Given its substantial oil and gas reserves, Algeria has maintained its position as a major global player in the hydrocarbons sector. Of all the oil exporters in the world, Algeria ranks 16th, with most of its oil heading to the US and Europe. Algeria is the fourth-largest crude oil producer in Africa, with an estimated 12.2bn barrels of proven reserves as of January 2012, according to the Oil and Gas Journal. The country was estimated to have 159trn cu feet (tcf) of proven natural gas reserves as of January 2012, and produced 2.83 tcf of natural gas in 2010.

KEY SECTOR: Algeria’s economy is still largely dependent on the energy sector, with hydrocarbons accounting for around 60% of budget revenues, 30% of GDP and 96% of export earnings, according to a 2012 OPEC report. The country nationalised its hydrocarbons sector in 1971, but since the 1980s has increasingly invited foreign firms to take part in exploration – all in all, some 40 international firms are involved in the sector. Harry Simons, country manager for Hess Algeria, told OBG, “Algeria is one of the world’s largest oil and gas producers and while regulations are complicated, companies are attracted to high-quality, long-life, low-cost production with appealing financial returns.”

BP put Algeria’s crude oil production for 2011 at 1.72mm barrels per day (bpd). Gas production stood at 2.75 tcf in 2011. While the industry is heavily export-oriented, with direct pipelines to the eurozone and a sizable volume of liquefied natural gas (LNG) exports, the economy of Algeria has been steadily growing in recent years, resulting in an increasing demand for energy at home. In 2010 Algeria earned €56bn in revenue from exports of oil, although in February 2012 the Ministry of Energy and Mines announced that the figure for 2011 had decreased slightly to €54.98bn.

A corruption scandal in 2010 and management changes in state-owned hydrocarbons giant Sonatrach, which holds a stake in numerous upstream projects, slowed activity in the months that followed. After the scandal, Sonatrach named Abdelhamid Zerguine, a 30-year veteran at the firm, as its new CEO in November 2011, and by early 2012 the energy sector had regained stability. A new hydrocarbons law was approved by the Council of Ministers in September 2012 that amended regulations to provide more attractive conditions for exploitation of unconventional resources and an improved tax regime, encouraging foreign companies to partner with local firms.

Sergey Panferov, Gazprom’s general manager in Algeria, told OBG, “The potential for Algeria remains huge in terms of exploration and production, but 2012 will be a crucial year – for one thing, the whole sector is hoping for more flexibility in the current regulations.”

SONATRACH: The state-owned energy company Sonatrach dominates the energy sector in Algeria.

The parastatal is active in exploration, production, pipeline transportation, and marketing of hydrocarbons and various by-products. It is required by law to take a stake in all domestic downstream and upstream projects. While the majority of Sonatrach’s operations are located in Algeria, the firm also has upstream projects in other African countries, such as neighbouring Mali, Niger, Egypt and Libya. Additional operations carried out in Europe, Latin America and the US have been intensified since the late 1990s, when Sonatrach began to diversify both in terms of area as well as the types of projects it was involved in. Future expansion efforts will predominantly target Africa, the Middle East and Latin America. Sonatrach also intends to strengthen its global position by increasing gas exports.

Youcef Yousfi, the minister of energy and mines, told OBG, “We intend to increase Sonatrach’s portfolio of oil and gas reserves through research and the acquisition of deposits abroad, particularly in Africa, the Middle East and Latin America. We also want to consolidate existing markets and continue to play an active role in the international energy industry, and aspire to increase gas exports by diversifying.” Sonatrach also operates in the Sahel and North Africa, with exploration blocks in Niger, Mali, Mauretania and Libya. The company is looking at exploration and production opportunities in West Africa and is present in Latin America as part of a consortium at the Camisea field in Peru.

Nationally, partnerships with foreign companies will be enhanced by new exploration efforts and the use of new technologies. Investments will be made in both upstream and downstream areas, as well as in pipeline transportation; however, the upstream segment will be given priority. Other potential areas for expansion include trading and shipping of oil and various service activities.

