Algeria's trade-off plan is right move

31 July 2008

The decision by Algerian Oil Minister Chakib Khelil and state energy company Sonatrach to seek upstream positions abroad in return for stakes in its own oil and gas concessions in Algeria is a novel strategy.

But it is a good one, allowing Algeria to diversify its assets and gain greater international experience.

Despite being the world’s second-largest exporter of liquefied natural gas (LNG), Sonatrach is still very much tied to its domestic market.

It has stakes in some oil and gas exploration blocks in Libya and Yemen, and is a major partner in the Camisea gas project in Peru, as well as a polypropylene plant in Spain, but not much else.

Its ambitions clearly run deeper than that, as it has now shown by seeking to take an equity stake in an upstream gas production asset run by an international oil company (IOC) in one of five countries in Africa and Latin America. In return, the IOC will receive a stake of a similar size in the potentially lucrative Ahnet basin in Algeria.

Sonatrach is right to try to make the most of an environment where IOCs, keen to add to their reserves, need national oil companies (NOCs) far more than the NOCs need the oil majors.

By doing so, it can diversify its risk, gain experience with production in different geologies and obtain a foothold in a new market.

But at the same time, it must be careful not to overplay its hand.

There is a chance that the strict prequalification requirements for the Ahnet stake may yet lead IOCs to stay away from the bidding entirely, especially as Sonatrach will maintain majority control of any venture.

The innovative nature of the plan, and the risks associated with it, mean that its progress will be closely watched by others in the region with their own licensing rounds, such as Libya and Egypt.

If it is successful, expect them to follow.

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