Algeria can achieve energy security and growth, but Sonatrach must change

Competitive landscape

• Algeria's upstream competitive landscape is built on Sonatrach together with a limited set of joint ventures, with the NOC holding a majority interest in most. Sonatrach’s capacity to discover and develop new fields, develop existing discoveries or maintain existing production is the critical determinant in the commercial value of every asset it touches. This competitive landscape has presided over stagnant natural gas production and exports, and a declining crude oil output profile since 2008.
• Algerian crude oil output was about 1.017 million barrels per day (b/d) in 2022; peak output was 1.381 million b/d in 2008. Note that Algeria produces natural gas liquids (NGLs) and condensates, which are not included within OPEC agreements. NGLs and condensates were roughly 440,000 b/d in 2021 but were as high as 789,000 b/d in 2002. The crude oil sector is mature, and unconventional oil is commercially challenged.
• Gross natural gas production was 179 billion cubic meters per year (bcm/y) in 2021. A recent peak was 189.1 bcm/y in 2016. Of gross volumes produced, roughly 37% has been reinjected to maintain reservoir pressure for crude oil output over the last 10 years. Another 13% of gross natural gas output is flared or lost due to shrinkage (which does show up as gas liquids). Over the last 10 years, only 50% of Algerian gross natural gas production has been marketed for either domestic consumption or exports. As is the case with crude oil output, Algeria’s gas fields face inevitable declines in base production, year in year out.
• Additional identified natural gas projects coming on stream now, in the near term or in appraisal phase represent an aggregate of roughly 27 bcm/y. This represents roughly 15% of gross natural gas output. Of course, the streaming of these new volumes will be staggered over five years plus, and some of the new output will go to replace ongoing decline.
• Algeria exports natural gas via pipeline (now two routes to Spain and Italy) and liquified natural gas (LNG). Total natural gas exports have been stagnant over the past 10 years. Volumes reached 55 bcm/y in 2021 (see linkage to crude output) but fell again to an estimated 50 bcm/y in 2022. LNG volumes have averaged about 16 bcm/y over the same time frame — only 45% of nameplate capacity of 35 bcm/y. Pipeline exports have averaged about 33 bcm/y — only 61% of the nameplate export pipeline capacity of 54 bcm/y. Note that Algeria’s 11.5 bcm/y Gaz Maghreb Europe pipeline was shut-in in 2021 due to a breakdown of diplomatic relations between Algeria and Morocco. This reduced Algeria’s export pipeline capacity to 43.5 bcm/y.
• Natural gas consumption has doubled over the last 15 years with increases in multiple sectors. Declining oil output with increasing demands for re-injected natural gas, stagnant natural gas production overall, minimal renewables capacity and rising domestic gas consumption have trapped Algeria’s energy sector in a zero-sum game. 

NOC institutional capacity, operational autonomy and global business environment

• In contrast to business development companies, which tend to be outward-looking, risk-taking, and focused on asset growth, partnering and transactional skills, Sonatrach is an asset management company (Amco), inward-looking and focused on technical excellence and minimizing risks, but with a twist. The NOC is fixated on operational control but lacks the focus on financial efficiencies, which is the hallmark of classic Amcos. One of its challenges is operational autonomy, which determines the ability to independently choose which projects to invest in and appropriate service sector partners. Greater operational autonomy goes hand-in-hand with increased capabilities. Sonatrach is a good production company. But Algeria’s upstream is large and increasingly mature; current challenges require much more. The lack of autonomy from local economic and political power groups has rendered Sonatrach less able to grow institutional capacity. In the face of such challenges, this is crippling given that Sonatrach has a controlling interest in almost every upstream asset in the country.
• The bulk of the changes in laws and policies since the 1980s regarding foreign investment, reform of Sonatrach and respective roles of the NOC and foreign companies, have all been incremental and/or reversed. The 2005 hydrocarbon reform law represented significant change but was repealed one year later in 2006, with the stipulation that Sonatrach had to have a minimum of 51% of any joint venture with foreign equity. More recently, the December 2019 law modifying the legal/fiscal framework for hydrocarbons purports to improve terms for foreign investment but appears incremental and does not fully address Sonatrach’s controlling footprint. 
• Algeria has held four exploration rounds since 2006. Out of 96 blocks offered, only 13 were awarded. More significantly, the global business environment has changed substantially. The impact of the energy transition on the larger energy companies means that fewer basins qualify for new investments. Global energy companies seek to build large asset positions and critical infrastructure to drive scale efficiencies over time. Anything less than this makes no strategic sense for these companies. Next door in Libya, Eni and TotalEnergies have clearly targeted these sorts of objectives and intend to do the same in Algeria if possible. And talks have been held with Chevron over the last several years but have not yet been finalized. Algeria plans a new round of foreign investment in 2023. But foreign investment will be insufficient unless Sonatrach reforms or a readjustment of the roles for the NOC vs. foreign investment is made. These changes now need to be more radical because of the changing global business environment.