The Fuse

OPEC Cuts, Higher Prices Will Not Be Enough to Revive Algeria’s Energy Sector

by Pi Praveen | @PiPraveen503 | March 15, 2017

The steep decline in oil prices beginning in the summer of 2014 devastated Algeria’s export-based economy, with oil and gas making up 95 percent of the nation’s exports.

Algeria, an OPEC member nation and one of Africa’s top exporters of oil and gas, is in dire straits. The steep decline in oil prices beginning in the summer of 2014 devastated Algeria’s export-based economy, with oil and gas making up 95 percent of the nation’s exports. Algeria’s 2016 oil and gas revenues experienced a 23 percent decline from 2015 and a whopping 54 percent decline from 2014. This dismal situation prompted the nation to take a leading role in negotiations preceding OPEC’s agreement to cut production late last year. It now sits on the OPEC Ministerial Monitoring Committee, a group of three OPEC and two non-OPEC nations responsible for ensuring compliance with cuts. However, it is not clear that the country’s prospects will improve in the near future even with OPEC’s efforts to increase global oil prices. Algeria needed a fiscal breakeven price of $96.10 and $93 per barrel in 2015 and 2016, respectively, but the International Energy Agency (IEA) projects oil prices taking until 2020 to reach just $79 to $82 per barrel.

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President Abdelaziz Bouteflika has called for the country to combat the “hegemony of fuel” in light of the devastation. The country will have very far to go in any effort to restructure; it consistently scores far below other Middle East and North African countries on measures of economic freedom. Algeria’s 2016 budget made strides to diversify the economy away from oil by incentivizing private investment in state-owned companies, but it conspicuously excluded Sonatrach, the struggling state-owned national oil company (NOC), from the plan. The 2017 budget furthers this agenda by decreasing subsidies for fuel and electricity. However, demonstrations and riots broke out in northwestern and southern regions last summer and early this year as soon as the austerity measures, long fought by opposition parties, were put in place.

Sonatrach’s current strategies produce lackluster results

Bouteflika’s public proclamations about the “hegemony of fuel” will do little to remedy the country’s deterioration if the government does not deal with Sonatrach’s deficiencies as an NOC and as the nation’s main breadwinner. Algeria delivers new discoveries at only one well for every five that are drilled. It registered a relatively low average production-to-rig rate of 39,000 barrels per day (b/d) between 2006 and 2015, as compared to Nigeria (92,000 b/d) and Iraq (60,000 b/d), both of which have suffered from near-constant violent conflict during that time period.

Still, Sonatrach’s CEO Amine Mazouzi announced last year that Algeria will largely self-finance a $70 billion effort through 2022 to replace depleted reserves and retain its status as a net oil exporter. Recent reports place the estimate at $100 billion, 90 percent of which Algeria says it will self-finance. Plans for expansion focus more on maintaining existing, aging fields like Hassi Messaoud and those in the Berkine Basin than on developing new ones. These new fields include shale gas plays that reportedly hold 709.6 trillion cubic feet in reserves. The government’s reticence to explore these reserves may reflect its fear of a disquieted citizenry—anti-hydraulic fracturing movements are active in pockets of the country—or, on a more practical consideration, its difficulty with finding the water and developing the technology needed to harness shale resources.

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Algeria has expressed interest in expanding its refining capacity, with one source suggesting that the country would like to stop importing refined products by 2018. If successful, Algeria’s replacement of some crude oil exports with refined products exports would bolster its bottom line. Europe continues to be the top destination for 76 percent of the country’s crude oil and condensate exports. Meanwhile, early reports this year showed U.S. refiners’ renewed appetite for Algerian crude after years of little-to-no uptake. Algeria’s Sahara crude grade, however, is easily replaced by U.S. crudes from Bakken and Eagle Ford. The resurgence of U.S. shale as OPEC complies with cuts should once again displace imports of light, sweet oil from countries like Algeria. In such a scenario, planned refineries in Tiaret and Hassi Messaoud (with a total capacity of 200,000 b/d) and five existing refineries contributing a little over 500,000 b/d of product could open up new markets for the country’s crude.

