In 2002 Sonatrach will experience its most important change to date, a change that will force its international expansion.		il and gas is the unconditional wealth of Algeria. Hydrocarbon exports have financed Algeria’s post-independence development and they’re the key reason why the country’s GDP per capita is three times that of its neighbors to the south.
		But Algeria is also highly dependent on the industry. Despite years of effort to diversify its export and revenue bases, oil and gas traditionally represent 95% of total exports, 60% of state revenue and 25% to 35% of GDP. In view of this dominance, it is somewhat ironic that Algeria is considered under-explored in terms of hydrocarbon resources. According to the Ministry of Energy and Mines, Algeria has only eight exploration wells per 10,000 km2, compared to the world average of 100 wells. With a total territory of over 1.5 million km2, the potential of this sector is indeed enormous. The result has been intense efforts at restructuring the sector to encourage competition and increase the level of foreign investment. Most fundamental in this is reforming the country’s national oil and gas company, Sonatrach. In terms of turnover – $22 billion in 2000 – Sonatrach is far-and-away Africa’s largest corporation.

t ranks as the 12th largest petroleum corporation in the world and its gas exports, both of LPG (liquid petroleum gas) and natural gas, are among, if not the, world’s largest. With over 48,000 employees and approximately 120,000 when including its subsidiaries, reorganizing the firm is no easy task.
The prospect of outright, or partial, privatization of Sonatrach has not been greeted warmly in Algeria. The powerful labor confederation, UGTA, last year threatened industrial action if Dr. Chekib Khelil, Algeria’s Minister for Energy and Mines (and formerly OPEC President in 2001), pushes forward divestment legislation. Nevertheless, the essential objective of the minister’s reforms has not wavered. The intention, proposed in a new draft law for liberalization of the hydrocarbons sector, is to fully commercialize the company by separating its operational procedures and responsibilities from those of its owner, the state, and expose it to full competition. “The only responsibility Sonatrach should have,” says Dr. Khelil, “is to make money, create employment and be competitive.”

THE MOST IMPORTANT STEP will be to establish two independent agencies. The first, called ALNAFT, will exist to award future exploration and production contracts to investors through an open bidding process and provide information on investment opportunities; a 0.5% share of oil royalties will finance it. Sonatrach, which currently performs this role, will no longer be in the position to award the contract and therefore will operate on an equal footing with other investors in the sector. The second agency, the Regulatory Authority, will be responsible for administrative and regulatory activities in the sector, such as ensuring each player has access to oil and gas transportation infrastructure and so on; it will be financed by charging a service fee. Removing these activities from Sonatrach and handing them to independent, self-financed agencies will erase potential conflicts of interest Sonatrach may have in its partnerships with foreign investors.
The changes will also put Sonatrach on a much more sound commercial footing. With its future income contractually based, it will not need to haggle with the government’s budget committee each year, allowing it to plan for the long term.
The requirement upon Sonatrach to build and maintain transportation pipelines will also be removed, with new construction being offered to any investor on an open bidding basis. Pipelines are not high-return operations and giving Sonatrach the right to pick and chose will reinforce the firm’s ability to improve financial management.

MORE CONTROVERSIAL, however, is the draft law’s proposal to limit Sonatrach’s share in all future commercial discoveries and pipelines to 25% (with the maximum duration of 32 years for exploration and production concessions, 50 years for transport concessions). This will most likely lower the government’s take over the long term when compared to the current production-sharing system. The point, says the government, is that this is the price to be paid for increased private investment in the sector, especially in the currently unexplored basins or small and marginal fields.
Anti-privatization proponents are afraid, of course, that the broad aim of the draft law – to expose Sonatrach to full competition – is merely the thin end of wedge. Like other national oil and gas companies whose monopoly fell in the face of economic reform, reduced opportunity in Sonatrach’s home market will more than likely lead to a strategy of international expansion. Sonatrach already has an international presence: a contract for pipeline construction and another for gas field development, both in Latin America. It has a joint venture with Agip in Yemen, it is developing a polypropylene plant in Spain with BASF and it owns a trading company in Singapore. Nonetheless compared to other of the world’s large oil and gas firms, this is still a very small portfolio.
The question, then, will be how to finance greater expansion. The most obvious way will be to raise funds on the international capital markets by selling shares and issuing bonds. Separating the operations of the state from Sonatrach will be the first step in demonstrating that it is acting in a more commercially oriented way; opening its capital to investors may well be the next logical step.

THE REFORM PROCESS will also affect Sonatrach’s subsidiary companies that operate both upstream and downstream in the oil and gas industry. One example is the National Enterprise for Well Works (ENTP). Although ostensibly created in 1983, it actually took shape 33 years ago as a branch of Sonatrach that was subsequently made into a subsidiary company. Today it is commercially independent, free to make its own joint-venture agreements and operates in competition with foreign powers such as Schlumberger and Halliburton.
Drilling both for Sonatrach and for foreign companies in Algeria with exploration contracts, such as BHP, Cepsa and Anadarko Petroleum, ENTP commands around 40% to 45% of the market. It has also entered into a joint venture with the Dutch firm, Deutag. Mr. Abdelaziz Krissat, the firm’s CEO, says that opportunities for increased business and partnership will come fast thanks to the upcoming deregulation of the sector. “Fifteen years ago, we would never have believed where we are today. In the 1980s, there was speculation that our wells would go dry by 2005 and hence business would dry up too. But today, with new discoveries, we still have the same level of reserves we had in the 1970s; we still have at least 30 years ahead of us. So for us, we think of it as starting from square one, only we now have 30 years of experience behind us.”