Focus on renewables adds to Algeria's commitment to fossil fuels

The steep fall of oil prices in 2014 underlined the extent to which the Algerian economy, already under pressure from growing domestic demand for energy and decreasing output, was dependent on hydrocarbons. Algeria is now facing the challenges of reforming and revitalising this strategic sector and, through state-owned energy company Sonatrach and its SH2030 Leading the Change strategy, is giving shape to long-term developments in offshore and shale. Renewables, meanwhile, are set to become an increasingly prominent component of the energy mix.

Size & Performance

The energy sector is the driving force behind the Algerian economy, with hydrocarbons accounting for about 30% of national GDP, 60% of budget revenue and 96% of exports.

Algeria was the biggest gas producer in Africa in 2017. It had some 4.3trn cu metres of proved natural gas reserves, ranking it 10th in the world and second in Africa, behind Nigeria. It was also third largest on the continent in terms of proved oil reserves, behind Libya and Nigeria, and 16th in the world.

In the second quarter of 2018 the National Statistics Office recorded an 8.2% year-on-year decrease in volume terms in the hydrocarbons sector, following a 2.4% drop in the first quarter. This follows a downward trend in output over the last decade: in 2006-16 oil production contracted by an annual average of 2.2%, while gas, conversely, grew by an average of 1.2%. Although oil output experienced a brief recovery in 2016, production was down 2.3% from 1.6m to 1.5m barrels per day (bpd) in 2017. Gas production, meanwhile, was down marginally from 91.4bn to 91.2bn cu metres in 2017. Although primary production from current oil and gas fields is forecast to ease to 181.3m tonnes of oil equivalent (toe) by 2019 and 167.2m toe by 2023, new fields are expected to generate 3.5m toe and 31.5m toe, respectively, for these years, bringing combined production to 192.2m toe in 2019 and 203.7m in 2023. The remainder is to be contributed by associated gas. While energy exports decreased in volume terms in 2017, the recovery in global oil prices allowed Algeria’s energy exports to rise in value, from $27.92bn to $33.06bn. The government forecasts energy export revenue will amount to $33.2bn in 2019, down slightly from the $34.37bn targeted in 2018.

It has been predicted that the world oil supply gap will reach 3m bpd by 2030, and Algeria finds itself in a similar position to that of most hydrocarbons producers, whereby lower oil prices have tightened the resources available for to fund exploration. Due to a combination of falling energy output and growing domestic consumption eating into energy exports, foreign exchange reserves decreased from $178.93bn in December 2014 to $88.6bn in June 2018.

With imports slated to reach $44bn in 2019, compared to a forecast of $43.5bn in 2018, the trade deficit seems likely to deepen. At the core of Algeria’s strategy to reduce imports is a new orientation towards refined products and petrochemicals. Oil refining is expanding, recording growth of 3% in the first half of 2018 relative to the same period in 2017.

Structure & Oversight

The nationalisation of the hydrocarbons industry in 1971 institutionalised the predominance of the state in the sector. Stateowned company Sonatrach is the main oil and gas producer in the country, as it must by law own at least 51% of hydrocarbons exploration and exploitation rights. Sonatrach can choose to carry out activities alone or in partnership with international oil companies (IOCs).

IOCs operating in Algeria include Shell, Total, Eni, BP, Statoil, Cepsa, Repsol and Anadarko, as well as other major players. In 2018 Sonatrach carried out most upstream activities without support from partners, undertaking 73 research perimeters alone, against seven in partnership, and 122 exploitation perimeters alone, against 49 in partnership.