STATE INVESTMENT: For 2010, Sonatrach reported a turnover of €43.4bn, making it the largest energy company in Africa and the 12th largest in the world. Sonatrach ranks fourth in the world in terms of exporting LNG, third when it comes to liquefied petroleum gas (LPG) exports and fifth in natural gas.

The government plans to inject €62.28bn over the next five years into the hydrocarbons sector, mainly to expand exploration and production. Of the total investment, 82% will be put into the upstream segment, 9% into the downstream segment and the rest will be dedicated to transportation. The amount is about €9.34bn higher than that indicated in previous reports. The investment, slated to take place between 2012 and 2016, is set to increase Sonatrach’s operations both upstream and downstream. “About 82% of these investments will target exploration and exploitation, 9% of the investments will be for the refining sector and the remaining will target the midstream sector, including canal transportation,” Yousfi told OBG.

NEW DEVELOPMENTS: Irish international oil and gas exploration company Petroceltic International received over $100m from selling 18.37% of the Isarene licence, which holds the Ain Tsila gas field, to Italy’s Enel in a deal announced in April 2012. Petroceltic may receive further payments from Enel as different regulatory approvals are obtained. The Irish firm remains operator of the permit with a 56.63% share, with Sonatrach holding 25% and Enel 18.37%.

Together with partners Sonatrach, RWE Dea and Edison, Spanish oil and gas company Repsol was granted authorisation by the National Agency for the Development of Hydrocarbons Resources (Agence Nationale pour la Valorisation des Ressources en Hydrocarbures, ALNAFT) to develop the Reggane Nord project in the Algerian Sahara Desert. Repsol holds a 29.25% stake in the partnership, while Sonatrach has 40%, Germany’s RWE Dea 19.5% and Edison of Italy 11.25%. The project is aimed at developing wells, surface facilities and infrastructure to exploit commercial reserves found in the blocks. Production should start in mid-2016 with an expected output of 8m cubic metres of gas per day. With an estimated investment of €2.23bn, the project includes the construction of a surface gas gathering network system, a gas accumulation system, and a pipeline for export and infrastructure.

After signing contracts with Italian multinational Eni, independent Canadian oil and gas company Talisman Energy and Total of France, Sonatrach is discussing collaboration with ExxonMobil and Shell regarding the exploration and production of unconventional gas, shale gas and tight gas. Sonatrach has also announced the signing of four contracts with French-US group Schlumberger and Halliburton-Enterprise de Service aux Puits, a joint venture between Halliburton and a local partner, regarding well services for oil and gas fields in Algeria. The contracts have a value of €446.65m.

Germany-based electric utility E.ON and Sonatrach have made further oil and gas discoveries in the Rhourde Yacoub licence area in the Berkine basin in eastern Algeria. The discoveries were made in the seventh exploratory well on the Rhourde Yacoub Block 405a licence, 250 km south-east of Hassi Messaoud. E.ON operates with 49% interest and will drill several wells in the next two years to appraise the full extent of the discoveries.

REGULATORY ENVIRONMENT: The 2005 Hydrocarbons Law introduced a number of market liberalisation measures. Previous restrictions on upstream and downstream activities were reduced, and the legal and tax regimes were simplified. The government also eased the 51:49 rule, which stipulates that in any joint venture an Algerian state-owned entity has the right to keep at least 51%, giving Sonatrach the majority. However, the company could still claim a 20-30% share at the production stage. International oil companies operating in Algeria welcomed the new law since it gave them more room to negotiate higher shares as part of exploration and production contracts.

One major change was the establishment of two new official bodies, the Hydrocarbons Regulatory Authority (Autorité de Régulation des Hydrocarbures, ARH) and ALNAFT. With the ARH and ALNAFT in operation, Sonatrach was essentially relieved of its responsibilities as a sector regulator. Under the new law, ARH was tasked with the implementation and enforcement of regulations applicable to the exploration and production of hydrocarbons. ALNAFT took over management of the bidding process, and approves respective contracts and development plans. Following ALNAFT’s approval of the development plan of any contract, the partner must enter into a joint operating agreement with Sonatrach within 30 days.

