Change in Algeria may spur overdue overhaul of economy

Huge peaceful protests again enveloped Algeria on Friday, opposing a fifth term for the ageing and ill president Abdelaziz Bouteflika.

The system has managed to keep a rigid economy afloat through its hydrocarbon earnings. But, while the country’s oil and gas sector is old it is, unlike the president, also on life support.

The regime may be able to defuse the current protests by letting go of Mr Bouteflika, if they can agree on an alternative candidate. Under its current model, though, Algeria’s problems will remain. The failings are twofold: a petroleum sector in gradual decline; and a failure to turn its earnings into a diversified economy and new export industries.

The country, an Opec member, reached almost 2 million barrels per day of oil output in 2005, but this has since drifted down to about 1.5 million bpd. Some smaller new fields will give a brief bounce in the early 2020s, but then decline will resume without significant new finds. And, of course, the fall in oil prices since 2014, even with some recovery subsequently, has slashed revenues.

Algeria remains the largest gas producer in Africa, and a key supplier to Europe via pipelines to Italy and Spain, as well as liquefied natural gas (LNG). It is important for replacing declining indigenous European gas output and preventing over-dependence on Russia.

But although output of marketed gas surged in 2016, overall it has been on an undulating plateau since 1999. A large part of the gain was achieved by reducing injection of gas into the ageing Hassi Messoud oilfield, in line with Opec cutbacks but compromising future output. The giant Hassi R’mel gasfield is dwindling, the cupboard of new developments is mostly bare, while exploitation of the country’s enormous shale gas resources has been held up by local protests and unattractive investment conditions.

Meanwhile, domestic demand is steadily rising. In a pattern common throughout the Mena region, subsidised pricing and a policy of energy-intensive industrialisation has led to consumption outpacing new supply. Consequently, even though 2017’s exports were up sharply on 2015, they have fallen 30 per cent since 2003.

Abdelmoumen Ould Kaddour, chief executive of state oil firm Sonatrach, has done his best to turn things around, including trying to provide a more attractive hydrocarbons law, and luring in ExxonMobil to explore the virtually untouched offshore. But he has been held back by his company’s bureaucracy and a lack of urgency in the rest of the government. Geoff Porter, a consultant on the country, notes rumours that Mr Ould Kaddour may be replaced.

Under the right leadership, the energy sector could be fixed, although it would be a long task. A previous reform effort, under Chekib Khelil, Oil Minister from 1999 to 2010, was undermined by vested interests and corruption allegations. With oil prices rising in his term, a liberal hydrocarbon law was replaced with windfall taxes and mandatory requirements for Sonatrach participation.

Transforming Sonatrach’s role and culture, speeding up the interminable approval of new fields, opening up more to international and private investment, attracting oil explorers into untouched parts of the vast Algerian territory, and reducing and targeting subsidies better, are all required. With among the best sunshine in the world, but little renewable energy deployment to date, solar power offers gas savings, job creation and possible electricity exports.

The country, though, has a long history of resource nationalism, dating back to its war for independence from France. Policies of privatisation are unlikely to be popular, whether under this government or a possible successor.

An even more intractable problem is the system’s reliance on petroleum revenues, and its inability to turn these into broad-based growth and jobs.

The Algerian economy features a heavy state hand, a lack of openness to international investment, and a reliance on creating employment through state jobs. Oil makes up 95 per cent of exports, in contrast to neighbouring Morocco, which has developed a promising manufacturing sector. Non-oil growth is only modest, and lower oil prices have led to wide budget and current account deficits in Ageria. Foreign current reserves, though still high, have halved since the oil price drop, and inflation has risen to 5 to 6 per cent as the government has printed money to cover deficits.

The state of petroleum markets has shaped Algerian politics before. In 1988, when the oil price collapse had undermined the economy, protests turned into lethal riots, and eventually into an opening up to democratic elections. With an Islamist party poised to win, the military’s cancellation of those elections triggered the brutal 1990s civil war.

In 2011, Algeria suffered some protests against poor living conditions and political stagnation, if not on the scale of neighbouring Tunisia, Libya or Egypt, but these were repressed. With oil prices rising then above $100 per barrel in response to the Libyan revolution, Algiers was able to offer subsidies and higher wages to buy acceptance.

The economic position today is somewhere between those two situations. Foreign debt is almost zero, and growth is low but positive, so there is still room for some handouts and relaxation of austerity measures. However, this would only buy a little time for vital reforms, while risking squandering what breathing space remains.

Algeria’s economy exemplifies many of the failings of its peers. But a large population and territory, an enviable geographic location, and other natural resources, give it opportunities. To respond to the protesters, this government or another needs to resuscitate the energy sector and resurrect its economy.

Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis