Major investments in Algeria focus on energy sector turnover and enhancing the value chain

 

Like most of the world’s producing countries, the glut in global oil supply and the subsequent collapse in prices has had a deep impact on Algeria’s economy, which has seen hydrocarbons revenues – for which state finances remain heavily dependent – sharply decline and foreign interest dampen. This, combined with maturing production at the country’s main oil and gas fields, has encouraged Algeria to consider new approaches with regards to its hydrocarbons potential. As output has remained more or less constant, efforts are currently under way to boost the sector’s turnover in the coming years, with plans to enhance activities all along the value chain.

To that end, in October 2017 Algeria announced plans to invest $78bn in the hydrocarbons sector between 2017 and 2021, with the largest share to be devoted to surveying and exploration. The plan aims at safeguarding and meeting domestic energy needs while boosting export revenues. It also targets the expansion of exploration activities with the goal of increasing hydrocarbons reserves and enhancing national output for oil and gas in the medium and long term. In an attempt to meet increasing domestic demand for energy products, additional investments will be directed at strengthening the country’s processing and refining capacities.

Revenues 

Energy earnings make up over half of government revenues and around 95% of exports. As a result, the collapse in oil prices has had a significant impact on the overall economy on the back of declining export revenues, which have dropped to around half of their value compared to 2014. Indeed, hydrocarbons exports fell from $58.4bn in 2014 to $27.7bn in 2016. For the first nine months of 2017 energy exports reached $24.41bn, up 19% compared to the same period in 2016, and accounted for 94.66% of total exports. By year-end, this figure is expected to rise to $31bn according to projections unveiled to the press by Algeria’s minister of finance, Abderrahmane Raouya. This marginal recovery in export revenues saw the trade deficit contract by 40% to $7.3bn (€6.2bn) through to September 2017. In 2016 it had widened to $20.4bn, up from $18.1bn a year prior, while the current account deficit grew considerably from 4.4% of GDP in 2014 to 16.9% in 2016.

Authorities have strived to bring about adjustment to the country’s ailing finances through currency devaluation, import restrictions and the phasing out of subsidies; however, their effect has been modest, and oil prices are likely to remain the key determining factor in the sector’s contribution to economic growth in the short and medium term (see Economy chapter). As of December 05, 2017 oil prices were trading at $57.17 per barrel, down from $114 in June 2014.

Balancing Supply 

In an attempt to drive down the excess in global oil supplies and rebalance prices, an accord – also known as the Vienna Agreement – was struck in December 2016 between OPEC and 11 non-OPEC members to cut production by 1.8m barrels per day (bpd) in the first half of 2017. During the bloc’s most recent policy meeting in November 2017, the supply restraint deal was extended to run through to the end of 2018. This decision was perhaps influenced by projected trends in demand for oil and petroleum products, which, according to the Paris-based International Energy Agency (IEA), are set to increase. Indeed, global oil demand is expected to grow at a faster pace than anticipated in 2017, with the IEA increasing its estimates for the year to 1.6m bpd, or 1.7%. Moreover, the agency expects to see global demand for crude oil rise by a further 1.4% in 2018.

Upstream Performance 

While exploration and production (E&P) activities in Algeria’s hydrocarbons sector are mainly carried out by the country’s state-owned oil and gas company, Sonatrach, most of the world’s major energy firms have operated to some extent on Algerian soil. Recent years, however, have met with a slowdown in E&P activities, primarily on the back of declining oil prices, which has affected profitability and the cost of doing business in Algeria. Currently, ongoing projects are generally those for which agreements were concluded prior to 2014. This trend is not particular to Algeria but rather one that has been witnessed across most oil-producing countries as investors decreased the budgets that have traditionally been allocated to E&P activities.

In Algeria’s case, a number of other factors – both local and external – have contributed to the downturn. The legal framework governing hydrocarbons has long been regarded as impeding. Despite several attempts to reform the law, its terms remain a deterrent for foreign investors and have caused the country’s last two bidding rounds to prove fruitless (see analysis). Considerations are currently under way, however, to reform existing legislation in a bid to stimulate foreign investment, with a first draft expected by June 2018, according to statements made to the local media by Mustapha Guitouni, the minister of energy. The new law is expected to bring about additional tax incentives and simplify bureaucracy. Although, the 51:49 foreign investment cap will remain untouched.

Another challenge for Algeria’s hydrocarbons sector are the multiple discoveries that have been made across Africa in recent years, such as the Zohr gas field in Egypt, which have driven interest elsewhere. “The trend in E&P has been to go toward areas that present the least risk due to the current price of the barrel,” Arezki Hocini, president of the state’s oil licensing body, the National Agency for Hydrocarbons Resources Valorisation (Agence Nationale pour la Valorisation des Resources en Hydrocarbures, ALNAFT), told OBG. “Companies have decreased their budgets and we have had to adapt.”