However, in 2006 the government reinstated the 51:49 shareholding rule. Following implementation, the 2005 Hydrocarbons Law was subjected to additional amendments, sending mixed signals to the oil and gas industry. One of the changes entailed the introduction of a windfall-profit tax that had an impact on the operation of firms producing under old contracts. Thus companies, especially those with large output volumes, faced additional taxes once the oil price rose above $30 per barrel. By 2008 all foreign companies in Algeria were asked to present an Algerian partner holding at least a 51% stake in the venture. The impact of a stricter regulatory environment was made clear during the bidding rounds for oil and gas concessions, which attracted less and less interest from foreign companies (see analysis). Three bidding rounds produced poor results. In the most recent licensing round in March 2011, only two out of 10 oil and gas blocks were awarded. Spain’s Compañía Española de Petróleos (Cepsa) and Sonatrach won the bids. Consequently, Yousfi announced in December of 2011 that changes would be made to the existing hydrocarbons law.

The new revised law, which was approved by the Council of Ministers in September 2012 (see analysis), has yet to be implemented, but offers more tax breaks for foreign oil and gas companies. While under the previous code taxes were levied based on the turnover of a project, the new legislation states that applicable taxes are to be paid based on the returns of the foreign company. Exempted from this new rule is, however, is the windfall-profit tax, with the government maintaining that it needs to look after its own national interests.

The government acknowledges the potential risk for companies developing fields in areas with limited access and infrastructure, as well as offshore. Minister Yousfi stated on national radio: “The tax incentive measures mentioned in the bill do not concern the windfall-profit tax, but rather are basing oil taxation on the difficulty and the investment made in oilfield development. We aim to boost the development and exploitation of medium-sized oilfields located in undeveloped and underexplored areas, such as offshore sites. Such amendments are not a result of foreign pressure, but rather… our own interests.”

The changes will only be applicable to new projects and not to existing agreements. While the 51:49 rule has been retained, in the past this rule has not proved particularly troublesome for foreign oil and gas companies. With this move, the government of Algeria intends to recapture the confidence of international companies interested in investment and exploration in the country. As Tarik Mokrane, Shell Algeria country chairman, told OBG, “Now it is time to sit down together and talk.”

CRUDE OIL: In 2011 Algeria produced an estimated 1.72m bpd of crude oil, according to BP. Most opportunities for exploration are near the borders with Libya and Tunisia. Algeria’s oilfields produce high-grade oil with little sulphur and mineral content.

To compensate for the decline in production in older fields, Sonatrach is increasing exploration and development of new fields. This will be crucial going forward, although perhaps not sufficient by itself, according to Mohammed Fechkeur, president of Red Med, an energy industry services firm. “Given its numerous energy export contracts with foreign partners, as well as growing international demand, Algeria needs not only to accelerate and increase the drilling campaigns but also to explore alternative energy sources,” he told OBG.

Sonatrach’s largest oilfield, Hassi Messaoud, produced an average of 350,000 bpd during 2010, about 28% of national production. An LPG plant was recently added to Hassi Messaoud, and the government is developing new sections of the field by awarding new permits. Hassi Berkine produced 300,000 bpd in 2010, and is jointly operated by Sonatrach and the Anadarko Petroleum Corporation. The Ourhoud oilfield is located in the Berkine basin and operates under Sonatrach and Cepsa, with output of 250,000 bpd. South of Hassi Messaoud in the Sahara lies the El Merk field, developed by Sonatrach, Anadarko and Burlington Resources. Once fully operational by the end of 2012, it is expected to produce 100,000 bpd of crude oil, 30,000 bpd of condensate and 30,000 bpd of natural gas liquids. In June 2012 production was at 1.2m bpd, according to Sonatrach.

