Gas as a viable energy alternative in Algeria

As oil output declines and fields mature, state-owned Sonatrach is relying more on Algeria’s extensive gas reserves to maintain exports while meeting growing domestic demand, with gas the focus of its SH2030 Leading the Change transformation strategy. There are two unconventional and offshore exploration wells planned for 2019, seven for 2020 and 12 in 2021 – with half to be carried out by Sonatrach and the other half in partnerships. While more and more offshore and shale gas opportunities are being identified, they may prove challenging to harness. Unconventional gas is thus in a strong position to attract investors, especially in light of the new hydrocarbons law currently in preparation.

Conventional Gas

Boosting gas output is at the heart of Algeria’s strategy to maintain high levels of energy exports and revenue. “There are many untapped gas reserves, especially in the south-west,” Zied Ben Hamad, general manager for North Africa at oilfield services company Schlumberger, told OBG. “There is much exploration and some development to be undertaken, but Sonatrach cannot do everything alone. It requires capital,” he added.

Fields that began operations in 2017 and 2018 are set to boost gas output. In late March 2018 the gas field at Timimoun entered its production phase, with a capacity of around 5m cu metres of natural gas per day. It is jointly managed by Sonatrach (51%), Total (37.75%) and Cepsa (11.25%). Timimoun’s gas will come from 37 wells connected to a gas processing facility that ties into the GR5 pipeline, used to transport gas from fields in south-west Algeria to Hassi R’Mel.

This followed the launch of operations of the Reggane Nord project in December 2017, which will have an annual capacity of 4.5 cu metres once fully operational. Operated by Sonatrach and European partners Repsol, DEA Deutsche Erdoel and Edison, this project is composed of six gas fields: Azrafil Sud-Est, Kahlouche, Kahlouche Sud, Tiouliline, Sali and Reggane. Other projects under way include Touat, co-managed by Neptune Energy and Sonatrach, which will produce 4.5bn cu metres per year, with reserves estimated at 68.5bn cu metres. This project was expected to launch production in 2016 but is now scheduled for April 2019.

International oil companies that are traditionally more involved in oil production are significantly expanding their gas activities. For example, Total signed a contract in October 2018 with Sonatrach to jointly develop the Erg Issouane gas field, located on the Tin Fouyé Tabankort Sud permit. Reserves are estimated at around 100m tonnes of oil equivalent. As part of this $400m investment project, a 22-km pipeline will be built to link the field with the TFT gas treatment plant. Operations are planned to start in 2021. In addition, after the acquisition of Maersk Oil in March 2018, Total is now involved in the Berkine Basin. Eni and Sonatrach also strengthened their cooperation in the Berkine basin.

Sonatrach plans to expand gas production of oilfields such as Hassi Messaoud or Rhourde El Baguel. It also launched a new gas pipeline pumping 8.8bn cu metres per year from south-western fields.

Product Diversity

In line with its SH2030 Leading the Change strategy, Sonatrach is also focusing on diversifying its portfolio of products for export, as well as developing commercialisation agreements with international partners. In November 2018 the company signed two deals valued at $100m with the US-headquartered company Air Products, which will see them produce and sell helium through their joint venture HELIOS. Sonatrach will furnish HELIOS’ liquid helium plant located in Arzew with the gas, with the aim of boosting exports to Europe and Africa.

Another step forward was the launch in November 2018 of the project to construct a phosphates complex, spread over four eastern provinces, which will start operations by 2022. This $6bn investment deal signed by Sonatrach (51%) and Chinese company CITIC (49%) will include three units, one of which will transform natural gas for the production of ammonia and fertilisers. With total production to reach 5m tonnes per year, is hoped the plant will cover local needs as well as generate surplus for export. Sonatrach estimates it will export $1.9bn per year if the expansion of the global market continues at the same pace.

Growing Demand

While exploration and production are central concerns, the performance of the gas sector must also overcome growing consumption. “The biggest challenge for gas in Algeria is domestic consumption, which leaves little scope for export,” Ben Hamad told OBG. Consumption increased by 66% in 2007-17, and in 2017 domestic electricity and natural gas use were up 6.4% and 7.9%, respectively.

With the government pursuing universal gas connection, the country may need to produce as much as 100bn cu metres of gas per year to satisfy projected demand. An expanding population and middle class will drive consumption higher still, particularly as gas and electricity subsidies mean the population is not incentivised to consume carefully. In short, as gas is an essential part of the energy mix, and in light of consumption trends, it will likely prove both increasingly important and difficult to maximise gas exports.

Gas Flaring

In addition, the widespread practice of gas flaring represents not only an environmental hazard but also a waste of energy. In 2017 Algeria was the 11h-largest gas flarer in the world.

In part to address this, in September 2017 the Guellala unit was established to recuperate flared gas in Hassi Messaoud. Valued at €140m, the project allows the recovery of 900,000 cu metres of gas daily, of which 500,000 will be for retail and 400,000 for re-injection into exploitation processes.

In August 2018 Sonatrach announced it had signed up to the World Bank’s Zero Routine Flaring by 2030 initiative, aimed at reducing systematic gas flaring. It joined 35 companies, including the Tunisian, Egyptian and Moroccan national oil companies, as well as over 25 governments – among them the US, Russia, France and Morocco – and development institutions such as the African Development Bank.

The World Bank praised the move to join the initiative, and explained that in 2017, 140.6bn cu metres of gas had been flared around the world – 7.1bn less than in 2016. Additionally, the initiative is in line with the Paris Agreement of 2016, which means that by reducing gas flaring, Algeria may be able to receive further financing from international climate funds.

Unconventional Boost

According to a 2015 study published by the US Energy Information Administration, Algeria has the third-highest available resources of shale gas in the world, after China and Argentina, with 9.3% of global resources. The main basins for shale gas are located in the wilayas (provinces) of Ouargla, Adrar and Ghardaïa. In terms of shale oil, Algeria ranks 13th, with proven resources of 5.7bn barrels located in the provinces of Ouargla, Adrar and Illizi. “Unconventional gas will become a pillar of Algeria’s future energy,” Abdelmoumen Ould Kaddour, CEO of Sonatrach, told OBG. “We will increase our efforts, together with our partners, to further explore and exploit these resources,” he added.

In October 2018 Sonatrach signed an agreement with BP and Norwegian multinational Equinor to explore and develop unconventional resources in the basins of south-western Algeria, which are seen as having considerable potential (see analysis).

“When it comes to unconventional resources, Algeria benefits from a comparative advantage thanks to existing infrastructure, which mitigates the need for heavy investment and allows for high early returns,” Wissam Al Monthiry, head of country for BP, told OBG.

The agreement, signed on the sidelines of the Algeria Future Energy Summit, includes a research programme that provides for a new 3D seismic acquisition, and the drilling of several exploratory and appraisal wells. According to a company statement announcing the signed agreement, in the medium term the development of this project is expected to make it possible to replace gas production in existing deposits, as well as extend the operating life of surface installations.