Hassi R’Mel and Hassi Messaoud are the biggest gas and oilfields, respectively, in the country, accounting for 44% of remaining conventional reserves. The Ministry of Energy and Mining oversees the sector, while the Hydrocarbons Regulatory Authority administers it. The National Agency for Hydrocarbons Resources Valorisation (Agence Nationale pour la Valorisation des Ressources en Hydrocarbures, ALNAFT) is in charge of promoting investments and concluding research and exploitation contracts. As the sector is closely tied to the national legal framework, it has undergone many changes. Law No. 86-14 of 1986 was the first piece of legislation to open it up to foreign investment, while stipulating that Sonatrach must hold a minimum 51% stake in any upstream activities. Then in 2005 Algeria took a step towards the liberalisation of hydrocarbons with the draft Law No. 05-07 in April 2005, which was set to allow foreign partners to have a majority stake. However, the state intervened before the law could be published, modifying it with Ordinance No. 06-10 in 2006. This amendment restored Sonatrach’s right to a majority stake, as well as introducing a retroactive windfall profit tax on barrels exceeding $30. The hydrocarbons law was again amended in 2013 with Law No. 13-01, in a bid to offset the negative impact of windfall profit taxes on foreign investment by introducing a battery of investment incentives.

Energy Policy

Policy adjustments were deemed necessary in light of a context of growing demand for energy, combined with decreasing output and vulnerability to external shocks. After a period of unstable management since 2010, Sonatrach was appointed a new CEO in March 2017, Abdelmoumen Ould Kaddour, who has demonstrated a commitment to reform the Algerian national oil company.

The new CEO announced a strategy of overall transformation for the company entitled the SH2030 Leading the Change project, with an investment plan of $55.7bn in 2019-23. Of this total planned investment, 76% will go towards exploration and production (E&P), 16% for refineries and petrochemicals, 3% to pipeline transport, 2% for liquefaction and separation, and 2% to renewables. Beyond Algeria, the company has additional plans to invest some $724m abroad over the period, primarily in Libya, Mali and Niger.

The overarching aim of the initiative is to make Sonatrach one of the top-five national oil companies in the world, and raise its revenue by $68bn between 2018 and 2030. It focuses on reorientating the company towards downstream and more value-added fields like petrochemicals and refining, but also on sharpening its traditional E&P activities, with the support of renewable energies. In addition, it addresses issues related to investment in human capital and digitalisation. Ould Kaddour’s approach is distinguished by an understanding of the importance of public relations, as shown by the regular press conferences he holds, as well as the recent resolution of disputes with foreign partners such as Total, Eni or Saipem. Prior to his appointment, relationships with foreign partners had deteriorated, as evidenced by unfruitful tenders: only four of the 31 blocks tendered in 2014 were attributed. Additionally, Sonatrach has been focusing on internationalisation. It has bought the Augusta refinery in Italy, with ownership transferred in December 2018, and signed a memorandum of understanding (MoU) in August 2018 with Bolivia’s Yacimientos Petroliferos Fiscales to cooperate in gas trading, petrochemicals and refined products.

New Law

Alongside this, the government is preparing a highly anticipated new hydrocarbons law, slated to be finalised in early 2019, which will be more pragmatic and investor friendly than existing legislation. Among the landmark measures it is expected to include are tax incentives and contract models that are more adaptive and responsive to the needs of different projects. The 49:51 policy is set to remain in place, however. Data indicates disinterest among international companies to invest in Algeria in recent years. For instance, 19 offers have been received for the 67 exploration blocks tendered since 2008. Drilling done in partnership has also dropped, from 25 sites in 2008 to four sites in 2018. While oil price volatility and the redeployment of activities by E&P companies can explain part of this evolution, legal frameworks are also a key factor as countries with hydrocarbons reserves compete to attract foreign investment.

The combination of Sonatrach’s new approach and the new hydrocarbons law might lead to a broader change of paradigm in relationships with foreign investors. Ould Kaddour asserts that partners are needed to share risks and finance new projects. This change of attitude is also perceptible in the ALNAFT communication processes: the institution organised an open day in October 2017 to promote its activities and bring together current or potential private partners. “We have changed many of our approaches. We are now more open,” Arezki Hocini, president of ALNAFT, told OBG. A surge of interest among foreign companies has duly ensued. “Even companies which have never operated in Algeria have come to see us,” Hocini told OBG. A further illustration of the positive impact of this more outward-looking approach is the Algeria Future Energy Summit, held in October 2018, which was attended by over 500 guests from 43 countries and led to various new agreements being signed.