PIPELINES & EXPORT TERMINALS: Crude oil exports in 2011 amounted to 750,000 bpd, with the US being the single largest importer of Algerian crude. About 40.5% of Algerian crude went to the US, 38.5% to Europe and 19.3% to Asia. Seven coastal terminals meet Algeria’s export needs for crude oil, refined products, LPG and LNG. The biggest terminal, Arzew, handles about 40% of Algerian hydrocarbons exports, including all LNG, LPG and condensates. Other export facilities include: Skidka, Algiers, Annaba, Oran, Bejaia and La Skhirra in neighbouring Tunisia. Oil is transferred from fields in the interior of the country to export terminals via a 4300-km pipeline network that is operated by Sonatrach. The main pipeline connects the Hassi Messaoud oilfield to the export terminals.

Other important pipelines are: two parallel 900-km lines from Haoud Al Hamra to Arzew; the Haoud Al Hamra-Bejaia pipeline, which is 750 km long; and the Haoud Al Hamra-Skikda line, which is 720 km. The pipeline from In Amenas to La Skhirra in Tunisia runs for 870 km. Sonatrach also operates oil condensate and LPG pipeline networks that link Hassi R’Mel and other fields to Arzew.

GAS: With 159 tcf, Algeria has the 10th-largest proven gas reserves in the world and the second largest in Africa after Nigeria. About 85 tcf of gas, more than half of Algeria’s total, can be found in the Hassi R’Mel gas field in the east. The south-east of the country is home to a number of other natural gas reserves in associated and non-associated fields. According to BP, in 2010 the estimated gas production was 2.83 tcf, slightly higher than the year before, when it stood at 2.81 tcf. The drop reflected the government’s changed energy strategy as well as decreased gas sales, with contributing factors including infrastructure and feedstock-related issues as well as a lack of new exploration. While in the US and Russia, gas flaring has recently increased, Algeria has had tremendous success in reducing the practice, according to a 2012 World Bank report.

The World Bank stresses the importance of reusing gas that has been emitted in oil production; however, in Algeria the government does not issue quality or emission standards. Instead, Sonatrach issues emission standards on a case-by-case basis and may impose operational restrictions, and the firm has worked on gas flaring reduction with the World Bank for a number of years. Since 2005 efforts to reduce gas flaring have cut greenhouse gas emissions by a volume equivalent to that emitted by some 16m cars.

One major new addition to the segment is the Southwest Gas Project, which aims to further develop gas fields in the country’s south-west. The project includes: the Reggane Nord field, with 102 bcf per year, which is being exploited by Repsol; Total’s 56-bcf-per-year Timimoun project; and French multinational GDF Suez’s Touat project with 159 bcf per year. The Reggane Nord project was approved in November 2011 and includes the construction of gas gathering facilities, a gas treatment plant and an export pipeline to the GR5 gas transportation system between the Reggane tie-in and the Hassi R’Mel gas hub. The project is divided among Repsol with 29.25%, Sonatrach with 40%, RWE Dea at 19.5% and Edison at 11.25%. It is anticipated that the project will come on-line in mid-2016, two years later than originally estimated. With Reggane Nord the wider development of Algeria’s south-west gas fields will open up, including the Timimoun and Touat projects. The Timimoun project is set to come on-stream in 2014, and Touat is expected to be given the green light in the near future, according to a report by Algeria’s state news agency in February 2012.

DOWNSTREAM: Due to insufficient refinery capacity, Algeria needs to import huge quantities of refined fuel products. In 2011 alone Sonatrach had to purchase 1.3m tonnes of fuel to meet growing national demand. The total refining capacity of Algeria’s four refineries was 450,000 bpd, according to the Oil and Gas Journal. Existing refineries in Arzew, Skikda and Algiers will be upgraded and expanded. Rising demand for gasoline and diesel has lead to an increase in imports of refined products. The country also recognises the need to upgrade its refining capacity. Gabino Lalinde, project manager for Repsol, told OBG, “A vast renovation programme is currently being implemented to upgrade the main refineries, along with plans for new ones, which will enable the country to boost its refining capacity.”

