Despite being a major oil producer, Algeria is a net fuel importer and is thus in the paradoxical position of being rich in hydrocarbons but lacking in refined products. It is currently in the process of developing its refining operations in order to satisfy domestic fuel demand, which has grown steadily since the 2000s.
Reducing Fuel Imports
The development of refining activities is now more urgent than ever. In 2017 domestic electricity consumption and natural gas consumption increased by 6.4% and 7.9%, respectively. Overall energy consumption rose by 7.1% to 16.7m tonnes of oil equivalent in the first three months of 2018, while natural gas consumption was up by 9.9%, reaching 12.8bn cu metres.
Refining production grew by 47% from 443,000 to 651,000 barrels per day (bpd) in 2006-16, with an average annual growth rate of 3.9%. However, it has been largely stagnant since 2014. The country’s six refineries cannot meet demand and fuel has to be imported in considerable quantities – especially diesel and petrol, which account for nearly 80% of derived energy imports. In 2017 the fuel import bill decreased in volume but went up in cost, reaching $1.6bn for 2.96m tonnes, compared to $1.3bn for 3m tonnes in 2016. Although refining throughput rose by an average of 4.3% a year in 2006-16, it has also declined since 2014. However, in the first quarter of 2018 it reached 8.2m tonnes, an increase of 4.4%.
With its investment capacity enhanced by the recovery in oil prices, state-owned energy firm Sonatrach has launched a programme to develop the refining industry and boost annual production capacity from 27m to 31m tonnes by end-2018, and 40m tonnes by 2022. It involves rehabilitating old refineries in Arzew, Skikda and Algiers, the purchase of the Augusta refinery in Italy, and the construction of new facilities in Tiaret, Biskra and Hassi Messaoud. The latter is being developed with $4.2bn of investment and should open in the fourth quarter of 2022.
Sonatrach is also pursuing a strategy of internationalisation to expand refining activities of which in-country development is lagging. In January 2018 the company signed a contract with the Dutch energy firm Vitol to exchange crude for refined products, and is in talks with oil majors and trading firms to create a trading joint venture. In May 2018 it announced plans to buy the ExxonMobil Augusta refinery at a cost of around $1bn. With a capacity of 175,000 bpd, it is set to help reduce fuel imports. Indeed, Abdelmoumen Ould Kaddour, CEO of Sonatrach, told local press that the combined production of the Hassi Messaoud, Algiers and Augusta refineries would be sufficient to cover all of the country’s domestic fuel needs.
One major focus is increasing the production and use of liquefied petroleum gas (LPG). The government has set up a kit subsidy programme aimed at converting 500,000 vehicles to LPG by 2021 and kept LPG prices consistent while increasing the cost of other types of fuel. As a result, LPG consumption went up 57% between 2015 and 2017, and 39% year-on-year in the first half of 2018. By comparison, petrol and diesel use dropped by 6.3% between 2015 and 2017, with further decreases expected in 2018.
In November 2018 Sonatrach signed a $248.5m engineering project construction contract with Italy’s Maire Tecnimont to construct a fourth LPG train in the Naili Abdelhalim industrial complex. Expected to come on-line in 2021, the facility will increase LPG production from 3600 to 4800 tonnes per day. Consequently, LPG presents significant investment opportunities, especially in the development of distribution networks, storage and transport.
Once it achieves self-sufficiency, Algeria plans to turn its strategic focus to boosting exports. It has set a target of exporting 35% of its fuel production by 2023. Storage capacity will therefore need to increase to 2m cu metres by 2021, up from 600,000 cu metres currently, and autonomy rise to 30 days.