A new, more transparent bidding process has seen the sector experience record new investments, up 45% in 2001, and groundbreaking deals, with the state oil and gas company, Sonatrach, signing 20 new exploration and production contracts, five times the yearly average prior to 2001. Thanks to this, the Ministry of Energy and Mines states that oil and gas production will be ramped up significantly in the following 10 years. Revenues are projected to increase 50% by 2006 from a 70% increase in oil production and a 40% increase in natural gas production.
Most of these production increases will stem from joint-ventures between Sonatrach and independent foreign investors. Crude oil production increases (to 2 billion barrels per day in 2014, up from 1.1 bb/d currently) will come from the production of Sonatrach and foreign oil firms such as Anadarko Petroleum, BHP Billiton, Cepsa, and Amaranda Hess. Increased gas production (scheduled to reach 85 billion m3 a year by 2006, up from 60 billion m3 currently) will be generated from key local/foreign joint-ventures such as Ohanet, to provide 6 billion m3 per year; In Salah, 9 billion m3 per year; and In Amenas, 9 billion m3 per year.
But, despite these striking advances, the sector is, according to the Minister of Energy and Mines, Dr. Chakib Khelil, performing beneath its potential. Notwithstanding its wealth of reserves, Algerian hydrocarbon exports currently represent only 1.2% of the world oil and gas market. The reason, says Dr. Khelil, is threefold.
“[First] our territory is under-explored,” says Khelil. “We have eight wells per 10,000 km2, while the average worldwide is 100.” Algeria has 1.5 million km2 of sedimentary basins of which only 600,000 km2 have currently been exploited. This, according to Dr. Khelil, means that Algeria has the capacity for at least 720 more wells. Second, the Minister argues that Algeria needs new seismic and drilling technologies, and third, better management and improved methods in order to optimize revenues. “Investment,” says Dr. Khelil, “is thus crucial to increase reserves and production and obtain a more significant market share.”
Algeria’s post-independence development model, which prioritized the state and actively marginalized the private sector, inhibited foreign investment. The economic liberalization program adopted by the government in the early 1990s has seen the deregulation of most key sectors of the economy, from industry and telecommunications, to banking and transportation, including the legalization for state entities to be privatized. However, the vital nature of the oil and gas sector – the mainstay of national wealth – has made liberalization and the privatization of Sonatrach a much more difficult legislative task.
Concerted reform of the sector, in the form of a proposed hydrocarbons law, has been on the cards since 1999. Overseen and promoted by its chief architect, Dr. Khelil argues that the hydrocarbons law is the only way to successfully mobilize sufficient levels of foreign investment to fully utilize the potential of Algeria’s reserves. But strident opposition from labor groups, popular distrust of economic reform, and a lack of political consensus has seen the law flip from one parliamentary committee to another, raising the possibility that the law may be shelved for the foreseeable future.
A large part of the controversy surrounds the privatization of Sonatrach. The Prime Minster, and possible candidate for presidential elections in 2004, Mr. Ali Benflis, has already declared his opposition to the privatization of Sonatrach, while Minister Khelil has also had to confirm that the law does not require breaking up or selling the state firm. But the debate regarding the future status of Sonatrach distracts from the basic thrust of the bill, which is to restructure the rules that govern the sector to make it more attractive to international investors by placing Sonatrach on a more competitive footing.
Much of this focuses on reforming the role of Sonatrach itself. The firm, which with an annual turnover of approximately $20 billion is the 11th largest oil and gas firm in the world, operates in a regulatory environment that, argues Minister Khelil, is a burden on Sonatrach and an inefficient way to manage the sector. As a state-owned monopoly, Sonatrach lacks proper incentives to minimize its costs and operate more efficiently. As an arm of the Ministry, it is subject to the annual uncertainties of the government budget, undermining its ability to plan and invest for the long term. And as a firm highly reliant on specialized and qualified human resources, it is unable to compete in term of wages with the private sector.
For foreign investors, Sonatrach’s role is ambiguous. Although Sonatrach is a commercial company that international firms are required by law to work in partnership with in Algeria, it also functions as the government’s agency, responsible for regulating the sector and awarding exploration and production contracts. This creates a conflict of interest. Is the state-owned company a commercial partner to do business with and maximize profits, or a guardian of the State’s resources and a regulator?
Dr. Khelil believes these impediments can be eliminated by giving Sonatrach its commercial independence by striping it of roles that logically should be performed by the government – as the owner and guardian of resources, a regulator, and promoter of investment. The law proposes establishing two independent, self-financed agencies to award future exploration and production contracts. The agencies would also be responsible for administrative and regulatory activities in the sector. The changes will eliminate potential conflicts of interest and put Sonatrach on a more sound commercial footing by requiring the company to compete with other firms for contracts. Paying taxes on revenues will allow the government to introduce profit incentives and an improvement in cost-effectiveness.
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 choose will reinforce the firm’s ability to improve financial management. The draft law also proposes to limit Sonatrach’s take of future production-sharing agreements with foreign investors to 25%, later raised to 35% after a public outcry, lowering the government’s initial 50% take.
There is no doubt that the law will make Algeria more interesting for international companies. Convincing Algerians that this benefits them requires more work.

