Algeria is preparing for an oil and gas licensing round that could prove to be pivotal for its beleaguered oil and gas sector.

As things stand, the failure of the government to attract enough interest in developing the country’s large hydrocarbon reserves means there are serious concerns about Algeria’s ability to sustain the energy exports that form the backbone of its economy.

The last oil and gas licensing round took place in 2011 and saw just two permits awarded out of the 10 on offer, making it the third in a row to see little enthusiasm from oil companies. In 2010, only three permits out of 10 were awarded, and in 2009, only 4 of the 16 licences on offer saw takers.

Hydrocarbons law

Since the failure of the last round, much has been done by the Algerian government to drum up interest in its gas and oil reserves, including an overhaul of the hydrocarbons law passed last year.

The new law includes incentives for foreign firms and links tax to profit rather than revenue. It also offers extra benefits for those who invest in Algeria’s unconventional reserves, such as shale gas.

A total of 31 fields will be offered in the upcoming licensing round, including some shale gas opportunities. Bids are set to be submitted in September.

Even after the overhaul of the hydrocarbons law, there are plenty of reasons for Western oil companies to be nervous about doing business in Algeria.

One of the key factors putting off potential investment is endemic corruption at the heart of the country’s oil and gas sector.

In 2010, the CEO of state-owned oil company Sonatrach was removed amid corruption allegations, and last year executives from the Italian oil company Saipemand an Algerian subcontractor told the UK’s Financial Times that they paid e200m ($264m) in bribes to Algerian energy officials to win $11bn of oil and gas contracts in 2009.

Although the allegations were denied by Saipem’s parent company, Eni, and its chief executive, the contract is now the focus of corruption investigations in both Italy and Algeria.

Investigators are also probing the activities of Montreal-based engineering company SNC-Lavalin. The focus is on one of its agents in Algeria, according to Canadian newspaper The Globe and Mail, which claims the agent was hired to secure more than $1bn in contracts from Sonatrach.

Security fears

Security is another major concern for Western oil companies looking at taking on new operations in Algeria, especially in the wake of the 2013 hostage crisis, which saw 800 people taken prisoner by terrorists at the In Amenas gas complex. Although the government has since stepped up security, oil firms are likely to remain nervous about operations in the country’s restive south.

“The security issue still has to be at the forefront of these
companies’ minds,” says Geoff Porter, director of North Africa Risk Consulting.

“While the Algerians have dedicated a lot more troops to the south, there are still big questions about how effective those troops are. Should there be another attack on the oil and gas sector, the companies would be heavily scrutinised. There is also a serious risk of reputational damage, as well as risk to personnel and the possibility of legal action against companies that have sent personnel to work in dangerous areas without adequate protection.”

Social tensions

Aside from the threat of terror attacks, there is also a risk of civil unrest. A generous subsidy system and steady military support saw Algeria weather the uprisings that shook the region in 2011, but this semblance of stability at the top of the political hierarchy could fade in coming years. Falling hydrocarbon revenues are making the country’s pacifying subsidy system less sustainable, and any attempt at reform could well spark riots.

Adding to tensions, there are concerns of a brewing power struggle as President Abdelaziz Bouteflika’s health steadily declines with no clear successor to replace him.

In an effort to kick-start production and boost hydrocarbon revenues, Sonatrach approved a plan in July to invest $100bn in the oil and gas sector over the next five years. However, the proposal follows other similar investment plans that failed to boost production and there are doubts about whether this will be any more successful.

In 2012, Algeria announced it was going to invest $80bn in its energy sector to increase output, but gas exports continued to decline, falling by 3.3 per cent to 78.6 billion cubic metres in 2013, according to the UK’s BP in its annual statistical review.

Although Algeria’s oil and gas sector faces a host of serious problems, there are also factors that should keep international oil companies interested. The first is the size of its reserves. Algeria boasts the 10th-largest proven natural gas reserves and is home to the world’s third-biggest shale gas reserves, with 20 trillion cubic metres of technically recoverable shale gas, according to the US Energy Information Administration.

Adding to the allure of Algerian energy, the current conflict in Ukraine and political tensions between Europe and Russia have ramped up demand for natural gas from North Africa as EU member states scramble to reduce their reliance on Russian hydrocarbons.

Despite concerns that a lack of upstream developments ready to come online will prevent Algeria from taking advantage of this opportunity, there are encouraging signs that some projects are moving ahead.

Spain’s Tecnicas Reunidas was awarded the $1bn engineering, procurement and construction (EPC) contract for the Touat field in southwest Algeria in August 2013. It is expected to produce 4.5 billion cubic metres a year (cm/y) of gas and 1,700 barrels a day of condensate when it eventually comes online.

South Korea’s Samsung Engineering signed an $800m EPC contract to develop the Timimoun gas project, also in the southwest, in February this year. The contract includes the construction of a 1.8 billion cm/y processing facility and a 180-kilometre pipeline.

In May, the UK’s Petrofac signed the $970m main construction contract on the 3 billion cm/y Regane North project. It covers a gas treatment station, a gas collection network and a 74km pipeline.

Wet gas

Also due to come on stream in the next few years is the Ain Tsila field operated by Irish oil and gas company Petroceltic. The front-end engineering and design contract is expected to be awarded later this year. The project is due for completion in 2017, with an output of 3.7 billion cm/y of wet gas.

While there is no doubt that Algeria remains a difficult market in which to operate, these signs of progress, along with increased demand from Europe and the recent amendments to the country’s hydrocarbons law, could well encourage international oil firms to take the plunge in the forthcoming licensing round.