Though the global recession will eat into Algeria’s energy revenues and potentially slow new projects, hydrocarbons will continue to drive the country’s growth this year.
Energy, and natural gas production in particular, dominates the economy, accounting for around 45 percent of gross domestic product and some 95 percent of export revenues. The extent of the industry’s influence on the economy becomes even more pronounced when the role of the state is taken into account, given that most of the funding for state services, infrastructure projects and subsidies comes directly from energy earnings.
The sector is one of the few off limits to the privatization program. Industry and Investment promotion Minister Hamid Temmar told parliament in mid-January the only state enterprises that would not be sold off were the energy sector and the national railway.
Earnings from hydrocarbons in 2009 are expected to drop to less than half their 2008 levels, due in large part to the decline in commodity prices.
Speaking on state radio on February 24, Minister of Energy and Mines Chakib Khelil said if prices remained at their present levels, Algeria would generate around $30 billion from gas and oil sales this year. This is a far cry from the $76 billion earned in 2008, when crude prices hit record levels of $147 per barrel. The reduced income stream means Algeria will have to dip into its fiscal reserves to fund state programs to improve infrastructure, health care, housing and education.
Demand dips for oil exploration
The global slowdown in the activities of international oil companies has also had an impact on some of Algeria’s more recent tenders. An auction for exploration rights in 16 plots held in mid-December generated little interest, with only nine bids received from the 80 firms cleared by the government to take part. After the bids were assessed, just four exploration licenses were granted for the 16 tracts available.
According to Khelil, the poor response to the auction was a result of the global economic downturn. “With conditions in the market, you would expect this kind of result,” he told the international media in early January.
While the minister may not be disappointed by the lack of interest, some analysts are suggesting that other factors could be causing potential investors to hesitate.
According to Susan Mance, an analyst at Edinburgh-based consultants Wood Mackenzie, complicated contractual requirements in Algeria can limit a foreign investor’s profits to less than 10 percent. The situation has lead many international companies to steer clear.
“Concession terms are among the most challenging fiscal regimes for international oil companies,” Mance said regarding doing business in the Algerian energy sector.
But at the same time, Algeria has demonstrated a keen interest in expanding its role in the international energy industry, as it seeks to become a transit route for exports from other countries, in addition to being a supplier itself. In late February, Algeria and Nigeria held talks aimed at finalizing a memorandum of understanding on the proposed Trans-Saharan Gas Pipeline (TSGP) project.
The $12 billion scheme foresees construction of a 4,400 kilometer gas pipeline from Nigeria through Niger to Algeria, where it will link into the Algerian export grid to Europe. According to Mohamed Meziane, the chief executive officer of Algerian energy monopoly Sonatrach, the TSGP could be operational by 2015.
“There is the need to speed up the process and ratify it fast,” Meziane said after a round of talks in the Nigerian capital. “This would give the two countries the opportunity to fully benefit from the investment.”
It is still unclear if Algeria will contribute to the construction cost of the pipeline, or merely be a conduit for Nigerian gas on its way to Europe. Either way, the country will be in a position to turn a profit.
While 2009 may prove a more modest year for the country’s hydrocarbon coffers, the country has identified gas reserves of around 4.4 trillion cubic meters and vast areas of the country are yet to be surveyed for further reserves.
