Algeria to spend its way out of trouble

Algerian state-owned firm Sonatrach has pledged huge investment in order to reverse falling revenue in what is Africa’s biggest gas producer and third-biggest oil producer.

Both oil and gas production have fallen over the past decade, affecting the finances of a government that relies on hydrocarbons for 60% of its budget revenues and 95% of export revenues. Sonatrach has already demanded that its contractors and service suppliers reduce their fees by 10-15% in order to take some of the sting out of lower oil prices, but genuine reforms are needed if the country is to make the most of its oil and gas potential.

Sonatrach’s management has been overhauled in preparation for the new spending strategy. Many of the old faces have been moved on and 22 new group managers appointed, including the new chief executive, Amine Mazouzi, who previously worked in the parastatal’s production development department. He is the fifth CEO at the company in five years, a period in which it has struggled to cope with lower oil prices; falling demand in its main gas markets, Spain and Italy; and a succession of corruption scandals. Mazouzi has announced that he will implement his predecessor’s preliminary plan to invest $90bn over the next five years in order to increase oil and gas production, despite the fact that it is predicated on an average oil price of $70/bbl over that period.

Low international oil prices have had a big impact on the Algerian government and state finances. Reduced export revenues have forced the government to tap its previously plentiful foreign reserves and prompted President Abdelaziz Bouteflika to name new finance and energy ministers. At $12.54bn, oil and gas export revenues were 42.8% lower over the first four months of this year than for the same period in 2014. With Bouteflika apparently still ill and possibly sidelined, government officials say that they are keen to attract more foreign investment but it remains to be seen whether the old problems will be tackled.

Sonatrach continues to dominate the industry and there is far too much bureaucracy surrounding foreign investment. Under the current investment regime, the state oil firm takes a guaranteed stake in all joint ventures with foreign companies. Last year’s licensing round for new oil and gas exploration blocks failed to attract much interest, with only four of the 31 blocks on offer actually awarded.

Algiers’ attitude to reforming its hydrocarbon investment regime fluctuates in line with international prices. When prices are high it is content to retain Sonatrach’s dominant position in the sector, with big restrictions on the role of foreign investors in the country. When prices are low, it talks about instituting major reforms to encourage greater foreign investment but the reforms that are actually implemented are fairly limited in practice.

This pattern looks like being repeated this time around, as the government has $198bn in foreign reserves and relatively little debt, so it is far better positioned to withstand a sustained period of low revenues than most other net oil exporting countries. However, continued low oil prices for at least another five years would seriously erode the government’s finances. Even if the terms of investment were then improved and significant new discoveries made, it would take several years to reverse declining hydrocarbon revenues.

New production

Sonatrach has tried to show that it can be successful on its own terms even without foreign support. In the first two months of this year, the company made two hydrocarbon finds in the Ghardaia and Touggourt regions that it described as “extremely high quality”. Further drilling is planned on both discoveries. Out of the 30 finds made last year, which collectively added an estimated 7bn barrels of oil equivalent (boe) to national reserves, Sonatrach made 29 of them. According to the firm, national output increased by 32,000 b/d in July as two new fields came on stream: 20,000 b/d from the Bir Sebaa field and 12,000 b/d from Bir Msana. It is working alongside PTTEP of Thailand and Petrovietnam on the former; and Petronas and Cepsa on the latter. Output on Bir Sebaa is expected to be ramped up to take advantage of its reserves of 758m barrels, reaching 40,000 b/d by 2019.

Algeria is still a more important producer of gas than oil and gas field development will account for $22bn of the 2015–19 expenditure. Total hydrocarbon production last year stood at 4m boe/d, up 4.4% on the previous year, with oil accounting for just 1.2m boe/d. Sonatrach aims to increase gas production from the established In Salah project and the commencement of production on the Timimoun and Touat fields. Algeria’s ability to increase its gas exports is partly dependent on the European Commission’s desire to enforce competition legislation. At present, Algeria sells most of its gas exports to Italy and Spain via pipelines running under the Mediterranean Sea. Weak economic and energy demand in both of those markets would not be so crucial if it were easier to market Algerian gas in other European countries but there are still restrictions within what is supposed to be a common European Union gas market.

The five-year investment programme includes $400m to be spent on a shale gas project with an unnamed foreign partner, as Sonatrach seeks to exploit a natural resource that it has thus far ignored. The US Energy Information Administration estimates the country’s technically recoverable shale oil reserves at close to 6bn barrels, in comparison with 12.2bn barrels of proven crude oil reserves. However, its technically recoverable shale gas reserves are even more impressive, at 700 trillion cu ft, much greater than its proven natural gas reserves of 159 trillion cu ft. Despite the shale gas boom in North America, Sonatrach has been reluctant to exploit its own reserves, partly as a result of a lack of domestic expertise in the necessary technology but also because of the government’s reluctance to liberalise the investment regime.