Continued government investment to reinvigorate Algeria's energy sector

Hydrocarbons activity is the single most important industry in Algeria, accounting for approximately 60% of government revenues and 95% of total exports. The fall in oil prices since mid-2014 of more than 50% had a negative impact on the country’s finances and resulted in a halving of earnings from hydrocarbons exports. Concerns have been raised that the decline in oil prices may result in decreased capital expenditure across the sector, with small companies expected to suffer the most in the near term. It is hoped that continued government investment will ensure the sector’s stability.

The fall in earnings pushed Algeria’s budget deficit to 18% of GDP in 2014, its highest level in 15 years, forcing the government to tap into its €140.9bn currency reserves.

Average production was 1.1m barrels per day (bpd) in July 2015, down from 1.9m bpd in 2008, and despite plans to increase those figures to lower the impact on the economy, the country has been only modestly successful in stemming the maturation of major fields.

Domestic Impact

This drop in production has had a significant impact. Falling hydrocarbons revenues and the failure to diversify Algeria’s economy forced the government to trim spending by 1.3% in its 2015 budget and by a forecasted 9% for 2016. Despite Algeria’s need for crude oil to be traded at $121 per barrel to avoid a budget deficit, its 2015 budget was initially prepared with a price of $90 per barrel, and subsequently had to be readjusted to $60 barrel (see Economy chapter).

The international decline in oil demand – along with the growth in output of countries such as Iraq and Libya, and the US’s emerging shale oil production – will continue to put significant downward pressure on prices.

Output

Amid the fall in oil prices and domestic pressure to uphold public spending, the government has tried to increase output. The government-owned Sonatrach has plans for significant investment over the next five years, which will be mostly directed towards ramping up conventional oil and natural gas production close to producing reservoirs, and ensuring maximum recovery at currently producing fields.

The country expects to produce 225m tonnes of oil equivalent by 2019, of which 144m will be destined for export. Algeria has recently added 32,000 barrels per day from its two newly producing fields: Bir Seba, which added 20,000 bpd and reserves estimated at 758m barrels, and Bir Msana in the Hassi Messaoud area, which added 12,000 bpd and 144m barrels in reserves.

OPEC

A declining oil producer among its Organisation of Petroleum Exporting Countries (OPEC) peers, Algeria has been unsuccessfully calling for the organisation, which is responsible for 40% of global oil production, to reduce supplies in order to halt the decline in oil prices. Ramtane Lamamra, minister of foreign affairs, said in October 2015, “The current price is not satisfactory. Going back to the very high price of before would be an illusion and not realistic. There could be satisfactory solutions for everybody between the two.”

However, Saudi Arabia has led the 12-member organisation to keep production levels unchanged at 30m bpd to maintain low prices and slow growth in non-OPEC oil producers, thereby impeding competitors – such as US shale producers – while maintaining its market share. OPEC’s better-off members – such as Saudi Arabia, which has a sovereign wealth fund containing over €620bn – can afford to keep oil prices low, but countries such as Venezuela and Algeria, which are highly dependent on revenues derived from hydrocarbons exports, will have to bear the consequences, reduce their spending and delve into their currency reserves.

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The Report: Algeria 2015

Energy chapter from The Report: Algeria 2015

The Report: Algeria 2015

The Report

This article is from the Energy chapter of The Report: Algeria 2015. Explore other chapters from this report.