Recent months have seen a flurry of new activity in the Algerian oil and gas sector. Not since a bundle of key contracts were signed in early 1996 have the fruits of liberalised hydrocarbons laws been so apparent. Having already drawn more than 30 foreign companies into exploration and development, Algeria is gearing up for a new wave of international interest as the oil price rises and political violence declines.

In a series of reforms enacted in 1986 and 1991 foreign companies were allowed to take equity interests in producing fields for the first time and the state monopoly on oil and gas transport was lifted. The original policy, in force since nationalisation, that any company exploring or producing hydrocarbons in Algeria had to be a 49 per cent minority partner of state energy company Sonatrach, remained in force.

Companies flocked in. Between 1992 and May 1998, a total of 22 exploration and production sharing contracts were signed, committing international companies to spend a minimum of $770 million. Arco and Anadarko, both of the US, and Italy's Agip led the way, signing the first three contracts. Upwards of 20 other international oil companies followed hot on their heels, attracted by the prospects of a country with 9,200 million barrels of proved oil reserves and the largest gas reserves in Africa. In 1996, Sonatrach reported a record breaking number of new finds - good news for a country in which oil and gas account for some 95 per cent of exports.

However, there was a hiatus after the initial rush, with only five new exploration contracts signed since December 1996. Moreover, it has become apparent more recently that a quiet withdrawal of international companies has been under way, with field relinquishments outnumbering the number of new contract signatures.

Low oil prices have been a deterrent for new investors and the turmoil created by mergers among the majors has not helped. At the end of last year, for example, the US' Mobil Corporation announced that it was abandoning its interests in the Touggourt acreage and several other companies have decided not to extend agreements with Sonatrach.

Significant plans are afoot, however, by those companies which remain as they advance to the development stage. One of the clearest signs that business is picking up was the September signing of three engineering and construction contracts for work on the flagship In Salah gas project. Sonatrach concluded a unique agreement with The British Petroleum Company (BP) in December 1995 not only to explore and develop the In Salah gas fields, but also to market its output through In Salah Gas, a 50-50 joint venture marketing company based in The Hague.

In Salah Gas has already signed sales agreements for 8,000 million of the9,000 million-11,000 million cubic metres a year of natural gas that the project is expected to produce when it comes on line. Ahmed Messili, managing director of In Salah Gas, is confident that the gas sales target will be met before the project is given the final go-ahead, which he expects will happen next year.

Fears that a low oil price would bite into profits has led In Salah Gas to trim some $1,000 million off its development costs which are now estimated to be $2,300 million-2,500 million. According to analysts, the recent contract appointments are one of the surest signs yet that the project will soon be given final approval.

Another company currently boosting its operations is Anadarko whose involvement in two of the largest oil fields constitute the company's largest international venture and make it the biggest foreign investor in the country. Since securing its first exploration licence in Algeria in 1989, Anadarko has drilled over 40 wells and, between February 1993 and March 1998 alone, made a staggering 12 newdiscoveries.

With its partners LASMO of the UK and Denmark's Maersk, Anadarko has so far announced that it has discovered reserves of 2,000 million barrels of crude oil and condensate. Many observers consider this to be a conservative estimate and expect the full extent of the reserves to be much higher.

The three partners started producing 55,000 barrels a day (b/d) in May 1998 from nine wells linked to a central processing facility in Hassi Berkine South (HBNS). The main development of the field will more than quadruple output from the area. In September, Anadarko and its partners signed a $770 million agreement to lift production from HBNS to285,000 b/d within three years. Plans are also under way for the consortium to develop the Hassi Berkine field which is expected to produce a further 75,000 b/d.

Developments

Anadarko's other engagement is with the country's second largest oil field, now known as Oughroud, where it made a major discovery in May 1994. Anadarko's find was one of the most important discoveries of the decade in the field, which stretches over three blocks. One of these - block 406a, operated by Cepsa of Spain - is estimated to have some 4,000 million barrels of oil in place, of which 1,500 million barrels is recoverable.

Sonatrach secured a licence in February to develop the field and in August the company invited bids for an engineering, procurement and construction contract. A strong response is expected from international engineering groups which can expect to reap some rewards from the renewed interest in upstream development.

As well as new field development, Sonatrach had hoped to undertake enhanced oil recovery (EOR) work in some of its mature fields with the help of international partners. So far, however, only Arco has signed an EOR contract with Sonatrach. The US company signed an agreement in 1996 involving $1,500 million worth of investment in the rehabilitation of the Rhourde El-Baguel field which has estimated reserves of 3,000 million barrels. Arco has announced that it intends to increase production four-fold to around 100,000 b/d. As the development phase gets under way, Arco recently sold a 40 per cent share in its interest at Rhourde El-Baguel to France's Elf Aquitaine.

The stiff terms of the agreement may go some way towards explaining why no other international companies have expressed much interest in already- producing fields: in addition to paying Sonatrach a $225 million signature bonus, Arco will finance all the field's operating expenses and EOR projects and has agreed to invest $50 million in gas exploration for the state energy company.

Such demanding conditions have proved a definite deterrent to other prospective investors. An official at a European company that is active in the country says that the authorities may soon have to consider ceding more control to their foreign partners if they are to stimulate further investment. Reinforcing the argument, one oil analyst says that oil companies are plagued by fears that Sonatrach 'may try and turn the screw' in the event of a substantial discovery.

Despite such reservations, Algeria could still enjoy a period of grace as oil prices recover to around $20 a barrel. International companies will be reviewing their capital investment and reserve acquisition strategies and may be more willing to work within Sonatrach's terms to secure new acreage. Positive political developments should also encourage a fresh approach as the country appears to be emerging from the civil war that has blighted the past seven years. Although many companies were undaunted by the political risks and maintained a presence in the remote south throughout, the apparent detente can only boost the country's attractions.