Drop in oil prices has led to a current account deficit in Algeria

Hydrocarbons wealth has underwritten Algeria’s growth for decades, allowing the country to accumulate huge foreign currency reserves and underwrite a major public spending campaign over the past 10 years. Thanks to high oil and gas prices, the government has been able to fund infrastructure and social programmes, including subsidies, helping the country sidestep the regional unrest of recent years. However, the dramatic drop in oil prices since mid-2014 has had an impact. Despite GDP growth of 4% in 2014, Algeria also experienced its first current account deficit since the late 1990s, equivalent to 18% of its GDP.

Exposed 

With hydrocarbons accounting for 95% of exports, nearly 30% of GDP and 60% of government revenues, Algeria has been exposed to fluctuations in global oil and gas prices. With oil falling from $115 to below $40 per barrel between June 2014 and December 2015, its earnings from hydrocarbons exports have dropped by around 50% in 2015, and according to the IMF its imports will exceed its exports for the first time in 15 years.

The impact of this on the broader economy highlights the centrality of Algeria’s energy sector, and the country has started to tap into its foreign currency reserves, leading to a drop from €159.6bn in 2014 to €142.6bn at the end of March 2015. In response to this situation the government has made aggressive plans to boost oil and natural gas production, including increasing onshore exploration, starting production on unconventional deposits and reforming the regulatory framework to improve investment attractiveness.

Basics

Algeria is the third-largest crude oil producer in Africa, behind Nigeria and Angola, and has some 12bn barrels of reserves. Furthermore, it is the biggest natural gas producer on the continent and has estimated reserves of 160trn cu feet (tcf) of conventional natural gas, the third-largest in the world. While many of Algeria’s gas deposits and oil blocks are maturing – necessitating enhanced recovery technology – almost two-thirds of the country remains either unexplored or underexplored, which means it still holds significant hydrocarbons potential.

However, Algeria will need to draw interest from foreign investors to bring in much-needed capital investment and technology critical to exploration and production. Recent changes in the country’s Hydrocarbons Law, which sought to increase incentives for international companies and provide the necessary framework for shale gas development, have still to prove their effectiveness.

Rising Hopes 

After years of declining production due to depletion of reserves in the country’s mature fields, and despite a challenging international outlook dominated by low oil prices and falling global demand, Algeria managed to increase its crude oil production to 1.53m barrels per day (bpd) in 2014, up 1.8% on 2013.

The country produced 83.3bn cu metres (bcm) of natural gas in 2014, up 2.2% from a year earlier. The minister of energy, Salah Khebri, estimated that this rising trend would continue in 2015 and that production could hit 195m tonnes of oil equivalent (toe) by the end of the year, due to an increase in production from the Hassi R’Mel, Hassi Messaoud, Berkine and El Merk regions contributing to a 4.1% rise in the country’s oil exports.

The government is aiming to increase Algeria’s hydrocarbons output to 224m toe by the end of 2019, which would be a 13% rise over current levels. As most of the country’s oil comes from a small number of mature and depleting fields, the national oil company Sonatrach – which is responsible for 80% of Algeria’s hydrocarbons production – will face the challenge of maximising production by bringing in enhanced recovery methods.

Oil

The Hassi Messaoud-Dahar province holds 71% of Algeria’s proven, probable and possible oil reserves. Located on the border with Libya and discovered in 1956, Hassi Messaoud is the country’s largest oilfield, holding 3.9bn barrels of recoverable reserves and producing around 400,000 bpd. The field is owned and operated by Sonatrach, which recently initiated a €551.3m project with Indian engineering company Dodsal that will involve the construction of both a gas compressing facility and a 180-km network of pipelines to maintain Hassi Messaoud’s output level.

Other major oilfields include Ourhoud and Hassi Berkine, which are both located in the Berkine Basin, with production of 150,000-200,000 bpd and 100,000-150,000 bpd, respectively.

Jointly developed by the US’s Anadarko and Sonatrach, El Merk oilfield – 300 km south of Hassi Messaoud – started production in 2013. It is set to reach plateau production at 98,000 bpd of crude oil, 29,000 bpd of condensate and 31,000 bpd of liquefied petroleum gas (LPG).

