Falling oil prices stress Algeria’s vulnerabilities
As Iran, freed from economic sanctions, is set to add oil to a glutted global market, Algeria appears to be one of the most vulnerable hydrocarbon exporters.
Algeria boasts more than 12 billion barrels of oil reserves and about 160 trillion cubic feet of natural gas. It is Europe’s third largest supplier of gas. It is connected to world markets through natural gas pipelines and has a large shipping fleet that sends liquefied natural gas (LNG) from several plants to customers in Europe and elsewhere.
Thanks to Algerian President Abdelaziz Bouteflika’s policy of national reconciliation, Algeria skirted most of the horrors of radical Islamic fundamentalism. Its energy sector is well-entrenched with secure long-term investors. Operating costs are relatively low.
However, with Iran formally re-entering the international oil market, Algeria faces greater challenges. The government’s financial policies are highly dependent on hydrocarbon revenues. Its margin to manoeuvre is restricted by public wariness about austerity measures and political opposition to recently introduced constitutional reforms.
Algeria planned to hike oil production 5% in 2016 to help offset the effects of falling prices. However, if prices slide further, it could be forced to reduce oil output because of production costs.
Algeria could find in Iran a challenging rival in the gas market and could consider withdrawing from the Organisation of the Petroleum Exporting Countries (OPEC) as a last-ditch attempt to defend oil prices.
The looming crisis from declining oil prices is a reminder of Algeria’s failure to introduce changes during better times. Despite pledges of reform, Algeria continues to be managed by what Algerians call the pouvoir — “the deep state” — a network of senior military and security officers and political and business elites for whom Bouteflika is a convenient figurehead.
It is difficult for the Algerian government to build consensus for opening the system in the midst of a menacing economic environment while preserving the country’s stability against upheaval in the Maghreb and sub-Saharan Africa.
Recently there were protests in Algerian cities seeking wage increases and lower food prices. The opposition sided with the protesters, denouncing what it described as the government’s intent to “starve” the population.
The oil and gas sector, which accounts for 98% of exports and almost 60% of government revenue, faces its own woes. Production has been falling slightly and the state monopoly Sonatrach has had a series of corruption scandals.
Local consumption of oil and gas has risen 75% in the last decade and the government is wary of political unrest should subsidies be cut.
Prospects of a shale gas bonanza appear out of reach. Algeria has the largest shale gas resources in the world but the fracking process is dependent on large amounts of water and Algeria has limited hydraulic resources.
Any bid to divert water from agriculture would trigger fierce reactions and has already provoked riots in southern Algeria.
Protests over food prices and the staunch resistance to the tapping of shale gas were signs that economic problems, combined with uncertainty over Bouteflika’s hold on power, could lead to the radicalisation of political opposition and the seepage of jihadist violence from trouble spots, such as Libya.
The attack on the In Amenas gas facility in January 2013, in which about 70 people died, showed how hard it is to shield a country with thousands of miles of borders from terror attacks. The facility is still a target. Algerian media reported in December that several jihadists were arrested and weapons seized in the In Amenas region thanks to the military’s vigilance.
Sonatrach has struggled to raise production since a corruption investigation at the company and the al- Qaeda attack in 2013 at In Amenas, a gas field that the state company operates with BP Plc and Statoil ASA. Algeria’s oil output has been about 1.1 million barrels a day for the last two years.
“We will end the year 2015 with about the same output as last year,” Sonatrach announced, despite prices steeply falling. “For 2016, we expect an increase in production by at least 5%, compared with 2015.”
The new context shaped by Iran’s added oil exports is likely to upset any such prospects for Algeria’s energy output. Average prices for Algerian Sahara blend declined 47%, according to OPEC data.
Price cuts prompted Sonatrach to trim costs and curtail investment. Its main priorities shifted to oil and gas exploration in areas near existing production facilities, raising output through new technologies and working to deliver projects on time.
Algeria had planned to spend $64 billion — 70% of its total investment programme from 2015-18 — in upstream activities to reverse the decline in crude oil and natural gas production, according to a release from the Energy Information Administration (EIA). Sonatrach set a goal of increasing gross hydrocarbon output from 1,429 million barrels of oil equivalent (MMBOE) in 2014 to 1,649 MMBOE by 2019.
An unidentified Algerian energy official told the local daily El Khabar that Algeria could be forced to cut oil production if prices were to stand at around $20 a barrel. The official said Algerian oil production costs have risen from a $6-$8 in the early 2000s to $18-$20 a barrel
“Sales of Algerian oil abroad would have no benefit if prices were to be in the range of $23-$25 a barrel. Algeria’s returns would be between $3-$4 a barrel. It does not make sense to export oil,” said Algerian energy specialist Said Baghoul.
“There is no interest for Algeria to remain a member of OPEC if there is a move to cut output. Algeria would leave OPEC as did Indonesia before.” He added: “Algeria’s situation is made more difficult as Sonatrach holds 45% of oil production capacity while the rest is held by its foreign investor partners.”
Algerian economist Mustapha Mekideche said: “In 2016 it will be more difficult for the authorities to manage the crisis, which calls for a greater economic efficiency and social fairness. The country has the financial resources to handle the crisis but the most difficult is political resistance to reforms.”
El Khabar analyst Said Okba argues the crisis puts Bouteflika in a dilemma between “government mediocracy” and opposition mistrust.
“The desertification of the political landscape has narrowed the president’s options to deal with the crisis. No self-respecting member of the opposition will accept to deal with the regime in such circumstances,” he said, calling on the government to urge loyalists to pray for an oil solution as they did in December when they prayed for rain to end a drought.
“Our whole economy is tied to the sky, be it for agriculture or oil. The only task the government can carry out is to beg the sky for mercy,” he said. “Can the situation be more miserable than that?”