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Algeria’s Plans for Shale Gas Development Bring Risks

Source: Algeria Times 9/22/2014, Location: Africa

Algeria’s state oil and gas company, Sonatrach, announced this summer that it plans to exploit the country’s shale gas reserves by 2020, taking advantage of what BP estimates to be the world’s third-largest reserves of shale gas. The plans currently estimate that the first stage of the extraction will produce enough gas to equal 40% of the country’s present production, a significant increase in supply if the estimates hold true. This project could not come at a better time for the country’s moribund energy industry.

In August, Algeria reported that its energy exports in the first quarter of this year fell 9% from a year earlier, and the impact on energy income was a decrease of 12%, year-on-year.

There are a few key reasons for this fall in exports, the first being last year’s dramatic attack on the Amenas gas facility in Eastern Algeria, which is jointly run by Sonatrach, BP and Statoil near the Libyan border. Islamic militants under the leadership of Mokhtar Belmokhtar, a former leader of Al-Qaeda in the Maghreb, attacked the Amenas production facility and killed 39 hostages before the Algerian military retook the plant after a battle that killed 29 militants.

This event not only halted production at the Amenas facility for a month, but also reduced confidence in Algeria’s ability to maintain security at its energy production facilities and has led to a decrease in energy-related FDI. An inquiry by the United Kingdom, which lost six citizens in the attack, into the Amenas incident began this week, rekindling fears about security in Algeria.

A medium-term trend of underinvestment in energy exploration compounds this issue, leading to few new energy discoveries or projects. Even in 2012, gas production had declined by 4% to 170 billion cubic meters (bcm) from the year prior. The older, major gas fields are declining in output and newer projects have failed to come online after being delayed. Foreign investors have been disappointed by the government’s often onerous terms, declining to participate in new energy projects and thus leaving them unfulfilled.

At the same time, domestic energy consumption in Algeria has increased greatly in recent years. Between 2001 and 2011, per capita energy usage in the country increased by 30%, while the number of cars of the road between 2006 and 2012 increased by over 25%. These trends are not isolated: the country’s 2012 estimates of 25-30 bcm of domestic gas consumption is expected to nearly double within the next five years to 50 bcm.

As a result, Algeria’s fiscal situation is increasingly unsustainable. The government is heavily reliant on energy exports, which represent 60% of total revenues, not to mention 30% of the country’s total GDP and 95% of export earnings. In defiance of the declining energy revenues and this heavy reliance on them for income, the government’s recently-announced 2015 budget of $112 billion is a 16% increase over the 2014 budget. An estimated 30% of government expenditures go towards subsidies, which are not only inefficient but are also difficult to remove.

Not surprisingly following the Amenas attack and the resulting effect on Algeria’s energy industry, the 2015 budget includes over $10 billion for the military to help secure the country’s resources. Instability in neighboring Libya, Mali and Tunisia have also contributed to this rise.

Algeria’s focus on energy and security speaks to the authoritarian regime’s sources of power. Revenues from oil and gas fund the government’s ability to deliver services and relative wealth to its people, while Africa’s first military with a budget over $10 billion keeps the regime and its grip on power in place.

However, the risks associated with this strategy are rising. Inefficient management by the government is a common trait of rentier petrostates and Algeria has shown itself similarly vulnerable by unnecessarily delaying previous energy projects, leaving the country with stagnating production levels. Rising consumption expectations may become more and more difficult to match, as their dramatic increase affects energy export quantities and hinders the government’s ability to support subsidies. Security will also be a challenging cat-and-mouse game; even with a massive budget, the Algerian military apparatus will have difficulty in achieving long-term security as long as regional unrest provides ungoverned spaces for militants to operate in.

The shale gas project itself offers no guarantee of respite. To begin with, many energy projects often have high estimated production figures but ultimately prove to offer little viable output. Should the shale gas reserves in Algeria even produce at significant levels, they are all in remote locations near regional pockets of instability, such as the border with Libya.

Some fields are closer to Northern Mali than Algiers, raising concerns about security risks stemming from the ongoing civil war in Algeria’s southern neighbor. Lastly, shale gas is often 4-5 times more expensive to extract than conventional gas. Given Algeria’s difficulty in funding recent projects and the potential volatility of future gas prices, shale gas in the country could become unfeasible.

There are good reasons why many have considered Algeria to be a candidate for the kind of uprising seen across the Middle East and North Africa since 2011. The brutal civil war of the 1990s is not far in the past and militant attacks have persisted in the country since the early 2000s. Algeria’s government is understandably pursuing the one source of revenue that has been reliable in recent years by going after new hydrocarbon resources, but by doing so it increases the risks that are already present. The regime will need to hope that its shale gas move is as rewarding as expected for a positive outcome in the short- to medium-term, but the country’s long-term picture has already deteriorated.

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

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Related Categories: Coalbed Methane  General  Heavy Oil  Methane Clathrate  Oil Sands  Oil Shale  Shale Gas  Tight Gas  Tight Oil 

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