Algerian hydrocarbon sector struggles to meet expectations and country requirements
Algeria is one of the most important African producers and exporters of oil and natural gas. Discovered during the final part of the colonial era (1956), hydrocarbon resources were soon exploited by French energy companies (1958) and subsequently by the Algerian national oil company Sonatrach (1963), providing the necessary economic resources fora development strategy based on import substitution.
Today, the hydrocarbon sector is still the main industry in Algeria, accounting for about 28% of GDP, 58% of government revenues and 98% of all exports . Such a large industry rests upon 12.2 billion barrels of proved oil reserves – the fourth biggest in Africa after Libya, Nigeria and Angola – and upon 4.5 trillion cubic meters (Tcm) of proved natural gas reserves – the second biggest in Africa after Nigeria . From such a significant resource base, Algeria is able to produce about 1.5 million barrels of oil per day (Mb/d) and 80 billion cubic meters of natural gas per year (Bcm/y), enjoying the third and the first position among African countries respectively .
Given the relatively limited size of its population, its economic structure and average income, Algeria sells abroad about three quarters of its oil output and three fifths of its gas production, generating revenues for more than 60 billion dollars in 2014 . Traditional buyers of Algerian hydrocarbons are European countries, the United States, Turkey and some Asia Pacific countries.
As far as oil is concerned, the light and sweet Sahara Blend, the most important Algerian quality of crude oil, was until a few years ago delivered mainly to the US by tanker, but it has been recently crowded out in that market by the increase in US domestic production from tight oil. Therefore, Algerian output is today being redirected more towards Europe (around 70%) and the Asia Pacific region .
Algerian natural gas is exported both by pipelines and by liquefied natural gas (LNG) tankers. Indeed, Algeria was the first country in the world to build, already in the 1960s, a liquefaction plant for gas export near Arzew, in order to deliver gas to the United Kingdom. The three international gas pipelines in use today were built only later: TransMed, connecting Algeria to Italy through Tunisia, came online in the 1980s, the Maghreb–Europe pipeline, connecting Algeria to Spain through Morocco, was commissioned in the 1990s, and MedGaz, connecting directly Algeria to Spain, started operations in 2011 . Beside this pipeline-based export capacity of 50 Bcm/y, new liquefaction facilities were developed and Algeria now has four plants between Arzew and Skikda with a total export capacity of 24 million tonnes per year . Thanks to this developed infrastructural system (Fig. 1), the country is not rigidly bound to the South-West European gas market – even if this remain the most economic and thus preferred option – but can deliver gas also to Northern Europe, Turkey and even Asia Pacific countries .
Fig. 1 – Algerian hydrocarbon fields and main infrastructure
Despite some positive characteristics – like the ample resource base, their high quality and the proximity to final markets – the Algerian hydrocarbon sector is facing serious challenges, some of them predating the current declining trend in prices. Indeed, in the last decade the industry has not been able to attract significant new investment from international oil companies (IOCs) and to maintain an adequate reserve replacement ratio through the development of new oil and gas fields. Three pieces of evidence highlight this situation: i) the level of proved reserves, which is essentially flat for both oil, since 2005, and gas, since 1999; ii) the amount of production, which peaked in 2007 in the case of oil and in 2005 in that of gas; iii) the lack of interest shown by foreign companies in the last four bidding rounds for exploration and exploitation concessions .
Fig. 2: Algeria’s oil and natural gas production and exports, 2006-2015
Several reasons, mainly institutional, contribute to this rather grim picture: the obligation for international oil companies to sign joint venture contracts with Sonatrach; the heavy fiscal burden, in place until recent changes (2013); the complexity of the bureaucratic and regulatory process, which is often cause for uncertainties, delays and corruption; the difficulty in enforcing contractual rights and the lengthy judicial process; security concerns after the In Amenas gas facility attack in 2013 and the murdering of French tourists in 2014; the lack of competition in the oil service sector, where the presence of only a handful of firms can keep prices high .
The current collapse in oil and gas prices has been compounding the situation, reducing both the profits out of which Sonatrach can finance its development plan as well as IOCs’ investment appetite.
