Algiers' plans for expansion unravel

15 January 2010

A range of upstream developments promise increased production of oil and gas in Algeria, but its recent history is one of falling short of its goals and failing to find bidders for new contracts

In an interview in 2005, Algerian Energy Minister Chakib Khelil told MEED that by 2010 the country wanted to increase oil production to 2 million barrels a day (b/d) from 1.4 million b/d. It also aimed to raise gas export capacity to 85 billion cubic metres a year from 60 billion cubic metres a year.

It has fallen a considerable way short of these targets. In 2009, gas exports fell to 59 billion cubic metres, from 63 billion cubic metres in 2008, and in November 2009 the country’s average oil production was less than 1.3 million b/d, according to the latest data from the Organisation of Petroleum Exporting Countries (Opec).

Its poor performance can in part be explained by factors beyond Algeria’s control. Oil prices collapsed in the second half of 2008 from a high of $148 a barrel in July to $40 a barrel in December, and the global economic downturn throughout 2009 has hit world oil demand hard. The quota system imposed by Opec on its 13 members, Algeria included, would have made an increase in exports to 2 million b/d impossible as the organisation cut output to adjust to reduced global demand for oil and support world oil prices.

The past year has seen a similar collapse in demand in the global gas industry, where market prices have also crashed. European demand for liquefied natural gas (LNG), of which Algeria is a major supplier, fell by an estimated 20 per cent in 2009.

Capacity shortfall

But while these external factors might offer an explanation for Algeria’s inability to hit its export targets, they do not account for the country’s failure to reach its planned increases in production and export capacity.

The country’s gas production capacity shortfall is particularly notable. Since 2005, scheduled gas infrastructure developments designed to meet the new capacity targets have fallen further and further behind schedule. Of the planned capacity increases - the new Medgaz pipeline to Spain, the Galsi pipeline to Italy, an expansion of the Transmed pipeline, also to Italy, and LNG trains at Skikda and Arzew - only the Medgaz and Transmed projects have come close to meeting their schedules.

Speaking at the World Gas Conference in Buenos Aires in October 2009, Khelil admitted that the Skikda LNG project, originally due to start pumping gas in November 2009, will now come on stream in 2012, while the Arzew LNG start-up has been pushed back from 2010 to 2013. Between them, the two new gas trains will provide additional capacity of about 9 million tonnes a year.

The Medgaz pipeline, scheduled for 2009, has only narrowly missed its start-up date. There is still some dispute about when it will actually start delivering gas - state energy company Sonatrach insists this will happen by March, while other project sources have suggested June is more realistic. But at some point in 2010 it will provide an additional 8 billion cubic metres of gas export capacity. Even then, the collapse of Spanish gas demand means initially the pipeline will only pump at 50 per cent capacity.

“We should see gas flowing through Medgaz in the second quarter of 2010 at about 4 billion cubic metres a year, with output expanding slowly in the second half of the year,” says Hakim Darbouche, a specialist on Algeria’s energy market at the UK’s Oxford Institute for Energy Studies (OIES).

In contrast, the government has not even reached a final investment decision on the Galsi pipeline, which is also designed to increase gas export capacity by 8 billion cubic metres a year. The government has promised the decision will be made in 2010, which would mean an operational start-up of 2014 at the earliest, but a similar promise has been made and broken every year since 2006.

Multiple problems

The government line is that the project has been delayed by the technical challenges of laying a underwater pipeline at depths of more than 2,800 metres, and that local planning difficulties in Italy have also caused delays. But the pipeline faces other substantial problems. Not only has gas demand in Italy dropped significantly, there are concerns that Algeria would not have sufficient gas to supply the pipeline even if the market picked up.

The lack of gas supply is also jeopardising the country’s plans to develop a gas-based petrochemicals industry. Sonatrach signed contracts in 2007 to develop an ethane cracker and a methanol plant, but neither has progressed to the implementation stage. A range of factors have held up negotiations, but a shortage of feedstock means the projects are not possible at the moment, according to industry sources.