Another crucial focus of energy policy is the promotion of energy efficiency and renewable energies, along with a revaluation of subsidies. Mustapha Guitouni, the energy minister, estimates the annual cost of oil subsidies to be $15bn, which Algeria simply cannot afford given the pressure on its finances. In 2011 the government launched the National Development Plan for Renewable Energies. The plan was updated in 2015, and now sets an objective of 22 GW of renewable energy generation capacity by 2030, with a first target of 4500 MW by 2020. This transition is a way for Algeria to comply with the requirements of the Paris Agreement of 2015 on climate change, while in the process easing pressure on its gas resources, which are critically important to generating revenues. Implementation of the plan will be supported by National Fund for Renewable Energies and Cogeneration.

Oil & Gas Value Chains

The oil and gas value chain includes all stages from discovering fields to delivering end-products, such as exploration, development, production, transport, storage, refining for oil or processing for gas, trading, marketing and distribution. Transportation is carried out via pipelines or on liquefied natural gas (LNG) carriers. Oil is stored in tanks, while gas is stored underground. It is a long and complex chain involving diverse costs and risks, especially in the E&P phase, and is highly capital and technology intensive – hence the need for Sonatrach to partner with IOCs that have financial means, experience and technical know-how.

Being more oriented towards upstream activities, Algeria’s economic performance depends on commodity prices. At present, its downstream activities are characterised by a lack of global investment, although there are projects under way to further develop this segment in the medium to long term, and boost downstream activities with more added value. To this end, Algeria is developing petrochemicals, refining and even trading activities, and in August 2018 Sonatrach announced it had entered into talks with 14 foreign companies regarding the possibility of setting up joint ventures.

Oil Prices & Local Industry

Along with many other hydrocarbons-producing nations, Algeria was affected by the drop in international oil prices that began in mid-2014, and which shrank the country’s revenue and investment capacity, and consequently slowed down the broader economy. However, it is notable that the latter proved more resilient than it did during the 1986 oil glut. Sonatrach, for its part, was able to maintain its investments over the period, preventing a dramatic plunge in production as foreign investment decreased in 2015 and 2016.

“The market in Algeria is dominated by Sonatrach, and Sonatrach does not act according to the barrel price. It has a five-year plan,” Zied Ben Hamad, general manager for North Africa at oilfield services company Schlumberger, told OBG. “Nevertheless, Algeria is not impermeable to the international context, and 2015 marked the biggest crisis the industry has known.”

Globally, investment in the hydrocarbons sector decreased between 2014 and 2016 by more than 40%. Investment in upstream, meanwhile, fell by 15.4% in 2016 and 8.3% in 2017, with a direct impact on E&P activity. The first annual rise in oil prices since 2012 came in 2017, with Brent crude oil prices averaging $54.19 per barrel, compared to $43.73 in 2016.

This recovery allowed a range of activities in the sector to resume, with hydrocarbons investment amounting to $450bn globally. There were also further price increases in 2018, with the per barrel price of Brent crude oil topping $80 in October of that year, its highest level since 2014, but decreasing somewhat thereafter, dipping to around $60 in late 2018.


Extensive bureaucracy and high rates of taxation currently hamper foreign direct investment (FDI) in Algeria’s energy sector. It has recorded a continuous decline since 2016, decreasing by 8% in 2016 and 33% in 2017, from $2.1bn to $1.4bn. According to the UN Conference on Trade and Development, FDI in Algeria fell by 26% year-on-year in the first half of 2018, largely due to dependence on hydrocarbons.

