Europe expecting too much from Algeria, analyst says

Algeria, already the European Union's third-largest foreign gas supplier, is poised to increase its exports by adding a pipeline to Spain and upping capacity of existing links to Spain and Italy.

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Feb. 10 -- Algeria, already the European Union's third-largest foreign gas supplier, is poised to increase its exports by adding a pipeline to Spain and upping capacity of existing links to Spain and Italy.

However, according to a report by the United Mediterranean Council of Industries (UMCI), big output increases could be hard to achieve in the long term due to Algeria's recent mixed results attracting foreign oil firms to invest in new exploration and production.

Only four foreign firms won oil and gas exploration permits in a licensing round in December, and 11 zones attracted no bids, said the UMCI report, published by the Albawaba news agency.

It said the licensing round was the first to be held under a 2006 law that gives Algerian state-owned Sonatrach a mandatory minimum 51% share in every oil and gas exploration contract awarded to foreign companies.

Resource nationalism
Analysts told UMCI that the law echoed a global trend towards resource nationalism and fitted with an environment of high oil prices, but seemed too restrictive since energy prices tumbled.

"It's raised questions over whether there will be enough investment to maintain Algerian gas production in the longer term," said Jonathan Stern of the Oxford Institute for Energy Studies. "I think we
re going to see a hiatus but it's hard to know how soon."

UMCI cited Algerian Energy and Mines Minister Chakib Khelil, who last month said his country was ready to increase gas exports to Europe if existing contracts allow. He blamed the weak global economy for the mixed results of the December licensing round.

"It is undeniable that a very unfavorable situation on the world market was [due to] one factor," he said on Jan. 17 at a signing ceremony for the four winning bidders, ENI, E.ON AG's Ruhrgas, Gazprom, and BG Group PLC.

New approaches needed
Speaking at an industry workshop on Jan. 28, Khelil said the volume of discoveries was below the world average, and new approaches are needed to revitalize oil and gas exploration.

Algeria needs "to discover intermediate deposits between the giant ones at Hassi Messaoud and Hassi R Mel and the other small wells discovered in the last decade," Khelil said.

Jon Marks of industry newsletter Africa Energy said the weak results of the latest licensing round had opened up a quiet debate in Algiers over whether Sonatrach needs the foreign oil majors to achieve its goals.

"There is one view that Sonatrach has the capabilities and the people and that it can always bring in engineering contractors to carry out the work," Marks said.

Overambitious Algerians
Industry executives told UMCI on condition of anonymity that there had been real interest in many of the blocs on offer but the Algerians may have been overly ambitious. Some of the available zones were not the country's most promising, they said.

There is a growing perception that Algeria is not such a competitive place to operate, and margins are not as good as with other exploration frontiers," Marks said. "It all means there should be some softening of the Algerian terms if they want people to come in."

Analysts say infrastructure investment seemed to be progressing well despite some problems last year, including a disagreement with Spanish partners that slowed development of a major gas project at Gassi Touil.

Sonatrach, in common with many other gas producers, also met with problems as production costs rose and a global labor shortage in the energy industry increased competition for staff.

Sonatrach pushing ahead
Sonatrach is now pushing ahead with Gassi Touil and the redevelopment of an LNG facility at Skikda port after it was damaged by fire. The 8 billion cu m Medgaz pipeline to Spain is due to begin operations in the second half of the year, and a new pipeline to Italy is in the works.

To some industry watchers, the onus is now on Europe to build enough gas interconnectors to ensure that more countries get better access to Algerian gas. Spanish officials say Medgaz will offer Europe an important supply route.

For now, though, Spain has the infrastructure to pump only a tiny proportion of Medgaz's capacity into France.

Craig McMahon of Wood Mackenzie told UMCI that many of Algeria's latest discoveries were being made in basins near In Salah in the southwest, where reservoirs appeared to be tight, finds relatively small, and pipelines still lacking.

"Establishing infrastructure and the development of existing discoveries in the southwest of the country is critical to Algeria increasing its export position," McMahon said.

Sonatrach's oil and gas revenues leapt to $76 billion last year from $57 billion in 2007. With hefty foreign exchange reserves, Algeria is under little domestic pressure to boost hydrocarbon production.

Sonatrach says it has the resources to press ahead with an ambitious national development program for years, even if oil prices stay low.

Plans to boost domestic electricity production could further reduce the amount of gas available for export. "It remains uncertain to what extent Algeria wants to continue expanding gas exports to Europe," Stern said. "It has quite aggressive plans for domestic expansion, even though that would seem far less profitable."

Contact Eric Watkins at hippalus@yahoo.com.

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