Few bidders for Algeria's gas

With oil prices more than 70 per cent off their July peaks, investors are becoming more risk averse.

Algeria's plan to boost gas reserves and production by nearly one third could face major delays following a disappointing response to the country's latest oil and gas licensing round. The long-awaited bidding round was the first administered by the new Algerian regulatory agency, Alnaft, and the first to test the country's resource-nationalist energy policy in an environment of falling energy prices. It resulted in only four oil and gas exploration permits being awarded to international oil companies last week, after 11 areas failed to attract any bids. "The highly disappointing seventh licensing round, in which most of the blocks remained unbid, is likely to result in a shortage of oil and gas development," said Samuel Ciszuk, the Middle East energy analyst with the consulting firm IHS Global Insight. Alnaft offered 16 exploration tracts for bidding in July, drawing strong initial interest from 74 companies it had pre-qualified to participate in the licensing round. But out of 52 firms that attended data-room sessions allowing them to access detailed geological information, only nine submitted bids. Earlier this month, Alnaft withdrew the most coveted area on offer, the Ahnet prospect, prompting speculation that bids had come in too low. In the end, only the Italian company Eni, Britain's BG Group, Russia's Gazprom and Germany's E.ON Ruhrgas signed up for new exploration concessions. The bidding round's results dealt a hefty blow to Algeria's hopes of expanding its gas exports to Europe in the next few years, and to European hopes of reducing dependence on Russian gas. Also at stake are the futures of several Algerian pipeline and liquefied natural gas (LNG) projects, and the country's reputation as a source of new energy supplies as it competes for a share of western gas markets with North African neighbours such as Libya and Egypt. Just last month, Belkacem Boumediene, the vice president of upstream operations at the Algerian state oil and gas company Sonatrach, told a conference that the government was aiming to increase the country's gas reserves to 210 trillion cubic feet (cf) from 160 trillion cf by 2015. "Algeria is wary of being seen as a stagnant play in Europe," Mr Ciszuk said. "It is positioning itself as a growth prospect and fears losing some of its strategic leverage should it increasingly be seen as having reached a plateau in its gas development." But the North African Opec member has also been at the forefront of a regional movement to squeeze better returns for state participants in domestic oil and gas developments by offering tougher contract terms to foreign partners. Until recently, with oil prices marching steadily upwards, the international oil companies grumbled but continued to bid for exploration rights. But now, with oil prices more than 70 per cent off their July peaks, they are becoming more risk averse. "The international oil companies will require better terms to induce them to invest, and it is likely that some companies which were considering submitting bids have concluded that the Algerian authorities might now be persuaded to improve those terms," the Economist Intelligence Unit wrote this month. The Ahnet acreage in Algeria's south-western desert, near the country's prolific In Salah gas project, was considered to hold such rich exploration prospects that the Algerian government took the unusual step of requiring foreign bidders to offer asset swaps to Sonatrach. The failed tactic was aimed at broadening the Algerian state company's international reach, especially in other countries exporting LNG to Europe. Bidders with oil and gas production projects in Egypt, Libya, Nigeria, Venezuela and Trinidad and Tobago were preferred. But now, the Ahnet basin's development "looks likely to be held back for several years, calling the chances of any rapid progress on a gas pipeline serving the whole south-western gas-producing area into question", Mr Ciszuk said. "Any delay in work on that pipeline risks spilling over into delays at all the other projects to the south and west of In Salah." While more liberal contract terms may be needed to attract investment, they will probably not be offered in coming months. Algeria is preparing for a presidential election in April, which makes unlikely any toning down of populist resource-nationalist rhetoric. "The chances that new terms could be finalised and offered before 2010 are small," Mr Ciszuk said. "Indeed, the chances are much higher that delays and a lack of investment result instead in lowering Sonatrach's investment ability, leading to project cutbacks during the coming year and less gas-production capacity development." In the hope of deflecting such an outcome, Sonatrach has announced aggressive plans to push ahead with three large gas production projects with international partners, expected in total to add about 1 billion cf per day of new gas production by 2013. Officials predicted Total's US$1bn (Dh3.67bn) Timimoun project, Repsol's $1.5bn Reggane Nord ­development and GDF Suez's $1.5bn Touat project would receive development approval within three to four months. Analysts said those projects were already long overdue and further delays could not be ruled out. [e-mail]