Unleashing the Power

The statement this week by the Algerian Energy and Mines minister that he expected the long-awaited energy liberalisation law to be passed soon by parliament heralded the beginning of a new era for Algeria's prominent oil and gas sector - and especially for the state-owned monopoly Sonatrach, Africa's largest company.



The draft law is expected to propose transforming Sonatrach into a purely commercial company, run according to international standards. It will also likely create separate agencies to regulate the industry and award exploration and development contracts.



All these activities are currently carried out by the Sonatrach Group alone - something seen as a disadvantage by government officials. As Energy and Mines Minister Chakib Khelil put it at a forum organised by the el-Moudjahid daily in Algiers on January 17, the draft law will enable Sonatrach "to stop investing millions in building pipes as it must do today." Instead, he said, "The money, something like $800m per year, will... be invested in exploration and production."



However, this is the second time the draft law has been put forward. It was first shelved back in 2003 because of protests from the UGTA trade union federation and opposition parties. They expressed concern that it might lead to Algeria losing control over its most crucial national resource.



This time around though, and taking most observers by surprise, UGTA Secretary-General Abdelmadjid Sidi Said performed a U-turn on this highly sensitive issue.



"As long as workers won't be fired," he told reporters on January 16, "I do not see why I should be against this new law."



Now, with President Abdelaziz Bouteflika, whose authority was reinforced by his landslide victory in the April 2004 presidential election, publicly backing the bill, analysts expect the draft to be put before the government during this winter, and to pass to parliament in the spring.



Importantly for international oil and gas companies, the new legislation would reduce Sonatrach's minimum stake in production-sharing agreements to 20%, as opposed to the current 50%.



This change, Khelil explained, "will give Sonatrach the tools to become more competitive on the international market".



Sonatrach currently employs 120,000 people worldwide, and is at present the only big state-owned oil company involved extensively in exploration and production outside its home country within OPEC.



Given too that Sonatrach alone typically accounts for over 30% of Algeria's GDP and over 95% of its foreign exchange revenues , any reform on the energy front takes on vital importance for the country. With oil prices surging higher than ever during 2004, Algeria's oil and gas exports skyrocketed to $31.6bn, up 31% over last year's $24bn. This is expected to raise the energy sector's contribution to well over 35% of GDP and 97% of export earnings. Indeed, Algeria's non-oil exports remain structurally low, at only $750m, in spite of a 20% increase in 2004 over 2003.



Khelil added that 12 new deposits had been discovered last year, and said that "this trend must be maintained in 2005". Algeria's oil production reached 1.4m barrels per day (bpd) in 2004, and is expected to rise to 1.5m bpd in 2005.



However, Algeria's vast reserves of natural gas drew even more attention from investors last year. Indeed, in late 2004, Spain's Repsol YPF announced that it, along with Gas Natural, had won a multi-billion-euro liquefied natural gas (LNG) contract to exploit the Gassi Touil deposit, in what will be Algeria's largest foreign-investment deal to date. The two companies plan to invest about 1.6bn euros in the 30-year exploration and production project. Repsol holds a 60% stake in the consortium set up for the deal, with Gas Natural holding the remaining 40%.



Meanwhile, Spain's industry ministry last week announced in a press release that it expected the construction by the Medgaz consortium of a gas pipeline between Spain and Algeria to start in mid-2006 and to be completed by 2009. The Medgaz pipeline will have an annual capacity of 8bn cu metres and will be the second line connecting the two countries after the Maghreb-Europe pipeline, which runs via Morocco. Most of the gas will be consumed in Spain, and some will be sent to France and Portugal, the ministry added.



Medgaz has said that total investment in the project will be around $1.5bn, $600m of which is earmarked for the construction of a 200 km underwater pipeline that will connect Algeria with the Spanish port of Almeria. Medgaz's main shareholders are Spanish oil company Cepsa and Sonatrach, each holding a 20% stake of the project. Gaz de France, Total, BP, Endesa and Iberdrola all have 12% stakes.



These developments are coming at a time when Algeria's civil society is demanding that the oil and gas sector's tremendous proceeds be invested to address the country's growing problems. The population is on edge due to rising unemployment - currently running at around 25%, but estimated to be much higher in some regions - and there is also a housing shortage. The increase, last weekend, in the cost of gas fuel, the only available source of energy in Algeria's remote mountain regions, sparked violent protests and riots in the town of Birine, south of Algiers, while in the north-eastern Kabylie region, angry demonstrators reportedly blockaded the region's main road in the town of Kherrata.



The government proudly announced its victory over the Armed Islamic Group (GIA) earlier this month after arresting and killing its main leaders, and also managed to strike a deal last week with tribal leaders in the Kabylie region, which had seen almost four years of violent unrest. While Algerians are largely doubtless grateful for that, now they want the government to tackle their economic and social needs. The government today has the financial nerve to do so. It remains to be seen whether it will also have the political will.