In the past five years, the licensing of oil and gas exploration in Algeria has all but ground to a halt. In 2005, a new hydrocarbons law was accompanied by government promises of up to two upstream licensing rounds a year. But the introduction of amendments to the law and the restructuring of the country’s institutional framework in the energy sector the following year resulted in a gap of almost four years between the sixth exploration round in early 2005, and the seventh at the end of 2008.

Not only that, but the reduced appetite among international companies, owing to falling oil prices and reduced global economic growth, combined with harsh new upstream licensing terms introduced in 2006, have resulted in meagre interest being shown in the two most recent rounds.

Only four of the 16 blocks originally offered in the seventh round were awarded, while the eighth round, held at the end of 2009, yielded three awards from the 10 licences on offer.

“The reserves are definitely there, but the way they’ve configured exploration and production contracts is very unattractive,” says Jonathan Stern, director of gas at the OIES. “Unless they change the terms quickly they will struggle to bring new gas on stream, and they show no sign that they are doing this.”

Domestic pressure

In the meantime, local gas demand is soaring. A major programme is under way to boost gas-powered electricity generation capacity, with more than 3,000MW added in 2009 alone. According to the Commission de Regulation de l’Electricite et du Gaz, the state-run energy regulator, Algeria’s gas demand is set to double by 2018, to 54 billion cubic metres from 26.6 billion cubic metres in 2008.

If there is to be any hope of Algeria meeting its gas export target, which has now been pushed back to 2014, it will have to focus on fields to which international partners have already been signed up.

Work is due to start on a range of upstream developments in the coming year that will result in substantial additional production coming on stream between 2012 and 2015.

The most promising new gas province is in the southwest of the country. Front-end engineering and design contracts are set to be awarded in 2010 for the development of three fields - Timmimoun, Touat and Reggane North - which will produce an estimated total of 9 billion cubic metres a year when they come on stream in 2013.

The prospects for gas production in the southwest were greatly enhanced by the one notable success of the most recent bid round: the award of a contract to develop the southwest’s fourth field, the Ahnet field. Not only does the field have projected production capacity of up to 5 billion cubic metres a year, but it also helps make the case for the construction of an 800-kilometre-long pipeline to link the southwest to the country’s trunk gas network at Hassi R’Mel.

Extraction costs from the four fields, where gas is tight and sparse, will be high and a new export pipeline is essential for their commercial exploitation.

Sonatrach has been reticent in committing to the considerable expenditure associated with the new line, but is now expected to proceed with the work. “The pipeline is the key,” says Darbouche. “Sonatrach has said it will be ready by 2013, which we can assume means 2014, if everything goes well.”

A number of other upstream gas developments are also under way. In 2009, Japan’s JGC Corporation was lined up for work on a 12 million tonne a year gas processing facility on the Gassi Touil field, which will supply gas to the Arzew LNG terminal in the northwest. Italy’s Saipem also began construction work on the Menzel Ledjmet Est gas field development, which by mid 2012 will pipe 3.6 billion cubic metres a year of gas to the facility, as well as producing 35,000 b/d of liquids.

The southeast, where the UK’s BP is continuing to work on the In Amenas permit, which produces about 8.5 billion cubic metres a year of gas, is also likely to offer gas production increases in the coming years. Dublin-based Petroceltic had a string of drilling successes in 2009 on the Isarene permit in the south of the Illizi basin, and BP has recently spudded an appraisal well on the Bouraret permit, which it may tie in to its In Amenas facilities, BP told MEED in early January. Sonatrach has also promised to build a new gas line to the southeast to accommodate increased production, according to industry sources.

Hopes for increased oil production, meanwhile, rest largely on the El-Merk project being developed by the US’ Anadarko in the Berkine basin. The main construction contracts on the scheme, which will produce an estimated 130,000 b/d of oil and condensate and about 6 billion cubic metres a year of natural gas liquids, were awarded last year and production is scheduled to begin by early 2012.

Whether Algeria can meet its gas export targets even by 2015 remains in doubt, and a major increase in oil production capacity has long ceased to be a priority. But the plethora of upstream projects under development will at least enable it to move in the right direction. If it is determined to accelerate its production still further, it will have to tender further upstream development sooner rather than later. First, though, it might take a serious look its oil and gas licensing terms.

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