Processing 300,000 bpd, the refinery in Skikda produces around 67% of Algeria’s refined products; however, following a modernisation and expansion plan, the refinery should double its output capacity before the end of 2012. The refinery in Algiers is also to be upgraded from its current output of 60,000 bpd to 80,000 bpd by end-2014. The Algiers plant is supplied by the Hassi Messaoud oilfield, and is geared to meet the demands of the European market.

Upgrading quality as well as quantity will be key, according to Abdelmalek Sahraoui, CEO of Petroser, an Algerian firm that produces and sells petroleum products. “As the demand for petroleum products, including fuels, lubricant and bitumens is increasingly growing, customers are becoming also much more demanding in terms of quality,” he told OBG.

PETROCHEMICALS: Algeria’s petrochemicals sector is also set for expansion. While still underdeveloped, it has become part of a bigger government investment plan to turn the country into an international player. The development of the industry not only serves to meet national demand and reduce imports, but also maximises the value of hydrocarbons. In June 2012 Sonatrach CEO Zerguine announced plans to expand the gas resource base and boost refinery and petrochemicals capacity. As part of the push to expand the petrochemicals industry, the government intends to focus particularly on developing synthetic fibres, plastics and fertilisers, and on becoming a major player in the international market for these products.

In Egypt, for example, the petrochemicals sector has been developed since 2002 based on a 20-year master plan and has grown ten-fold in terms of revenue. A number of significant project have already materialised, including a €54m acrylic fibre complex in partnership with India’s Aditya Birla Group, and a methanol plant and ammonia facility in Alexandria. But Algeria produces far more oil and gas than Egypt, output which can be used to support the development of the petrochemicals industry. It is unlikely that petrochemicals producers in the region will have a problem with surplus capacity in the near term since Africa’s potential as a growth market is relatively large.

Foreign companies interested in investing in Algeria will have the opportunity to build petrochemicals facilities to help develop the industry locally.

Current expansion plans include a LNG facility plant and three LPG plants. The Arzew refinery has a capacity of 60,000 bpd, and based on a 2008 contract the refinery is expected to increase capacity by 30,000 bpd. The upgrade of the facility was initially planned for completion before the end of 2012.

However, the project had to be halted due to a shortage of ethane to supply the cracker.

Future ethane supplies should be provided by the Hassi R’Mel natural gas fields, 500 km away, but feasibility studies for transport over such a distance must be completed first. Sonatrach and Total had previously shared operation of the Arzew refinery, although the joint venture was extended to Qatar Petroleum (QP), changing the shareholdership to Sonatrach (51%), Total (39%) and QP (10%). A total investment of €2.33bn in the project is planned for the future. By tapping into locally available gas resources, the plant will be able to produce at a lower cost than European petrochemicals facilities.

Arzew’s €2.33bn petrochemicals complex benefits from a high ethylene production capacity, integrated downstream plants and labour costs that are much lower than in Europe. These factors will allow for more efficient operation of the plant, and once Arzew swings into full operation ethylene capacity should rise to 1.23m tonnes per annum (tpa) and polyethylene capacity should reach 878,000 tpa.

The 30,000-bpd Hassi Messaoud oil refinery supplies southern Algeria and operates as a regional substation. A Sonatrach project to build three additional LPG trains was awarded to Italian firm Saipem in 2010, but has since been delayed. Sonatrach had planned to start up a 1m-tpa methanol complex in 2012. The plant is being built by a number of companies led by Kuwait’s Qurain Petrochemicals Industries Company. However, restructuring within Sonatrach and a new round of negotiations on the contract has pushed the completion date back to 2014, and this may result in reduced capacity.

BIDDING ROUNDS: The poor results for the last three bidding rounds for new oil and gas projects in Algeria indicated a decline in interest in doing business in the North African country among foreign oil and gas companies. This became especially apparent in the last bidding round held in 2011. For the 10 blocks open for bidding only four companies submitted proposals, even after the government extended the deadline for several weeks to encourage more interest among the some 40 firms eligible to bid. Only two blocks were awarded: the Rhourde Fares licence went to state conglomerate Sonatrach, and Cepsa was awarded the Rhourde Rouni block.

