In less than a month, Algeria’s oil and gas sector has undergone its greatest shake-up in President Abdelaziz Bouteflika’s 11-year rule. On 3 May, the entire senior management of state energy company Sonatrach was formally deposed. All but one of its five most senior executives stepped aside in January, pending the conclusion of investigations into alleged corruption. On 28 May, the shake-up at Sonatrach was followed by the sacking of Chakib Khelil, who had been energy minister since 1999.

Fresh impetus

The appointment of a new team to manage Algeria’s energy sector has been greeted with relief by foreign investors. Despite government assurances that the oil and gas sector would be unaffected by Sonatrach’s internal problems, the uncertainty that accompanied the corruption investigations has paralysed investment in the hydrocarbons sector.

The country’s energy administration is expected to take a more conservative approach to development

 Although oil and gas production has continued uninterrupted, several projects that were set to make progress in the first half of the year have been halted.

Analysts and foreign investors are confident the new executive team has the skills to put the projects back on track.

“The new team is well known,” one former Sonatrach employee tells MEED. “They have had careers in Sonatrach and they know the business. There are no doubts about their record and their knowledge. Now the new team is in place, projects can start to make progress again.”

The right skills alone will not necessarily be enough to ensure a positive future for Algeria’s hydrocarbons projects, it also requires political will and this is less assured. The change in Sonatrach personnel could well herald a change in the firm’s strategic direction, which for the past five years has been at best confused, and at worst hapless.

Everyone in the government will tell you how aware they are that the country’s oil has not got long to go

Hakim Darbouche, Oxford Institute for Energy Studies

The liberal-minded Khelil was always likely to be a controversial figure for the more conservative power groups in the Algerian military that helped bring Bouteflika to power at the end of the 1990s after a decade of civil war. Educated in the US and a former energy expert at the World Bank, Khelil quickly embarked on the preparation of a new hydrocarbons law that is intended to accelerate the development of the country’s resources and create a more open environment for foreign investors.

He staked his reputation – and at one point his political future – on the bill, which promised to open up both upstream and downstream oil and gas ventures to majority foreign ownership. But he faced constant opposition from nationalist groups, who believed that oil was part of Algeria’s natural heritage and should be kept in the hands of Algerians.

The hydrocarbons bill passed into law in 2005, but a year later the conservatives got their way. Amendments to the law in 2006 reimposed Sonatrach’s right to a majority stake in upstream contracts and added a punitive windfall tax on the profits of international oil companies (IOCs) at oil prices of $30 a barrel or more.

In 2008, further legislation was passed limiting foreign companies to a minority stake in all local joint ventures, throwing a raft of planned petrochemicals projects into jeopardy.

Since then Algeria’s oil and gas strategy has been in turmoil. The retrogressive legislative changes ran counter to targets introduced in 2005 to increase oil exports to 2 million barrels a day (b/d), from 1.4 million b/d, and gas exports to 85 billion cubic metres a year (cm/y) from about 60 billion cm/y. Domestic energy consumption, meanwhile, has risen sharply and unattractive terms have meant there has been little interest in the country’s two recent upstream licensing rounds.

The development of tight gas in the southwest of the country, long touted as Algeria’s new gas frontier, has been hindered by a combination of bureaucracy and concerns about the marginal viability of the projects in a depressed international gas market.

Conservative approach

The seeming contradiction between the Algiers’ ambitious targets and its increasingly closed business environment has been an increasing embarrassment for Khelil.

While the target for oil output has been quietly forgotten, that for gas has been maintained but postponed. The new target date is 2014, according to the most recent statements from the energy ministry made in the last months of Khelil’s tenure.

Now that Khelil and his team have been pushed out, the country’s new energy administration is expected to take a more conservative approach to oil and gas development. In 2006, an under-pressure Khelil sought to justify his U-turn over the hydrocarbons law by insisting on the need to keep oil in the ground “for future generations”. This is likely to become an increasingly popular mantra for the country’s energy leaders and the expansionary goals of the past are almost certain to be abandoned.