The resurgence of U.S. shale as OPEC complies with cuts should once again displace imports of light, sweet oil from countries like Algeria.

In addition to the 49 international companies considering partnering with Sonatrach’s refining arm, firms such as ExxonMobil and Anadarko are in talks to help jumpstart an offshore drilling arm. If fruitful, Algeria’s foray into the Bejaia and Oran offshore blocks could contribute to the nearly 20 percent increase the country hopes to realize in oil and gas production by 2020. That would require a combined oil and gas output increase of approximately 280,000 barrels of oil equivalent (boe) from 2016 levels. Per the IEA’s 2017 report, Algeria’s crude output will actually drop by 70,000 b/d by 2020 and by another 20,000 b/d on top of that by 2022. Further, the IEA suggests that the country’s attempts to reinvigorate investment into its hydrocarbons sector merely temper this drop, which would otherwise be even more drastic.

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AQIM and IS: a clear and present danger

International oil companies (IOCs) like ExxonMobil, Anadarko, and Schlumberger may be undeterred by the country’s maturing oil and gas fields and dwindling discoveries or Algeria’s poor record on being conducive to foreign investment, but they will find emergent security threats a serious cause for concern. As the Islamic State (IS) is expelled from Libya, fleeing militants are trickling into neighboring nations. Algeria borders Libya, Tunisia and Mali—all of which are attractive destinations for militants looking to calibrate and expand operations in the Northern Africa region.

IOCs may be undeterred by the country’s maturing oil and gas fields and dwindling discoveries or Algeria’s poor record on being conducive to foreign investment, but they will find emergent security threats a serious cause for concern.

The Foundation for the Defense of Democracies’ David Gartenstein-Ross has identified Al Qaeda in the Islamic Maghreb (AQIM) as being more of a threat to regional security than IS. Moreover, AQIM’s leader, Abdelmalek Droukdel, encouraged jihad against Bouteflika and his regime in January. That same month, Algerian armed forces enforced a state of emergency on the border after 800 Tunisians reportedly returned home after fighting for IS. AQIM is suspected to have coordinated the 2013 Tigantourine and 2016 In Salah gas plant attacks in Algeria. The Tigantourine attack killed 38 people, three of whom were Americans. After the In Salah attack on a BP-Statoil facility, AQIM issued a warning to IOCs in Algeria, threatening to carry out further attacks on those involved in upstream shale oil and gas exploration and development.

Threats from AQIM and IS are rising at an inopportune time. Bouteflika’s health continues to decline, and any weakening of his power could worsen the rift between Algeria’s armed forces and intelligence community. January’s unrest may multiply, as much as government officials play off any intimation that protests are reminiscent of the Arab Spring. Under these conditions, Algeria could become a flashpoint amid attacks on oil and gas supply or for insurgency and war. Al-Jazeera quotes Dalia Ghanem-Yazbeck of Beirut’s Carnegie Middle East Center, “The south might become the breaking point of Algeria’s stability, as its topography makes it really hard to control and protect. And that makes it fertile ground for criminal and terrorist activities.”

Algeria’s priority at this juncture is an adherence to discipline as it implements austerity and diversification measures.

Algeria’s priority at this juncture is an adherence to discipline as it implements austerity and diversification measures. On the supply side, Algeria cannot afford a reprise of 2014, when an auction for oil and gas partnerships garnered only 4 awarded blocks out of 31, or of 2015, when the auction was altogether shelved. Algeria’s foreign exchange reserves are projected to shrink to $96 billion by this summer and its sovereign regulation fund (Revenue Regulation Fun) was down to $6.7 billion at the end of 2016. Though the government says it will provide funds of about $90 billion to replace Algeria’s maturing, depleting reserves, it is not in a position to do so now or in the near-future. Bouteflika, or those who speak for the ailing leader, must commit to creating a hospitable business environment for the IOCs with the cash—whether that means accepting that it needs more foreign investment, making contractual concessions, or significantly strengthening internal security.

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