Exploration 

While foreign investors have shied away, Sonatrach has maintained its investments with plans to inject upwards of $50bn in E&P between 2016 and 2021. This is expected to see annual output exceed 230m tonnes of oil equivalent (toe) by 2021. As of September 2017, 26 new fields had been discovered, mostly to the north and south of the country, accounting for an estimated 130m toe. The field count is expected to exceed 30 by the end of the year.

There have been a significant number of exploration projects in Algeria, though most of them, particularly over the past 10 years, have been led by Sonatrach. This can largely be explained by the lack of potential partnerships in this field, which have been harder to come by on the back of constricting regulation and the more recent decline in profitability.

As a result, the country’s national energy firm had to step up its efforts to meet sector targets by boosting output and exports to offset any potential decline in production in the face of dwindling foreign interest and depleting reserves. With two-thirds of its territory currently unexplored, Algeria holds significant untapped potential in that regard. In 2017 ALNAFT commissioned a complementary research study to explore its hydrocarbons potential particularly in the largely untouched offshore fields in the northern area.

Offshore 

While Algeria has not established any large-scale offshore activity since the 1970s, the sector possesses a great deal of potential according to the president of ALNAFT. “We have launched a call for expression of interest. Although no agreement has yet been signed, several major companies have expressed interest in carrying out the required studies, and accords to that end are expected to be concluded in the very near future,” Hocini told OBG.

According to local media reports, Sonatrach is carrying out discussions with Italy’s Eni, and American firms ExxonMobil and Anadarko to start offshore drilling. Encouraged by other successful Mediterranean discoveries and by its favourable climate, offshore exploration is also seen as a more accessible and affordable alternative to exploration in the south of the country, according to Hocini.

Oil 

According to BP’s “Statistical Review of World Energy 2017”, Algeria’s total proved oil reserves as of end-2016 stood at 12.2bn barrels, making it Africa’s third largest behind Libya (48.4bn barrels) and Nigeria (37.1bn barrels). Hassi Messaoud is the country’s largest oilfield with a crude output of around 500,000 bpd, accounting for around one-third of the national total. Other producing fields include Ourhoud, Hassi Berkine, El Merk and Bir Seba. Low global oil prices, tough contractual terms and stringent legislation have resulted in a reluctance on behalf of foreign companies to invest in the oil sector in recent years.

As a result, Sonatrach has sought to forge bilateral agreements with foreign partners as a way to keep up with its target of boosting crude oil output by 14% by 2019 (see analysis). The state-owned company has also been prompted to divert attention to optimising output in currently producing and maturing fields to offset any potential decline in production. Previously estimated at 1.1m bpd, output in the country’s fields has seen a reduction of 50,000 bpd, in accordance with the Vienna Agreement signed in December 2016.

Gas

At the end of 2016 Algeria’s total proved natural gas reserves stood at 4.5trn cu metres, the second-largest in Africa after Nigeria (5.3trn cu metres), according to BP. The country ranked first, however, in terms of output, with a return of 91.3bn cu metres for 2016. In the face of rising local demand – domestic consumption swallowed up 40bn cu metres in the same year. The government is looking to increase its natural gas output by 13% by 2019.

The bulk of Algeria’s natural gas production comes from the Hassi R’Mel field in the wilaya (province) of Laghouat, with estimated reserves of around 2.4trn cu metres. The remainder of the producing fields are located predominantly in the south and south-east of the country. Sonatrach saw gas production start at two new fields in 2017 with a combined capacity of 20m cu metres. Three major gas sites located in the wilaya of Adrar are also due to come on-line in the near future as part of the Sonatrach funded South-West Gas Project (SWGP). Comprising a total of seven fields, the SWGP aims to increase annual gas production by 16bn cu metres by 2018. The first is the Reggane North project, which is being carried out with Spain’s Repsol and is expected to produce 8.2m cu metres of gas per day and 148 bpd of condensates once operational at the end of 2017. Next in line are the Timimoun and Touat projects, which are both due in the first quarter of 2018 and are being developed in partnership with French firms Total and Engie, respectively.

Pipelines 

With the anticipated increase in gas output, Algeria also plans to enhance its gas transportation capacity by 18.3bn cu metres per year by 2019. Algeria’s natural gas is transported through three transcontinental pipelines with a combined annual capacity of 54bn cu metres. These include Enrique Mattei, connecting to Italy via Tunisia; Pedro Duran Farell, connecting to Spain; and MEDGAZ, which also connects to Spain and Europe. Plans are under way to boost the latter’s capacity from its current 8bn cu metres per year to 10bn cu metres. In 2016 Algeria’s pipelines transported 37.1bn cu metres of gas, up from 26.3bn cu metres a year prior.

