The collapse in the global oil price has left many governments in developing countries struggling with difficult economic choices and political challenges. Algeria is among them.
While the country remains a key exporter of natural gas and has a promising future with shale, investing in Algeria’s oil and gas sector remains risky for energy companies exposed to events there, especially at a time of low international energy prices.
Algeria is the largest natural gas producer in Africa and the third-largest oil producer after Nigeria and Angola. The oil and gas sector is the most important driver of the economy, accounting for 30% of GDP and 60% of government revenue.
But because of the country’s overdependence on oil, the fall in the oil price has had huge economic and political effects. As Algeria’s present economic situation continues to deteriorate, investment needed to improve Algeria’s oil and gas sector and boost state revenues has dried up.
“Algeria’s revenues fell by 40% last year, while its deficit widened from 6.2% of GDP in 2014 to 11.5% in 2015,” says Ante Batovic, analyst at Global Risk Insight.
“The government is planning to increase oil production by 5% in 2016 and offer new energy-exploration rights to international oil companies. However, it is doubtful if it will find many takers in the current low-price environment.”
According to Batovic, around 80% of the country’s oil and gas infrastructure is still owned and controlled by Algeria’s national state energy company Entreprise Nationale Sonatrach (Sonatrach), the largest corporation in Africa, with a consolidated turnover of $100bn in 2013, according to a report on Africa’s oil market published by global accountancy firm EY in February 2015.
While Sonatrach has prioritised infrastructure in some areas, it has been the victim of political interference in its technical decision-making: in 2011, former Sonatrach chief executive Mohamed Meziane received a two-year prison sentence for misusing public funds after he awarded contracts to companies without competition.
Restrictive legal conditions have also limited investor interest in future projects in Algeria, despite 18 new hydrocarbon discoveries made there in 2014.
According to Algerian law, Sonatrach must own a 51% stake in domestic hydrocarbon projects, while investment costs are exclusively borne by international energy companies during the exploration phase of a project.
Costs are only reimbursed by it once a discovery is made and even when opportunities arise, there are often delays in getting government approval of projects and work. Add to this the obligations for foreign oil firms to employ the services of Algerian subcontractors and personnel in preference to skilled foreign staff and firms, and investors can be reluctant when it comes to the Algerian oil and gas sector.
To bolster the economy, Sonatrach did announce its intention to allow overseas corporations to commence fracking operations for shale gas in December 2013. But most of the wells and deposits discovered so far in Algeria are in the central and southern Saharan areas of the country, which raises security issues, as these areas are near Libya and Mali.
Moreover, fracking is a water-intensive process in an arid region, and as the water used is chemically treated, it cannot be used again.
The threat of groundwater pollution from fracking caused a major backlash against shale gas extraction in March 2015. The fallout from Sonatrach’s embrace of shale gas revealed the widespread opposition
to it in many Algerian communities.
In February 2015, Sonatrach’s then chief executive, Said Sahnoun, underlined to journalists at a press conference arranged to highlight the firm’s new shale gas operations.
“Sonatrach is a corporate citizen which will never carry out some activities that may be detrimental to the health of citizens or to the environment,” he said.
He highlighted that an environmental management plan had been developed for extraction operations in the Ahnet basin near the oasis town of Ain Salah, also known as In Salah, and claimed reassuringly that five environmental inspections had been carried out.
A month later, The Ecologist magazine reported that Ain Salah, which lies deep in the Algerian Sahara about 750 miles south of Algiers, had been the scene of violent protests against Sonatrach operations by locals, still worried about the effects of the drilling on their water supplies.
The government is officially in the hands of President Abdelaziz Bouteflika, but he is 79 and in bad health. According to media reports, his government has announced it will amend the constitution in order to make Algeria’s system more democratic and accountable, but there are strong doubts that the changes will make any real difference.
Algerian distrust of its government extends to the pronouncements of its state-owned energy giant and attaches to the international partners who, by law, must work with it.
The In Amenas gas plant in the southeastern Illizi province was attacked by al-Qaeda-linked terrorists in 2013. The facility was often described as a BP project, but was in fact a joint venture with Sonatrach – an unpopular actor in the area.
Hoping to lure investors back, Algeria has increased security at oil and gas facilities since the attack at In Amenas.
Declining production has also caused the Algerian government to temper its laws on foreign investment in the sector in an attempt to attract the investment and technology improvements it needs to reverse them.
Nonetheless, according to the US Energy Information Administration just last August: “Civil unrest and some opposition to the government’s commercialisation of shale resources may present obstacles to attracting foreign investment.”
It does not seem likely that 2016 will give investors pause to reconsider this judgement.