968, SONATRACH obtained
an 11.5% interest in the Rhourde El Baguel oilfield
through a joint venture with the Getty Oil Company,
and in 1969 and 1970 it acquired a further 28% of
the Rhourde El Baguel field with the takeover of
the assets of Sinclair, Shell, Phillips, Amif
(Italian), and Elwerath (German). Thus most of
SONATRACH's present crude oil production was
obtained through negotiation and by nationalization
and little by developing its own production, al-
though it has made several small discoveries in
the ASCOOP,zone .
Under the Evian Accord, Algiers was given a 41.5%
share of the French-owned S.N. RepaZ, The 1965
Accord increased this share by 8.5% to a total of 50%.
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12. Since 1965, pipeline coy-3truction and opera-
tion has come preponderantly under Algerian control.
Of the three pipelines now operating, SONATRACH
built cne and owns part of the other two. By
nationalizing non-French companies, the state oil
company acquired 25% of Sopeg's Hassi Messaoud-
Arzew Pipeline and 35% of the Trapsa Pipeline
through Tunisia. SONATRACH now is building a pipe-
line from Mesdar to the port of Skikda which will
give the company 70% ownership of the country's
pipeline capacity.
13. By roughly the same route, SONATRACH has
become the major owner of Algeria's sole refinery
at Algiers, which has a capacity of 51,000 b.p.d.
Under the 1965 Accord, SONATRACH's interest,
through its share in S.N. Repal assets, was in-
creased to 10%. Nationalizing Esso and Mobil's
interests in 1967 increased the state company's
share to 44% an+d to 68% in 1970 when Shell's
interest was taken over. As a parallel development,
domestic marketing came under SONATRACH's complete
control. By buying out British Petroleum and
nationalizing Mobil and Esso assets in 1967, Algeria
acquired 42% of all marketing activity, and the
remainder was obtained in 1968 when Shell and 13
small French companies were taken over.
14. Government participation in the petroleum
services industry has been almost entirely through
joint ventures with foreign companies in which
SONATRACH normally holds 51%. Since 1965, there
have been at least eight partnerships with Western
firms (see Figure 4) to provide technical assist-
ance in general exploration, including seismic
surveying, and drilling operations. Some special-
ized services also are provided in producing and
marketing oil. Services provided by these joint
companies are used by SONATRACH itself, other com-
panies operating in Algeria, and even by companies
abroad.
15. SONATRACH's technical competence is quite
high, largely because the company employs so many
foreigners. Since 1965, the US consultant firms
have 25X1
maintained advisory staffs in Algiers, and technical
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Figure 4
JOINT VENTURES IN WHICH SONATRACH PARTICIPATES
ALFLUID (Drilling Additive Producer)
51% SONATRACH
49% Davis Mud & Chemical, Inc. (US)
ALRGEL (Geographic, studies)
51% SONATRACH
49% Globe Universal Service, Inc.
ALTEST (Well Analysis)
51 % SONATRACH
49% Baker Tools, Inc. (US)
Unnamed New Firm (Exploration &
Drilling)
51 % SONATRACH
49% Dresser Industries, Inc.
CONFIDENTIL'
CONFIDENTIAL
A. Exploration and Production Ventures
ASCOOP* SONAGET
52.5% SONATRACH 51% SONATRACH
47.5% SOPEFAL (French) 49% Getty Oil Co. (US)
B. Service Companies
ALTRA (Exploration-drilling)'
51% SONATRACH
49% Forex (French)
ALCORE (Geologic Surveying
Analysis)
51 % SONATRACH
49% Core Laboratory, Inc. (US)
ALGEO (Exploration)
51 %. SONATRACH
49% Independex Exploration
Co. (US)
ALFOR (Drilling Co.)
51% SONATRACH
.49% Southeastern Drilling Co.
(US)
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experts have been hired from the West or accepted
from the USSR and East European countries. The
Algerians view technical cooperation with French
and US ^ompanies as very valuable. Soviet and
Eastern European technical influence, however, has
been relatively small, and the Algerians generally
consider their methods out-of-date and their equip-
ment poorly built.
16. Algeria has gained considerable prestige
in Arab oil circles and now is providing some
services to state oil companies in Libya, Syria,
and South Arabia.* Under the 1970 agreement with
Libya, the two countries will create a joint ex-
ploration company and coordinate their policies
with the foreign oil companies. Algeria is now
training 50 Libyan technicians and is believed to
be partly responsible for advising the, Libyans and
Nigerians on negotiation techniques with Western
oil companies. Aid to Yemen and Syria consists of
exploration work.
