REPOST: Can Algerian oil and gas catch a break?

This Forbes.com article discusses the downturn in oil and gas production in Algeria due to foreign investors' wariness on the country's safety and profitability.

 

Image Source: forbes.com

Algeria’s energy fortunes have been a bit of a roller coaster as of late. Almost as soon as they put a lid on a wide-reaching corruption scandal that brought down the heads of the country’s state-backed energy firm Sonatrach, a more pressing challenge emerged. The oil and gas-rich nation faced a steady downturn in production as foreign investors began viewing the country as increasingly inhospitable. The World Bank ranks the country 152nd in its global index of business friendliness.

Last year the state rushed to reverse course with an aggressive energy investment plan and promises of legislative change meant to bring in more new financial partners than had left. But, even that managed to disappoint as the new policies fell short of addressing traditional energy efforts in favor of uncertain shale potential.

More recently, the country’s energy sector has been left to fend off the overflow from the region’s recent tumultuous political transition. Sure, the North African nation largely escaped the kind of protest movements that ousted Gadaffi in the East and Ben Ali to the North, but they still had to deal with the regional unease. This was made significantly worse by a flare-up from Malian separatists to the south.

This periphery instability came home to roost in January when, in an apparent response to Algeria’s open air space for anti-separatist troops from Europe, armed militants raided a BP & Statoil-held natural gas site near the Libyan border. The raid and messy government response left scores dead, among them 38 foreign workers. The message to international energy firms was clear – Algeria offered enormous energy potential, but with it, enormous risk.

Growing Labor Frustration

Adding to the energy sector’s security concerns, this month saw growing frustration with job opportunities boil over with protests across the country’s south. According to an AP report, the south is home to only 10 percent of the country’s population, but also the majority of oil and gas reserves. With thousands turning out to demand a role in the country’s energy indsuty, the spotlight was turned on what activists believe is an uneven approach to developing Algeria’s most important industry.

Algeria is currently Africa’s third largest producer of oil, boasting an estimated 12.2 billion barrels of what is described as a “high quality light crude oil with very low sulfur and mineral contents”, by the U.S. Energy Information Administration. The majority of the country’s reserves are situated in the eastern Hasi Messaoud Basin (60%) with many of the country’s more recent discoveries centered in the Berkine Basin. Algeria produces about 1.27 million barrels per day, with more than half (750,000bbp) reserved for export. Much of this output is reserved for the United States market (40.5%), with OECD European member states, led by Spain and Italy, close behind (38.5%).

Further complicating the protest movement in the eyes of those in search of a little energy sector stability has been the sudden support from the North African arm of Al-Qaida. In an online message, the group called the protests a “natural response to the policy of marginalization and nepotism used by the corrupt Algerian regime”.

For a government trying to downplay the impact of regional unrest on local energy efforts, this was hardly welcome news. The Algerian leadership has been able to address earlier protest movements by increasing public spending aimed at frustrated groups. However, as production and revenue continue to fall and vital trading partners like the U.S. begin relying on closer and more stable resources, this approach may prove unsustainable.

How Big is the Problem?

It would be fair for any energy producing country facing such a roster of challenges to be a little worried. But for Algeria, these last few months may be a reason to panic – or at least take a good, long look at how they do business. After all, this is country that looks to energy revenue for just about all of their export revenue and almost as much of their state spending. To meet even their most basic needs, they will need to increase output and work to expand their production options to reduce their dependence on existing efforts high prices. As the Economist noted on February 9th, “To break even, (Algeria’s) budget banks on oil at around $120 a barrel, above typical forecasts for this year; today’s price is around $116 for Brent.”

The government has offered solutions in the form of new shale opportunities and plans for renewable development. However, with domestic demand rising and foreign investors on edge, such long range options may not be enough.

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