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Algeria’s deepening energy problems

Insecurity, economic malaise and uncertainty about the presidential succession are hindering the country’s oil and gas sector

Three dark clouds hang over Algeria and its oil and gas sector today in the form of a severe economic crisis, fear of more terrorist attacks on energy facilities, and uncertainty over the future presidential succession.

One aspect of the economic difficulties is easily explained. Algeria relies on oil and gas export revenue for 60% of its annual budget expenditure. That revenue fell from $60.3bn in 2014 to $35.7bn last year, a drop of 41%. According to the IMF, GDP growth in 2015 was 3.7%. But the fiscal deficit almost doubled to 16% of GDP. No wonder Youcef Yousfi, Algeria’s energy minister between 2010 and 2015, and his successor Salah Khebri, have been so vocal in demanding fellow Opec members cut supply to prop up oil prices.

Yet Algeria’s problems are also internal. While the country is a major oil and gas producer its economy is centralised and inflexible. Large chunks of hydrocarbon revenues are spent maintaining a wide range of state welfare and subsidy programmes. Mindful of the popular uprisings that shook Libya and Egypt, no Algerian government will risk ordering major reductions to these hand-outs.

So the authorities are seeking savings elsewhere, cutting public spending and freezing infrastructure projects. In March, a plan to reduce imports by 15% was announced. The IMF was not impressed, saying that import restrictions “cannot substitute for reforms aimed at boosting exports”.

Algeria is a major gas exporter, selling 48bn cubic metres per year (cm/y), mostly to Europe. But rising domestic demand for subsidised gas in industry and homes — an annual increase of 10% a year in the decade up to 2014, according to government figures — is a problem. For example, total Algerian gas production was 83.3bn cm in 2014, or about 6% lower than in 2006. Domestic consumption in the same period rose from 23.7bn cm in 2006 to 33.4bn cm in 2014. The trendlines mean diminishing volumes available for more lucrative exports.

Efforts over the years to introduce major reforms to the energy sector and make it more attractive to foreign investment have encountered political opposition. The current chief executive of state energy company Sonatrach, Amine Mazouzi, has succeeded in making changes to its senior management. But more radical reforms are needed if Sonatrach is to be transformed from a cumbersome and overstaffed (120,000 employees) monolith into a dynamic entity – along the lines of Saudi Aramco, incorporating the latest technology and business practices.

Terrorism breeds inactivity

The effect of the energy-sector inertia – added to extensive bureaucracy, project delays and unattractive fiscal terms – has muted the interest of international oil companies in bid rounds. Output is gradually declining. Oil production averaged 1.2m barrels a day in 2012 but has been steady at 1.1m b/d ever since and is predicted to decline further.

Natural gas production has fallen from 88bn cubic metres a year in 2010 to 81bn cm/y in 2015. In February the Southern Fields expansion project at In Salah, in southwest Algeria, began to come on stream, and will eventually add about 3bn cm/y to the country’s output. But on 18 March a terrorist attack on one of the In Salah facilities prompted the two foreign operators, BP and Statoil, to withdraw international staff, raising fears that the phasing-in of the full gas increment may be delayed.

No one was killed in the In Salah rocket attack, in contrast to the capture by al Qaeda terrorists of the In Amenas gas facility in 2013, when 40 workers lost their lives. Security at all energy installations has been increased. But guaranteeing the safety of personnel at remote sites around the country is impossible, and Algeria has to acknowledge that terrorism has become another impediment to energy-sector development.

Leading Algeria through these uncertain times is a man who has been in power since 1999. Now in his fourth term, approaching 80 and in poor health, President Abdelaziz Bouteflika is rarely seen in public. He has no vice president and so Algerians can only guess his thoughts on the succession. Last year he dismissed the powerful head of the Department of Intelligence and Security (DRS) and his former ally, General Mohamed Mediene, increasing the influence of his own circle. Constitutional changes introduced this year give greater authority to parliament, but leave the presidency and the army with most of their former powers. The amendments shed no light on the succession issue.

There are three possible successors. The first is the prime minister, Abdelmalek Sellal, who would be likely to follow the Bouteflika line. The second is the president’s chef de cabinet and former premier, Ahmed Ouyahia. For the past two decades he has overseen economic restructuring which has led to public-sector job losses and made made him unpopular. The third name is Mouloud Hamrouche, another former prime minister who has spoken of the need for democratic reform and a shake-up of Algerian politics.

Amid the speculation, Algerians were surprised by the recent return to the country of former oil minister Chakib Khelil, who had been accused of corruption. He was a strong ally of the president and an advocate of reforms in the energy sector. His reappearance and the lavish welcome he received at Algiers airport suggest to many that President Bouteflika, having purged the DRS and strengthened his own position, may give Khelil another chance to streamline Algeria’s oil and gas sector.

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