The Importance of Oil
17. The oil industry has been by far the most
dynamic growth sector since independence. Except
in 1965 and 1969 when growth was impeded by pipe-
line.bottlenecks, production has risen steadily
since the first wells came on stream in 1958. Since
1962, output has grown an average annual rate of
11.5%. in 1969, exports were valued at about $600
million f.o.b. Algerian ports,** and output reached
a record 930,000 b.p.d. In the early post-
independence years -- before the Franco-Algerian
Accord and the Boumediene government in 1965 --
while oil revenues were small (see Table 1), they
were the only growing source of government revenue
and foreign exchange. GNP was declining because of
a massive flight of privet;; r i .al and French
nationals as well as the lack of coherent Algerian
leadership and administration.
* More recently, Nigeria has sought SONATRACH'a
advice.
** Based on a weighted average of French and non-
French prices in 1969. The weighted average price
is about $1.95 per barrel ($2.16 to France and
about $1.65 elsewhere).
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Government Oil Revenues a,
1960 1961 1962 1963 1964 1565 1966 1967 1968 169
Government oil revenues
(million US $) 18.4 b/ 33.6 b/ 43.9 b/ 49.5 59.0 89.4 126.0 176.0 222.5 280.0 b/
Production c/
(million barrels) 66.3 121.1 141.9 163.9 bi 181.8 h/ ist79 h/ oil 1.. ~cA C L. moo. ,
Government revenues
e
, p p zce ranspe_tatzon taxes but excluding
contributions by SONATRACH to the central government.
b. Estimated.
c. Total production minus SOLV TRACH production.
d. Not adjusted for arrearages.
per barrel (cents) d/ 28 b/ 28 b/ 31 b/ 30 b/ 32 b/ 49 b/ 54 b/ 67 b/ 78 98 b/
a. Government tax revenues, including income taxes royalties and i
l' t A
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3.8. Since the 1965 Oil Accord with France,
government oil revenues have risen rapidly (see
Table 2) and have been the principal engine of
economic growth. The deterioration was halted in
agriculture, government administration improved,
and since 1968 GNP has been growing about 6'% a year.
With investmen. spending still low, although re-
cently increasing, and with rigid import controls
imposed in 1967, foreign exchange reserves accumu-
lated rapidly -- by the end of 1969 they totaled
about $600 million.
19. Anticipating further increases in oil reve-
nues, the government under::ook an ambitious new
four-year development program in 1970. To ensure
adequate financing of the plan, Algeria is attempting
to increase oil output significantly, to obtain a
major increase in oil tax payments, and to force
the oil companies to retain a very high proportion
of their gross foreign exchange receipts in Algeria.
20. Algeria's need for increased earnings from
the oil sector to finance planned investment goals
without foreign borrowing or drawdown of reserves
is clear. We estimate that during 1970-74 non-oil
exports will total about $1.3 billion and remittances
from Algerians abroad about $0.7 billion, or a total
of $2.0 billion, and that imports will total about
$4.7 billion.* The shortfall to be filled by the
oil industry is thus about $2.7 billion.**
A detailed estimate of the probable balance of
payments is beyond the ecope of this memorandum.
The impact of the relatively small itema such as
services, tourism, and private capital movements
that are not considered, however, probably would
be Zess than the margin of error in the estimate
of the major items.
** Foreign exchange earnings from the sale of gas
(included in estimates of non-oil exports) will not
rise significantly until 1973, Algeria is now ex-
porting about 1.5 billion cubic feet of liquefied
natural gas a year, with a value of about $30 mil-
Zion. EZ Paso Natural Gas Company (a US firm) has
contracted to buy 10 million cubic feet a year,
beginning in 1973, and France will take an addi-
tionaZ 3.5 billion, cubic feet a year, starting
in 1975.
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Year
Crude Oil
Production a/ Exports as Oil Revenues
(Thousand a Percent as a Percent
Barrels of Export of Government
per Day) Earnings Revenues b/
X958
10
2
N.A.
1959
25
N.A.
N.A.
1960
180
N.A.
N.A.
1961
335
45
N.A.
1962
435
50
N.A.
1963
500
58
1964
555
52
1965
555
'61
1966
710
65
1967
815
73
1968
895
71
1969
930
71 c/
a. Data are rounde to the nearest five thousand barrels.
b. Petroleum tax and royalty revenues from oil (excluding
transfers by SONATRACH) as a percent of ordinary government
revenues.
c. IMF estimate.
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21. Algeria hopes to finance the payment gap
by increasing oil output from 930,000 b.p.d. in
1969 to 1.380 million b.p.d. in 1973 -- an average
annual increase of about 10%. if present marketing
patterns, price structure, and level of repatriation
of earnings* by the foreign-owned oil companies
remain unchanged, the planned increased production
would provide Algeria with a total of about $2.2
billion in foreign exchange during 1970-73, or $500
million less than is needed to finance development
plan imports. Algeria could, of course, make up
the difference by foreign aid or a drawdown of
reserves. However, the government obviously would
prefer the oil industry to meet the bill.