Meanwhile, the Bir Seba field – a joint venture between Sonatrach, Thailand’s PTT Exploration and Production, and PetroVietnam Exploration Production – came on-stream in 2015, and is expected to produce 200m barrels in its first 25 years of operation, with output of 40,000 bpd between 2018 and 2021. Bir El M’Sana, to the east of Hassi Messaoud, is being developed jointly by Sonatrach, Spain’s CEPSA and Malaysia’s Petronas, and began production in July 2015. It is expected to reach plateau production of 12,000 bpd.

Despite the current low level of global oil and gas prices, Kamel Youcef, the director-general of maintenance and services firm EMI Services Algeria, believes that projects initiated in 2014 and beginning in 2015 will continue ahead. For 2016, however, he said that the launch of new projects is still in the balance. “Everyone will be waiting to see whether Sonatrach launches its 2016 projects as planned,” Youcef told OBG. “We are now seeing international service companies like Halliburton demobilising more and more, which could be a sign of the market anticipating decreased demand for contractors and service companies as a result of lower sector activity and investments.”

Gas

Sonatrach is the leading natural gas producer in Algeria. Other companies involved in the sector include Total and Engie, both from France, Italy’s Eni, Spain’s Repsol and the UK’s BG Group.

Located in Laghouat Province – 550 km south of the capital, Algiers – Hassi R’Mel is the largest natural gas-producing field in Algeria, holding more than 85 tcf of recoverable reserves. According to the US’s Energy Information Administration (EIA), the field is responsible for more than 50% of Algeria’s total gas output, despite its production declining from 75 bcm in 2008 to 55 bcm in 2012.

The remainder of natural gas production comes from associated and non-associated mature depleting fields in the south and south-east. These include the In Salah project, which is jointly operated by Statoil, BP and Sonatrach. In its first development phase it is producing 9 bcm of gas per year from the Krechba, Teg and Reg fields.

The In Amenas gas facility, also operated by BP, Sonatrach and Statoil, produced 7.8 bcm per year and accounted for 10% of Algeria’s natural gas output before it was attacked by militants in January 2013 and forced to shut down. Production resumed in the second half of 2014 and full output was re-established in 2015. Other important fields include Gassi Touil, Menzel Ledjmet Est, El Merk and Rhourde Nouss, which added 10 bcm of production capacity between 2013 and 2014.

Conventional Gas

The government is aiming to facilitate a 13% rise in Algeria’s natural gas output by 2019 in order to cope with the steady rise in domestic consumption without compromising exports. More than €35bn will be invested, with an emphasis on maximising recovery at already producing fields, as most of Algeria’s gas production comes from mature, depleting assets.

New Gas Output

However, around 20 new fields are expected to come on-stream by 2020, seven of them as part of the South-west Gas Project, which will add up to 16 bcm to the country’s annual gas production by 2018. The first phase is due in 2017, and includes the development of the Touat, Reggane North and Timimoun fields by Engie, Repsol and Total, respectively. The second phase includes the development of Hassi Mouina and Hassi Ba Hamou, with an estimated combined output of 21m cu metres (mcm) per day.

Another important project is the In Salah expansion, which is due in 2016, and is expected to ensure that the current level of production is maintained. Sonatrach also plans to initiate production by early 2017 at the Tinhert project, with expected natural gas output of 24 mcm. In addition, the company intends to develop resources near Djebel Mouina Sud and Bir Berkine in 2016, as well as in various satellite projects around the Ahnet and Menzel Ledjmet Sud Est fields in 2019.

Exploration Investment

As part of the attempt to increase hydrocarbons reserves and output, Sonatrach has invested more than €27bn over the past three years to intensify its exploration activities for conventional resources. The company drilled 275 oil and natural gas wells and ordered the seismic mapping of large areas.

These efforts produced results in 2015, when the company discovered two new oilfields in the Taggourt and Ghardaïa regions and one gas field in El Bayadh which, combined, could add up to 4000 bpd to the country’s total output.

For the 2015-19 period, Sonatrach announced that it would invest over €57bn to drill 125 wells per year and conduct annual seismic mapping of 26,000 sq km to confirm conventional hydrocarbon potential in various areas, including offshore. Furthermore, in 2012 Sonatrach initiated an unconventional resource assessment throughout various parts of the country, drilling its first two vertical shale exploratory wells, which confirmed shale gas potential. After this, the company started a pilot project in the Ahnet Basin in 2014, confirming the existence of shale gas.

