Like many of its hydrocarbons-rich counterparts in the Middle East, Algeria’s state energy company, Sonatrach, is reaping the benefits of the global boom in oil prices. The country earned $27.2bn in oil revenues in the first four months of 2008, a 56 per cent increase on the same period in 2007, and expects full-year revenues of $81bn, compared with $59bn in 2007, Energy Minister Chakib Khelil announced in May.

Company Sonatrach
Oil Reserves 12.3 billion barrels
Oil Production 2 billion barrels a day*
Gas Reserves 159.45 trillion cubic feet
Gas Production 83 billion cubic metres
*includes NGLs. Source: BP Statistical Review 2008

Such is the massive shift in the country’s earnings that in the draft supplementary budget made public in early June, Algiers finally revised the oil price it had used to estimate its earnings for the past 10 years from $19 a barrel to $37 a barrel.

Just as Sonatrach enjoys the same benefits as most of its fellow Middle East NOCs, it also suffers from the same systemic pitfalls. The company is wholly owned by the state and respondents to MEED’s NOC survey say the lack of independence from state control is its greatest weakness.

There have been attempts to address this problem. In 2005, Khelil introduced a hydrocarbons law that divested the company of its state responsibilities, passing them instead to two newly created agencies, and removing the obligation for the company to take a majority stake in upstream oil contracts.

But there are still severe limitations on Sonatrach’s commercial freedom. In 2006, amendments to the hydrocarbons law restored the partnering obligation. More importantly, its key role as a state employer means improving the company’s oversized workforce will always be a struggle. Although Algiers is in the process of privatising more than 1,000 state companies, Sonatrach is one of the few that has been declared ‘strategic’, and is therefore not for sale.

“Sonatrach’s greatest weakness is overstaffing,” says Valerie Marcel, a Dubai-based expert in NOCs affiliated to the Royal Institute of International Affairs in London. “They have a lot of young people who would really like to see the organisation take off but they are surrounded by people who are just coming to work to get their pay cheque. Sonatrach cannot fire people because it would have repercussions for the government, which needs to be seen as doing its best to provide employment.”

One survey respondent says that “removing bureaucracy and empowering staff” is the issue Sonatrach must most urgently address.

As a result, Sonatrach is losing some of its best people to other national and international oil companies. Efforts are being made to improve the situation. In recent months, Sonatrach has announced that it will start to reward its employees based on performance rather than longevity of service.

Meanwhile, bureaucracy and human resource weaknesses are having an impact on the company’s ability to implement its ambitious hydrocarbons development plan.

Industry sources say the loss of key personnel is one of the main reasons for the company’s failure to award more than two of the five projects planned under its petrochemicals masterplan, and for the subsequent delays in getting those two off the ground.

Development plan

Internal divisions at Sonatrach are cited by industry sources as one of the reasons why the 300,000-barrel-a-day Tiaret refinery project has not started, although cost inflation and competition in the market is also a factor.

Political interference is also having an impact on the country’s plans to increase its crude oil production to 2 million barrels a day (b/d) by 2010, from about 1.4 million b/d today, and to raise gas exports to 85 billion cubic metres a year from the current 65 billion cubic metres. Energy Minister Chakib Khelil has said he wants to “keep resources in the ground for future generations”.

Add to this delays in the development of liquefied natural gas terminals at Skikda and Arzew and the gas export pipeline to Italy, and potential delays to upstream oil and gas development projects being undertaken by Canada’s First Calgary Petroleums and the US’ Anadarko, and it is clear that the targets will not be met. Algiers is now publicly admitting that the gas target is more likely to be reached in 2011-12.

There are positives too. Sonatrach’s efforts to develop its downstream infrastructure, while delayed, are impressive. Once complete, they will not only dramatically increase its natural gas exports to Europe but also ensure its position as one of the world’s leading LNG exporters.

Sonatrach also has a good record on the environment, exemplified by the groundbreaking carbon-capture operation being carried out in partnership with the UK’s BP and Norway’s Statoil at In Salah.

It is also trying to overhaul its health and safety operations, following the fatal explosion at the Skikda LNG terminal in 2003. Overseas, it has an impressive and growing investment portfolio that includes interests in Libya, Egypt, Mali and Mauritania. It is now looking at investing in the Indian energy sector and in power stations in Brazil.