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Algeria's expansion strategy

The country's energy sector has big ideas for the future—if the creaking political establishment will approve them

Algeria's ambitious oil and gas expansion plan faces its moment of truth in June when the government unveils a long-awaited hydrocarbons law designed to lure sceptical international oil companies. The plan, Project 2030, calls for $56bn of investment over the next four years. But it won't work without foreign investors, and to date they've been scared off by corruption, political turmoil, low returns and onerous contract conditions.

Project 2030 aims to change all that. It's the brainchild of Abdelmoumen Ould Kaddour, appointed in March last year as chief executive of Sonatrach, the state-owned firm that has a monopoly on Algeria's oil and gas industry.

Kaddour's plan calls for a thorough re-vamp of Sonatrach, aiming for more exploration, improved production and better IOC contracts. "We want to change the way we do business," he explained in September.

Exploration is at the centre of Project 2030, which calls for a $9bn investment in new fields, with a target of 100 oil wells each year for the next four years. The plan also calls for raising output in oilfields, with new gas pipelines to Europe, where Algeria is already the number-three supplier. There are to be new refineries to add value to existing production and hefty investment in shale oil, a possible trump card, with Algeria holding the third-largest reserves in the world.

But for all this to happen, reluctant IOCs have to be persuaded to take part.

Luring investors

The new hydrocarbons law has been a long time coming, having been first announced last October by energy Minister Mustapha Guitouni, who said IOCs should be encouraged: "We want to strengthen ties with our partners. It is necessary to be flexible."

The 10-month timeline is mostly down to political infighting among a divided and fractious political elite, the so-called Le Pouvoir (The Power). The elite is notoriously inscrutable, with diplomats talking of a tussle between reformers and conservatives over whether to open the doors further to foreign investors.

For now, most IOCs are staying away. Their stand-out complaint is Algeria's insistence that Sonatrach has a minimum 51% stake in any joint venture, with potential foreign investors grumbling that they're expected to contribute equipment, finance and expertise into projects they can't control.

1.01m b/d—Algeria's January oil production

A second problem is the so-called windfall tax, introduced in 2006, which scoops off extra profits when oil and gas prices go up. Taxation rates are another problem, as are existing contract terms—negotiated when oil prices were high—that squeeze foreign investors.

IOCs also complain of the problems of doing business in a country dogged by corruption, inefficient administration and red tape. Oil executives point to clumsy bureaucracy as a major hurdle for exploration, where nimble minds and constantly changing rig requirements are the norm. The US embassy website describes a business climate clouded by "unanticipated regulations, heavy bureaucracy, and comparatively few incentives". The past year saw Algeria drop three points on the World Bank's Ease of Doing Business Index, from 163 to 166. Transparency International rates it 112 out of 180 states for corruption.

Soaring ambitions: Sonatrach is waiting to see if its reforms win establishment approval

Things will have to change to lure IOCs to bid for exploration blocks. Previous auctions fell flat, with only two of 11 blocks taken in 2011 and four of 31 in 2014.

One risk that appears to have subsided is terrorism. Islamic State is on the back foot after shattering defeats in neighbouring Libya, and security forces appear to have got the upper hand against al-Qaeda in the Maghreb, five years on from the terror attack at BP's In Amenas gasfield that left 40 workers dead.

Steadying the ship

On the plus side, Kaddour can point to a solid 12 months in office. He is Sonatrach's seventh chief executive in 10 years and arrived after the company endured prolonged turmoil and corruption investigations earlier in the decade. "When I arrived at the office six months ago, I found a pile of documents and letters that needed to be signed on a daily basis," Kaddour told Reuters last October, saying he had found "no long-term vision, no communication".

Since then, he has overseen a blizzard of activity, helped by a good relationship with Guitouni. Total has dropped an arbitration case it initiated over Algeria's imposition of the windfall tax and, with relations restored, work resumed on a joint Sonatrach/Total project at Timimoun gasfield.

IOCs struggle in a country dogged by corruption, inefficient administration and red tape

In December, Kaddour signed a deal with BP and Statoil to produce an extra 11bn cubic metres a year of natural gas from Tiguentourine gasfield, adding to the 9bn cm/y already flowing. Then in January, Sonatrach signed a deal with Cepsa to boost production at the Rhourde el-Khrouf oil-and-gasfield, expected to raise crude production from 11,000 barrels a day to 24,000 b/d within five years.

Despite his vigour, Algeria's oil production has fallen on Kaddour's watch, from 1.08m b/d to 1.01m b/d in January. Gas has fared better, up from 132.2bn cm/y in 2016 to 141bn cm/y now. With gas exports rising to 57bn cm/y from 54bn cm/y, Algeria's total hydrocarbon export revenues are up to $32.3bn from $27.7bn.

Political uncertainty

While Kaddour can claim to have put in a good shift in his first year in the chair, it is still uncertain whether the government will loosen terms enough for IOCs to buy into Project 2030. Political turbulence in government circles has pitched reformers against an old guard determined not to cede control; and the hiring and firing of ministers continues. Guitouni has been in the job only since May, replacing Noureddine Boutarfa who was dismissed, no reason given, despite his popularity with Opec, where he had overseen production cuts agreements.

"A lot of stakeholders in Algeria are comfortable with the way things are, and are pushing back against reform," said Geoff Porter, head of North Africa Risk Consulting. "IOCs are sceptical about Kaddour's ability to really change things. Past patterns support their scepticism."


Le Pouvoir: aging but still powerful

Indecision is the default setting for Algeria's governing elite, an inscrutable grouping of military, political and business figures collectively nicknamed Le Pouvoir. The squabbling clans of The Power are anchored around the FLN, the socialist party that led Algeria to independence from France in 1962, and has run the country ever since. But old stalwarts are dead or retired, and the FLN's waning grip is personified by ailing president Abdelaziz Bouteflika, an 81-year-old recluse into his fourth term in office who was last seen in public in 2013.

Plunging oil prices triggered a crisis in the state-dominated economy. Spending cuts have seen protests from teachers and health workers complaining of falling living standards, and the government dares not cut spending further. Instead, it is raiding fast-diminishing foreign reserves, which plunged from $194bn in 2014 to $60bn now.

Economic reform is being urged by both the IMF and the World Bank; but Le Pouvoir appear to be circling the wagons. Last August, Bouteflika fired 73-year-old prime minister Abdelmadjid Tebbourne. The replacement wasn't a thrusting reformer but party stalwart Ahmed Ouyahia, 66, taking up his fourth stint in the post. A case, one might say, of plus ça change.

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