The push comes in part due to the fact that many current fields are maturing. Baker Hughes’s country director, Salim Mouici, highlighted this shift in mentality. “With the change of dynamics in the international market, especially low oil prices, we expect to see a downward trend in exploration in Algeria. Efforts will be certainly be redirected towards increasing production, especially by maximising the rate of recovery in already producing fields,” he told OBG. “We expect in 2016 that around 90 exploration wells and 180 production wells to be drilled around the country, which represents an 3%-4% increase compared to 2015.”

Shale

According to the EIA, Algeria has an estimated 707 tcf of technically recoverable shale gas resources. On the back of the shale boom in the US – and with most conventional producing areas reaching maturity or depletion – Algeria is planning to tap into its shale hydrocarbons to maintain production and export levels. Sonatrach intends to start shale gas exploitation in 2020, with output levels close to 30 bcm in the first stage.

However, as developing these resources could be five times more expensive than developing conventional assets – in part due to the high requirements for water in the arid country – and given Algeria’s limited experience in developing shale gas, the government plans to turn to foreign companies to bring in capital, know-how and new technologies, which include horizontal drilling and multi-stage hydraulic fracturing (fracking).

Mouici points to private sector initiatives as a means of overcoming cost-related challenges. “Shale gas development requires an operational capacity that far exceeds what is present in Algeria in 2015,” he told OBG. “These developments are relatively costlier than many conventional plays. International oil and services companies must focus on creating economies of scale as a means of lowering development costs and rendering these plays profitable.” Players in the Algerian hydrocarbon market have also been working to attract partnerships with international companies that possess the experience to build the economies of scale, and have the technical expertise, to make shale gas production a reality in Algeria.

However, many other challenges remain, including the development of the necessary supply chain and finding large enough quantities of water to break up shale to release gas. Most notable among the challenges may be the reaction of the public. The first quarter of 2015 saw consecutive months of protests over the impact of fracking chemicals on the local population’s drinking water.

Legal Re-VAMP

Algeria’s business environment, which was ranked as 163rd out of 189 countries in the World Bank’s “Doing Business 2016” report in terms of ease of doing business, has constrained investment in the energy sector in recent years. The EIA cites protectionist policies, slow government approvals, opaque regulations and security risks as key challenges for the country.

In a bid to address these issues, the government enacted the February 2013 amendments to the Hydrocarbons Law, aimed at providing a comprehensive framework for the development of unconventional resources and increasing the sector’s attractiveness to foreign companies.

Although the changes do not alter the existing 49% cap on foreign ownership, the new framework eases the country’s tax regime, by linking taxes on foreign companies to profits instead of revenues from their projects, and takes into consideration exploration difficulty and risk by providing longer licence periods to carry out exploration (11 years instead of seven for conventional assets) and extended production periods for unconventional resources, extending them to 30-40 years, compared to 25-30 for conventional resources. Exploration costs are borne by the operator during the exploration period and are subsequently reimbursed by Sonatrach up to its participating share if commercial discovery occurs.

The hope is that the regulatory reform will also facilitate a streamlining of the bureaucracy. Youcef points to red tape as the biggest inhibitor to international investors entering the market. “Bureaucratic processes and a lack of transparency remain the most significant challenges in the sector. In contract tendering, for example, it can take from 18 months to three years for an engineering contract to be awarded”, he told OBG. “While public discourse has focused on reducing bureaucracy and liberalising the market, this has yet to take effect. Partnerships with local firms could help international companies navigate the local market conditions and enable them to maintain a more steady, long-term presence in the country.”

Bidding 

The importance of overhauling the sector’s regulatory framework can be seen in the wake of the most recent bidding round. After a failure to generate interest from international investors in the 2011 licensing round, in which only two contracts were awarded out of 10 oil and gas permits on offer, 31 licences were put on offer in 2014, 17 of them for unconventional prospects.

Despite the regulatory and legislative changes in 2013, only four contracts were awarded in the bidding round, including a licence for shale exploration in the Timissit area to a foreign consortium composed of Norwegian Statoil and multinational Royal Dutch Shell. Two of the other licences in the Tinhert and Msari Akabli areas were granted to Italy’s Enel and Dragon Oil, while the last one in the Boughezoul area was awarded to Repsol and Royal Dutch Shell. In terms of new exploration, it is widely assumed that a great deal of untapped potential remains. For instance, it is believed that Boughezoul could produce several million barrels of oil. Despite having granted only 12% of the permits on offer, the 2014 bidding round marked renewed interest by major players such as Shell, Repsol and Statoil, who sought access to the country’s unconventional assets.