The disaffection of foreign investors has impacted production levels in recent years, although they have been kept on track by Sonatrach investments. It was reported that out of the 31 potential licences offered to foreign investors, only three are in development, with all of these at the initial set-up stage.

Moreover, Algeria is increasingly in competition with countries like Egypt that are more appealing to foreign investors. “Everyone wants to work in Egypt. A few IOCs are the traditional partners in Algeria, which is relatively limited for a country offering many opportunities,” Ben Hamad told OBG.

The new hydrocarbons law, expected to be tailored to attract FDI, could reverse this trend, however. Indeed, many players are likely waiting for the law to be implemented before moving in. “Stability of contracts and a more incentivising tax framework would definitely further encourage international investment in the future,” Didier Wloszczowski, Algeria Business Unit Director of Repsol, told OBG.


Decreasing output and maturation of major oil and gas fields such as Hassi Messaoud or Hassi R’Mel has precipitated a need to further exploit Algerian underground reserves, two-thirds of which remain unexplored, especially in the north and south-west of the country. Based on the pace of production in 2017, reserves are forecast to be depleted in 47.5 years for gas and 21.7 years for oil. To address this, Algeria announced that $78bn will be invested in upstream activities through to 2021, with the largest share to be devoted to surveying and exploration.

Recent exploration efforts have proved fruitful, with Guitouni announcing the discovery of 17 oil and gas fields in the first five months of 2018, against 14 for the same period in 2017. In line with a strong acceleration of discoveries since 2010, there were 32 discoveries recorded in 2016 and another 33 in 2017. This helped the level of remaining available reserves increase from 4.13bn toe in 2017 to 4.19bn toe in 2018. Although most discoveries are made by Sonatrach, foreign partners also play a key role in exploration. Sonatrach is similarly predominant when it comes to production. In 2018, for example, 25% of primary production came from projects done in association, while the 75% remaining were done by Sonatrach.

Sonatrach also moved forward on gas exploration with the signing of an MoU with BP and Equinor to explore the basins of south-west Algeria.

While exploration activity is ongoing, there are also concerted efforts to maximise output from existing fields. Indeed, the biggest field development under way in the country is the Boosting Hassi R’Mel Phase III project – a $2.79bn investment planned for the first quarter of 2020, which Sonatrach hopes will maintain the field’s levels of production. Declining hydrocarbons output has also prompted interest in offshore and unconventional hydrocarbons, whose potential is largely untapped. “The Algerian oil map stops at the sea,” according to Ben Hamad. Both feature in the SH2030 Leading the Change strategy, which aims to generate 20bn cu metres of unconventional resources by 2030 and 70bn by 2040, as well as explore the untouched 100,000 sq km offshore area.

In 2014 evaluation of seismic studies carried out off the coasts of Béjaïa and Oran indicated that it might be worth digging further, but to date no drilling has been done. However, steps forward were made in 2018, which saw the announcement of three new offshore studies and a possible start to drilling offshore in 2019, in addition to the signing of a deal between Sonatrach, Total and Eni to pursue offshore exploration.


The Algerian offshore area corresponds with the southern edge of the western Mediterranean, extending from east to west over 1200 km, and covering an area of 93,500 sq km. It is characterised by a relatively narrow continental shelf. Exploration began in the late 1960s with seismic reflection work, and a total of 38,000 km of 2D and 5000 km of 3D seismic surveys have been carried out. Gravimetric and magneto metric surveys have also been also conducted. Deep drilling has taken place at the HBB-1 site in the marginal plateau level of the Habibas basin, in the west zone; and there are two core drill sites, ARZ-1 and ALG-1, on the continental shelf of the Algerian-Provençal basin. The analysis of the results of the HBB-1 drilling, combined with the existing data and basin modelling, suggests that the Algerian offshore area has the possibility of petroleum potential linked to a functional play. To explore this potential, Sonatrach has partnered with Eni and Total in two areas to the east and west, respectively, with the aim of drilling the first exploration wells in the Algerian offshore. As of late 2018 related preparation work was being started, with well drilling to be preceded by a 3D seismic acquisition programme to allow engineers to optimise the position of the well.

Technology & Infrastructure

In addition to conventional and unconventional exploration, Algeria has been making concerted efforts to develop its pipeline network. A new 765-km pipeline connecting Reggane North and the GR5 compression station in Hassi R’Mel was inaugurated in February 2018. This followed the opening of the Hassi R’Mel station in July 2017, which will see the field’s production capacity increased thanks to the new pipeline. Various other pipeline expansions are also taking place. The construction of a new $274m pipeline between El Aricha and Beni Saf started in September 2018 and is slated to finish in August 2020. Spanning 200 km, this development will allow gas from the Maghreb-Europe pipeline to reach MEDGAZ. As a result of this project, the capacity of the latter will be increased from 8bn cu metres per year to 10bn cu metre, following the proposed installation of turbochargers.

In line with its overarching strategy to boost downstream activities, Sonatrach is in the process of revamping several of its oil refineries and gas processing plants. The modernisation project of the Sidi R’cine refinery was expected to be finished by end-2018, and will see its transformation capacity increase from 2.8m tonnes to 3.7m tonnes. With regard to gas processing, Sonatrach, Emerson and Fores Engineering have signed a contract to invest a combined $32m in the modernisation of the Alrar gas processing facility in the eastern wilaya (province) of Illizi.


Reinvigorated by the rebound in international oil prices and the pressing need to foster more value-added activities as oil production declines, Sonatrach is planning to invest in a number of downstream activities, notably petrochemicals. The SH2030 Leading the Change project outlines plans for four petrochemicals projects in partnerships by 2023, concentrated in Arzew and Skikda. A milestone in the execution of this strategy came about in October 2018, when Sonatrach and Total established a joint venture – Sonatrach Total Entreprise Polymère – which will carry out petrochemicals activities in Arzew, transforming propane into polypropylene. Front-end engineering and design of the facility is expected to begin in November 2018. The plant will have a production capacity of 550,000 tonnes per year, sourcing the 640,000 tonnes of propane required for production from the liquefied petroleum gas (LPG) plant in Arzew. Other projects include a polyester production facility in Skikda, and an LPG steam cracker facility and methanol facility, both in Arzew.

In November 2018 Sonatrach signed a stakeholder pact with Turkish conglomerate Rönesans Holding for the construction of another petrochemicals complex in Turkey’s Adana province. With an expected investment of $1.2bn, the plant is expected to transform 550,000 tonnes of propane per year – to be provisioned by Sonatrach from its LPG installations – in order to produce 450,000 tonnes of polypropylene.

With regard to further investment possibilities – given that Algeria intends to increase its output – there are different opportunities to be found in upstream. Alongside this, the development of offshore and unconventional resources could present opportunities in ad hoc technologies and infrastructure, while the shift towards downstream activities will be able to open doors in refining.

Energy Import & Export

Fuel, diesel and petrol account for 80% of Algeria’s derived energy imports. While the volume of petroleum product imports decreased by 3.4% in 2017, the total volume of energy imports increased by 2% in 2017, driven by coke and electricity. Algeria imports relatively small quantities of electricity, though the total more than doubled from 257 GWh in 2016 to 537 GWh in 2017.

Europe is Algeria’s primary market for hydrocarbons exports, accounting for 70% of the total in 2017, followed by the US (15%), Asia (9%), Africa (5%) and the Middle East (1%). Europe also ranks as Algeria’s primary gas export market, comprising some 80% of the total.

In 2017 exports of gas to Europe reached 54bn cu metres and are expected to top 57bn cu metres in 2018, making Algeria the continent’s third-biggest gas supplier after Norway and Russia.

