Algeria: trying to do better
Arezki Hocini, president of Algeria's upstream regulator, discusses the challenges facing the hydrocarbon sector and obstacles to reform
Europe's third-largest gas supplier has been shunned by international oil companies over the past decade. This has been primarily due to Algeria's fiscal terms, cumbersome bureaucracy and deteriorating business sentiment. The result has been a serious decline in exploration and production activities. To add to its problems, the recent downturn caused by depressed oil prices has meant Algeria being forced to compete with other producing nations as IOCs have become more selective on where to invest.
With a friendly and welcoming demeanour, Hocini, head of Alnaft (Agence Nationale pour la Valorisation des Ressources en Hydrocarbures), speaks with pragmatism, while still showing a shrewd sense of business reality. Hocini took on his role at Alnaft in March 2017. One of its key mandates has been to improve relationships with existing partners. "We have become more flexible with partners," Hocini told Petroleum Economist in an interview at the North Africa Petroleum Conference (Napec) in Oran in March. "In the past, we would take a position in negotiations and would not move from there. Now we are more flexible."
This new flexibility has translated into the extension of hydrocarbon agreements. One example is a $1.2bn deal with Spain's Cepsa for crude production until 2043 at the Rhourde el-Khrouf concession in the Berkine Basin; another is a new framework agreement for the Timimoun gas project in the southwest Sahara.
Rising gas demand
But no major, new E&P contract has yet emerged—something that's much needed in light of the current supply and demand balance, and the role exports play in the country's fiscal budget. Algeria's domestic gas demand grew at an annual average rate of 4.5% between 2007-17 to around 41bn cubic metres a year. Exports, in the meantime, have been falling at 0.7% a year on average to 54bn cm/y. Marketed production reached an all-time high of 96bn cm/y in 2016 and 2017, following years of stagnation.
But production is just one indicator. "Journalists focus a lot on production figures," said Hocini. "I can raise my production by opening the tap—there is no problem. The critical part is to renew your reserves through exploration. Of course, production is important, but if you open the tap you need to be able to replenish your reserves by as much as you have taken out." Algeria's proven gas reserves were revised down to 2.745bn cm in 2015, down 39% from the previous figure.
"In the past, we would take a position in negotiations and not move. Now we are more flexible"—Hocini, president of Alnaft
"Our objective is to both increase our reserve base and produce higher volumes to satisfy domestic needs and honour exports," Hocini continued. "You need money for this. We are trying to achieve this with Sonatrach and develop new projects with our partners in order to bring in additional volumes of gas." Alnaft estimates that 30bn cm/y of additional production would be needed to "be comfortable with national demand and to meet contractual commitments. This is not a formal figure, more a reference level."
The start-up of new fields in the South West Gas Projects in late 2017, after years of delay, is a sign of renewed momentum. The projects should ultimately bring an additional 9bn cm/y, when its three key fields—Timimoun, Reggane and Touat—reach plateau production. But more projects are needed to avert production decline elsewhere in ageing fields.
"In the next two-to-three years, there will be other projects, which if they go according to plan, would total around 10bn cm," Hocini says. Ongoing projects, mostly conducted by Sonatrach alone, include the tie-up of the Tinhert peripheral fields to existing infrastructure at Ohanet and Alrar in the Illizi basin.
Sonatrach has also inherited other projects such as Hassi Mouina and Hassi Ba Hamou, after foreign partners—respectively Statoil in 2014 and BG (now Shell) in 2013—pulled out for economic reasons.
Asked how long it would take for new volumes to be brought in at the current rate, Hocini said: "One aspect we need to improve in Algeria is the gas or oil-to-market lead time. Look at Egypt's Zohr [giant offshore natural gas field] discovery, for instance, it took them two years from discovery to production. We never had that." The Alnaft boss added: "We have a lot of administrative procedures. It's not easy to change a culture and business environment in one go."
With Sonatrach reducing its five-year investment plan from $75bn for 2017-21 to $56bn between 2018-22, project development could be further delayed, unless there is a serious boost from investors.
Addressing delegates at the Napec opening ceremony, Hocini highlighted several possible avenues to increase natural gas reserves—estimated by the US Energy Information Administration at 200 trillion cm of technically recoverable resources, the third largest in the world.
But it's still very early days. "We are conducting studies to assess the potential in the entire southern [Sahara] area," Hocini said. "The studies are over a two-year period between 2017 and 2019. We will focus on the more juicy areas, such as the Ahnet basin, where Sonatrach had done initial drilling [at two wells in 2014]. Once we know what we can produce, we'll be in a better position to negotiate [future contracts]."
Alnaft is also conducting prospective studies to assess its offshore resources. Algeria's offshore ambitions aren't new. But recent success stories, such as Egypt's Zohr discovery and others in the wider East Mediterranean region, may well be an incentive to appraise neighbouring geology. According to Hocini, "we have some data. We are conducting a study due for completion at the end of the year. Based on the results, we may or may not perform further seismic studies."
But much hinges on creating greater investor confidence. Energy Minister Mustapha Guitouni last July reiterated plans to propose initial changes to the hydrocarbon law. Any amendment is likely to be a lengthy process. "Nothing is decided yet. We're doing a diagnosis. This will result in recommendations from a team of members from the energy ministry, Alnaft and Sonatrach," Guitoni said. "Proposals will be made and will go through parliament. They may be approved, or they may not."
A new bidding round is, therefore, unlikely in the foreseeable future. "If we hold a tender today, do you think there will be interest? Why buy new clothes today when you know they will be on sale next week?" Hocini said.
In the meantime, Alnaft will continue to do business as usual. Other contracts will end soon, including the joint-operations agreement at the Tin Fouye Tabankort gasfield with France's Total in 2019. Alnaft, Hocini says, is "looking at it. If there is an interest, we will go for it. You can imagine, if it is more economic for us to carry on with the same partner, instead of bringing in someone new, then we will do it."
Asked what's needed from partners, Hocini said: "We want them to share the risk with us, as well as the profits, in line with the law. Also, that they bring technology and help train our personnel."
But there's no ideal partner. "As long as there is an interest for us, people are welcome to the table." Hocini stresses the need "to think differently" and be flexible. "Today, we are not entirely there. Myself I am trying to change." Hocini admits resource nationalism is a reality in Algeria. "Being nationalist is good, but one has to be reasonable. You can't do things on your own. Even in the US, with shale gas, it required a lot of money and technology."