Hoping to reverse a steady decline in hydrocarbon production over the last decade, Algeria has finally offered official approval for a shale exploration effort, including regulatory restructuring to entice foreign investment interest and nearly a dozen test wells to be drilled over the next 7 to 13 years.
The announcement, which followed nearly five years of research and political promises, came with public approval of President Abdelaziz Bouteflika and a rollout of new regulations concerning taxes on profits and joint ventures.
Algeria has faced calls for a new approach to production agreements over the last several years, with an increasing number of foreign firms expressing frustration with the local business environment, resulting in lower overall output.
According to a Platts report, Algeria’s oil production stood at 1.14 million barrels per day in November of last year, down 15% from 2005-2010 averages.
Meanwhile, the country’s gas production has declined steadily since 2005 to 2.9 trillion cubic feet in 2011. According to Abdelhamid Zerguine, head of Algeria state-backed energy firm Sonatrach, the industry decline,, was due to the country’s awarding of some permits to small operators that did not have the “financial capacity” to meet the requirements of local projects, leaving them “overstretched”.
With some firms headed for an early exit, Algeria’s political leadership responded with promises for a legislative solution, but results have only included new regulations related to shale gas, leaving the country’s traditional production efforts largely unchanged. Algeria faced further scrutiny from foreign firms operating in-country after regional violence spilled over its borders with a January 2013 attack on a Statoil-BP held gas facility along its eastern border. Leaving scores dead, the attack forced staff evacuations and a reassessment of company activities in the country.
While not likely to take shape for several years, Algeria’s shale industry is viewed as a new lifeline by the country’s energy sector, as well as some foreign firms. According to the U.S. Energy Information Administration, Algeria is home to the world’s third largest shale deposits behind China and Argentina with 707 trillion cubic feet, though this remains unproven. The country’s potential has attracted interest from a number of foreign firms who have been conducting studies on the country’s potential. With Europe seeking new ways to ease dependence on Russian gas through diversification, this trend could continue with companies from import-heavy countries like Italy and Greece seeking to expand their access to North African reserves.
However, challenges remain for both Algeria and potential foreign partners. Locally, Algeria faces a significant obstacles when it comes to supplying the necessary infrastructure needed for shale extraction, known as hydraulic fracturing, or fracking. While international firms will be able to provide the expertise and experience needed for the costly extraction process, Algeria will still need to find a way to provide the millions of gallons of water needed for each active site.
For interested energy firms, Algeria hardly offers a secure investment environment overall (the World Bank ranked them 148th out of 183 in terms of the ease of doing business). The energy sector has been shown to be just as much of a concern. In 2010 the country’s energy faced a series of management shake-ups at Sonatrach, including one related to a corruption investigation in 2010, followed by a CEO replacement 18 months later. More recently, Sonatrach were included in an investigation into alleged bribes paid to local officials by Italy’s Eni through its local subsidiary Saipem.
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