Algeria: Trouble at the pumps

The lack of interest from international oil companies (IOCs) in the latest round may be partly attributed to the uncertainty of the political situation in the region. Clarification meetings on the terms of the licenses took place in the early weeks of January, when there were outbreaks of civil unrest throughout the Middle East and North Africa, including Algeria. By the time bids were submitted on March 17th, two regimes had fallen in North Africa and a third was in the throes of civil war. The government argued, meanwhile, that interest in the first two rounds was affected by the global economic downturn. But according to IOCs, Algeria's contract terms remain the major barrier. Since an oil windfall tax was introduced in amendments to the hydrocarbons law in 2006, Algeria's oil and gas licensing terms have been among the toughest in the region, according to Wood Mackenzie, an energy consultancy. As Algeria's reserves become more difficult to access-particularly gas, of which remaining resources are increasingly deep and sparsely distributed-the attractiveness of these terms has diminished still further.

The government has consistently said that it will not alter its terms for upstream concessions, insisting that the lack of interest has been due to external factors. But pressure is building within the oil and gas administration for changes to the licensing regime, according to energy analysts speaking to the Economist Intelligence Unit. Any change to the terms would be politically delicate. Influential members of Algeria's traditional ruling elite, from whom the president, Abdelaziz Bouteflika, derives much of his authority, believe that oil and gas reserves should be preserved for future generations of Algerians rather than being farmed out to international companies. This resource nationalism will be difficult to overcome. But the lack of exploration in recent years is already beginning to have an impact on Algeria's ability to keep pace with demand for its oil and gas. The one notable success of the past three licensing rounds was the award to Total, a French oil and gas major, of the Ahnet block in the south-west of the country. Combined incremental production from Ahnet, the Reggane North field, which Repsol of Spain was given the green light to develop in February (Economic performance, March 2011), and the Timmimoun and Touat fields, on which development work is also under way, is expected to be more than 10 bn cu metres/year. But this may be insufficient to meet international gas supply commitments and fast-growing domestic demand, creating a potential supply crunch in 2013-14. The government has outlined ambitious plans for state investment both in upstream oil and gas and the construction of renewable energy infrastructure (Economic policy, February 2011), but these too are unlikely to be delivered in time, or in sufficient quantities, to meet the projected shortfall.

The timing of any changes to the licensing regime remains uncertain. The current high oil prices, which assure the country substantial hydrocarbons revenue from current production, mean that there is little financial incentive for the government to make changes in the short term. Equally, Mr Bouteflika will be keen not to appear reactive to the poor showing in the latest Alnaft bid round. Rumours of an imminent cabinet reshuffle have focused on a possible promotion for Youcef Yousfi, the energy minister, to the post of prime minister, which could create an opportunity for a change in energy policy. But as yet there has been no official confirmation that a reshuffle is being considered. The possibility remains that changes will only become politically palatable when the fact of the production shortfall becomes discernible on the ground.

Plans to develop Algeria's shale gas potential are likely to take even longer to reach fruition. Mr Yousfi told an energy conference in Houston in early March that the country has estimated reserves of shale gas of up to 1,000 trn cu ft. Based on a preliminary evaluation, Algeria's shale gas potential is "at least comparable" to the major operations in the US, said Mr Yousfi. Shale gas has had enormous success in the US, which in less than a decade has transformed from a country that was increasingly dependent on gas imports to one with an estimated 100 years of domestic supply. But shale gas exploitation relies on cutting-edge technology that would only be available to Algeria from foreign companies. The complex nature of the process would mean that an entirely new framework would have to be drawn up to facilitate such co-operation. According to Mr Yousfi, the government is "already talking" with some companies, and pilot tests are due to begin in 2012. But analysts say it could take several years of negotiations before a suitable framework is agreed.