Related Articles
Forward article link
Share PDF with colleagues

Waning Algeria

Hit hard by the oil-price collapse, Algeria’s energy sector and economy are struggling with political inertia, giving investors little to cheer

ALGERIA is high on the list of those energy producers regretting their failure to reduce oil and gas dependency when global prices were at their height. Today, in the opinion of the IMF, the Algerian economy is "facing a severe and likely long-lasting external shock". The collapse in oil prices "has exposed longstanding vulnerabilities in a state-led economy that is overly dependent on hydrocarbons".

The period of low global oil prices has deeply hurt the country. Hard currency reserves stand at $106bn, according to government figures, down from $143bn at the end of 2015 and $192bn in 2013. But all is not lost, the IMF says, for public debt is below 10% of GDP and so Algeria has "a window of opportunity to smooth the adjustment to the shock and reshape its growth model".

Whether Algeria will introduce the reforms needed to transform all aspects of the economy, including the oil and gas sector, is open to doubt, based on the government's past performance. For example, in the 2014 licensing round the authorities received only five bids for the 31 blocks on offer and awarded four. Even though changes had been made to the Hydrocarbons Law to encourage investment, most international oil companies (IOCs) felt that it still failed to spell out clearly the returns they could expect from exploring for tight gas deposits or shale gas - particularly at a time of low global energy prices and restrictions on corporate investment budgets.

Among global oil producers Algeria is one of those most dependent on oil revenue, which accounts for 97% of its export earnings. State expenditure is colossal, with generous subsidies on a wide range of public services. The authorities believe that the existence of these state handouts helped to keep Algerians at home when Arabs in many other states were taking to the streets in the 2011 uprisings. So maintaining subsidies, runs this thinking, is essential if social unrest is to be kept at bay. A further demand on the public purse is the annual import bill, with the domestic industrial and agriculture sectors remaining weak.

But given the current circumstances and the drain on savings the conclusion might be that Algeria has no option but to ease subsidies and cut back on imports. Indeed, that was the advice of the central bank governor Mohammed Laksaci earlier this year. In an effort to protect the ailing economy he put a brake on imports by allowing the Algerian dinar to depreciate - by about 30% - and tightening banks' credit restrictions. He also called for significant cuts in public spending.

Deaf ears

But his advice was not welcomed by Algeria's political establishment and he came under strong criticism from senior figures in the ruling National Liberation Front (FLN) who blamed him for contributing to the dire state of the economy through his fiscal measures. On 31 May, President Abdelaziz Bouteflika sacked Laksaci, who had been in the post for 15 years, and replaced him with Mohammed Loukal, head of the Exterior Bank of Algeria.

The removal of Laksaci and the appointment of a new governor who lacks experience in monetary regulation leads to the conclusion that the FLN establishment will block further moves to introduce economic reforms. On the other hand, the newly appointed Energy Minister, Nouredine Bouterfa, said in mid-June that rises in electricity and gas charges were inevitable.

The likelihood is that price increases will be small and gradual so as not to inflame public opinion. Until such measures halt the economic decline, the investment environment in all sectors, including energy, will remain gloomy. The national energy company, Sonatrach, has announced a $13bn cut in its 2016-20 investment programme, at a time when Algerian oil production is in slow decline. It averaged 1.09m barrels a day in May and the International Energy Agency predicts a further drop of 190,000 b/d before 2021. Natural gas production is steady at around 82bn cubic metres a year, but domestic consumption (close to 40bn cm in 2015) is rising steadily. Upstream investment is urgently needed if sufficient export volumes are to be found in the coming years to maintain the flow of revenue.

In the wake of the disappointing 2014 licensing round, the plan was for IOCs to be invited to bid again in the third quarter of 2015. But the authorities postponed the auction, citing low global oil prices and cuts to IOCs' investment budgets. So far it is unclear when a new licensing round will be held and whether the terms on offer will be more attractive to international firms than in the past. In any event, under current circumstances, with the economy in serious trouble, uncertainty over President Bouteflika's succession and worries about further terror attacks on energy targets, IOCs are unlikely to regard Algeria as fertile ground for investment in the near future.

Also in this section
Ecuador: In a hurry to mend the past
15 October 2018
After a decade marred by corruption and legal disputes, Ecuador’s reformist government wants a more investment-friendly exploration regime
Big guns boost UK North Sea commitments
12 October 2018
Shell and Equinor have bolstered their offshore presence in the UK, while Total has made a sizeable discovery
Chill in the air for Canadian drillers
10 October 2018
Labour day heralded the unofficial start of the Canadian drilling season. This year it’s beginning amid uncertainty