While the instability of the relationship between Russia and Europe could enhance Algeria’s export opportunities, the lack of pipeline networks from Spain to the rest of Europe might prove a hurdle.

Algeria is nevertheless ramping up its export capacity with the extension of the Maghreb-Europe pipeline, launched in September 2018, and is set to increase the capacity of the MEDGAZ pipeline from 8bn cu metres to 10bn cu metres per year. Inaugurated in 2011, MEDGAZ allows Algeria to transit gas to Europe directly, instead of relying exclusively on the Maghreb-Europe gas pipeline through Morocco or the Trans-Mediterranean pipeline that runs through Tunisia. The ownership of the pipeline will shift from Spain to Morocco when the current contract, which was signed in 2011 and covers 640m cu metres, expires in 2021. Talks to extend it are ongoing, and it looks like some Algerian gas will still run through the pipeline.

Neighbouring countries such as Morocco also import gas from Algeria. Partly as a result of imports to the US decreasing because of its own shale gas upsurge, Algeria has recently begun to turn its attention to new markets such as Asia as well as develop its LNG exports. Export levels are of course critically important for the country’s revenues and foreign reserves. With most mid- and long-term Sonatrach gas contracts ending by 2019, Algeria must find alternatives to hydrocarbons at a level that is sufficient to satisfy both internal and export demands.

Renewable Energy

Algeria made the development of renewable energies a national priority with the National Development Plan for Renewable energies, which seeks to have renewable energy sources account for a combined 27% of the national energy mix by 2030. Renewable energies are still largely untapped, with investments remaining modest in spite of considerable potential. Algeria has a high level of sunshine, at over 3000 Hz per year, and an extremely high average insolation of 5 KWh per sq metre per day. This solar potential could satisfy internal demand as well as generate exports. Moreover, production costs in solar and wind are decreasing (see analysis).

Nonetheless, the current installed generation capacity from solar of 340 MW is far from its full potential. Wind also presents opportunities and is similarly underexploited, with installed generation capacity of 10 MW, stemming from a single wind farm in Adrar. To help encourage further participation in the segment, in November 2018 the Regulatory Commission for Electricity and Gas launched a tender for 150 MW worth of solar energy projects, open to both public and private operators, with a possibility of partnership with a foreign company.

These developments are coupled with a will to attract investment, demonstrated by factors such as the new hydrocarbons law and the appointment of Ould Kaddour, who is targeting an integration rate of 55% and has made numerous gestures to encourage investment in the segment, including organising an information day called Opportunities for Investment for Algerian Businesses in September 2018. Renewable energies are set to play a key role in optimising hydrocarbons and therefore export capacities.

For its part, Sonatrach is planning $1.9bn worth of investment in renewable energy over the 2019-23 period, and targeting 1.3 GW of installed generation capacity, which would cover roughly 80% of its sites’ energy needs. Of the total planned investment, $464m will come from the company and the rest from partners, with $506m to be put towards developing solar capacity at some of its industrial sites in the south of the country, and $1.35bn forming part of the national renewable energy programme.

Some progress on the solar front has already been made. In October 2018 the company announced the inauguration of a 10-MW photovoltaic solar plant in its Bir Rebaa Nord field that will produce 20 GWh, which will in turn allow the company to use less gas.


The continued vulnerability of the Algerian energy sector to external shocks makes its continued evolution a necessity. Sonatrach appears to have accelerated this development in recent years and has launched a strategy of transformation of the state-owned oil and gas company, which is set to open opportunities in untapped segments such as renewable energies or downstream activities. This goal was expressed in the SH2030 Leading the Change strategy, and has already generated interest among international companies involved in the country. While diversification will need to remain a top priority to avoid economic crises such as that of the 2015-17 period, energy will remain the most prominent sector for the country in the long run. Proper management of projects, further inclusion of foreign players and an increased participation of new energy sources are all essential to making the country globally competitive.

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The Report: Algeria 2018

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