The African energy narrative can be summarized as follows: an underexplored and underdeveloped region with a bright, if not gassy, future. Put another way, the continent, which is among the world’s last oil and gas frontiers, is poised for extraordinary growth. East Africa is especially promising and nations like Mozambique – whose GDP is nearly two and a half times less than the yearly net income of ExxonMobil – may soon dominate global markets.
Still, such success is hardly a foregone conclusion (read: considerable political and physical risk as well as massive infrastructure deficiencies). As such, events in the north and west will continue to define the continent’s energy trajectory in the medium-term. With that said, let’s look at established producer and OPEC member, Algeria.
First, the positives. Algeria holds the world’s 16th largest proved reserves of crude oil and the 10th largest proved reserves of natural gas. Furthermore, it is estimated to possess more than 20 trillion cubic meters of shale gas in addition to an advantageous location between the American, European, and Asian markets. Economic growth is steady and a large stash of foreign reserves dulls the pain caused by any extended oil price depression.
After a poor start to the decade, Algerian crude oil production is finding its second wind. What’s more, its natural gas industry has begun to rebound from the 2013 In Amenas terrorist attack. According to the country’s energy ministry, crude oil and condensate production rose 4.8 percent to roughly 1.2 million barrels per day (mbpd) in 2014. Total gas output increased by 3 percent to approximately 82 billion cubic meters (bcm), or about 5 bcm short of 2012’s pre-attack production.
Over the next five years Algeria plans to invest $90 billion in its oil and gas sector, of which a majority will be put toward upstream initiatives. The general hope is to double both gas production and exports and boost oil production by 50 percent by 2025.
Toward that aim, the country’s South West Gas Project (SWGP) is particularly important. The much-delayed suite of projects jointly developed by Algerian state-owned Sonatrach and a host of western majors is projected to add up to 16 bcm per year by year’s end 2018. Phase 1 – online in 2017 – includes the Touat, Reggane Nord, and Timimoun projects, developed by GDF Suez, Repsol, and Total respectively.
The positivity however, is the exception and not the norm. Despite its promise of abundant resources, shale gas, and virgin terrain, Algeria has struggled to attract sustained investment and outside attention – perhaps a side effect of its dismal business environment. Moreover, its market is disappearing.
Stagnant demand worldwide, an abundance of competing projects, and a growing global preference for spot markets underscore the nation’s predicament. Since 2007, American imports of Algerian oil have dropped more than 90 percent, or by approximately 414,000 barrels per day. Its market share in the European Union – its largest natural gas market by far – has also suffered, falling nearly 8 percent since 2002. Its presence in Asia is next to non-existent.
For Algeria, these are hardly new challenges, and that makes the rentier state’s hydrocarbon industry reform – or lack thereof – all the more puzzling. The controversial windfall tax is no more, but Sonatrach’s dominant hold over existing and future projects has yet to be addressed. The fiscal incentives have improved, but with a focus on far-flung and uncharted unconventional plays, foreign involvement has been slow to materialize. In fact, during the most recent bid round, only four of the 31 blocks were awarded.
For all of its inherent advantages, Algeria’s pursuit of greater market share and higher prices abroad is unlikely to bear fruit anytime soon. Still, there is something to be said for its headstrong, if-you-have-it-they-will-come, strategy. If anything, Asian interest and the resulting price spike in the upstart east will create some relative deals underneath the Algerian sands.
First published at Oilprice.com