RECENT                                                                                                         DEVELOPMENTS A power production deal was signed between Sonatrach and Sonelgaz, Algeria’s electricity utility, for a desalinization unit in Arzew with a capacity of 90,000 m3 of water per day. The plant is to be operated jointly by the US-South African company Black & Witch with the Omani company Sogex. Sonatrach and Sonelgaz jointly hold 20% of the plant, with 80% belonging to the private sector. Sonatrach has signed a $1.1 billion contract with BP to increase production in the region of In Amenas. This investment could reach $1.8 billion in the second phase of the project. The Ministry of Energy and Mines launched an invitation to tender for a large-scale, integrated gas project in the region of Gassi Touil. This project includes development of the gas field, liquefaction, and transport. Subsequently, the Ministry held meetings last year with the US Secretary of Energy to discuss the possibility of increasing LNG exports to the United States. MedGaz, a gas pipeline project from Algeria to Spain, is pending the approval of Spain and the European Union. A gas pipeline extension project toward Italy is also being negotiated. Under proposal is the extension of the pipeline to Sardinia in cooperation with Italian and German companies. Yet another gas pipeline proposal – to Nigeria – is being negotiated. Feasibility discussions were held between Algerian and Nigerian officials in London late last year. Sonatrach has signed agreements to study production and exploration in Niger, Mali, and Cameroon. Sonatrach has already completed a study in Sudan and is currently submitting offers. The firm is also negotiating greater upstream participation of the gas field in Peru’s Camisea project. This year Sonatrach, with is German partner BASF, will inaugurate a propylene production plant in Tarragone, Spain. A three-part agreement was concluded in Spain with oil and gas firm Cepsa. The agreement concerns power production, gas marketing and the trading of oil products in Spain. The Ministry will also launch an invitation to tender for the construction of another power plant, in cooperation with Sonatrach, Sonelgaz, and private investors. Located near Skikda, the plant will generate 600 MW. Germany’s Linde AG and Sonatrach have signed an agreement for a joint-venture to produce and distribute helium. With Linde holding a 51% stake, a helium liquefaction plant will be built in Skikda on Algeria’s east coast at a cost of approximately $85 million. The plant is scheduled for completion by 2005. The German-Algerian venture will produce 17 million m3 of helium per year and is banking on strong worldwide demand for helium, which has been increasing annually by 5% to 10%.

SONATRACH  GROUP                                                                                                                                         The hydrocarbons law, if passed, envisages a fundamentally more competitive and open sector. Sonatrach Group, which consists of a network of affiliated companies that are either 100% or majority-owned by Sonatrach itself and active both upstream and downstream, will bear the brunt of the new environment. Three of them talk to Arab Communication Consult.     ENAFOR    The Algerian National Enterprise for Drilling (ENAFOR) was established in 1982 to perform drilling and exploration operations, and oil-and-gas-well maintenance. Mr. Ali Acila, who was appointed CEO last year, argues that it is already in the process of preparing for a fully liberalized market. “My mission is really to prepare ENAFOR for an increasingly difficult and competitive environment. We will be subject to new invitation to tender procedures and will be put on an equal footing with foreign companies as of 2004. We will no longer have an exclusive agreement with Sonatrach. The environment will be really difficult. To do this we need to make every effort to control our costs, we will achieve ISO certification by the end of 2003, and we need to develop our health, safety, and environment standards.”    GCB           GCB, 100% owned by Sonatrach and established in 1981, is a civil engineering and construction firm mainly concerned, but not restricted to, the construction requirements of the companies operating in Algeria's hydrocarbons sector, such as earthworks, pipelines, access roads and civil works for drilling rigs, and petrochemical infrastructure works. GCB CEO, Mr. Mourad Zeriati, newly appointed in 2002, argues that diversification, reorganized management, and new markets are necessary for the changing conditions. “We face fierce competition, in particular in the hydrocarbon sector, from both national and international competitors. Therefore, we have taken rapid steps to diversify and restructure internal operations. [Last] year we were able to penetrate the water sector, working with a Canadian company, SNC Lavallin, as a subcontractor in the execution of work to supply Algiers with drinking water. This experience introduced GCB to a new client, the Ministry of Water Resources, and opened us to a very ambitious program over the next five years for water resource development. It is also one of our objectives to explore new markets close to the Maghreb.There are extremely interesting operations in the Middle East, and we have recently visited Oman with ENAFOR, ENSP, and ENGTB to open a representative office.”    ENSP         The National Enterprise for Well Services (ENSP), established in 1983, is the key drilling services supplier in Algeria, working with both Sonatrach and international firms in the sector. Mr. Abdelhak Ziada, formerly a senior manager at Sonatrach and now CEO of ENSP, argues that regulatory changes in the sector have already made an impact. “Up until the end of 2001, ENSP's were contracts ensured by Sonatrach and renewed through tariff negotiations. But with the decisions made by the Ministry of Energy and Mines, all contracts must be won through the tender process. My main apprehension was that the company, including myself, was not ready for this radical change. So our strategy has centered on two main points: we have to strengthen the business activities we perform and seek partners so that we adapt quickly to fast-changing technology and ensure that the quality of our services is in conformity with international standards. To do this, we are concentrating intensively on training, which is an essential element in a service firm; it must be re-examined and reorientated according to new market requirements. I am speaking of a change of culture and developing modern management tools.”

PROVEN OIL RESERVES:              TOTAL OIL PRODUCTION:           MAIN MARKETS:                          OPEC QUOTA:                            NET OIL EXPORTS:                      PROVEN NATURAL GAS RESERVES: NATURAL GAS EXPORTS: MAIN MARKETS:   9.2 billion barrels 1.46 million bb/d in 2002 Western Europe and the United States 780,000 barrels per day (crude oil) 1.25 million barrels per day in 2002 4.5 trillion m3 60 billion m3 in 2002 Western Europe, mostly via two submarine  pipelines to Italy and Spain. 2002 was another record year for Algeria’s hydrocarbons industry, with total income topping $19 billion. This was thanks to an average 2002 oil price of $23, way above the budgeted forecast of $19. 2003 will see the Ministry of Energy and Mines seek to pass once and for all its draft law for the liberalization of the sector amid intense opposition from labor groups and opposition politicians. Source: Sonatrach