While Opec has been celebrating its 50th anniversary this year, Algeria’s hydrocarbons sector has been in a state of paralysis brought about by a corruption scandal at the heart of the country’s state energy producer, Sonatrach.

Terroritorially, Algeria is Opec’s largest member country. It joined the producer group in 1969, some seven years after winning its independence from more than a century of French colonial rule. In the years since then, hydrocarbons have become the backbone of the country’s economy, accounting for some 95 per cent of export earnings. In 2009, Algeria accounted for about 2 per cent of the total crude produced globally. It has oil reserves estimated at 12.2 billion barrels or 0.9 per cent of the world total. Its gas endowment is much richer, at 159.1 trillion cubic feet, some 2.4 per cent of global gas reserves.

Mismanagement has prevented Algeria hydrocarbons sector from living up to its potential in recent times, and has also delayed much needed investment in new infrastructure.

New Sonatrach management team

At the start of 2010, president of Sonatrach, Mohamed Meziane and three of the company’s four vice-presidents, were removed from their positions pending the completion of investigations into alleged corruption in the award of contracts.

It was not until the beginning of May that a new permanent management team was finally appointed to head up the energy firm, the largest in Africa and the sixth largest natural gas producer in the world when measured in terms of reserves and production. Just three weeks later, the corruption investigations took another casualty when President Abdelaziz Bouteflika removed energy minister, Chakib Khelil from his post, although the minister has still not faced any formal charges.

[It] is becoming an ever more strenuous challenge to keep up with the growing demand for oil and gas

Despite the appointment of an interim team at Sonatrach, Algeria’s energy sector was essentially leaderless for the first half of this year. Decision-making at the company has always been a bureaucratic process, with middle ranking officials unwilling or unable to take decisions without approval from senior executives. Working in the shadow of the investigations, which are being carried out by the state security service, the chance of new contracts been signed by a temporary management team was always remote.

Many projects had already been delayed by a combination of bureaucracy and the impact of the global economic downturn in 2008-09 on energy demand and on the appetite of foreign companies to take on new work. But Sonatrach’s internal crisis severely exacerbated these hold-ups.

Many projects had already been delayed by a combination of bureaucracy and the economic downturn

It is only since early September that there have been signs of the resumption of the government’s oil and gas programme, both upstream and downstream. On 2 September, state hydrocarbons regulator Alnaft announced the launch of its third upstream licensing round. The round offered 10 contract areas across five onshore basins, with a total area of just over 64,000 square kilometres. Nine of the 10 areas have already been drilled.

Later in September, Sonatrach made its first major contract awards of the year. A $908m contract was awarded to France’s Technip for the expansion and rehabilitation of Algiers refinery and a $500m contract to Italy’s Saipem to build a gas/oil separation plant at Hassi Messaoud.

Growing demand for Algeria’s oil and gas

Signs that the country’s new energy team is focused once again on developing Algeria’s energy infrastructure is certainly good news. But the recent announcements are no more than a small step forward in tackling what is becoming an ever more strenuous challenge to keep up with the growing demand for Algeria’s oil and gas. The government has already delayed a 2010 target to increase its gas exports to 85 billion cubic metres a year (cm/y) to 2014, and the chances of meeting the revised objective look as remote as ever.

In the next five years, new liquefied natural gas terminals are due to start production at Skikda and Arzew, and the Medgaz and Galsi pipelines are due to start pumping gas to Spain and Italy respectively.

Algeria’s domestic demand for gas is expected to more than double in the period 2009-18, from 25.5 billion cm/y to between 51-63 billion cm/y, according to figures from the state power regulator.

Meeting this demand may well be beyond Algeria’s means. Alnaft’s first two bid rounds ended in disappointment, with harsh licensing terms meaning only four out of 16 contracts were awarded in 2008 and three out of 10 the following year. Although the government consulted with international oil companies on which blocks they would like to see included in this year’s round, it has shown no inclination to make its contract terms more appealing. Industry sources remain pessimistic about the prospects of the new round.

Algeria’s upstream oil delays

Other upstream plans are also delayed. The government has yet to approve a development plan for the Reggane Nord field, a major gas prospect in the southwest operated by Spain’s Repsol, that was submitted in 2009.

Meanwhile, Algeria’s only alternative source of gas, the planned Trans Saharan Gas Pipeline project to bring gas from Nigeria through Niger to the Mediterranean coast, looks no more than a pipe dream. International companies such as France’s Total and Gazprom of Russia have expressed an interest in building the pipeline, but a source of finance for a scheme that is not only technically challenging but complicated politically will be hard to find.

A shortage of Algerian gas and the slump in energy demand in Europe, coupled with some technical challenges, means that both Mediterranean pipelines have been delayed.

Medgaz, which was due to begin operations at the end of 2009, is now set to come on line in the fourth quarter, though not at full capacity, while Galsi, which was due for completion in 2010, has not even reached financial close.

Other oil and gas infrastructure plans are facing similar delays. Work is yet to get under way on a $3bn ethane cracker, due to be developed with France’s Total and Qatar Petroleum, and on a 1 million tonne-a-year methanol plant proposed by Almet, an international consortium, despite headline agreements being signed for both projects in 2007. A planned 300,000-barrel-a-day refinery at Tiaret also looks unlikely to get off the ground despite companies being shortlisted last year to carry out front-end engineering and design studies.

If Algeria is to even come close to realising its ambitions, new energy minister Youcef Yousfi and Sonatrach chief executive Nourredine Cherouati face the stiffest of challenges.