Introduction
There has been a lot of ink spilled on the energy relationship between Russia and Europe. Russia is, after all, Europe's top supplier of natural gas.
But it is not the only source of natural gas. Just across the Mediterranean is a country that often doesn't make it into the headlines, but one that the European Union could not do without. That country is Algeria. Algeria is Europe's third largest supplier of natural gas, and those flows could continue to rise into the future.
Consider this: Algeria has the third largest estimated reserves of shale gas in the world (after China and Argentina) with 707 trillion cubic feet. It is Africa's largest natural gas producer, and one of the continent's top three oil producers. There is a lot of promise for Algeria. But to become one of the world's great shale producers, there is a lot to overcome.
Lots of Potential But Big Hurdles
The North African OPEC member depends on oil and gas for 95% of its export revenues. But production levels have declined. There are several reasons for this including bureaucratic red tape, a dearth of infrastructure, and a shortage of investment.
Its eastern neighbor Libya has been struck by a massive bout of violence, which has tossed its oil and gas sector into disarray. Although Algeria avoided much of the instability during the Arab Spring, it is not immune to security threats. In 2013 there was an attack on the In Amenas gas facility,…
Introduction
There has been a lot of ink spilled on the energy relationship between Russia and Europe. Russia is, after all, Europe's top supplier of natural gas.
But it is not the only source of natural gas. Just across the Mediterranean is a country that often doesn't make it into the headlines, but one that the European Union could not do without. That country is Algeria. Algeria is Europe's third largest supplier of natural gas, and those flows could continue to rise into the future.
Consider this: Algeria has the third largest estimated reserves of shale gas in the world (after China and Argentina) with 707 trillion cubic feet. It is Africa's largest natural gas producer, and one of the continent's top three oil producers. There is a lot of promise for Algeria. But to become one of the world's great shale producers, there is a lot to overcome.
Lots of Potential But Big Hurdles
The North African OPEC member depends on oil and gas for 95% of its export revenues. But production levels have declined. There are several reasons for this including bureaucratic red tape, a dearth of infrastructure, and a shortage of investment.
Its eastern neighbor Libya has been struck by a massive bout of violence, which has tossed its oil and gas sector into disarray. Although Algeria avoided much of the instability during the Arab Spring, it is not immune to security threats. In 2013 there was an attack on the In Amenas gas facility, stoking fears over the security of workers. Jointly operated by Algeria's state-owned company Sonatrach, with the help of BP (NYSE: BP) and Statoil (NYSE: STO), the In Amenas facility is located on the Libyan border. BP and Statoil withdrew their staff after the attack. They have since returned but instability is a constant threat.
And the southern desert is where a lot of Algeria's shale gas resources are located. Sonatrach has plans to invest $70 billion over the next 20 years in order to develop these reserves, but it has also faced local opposition due to concerns over water. Sonatrach is planning on drilling over 200 wells and eventually produce 700 billion cubic feet of gas per year. That gas would be perfectly positioned to sell to the European Union, which has been searching for ways to break its dependence on Russian gas.
Algeria will need a lot of help from the private sector to help make this happen, but it has struggled to woo enough investment. As a result of tepid interest from international oil and gas companies, in 2013 the Algerian government tried to offer more attractive terms, particularly for its shale resources. Thus far there hasn't been a significant change. In its fourth round of bidding in 2014, only four blocks out of a total of 31 offered were actually awarded. That result shows that Algeria is continuing to struggle to convince international companies that it is a worthwhile place to invest.
Nevertheless, there is a lot of potential in this North African country and 2015 has seen some progress. Oil and gas production from Algeria jumped 4.4% in 2014 from a year earlier. Gas flows to Europe have increased in recent weeks. Gas contracts are often linked to the price of oil, but there is a lag effect. Low oil prices are finally making their way through the system, and countries like Italy and Spain have recently increased imports of Algerian gas as prices have become more attractive.
Investment is not where Algeria would like it to be, but there are some major companies operating there. Spanish oil firm Repsol (BME: REP) has had some luck in Algeria. Repsol has the rights to three blocks under development. It is jointly developing the North Reggane natural gas field with its partners. Repsol controls a 29.95% stake in the North Reggane, Sonatrach has 40%, RWE Dea has 19.5%, and Italy's Edison SpA (BIT: EDN) controls the remaining 11.25%. The $3 billion project will involve drilling 104 wells across a six areas. The consortium expects production to start in 2016 and last for 25 years, with flows of about 8 million cubic feet per day of natural gas for the first 12 years.
Repsol has also had some success on its other main block in the Illizi basin, where it just announced a discovery at its Tan Emellel Sud-Ouest-2 (TESO-2) well. Located on the border with Libya, Resposl said the TESO-2 well had initial flow rates of over 6 million cubic feet per day of natural gas, plus 90 barrels of oil per day. That discovery came on the heels of several previous discoveries. Repsol still needs to drill more appraisal wells to assess the full extent of the bounty on hand, but given the results thus far, the Spanish company is feeling pretty good about what it is sitting on. The TESO-2 is owned by Sonatrach with a 51% stake, and the other 49% divided up amongst several companies - Repsol (52.5%), Enel (BIT: ENEL, 27.5%), and GDF Suez (now known as Engie, EPA: GSZ, 20%).
Still, the bulk of new discoveries have been achieved by Algeria's state-owned company Sonatrach. In 2014, Sonatrach made 29 oil discoveries while all other companies operating in country only made one. Just this year Sonatrach made two "extremely high-quality" oil discoveries and one gas discovery. While exact details were not disclosed, a company spokesperson said that wells had flow rates of about 3,000 to 4,000 barrels per day, or "flows that we haven't seen for some time." The success of the state-owned firm has more to do with Sonatrach controlling the rights to the best pieces of acreage rather than having a technical advantage over its international peers. No doubt Algeria hopes its private sector partners have more success in the future.
Political Instability
Despite the government's desire to find more international investment and ramp up its oil and gas production, there is a power vacuum at the top that threatens to undermine stability. Algeria's 78 year old President Abdelaziz Bouteflika suffered a stroke 2 years ago and has been largely unable to rule. Without any direction, Algeria has drifted and appears to be vulnerable to unrest.
To make matters worse, the collapse in oil prices has sapped the country of much needed revenue. U.S. intelligence concludes that Algeria is vulnerable to a political uprising not so dissimilar from that of its neighbors. While the government appears to be in control, uprisings tend to come unexpectedly and spread with speed and force. The Achilles heel for Algeria in realizing its shale dreams is the seemingly delicate political pact that the government has with its people.
Conclusion
Algeria has a lot of the most important factors in place to be a successful oil and gas exporter. It has the reserves, it is located close to a large market, it has the technical expertise and it also has a history of hydrocarbon production.
The missing ingredients are political stability and investment. While the latter can always be enticed, it is often the former that is the most difficult to solve. Still, if and when oil prices rebound, Algeria could be in a strong position to seize the opportunity.