According to the International Energy Agency (IEA), the medium and long-term prospects for the Algerian hydrocarbon sector are not particularly rosy. Crude oil production is expected to decline by more than 0.2 Mb/d between 2015 and 2020, while condensate and natural gas liquids (NGL) output is set to remain essentially flat at 0.44 Mb/d . In the longer term, liquid production (crude oil, condensate and NGL) is forecasted to stay at 1.3 Mb/d up to 2035 and to possibly increase slightly to 1.5 Mb/d only around 2040 . As far as natural gas is concerned, output is predicted to follow the recovery trend begun in 2014 and to exceed 90 Bcm by 2020 . However, this prospect is bound to Sonatrach’s ability to attract the financial resources and technologies from IOCs that are needed to implement a development plan for new 27 Bcm/y of capacity in six different gas fields . While the timing for the exploitation of shale gas resources is not clear, overall natural gas production is expected to keep growing to 96 Bcm in 2025, all the way to 116 Bcm in 2040 .
Fig. 3 – Algeria’s oil and gas export revenues, 2006-2015
From these forecasts, we can summarise that Algeria has a great potential but for the above mentioned reasons, there is quite a consensus on the idea that it will struggle to realise such potential and to transform reserves into actual production. This conclusion is all the more troubling for the prospects of the Algerian economy and for its government because Algeria is expected at the same time to increase domestic consumption, thereby reducing margins for exports. Consumption of oil more than doubled in the past 15 years, passing from 0.19 Mb/d in 2000 to 0.39 in 2013; over the same period, gas consumption experienced a 70% increase, from 19.8 to 33.4 Bcm/y. Even if oil consumption growth slowed down in 2014, gas consumption increased by a further 4.1 Bcm, i.e. by 12.4%, in particular due to the installation of new gas-fired power plants . Therefore, even if Algeria remains a small oil consumer on the international stage, it is already the second largest gas consumer in Africa and one of the fastest growing final markets for natural gas in the world.
Such a relevant increase in domestic use of hydrocarbons is due to two main reasons: strong population growth and universal subsidies for energy consumption. The second reason, in particular, leads to a wasteful use of energy that puts further pressure upon the sustainability of domestic production. With respect to future consumption, IEA expects now a slower growth for oil than in the recent past, while demand for gas is forecasted to increase, mainly for power generation, up to 43 Bcm in 2020 .
The capability of the Algerian hydrocarbon industry to cope with these production and domestic consumption outlooks while preserving its role of rent provider for the whole of the Algerian society is nowadays even more challenging in the light of the recent collapse in oil and natural gas prices. Oil, having traded at more than 100 dollars per barrel ($/b) between 2011 and the first half of 2014, was worth only about 53.6 $/b in 2015 and is now floating around 30-40$/b . Prices for natural gas exported by Algeria are not easily known, but since they are mainly oil-indexed, it is plausible to infer that they have decreased as well . This is confirmed by data on the 2015 export revenues. Last year Algeria earned only 35.7 billion dollars from the sale of oil and gas abroad, i.e. 24.6 billion less than the previous year (-40.8%).
Forecasts for this year and the next one are not much better. According to IEA, prices are expected to remain weak, since the market will remain oversupplied at least for the first half of the year . While prices may have reached the bottom in the first weeks of 2016, the contango in futures market is still very small, i.e. the price of oil futures increases only very slowly for the next several months . As a result, despite a possible minor boost to production and exports, thanks also to a slackening in domestic demand growth, Algeria cannot expect to earn more revenues than in 2015. Indeed, the opposite is likely to be true.
Algerian policy-makers should be aware of that.
 The role of the hydrocarbon sector has been decreasing in the past few years as a percentage of GDP (from 35% in 2012 and 33% in 2013 to 28% in 2014), but preserves its essential role with respect to export and government revenues. Cfr. Lohoues H., T. Benbahmed (2015), Algérie 2015, in BAfD, OCDE, PNUD, Perspective économiques en Afrique,pp. 2-5.
 Where not specified, data on oil and gas reserves, production and consumption are referred to 2014 and are drawn from BP (2015), Statistical Review of World Energy.
 The top two African oil producers are Nigeria and Angola.