Gas Contracts 

Sales of gas have traditionally been governed by long-term contracts with European partners, often exceeding 25-year agreements indexed to oil prices. Algeria, however, is now looking at renegotiating such contracts – most of which are due to expire by 2021 – and explore more flexible opportunities for the marketing of its gas in line with evolving trends in demand and supply. These would potentially include contracts of 10 to 15 years and spot contracts, enabling the country to benefit from growing global demand. In 2016 Algeria exported 53.1bn cu metres of gas, up from 44.3bn cu metres in 2014.

Speaking at the Oil & Money 2017 conference in London in October, Sonatrach’s CEO, Abdelmoumen Ould Kaddour, suggested creating joint ventures with trading companies that would not be indexed based on oil prices. According to Nabila Metref, head of commercialisation at Sonatrach, “Despite fluctuating hydrocarbons prices, Algeria has always heavily invested in its oil and gas value chain, with its current diversified export transit capacities including pipeline transportation and liquefied gas plants. Combined with the country’s strategic geographic position, this natural gas/liquefied natural gas (LNG) flexibility allows Sonatrach to quickly react to cover international demand by boosting gas exports to Europe via pipeline and supplying LNG to other markets, such as those in the Middle East, Asia and Latin America.”

Recovery 

With most of Algeria’s hydrocarbons derived from mature and depleting fields, and in line with its ambitions to boost output, a greater focus is being placed on the need to optimise production, notably through the use of enhanced recovery technology. To that end, Sonatrach is looking to partner with foreign investors to collaborate in matters of know-how and technology transfer, with a number of service contracts having already been concluded.

In 2016, for instance, the company awarded a $339m contract to Global Japan Corporation to enhance production at the Hassi Messaoud oilfield. Moreover, a project led by Sonatrach at Hassi Messaoud is currently under way to recover gas for the first time at this oilfield, with production expected to begin before the end of the year, delivering 10m cu metres of gas daily. “Recovery efforts carried out by Sonatrach in the country’s maturing fields have started to bear their fruit,” according to François Lagardère, country manager at Engie. “The question that lies ahead, however, is how to utilise these recovered resources.”

Recent projects have been launched to support the state-owned firm’s intentions to market part of its recovered wealth. In September 2017, for example, plans were announced for a more than €140m flare gas recovery plant in Hassi Messaoud by a consortium binding Swiss-Swedish multinational ABB Group and the Société Algérienne de Réalisation de Projets Industriels (SARPI). The plant is expected to allow the recovery of 900,000 cu metres of gas per day, 500,000 cu metres of which is destined for sale, while the remainder will be re-injected into production. A similar unit was also set up in the Rhourde El Baguel gas field in September 2017. This plant is expected to recover 17m cu metres of flare gas per day with 6m cu metres destined for exports and 11m cu metres to be re-injected back into the field to enhance productivity.

Shale Gas 

A growing debate has surrounded the potential development of shale gas in recent years. Algeria is estimated to have 20trn cu metres of technically recoverable shale gas resources, according to the US Energy Information Administration, representing the third-largest reserves in the world after China and Argentina. On the other hand, efforts to explore the resource by Sonatrach in the Ahnet Basin in 2014 caused conflict with environmentalists and the local population living in the area. The matter has also divided policy makers, with former energy minister Noureddine Boutarfa, for instance, announcing that there was no immediate need to develop shale gas and to focus instead on developing renewables in order to consolidate energy self-sufficiency. Talks, however, have unfurled in a different direction more recently, with authorities expressing their eagerness to continue the exploration and development of shale gas.

Lng 

Algeria has two liquefaction centres located in Arzew (46m cu metres per day) and Skikda (10m cu metres per day). Installed capacity is significant, yielding more than 5% of the world’s total liquefied natural gas (LNG) exports. The industry exports just over half of its output annually, which in 2016 accounted for 15.9bn cu metres, down from 16.6bn the previous year.

To strengthen its LNG shipping capacity, Sonatrach, via its subsidiary Hyproc Shipping Company, acquired two new tankers in 2017, each bearing a capacity of 169,000 cu metres, bringing the company’s total fleet to eight LNG tankers, six liquefied petroleum gas tankers and two bitumen carriers. The purchase was the first of its kind since 2008 and is expected to help accommodate the future expansion of the industry.

Refining 

Algeria also aims to expand its downstream sector to enhance activities along the value chain. In addition to the five oil refineries located in Adrar, Arzew, Algiers, Skikda and Hassi Messaoud, four new plants are expected to be added, bringing its output of refined petroleum products to 50m tonnes a year by 2040, up from 30m tonnes currently. The value of the project is estimated at $6bn with two plants to be set up in Skikda and one each in Tiaret and Hassi Messaoud. A call for tender is expected to be launched for the latter two in the near future, according to local media. Once operational, the nation is expected to become self-sufficient in processed output, with the potential to export part of this to nearby markets.

