The importance of security in Algeria should not be underestimated. This is a country that plays an extremely crucial role in the global oil and gas market, with some 160 trillion cubic feet of natural gas reserves. In the Arab world, Algeria is the third largest producer of natural gas after Qatar and Saudi Arabia, and its state-owned Sonatrach is the largest gas producer in Europe. To Europe, Algerian gas supplies are critical and the development of shale and tight gas reserves are also being eyed hungrily. Algerian officials recently said the country had between 300 and 500 trillion cubic feet of technically recoverable tight gas and 700 trillion cubic feet of shale gas untapped.
We don’t usually think of Algeria as a major oil play, though, but this should change your perspective. The EIA estimates that Algeria has crude oil reserves of about 12.2 billion barrel, and plenty of analysts out there think that we could see a doubling of Algeria’s oil production in the next decade because the Sahara is relatively unexplored and untapped.
Most of Algeria’s oil reserves have been discovered in the eastern region, and this is where all the production is. But exploration is now taking place in the south-western region, and we’re also looking at the onset of offshore drilling and the development of shale plays. Other, mature basins are also seeing new discovery, deeper down, adding to reserves quickly.
Algeria’s Hassi Massoud oilfield (near the border with Libya) has proven reserves of about 6.4 billion barrels of oil and currently produces about 600,000 barrels per day. As recently as last week, we’ve seen an estimated 1.3 billion barrels added to this plays resource base with new discoveries. The field was discovered by Sonatrach and is being described by officials as one of the most important discoveries the company has made in two decades. It will take around four years to explore and develop—and a great deal of hydraulic fracturing.
Another major oil victory came last week when Sonatrach, in partnership with US-based Anadarko Petroleum Corp., officially began production at the El-Merk oilfield in the Berkine Basin, Illizi Province. The field has an estimated 1.2 billion barrels of oil, 647 million barrels of which are technically recoverable. This area is the heart of Algeria’s oil development plans, and we expect to see a lot more unveiled as exploration gets further underway.
For El-Merk, we’re looking at production of about 12,000 barrels per day by May 2014, ramping up to over 140,000 barrels per day by the end of 2014. An estimated 80 wells will be drilled and around $4 billion spent on exploration. (Sonatrach has a 51% stake in the project, while Anadarko holds 49%).
We can also expect another auction of onshore exploration rights sometime near the end of this year or the beginning of next. And offshore, next year should see the first-ever well drilled.
The Security Question
New production and exploration efforts though are picking up pace at a time when security in Algeria is increasingly threatened by the chaos in neighboring Libya and other weak points along the border.
On the security front, Algeria recognizes the increasing threat of militant infiltration to its borders and is acting quickly. As of 21 October, the Algerian army is on full alert and an additional 12,000 troops have been mobilized and deployed on the country’s eastern border with Tunisia.
While Algerian forces are capable of controlling the situation on the Tunisian border for now, our greater concern is the spillover from Libya, which we believe is reaching a dangerous turning point. The impotent transitional government in Libya cannot contain the myriad militias and the past 3-4 weeks have indicated increasing militia movement and regrouping for control of Libya’s key resources.
Among other recent incidents, of major concern is the discovery of a large weapons cache on Algeria’s southern border with Libya. The cache was no less than a “war kit” containing hundreds of anti-aircraft missiles, landmines and rocket-propelled grenades. Also of significance was the location of the cache, in the area of Illizi, the up-and-coming oil venue for Algeria and another prime attack target for militants. This is about 200 kilometers from the BP-Statoil Amenas gas facility that was attacked in January.
Illizi province is at the heart of Algeria’s oil development strategy, and production at El-Merk began only last week, on 27 October. The indication is that another attack is being planned—but on a much larger scale than the hostage scenario we saw in Amenas. It also indicates that militant groups have been highly successful in weapons trafficking and fundraising based on the size and scale of the cache. This is even more the case if the French have indeed paid a 25 million euro ransom for the release of four hostages as alleged by French intelligence leaks and leaks from officials in Niger, which helped negotiate the release of the hostages.
The Political Stability Question
Algeria is entirely dependent on oil and gas which accounts for 95% of export earnings and one-third of the national GDP. So any major fall in oil prices could be catastrophic for Algeria’s economic, social and political stability. And then we have elections scheduled for next year.
What is promising in terms of stability is that Algeria has some $200 billion in oil and gas sales in reserve—and more new oil and gas projects coming online—all of which will go a long way to ensuring a non-restive socio-economic foundation for elections.
But the presidential battle will be anything but a gracious one. Algerian President Abdelaziz Bouteflika was endorsed on 26 October by his National Liberation Front (NLF/FLN) party to run for a fourth term, despite his poor health and his public suggestion in April 2012 that he would not seek another term. The endorsement is being interpreted as an attempt to determine what Bouteflika’s chances would be were he to run in the next election, as there has not yet been an official announcement from Bouteflika himself. The backup plan would be to install a loyalist from within the Department of Intelligence and Security (DRS), which is the main power broker behind the scenes. The DRS shake-up earlier this year was intended to both ensure a loyalist if Bouteflika does not run or is challenged, or alternatively, to set the stage for his fourth term.
In the event that the president does not, or cannot, run for re-election, the stage has been set for a loyalist to take his place. The lynchpin of his strategy has been to reduce the power of the highly influential director of the intelligence service (DRS), Mohamed Mediene, by transferring some of the DRS’ mandates to the army. Two other key intelligence figures have been removed, somewhat lessening the DRS’ ability to maneuver politically. Within the ruling FLN political party, there have also been some important changes. Bouteflika’s choice for party leader, Amar Saadani, has been installed over the DRS rival for this spot.
While these moves do not secure the presidency for Bouteflika or one of his loyalists, they do better position him and his camp ahead of the elections.
So there is a lot a stake now for investors in Algeria, where from a legislative perspective things have been improving, but on the security front, it’s extremely challenging to contain the chaos of the Sahel and the quick disintegration of Libya. The mounting political battle for the presidency will also reverberate.