INTERVIEW: Sonatrach seeks security of demand as it preps new oil and gas investments

Algeria has several projects planned under its new hydrocarbons law, but would like to see customers commit to more long-term contracts to support its oil and gas investments, the head of state-owned Sonatrach told S&P Global Commodity Insights.

The company expects to supply the gas market with more than 110 Bcm/year through 2027 to meet both domestic and export demand, while its oil refining capacity now stands at more than 30 million mt/year, Sonatrach CEO Touffik Hakkar said in an email interview.

Reaching those volumes has required billions of dollars in capex spending, with billions more intended, including through partnerships with Eni, Occidental, TotalEnergies and other western IOCs, along with China's Sinopec.

"We are still convinced that only visibility on market behaviors and future demand for natural gas could support investment policies in capital intensive gas projects," Hakkar said. "Long-term contracts have the advantage of maintaining the level of investment necessary to supply the market and ensure price stability."

Algeria is the EU's third largest gas supplier behind Russia and Norway, with pipelines across the Mediterranean to Spain and Italy, as well as LNG terminals at Skikda and Arzew.

Algeria marketed 99.2 Bcm of gas in 2022, a drop from 102.8 Bcm in 2021, according to the Joint Organizations Data Initiative. As a member of OPEC, Algeria's crude production has been capped by a quota, which has stood at 1.01 million b/d since October, down from a peak output of 1.4 million b/d in 2008.

Western governments have sought alternatives to Russian oil and gas since imposing sanctions targeting Moscow's energy sector over the war in Ukraine.

Algerian production comes largely from its giant Hassi Messaoud oil field and the Hassi R'Mel gas field, and Sonatrach has eyed aggressive upstream expansion plans, optimistic that the country's 2019 hydrocarbons law, now fully implemented with more a favorable tax structure and contract terms, will attract foreign partners.

"Algeria is underexplored, and there exists good potential for further discoveries," S&P Global Commodity Insights analysts said in an upstream assessment of Sonatrach.

In June, Hakkar reported Sonatrach had made 35 new discoveries since 2020, adding 2.250 billion barrels of oil equivalent in reserves.

As well, a new 5 million mt/year oil refinery is scheduled to come onstream in the coming years.

While climate-conscious Europe has increasingly sought to wean itself off of fossil fuels, Hakkar said the current crisis has put energy security at the forefront, making customers more open to long-term deals.

"We clearly understand that security and diversification of supplies remain key issues for our customers," he said. "However, these concerns should take into account the requirements for fair and clear visibility on gas contracts, at medium and long term, in order to allow gas suppliers to plan and forecast their investment."

Hakkar also answered questions from S&P Global on Sonatrach's partnerships with IOCs, its downstream strategy and his view of the oil and gas markets. Below is a transcript of his comments, edited for length and clarity.

Gas customers

S&P GLOBAL: By how much and how quickly could Algeria increase its gas production and exports? What level of exports (gas and LNG pipeline) do you expect in 2023?

HAKKAR: First of all, I would like to remind that during 2022, Sonatrach made significant efforts to supply the markets with additional quantities of natural gas, in addition to fulfilling our contractual commitments towards our foreign customers. Besides, we have been able to place more than 4 Bcm on the spot market, via the GEM [Enrico Mattei or TransMed] pipeline.

Sonatrach intends to keep developing its gas potential in order to place additional volumes on the domestic and international markets, especially on the European market. Thanks to these efforts, we expect to supply the market with more than 110 Bcm/year over the next five years, in order to cover domestic market demand and meet our export commitments or any additional demand, depending on operational and commercial conditions. The gas industry is very capital intensive, and Algeria is committed to ensure its partners with a stable, sustainable and reliable supply of natural gas, as long as demand for gas remains strong.

S&P GLOBAL: Is Sonatrach encountering much resistance to long-term contracts, given the energy transition imperatives that many western companies are facing?

HAKKAR: It is true that a few years ago, the market showed signs of resistance to long-term contracts. However, recent developments on the energy scene have put back on the agenda the issues of securing energy and maintaining adequate levels of investment, and consequently, reconsidering the option of long-term or at least medium-term contracts.

Also, Sonatrach adapts to market conditions and to exceptional situations that our customers may face by introducing more contractual and operational flexibility.

Upstream cooperation

S&P GLOBAL: Can you update us on the upstream agreements signed with Eni, Sinopec and the Occidental/Eni/TotalEnergies consortium under the new hydrocarbons law? How much production potential is there from those projects?

