PROFILE: Storm clouds gather over Sonatrach

20 January 1995

The Sonatrach complex in Algiers' Hydra neighbourhood is a model of how many Algerians would like their country to be run. Security at the gate is tight but efficient; the buildings are clean and compact. Officials are knowledgeable and committed to their job. The company generates hard currency revenues, which finance a significant portion of the national budget, and is recognised in global energy markets as a major player with considerable capacity for growth.

At home in Algeria, Sonatrach staff are more concerned by plans for another major reorganisation of the state energy company. However, the corporate culture still seems relaxed, which is all the more surprising as Algeria's civil conflict rages all around it.

Sonatrach is abiding by its declared aim of becoming a major international company, whichever way Algeria's tortured politics takes the country. It is pursuing the strategy by building links with other international companies, encouraging more domestic exploration and production, and increasing its operations abroad.

It is now ranked eleventh in the New York-based Petroleum Intelligence Weekly ranking of the world's top 50 oil companies. Among Middle East entities it lies third behind Saudi Aramco and the National Iranian Oil Company. Algeria has huge untapped gas reserves and much of the country is only lightly explored so there is every prospect Sonatrach can enhance its standing in the years ahead.

'We are satisfied to have signed 30 exploration contracts with important companies,' Energy & Industry Minister Amar Makhloufi says. 'But at the same time we're not satisfied because half the domain is not covered at all. It needs more companies to come in, especially in the south and west to bring us towards a figure of 100 wells to be drilled every year.'

Sonatrach cannot do all this work alone, and hydrocarbons legislation has been amended to attract foreign investment. This started with a trickle of companies after the passing of a revised hydrocarbons law in 1986. It has accelerated since amendments were made in 1991 and dozens of international companies have since signed new exploration and production-sharing deals.

In 1993, foreign operators drilled more metres of exploration wells than Sonatrach, for the first time since nationalisation in 1971, reporting 35,369 metres drilled, against 32,839 for Sonatrach. In 1992, Sonatrach had drilled 34,347 metres and foreign firms 17,072 metres.

This increase in international activity is essential if oil reserves are to be maintained and the best use made of existing capacity. Sonatrach cannot bear the cost of greater exploration activity alone, nor does it have the technology to maintain production from mature wells.

It also needs financial help to develop the huge gas fields which are the key to Algeria's long-term prosperity. Sonatrach has been negotiating with several international companies to create ventures to exploit the gas finds. The most advanced talks are with The British Petroleum Company (BP), which is negotiating to develop the Southwest District 3 field at a projected cost of more than $2,000 million.

'The scale of investment needed is huge,' Makhloufi says. 'Gas is the most dynamic sector and structurally this can only be developed on an integrated basis with a big investment both upstream and downstream.'

The signing in mid-1994 of an agreement in principle with the US' Atlantic Richfield Company (Arco) was the highlight in Sonatrach's year. The $1,300 million contract is for enhanced oil recovery (EOR) work to raise output in the Rhourde El-Baguel field. This marks the first time a foreign operator has come into an existing oil field, providing a large-scale investment and a $300 million cash bonus.

Negotiations were delayed for months by legal wrangling. 'We had never seen anything quite like their American lawyers,' says a Sonatrach official. A final contract has still to be agreed before work can start.

It is unclear whether Arco will go ahead while Algeria's political crisis is unresolved. Several of Sonatrach's partners are continuing exploration and development work despite the obvious dangers. These include Italy's Agip and the US' Anadarko Petroleum Corporation, in which Sonatrach has a minority stake. Many others have reduced activity sharply, even though the conflict between radical Islamists and the state has until now left the hydrocarbons industry relatively untouched.

In its determination to maintain business as usual, Sonatrach has put pressure on foreign firms not to pull out or declare force majeure. Gaz de France withdrew its staff from the country in November, but refused to comment on the grounds that this might affect its relations with Sonatrach. Other firms have also quietly withdrawn staff.

Despite the crisis, Sonatrach says that further exploration and development work will go ahead in the coming months.

Indeed, new deals are being struck:

A consortium of South Korean firms signed a contract to explore in the Illizi basin on 15 November.

France's Total is reportedly negotiating for an exploration licence for blocks 443b and 444 in the Dahar depression on the Tunisian border north of the Ain Romana, Hassi Keskessa and El-Borma fields.

Anadarko is negotiating to develop the Hassi Berkine field, discovered in February 1994.

Spain's Compania Espanola de Petroleos (Cepsa) has announced an investment of Pta 23,000 million ($166 million) to develop the Rhourde Yacoub field.

Agip is developing block 403 in the southeast, to produce 40,000-50,000 barrels a day (b/d) from July 1995.

These projects are necessary to maintain oil production, which fell to 747,300 b/d in 1993 and even slightly lower in 1994.

Strategic alliances are another strand of the Sonatrach strategy. To improve access to markets and technology it has signed agreements with Royal/Dutch Shell, BP, Japan's Itochu Corporation, France's Total and Italy's Ente Nazionale Idrocarburi (ENI) group, among others.

Others moves to raise the corporate profile include plans to increase trading operations through the Sonatrach offices in London and Singapore.

Another round of restructuring within Algeria is imminent, to complete unfinished business and iron out problems that have arisen from previous structural changes. This includes privatising non-core activities and reintegrating refining and some upstream operations into the main holding company.

Refining and marketing companies Naftal and Naftec were made autonomous in a previous restructuring, but experience has shown their operations are strategically important and should remain part of the main Sonatrach company, according to Sonatrach chairman Abdelhak Bouhafs.

Operations outside Sonatrach's core business of exploration, production, transport, refining and marketing will be hived off into independent companies, in line with the government's privatisation programme. Bouhafs says that service companies Enageo, ENTP, Enafor and GCB are doing more work as contractors to foreign companies which has shown they can thrive in a commercial environment, and earn hard currency.


The planned changes are not going unopposed. The National Federation of Oil, Gas & Chemical Workers threatened a three-day strike in late-November in protest at the reorganisation. The federation wants all hydrocarbons sector companies to be reintegrated into Sonatrach, which is the complete reverse of plans to privatise non-strategic companies. The company will not hear of any changes. In reply, Bouhafs said that 'assembling different activities within a group around Sonatrach would only lead to an accumulation of constraints. That would weaken all areas of activity in the sector and, more seriously, weaken the national oil company during a critical phase of consolidation and in an environment of increasingly intense competition.'

Sonatrach hopes the reorganisation will make it more profitable and more like an integrated hydrocarbons company. It is a big ambition but it remains to be seen whether it can remain sufficiently insulated from the surrounding political turmoil and make it happen. That same worry is concentrating the minds of all those concerned with Algeria's future.

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