Exploring the future: The focus on finding new reserves is intensifying

At a press conference in September 2013, Algeria’s minister of energy and mines, Youcef Yousfi, announced that hydrocarbons giant Sonatrach had made some “very important” and “extremely promising” gas finds and that the country’s natural gas reserves were “not falling, but rising”.

These statements were repeated in October at a conference in London, with plans of “more than doubling” gas output in the next seven to 10 years. Yousfi also expressed confidence that Algeria would be able to hold its crude oil production at the current level of 1.2m barrels per day (bpd).

The addends that contribute to this bullish outlook are based on a number of recent developments. Chief among them is the potential for shale production, and shale gas in particular (see analysis). The Ministry of Energy and Mines (MEM) has cited evaluation work progressing and a figure of around 20bn cu metres (bcm) of technically recoverable gas. Optimisation and rehabilitation at existing oilfields – most of which are in various stages of maturity – play a role in buttressing output, while a spate of new discoveries is also a major factor.

NEW POTENTIAL: A billion new barrels of oil have been identified under the enormous – and ageing – Hassi Messaoud field, according to the MEM, alongside new oil and gas discoveries in the mature southeastern Illizi and Berkine Basin. Most crucially, Sonatrach has also announced a commercially feasible discovery in the south-west, an area that has been only partially explored.

In addition, the MEM has highlighted potential reserves of tight gas – a type of deposit that differs from shale gas, but is similar in respect to its geological awkwardness. Progress has been made in evaluating resources, and according to the government there is between 8trn and 14trn cu metres that is technically recoverable. “As soon as possible we will start pilots for tight gas and then for shale gas to see what is economically recoverable,” Yousfi said.

The new finds are not that unusual. For its area, Algeria is relatively underexplored: with wells per 10,000 sq km averaging around 100 worldwide in 2011 and exceeding 500 in the US, the rate for Algeria is just 14. The country may also harbour some surprises. The Sahara is tectonically fairly simple, but not so the north, where the collision of tectonic plates has created a complicated geology. There could be unexpected wealth there, and Eni has expressed interest, offering to examine the Atlas region 100 km south of Algiers. A programme of seismic work was also planned for offshore blocks in 2011 and, according to the MEM, the first offshore drilling may take place in 2014.

RECENT DISCOVERIES: The new potential finds are also not particularly surprising in light of the discoveries both Sonatrach and foreign firms have made in recent years. Although operators have had to deal with a challenging regulatory framework subject to multiple changes over the past seven years, the reality on the ground belies the extensive potential Algeria’s underground wealth offers. The number of rigs active in Algeria, hovering around 20 between 2000 and 2005, and briefly hitting 27 in 2009, rose from 24 in 2010 to 33 in 2011 and 38 in 2012 – indicative of the sector’s attractiveness.

In both 2008 and 2009, hydrocarbons discoveries numbered 16, comprising seven by Sonatrach acting by itself and nine in which the company was working with partners. In 2010 and 2011 the totals were better, at 29 and 20 – all but one and two discoveries, respectively, were made by Sonatrach alone. The 2012 tally was even higher than this, at 31, with 24 of them solely by Sonatrach.

EXPLORATION SPENDING BOOST: The 2011 discoveries reportedly yielded proved and probable reserves of approximately 157m tonnes of oil equivalent, around 80% of annual hydrocarbons output. The 2012 discoveries were “modest”, Sonatrach’s CEO, Abdelhamid Zerguine, told journalists, and did not amount to more than the equivalent of 30% of what is currently being produced. As a result, he announced, Sonatrach has decided to triple spending on exploration in the medium term.

Similarly, on the last day of 2012 Sonatrach announced discoveries by two of its partners. Russia’s Gazprom had found a new gas-bearing deposit in the El Assel field in the Berkine Basin that it had won in 2008, having drilled a 5000-metre-plus well.

Another discovery was made in the Hassi Bir Rekaiz field, also in the Berkine Basin, by Sonatrach, Thailand’s PTTEP and China National Offshore Oil Corporation. It is apparently a very promising field: by April 2013 seven “very satisfactory” discoveries had been made from nine wells drilled.

Spanish company Repsol, which is the operator of the Sud-Est Illizi block – where the other stakeholders are Sonatrach, Eni, RWE Dea, Enel and GDF Suez – made discoveries there in November 2012, the second of which involved a very substantial flow rate of 235,000 cu metres of gas per day.

STRENGTHENING OUTPUT: The discoveries and new finds would significantly improve the sector’s medium- and long-term outlook. According to official statistics, proven reserves of both oil and gas have been static – subject to no more than replacement of current production – since 2007.

Depletion is prima facie less of a concern for gas than it is for oil. The reserves-to-production ratio, which shows the number of years reserves would last at 2012 rates of commercial production, is just 20 for oil and 55.5 for gas, according to BP’s “Statistical Review of World Energy 2013”.

However, gas is a worry too, partly because Algeria is using almost as much for reinjection as for sale. According to OPEC, reinjection was 77.4 bcm in 2012, three times the average proportion of total output among other OPEC members. In 2008, when the country was producing 200,000 bpd more oil, reinjection had been as high as 93 bcm.

Yet it is partly also because domestic consumption of gas is huge, rising fast and eating into lucrative export potential. Total consumption in 2012 was 30.9 bcm, 10.8% up on 2011, with households attached to fast-growing public distribution networks consuming 18% more and power plants taking up 14.1 bcm, up 10.9% on 2011.

With public distribution networks set to continue growing, grandiose plans for new gas-fired power capacity in the next four years and beyond, and petrochemicals use likely to rise, increasing gas reserves and output would be a very good idea.

BIDDING ROUND: The overall impact of this potential is likely to receive a boost when the next bidding round is launched, particularly with the new hydrocarbons code now in place. The round has been planned for quite some time and – according to the MEM – it is likely to be under way by early 2014.