Luring global oil firms an uphill task for Algeria

As Algeria embarks on plans to double its gas output in the next seven to 10 years, it will struggle to draw global oil firms because of its tough demands, security concerns and slow bureaucracy.

The Algerian energy minister Youcef Yousfi said last month the discovery of major reservoirs in maturing and new gasfields would help the country to boost its current gas output of 3 trillion cubic feet a year. Mr Yousfi said a new auction of exploration blocks would be held in the next couple of months, but did not set a firm date for the licensing tender, which was initially planned for February.

The ministry is also looking at regions in Algeria’s south-west, which are little explored and where some oil and gas discoveries were made recently.

The country also expects to drill its first offshore well next year.

But discoveries have to keep pace with rising domestic demand that is eating into exports.

Robin Mills, the head of consulting at Manaar Energy Consulting, said Algerian gas output had been flat and exports were declining because of fast-rising domestic demand and the lack of major new developments.

Mr Mills said gas volumes in the European market were contracting instead of growing, and that posed a problem to Algeria because of its reliance on Europe's gas market.

According to Mr Yousfi, Algeria, a member of the Organization of Petroleum Exporting Countries, is also producing 1.2 million barrels of oil a day.

New discoveries included about 1 billion barrels of additional reserves to Hassi Messaoud, Algeria’s biggest field that contributes a third of its output.

Rob Smith, a consultant at Facts Global Energy, said Algeria was trying to improve its image, but the licensing round and security concerns were key concerns.

Foreign investors have been showing little appetite for taking part in licensing rounds for the oil and gas rights, because of the tough terms in production-sharing agreements.

In the last three licensing rounds, global oil firms also displayed little interest. In a licensing round in 2011, the state-run energy firm Sonatrach won a permit, while the other went to Spain’s Compañía Española de Petróleos (Cepsa).

“The wait-and-see attitude [of foreign investors] revolves around improving the fiscal terms and making security a bit more comfortable for the foreign investors,” said Mr Smith. “That would likely mean letting them have private security as well as the Algerian military.”

Algeria is also counting on drawing global oil firms and foreign investors to its tight gas and shale gas resources. The Algerian energy minister estimates that the country has 300 to 500 trillion cubic feet (tcf) of tight gas and 700 tcf of shale gas.

“It will be very difficult to do much with that unless they can really speed things up,” said Mr Mills, “because these unconventional resources need cost control, they need rapid pace of activity, they need a lot of service company support, and that is going to be very difficult.

“When a discovery is done, there are very rigid procedures for delineating it and preparing development plans … that does not allow the companies to be very flexible and particularly for unconventional resources that is not going to be suitable.”

Algeria ranked fourth globally in terms of natural shale gas reserves, behind the United States, China and Argentina, according to a study, published in June, by the US Energy Information Administration and consultancy Advanced Resources International. Algeria’s estimate of 707 tcf was triple the 230 tcf forecast in a 2011 report.

Mr Smith said there was a lot of shale potential in Algeria. “But with the current sort of technology, shale requires a lot of water to make it work. You need a place for it to be exported or go into the domestic system to be used,” he said.

To encourage more foreign investments, Algeria amended in January its hydrocarbons law, but investors are not likely to rush in because the changes are not major.

Mr Mills said the legal amendments were “cosmetic” and he thought it would be hard for Algeria to boost output significantly until it offers major changes and more incentives.

The legal amendments came after the deadly January attack on the In Amenas gas complex, operated by Norway’s Statoil and Britain’s BP.