“In general, Algeria is switching from selling brute oil to creating value. For example, following new regulations, Sonatrach now offers free access to its transport network to international companies that wish to move their output,” Slimane Arbi-Bey, vice-president of transport at Sonatrach, told OBG. “The national hydrocarbons company is currently in discussions to transport their production abroad. It owns a ramified network that crosses 34 wilayas and has the capacity to deal with potential increases in foreign demand.”

In the meantime, the industry should receive a boost from the much-anticipated delivery of the Algiers refinery, which has been under renovation since 2015. Expected in early 2018, the plant should see its refining capacity increase by 35% and therefore help address the pressing need to reduce the import Local oil consumption is estimated to have doubled between 2010 and 2017, rising from 210,000 to 420,000 barrels of refined oil products – particularly fuel – which have come to weigh heavily on the country’s trade balance.

Domestic Consumption 

As consumption outstrips supply, demand for fuel has resulted in an annual import bill of $1bn in recent years. Part of the 3.5m tonnes of fuel imported per year can be attributed to the rising number of vehicles purchased over the past seven years and to inefficient energy use.

Local oil consumption is estimated to have doubled between 2010 and 2017, rising from 210,00 barrels to 420,000 barrels. Overall, local demand takes up one-third of hydrocarbons output. As of September 2017 national energy consumption stood at 44m toe, up 0.7% year-on-year (y-o-y). Natural gas consumption was also up by 3% y-o-y, reaching 31bn cu metres of gas. In an attempt to alleviate the burden on public finances and reduce the budget deficit, the government phased out a number of energy subsidies in 2016, including electricity, natural gas, petrol and diesel.

Power 

Algeria is currently reaping the benefits of the investments made in its power sector over the past 10 years, with total power generation capacity reaching 15 GW in 2016, up from 13 GW in 2012. With the majority of projects carried out by state-owned power company Sonelgaz and its subsidiaries, plans are under way to invest $20bn in building new power plants with the view of doubling the country’s electricity output by 2020. These efforts come on the back of yearly increases in electricity consumption. As of July 2017 consumption peaked at a record 13,881 MW, representing a growth of 8.1% y-o-y.

Planned investments to boost generation capacity in the medium term bode well for the sector; however, a number of issues need addressing. “There is strong demand for electricity in Algeria,” Touffik Fredj, president and CEO for North-west Africa at General Electric (GE), told OBG. “The challenge that lies ahead, however, will mainly be to sustain significant levels of investment in power generation under such difficult economic circumstances, while at the same time preparing the ground to receive this added capacity through investments in distribution and transport,” he added. It is worthwhile to point out that focusing on efficiency and waste reduction could also contribute to striking a balance between supply and demand.

Renewables 

Algeria has seen increased interest in the development of its renewable energy sources. To support this, the government announced an ambitious plan in March 2017 to develop a 4-GW solar project (see analysis). The initiative is part of the broader National Development Plan for Renewable Energies, which was launched in 2011 and amended in 2015 with the aim of achieving 22 GW of renewable energy generation capacity by 2030. The programme is expected to mobilise $120bn (€100.1bn) in investment and significantly boost the share of renewable energy to the country’s energy mix from 2% to 27% by 2030.

Out of the planned 22 GW, solar photovoltaic will account for 61.7% of projects, followed by wind with 22.7%, thermal solar 9%, biomass 4.5%, co-generation 1.8% and geothermal 0.07%. Though still in its early days, the newly established Ministry of Environment and Renewable Energy should help support the country in its ambitions in the medium and long term.

Outlook 

With two-thirds of its territory still untapped, a nascent downstream sector and the determination to introduce changes, Algeria’s energy industry presents undeniable benefits. The outlook with regard to hydrocarbons output is likely to remain unchanged in the immediate term, while projects in E&P continue to be carried out. “The challenge that lies ahead of Algeria is to maintain production in its energy sector while enhancing productivity and efficiency,” GE’s Fredj told OBG. Digitising operations throughout the value chain is certainly one way to help achieve that goal. In addition to the much-anticipated reform of the hydrocarbons law, investors will be assisted in their decision-making by a database compiled by ALNAFT since 2007, which pertains to a variety of activities in the energy sector and is expected to launch in 2018. Moreover, government plans to bring about structural changes to the national oil and gas company also bode well for the future of the sector, though specific details of the changes to be brought about were yet to be unveiled at the time of writing.

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The Report: Algeria 2017

Energy chapter from The Report: Algeria 2017