Another bidding round was set to be held by the end of 2015 but was postponed as the authorities judged the market conditions not favourable, most notably due to low crude oil prices. Despite uncertainty over the revival of global oil prices in the short to medium term, Mouici points to a comparative advantage that Algeria can harness in attracting international investment. “The cost of producing in Algeria is one of the lowest in the world. Around 90% of production costs under €10 per barrel,” he told OBG. “What makes projects expensive is delays. Many have been delayed for two to three years, resulting in additional costs. This could be solved by improving decision-making mechanisms and speeding up approval processes.”

Refining & Petrochemicals 

Algeria has five oil refineries located in Algiers, Skikda, Arzew, Hassi Messaoud and Adrar, with a total capacity of 652,000 bpd, according to the EIA. Petrochemicals products generated foreign receipts of €1.2bn in 2013, almost two-thirds of the country’s non-hydrocarbons exports. Sonatrach is the largest player in Algeria’s refining sector, owning all of the country’s refining capacity except the Adrar facility, which it jointly operates with the China National Offshore Oil Corporation.

While the bulk of the processed output is destined for overseas market, Algeria plans to double the country’s output by 2019 by investing in three new refineries, with a cumulative investment of around €8.9bn carried by Sonatrach under the umbrella of its ambitious €80.3bn development plan for the next few years. These three refineries are expected to have a combined annual output of 9m tonnes of diesel and 4m tonnes of petrol.

To reduce its reliance on crude oil, Algeria has also established plans to boost its petrochemicals and fertiliser sector. Having imported more than €15bn in petrochemicals products between 2008 and 2013, the country aims to increase its production of methanol, liquid nitrogen, naphta and fertilisers such as urea and ammonia to meet rising domestic demand, and increase its potential as an important petrochemicals player in North Africa.

According to Sonatrach’s planning director, Lamine Ouis, six new petrochemicals complexes will be built by 2020. The €2.3bn Al Djazaïria Al Omania Lil Asmida fertiliser plant, the launch of which is due in 2015, will have a capacity of 2.4m tonnes per annum (tpa) of ammonia and urea, and will allow the country to increase its fertiliser production capacity by around one-third. Moreover, Fertial, a joint venture between Grupo Villar from Spain and Sonatrach subsidiary’s Asmidal, will invest €239.9m to increase ammonia output at its Arzew and Annaba plants to 1.8m tpa in 2018. Another important fertiliser project is Sorfert, which has a production capacity of 1.26mn tpa of urea and 1.6mn tpa of ammonia.

In The Pipeline

Algeria’s oil and gas reserves are connected to world markets through a well-developed network of over 10,000 km of gas pipelines and 4300 km of oil pipelines. These carry hydrocarbons from Hassi R’Mel and Hassi Messaoud to refineries and export terminals on the northern coast, including Arzew, the country’s largest hydrocarbons processing and exporting hub, as well as Skikda, Algiers, Annaba, Oran and Béjaïa.

Algeria’s three natural gas transcontinental pipelines – Enrique Mattei, Pedro Duran Farell and MEDGAZ – have a combined capacity of 54 bcm per year. Enrique Mattei, which is also known as the Trans-Mediterranean Gas Pipeline, started operations in 1983 and is Algeria’s largest pipeline, with a capacity of 33.5 bcm per year. It runs 2340 km from the Hassi R’Mel gas field to Italy via Tunisia and is jointly owned and operated by Sonatrach, the Tunisian government and Eni.

The Pedro Duran Farell pipeline, which is also known as the Maghreb-Europe pipeline, runs to Spain under the Mediterranean Sea and transports approximately 11.5 bcm of natural gas annually. The third gas pipeline, MEDGAZ, which also runs to Spain, has an estimated capacity of 8 bcm per year and came on-stream in 2011.

Algeria plans to build another transcontinental pipeline, the 837-km GALSI, which would cost €2.2bn and allow some 8.8 bcm of gas exports per year to flow to northern Italy and Europe. First proposed in 2005, the project has been facing delays due to logistics, costs and long-term contractual commitment issues.

