Algeria has survived the decade of political turmoil, with Arab Spring revolutions subverting authoritarian leaders across the Maghreb, largely unscathed. Popular unrest was swiftly quelled by government handouts and thereafter kept on a minimal level, even though the nation has been ruled by Abdelaziz Bouteflika for almost 20 years.
Bouteflika, confined to a wheelchair after a 2013 stroke and avoiding public appearances, still managed to secure a fourth presidential term in 2014. Yet despite the relative tranquility, pressure is mounting on the Algerian establishment to conduct thorough reforms that would modernize the country’s society and kick-start economic growth. Being a very young society – Algeria’s population has grown by 10 million in the past 17 years – diversifying away from oil & gas will be the primordial task of the government.
The reform indispensability factor looms large on the agenda, since no one wants to be the person to admit that future generations will be worse off than their parents. In order to diversify in the future, Algeria needs to fully tap into its oil & gas reserves now to raise much needed cash. For this, the government needed to put Sonatrach, the national oil and gas company, on a firm footing – the past eight years have seen six different CEOs at the helm of the company. However, last year’s nomination of Abdelmoumen Ould Kaddour, invested with sufficient authority to conduct far-reaching reforms, might herald a new era for Algeria’s oil sector.
The new Sonatrach strategy (named SH 2030) is essentially a combination of facilitating foreign involvement, revitalizing downstream and developing Algeria’s heretofore off-limits shale gas deposits. The timing is more than appropriate – under current conditions Algeria’s oil reserves will be depleted in 32 years (for the sake of comparison, Saudi Arabia’s current proven reserves are enough for 61 years of current-level production), deteriorated by the fact that oil production has been falling steadily since the mid-2000s. This is not that easy to discover, though, as most statistics will present a combined oil + condensate graph, which remained fairly stable throughout the past five years (even though it, too, fell from a 2 mbpd peak in 2007 to the current 1.55 mbpd).
Graph 1. Algeria’s Oil Production and Exports (mbpd), Fiscal Breakeven Price ($/bbl) in 2010-2018.
(Click to enlarge)
Amending Algeria’s hydrocarbon law underpins Ould Kaddour’s drive to give real substance to reform – after more than a year’s work, the draft should be ready by late 2018. Albeit stopping short of altering Sonatrach’s 51 percent-49 percent stake allocation rule or entrenching upon its full transportation monopoly, the new hydrocarbon law will allow for a bigger variety of contracts – in addition to currently used production sharing agreements, concessions and risk service agreements will also become part of the game, with new tax remissions also being mulled over. Despite some progress in a country historically known for endless red tape, the initiatives proposed by the government feel somewhat lacking in ambition, especially if one is to take into account the absolute failure of the last two licensing rounds (the 2011 round wielded only 2 permits out of the possible 10, the 2014 round ended up with a mere 4 permits out of 31).
Ould Kaddour and the energy minister Mustapha Guitouni will try to push forward the reform agenda, however, they will not be able to fully overcome traditional roadblocks which hinder Algeria’s development for decades. Here are five trends to look out for in the upcoming months:
1. Oil losing out to gas for good
Virtually all of upcoming new projects are within the gas sphere – the Touat gas project (expected plateau production of 4.5 BCm/158 BCf per year), the Timimoun field (1.9 BCm/65 BCf per year) or the Reggane field (2.9 BCm/102 BCf per year) either started already this year or are on the brink of commissioning. No similar big projects can be seen in the oil sphere – Sonatrach focuses instead on enhanced oil recovery projects at its flagship assets, most notably the nation’s largest oil field, Hassi Messaoud. Algerian authorities prioritize gas development because it is a crucial element of domestic electricity consumption – roughly one third of the 91 BCm of gas annually produced is used for generation purposes, which increase year-by-year by around 6%.
Bureaucratic foot-dragging is one of the main reasons why Algeria has seen no ambitious project coming down the pipe. Of the 41 potential licenses made available to foreign investors, only 3 are being developed in the initial setup, with a long list of European majors (Repsol, ENI, Total) relinquishing their stakes, most notably from the Boughezoul and Tinrhert licences – half of the permits granted in the 2014 licensing round. Either they hard-bargain the investment terms into the ground or simply dole out less prolific fields which end up being dry, the result is the same. Cognizant of the limitations stemming from Algeria’s tradition of resource nationalism, the government could supplement the mild changes in the law code with sweeteners (e.g.: tax exemptions – easing local content requirements or the windfall tax) to be negotiated situationally with prospective suitors. This, however, is a long shot in the short-to-mid-term horizon.
3. Establishing a firmer downstream footing…abroad
Sonatrach has shaken up the Mediterranean downstream market by acquiring ExxonMobil’s Augusta refinery in Sicily for approximately $1 billion. The sole fact that this deal took place is an acknowledgement of the many woes of present-day Algeria – against the background of a depreciating Algerian dinar, importing motor fuels is an increasingly costly business (the overall Nelson complexity of Algeria’s refineries barely reaches 4 and only the Skikda refinery can produce unleaded fuel). At the same time, by buying Augusta, Sonatrach acknowledged that the refinery modernization drive, launched more than a decade but progressing very slowly, will not be able to meet the country’s current needs. Sonatrach intends to bring in a fuel hydrocracker and naphtha reforming unit at the Skikda refinery and a MTBE unit at Arzew, however, these measures are inadequate to turn the fuel scarcity around.Related: Oil’s Next Hotspot: The Cowboy State
4. Algeria’s own shale gas revolution progressing…slowly
Shale gas is the only viable long-term solution to Algeria’s energy woes – according to current estimates, its shale gas reserves surpass fourfold its conventional ones (estimated at 700 TCf/20 TCm). Yet shale gas development is a highly politicized issue in Algeria, since the most gas-prolific regions of the country are also its most fragile from the point of view of water availability. Hence, when Sonatrach spudded its first shale test well (Ahnet-1) in December 2014, protests flashed up across the southern and central provinces, demanding a moratorium on hydraulic fracturing out of fear that the already scarce water resources would be fully depleted. Further complicating matters, shale drilling would necessitate massive foreign involvement which will be inevitably turned, in the usual resource nationalist manner, against whoever decides to proceed with shale drilling.
5. Balancing out of Algeria’s domestic product demand
Historically, Algeria has been very long on LPG and Naphtha supplies due to the low complexity of its domestic refineries, however, it imports substantial amounts of gasoline and diesel (around 70 000 bpd). The acquisition of the 175 kbpd Augusta refinery would allow Sonatrach to cover its domestic needs – a sorely needed development for a country which is one of the few remaining nations to rely on leaded gasoline. Lacking funds for a substantial refinery upgrade within Algeria, Augusta’s output will be the instrument by which Sonatrach will balance out its product demand in the next 10-15 years. With the motor fuel deficit expected to double in ten years, to a level of 130 000-140 000 bpd, Augusta will provide the goods until Skikda and Arzew refineries are brought to a sufficient capacity and complexity level. By Viktor Katona for Oilprice.com