The oil and gas industry is Algeria‘s hard-currency lifeline. Now facing futher moves toward deregulation and privatization, the sector will increase Algeria‘s foreign earnings even further

Oil and gas production represents 95% of Algeria’s exports, 60% of state revenue, and 25% to 30% of GDP. While these huge numbers depict an alarming lopsidedness in the national economy, the country still contains vast hydrocarbons potential yet to be exploited.

In what is both a blessing and a burden for Algeria, the hydrocarbons industry is the core of the nation‘s economy. The prized resource was first discovered in Algeria at the Hassi Messaoud oil field in 1956.

After a period of limited development, due to the political and economic dislocations caused by Algeria‘s independence struggle from the French, the industry was nationalized in the 1970s with all hydrocarbon infrastructure development and production consolidated under the state oil company, Sonatrach, an acronym for the much more weighty title, National Enterprise of Research, Production, Transport, Transformation, and Commercialization of Hydrocarbons.

Over the last several years, significant oil and gas discoveries have been made, both by Sonatrach and by foreign companies operating in partnership with the state-owned company. While official estimates of proven oil reserves remain at 9.2 billion tons, these recent oil discoveries, along with plans for more exploration drilling, improved data on existing fields, and use of more effective oil recovery systems, have upped estimates of the country‘s reserves.  As a result, the government implemented a major expansion program in 1996 designed to increase output. Under the program, Sonatrach and its foreign partners expect to have increased Algeria‘s crude oil production capacity to 1.5 million barrels per day by 2004. Included in this program are provisions for more exploration wells to be drilled (many of which have already been dug), half by Sonatrach and half by foreign companies.

These factors, along with a shift towards domestic natural gas consumption (approximately 95% of the country‘s electricity is now generated by gas), should see a strong increase in Algeria‘s exports of crude, especially given that Algeria‘s Saharan Blend oil is among the best in the world. Approximately 90% of Algeria‘s crude oil exports go to Western Europe, with Italy, Germany, and France as the main markets. The Netherlands, Spain, and Britain are other important export destinations.

Algeria also wants to increase gas production. The country has 3.7 trillion cubic meters of gas reserves (although Sonatrach estimates that Algeria‘s gas potential is even higher), and it is currently exporting more than 60 billion cubic meters of gas per year, placing the country among the top 10 worldwide exporters of gas. As with oil, the European Union (EU) represents Algeria‘s most important market for its gas, with Algeria accounting for one quarter of EU gas imports. Approximately half of the country’s gas exports are in the liquefied form, while the rest is pumped through two new pipelines, theTrans-Mediterranean to Italy and the Maghreb-Europe Gas Line to Spain and to Portugal via an extension, making Algeria a premier gas supplier for southern Europe.
But the key to increasing gas exports is the multibillion dollar development of the In Salah region by Sonatrach and BP-Amoco. In the largest foreign investment ever made in Algeria, the $2.5 billion development is set to increase the nation‘s gas production by 9 billion cubic meters and includes exploration for new gas reserves. Under the profit-sharing agreement, project investment is split 65% BP-Amaco and 35% Sonatrach. Additionally, the joint-venture has established In-Salah Gas Marketing, a European-based company, to search for buyers. Its first deal is to supply Italian electricity giant Enel with 4 billion cubic meters of gas annually. The venture is also marketing gas to other potential clients in Europe, Turkey, and North Africa.
Also high on the list of priorities is to develop the sector‘s downstream activities. Sonatrach has an ambitious $2.3 billion program to expand its petrochemical industry via its affliate, Entreprise Nationale des Industries Pétrochimiques, paving the way for a number of opportunities for local and foreign investors.