Sonatrach aims to become major international oil firm

• Algerian oil, gas production, 1958-2001 [84,586 bytes]
• Algerian reserves base [108,397 bytes]
• Algeria's main gas development projects [125,888 bytes]
• Algeria's gas, LNG transport routes [122,740 bytes]

Algeria's national oil firm Sonatrach is looking at a new strategy to enable it to develop the dimension and characteristics of a major international oil company. The strategy is geared to "recovering its vertical integration," according to Sonatrach official Mourad Preure.

Preure spoke about Sonatrach's plans at Institut Français du Pétrole's annual Panorama conference in Paris early this year.

Sonatrach wants to add to its current role as the state-owned oil company of a producer country and become an international, integrated firm capable of dealing with market risks.

"Sonatrach is seeking a dynamically balanced portfolio, which should include profitable sectors to compensate for as yet unprofitable growth areas, as well as for growth areas with strong potential but high risks," said Preure.

A new paradigm

"In a bearish international context," said Preure, "Sonatrach is confronted with increasingly harsh competition." In order to thrive, he says, the company must develop an appropriate strategy, invest in technology and innovation, achieve a high standard of management and organization, and, in the final analysis, control costs and choose its portfolio selectively.

"In this competition, the most exposed in the medium term are the oil companies of producer countries with short reserves. They must try to improve their performances and be constantly toughening up in contrast with their competitors."

Preure pointed out that the companies in these producer countries are acquiring a new shape. He calls this the "solidarity concept." It involves cooperative efforts among companies, including strategic alliances and joint investments.

Preure also insists that technology should be at the heart of new cooperation between producers and consumers. Such collaboration should include joint R&D work and engineering partnerships, as well as technology transfers.

"In this way, and without giving up its initial mission, OPEC will be able to go beyond the dilemma, in which it has been enclosed, of defending prices or market share (and influence) the structural changes of the oil industry."

Preure believes that "cooperation between the oil companies of producer countries and international oil companies will become a stabilizing element for the oil industry in the years ahead."

Spending to achieve its goal

To achieve its desired international status, Sonatrach and its partners will invest $19.2 billion in a 5-year development plan during 1997-2001. Its goal is to increase oil and gas production, in conjunction with an "unprecedented" technological effort, and to become a significant player in refining and petrochemicals as well as in the trading of oil and gas.

Upstream, Sonatrach's plan is to increase oil production and boost LPG and condensate sales. Along with petrochemicals, these will become "important business units," says Preure.

The $19.2 billion Sonatrach plans to spend to reach its goals will be divided among several industry segments. Of the outlays, 62.2% will be spent to develop known fields, 17.1% will be spent on pipeline transportation, 13.6% on exploration, 5.5% on gas liquefaction, and 1.6% on other projects.

Exploration

The partnership policy followed by Sonatrach during the last 10 years has provided a distinct boost to Algeria's oil and gas industry, said Preure. Thirty-eight exploration contracts have been signed with 22 companies. These deals involve 37% of the 807,291 sq km of working acreage in Algeria.

Seismic activity also has increased, with 57,000 km of 2D and more than 670 km of 3D data being collected. In addition, 103 wells have been drilled (61 exploration, 25 extension, and 17 development).

Currently 18 companies are working in Algeria under 21 exploration contracts on 28 blocks. During the last 10 years, this increased exploration effort has yielded 30 discoveries, mainly in the Berkine basin. Reserves in these finds total 5.904 billion bbl of oil, 200 million bbl of condensate, and 71 billion cu m (bcm) of natural gas.

Sonatrach's plan for 1997-2001 includes drilling a total of 300 wells, half of them in association with foreign partners.

Production

Algeria's oil production is about 860,000 b/d. Production is increasing, however, says Preure, and should soon exceed 1 million b/d, or 50 million metric tons/year (see graph, p. 28). And, with the broadening of the country's reserves base, by the turn of the century, oil output should be 1.3-1.5 million b/d.

Likewise, natural gas production is set to grow strongly in the years ahead to meet the growing needs of Europe.

Priority will be given to satisfying Algeria's increasing demand until 2035. But Preure believes it is "quite realistic" to target gas exports of 70-100 bcm/year-up from 60 bcm in 1998-as better knowledge of Algerian fields pushes up current reserves estimates, which he considers conservative.

To help boost exports, the capacities of Algeria's two gas pipelines can be increased, when needed, as can the capacities of the two liquefaction plants (see map, p. 30).

In addition to the giant Hassi R'Mel gas field, which accounts for most of Algeria's gas production, further development of the condensate-rich fields southeast of Hassi R'Mel could increase production and improve the flexibility of the gas supply system. This is also true of the In Salah fields in southwest Algeria, which are to be developed under a $3 billion partnership between Sonatrach and British Petroleum plc.

Preure held up this partnership as an example of the kind of integrated project that Sonatrach wishes to pursue under its expansion strategy.

Movement downstream

Besides reducing Sonatrach's exposure to market cycles, expansion into the downstream arena to achieve the firm's goal of vertical integration also is intended to provide the financial means to sustain upstream expansion and help buffer the risks linked with oil exploration.

Admitting that, for producer countries, it is difficult to achieve downstream integration-in particular because of the high investments required, but also because it involves the risk of weakening a company's cohesion-Preure nonetheless says that Sonatrach will pursue its downstream growth policy.

"Refining as well as petrochemicals will become important business units," he said, adding that the relaunch of petrochemicals was "a strong strategic option" intended to maximize the value of oil products.

Preure is convinced that Algeria has "decisive advantages" in this area, such as available raw materials, already operating industrial installations, and experience "that is not negligible." Partnerships in this area would follow the line of partnerships successfully formed upstream, he said.

Sonatrach has a petrochemical branch involved in olefins and plastics-Enip, based in Skikda. The company has joined with BASF AG to build a 350,000 ton/year propane dehydrogenation plant in Tarragona, Spain.

Sonatrach also formed in 1990 a joint venture with Repsol Quimica SA to build a polyethylene plant, but this project has not materialized.

Preure summed up Sonatrach's expansion strategy by saying that producer countries like Algeria that want to become major players in world hydrocarbon markets can choose one of two methods. They can either enter passively by simply exporting more raw materials or they can do so actively through their oil companies by bolstering their technological and management skills.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.