Algeria is also a liquefied natural gas (LNG) producer and currently has two liquefaction plants located in the Mediterranean coastal cities of Arzew and Skikda with a combined output capacity of 3.8bn cu feet (bcf) per day, more than 5% of the world’s total LNG exports. A third LNG train with a capacity of 0.6 bcf per day came on-stream in November 2014 in Arzew’s LNG plant to process natural gas coming from the Gassi Touil field. Algeria exported 500 bcf by LNG tankers in 2014.

Exports

Recent rises in domestic energy consumption – along with plateauing hydrocarbons output and falling US demand – have had an adverse effect on Algeria’s oil and gas exports, which the government expects to drop by 50% in 2015 to €30.3bn. Energy exports reached €16.1bn in the first half of 2015, down from €28.5bn in the first six months of 2014. Natural gas exports fell from 74 bcm in 2008 to less than 56 bcm in 2014.

Demand from the US – once Algeria’s main market for crude oil exports – has slowed, mainly due to the development of its shale resources, which has negatively impacted trade with Algeria and other African countries, including Nigeria and Angola. However, most of the slack left by the US has been taken up by the EU, which has become the primary export destination for Algeria’s hydrocarbons, accounting for 72% of its crude oil and 90% of its natural gas exports in 2013.

In recent years Europe has sought to diversify its energy suppliers, especially for natural gas, presenting an opportunity for Algeria to strengthen its position in the market. The country expects to take greater advantage of the underutilised pipelines connecting it to the European market: it exported only 25 bcm of natural gas by pipeline in 2013, despite installed capacity of 54 bcm. According to the EIA, Europe also accounts for more than 50% of Algeria’s LNG exports.

Domestic Consumption

However, the greatest pressure on exports is coming not from external forces, but from rising domestic consumption. Increased economic activity has fuelled energy demand in Algeria in recent years.

In 2014 domestic natural gas consumption reached 33.7 bcm and, according to state-owned power company Sonelgaz, it grew by an average 10% annually, almost tripling between 2004 and 2014. Electricity consumption, which has been steadily increasing by an annual average of 6.6% over the past 10 years, also contributed to rising domestic gas consumption, as 93% of the country’s power generation output comes from natural gas. As domestic gas consumption has risen faster than production, Algeria is confronted with the challenge of preserving the balance between domestic gas consumption and gas exports.

As for oil, Algeria consumed 395,000 bpd of the 1.5m bpd it produced in 2014, leaving 1.1m bpd for export. Domestic consumption was 230,000 bpd in 2003, which points to a more than 70% rise over the past decade. According to the US Department of Energy, Algeria’s domestic oil consumption has increased by 5.5% annually over the last 10 years, due in part to a rise in the number of vehicles from 2.9m a decade ago to 5.5m in 2013. As the growth rate of domestic hydrocarbons demand is outpacing production, the country plans to not only raise its generation capacity, but also reduce the share of fossil fuels used for domestic needs by boosting renewable sources and increase energy efficiency.

Power Demand

Algeria’s electricity consumption has been steadily rising over the past decade, mainly driven by the country’s economic growth and improving living standards, as well as the sustained increase in its population, which went from 33.5m in 2004 to 38.8m in 2014.

According to Sonelgaz, electricity consumption throughout the country grew by an average of 5% per year between 2004 and 2009, and the sector as a whole registered annual rises of 8.6% in 2011 and 10.9% in 2012. Algeria’s power consumption, which peaks during the hottest months in the summer, reached 40.9 TWh in 2013 and is expected to continue increasing to reach over 80 TWh in 2020 and up to 150 TWh in 2030.

Generation

Natural gas is the predominant feedstock for electricity production. Despite the recent projects to raise the share of renewables in the generation mix to 20% by 2030, conventional thermal sources are expected to remain dominant in the medium-term, as most of the projected power plants will use natural gas as their main feedstock and to a lesser extent coal and oil. Renewable energies will start playing a more significant role in the long term.