HAKKAR: Under these three contracts, we plan to mobilize nearly $6 billion to keep developing fields, by improving recovery of crude oil, condensate, LPG and natural gas and extending the lifetime of these fields. We expect an additional production of around 1 billion barrels of oil equivalent. These contracts testify to the attractiveness of the 19-13 Hydrocarbons law, on the one hand, and the efforts made by Algeria to improve business climate and allow investors, especially foreign investors, to have a competitive advantage in the international environment, on the other hand.

In the same context, Sonatrach is discussing with partners that are operating in Algeria and who are interested in new exploration and development projects, and with other companies interested in a future partnership, and we hope to sign new contracts in 2023. The discussions we are having with our partners, in addition to the exploration and production segment, concern other equally important segments, including petrochemicals, renewable energies and the reduction of the carbon footprint generated by our activities.

S&P GLOBAL: Algeria's OPEC+ quota has limited its crude production to 1.01 million b/d. What is Algeria's actual production capacity, and are there plans to expand this? Does the quota hinder Sonatrach's ability to invest for future production capacity?

HAKKAR: Sonatrach has launched some projects aimed, in the medium term, at maintaining and increasing its crude oil output, within the limit of our OPEC quota, in high potential regions. Such investments mainly relate to extension works, recovery improvements and new developments.

In addition to this effort, we are working on the reassessment of oil classified as probable and possible, in "Near-Field" areas. We are introducing advanced technologies, particularly 3D seismic, and we hope to uncover a good portion of these volumes, which would support our crude oil production in the long-term.

Algeria has always adhered to OPEC's decisions and participated in them and has always showed a collaborative and constructive spirit with this organization's member countries.

S&P GLOBAL: With Europe seeking to diversify its supplies of refined products from Russia, does Sonatrach see an opportunity to further expand or build new refineries?

HAKKAR: During the last decade Sonatrach has considerably increased its refining capacities which have reached more than 30 million mt/year. These achievements have not only allowed Sonatrach to fully supply the domestic market with fuels but also to reach an export level of 15 million mt/year of refined products, especially naphtha and fuel oil.

The refining segment and more broadly the transformation of hydrocarbons are today a major axis of Sonatrach's development plan. In this regard, we have allocated a budget of $5 billion for refining, first for optimizing refining facilities and increasing their output capacity, particularly gasoline and diesel, to meet domestic demand for fuels, then for developing new facilities. The main projects in this area are:

• Implementation of a fuel oil cracking unit in Skikda, to increase our diesel capacity by 37%,
• Construction of a new naphtha reforming unit at Arzew refinery, with a capacity of 1.2 million mt/year of gasoline,
• Construction of a new 5 million mt/year refinery.

However, as already mentioned for natural gas, Sonatrach, as an investor, needs medium- and long-term visibility on the demand for petroleum products in order to undertake new projects to increase refining capacities that are highly capital intensive.

Market outlook

S&P GLOBAL: Is there an ideal oil price that Sonatrach would like to see? How does Sonatrach view current oil and gas market fundamentals?

HAKKAR: We believe that the ideal price would be the one that allows Sonatrach to realize its investment projects across all the oil chain. It would also be the level that would support world economic growth and guarantee energy security at affordable prices for everyone.

Furthermore, I would like to recall that world oil demand in 2022 has been resilient to oil prices rising above the $100/b mark, as post-COVID oil demand growth has continued. Oil prices have stabilized in a range of $80-$90/b, at the same level as before the Ukraine conflict. On the other hand, many sources and international banks currently agree that with a significant increase in demand and oil supply held back by weak investment, oil prices are expected to range between $90-$100/b during the second half of 2023.

However, the risks of a prolonged contraction in global economic growth remain high, and many uncertainties remain.

Finally, I would like to recall that the lack of investments in the oil and gas industry over the last decade has had an impact on global supply and on energy price stability, especially in 2022. As we have all noted, oil and gas price volatility in 2022 reached historic peaks, and the risk of such a situation being repeated in the future is quite high.

On a short-term point of view, the return of big consumers such as China is to be carefully assessed, while on the longer term basis, the limited potential of new supplies, the risk on demand, the lack of investments in the upstream and the downstream and the regulatory interventions alongside strong politics towards the decarbonization of the world are the main elements to consider.

We strongly believe that oil and gas will still dominate the global energy mix for the next two to three decades. We are also convinced that the oil and gas industry will have to be more attentive to environmental constraints by integrating the reduction of emissions as a priority action.