Two years earlier, the 2009 bidding round generated just six submitted bids for 10 blocks, of which three were awarded. Ahnet, which had been on offer during the previous round, was awarded to a consortium of Total, Partex Oil and Gas, and Sonatrach, which was the major shareholder. Repsol, GDF Suez and Enel received Sud-Est Illizi, and Hassi Bir Rekaiz went to Thailand’s PTT Exploration and Production and the Chinese National Offshore Oil Corporation. Prior to that, a bidding round in 2008 raised a lot of interest since it was the first one to be held after the amended 2005 Hydrocarbons Law. Despite some 50 firms showing interest in the 16 blocks on offer, only four submitted bids, among them Gazprom, Eni, BG Group and E.ON Ruhrgas.

In the three bidding rounds since 2008, a total of 36 blocks were on offer; however, only nine blocks were awarded. Foreign oil and gas companies seem to have perceived the business environment in Algeria to be unfavourable and potentially risky, and as a consequence refrained from submitting bids. The amendments of the new hydrocarbons law in 2012 are expected to generate new interest, however.

SHALE GAS: Algeria sees a promising future in the exploration of shale gas. After initial tests in three provinces covering 180,000 sq km, Sonatrach announced that the country has shale gas reserves of 600 tcf. About 20% of these reserves, according to Sonatrach officials, are recoverable, which makes Algeria the first African country to undertake extensive exploration activities with regards to shale gas.

Exploratory drilling began in early 2012 and continued throughout the year. With the increase of shale gas exploration in the US and rising demand for gas globally, Algeria is hoping to become a major supplier of shale for the international market in the future. Several fields in the western basin, such as Ahnet and Tinhert, are already undergoing test drilling and hydraulic fracturing. Sufficient amounts of water, which is required for shale gas exploitation, are also available. In the eastern basins the existence of well-developed infrastructure offers cost-effective exploration and exploitation, though Algeria will require foreign expertise and technical understanding to further develop shale gas reserves as it has yet to develop much of the technology required for such projects.

In addition, according to Abdellah Merad, the general manager of Schlumberger’s Algerian operations, there is still much that can be done to improve the environment for conventional resources first. “Even though unconventional resources represent a bright opportunity for the sector, more should be done to optimise the business processes related to the extraction of conventional resources first, as current production is decreasing even as local demand is rising.”

FOREIGN GAS FIRMS: Based on a cooperation agreement that was signed in May 2011, the Italian company Eni has partnered with Sonatrach to develop shale gas. Talisman is also exploring and developing several fields in eastern Algeria, and production is set to begin in 2013. The company has earmarked €20.5m for exploration in the year 2012, with the initial stage concentrating on drilling wells. Focusing on the Mouydir basin of Algeria, Royal Dutch Shell signed a contract with Sonatrach to look into shale gas and oil potential. In addition, talks with ExxonMobil are ongoing, with the aim of exploring further possible collaboration.

As a result of the changes to the hydrocarbons law collaboration with various major foreign oil and gas players is expected in the near future, and minister Yousfi has reiterated that Algeria is willing to work with all its partners. GDF Suez recently announced that it has drilled the second of 24 production wells at the Touat field, and output is expected to begin there in 2016. GDF Suez has a 65% share in Touat, while Sonatrach holds the rest. The project will be the French utility’s biggest for exploration and production, with investment of $3bn. Production will depend on a pipeline linking the field to its northern network. The construction of the backbone-GR5 pipeline from Reggane to Hassi R’Mel has been approved, and the complete system will be built by Sonatrach.

ELECTRICITY & RENEWABLE ENERGY: With economic growth exceeding 2.3% in 2012 and projected to reach 2% in 2013, domestic demand for energy is growing as well, which will have knock-on effects on the country’s export volumes. As part of the Algerian government’s strategy to reduce its dependency on fossil fuels, renewable energy has increasingly become a focus. Given the current rate of expansion of domestic consumption, there are concerns over the sustainability of gas exports beyond the next 20 years. Therefore, the government has taken steps to mitigate reliance on conventional forms of energy with a national renewable energy plan approved in February 2011.

Under the National Renewable Energy Programme 2011-30, the plan’s initial phase, currently under implementation, seeks to consolidate available data from different renewable energy disciplines and to assess various technologies for their suitability. The second phase, from 2014 to 2015, will accelerate investment in renewables, with the final stage, from 2016 to 2020, targeting large-scale deployment.

The overall programme aims to produce 22,000 MW of electricity by 2030, or about 40% of national energy generation. In comparison, natural gas currently produces about half of that amount. The state-owned utility responsible for electricity production and supply, Sonelgaz, intends to provide about 10,000 MW of the production from renewables for export, especially to Europe, and has expressed interest in a long-term partnership with foreign companies. Forms of renewable energy that have generated interest include solar and wind power, biomass, geothermal and hydropower. At the launch of the programme, Noureddine Bouterfa, the CEO of Sonelgaz, announced that Algeria has earmarked an investment of €46.71bn until 2030 in order to implement this strategy. “The development of renewable energy is a key strategy for Algeria,” Bouterfa said.

The Ministry of Energy and Mines has also confirmed that solar energy has the greatest potential for renewable energy in the country. According to the World Energy Council, Algeria benefits from an average of 2000 hours of reliable sunshine annually, with the high plateau of the country reaching up to 3900 hours. Algeria’s government has shown a commitment to implementing renewable energy initiatives, following international trends. The key will be to balance the use of conventional energies with alternative energy resources by harnessing renewable potential, which includes efficient and sustainable use of already developed energy sources.

Farouk Benabdoun, general manager of Siemens Algeria, told OBG, “Algeria aims to be a major actor in the production of electricity from photovoltaic and solar power given that it can not only serve as a source of energy but also a lever for economic and social development, particularly through the establishment of job-creating industries that manufacture the needed equipment.”

At the end of 2011 Algeria reached an agreement with the DESERTEC Foundation, a Germany-based global civil society initiative that was established in 2009. The intended goal of the agreement is to shape a sustainable future by enhancing the usage of renewable energy, especially in sun-rich deserts. One of DESERTEC’s focus regions is the Europe and the Middle East and North Africa. Ultimately, the project wants to secure 15% of Europe’s electricity supplies via North African renewable energy projects. The memorandum of understanding signed between Sonelgaz and the DESERTEC Industrial Initiative is the third of its kind, following similar agreements with Morocco and Egypt. Morocco is the first developing nation to announce the goal of securing over 40% of its electricity from solar energy.

Algeria’s solar hybrid power plant with a combined cycle, the first of its type in the North African region, is located in Spanish firm Abengoa’s Hassi R’Mel gas field in the north of the country. It generates 155 MW of electricity from 224 solar collectors and a turbine fired by gas and sun. The use of such technology will most likely increase in the future. In April 2012 Siemens was awarded a contract to provide long-term maintenance services. In July 2012 the Algerian Electricity and Gas Company invited national and foreign firms to bid for the construction of photovoltaic and wind farms, and Sonelgaz awarded a contract to German firm Centrotherm Photovoltaics to build a solar energy plant worth €317.63m. It will produce up to 120 MW of electricity and is expected to begin operations in 2013.

HIGH CONSUMPTION: Power consumption in Algeria is among the highest in North Africa. The heavy use of air conditioning during the hot summer months contributes to electricity shortages, resulting in power cuts. Demand for electricity went up by 14.5% year-on-year in 2012. In 2013, it is expected to rise to 11,436 MW and may even reach 20,000 MW by 2017. Currently, the national power capacity is over 10,000 MW, while consumption is an average of 7000-8000 MW per year. Christophe Begat, country president for Schneider Electric, told OBG, “Electrical energy consumption will double by 2030, so in return it is necessary to reduce CO emissions by a factor of two. The development of the renewable energy sector thus offers massive potential.”