Total power generation capacity in Algeria reached 15 GW in 2014, up from 13 GW in 2012 and 11.5 GW in 2011. Maximum demand, which reached 11.5 GW in 2014, is expected to increase to more than 13.2 GW in 2016. With a narrowing gap between installed generation capacity and domestic demand, the country will require major investment in its power sector to avoid demand outpacing supply, as occurred in 2012 when Sonelgaz had to ration electricity supply due to load-shedding, causing power cuts and sparking protests. Sonelgaz will lead the effort to increase generation, and it plans to invest €6.8bn in thermal capacity by 2017. The company signed various agreements with GE in 2013 aimed at increasing Algeria’s generation capacity through six combined-cycle power plants, two fast-track projects with a capacity of 528 MW and a new 370-MW simple-cycle power plant at a cost of €2.6bn, among other developments. “With 9 GW set to come on-line in the next few years, the country will have more than enough capacity to meet domestic electricity demand,” Youcef told OBG.

Sonelgaz also contracted Spain’s Duro Felguera to build a 1250-MW combined-cycle plant with four gas turbines and two steam turbines for €641.3m. “The Algerian electricity market is split into two zones; the densely populated north, which has a clustered and interconnected grid that resembles what is seen in OECD countries, and the sparsely populated south, which requires locally sustainable production units and sources for each city or community,” Youcef told OBG. “Sonelgaz’s challenge will be to ensure that the northern network efficiently absorbs and distributes the new capacity, while increasing the number of local, disconnected generation sources for the south.”

Joining The Dots

A 305,000-km national distribution network connects 99% of Algerian households to the electrical grid. However, the grid will need to be upgraded to support increased power flows, especially when peak demand occurs during the summer. Pressure on the existing power grid will also increase as power plants fuelled by conventional thermal sources and renewable energy come on-line in the years to come.

Sonelgaz plans to widen its high-tension electricity transportation network by 27,000 km at a cost of €1.1bn. The firm’s long-term objectives include the expansion of its distribution network by more than a third by 2024, which will involve the construction of 175,400 km of power lines. However, despite having an interconnected, well-developed power grid servicing the north of the country and the Hauts Plateaux region, grid integration is an issue in the south, where there are 25 isolated networks, mainly run on diesel motors.

Opening The Power Market

Despite the liberalisation of Algeria’s electricity market initiated in February 2002 with the passing of Law 02-01, which established the principles of the unbundling of generation, transmission and distribution segments, the power market is largely dominated by Sonelgaz and its subsidiaries.

The company is responsible for about 87% of the country’s domestic electricity as an independent power producer, while it produces the remaining 13% in joint ventures with international companies. The low level of involvement of private companies has slowed down the much-needed investments in the power generation and transmission sectors, as private capital and new technologies have been restricted from entering the market at will.

Focus On Renewables

Similarly to its North African counterparts, Algeria has been increasingly interested in boosting its renewable energy sector. It is estimated that throughout the MENA region, over 1500 MW worth of renewable energy projects will be tendered during 2015. Renewables have become a priority for the Algerian government, which needs to find alternative sources of energy to counter its dependency on fossil fuels, especially in the context of falling oil prices and depleting hydrocarbons reserves.

The Renewable Energy and Energy Efficiency Development Plan (REEEDP) was designed in 2011 and amended in 2015 to raise its targets. Under the plan, Algeria will install 25 GW of power generating capacity from renewable resources before 2030, with the first 4.5 GW expected by 2020. These updated targets represent a near-400% increase in the targeted installed capacity for solar photovoltaic and wind generation, compared to the plan’s initial objectives. Of the 25 GW, 10 GW will be allocated for exports, mainly to Europe. Reaching these targets will require €107bn in investment, from both the public and private sectors. This confirms Algeria’s ambition to become an energy export centre in the region, due especially to its solar power potential.

The benefits of increasing renewables output will be felt throughout the energy sector. The REEEDP will help the country preserve around 300 bcm of natural gas per year by 2030 for export. There will be a strong focus on solar energy, the most abundant renewable resource in the country. With 85% of its landmass located in the Sahara desert, Algeria’s solar radiation potential is among the highest in the world at an estimated 13.9 TWh per year. However, other resources will also be exploited, including wind, hydropower, geothermal and biomass. The plan targets the development of 60 solar power plants, wind farms and hybrid power plants. Crucially, while the bulk of power in Algeria comes from Sonelgaz and its subsidiary SKTM – which was created in 2013 and deals with electricity and renewable energy – the government has designed incentives for companies that invest in renewables. These include a 20-year power purchase agreement, under which investors receive a guarantee that Sonelgaz or its subsidiaries will buy the energy produced. There are also feed-in tariffs (FITs), which were introduced in February 2015 and reduce risk for private investors with guaranteed fixed payments to sell energy from renewable sources. The FIT scheme will be financed through the National Fund for Renewable Energy and Cogeneration, mostly fed by a 1% levy on the state’s oil revenues.

