2015 breakeven oil price $111

2014 breakeven oil price $130

All hydrocarbons-exporting nations have been hit hard by the decline in global oil prices since June last year, but in the Middle East and North Africa (Mena) region, Algeria has been one of the worst affected.

Even before the 50 per cent price drop, Algiers was struggling to balance its books, while its oil and gas sector wrestled with a wide range of interconnected challenges. These included decreasing production, security problems and a lack of interest in developing its oil and gas fields among international oil companies, which are wary of the country’s restrictive legislation.

While Algeria has large untapped natural gas deposits, its gas exports have steadily declined over the past decade due to surging domestic demand, delays in production and infrastructure projects, and languishing efforts to locate and develop new fields. After peaking at 2.3 trillion cubic feet in 2005, exports had dropped to 1.7 trillion cubic feet by 2012.

Replacing assets

The drop in oil prices has prompted a dramatic decline in global investment in oil and gas exploration. This is further sapping interest in Algerian hydrocarbons at a time when the country is looking for new fields to be developed to replace maturing assets, some of which are seeing output rapidly declining.

Algeria awarded only four oil and gas blocks out of a possible 31 in its last licensing round held in September 2014. Another round is planned to be held by the third quarter of 2015, but unless the terms on offer are improved it is unlikely it will be a success.

As one of Europe’s major gas suppliers, many observers were hoping that state-owned oil company Sonatrach would take advantage of increasing anti-Russia sentiment by massively ramping up its gas export capacity.

This would include major projects such as the Galsi pipeline being resurrected as well as huge investment in shale gas. However, shale gas has proved to be incredibly unpopular with Algerians and many of the major pipeline projects have still not come to fruition.

The problems faced by Algeria’s oil and gas industry have ramifications for the whole country in terms of economic and political stability. The hydrocarbons sector accounts for 97 per cent of exports and 58 per cent of total fiscal revenues, according to the Washington-based IMF, which downgraded its 2015 growth forecast for the country from 4 per cent to 2.6 per cent in April.

According to the fund, Algiers needs its crude to trade at more than $130 a barrel to avoid a budget deficit, something that has been impossible over recent months, with the Opec basket price dropping below $45 a barrel in January.

As a consequence of the decline in global oil prices, Algeria’s deficit hit 18 per cent of GDP in 2014, its highest level in 15 years. In December, President Abdelaziz Bouteflika signed off the 2015 budget, which increased state spending by 15 per cent and pushed the predicted deficit for 2015 to 22.1 per cent of GDP.

Growing fears

The collapse in oil prices and the precarious state of the country’s public finances have sparked fears Algeria may see a repeat of 1986, when low oil prices forced the government to slash spending, sparking riots and edging the country closer towards civil war, which eventually broke out in 1991 and cost the lives of more than 100,000 people.

This time around, things are different. Years of high oil prices and budget surpluses mean Algeria’s financial reserves stood at about $178bn at the end of 2014. This should provide a cushion from the worst impacts of the price drop, but the country’s foreign reserves are finite and it is unlikely they will last long enough to see oil prices rise to a level where the budget breaks even.

Algeria saw its funds fall by $11.6bn in January, the largest monthly drop in 25 years. If the government continues to burn through its reserves at that rate, they will be completely depleted in less than 18 months.

In July 2014, Algeria announced it would be investing about $100bn in energy infrastructure. If the money materialises, this kind of investment should boost activity and help reverse the country’s declining gas production. However, Sonatrach has a track record of failing to follow through on spending promises and there are doubts over whether it can do what is needed to improve performance.

In 2012, the company announced a similar plan to invest $80bn over five years, but only a fraction of the amount was actually spent. In the current climate, Algeria’s worsening finances mean there is even less likelihood of the spending being delivered.

Regional projects tracker MEED Projects states that there are more than $30bn-worth of non-hydrocarbons schemes at pre-execution levels. Whether this is enough to head off some of the problems in Algeria is debatable, especially with youth unemployment, estimated to be as high as 25 per cent among the under-30s.