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Algeria: Leveling the Playing Field for Shale Gas Exploration

Algeria: Leveling the Playing Field for Shale Gas Exploration

(This report is part of Oilprice.com’s premium publication Oil & Energy Insider. Oil & Energy Insider gives subscribers an information advantage when investing, trading or doing business in the energy sectors. Successful investors, hedge funds and senior executives, have access to high level intelligence and power in ways that you, as an individual investor, are locked out of (the game is and never has been fair.) Let us help you level the playing field by using our network of traders, intelligence assets and high level partnerships to ensure you are making the right investment decisions.)

It may be cynical, but this is how it is: A major attack on a foreign-operated energy installation can set things in motion for more investment. Algeria, concerned about the implications of the attack on the BP-operated In Amenas gas facilities earlier this year, is making swift moves to ensure that investors do not grow wary of working in Algeria.

Last month, Algeria passed new laws governing foreign investment in the country’s shale gas, easing the tax regime. It’s hoping to court more investors to some other gas fields by offering more favorable conditions in order to maintain its gas exporter prowess. Investors are already lining up, and so are end clients. 

Algeria Shale Gas Potential

Russia’s Gazprom is the first on the new gas scene—it held talks with Algeria’s state-owned Sonatrach in early February. Next week, high-level talks with Algiers will take place in London as the UK eyes more gas exports from Algeria as a way to lessen its dependence on Qatari imports.

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There are great new opportunities here, but with the understanding that Algeria’s unconventional reserves—which are largely in the country’s south--are still far from developed. So far, bidding for unconventional acreage hasn’t attracted nearly the attention that Algeria had hoped.

Algeria is willing to raise the bar for investor incentives because its share of the global LNG market has slumped a bit and Algiers is worried that the attack on Amenas will contribute further to this slump by scaring away potential investors from new shale gas exploration projects.

The fact is that while Algeria has built up its status as an oil and gas exporter based on its conventional reserves, these reserves have already reached peak output. The real opportunity here is in shale gas, which Algeria is only just now thinking about tapping into, and it has more untapped shale gas than it has conventional oil and gas resources.
Exploration could also turn up some unconventional oil plays.

Algeria’s main gas field, Hassi R’mel has already reached peak output, and so has production at its main oilfield, Hassi Mesaoud. New exploration projects have not been started.

So what are the new incentives, exactly? One of the biggest things keeping investors away from Algeria’s unconventional exploration opportunities has been the tax regime—specifically the windfall tax on hydrocarbons. In February, Algiers removed this tax with a new hydrocarbons law. Royalty fees will now be adjusted based on production levels, and taxes on revenues will take into consideration exploration difficulty and risk.

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This is a major move by Algiers to render the investment atmosphere more attractive, but there is still some way to go. For instance, state-owned Sonatrach still maintains a majority stake in all JVs under the new law. But we expect more reforms in the works because Algeria is desperate to stake out its unconventional plays as its conventional oil and gas industry slumps.

So far, since Algeria began talking about easing its tax regime for unconventional investors late last year, Exxon Mobil Corp. (XOM) has been in talks with Algiers, while Eni SPA (ENI), Royal Dutch Shell Plc (RDSA) and Talisman Energy Inc. (TLM) have all signed shale exploration agreements.

Eni has begun exploratory fracking, while both Shell and Talisman are planning to drill their first wells.

Competing with Algeria in Africa are Libya, whose reserves are larger, but where the security situation is far less favorable, and South Africa, which has only conditionally approved hydraulic fracturing.

According to geologists, there is vast unconventional potential in Algeria and it has a lot of source rock. The International Energy Agency estimates that Algeria has around 231 trillion cubic feet of recoverable shale gas. To get at it will require the drilling of some 400 test wells to determine commercial viability. 

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