With Oil Down, Can Algeria Afford To Bet On Shale?

By Christopher Coats

While the declining price of oil has been felt across the globe, economies like Algeria feel it the most. Algeria currently counts on energy for about 98 percent of their export revenue, making up the lion’s share of state spending. For years, that revenue has remained strong, allowing the long-standing government of President Abdelaziz Bouteflika to counter public unrest and uncertainty with readily available funds. This even helped keep things calm in the country as protests spread across the region from 2011 on.

However, with a political transition likely and oil prices dropping to uncertain lows, Algeria may not have the access and reliable financial tools they have become used to. To be clear, Algeria currently has sizable foreign reserves, allowing some level of confidence and reach. However, the downturn has helped exacerbate an already battered energy environment that has seen a downturn in vital production levels over the last several years.

According to a Platts report, Algeria’s oil production stood at 1.14 million barrels per day in November of last year, 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. According to Abdelhamid Zerguine, head of Algeria state-backed energy firm Sonatrach, the industry decline, 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”.

Despite the production and pricing downturn, Algeria’s political and industry leadership do not appear to be changing course, insisting that the country’s future is building on traditional exploration with shale efforts. After amending national law to allow more favorable conditions for those firms interested in shale projects last year, Algeria announced a $100 billion budget for new hydrocarbon development, including “blocks for unconventional resources, with tax incentives for foreign companies interested in investing in shale gas and shale oil,” an important component of the country’s energy plans moving forward, according to a Reuters report. Additionally, in June of this year, the country’s government announced plans to launch a dozen test wells over the next 7 to 13 years.
However, all these efforts will require substantial amounts of money, which the government is seeing less and less of with each passing day. According to a report in the National, for every $1 drop in the price of crude oil, Algeria stands to lose $560 million per year.

Those hoping for production partnerships with foreign firms have their own set of challenges – namely, the country’s dour reputation for investment.

For interested energy firms, Algeria hardly offers a secure investment environment overall (the World Bank ranked them 148th out of 183 in terms of the ease of doing business). The energy sector has been shown to be just as much of a concern. In 2010, Sonatrach faced a corruption investigation that resulted in a management shake-up, followed by a CEO replacement 18 months later. More recently, Sonatrach were included in an investigation into alleged bribes paid to local officials by Italy’s Eni through its local subsidiary Saipem.

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