Will foreign companies save the Algerian petroleum industry? This is the last hope for Abdelaziz Jerad’s government of raising the billions of dollars and acquiring the new technologies so urgently needed to boost the hydrocarbon production which has been declining now for nearly fifteen years. Nothing is certain in advance. Fossil fuels are no longer popular with banks. The international oil companies, impoverished by the pandemic and the economic crisis are fantasising about “green electricity.” As for the new Algerian law on hydrocarbons, indispensable to attract future investors, it is still not ready.
Seventy-four-year-old Abdelmajid Attar, former CEO of the national company Sonatrach in the nineties, minister of hydraulic resources during the 2000s, a recognized authority in these matters, was appointed Minister of Energy in June 2020 and abruptly dismissed in February 2021. He gave a frankly pessimistic overview of his sector via national radio on 25 January of this year: a budget shortfall of 10 billion dollars last year, a new drop in production, export and investment figures leading to disastrous financial results. At the beginning of February 2021, the US news agency Bloomberg, considered an authority in North America and especially on Wall Street, put the question bluntly: “Algeria: An Oil Country No More? ”1 Its crude exports represent less than 1% of the total exports of the Organisation of the Petroleum Exporting Countries (OPEC). Of course, Algeria has not been spared by the coronavirus pandemic and has made it a point of honour to follow the OPEC guidelines and cut back its production. The virus and its consequences explain in part the year’s setbacks. But only in part.
A law passed and then repealed
Until 1986, the country lived off of two giant deposits discovered in 1956 by French corporations, one of oil at Hassi Messaoud, the other of gas at Hassid Rimel. With the money from the oil, nationalised in 1971, industrialisation was launched, medical care was socialised, there was free education for all as well as a plethora of expanded social policies. A powerful gas industry was built which absorbed more capital than was spent on searching for new deposits. But it just isn’t possible to spend the same dinar twice and the oil sector proper, which brought in the most cash was, for some fifteen years, deprived of investments, especially for the task of prospecting so essential to maintain uninterrupted the exploitation of the oilfields.
Sixteen years after the nationalisation of the foreign companies and despite much political and ideological resistance, a new law made Algeria’s mineral resources available to foreign companies. These were prepared to finance 100% of the prospecting costs, counting on getting their money back from the sales of the production if they hit pay dirt and even prepared to remain minority shareholders with 49%. New companies came running, such as the US Anadarko, others returned in force like ENI, the Italian company. A third oil province was discovered around Berkine in the East. Soon, however, the boom fizzled out. The companies began to quarrel among themselves and with Sonatrach, the national company, automatically involved in the partnership with a majority of shares. There were more and more lawsuits and little by the little the foreign companies began to tiptoe away. As a result, instead of the 2.6 million b/d hoped for at the time, daily oil production fell inexorably to less than one million b/d at the present time.
In December 2019, a new law was passed in the midst of a political crisis. The idea was to bring back the international companies which had often had their fingers burned by Algerian ways of doing things, from customs tariffs to tax-collecting by way of banking mores and, of course, by the national company, Sonatrach, which has to approve every decision and is never in a hurry. With the result that worksites are constantly delayed and take twice as long as planned to complete if not longer. It is not rare that a project takes twenty years to materialise.
Unattractive tax system
Which makes the profitability that much smaller since Algerian oil taxes are especially high. According to Rystad Energy, a Norwegian consulting firm specialised in hydrocarbons and which has produced a study of the world petroleum industry, the public sector (the State and Sonatrach) monopolises 90% of the oil income as against an international average of 72%, or 68% for Saudi Arabia.
Along with Russia, Algeria has the world’s most unattractive tax system. So, they must loosen the purse strings, and at the very least fall in line with the international average in order to attract new candidates, necessarily reluctant in view of the country’s poor reputation, or lower the tax rate even more to compete with their rivals among the OPEC countries and elsewhere. For the past year, the authorities have been wavering between their fear of losing fiscal revenues for a national budget that is already in the red and the unavoidable obligation to attract more capital and technologies in the oil sector. Where to set the bar? The minister and the company are in disagreement and the dossier has been taken away from the latter’s CEO but has moved no faster.
The second obstacle are those 51% automatically granted Sonatrach. This is not a new dispute: already in 2005, former Energy Minister Shakib Khalil had a law passed which allowed companies other than Sonatrach to hold a majority of shares on a given oil- or gas deposit. Howls of protest led then President Abdelaziz Bouteflika, to scrap the law. The tutelage exercised by the national company over the groups associating foreign partners had left the latter with too many bad memories: there had been no less than 13 lawsuits brought before international arbitral bodies and the dispute had finally been settled with the pure and simple withdrawal of the Algerian side and the payment of sizeable indemnities. An executive order issued on 9 February 2021 by the Council of Ministers maintained the 51% and put an end to the dispute, at least for the time being. ‟It guarantees and preserves the interests of the State by keeping the share of participation of the national company at a minimum of 51%, whatever the type of transfer granted.”
A need for modernisation
As much as they need fresh capital, Algerian hydrocarbons need new technology. The way the deposits are extracted, the quantities of gas injected to maintain the pressure and above all the recovery rate of existing reserves urgently need to be updated. Between the Berkine deposit exploited by a US company and Hessi Messaoud under the control of Sonatrach since the 1971 nationalisation, the difference in the rate of extracted crude oil is between 15 and 20%. “The price per barrel is not the only parameter determining our financial resources” explained as early as December 2014 Sid Ahmed Ghozali, one of the founding officers of the national company. In fact, Algeria is the only OPEC member that fails to fill its quota, exporting less crude oil than authorised under the December 2020 agreement. Hence foreign companies’ reluctance is understandable.
In January 2021, the country has not been able to take advantage of the upturn in the price per barrel which for the first time in a year is over $60. Yet more than ever before Algiers has an urgent need for cash. The Compagnie française d’assurance-crédit (Coface) which underwrites French exports, estimates that the Bank of Algeria’s foreign exchange reserves will last another eight months. This represented 23 billion dollars in December 2020. Barely enough to finance the external current account deficit for the year. What will happen next?
1‟Algeria: An Oil Country No More? Algerian Energy Exports Sink Rapidly,” Bloomberg, 8 February 2021. Algiers estimates its exports in January 2021 at 937,000 barrels per day (b/d) as against Bloomberg’s figure of 290,000. It adds 647,000 b/d of gas products (natural gas and LNG). Two thirds of Algerian crude oil is indeed refined locally and consumed in the home and by Algerian companies.