stormy days

Two corruption cases rattle Sonatrach in Algeria and Lebanon

By Farid Alilat

Posted on July 9, 2020 15:33

Algeria has initiated an investigation into Sonatrach’s acquisition of the Augusta refinery in Italy. What’s more, one of the Algerian state-owned energy firm’s subsidiaries has found itself in the crosshairs of a Lebanese court.

Stormy days are ahead for Algeria’s state-owned oil company Sonatrach, currently rocked by two alleged corruption cases. The first involves the firm’s acquisition of the Augusta refinery, located on the eastern coast of Sicily, in 2018.

On Thursday, 2 July, Ahmed El-Hachemi Mazighi, former vice president of marketing at Sonatrach, was placed under a committal order at El Harrach Prison and has been charged on allegations of “squandering public funds and impersonating a public official”.

Other individuals associated with the case will be questioned by the examining magistrate in the coming days. According to our sources, Abdelmoumen Ould Kaddour, former Sonatrach CEO (from March 2017 until April 2019), who is currently abroad, did not receive a summons from the Algiers judges.

A scam at best, an act of fraud at worst

In December 2018, the Italian subsidiary of ExxonMobil, Esso Italiana, completed the sale of its Augusta refinery to Sonatrach for just under $800m. The deal also included three fuel terminals in Palermo, Naples and Augusta, as well as their associated pipelines.

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At the time of the sale, the US ExxonMobil Group entered into a 10-year oil purchase agreement with the refinery. Sonatrach, which had also been eyeing two other refineries, one in France and the other in Italy, hired two international advisory firms to explore their acquisition.

However, the Augusta refinery purchase was controversial as much for its cost as for the choice of the site itself. Some experts found that the Algerian oil company had overpaid for the refinery, while others noted that the refinery’s facilities were in a state of disrepair and unprofitable, and that Sonatrach would have to commit a significant amount of financial resources to bring the refinery into compliance with the European environmental standards in force.

What’s more, events that arose later on during the commissioning of the complex bolstered critics’ arguments against the acquisition – critics who had warned that the deal was a scam at best and an act of fraud at worst.

In January 2020, Sonatrach was granted a $250m loan from the Arab Petroleum Investments Corporation (APICORP) to fund the maintenance of the Augusta refinery and cover crude oil purchases from Saudi Arabia for the Sicily-based site.

Looking back now, does this loan raise some red flags? With the initiation of an investigation, Algeria’s court authorities are giving credence to those who viewed the Augusta refinery acquisition as yet another stain on the oil company’s reputation.

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A former senior executive from Sonatrach who wished to remain anonymous brushed this off as nonsense, adding that the purchase of the refinery from Exxon met two main criteria: “Sonatrach couldn’t keep importing $2bn worth of refined petroleum products. Financially, that was becoming unsustainable for the company, as it had been hit hard by the drop in oil prices. And building a new refinery would have taken anywhere from five to ten years and cost $5bn at the very least. The Augusta complex cost us almost one-fifth the price of a brand-new refinery.”

Scapegoating Mazighi

An adviser to Kaddour at the time, Mazighi spearheaded the planned purchase of Augusta and led the negotiation process for more than a year. He was foisted into the spotlight to defend the choice of the site and provided the following argument for its suitability: “The Augusta refinery offers the best fuel and base oil yields.”

Shortly after the acquisition, Mazighi – whose former colleagues describe him as as brilliant as he is low-key – was appointed vice president of marketing.

Dismissed from his position in March 2020, at the beginning of the coronavirus outbreak, he reportedly threatened to reveal insider information about the project if he were to take the blame for the acquisition.

According to a person who took part in negotiating the deal, the acquisition agreement for the Augusta refinery had been approved by the Office of the President of the Republic of Algeria and the government, which at the time was under the leadership of Prime Minister Ahmed Ouyahia.

“Sonatrach’s Board of Directors, which is made up of representatives from the president’s office, the Ministry of Energy, the Ministry of Finance, the Algerian Tax Authority and the Bank of Algeria, gave the green light for the acquisition,” the same source said, adding that Mazighi cannot take all of the blame.

This is especially the case given that questions arose immediately following the announcement of the purchase of the complex in Sicily.

Allegations of contaminated fuel

The investigation initiated in Algiers comes in the wake of an inquiry launched in April in Lebanon into allegations that Sonatrach supplied contaminated fuel, via its subsidiary Sonatrach International Petroleum Exploration & Production BVI (SIPEX), to Lebanon’s state power utility Électricité du Liban (EDL).

“The contaminated fuel comes from the Augusta refinery, the very same one Sonatrach acquired,” said Wadih Akal, a Lebanese lawyer and member of the Free Patriotic Movement (FPM), founded by President Michel Aoun of Lebanon. “The contract between Sonatrach and EDL covers more than $2bn worth of fuel deliveries per year,” he added.

It all began on 11 March 2020, when the Baltic vessel arrived in Lebanon with a fuel shipment for two EDL-managed power plants, in line with a contract signed in 2005 by the Lebanese company and the Algerian energy firm.

Tests conducted in Lebanon showed that the fuel transported by the vessel was of poor quality, contradicting tests previously carried out in Malta by Bureau Veritas-owned laboratories and others performed by the laboratories of Lebanon’s Ministry of Energy and Water.

Further testing conducted by EDL also confirmed the fuel’s poor quality. Two additional independent tests, one carried out in London and the other in Dubai by two companies working on behalf of EDL, once again indicated that the fuel was contaminated. After whistle-blowers referred the matter to Ghada Aoun, state prosecutor of the Mount Lebanon Court of Appeal, she ordered the opening of an investigation into several deliveries made by this particular Sonatrach subsidiary.

“At least two other vessels whose shipments came from the Augusta refinery arrived in Lebanon at the beginning of this year,” the lawyer said. “Both were transporting almost $20m worth of fuel.”

After three months of investigation work, the inquiry resulted in a first round of indictments. On Monday, 6 July, Aoun asked that charges be brought against Aurore Feghali, general director of oil at Lebanon’s Ministry of Energy and Water, and Sarkis Hlaiss, chief of oil installations at the same ministry. They allegedly falsified reports related to the contaminated fuel deliveries.

Several oil facility officials have also been indicted on corruption charges while others have been arrested or are wanted, in a case that has morphed into a government scandal.

One such official is Tarik Faoul, presented by the Lebanese court authorities as Sonatrach’s representative in Lebanon. He is being prosecuted for “money laundering” and “fraud”. Sonatrach BVI, a subsidiary of the Algerian oil company, has been charged with “fraud”.

Eventually, Algeria got wind of all the commotion in Lebanon. Confronted with an avalanche of allegations against the country’s state-owned behemoth, President Abdelmadjid Tebboune ordered the justice minister to open an investigation.

Potential for investigations in Lebanon and Italy

Will the two Algerian investigations into the contaminated fuel case and the Augusta refinery acquisition push the Algerian judges towards conducting further investigations in Lebanon and Italy? The potential is there.

As part of the investigation into seven contracts worth $8bn that Sonatrach awarded to Italian oil major Eni between 2007 and 2009, the Algerian judge visited his Italian and Lebanese counterparts to gather additional evidence that led to the conviction of Chakib Khelil and his henchman Farid Bedjaoui in August 2013.

According to our sources, Khelil, who fled to the United States in April 2019, is no stranger to the contract signed in 2005 between Sonatrach and EDL since he was energy minister at the time.

Bedjaoui, who became a Lebanese citizen in July 2018, is also cited by our sources in Beirut. Sonatrach has already announced that it will not renew the agreement with EDL when it expires on 31 December 2020.

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