Restoring investor confidence in Tunisia

04 January 2012

Tunisia needs foreign investment to increase gas production and meet renewable energy targets. The new leadership will have to reassure investors it is serious about private projects

Key fact

Demand for power in Tunisia is growing at about 6 per cent a year

Source: Steg

When Toufic Nassif was appointed as president of Sonde North Africa in November 2011, he took on a challenging task. The only project the Canadian firm has in the region is an offshore oil and gas block, which sits either side of the Tunisia-Libya border.

In the longer term, Tunis will probably have to consider unpopular reforms to its energy subsidies

The company issued a force majeure notice earlier in 2011, explaining to shareholders that its work at the field had come to a halt because of international sanctions on Libyan state companies and individuals involved in the project. In October, it said it was lifting the force majeure. With an estimated 51 million barrels of oil and condensate and 123 billion cubic feet of gas in place at the Zarat field, there is a lot at stake for the company.

Resource poor

For Libya, its share of the output from the field would be just a drop in the ocean for the African continent’s biggest oil producer. For Sonde, it would be a profitable outcome for its first venture outside Canada, but the biggest winner from the development would unquestionably be Tunisia.

Despite sitting between two regional energy giants, Algeria and Libya, Tunisia is relatively resource poor. In 2010, oil output was just under 80,000 barrels a day (b/d) according to the UK’s BP. The UK’s Mott MacDonald estimates that total gas output totalled 3.4 billion cubic metres that year.

The country is a net exporter of oil. But it also imports the equivalent of about 40,000-50,000 b/d of refined oil products to complement the 30,000 b/d processed at its sole oil refinery at Bizerte, owned by the state-run Tunisian Company for Refining Industries (STIR).

Tunisia’s overall oil output has been on the wane for the past five years, after peaking at about 100,000 b/d in 2007. Gas production has been gradually increasing, but not quickly enough to meet the requirement of the country’s power sector. Some 90 per cent of power generating capacity in Tunisia is gas-fed, but only 60 per cent of the gas used comes from domestic sources. The remainder is provided by Algeria via the Transmed pipeline, which passes through Tunisia en route to Italy.

If commodity prices rise again … it could compromise Tunis’ ability to underwrite subsidies

According to state utility Societe Tunisienne de l’Electricite et du Gaz (Steg), demand for power is growing at about 6 per cent a year. Total installed capacity in the country was 4,000MW in 2010, of which Steg owns about 3,500MW. Much of the remainder belongs to the US-owned Carthage Power Company, which owns and operates a 471MW power plant at Rades in the northeast of the country.

Steg and the private sector will need to add more than 200MW a year of new capacity in order to hit the 7,500MW the state utility estimates it will need to produce in 2020 to meet growing demand. They will also need to find some way of powering the new plants.

Before 2011, the government of Zine el-Abidine Ben Ali had a two-tiered solution to the problem of import-dependency and soaring power demand.

It wanted state energy firm Entreprise Tunisienne d’Activites Petrolieres (Etap), which oversees the development of the sector, and private partners to boost oil and gas output. It sought to encourage private investment in new capacity using both traditional hydrocarbon-based technology and new renewable energy projects. However, the government’s plans would appear to have suffered from a degree of overconfidence.

In 2008, for example, Etap chief executive officer Khaled Becheikh announced that overall gas production would exceed total domestic demand by 2010. By the end of that year, however, gas consumption still outstripped production, despite the addition of about 4.2 million cubic metres a day (cm/d) of capacity.

Gas output

Some of the new output came from the Chirgui gas project, which Etap developed along with the UK’s Petrofac at a cost of $100m, adding 700,000 cm/d of gas. But the biggest boost came when Etap and the UK’s British Gas commissioned the $1.3bn development of the offshore Hasdrubal gas field, which added another 3.2 million cm/d. In June 2010, meanwhile, production started at another offshore field, Bakara, which was jointly developed at a total cost of $300m by Etap and Italy’s Eni, adding another 300,000 cm/d of capacity.