The government decided in August 2012 to increase Sonelgaz’s 2012-16 investment programme from an additional 8000 MW to 12,000 MW within the next five years. To meet the rapidly growing demand Algerian authorities have announced plans to build nine new power plants over the next five years, with a total capacity of 8050 MW. International tenders have been launched for the construction of four new gas turbine power plants in Tamanrasset (51 MW), Illizi (30 MW), Béni Abbès (34 MW) and in El Goléa (60 MW). In Boumerdès Province, a new combined-cycle facility with a 1200 MW capacity will also be built. The contract, worth €715.9m, was awarded to the South Korean group Daewoo EC.

WATER MANAGEMENT: Water is a scarce commodity in Algeria, and the country lacks adequate water infrastructure. The government has embarked on various programmes aimed at providing a sustainable supply of water. One of the key areas of focus is further investment in desalination plants and gradual improvement of infrastructure by building more dams, drilling wells and maintaining transport infrastructure.

Today, Algeria has 68 dams that are used to supply fresh water, compared to only 13 dams at independence in 1962. Then, Algeria’s fresh water capacity was only 430m cu metres, reaching 2.6bn cu metres in 1999. As of 2012 the country’s water supply stands at 7bn cu metres. The National Agency for Dams and Water Transfer is currently overseeing the construction of 12 additional dams, with three more planned for the future. While the availability of water has increased during the last decade, per capita water availability has experienced a steady decline. At independence, Algeria had 1500 cu metres of water per capita, but by 1998 this dropped to 630 cu metres. Currently, it is estimated at 500 cu metres per capita and is expected to drop further in the future. International organisations such as the World Bank define water scarcity as 1000 cu metres per capita.

The situation is slightly better along the Mediterranean coast, where 90% of the population lives. Since 2007, the government has invested €1.94bn in a seawater desalination programme to build 12 plants with an output of 2.2bn cu metres along the coast. Significant plants include Maagta in Oran, currently the biggest membrane-based reverse osmosis desalination facility. Maagta is designed to produce 500,000 cu metres of water every day. The Fouka facility, which covers the needs of the eastern regions of Tipasa Province and parts of Algiers, has a capacity of 120,000 cu metres per day.

Management of water resources falls under the state-owned Algérienne des Eaux, which oversees processing, storage, supply, and distribution of drinking and industrial water. The Ministry of Water Resources, set up in 2000, is implementing a national water strategy by improving resource mobilisation, protecting existing water resources and focusing on sustainable water governance. The management of water and sanitation in Algeria’s four largest cities has been outsourced to private firms. As Arezki Zerrouki, CEO of the state’s water drilling company Foraqua, told OBG in 2011, “Water is vital to Algeria’s economic development and is just as important as petroleum.”

OUTLOOK: The energy sector remains the backbone of the economy and there is no indication that this will change any time soon. Algeria must find a way to balance its export responsibilities with growing domestic demand. With new, long-awaited revisions to the hydrocarbons law, collaboration with international oil and gas firms is expected to intensify in the future. Following three bidding rounds that ended with limited interest from foreign companies, exploration activities should see an increase given the implementation of a more conducive tax regime.

Hydrocarbons will continue to fuel the national electricity generation, but the country is increasingly diversifying the industry. The reasons for this include growing demand and a desire to become a potential world player in the renewable energy sector. Renewables, especially solar and to a lesser extent wind, have entered the conversation, and conditions for renewable energy generation are favourable. The government has exhibited a commitment to large-scale investments as well as setting ambitious targets to substantially increase the contribution of renewables to the national energy mix. Development of shale gas has also started, with potential deposits showing much promise and opening the doors for substantial foreign investment. While various challenges do exist in the Algerian energy sector, the opportunities for expansion and partnerships are substantial for the right firms.