Algeria’s upstream sector in critical condition, according to GlobalData

Algeria’s latest bid round was the most unsuccessful of all four rounds undertaken since the regulatory changes of the country’s 2005 Hydrocarbon Act, and urgent action is required to revive its upstream sector, says an analyst with research and consulting firm GlobalData.

Undesirable investment environment

According to Robert Stevens, GlobalData's Lead Upstream Analyst covering the Middle East and North Africa (MENA), security threats and unfavourable fiscal terms have meant that the changes introduced in 2013, designed to make Algeria’s investment environment more attractive, have had little impact, with just four blocks awarded from the 31 on offer.

Stevens says: “The poor outcome of the latest bidding round continues a difficult decade for Algeria’s upstream industry. While the country accounted for 21.4% of the entire MENA region’s gas production in 2003, it is now estimated to represent less than 10%. This is due to the country’s gas production stagnating, while the MENA region’s has doubled since 2003.

“Such trends, coupled with the disappointing results of the latest licensing round, suggest that more must be done to reverse the declining foreign investment in Algeria’s upstream industry and ensure that the country remains a significant oil and gas supplier to the European market.”

Sonatrach: stake demands and scandals

Since the introduction of the 2005 Hydrocarbon Act, and following amendments to the bill in 2006, Algeria’s national oil company, Sonatrach, has been guaranteed a minimum 51% stake in all hydrocarbon projects.

Furthermore, Sonatrach has recently been hit by corruption cases, with several former executives jailed in 2010 for bribery charges related to the awarding of contracts, and new allegations surfacing in early 2013 in the “Sonatrach 2” scandal. Planned projects have also faced unexpected delays and the company’s Chief Executive Officer was dismissed in July this year due to low production output.

Stevens continues: “Despite these scandals, any attempt to remove or decrease Sonatrach’s 51% stake in energy projects would be met with resistance from those who view the clause as a constitutional necessity. The most likely option for state body ALNAFT would therefore be to further reduce taxes or extend contract durations.

Another bid round

“With Algeria’s falling energy earnings and the recent decline in oil prices, this is a critical time for the country’s upstream industry. The urgency of the situation was illustrated by ALNAFT’s surprising announcement that it plans to hold another bid round ‘within weeks’. However, it is not yet clear what, if any, changes will or can be made to the terms of the blocks on offer,” the analyst concludes.

Written and submitted by GlobalData

Edited from various sources by Cecilia Rehn

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