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Algeria’s upstream rebirth is interrupted

A promised rejuvenation of the hydrocarbons sector and state oil company has been stopped in its tracks

Algeria’s long-awaited new hydrocarbons law became one of the first on the statute books days after the appointment of a new government in January. Yet just months later the revival of the company’s upstream looks to have ground to a halt. With coronavirus ripping through the global economy and oil prices plumbing 17-year lows, president Abdelmadjid Tebboune issued an order that the state budget be reduced by 30pc. As part of that order, state-owned Sonatrach has been told to slash in half its planned expenditure for 2020.

Passage of the law, which languished on the drawing board for years, signalled the priority given to attracting renewed foreign investment in Algeria to boost stagnant oil and gas production. The move was followed in February by the promotion of Toufik Hakkar to CEO of state Sonatrach from his previous role steering the company’s response to the new rules.

Price war

Algeria has been among the countries worst-affected by Saudi Arabia’s decision in early March to launch a price war, a development that compounded the demand collapse caused by Covid-19 to send Brent tumbling to below $25/bl. Years of unfulfilled diversification pledges have left Algeria dependent on oil and gas for more than 90% of its export earnings and over half of its revenues.

90% - Proportion of Algeria’s export earnings from oil and gas

The price slide—which has also affected the government's predominantly oil-indexed gas-sales contracts—threatens to decimate foreign exchange reserves while widening the fiscal deficit. The revelation in late March that the government was in talks with the IMF about securing a slice of a $50bn global bailout package was both unsurprising and indicative of the scale of the crisis. The Washington-based fund has a toxic reputation locally, and the new administration's hold on power remains tentative. 

The ‘hirak’ protest movement that forced the resignation of veteran president Abdelaziz Bouteflika in March 2019 left the streets only last month to comply with coronavirus containment measures. How nearly a third is to be cut from government spending has so far been left vague, bar the assurance that public-sector wages, health and education would be spared.

Spending cuts

In an interview published by the official Algerie Presse Service on 30 March, Hakkar provided only marginally more clarity on the means by which Sonatrach intended to halve spending while fulfilling a mandate to arrest oil production and the decline in gas exports. A sizeable chunk of the $7bn in cuts will come through efficiency savings, he claimed. However, he conceded some ‘non-urgent’ projects would be postponed.

The billing of such delays as a deliberate, temporary response to external circumstances might provoke a wry smile from seasoned Sonatrach-watchers given the company’s woeful record on timely project execution. Its largest recent contract award, a $3.7bn deal signed in early January, covered construction of a greenfield refinery first mooted more than seven years ago despite the urgency inherent in the growing fiscal burden imposed by fuel imports. A second long-planned refinery at Tiaret, and a petrochemicals joint venture agreed with French major Total in early 2019 after years of on-off negotiations, are among the investments likely to return to their familiar position on the backburner.

On upstream plans, the new CEO emphasised talks with IOCS about investment under the improved terms would continue during the funding squeeze—citing a memorandum of understanding signed on 12 March with US major Chevron to explore upstream collaboration and promising similar agreements with other foreign firms. However, IOCs are highly unlikely to commit to major new investment under an untested new regime at a time when capital budgets are being hastily revised downwards. The development of vast shale reserves in southern Algeria—which are estimated at more than 700tn ft3 and are assumed to be the main source of Chevron’s interest—is expected to be mothballed on both financial and political grounds. The widespread economic hardship in Algeria argues against reigniting the heated popular opposition to shale.

New dawn?

Hakkar's assertion the investment pause could be used by Sonatrach to develop new relationships with IOCs could be extended to rest of Algeria’s government—and the need to clarify whether legislative change genuinely signals a new attitude towards foreign direct investment in the hydrocarbons sector. Particular attention will be paid to the issue of Total's planned purchase of US firm Anadarko Petroleum's Algerian assets as part of the latter's takeover by compatriot Occidental Petroleum. Algerian energy minister Mohammed Arkab has publicly stated his intention to block the transfer since shortly after his appointment last year, deeming the deal incompatible with local legislation and suggesting Sonatrach would exercise pre-emption rights.

Oxy executives confirmed during a late-February earnings call that Algerian government approval remained pending. The transaction is to an extent a special case given Total’s colonial associations, but obstruction of the deal would nevertheless belie the promise of a new dawn for Algeria’s chronically-underperforming hydrocarbons sector.

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