BP builds big stake in Algeria

19 January 1996

Algeria is starting the new year on a high note, in oil and gas sector at least.

Expectations that the country`s political difficuties would deter prospective investors have been turned on their head by events.

By becoming one of the first OPEC members to open up exploration acreage to outsiders, Algeria is attracting unprecedented attention. New investment in exploration is rising sharply, Exxon is stating talks on a big gas project and new oil, gas and condensate discoveries have been announced.

The latest coup for state oil company Sonatrach was the late December signing of a gas deal with The British Petroleum Company(BP). It is the largest of more than 20 exploration and developments agreements signed with foreign oil ventures since investment laws were first revised in 1986 and the first to target gas.

The BP deal could lead to long term investment of $3,500 million if it goes to full development. It will also transform BP as a gas producer. 'This is a landmark agreement which could increase BP`s world wide gas production by 30 per cent,' BPchief executive John Browne said in a statement to coincide with the signing ceremony in Algeria on 23 December. Just before the BP deal was signed it emerged that Exxon,the largest US oil company, is to starts talks on a possible liquefied natural gas (LNG) project in an adjacent area of southern Algeria.

Joint marketing It has been a long haul for BP which began talking to Sonatrach five years ago and concluded its agreement after three years of detailed negotiations. The deal is for exploration, appraisal and development of gas resources at In Salah and covers about 20 per cent of the area known as District 3.

The licence area covers 25,000 square kilometres.

BP will invest $100 million in the initial phase of exploration and appraisal. The UK company is to provide about 65 per cent of the investment; Sonatrach will contribute 35 per cent over the life of the project. The gas will be sold on a 50-50 basis by the two partners. BP will be entitled to about a third of the profit oil. A novel feature of the agreement is the creation of a joint marketing company,owned in equal shares by the two companies.

There are seven known gas fields in the licence area-Krechba, Teguentour, Reg, Garat el-Bafinat, Hassi-Moumene, In Salah and Gour Mahmoud- where BP will shoot 750 square kilometres of 3-D seismic and drill five appraisal wells. The company will shoot 2,000 square kilometres of 2-D seismic and drill four more exploration wells in a separate area.

If the exploration and appraisal work, which is expected to take up to three years, proves succesful, the project will move into a five year development programme. This will entail the installation of surface flowlines and the drilling of around 200 production wells.

A 48 inch export pipeline will have to be built to Hassi R'Mel, 520-kilometres to the north, at a cost of about $1,000 millionThis will link into the export pipeline running through Morocco to Spain, which is the expected market for the gas BP expects the first gas to be delivered in 2002-2003.

The geology of the District 3 zone is characterised by thin, extensive hydrocarbon-bearing strata, some of which extend across 350 kilometres or more. BP estimates the area has gas reserves of 10 trillion cubic feet (tcf) and could achieve production of 10 billion cubic metres (bcm) a year.

This addition to BP's global gas reserves will boost its status as a gas supplier significantly. The company currently produces 13 bcm a year, mostly from the North Sea, but has set a target of expanding its gas business at a rate of about 6 per cent a year in the belief that gas is the energy of the future.

The UK company regards Algeria as one of the most prospective countries in the world. It is the second largest exporter of LNG after Indonesia, ranks eighth in gas reserves, and is 13th in oil reserves (Oil & Gas, MEED Special Report, 22:9:95). BP is no stranger to working in environments that are both physically challenging and politically troubled, which makes it confident of managing to operate in the remote location and amid the security concerns.

Other international oil companies which have ventured into Algeria since the oil and sector was reopened to foreign investors are thriving. Italy's Agip, Petro- Canada, Cepsa of Spain and the US' Anadarko have all met with success. There are suggestions that the find by Anadarko at Hassi Berkine could lead to oil production of 250,000 barrels a day. In early January Sonatrach announced that another of its partners, Spain's Repsol, made a successful oil strike in the south east of the country near the Libyan border.

The BP deal will account for about a third of the extra export gas that Sonatrach is contracted to supply by 2000. Algeria now exports 30 bcm a year to customers in Italy, Spain, Belgium, Turkey, France and the US and is committed to raising this to 60 bcm by the end of the decade.

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