Algeria Confronts 'Troubling' Realities -- OIES Study
An Algerian cabinet meeting on February 22 2016, chaired by veteran ailing President Abdelaziz Bouteflika, was confronted with the awful realisation that reserves and production were inexorably dwindling, domestic gas consumption set to soar, with ever less gas available for hard-currency exports.
In his concise but compelling analysis published this May by the Oxford Institute for Energy Studies (OIES), Algerian Gas: Troubling Trends, Troubled Policies, Ali Aissaoui, a former adviser to Algeria's oil minister in the 1990s, tells how this top-level session provided the context and rationale to study the country's gas predicament. The author himself is supremely qualified to conduct such an examination. As the top adviser to Algeria's oil minister in the early 1990s, Aissaoui devised the strategy for opening up its upstream to international investors during a bleak period of insurgency.
Since 1996 he has worked abroad, initially at OIES, then chiefly as an economist and consultant for the Saudi-based multilateral bank Arab Petroleum Investments Corporation (Apicorp). With long experience as a petroleum investment adviser, he provides constructive advice on what steps Algeria might now take.
Structured into three main chapters -- on production, domestic demand and pricing, and exports -- his analysis begins by showing how marketed production slumped from a 2005 peak of 89.2bn m3 to just 79.9bn m3 in 2013; the 2015 figure was 82.5bn m3. (Marketed volume is the key measure here, as much of Algeria's higher gross gas production is used in oilfield reinjection).
Arresting the decline in the super-giant Hassi R'Mel gas field, where water incursion is reported, may require bilateral investment deals with specialist international oil companies (IOCs), suggests Aissaoui, noting recent press reports that state Sonatrach is thinking along such lines – despite the lump in the throat this would give patriotic Algerians, given the field's iconic status in the 1970s.
Aissaoui also details how the view prevalent in government just two years ago, that shale gas would solve all Algeria's production decline problems by 2020, has now been discarded – in favour of a more realistic understanding that harnessing shale resources requires patience plus political and technological dexterity, after last year's anti-fracking protests by desert communities anxious about the loss of their water.
Runaway domestic gas consumption needs controlling, argues Aissaoui in his second main chapter, with higher prices the undodgeable bullet. Domestic wholesale prices of around $0.50/mn Btu make it easy to understand how domestic gas use has "grown by 5.2% per year from 22.6bn m3 in 2004 to 39.5bn m3 in 2015" to a point where it almost equals Algeria's gas export volume. Given only fitful attempts to develop solar generation, the author sides with a forecast by the country's regulator Creg that domestic gas use will reach 54.6bn m3 in 2023 and himself extrapolates it may reach "nearly 70bn m3 by 2030 ....too close for comfort to current marketed production... unless demand for both electricity and gas is moderated through a policy of aggressive price increases."
As if to indicate where prices might need to go, his earlier chapter noted that wellhead production costs – which at Hassi R'Mel are about $0.50/mn Btu – could hit $3 for Touat, $4 for Reggane Nord, and $4.70 for Timimoun's tight gas – three fields originally due onstream in 2016-17 but are now expected to start up 2018. Egypt's energy-intensive users are paying roughly the cost of imported LNG, and Aissaoui points out this meant in 2014 they paid as much as $8. However by mid-March 2016, the price charged to Egyptian steel producers was about $4.50/mn Btu.
Algeria's exports are the focus for Aissaoui's next chapter. He sees current gas exports at 60bn m3/yr but says -- even with moderated domestic demand - they are on course to shrink to just 15bn m3/yr by 2030. "In a lower production or higher demand scenario, [Algeria] will cease exporting all together." Thus the author sees Sonatrach's recent voluntary reduction in sales to Italy as more a template for future behaviour, than its 1Q2016 increased sales there, although he believes that Sonatrach recently abandoned the decades-old and rigid oil-indexation for its gas sales price to Eni.
Renegotiations of the state export monopoly's gas contracts need to reflect the new volume and price realities, and not its current 69bn m3/yr contractual level, argues Aissaoui. "With this perspective, it would be arrant nonsense to talk about investment in new export capacity" so the 8bn m3/yr Galsi pipeline to Italy via Sardinia should be "scrapped... without further discussion", and Sonatrach should also consider decommissioning its old gas-guzzling Arzew GL1Z and GL2Z liquefaction trains in order to maximise netbacks for the Algerian state by exporting LNG from newer plants only.
Mark Smedley