22. Increased oil output of 10% per year is far
from certain, however. Present plans call for in-
creasing output from Hassi Messaoud from 420,000
b.p.d. in 1969 to 640,000 b.p.d. in 1973 and from
all other fields from 510,000 b.p.d. to 740,000 b.p.d.
SONATRACH is also counting on some production from
new fields not yet being exploited or even com-
pletely explored. French oil experts doubt that
output from existing fields can increase as rapidly
as the Algerians expect if "good production prac-
tices" are followed. French companies also balk at
increasing exploration investment, ostensibly be-
cause they claim that prospects for discovering
large c,dditional reserves are poor, but perhaps
also because they see Algerian harassment u7 non-
French companies as likely eventually to be ex-
tended to them.
23. The Algerians have turned to the USSR for
advice and have been assured that the production
plans are reasonable. Soviet technicians assert
that Hassi Messaoud production alone could be
raised to 851,000 b.p.d. -- or 30% more than
7 Algeria now retains about $1.20 a barrel in
foreign exchange from French companies' oil exports.
A 10% annual growth in oil output could provide
$2.2 billion in foreign exchange and leave a deficit
of $500 million. A 7% annual growth in oil outpvt,
which is the more likely, would provide $2.0 bil
Zion in foreign exchange and a deficit of $700 mil-
lion.
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current plans call for -- by increasing the number
of wells from 250 to 1,000 and by pumping sea water
into the deposit. French engineers diriputing the
Soviet claims insist not only that the additional
costs would not be justified by increased earnings
but that a large portion of the underground reserves
might be lost forever.* Nevertheleris, the Algerians
have awarded the USSR a contract to expand output
in this field rapidly.
24. In any case, pipeline capacity clearly is
the main constraint to major increases in produc-
tion. Algeria's; three existing pipelines are
already operating at close to capacity -- about
980,000 b.p.d. in 1970. There will be no now
capacity until late in 1971 when one pipeline with
an initial capacity of 220,000 b.p.d. and a
40,000 b.p.d. increase in the Sopeg line will be-
come available. This expansion will increase
Algeria's pipeline capacity by 26% compared with
that of 1970 and will allow output to reach about
1,250,000 b.p.d. -- the equivalent of about a 7%
annual average increase during the four-year-plan
period 1970-73 compared with the 10% the plan calls
for.
Squeezing the Oil Companies
25. Partly because of problems in increasing
production and the pressing need for increased
government oil revenues to meet both current and
development expenditures, Algeria has been demanding
the industry pay higher taxes and retain more of
its foreign exchange receipts in the country.
During a preliminary review of the 1965 Oil Accord
in 1969, Algeria demanded the French raise the tax
reference price from $2.08 to $2.65 a barrel. When
Paris refused and suspended discussions in 1970,
Algiers unilaterally set the tax reference price
at $2.85 per barrel. Moreover, in July 1970
Water n cCtion prooedurea ueeud in tng USSR's
major= producing area (Urals-Volga area) have caused
an estimated 40% reduction in recoverable reserves
because centrally injected columns of water have
effectively compartmentalized individval fields,
blocking of" previously recoverable oil.
CONFIDENTIAL
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CONFIDENTIAL
Algeria ordered that French companion retain in
Algeria $1.80 per barrel of gross oil export
earnings. In retrospect those moves clearly were
more a bargaining ploy than a fiat, and implo-
,tinonting the edicts has boon pontponod pending the
complete review of the 1965 French-Algerian Accord.
26. With a tax roforonto price of $2.65 a
barrel and earnings retention in Algeria of $1.80
a barrel, French companion could still mike a small
profit from Algerian operations -,t 1969 prices. A
tax reference price of $2.65 with current operating
costs would provide the French companies a profit
of about 36 cents a barrel. However, only about 60%
of this sum could be repatriated if $1.80 per barrel
of earnings stays in Algeria. Moreover, the profit
would be attributable entirely to the French govern-
ment subsidy implied in the high French import price
for Algerian oil. French sales to other markets at
going prices would be unprofitable because those
prices are some 50 cents per barrel lower than in
France.
