The oil patch is reeling from a political crisis in Algeria that first saw Exxon halt its prospective shale ambitions in the country, and has now spread to major trading houses and far beyond borders.
Earlier this week, Algeria’s state-run oil company Sonatrach shuttered plans for a trading joint venture just as it was about to choose a partner from among trading giants Vitol, Gunvor, French Total SA and Italian Eni.
And as far away as Greece, another deal for the sale of a 50.1-percent stake in Greece’s largest refiner, Hellenic Petroleum, is also falling apart because a consortium of Algeria’s Sonatrach and trader Vitol were among those short-listed for bidding (though there were other Greek-style complications with this deal, too).
In an official statement, the Greek government attributed the lack of offers to “reasons related to the short-listed parties and recent developments in the international environment.” In other words—political crisis in Algeria.
Exxon’s withdrawal from the Algerian shale patch should have been the first big sign to investors that the uncertainty is far too high.
Last month, The Wall Street Journal reported that Exxon, BP, and Norway’s Equinor had all put the brakes on investment plans for the North African country amid escalating protests. Exxon was about to sign a preliminary deal for a trading joint venture with Algeria’s Sonatrach, and BP and Equinor both have a long-standing presence in the country—both with new investment intentions that were put on hold.
The markets are now responding to the heightened Algerian crisis because Algeria’s production of around 1.1 million bpd of crude oil puts it on par with today’s Libya—another venue of crisis that is reaching a violent tipping point.
Not only are Algeria’s oil reserves estimated at 12 billion barrels, but it is also a major natural gas producer and home to the third-largest shale gas reserves in the world, at 20 trillion cu ft, according to U.S. government data. Production was around 94.78 billion cubic meters for 2017, of which 53.89 billion cubic meters was exported. Oil exports account for roughly half of Algeria’s output. Related: Goldman: The Renewables Revolution Is Good For Big Oil
That production isn’t being affected by the crisis for now; but that’s largely because the country’s oil and gas fields are in remote areas; however, oil giants, oil traders and even Sonatrach itself have spoken out loudly about the state of affairs: Uncertainty rules the day.
For Sonatrach, the situation is extremely volatile. When mass protests forced long-time President Abdelaziz Bouteflika first to give up on designs to run for a fifth term and then to step down entirely, they set in motion a tricky transition period that could get messy for a state-run company dogged by high-profile corruption scandals.
Anyone entertaining deals with Sonatrach will want to keep a healthy distance right now because as the ruling elite of Algeria changes, so too will heads roll at Sonatrach—the company that is at the heart of Algeria’s revenues.
The protest movement that managed to get the military on its side hasn’t been appeased simply by the resignation of Bouteflika: They want much deeper change, and protests continue to ensure that happens.
Sonatrach has had numerous changes in leadership recently and earning credibility and legitimacy in the eyes of the protesters won’t be easy. The Algerian protests are protests against the regime, not just Bouteflika—and the regime in many ways encompasses Sonatrach. Exxon knows this, now everyone else does, too.
The political crisis also halts the introduction of a new hydrocarbons law that aimed to enhance productivity and investment.
Investors should also be watching what happens on a geopolitical level, paying close attention to Sonatrach’s earlier agreement with Russian Lukoil that resulted in a gloomy dose of reality for Europe. To wit: That agreement suggested that Russia and Algeria could join forces to further squeeze European energy supplies because Europe has in part been banking on Algerian gas for independence from Russia.
Sonatrach also has its footprint in Yemen, Libya and Venezuela—and with respect to the first two, this means that powerful Arab nations also have a great interest in who comes to power next in Algeria.
While the world watches what unfolds next in Algeria as external actors start their meddling, billions of dollars in oil deals will be relegated to the sidelines.
By Irina Slav for Oilprice.com
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