Added value

“I think the new team will have a different strategy from Khelil,” says Hakim Darbouche, a specialist in Algeria at the Oxford Institute for Energy Studies in the UK. “They will question whether a project has added-value, rather than just pumping oil and gas out of the ground and selling it.”

Algeria’s decision to turn its back on its brief period of liberalisation has been a disappointment for foreign investors.

But while the turnaround may be rooted in politics, there are also practical barriers to an expansion of the country’s oil and gas production capacity.

BP’s latest annual Statistical Review of World Energy, published in June, says Algeria has just 18.5 years of oil remaining at current consumption. Output is falling from its largest field, Hassi Messaoud and insufficient new production is being brought on stream to arrest the decline in overall reserves.

“Everyone in the Algerian government will tell you how aware they are that the country’s oil has not got long to go,” says Darbouche.

The gas position is more promising. Algeria’s reserves will last 55.3 years at current production levels, according to BP. But a  combination of falling gas prices, lower demand in Europe and the government’s accumulation of more than $150bn in foreign exchange reserves has eroded the case for a rapid increase in production.

One project has already come under the knife during the brief tenure of the new Sonatrach chief, Noureddine Cherouati.

Local media reports say the front-end engineering and design contract awarded to Canada’s SNC Lavalin on an ambitious project to build a new town at the Hassi Messaoud oil hub has been cancelled, according to local press reports. The project was designed to accommodate oil workers operating in the area with a capacity of up to 15,000. Cherouati is understood to have withdrawn the contract on the grounds that it was awarded by the energy ministry rather than the housing ministry.

Two major hydrocarbons infrastructure projects are also under threat. A planned 300,000 b/d refinery at Tiaret and the Galsi export pipeline, which would export 8 billion cm/y of gas to Italy, could both be abandoned, say industry sources.

The business case for the Galsi pipeline, originally due to come on stream in 2010, has been severely hit by the global economic downturn and Europe’s recession in particular. Italian demand has collapsed in the past two years and gas prices have tumbled.

The recent slowdown in exploration and development and rapidly rising domestic consumption also threaten Algeria’s capacity to provide gas for the pipeline. Three major gas export projects are already due to come on stream in the next five years. The 8 billion cm/y Medgaz pipeline to Spain is due to open by the end of the year as are new liquefied natural gas terminals at Skikda and Arzew, which will together add 9.5 million tonnes of new export capacity.

The government insists that Galsi will still go ahead, but industry analysts doubt the viability of the project.

“The work we’ve done on Algeria’s gas export projections make it pretty clear that there’s no future for Galsi,” says Darbouche. The project would be more viable if a scheme to bring Nigerian gas to the Mediterranean were also realised. But few believe the Trans Saharan Gas Pipeline will ever get off the ground. Even if the substantial technical and financial barriers to such a huge undertaking are overcome, the political and security challenges and the questionable availability of Nigerian gas, are likely to remain key sticking points.

Economic rationale

The viability of the Tiaret refinery has also long been in question. Algeria currently imports gasoline, but industry analysts claim the shortfall in domestic supply is insufficient for the local market to absorb a new 300,000 b/d facility, particularly as existing refineries at Arzew, Skikda and Algiers are all being revamped.

The inland location for the refinery, far from either a natural source of cooling water or a port for overseas exports, was chosen to fulfil the political aim of stimulating regional development rather than for any economic rationale. Some senior Sonatrach executives are now expressing misgivings about the project, say sources close to the market.

“The new Sonatrach chief executive will certainly question the project and what the company’s interest is in building a refinery at Tiaret,” says Darbouche. “Economically it’s nonsense.”

Algeria’s unsuccessful attempts to diversify its economy will ensure that the oil and gas sector will remain the lynchpin of the economy for many years to come. But the recent leadership changes may well put the brake on the pace of development.