 The price of oil was already in decline in the second half of 2014. In the previous years, thanks to higher average prices and somewhat higher hydrocarbon export volumes, total revenues ranged from 71.4 billion dollars in 2011 to 63 billion in 2013. Cfr. Algeria’s Oil&Gas Revenues Plangue 41% in 2015, in MEES, vol. 59, no. 4, 29th January2016, p. 16.
 Energy Information Administration (2014), Country Analysis Brief: Algeria, p. 7.
 Ibidem, p. 13.
 GIIGNL (2015), The LNG Industry, Neuilly–sur–Seine, Groupe International des Importateurs de Gaz Naturel Liquéfié, p. 22.The International Energy Agency reports the export capacity of LNG expressed in Bcm/y, stating that in 2014 it was equal to 39 Bcm/y. Cfr. IEA (2015), Gas Medium Term Market Report, Paris, International energy Agency, p. 133.
 Algeria exports more gas by pipeline than by tanker. However, the precise share depends on several factors. In 2014 export by pipeline was equal to 23.5 Bcm, with the main destinations being Spain and Italy. Export by tanker was equal to 17.3 Bcm, with main destinations being Spain, France, Turkey and Japan.
 The last bidding round for the awarding of mineral exploitation rights took place in September 2014. Only four of the 31 blocks on offer were awarded. Cfr. Algeria Needs To Streamline Operations, Not Just Improve Terms, Firms Say, in MEES, vol. 59, no. 1, 8th January 2016, pp. 2-3.
 Ibidem. Cf. Sonatrach Engages With IOCs In Race Against Upstream Decline, in MEES, vol. 58, no. 52,23rd December 2015, p. 2. More Trouble For Algeria As Hess Walks Away, in MEES, vol. 59, no. 5, 5th February 2016, p. 10.
 IEA (2015), Oil Medium Term Market Report, Paris, International Energy Agency, p. 52 and p. 59.
 This forecast is based on the New Policies Scenario. Cfr. IEA (2015), World Energy Outlook, Paris, International Energy Agency, p. 142.
 IEA (2015), Gas Medium Term Market Report, op. cit., p.86.
 Ibidem, p. 86-87.
 IEA (2015), World Energy Outlook, op. cit., p. 206.
 These data are from BP (2015), Statistical Review of World Energy, p. 23.
 Electricity demand in Algeria is growing fast and, in order to cope with frequent black outs and public discontent, Sonelgaz, the Algerian vertically integrated electricity company, has an investment plan of 22 billion dollars for the construction of 6 gas fired power plants between 2014 and 2017 and a strengthening of the electricity grid. Cfr. IEA (2015) Gas Medium Term Market Report, op. cit., pp. 47-48. Part of this plan has been already implemented but it may not be completed due to the reduction in funds availability in the last months. Algeria is beginning to exploit also renewable energy resources like wind and solar power, but they still represent a small fraction of generation capacity. Cfr. Key Power Start-Ups Oil & Gas-Fired Despite Increasing Renewable Focus, in MEES, vol. 58, no. 52, 23rd December 2015, p. 5.
 These values refer to the ICE Brent, the international oil benchmark. Sahara Blend, the most important quality of crude produced in Algeria, is usually sold with a little positive or negative mark up over the value of the Brent. In 2015, for instance, its average price was 52.8 $/b, i.e. a discount of 0.8 $/b to Brent.
 Estimates published by the European Commission suggest that in mid 2015Algerian gas shipped by pipeline was paid around 22-25 €/MWh at the Italian border and a little over 20 €/MWh at the Spanish one. In the same period, the price of LNG in Spain, a country mainly supplied by Algeria, was about 20-21 €/MWh. All these values are on average lower than those recorded in the previous years. Cfr. DG Energy (2015), Quarterly Report on European Gas Markets, vol. 8, no. 3, Brussels, European Commission, passim.
 The reasons for this forecast are several: the end of economic sanctions to Iran, the slowdown in oil demand in emerging economies, the appreciation of the dollar, etc. Cfr. IEA (2016), Oil Market Report, 19th January 2016, Paris, International Energy Agency, p. 3.
 In January, the price forward curve for the ICE Brent forecasted a price of 40 $/b only towards the end of the year. Ibidem, pp. 40-41.