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Algerian O&G Promises Return to Form, Placing Blame Elsewhere

Source: Algeria Times 12/31/2013, Location: Africa

Algeria’s state-backed energy company brought a troubling year to a close with a bit of good news this week. After years of declining output and dwindling interest from foreign firms, the energy-rich, North African nation was showing real signs of recovery and would begin increasing over the next five years. Despite continuing decreases in oil and gas output this year, Sonatrach head Abdelhamid Zerguine told reporters that the country’s energy sector was ready for a turnaround.

According to a Platts report on the announcement, Algeria’s oil production stood at 1.14 million barrels per day in November, down 15% from 2005-2010 averages.

Meanwhile, the country’s gas production has declined steadily since 2005 to 2.9 trillion cubic feet in 2011. The industry decline, Zerguine explained, was due to the country’s awarding of some permits to small operators that did not have the “financial capacity” to meet the requirements of local projects, leaving them “overstretched”.

While welcome news for anyone concerned about Algeria’s recent decline in output, the Sonatrach explanation was noticeably free of local accountability, namely the country’s own struggles with industry corruption, legislative progress and related frustration among foreign production partners.

Algeria’s production began slowing following the passage of new revenue sharing laws and taxes in 2005, including a 2006 clause that applied heavy costs when oil climbed over $30 a barrel. In 2009 alone, production dropped 5 percent as frustration grew over possible retroactive renegotiations of contracts and allegations of widespread corruption at Sonatrach. The response from foreign firms was clear, with some threatening to leave the country entirely and licensing rounds eliciting embarrassing results. One round of ten last year attracted only two interested parties, one of which was Sonatrach. While Algeria as a whole hardly offered a secure investment setting for foreign firms (the World Bank ranked them 148th out of 183 in terms of the ease of doing business), the energy sector seemed especially turbulent. For many, the pay-off was just not worth the hassle. The country’s energy business environment was not helped by a series of management shake-ups at Sonatrach, including one related to a corruption investigation in 2010, followed by a CEO replacement 18 months later.

In mid-2012, the country’s government appeared ready to deal with these concerns with a promise for a legislative overhaul that would prove more attractive to concerned foreign firms. However, when the new legislation was finally announced in October 2012, traditional exploration and production projects were left aside in favor of the country’s potential shale efforts, frustrating existing partners.

This disappointment set the stage for another year of declining output, a violent raid on a gas facility and another corruption scandal, this time involving investigators on both sides of the Mediterranean. The investigation focused on about $268 million in alleged payments to Algerian officials by Italy’s energy giant, Eni in order to secure contracts for its local subsidiary, Saipem.

The country’s energy sector did receive a bit of good news as the year wound down with the announcement that Norway’s Statoil would not be selling their local assets and would begin returning their staff to the local sites. This move came after a nearly year long investigation into an attack on a gas facility held by Statoil and BP near the country’s southeast border with Libya in late January. Claimed by militants from neighboring Mali in retaliation for Algeria’s allowance of their air space for air raids on separatists groups, the raid left scores dead, including a number of foreign workers. While the investigation showed that the company or joint venture partners could have stopped the raid, it did not demonstrate much confidence in local military protection, according to a Platts report.

Given Algeria’s strong energy sector potential, including unconventional options, there is no reason to think that they could not turn their production output around over the next five years. However, as long as the country’s political and energy leadership are unwilling to recognize and address problems at home, there is little reason to believe that they will.

For more information about related Opportunities and Key Players visit Algeria Oil and Gas Projects

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