Algeria also hopes to establish local manufacturing facilities for renewables components in order to reduce costs and make the renewables sector sustainable. In the photovoltaic segment, it is expected that by 2020, around 80% of the components necessary to produce electricity will be manufactured within the country, including solar panels, silicon, inverters, batteries, transformers and other equipment used in the construction of a photovoltaic plant. As for thermal solar energy, it is expected that half of the necessary components will be made in Algeria by 2020. The creation of a domestic supply chain to support the segment could boost economic and social development.

Solar

Algeria’s annual sunshine exposure is equivalent to 2500 KWh per sq metre, and its solar potential is the main factor behind the REEEDP, which aims to boost both solar photovoltaic and solar-concentrated energy, which between them are expected to produce 15.5 GW by 2030.

Operating since 2011, the Hassi R’Mel hybrid power plant is currently Algeria’s largest solar thermal power project, combining an output of 25 MW of solar power and 130 MW through a combined gas turbine. The plant is operated on behalf of Sonatrach by Spain’s Abengoa Solar and New Energy Algeria for a period of 25 years.

By the end of 2014, various smaller solar power generation projects, with a combined capacity of 343 MW, were under construction in the country, including 90 MW in the Sétif region, 85 MW near Sidi Bel Abbès, 90 MW in the southern Ouargla region and 53 MW at In Salah-Adrar-Timimoun. To support the bid to meet the country’s solar energy target, the state-owned electronic components producer Entreprise Nationale des Industries Electroniques will build a production facility for photovoltaic cells and panels. The €17.9m plant will manufacture solar panels capable of producing 25 MW per year at competitive prices. Prices in solar photovoltaic systems have been dropping in recent years, and went from €6.20/watt in 2008 to less than €1.30/watt in 2014.

Wind 

The second-largest bet for Algeria in terms of renewables is wind power, which has the potential to provide around 35 TWh per year. The REEEDP targets wind power to generate 5 GW by 2030. The most important wind farm in Algeria was built by French firm Cegelec, and produces 10 MW generated by 12 turbines. The southern and south-western areas have the most potential for wind farms, as both average high velocities. Studies are currently being conducted to detect suitable sites with the goal of installing 1700 MW of wind capacity by 2030. According to Sonelgaz and the Desertec Industrial Initiative, the cost of power produced in Algerian wind farms and exported to Europe could be as low as €0.11 per KWh.

Efficiency

Parallel to the efforts to increase hydrocarbons and renewables production, Algeria has initiated plans to reduce domestic energy consumption by 9% by 2030 through the National Programme for the Development of Energy Efficiency. The programme is expected to create 180,000 jobs, generate savings of €37.5bn by 2030 and save 63m toe. It targets the insulation of 100,000 dwellings per year, as well as the conversion of 1m private vehicles and more than 20,000 buses to LPG and compressed natural gas. As of 2015, only 3% of vehicles in Algeria run on LPG.

Nuclear

Depletion of fossil fuels and a rise in domestic demand have prompted Algeria to consider its energy security and renew interest in nuclear power, although it has little experience in the sector. In 2009 the country announced the construction of its first nuclear plant by 2020, but in 2013 this was postponed to 2025. The government has also started setting up training institutes and research centres, such as the Nuclear Engineering Institute. In 2014 an agreement was signed between the Russian state-owned nuclear company Rosatom and the Algerian government for the design, construction, operation and servicing of nuclear power plants and research reactors. Both countries also agreed to increase uranium exploration and prospecting in Algeria – which has uranium reserves estimated at 29,000 tonnes – that would enable the operation of two 1000-MW power plants for around 60 years.

Outlook

As Algeria aims to sustain one of the most prolonged periods of economic growth it has ever seen, maintaining government revenues will require boosting hydrocarbons production to offset depressed global prices and allow for exports to sustain their current levels without sacrificing output directed to the growing domestic market. While significant regulatory reform is ongoing in the sector, the renewables segment could benefit from further liberalisation, which would allow it to contribute in the long-term to the energy mix.