Some Revue Projections
27. Algeria's ability to finance its import
requirements during the plan period (1970-73) will
depend primarily on the rate of growth of oil pro-
duction, the preferential treatment of Algerian oil
in the French market, and the share of oil earnings
retained in t1_geria. The implications for ;tlgeria'u
balance of payments of alternative assumptions for
these factors Are shown in Table 3. If French com-
parias continue operations and accept retention in
Algeria of $1.80 per t~arrol of crude oil," Algerian
oil revenue will about cover the non-oil payments
deficit, oven if oil output grows only 71 rather
than the planned 10%. Repatriated earnings would be
very small -- only 101 of total export earnings --
unless the French government rained the French
import price of Algerian oil. These conditions the current Algerian demand on the French -am
panios -- appear to define the upper limit of
Algeria's possible earnings from oil. Now, less
onerous Algerian proposals probably will be forth-
coming.
' This con ition would control Algeria's balanoa-
of-payments earningo if the tax referonoo pride
ogre raised even beyond $2.65 a barrel.
CONFIDENTIAL
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Valance-of-paynent.s Effects of +IternaL fve Oil Re.-e.;4e Projections
1970-73
Billion US S
Under Recent
aer:an Oe:ma;ds
tinder
-Nationalization
71 l0%
71
13
Cros.t: Rate a/ G
h
/
1
ro4rt
Rate A
Growth Rate a/ Growth Rate a/
Gross oil export revenues 2.99 b/
3.24 hf
21 . 5 4 c/
2.75
Repatriated earnings -0.29 d/
-0.31 d/
-
_
C
Earnings retained in Alceria 2.70 e/
2.93 e/
2.54
2.75
.y?
Deficit. excluding oil f/ -2.70
-2.70
-2.70
-2.70
Balance 0
0.23
-0.16
0.05
a
rz=
are [IJir:::. 19(13 r: i f a
r:
are
t
-h
use
c
.~ aditcrranca=: vourca'J arc: r,~ ;rp+J. L?~:!eJ'
J`J?C
u
Eic :43E'
Z
Cj tE=~:tCc'C.` 8urt.tLB8 fTGZ
.
~
to unccrt;:sn.
Fvt
G~:-
these ccnditiana gill
Continue
C. FrajarcrsLiol Lra"':C^+C'-iL :r,
barrel. `renr*h nJP~VL t83bt'"1Cc: :c ha 7e
ceased. All ales
t
$1
65
a
.
Fez-
d. d. If $1.80 par barrel is re!c.red in
e. Residual in gsrr 6.; cry.,^r: relrcn.,e.
j. CIA g rcr~tcct ?crs (a c rarc~;~r~rrs 1. -_: 1.
g. Nct Algerian balance a 4 or 1 c, ''~ =a .
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CON 1' I _)1N'1'IAL,
28. If the French companies do not accept
Algerian demands, nationalization is an option
available to the Algerian government. Under
nationalization and with no componeation, Algeria
could keep all of the earnings from oil exports.
This gain, however, would be much more than offset
by the (almost certain) loan of the price prefer-
ence in the French market, and Algerian retained
earnings would be almost 6% smaller than in the
case described above. International payments
would approximately balance with oil production
growing at the planned 10%, but there would be a
substantial deficit of almost $200 million in the
four-year period if the growth of output is only 7%.
Algeria would be able to cope with even this situa-
tion without recourse to foreign borrowing because
its foreign reserves are about $600 million.
29. With retained oil revenues in Algeria any-
where near the magnitude demanded by thG Algerians,
tax receipts would be no problem. The Algerian
initial demand for a tax reference price hike to
$2.65 per barrel for French companies would more
than cover government revenue needs. Even a tax
refs:enee price of $2.45 per barrel would be more
than sufficient given at least a 7% annual expan-
sion in oil production.
Conclusions
30. Although rosultb of the current French-
Algerian oil negotiations cannot be predicted in
detail, mutual dependency will probably preclude
nationalization of the French oil companies during
the next few years. France buys 601 of Algerian
oil exports while Algeria supplies France with
30% of its crude oil imports. Neither aide has
any desire to interrupt this trade. Beyond this
the French provide preferential prices -- oil
exports to France are now worth some $260 million
a year to Algeria -- as well as some $100 million
a year in direct economic aid. The Algerians
offer France no such advantages, but the two major
French oil companies depend largely on Algeria
for their oil supply and have most of their assets
in Algeria.
- 19 -
CONFIDENTIAL
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 Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030147-6
CONFIDENTIAL,
31. With oil and fuel generally in short oup-
ply the world over, the Algerians are in an espe-
cially good position to improve the terms of their
agreements with the French oil companies. A oub-
stantial rise in Algerian earnings per barrel,
however, is likely to eventually diucourago French
oil company inveatmonts and to lead to national-
ization un.,ono the French government cooperates
by increasing the price preference for Algerian
oil or through some other form of subsidy. Thus
the oil issue will be negotiated as part of the
broader framework of French-Algerian relations.
^ CONFIDENTIAL
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