Algeria’s oil and gas sector has been poised for major reform for the last two years. But the centerpiece – the draft law for the liberalization of the sector – remains in limbo due to popular fear that Algeria will be selling its most prized resource to the highest bidder.

The development of Algeria’s hydrocarbons industry – the key source of government income – will reach a crossroads of sorts in 2003. Ostensibly, the sector is a picture of vitality. Continued high oil prices meant a third straight year of bumper exports in 2002 - slightly less than $20 billion.

A new, more transparent bidding process has seen the sector experience record new investments, up 45% in 2001, and groundbreaking deals, with the state oil and gas company, Sonatrach, signing 20 new exploration and production contracts, five times the yearly average prior to 2001. Thanks to this, the Ministry of Energy and Mines states that oil and gas production will be ramped up significantly in the following 10 years. Revenues are projected to increase 50% by 2006 from a 70% increase in oil production and a 40% increase in natural gas production.

Most of these production increases will stem from joint-ventures between Sonatrach and independent foreign investors. Crude oil production increases (to 2 billion barrels per day in 2014, up from 1.1 bb/d currently) will come from the production of Sonatrach and foreign oil firms such as Anadarko Petroleum, BHP Billiton, Cepsa, and Amaranda Hess. Increased gas production (scheduled to reach 85 billion m3 a year by 2006, up from 60 billion m3 currently) will be generated from key local/foreign joint-ventures such as Ohanet, to provide 6 billion m3 per year; In Salah, 9 billion m3 per year; and In Amenas, 9 billion m3 per year.

But, despite these striking advances, the sector is, according to the Minister of Energy and Mines, Dr. Chakib Khelil, performing beneath its potential. Notwithstanding its wealth of reserves, Algerian hydrocarbon exports currently represent only 1.2% of the world oil and gas market. The reason, says Dr. Khelil, is threefold.

"[First] our territory is under-explored," says Khelil. "We have eight wells per 10,000 km2, while the average worldwide is 100." Algeria has 1.5 million km2 of sedimentary basins of which only 600,000 km2 have currently been exploited. This, according to Dr. Khelil, means that Algeria has the capacity for at least 720 more wells. Second, the Minister argues that Algeria needs new seismic and drilling technologies, and third, better management and improved methods in order to optimize revenues. "Investment," says Dr. Khelil, "is thus crucial to increase reserves and production and obtain a more significant market share."

Algeria’s post-independence development model, which prioritized the state and actively marginalized the private sector, inhibited foreign investment. The economic liberalization program adopted by the government in the early 1990s has seen the deregulation of most key sectors of the economy, from industry and telecommunications, to banking and transportation, including the legalization for state entities to be privatized. However, the vital nature of the oil and gas sector – the mainstay of national wealth – has made liberalization and the privatization of Sonatrach a much more difficult legislative task.

Concerted reform of the sector, in the form of a proposed hydrocarbons law, has been on the cards since 1999. Overseen and promoted by its chief architect, Dr. Khelil argues that the hydrocarbons law is the only way to successfully mobilize sufficient levels of foreign investment to fully utilize the potential of Algeria’s reserves. But strident opposition from labor groups, popular distrust of economic reform, and a lack of political consensus has seen the law flip from one parliamentary committee to another, raising the possibility that the law may be shelved for the foreseeable future.

A large part of the controversy surrounds the privatization of Sonatrach. The Prime Minster, and possible candidate for presidential elections in 2004, Mr. Ali Benflis, has already declared his opposition to the privatization of Sonatrach, while Minister Khelil has also had to confirm that the law does not require breaking up or selling the state firm. But the debate regarding the future status of Sonatrach distracts from the basic thrust of the bill, which is to restructure the rules that govern the sector to make it more attractive to international investors by placing Sonatrach on a more competitive footing.

Much of this focuses on reforming the role of Sonatrach itself. The firm, which with an annual turnover of approximately $20 billion is the 11th largest oil and gas firm in the world, operates in a regulatory environment that, argues Minister Khelil, is a burden on Sonatrach and an inefficient way to manage the sector. As a state-owned monopoly, Sonatrach lacks proper incentives to minimize its costs and operate more efficiently. As an arm of the Ministry, it is subject to the annual uncertainties of the government budget, undermining its ability to plan and invest for the long term. And as a firm highly reliant on specialized and qualified human resources, it is unable to compete in term of wages with the private sector.

For foreign investors, Sonatrach’s role is ambiguous. Although Sonatrach is a commercial company that international firms are required by law to work in partnership with in Algeria, it also functions as the government’s agency, responsible for regulating the sector and awarding exploration and production contracts. This creates a conflict of interest. Is the state-owned company a commercial partner to do business with and maximize profits, or a guardian of the State’s resources and a regulator?

Dr. Khelil believes these impediments can be eliminated by giving Sonatrach its commercial independence by striping it of roles that logically should be performed by the government – as the owner and guardian of resources, a regulator, and promoter of investment. The law proposes establishing two independent, self-financed agencies to award future exploration and production contracts. The agencies would also be responsible for administrative and regulatory activities in the sector. The changes will eliminate potential conflicts of interest and put Sonatrach on a more sound commercial footing by requiring the company to compete with other firms for contracts. Paying taxes on revenues will allow the government to introduce profit incentives and an improvement in cost-effectiveness.

The requirement upon Sonatrach to build and maintain transportation pipelines will also be removed, with new construction being offered to any investor on an open bidding basis. Pipelines are not high-return operations and giving Sonatrach the right to pick and choose will reinforce the firm’s ability to improve financial management. The draft law also proposes to limit Sonatrach’s take of future production-sharing agreements with foreign investors to 25%, later raised to 35% after a public outcry, lowering the government’s initial 50% take.

There is no doubt that the law will make Algeria more interesting for international companies. Convincing Algerians that this benefits them requires more work.

© 2003 Arab Communication Consult S.A.L.

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