Although some smaller projects are under development, Etap is now pinning its hopes on the development of the Hadouma gas field, a joint venture between Etap, Eni and Austria’s OMV. The project will cost an estimated $2bn to develop. In late 2010, the partners said they hoped to bring the scheme onstream by the end of 2012. It was not clear at the time of writing whether the scheme had been affected by the events of 2011.

While plans to develop the hydrocarbons sector have not met expectations, the country’s renewable energy programme has enjoyed more success.

Studies by Steg in the mid-2000s predicted that Tunisia could produce as much as 4,700MW of power through wind, solar and biomass energy schemes, not far off the capacity it hopes to see added by 2020. Under plans drawn up by the utility, the aim was to increase the mix of renewables in total energy proportion from 1 per cent to 4 per cent between 2008 and 2011. It has more or less achieved this.

Its wind farm at Sidi Daoud, which was built by Made, a subsidiary of Spain’s Gamesa, between 2000 and 2007, produces 54MW – about 1 per cent of total electricity output, while small hydroelectric power plants run by Steg contribute another 62MW.

Wind farms

In 2009, Gamesa was commissioned by Steg to build two new wind farms at Metline and Kchatba, at a total cost of $350m. These projects were being commissioned in late 2011 after delays earlier in the year, according to a source with knowledge of the scheme. They will add 120MW to the country’s installed power-generating capacity.

The next part of the plan is more ambitious. Steg intends to build, along with private sector partners, about 40 new solar plants between 2010 and 2016 at a total cost of $2.7bn, while developing further wind generating capacity.

Tunisia remains interesting for potential investors thanks to its generally advanced investment laws and its strong wind and solar profiles, says an executive at a Gulf-based renewables firm.

But the executive wants to wait to see how the new administration acts before considering seeking major projects there. “There are a lot of preconditions for working in any country on renewables – good terms for investment, a strong business environment and government support through incentives and subsidies,” he says. “So until we know where we are on those, we will watch with interest, but move slowly.”

Oil and gas firms have shown no such compunction. With oil prices above $100 a barrel in Europe at the end of 2011, the big international oil companies (IOCs) are all looking for new opportunities and many oil and gas executives remain convinced that Tunisia could still be the site of major hydrocarbons reserves like its neighbours. In June 2011, Spain’s Repsol won a contract to explore three offshore areas along with Etap, while OMV saw through its plans to buy the Tunisian operations of the US-based Pioneer Natural Resources for $866m.

The UK’s BG, meanwhile, which is the country’s biggest hydrocarbons producer, has reaffirmed its commitment to projects in Tunisia.

One place where Tunisia needs investment, but may find it hard to attract, is in the development of a new refinery, of which the country has long been in need. Since the early 2000s, plans have been in place for the development of a 120,000 b/d refinery at La Skihrra, 350km north of Tunis.

Private finance

The government struggled to find a private sector investor for the scheme until late 2010, when Tripoli announced that it was gearing up to take part in the project. However, now that the regime of Muammar Gaddafi has been swept aside, any plans for the scheme will have to be reapproved by the National Transitional Council.

Foreign investment in Tunisia could provide a much-needed boost to the country, as it does not have the financial clout of its resource-rich neighbours. In the longer term, however, Tunis will probably have to consider unpopular reforms to its energy subsidies.

A report commissioned by the EU showed that in 2010 Tunis spent about 1 per cent of total gross domestic product (GDP) on petroleum subsidies, while another 1.4 per cent of GDP went on food subsidies.

These figures were down on 2008 when, as global commodity prices peaked, food and energy subsidies totalled 3.7 per cent of GDP. If commodity prices rise again in the coming years, it could severely compromise Tunis’ ability to underwrite subsidies and also put pressure on domestic supplies of foreign currency.

If the new leadership in Tunisia wants to continue along the path of working with private sector players and achieve fiscal stability, it will probably have to start easing subsidies to balance its own books and make private-sector sponsored projects, such as new power plants and refineries, financially viable.

This leaves any future minister of industry with a tough choice: to cut subsidies to ensure future energy security and risk unpopularity and unrest or maintain stability and keep losing money.

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