ALGERIA: Gas deals signed for In Salah

18 July 1997
SPECIAL REPORT OIL & GAS

WHEN British Petroleum (BP) signed an agreement with state energy company Sonatrach to explore and develop the remote District 3 two years ago, it was a high-profile affair. The project, budgeted at $3,500 million, was hailed as the first to involve private investment in gas production, if the hoped-for reserves materialised.

Two years on, the partners are not only confident that there are enough reserves to go ahead, they have already signed their first gas purchase agreement, even before spudding the first well.

'We are confident that the project we originally envisaged, of producing 9-11 billion cubic metres (bcm) a year, is what we will go ahead with,' says Ahmed Messili, general manager of In Salah Gas.

His company, launched in April, is responsible for all gas sales from the project and represents the vehicle through which the two partners will share the proceeds. It is an innovative way to handle what is usually covered by production sharing agreements: The partners operate the marketing company jointly, with a team composed equally of members of staff from both parent firms. Revenue is shared on a 50:50 basis, although BP carries 65 per cent of the development costs.

In Salah Gas hopes to be equally innovative in the type of contracts it offers to buyers in an attempt to outbid rival gas suppliers Says commercial manager Brian Hunter: 'Our approach is to be available in the market and offer tailor-made agreements. There are a number of elements in a contract which the customer may like to change. This is a new approach.'

In addition to flexibility, the joint venture believes its geographical proximity to growing markets will give it the edge in an increasingly competitive market. 'The market is very competitive from a supplier's point of view. But if you look at the range of suppliers, we are fundamentally advantaged in our geographical position, which translates into lower costs,' Hunter says.

To take full advantage of the location of its fields, In Salah Gas will be targeting southern Europe, where demand is growing fast.

The company has already made a start with a first gas purchase agreement concluded with Italy in April. The contract was a coup for the company: it came before BP even started exploration drilling and does not carry any penalties for starting delivery late.

It could not have come about without help from Sonatrach. The deal involves taking over a commitment by the state company to supply 4 bcm of gas a year to Italy's Enel. 'Deliveries under this contract started towards the end of 1996 and will continue to be met by Sonatrach up to the date of first production from In Salah,' the joint venture said when it announced the deal.

In Salah Gas is now looking for new clients in the growing southern European market. 'Turkey is in our plans. It is a market with big growth, especially in power generation,' Messili says. Other countries the company will be looking at include Morocco and Tunisia, which are planning gas-fired power stations, and Spain and Portugal. 'Portugal is a new consumer on the market and can grow very rapidly. Our gas will come to the market in 2002 and they are planning their supplies now,' says Messili.

The production schedule is less far advanced than the sales. So far, a little more than 30 per cent of the seismic data acquisition has been completed and drilling is to start at the end of the summer. Exploration work will aim at confirming known reserves and finding new fields. Sonatrach discovered seven fields in the area but never developed them because it then concentrated on exploiting the massive Hassi R'Mel field, which it discovered shortly after.

'The level of reserves is already quantified at 10 tcf,' says Messili. In addition, wells will be drilled at other locations inside the 23,000- square-kilometre licence in the hope of discovering new fields.

The exploration and appraisal phase will run until the end of 1998 and the target for start-up is 2002. Development work is likely to be lengthy and expensive as District 3, the area in southern Algeria covbered by the BP licence is virgin territory as far as hydrocarbons are concerned and all infrastructure has to be built up from scratch.

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