[NGW Magazine] Algerian upheavals delay upstream progress

Strong, autocratic rule need not always deter foreign investors, but a head of state needs to reassure them that it is all for the best – and this signal is not forthcoming from Algiers. 

Algeria, Europe’s second largest gas supplier, seems to be heading for a political crisis. The mid-August surprise sacking of three ministers by the country’s long-time president Abdelaziz Bouteflika is causing tensions that could have repercussions for the country’s economic future. 

The sackings of prime minister Abdelmajid Tebboune just after three months in the job, along with the ministers for industry and mines (Mahjoub Bdeh) and commerce (Ahmed Sassi), have created a political fall-out and the dust has yet to settle.

The official reason was accusations of harassing businessmen and investors, while also constraining government initiatives. Bouteflika has appointed Ahmed Ouyahia as prime minister: it will be his fourth time in the hot-seat.

Bouteflika’s actions have already prompted calls for demonstrations as activists are now accusing the government of financial mafia rule and manipulation of state institutions.  The new government, which was recently appointed, has been accused by several political groups of fraud, constraining investments and price manipulation.

Analysts are worried about the road the president is taking, as the sacking of three such key ministers shows that the already harshly criticised ‘financial cartel’, made up of the Forum of Heads of Enterprises, is gaining strength. The opposition at present is directing most of its fire power at the influence of the head of the cartel Ali Haddad, who is a close ally of Bouteflika.

The crisis comes at a critical moment for Algeria. The tenure of Algeria’s president Bouteflika seems to be heading to an end, as he is very old and physically fragile. The main power players are preparing themselves for a life after Bouteflika, while also trying to increase their own power positions in the country’s fledgling economy. 

At present, pundits are putting their money on Tebboune and Ouyahia, and the latter seems to have been able to gain influence at the expense of Tebboune. An outsider could be former prime minister Abdelmalek Sellal, who was removed from power when he lost the battle for influence against Ouyahia and others. Until his sacking Tebboune had been seen by the pundits as a go-between or an intermediate solution until Ouyahia gains power.

Tebboune’s move to step up and start a direct fight with parties involved in corruption, while at the same time trying to disentangle the network of business interests and politics, put him in the sights of the likes of Ouyahia and Bouteflika himself.

Tebboune’s determination to tackle these issues has brought him into direct conflict with Ali Haddad, a battle which the former prime minister lost.  Haddad’s overall position in Algeria’s economy is strong. The entrepreneur is a supporter of liberalisation and of direct links between business and the Algerian political system.

A possible political showdown could emerge if Bouteflika is not able to control the different factions within his ruling party and opposition, as there are several players just waiting for signs of weakness. The rapid changes in the Algerian government come at a critical moment, as the country is facing increased economic uncertainty and high deficits.

The Opec member has been hit hard, not only by greatly reduced oil prices and revenues, but also by the perceived gas glut and emerging US LNG competition on some of its main markets, mainly the European Union. Algeria needed to tap heavily into its foreign reserves, which have fallen by 45% since April 2014 – a few months before the oil price fell. At the same time, Bouteflika, who has been ruling Algeria for years, has been hit by severe medical challenges, such as a stroke in 2013.  The president is already 80, so the current tenure is seen as his last period.

The newly appointed government, now led by Ouyahia, will have to deal with severe economic challenges including the curbing of energy subsidies. The government is implementing a strong but hard needed austerity program, as the budget deficits need to be dealt with.  Part of the current problems have been caused also by the generous financial programs put in place just after the start of the Arab Spring, which was meant to quell possible opposition. As oil and gas exports account for nearly 60% of the economy, the current global market conditions are not very promising.

At present, based on the rentier position of the Algerian economy, the only way out for the short term will be a more functional and commercially attractive oil and gas sector. But the reserves have been poorly managed for years.

The attractiveness of Algeria’s hydrocarbon sector has also dwindled thanks to continuing government interference and a lack of transparency. Still, the Algerian government is still very optimistic about its oil and gas export potential for the coming years. Algeria’s stagnant national oil and gas company Sonatrach stated at the beginning of August that it expects – once the Reggane and Touat fields are on stream – its gas exports could reach 54bn m³/yr, which is 3bn m³ more than in 2016. The production increase is set to come from Timimoun (1.6bn m³/yr), Touat (4.4bn m³/yr) and Reggane North (2.9bn m³/yr). Sonatrach also stated that the Isarene field, run by Petroceltic, will come on stream later.

Algeria’s importance for Europe is still very large. Until now, exports have been constrained partly due to a very difficult investment and operating environment in the country. Sonatrach’s stagnant output, strict terms and a rising gas demand in the country itself to meet power generation needs have been threatening possible future exports to Europe.

However, the European Commission also has an interest in Algeria developing a reputation for long-term reliability, as it wants to offset rising Russian gas exports. To support this, discussions are ongoing between Algiers and Brussels on the possible improvement of investment conditions on both sides. A more intricate supplier-customer relationship could assist also investments needed in Algeria itself.

Algeria’s overall gas sector is facing immense challenges. The stagnation of part of its gas production has been caused by political infighting; constrained relations between Sonatrach and the government; local gas price settings; and international operators not wanting to take part in bid rounds or compete for new concessions.

The growing demand for gas locally is also a hard nut to crack. Officials have stated that there is a possible 50mn m³/d shortage in gas production. The real solution to this has not yet been found, but more attractive operating terms for oil and gas companies in Algeria will for sure be an area to start with.

The North African producer is also in a fight with international LNG exporters to compete for European market share. The growing global LNG production, especially in Asia and the USA, is competing fiercely for market share in Europe with the traditional pipeline gas suppliers, such as Algeria.

The North African gas giant is however hit on both sides, it supplies not only pipeline gas but also LNG to several European customers. The fact that LNG has become much cheaper than formerly has given Algeria’s southern European customers – Italy and Spain – the choice between pipeline supplies or LNG. LNG has become cheaper, encouraging long-term capacity holders to bring in cargoes rather than raise nominations for Algerian gas.

The reliability of Algerian supplies also is a growing factor in customer discussions. Perceived unreliability on the Algerian side, supported by a growing political and security instability in North Africa and the country itself, is putting some customers off.

The combination of a year long decline in production volumes, resulting from a lack of exploration and investment; growing local demand; and growing political instability, will put investors and possible operators off for even longer. The current decision by president Bouteflika to reshuffle the cabinet just a couple of months after new ministers were appointed, will not be seen as a promising sign for stability.

Much needed changes to the investment laws, regulations, local gas prices or export terms, will be delayed as long as there is an internal turmoil in Algeria’s ruling elite. The old guard, represented by Bouteflika, will need to be changed or at least give an indication who will be the next Algerian president, before the international community – European parties in particular – can regain their trust and interest in the country’s capabilities.

Until that point is reached, Algeria’s pipeline and LNG dreams could still be hidden behind some very black clouds.  Ranking at 156 on the World Bank’s Ease of Doing Business Index, which is even below Niger, West Bank and Gaza, Algeria does not need any further political problems. Changes are needed, but with the current indicators these will not happen very soon. Transparancy and stability are key, but in Algeria not yet a priority it seems.