IHS Global Insight Perspective | |
Significance | Algeria late last week launched its latest upstream licensing round, hoping to regain its development momentum following two largely disappointing rounds in 2008-09 and six months of extreme turbulence at the helm at state-owned Sonatrach and the Energy Ministry. |
Implications | Ten onshore exploration areas have been offered to bidders, encompassing 24 blocks, three of which are located in the Illizi Basin, four in the Berkine Basin and one each in the Oued Mya and Sbaa Basins, with the last areas being offered in the northern Tell basin. The choice of mainly previously unoffered acreage shows a willingness to restart attracting investors, amid a slowdown in IOC exploration despite long-term strategic plans calling for the opposite. |
Outlook | It is quite an achievement, and show of determination to attract investors, of the new leadership to launch the round now, given the complete decision paralysis suffered throughout the state energy organisation over the past seven months or so. |
Emerging from the Darkness
Algeria has launched its tenth licensing round, a little later then it normally prefers to time the start and conclusion, but given the organisational problems and recent management changes, it is still rolling back the expected delay significantly. In fact, given the challenges, the fact that the normal July launch was only delayed until now and that the round will close in March 2011 instead of late December 2010 should be seen as a clear signal from the Energy Ministry that continuing to invite foreign companies to Algeria’s upstream sector is highly important for the new leadership. Signing up new IOCs could even be said to be a top priority for the new Energy Minister Youcef Yousfi and the new Sonatrach Chief Executive Nordine Cherouati, given that such a demanding process for the Energy Ministry and the regulator has been launched as the first undertaking of the new energy regime.
Algeria has a long experience of holding and organising licensing rounds despite the deep changes in leadership positions at the head of all involved agencies—Energy Minister Yousfi was previously head of the hydrocarbons sector regulator Alnaft and thus has significant experience within the mid-level leadership to fall back on despite most of the high-level positions having been switched. Thus any delays in the timeframe of the licensing round remain relatively unlikely despite the potential for decision making and experience shortages throughout the process. It is likely that a thorough organisational capability audit has preceded the launch in order to avoid any disturbances to the schedule mid-process.
Algeria's Tenth Upstream Licensing Round - Timeline | |
30 September | General Presentation |
3 October – 30 November | Data room open to prospective bidders |
10 October – 20 December | Clarification meetings regarding contractual and/or technical issues with prospective bidders |
7 February (at the latest) | Final model contract sent out to all prospective bidders informing on any changes. |
3 March (10:00 local Algiers time) | Submission deadline for any bids, followed by bids opening (est. 10:30 local time). |
20 March | Contract Signing Ceremony |
Source: Alnaft |
The process in itself is likely to provide companies active in Algeria and/or mulling investment opportunities to size up the new ministry, Alnaft and Sonatrach leadership in meetings, presentations and negotiations. With so many high-level changes being made and new personalities having been brought in, existing Algerian IOC players will need to build up new relationships with key decision makers—a vital aspect of doing business in Algeria and especially with the top-heavy organisation of Sonatrach. Gauging the interest and level of sympathy to IOCs among the new Alnaft and Energy Ministry hierarchy will probably also be a priority, which in itself might lead to the number of companies expressing interesting bidding and entering the data room increasing this year compared to previous years. This should, however, be taken less as an indication on actual bidding interest then during other rounds.
Terms Remain
Although Sonatrach and the Energy Ministry now seem set to start moving out of their post-corruption allegation decision-making paralysis and as the subsequent widespread management dismissals and reshuffles are starting to abate, the core gripe of IOCs with the Algerian upstream investment landscape, the harshness of its fiscal terms, has not been addressed. Gauging whether there is any interest in making the upstream production-sharing agreements more attractive to IOCs within the new hydrocarbon sector leadership will be key for companies already active in Algeria’s E&P sector, as well as for some potential newcomers, although the lack of improvements so far is likely to keep the number of actual newcomers in the bidding low. Harsh fiscal terms have been quoted by IOCs over the past five to six years as an increasingly big problem discouraging investment. It has been the main reason behind the largely disappointing results of the eight and ninth licensing rounds. On top of that, other gripes of IOCs have been extremely long lead times for Alnaft and Sonatrach, which partners all E&P licensees, when it comes to assessing and passing exploration programmes, development plans and actual construction design and engineering studies. Massive amounts of red tape throughout the Algerian state agencies and companies has not been adding to companies’ view of the country as a good investment destination and increased political hostility against private upstream, as well as downstream, investment over the second half of the last decade from Algeria’s parliament has not been helpful either.
Algeria's Tenth Upstream Licensing Round | |||
Basin | Perimeter | Blocks | Area (sq. km.) |
Oued Mya | Guern Cheikh | 350b, 349 | 11,200 |
Illizi | Isarene Ouest | 225b, 227 | 9,343 |
Timissit Est | 235, 239c, 244a | 5,710 | |
Bordj Omar Driss N | 221b, 222b, 222c | 5,691 | |
Sbaa | Belrhazi | 354a | 14,118 |
Berkine | Rhourde Rouni II | 401d, 401c, 403f | 3,034 |
Zemlet En Naga | 403c/e | 1,613 | |
Rhourde El Louh II | 401a, 402b | 4,169 | |
Rhourde Fares | 406b, 209 | 2,773 | |
Tell | Hodna Ouest | 104a, 117a 118a, 137a, 119a | 6,678 |
Source: Algerian Ministry of Energy and Mines |
The new energy sector leadership in Algeria might be interested in trying to catch up with the country’s long-term oil and gas plans, which, given the by now lower-than-expected upstream exploration and development commitments in especially Algeria’s frontier gas regions, is starting to lag—if nothing else than from a purely technocratic viewpoint, as the country’s massive gas export projects in a few years might struggle to be filled. Their ability to change terms is, however, largely non-existent, given seemingly continued strongly resource nationalistic sentiments in parliament. Whether or not the new Energy Minister and Sonatrach head start trying to influence political circles by spelling out the country’s increasing challenges, will be another test of Algeria’s future direction, but will not happen enough to boost the now launched bidding round sufficiently.
Doing What One Can
Still, there is the choice of more oil-prone exploration acreage than gas-prone acreage in the tenth licensing round, through the choice of especially four Berkine, but also three Illizi, areas, although they too could hold substantive gas resources. Over the last years Algeria has been more eager to concentrate on signing up companies to its highly prospective but expensive and generally geologically complicated frontier gas areas in the south-central and south-western Sbaa, Oued Mya, Timmimoun and Reggane basins. Some of the latest offering is from these areas, although the weight towards the cheaper and easier (generally) oil and gas of Berkine and Illizi means that the Algerian hydrocarbon leadership is hoping for two things: a more successful round at the start of the new tenure, rekindling optimism throughout the industry and reinforcing their own positions, and, secondly, to increase oil investment first, given its ease to monetise speedily and its important share of the government revenues. With increasing mature decline rates keeping oil production levels up, this translates more quickly than gas into a direct budget benefit.
Outlook and Implications
The launch of the tenth licensing round at this point, as the Algerian hydrocarbon sector’s new leadership is just starting to emerge from the post-corruption crisis decision-making paralysis, signals that the new Energy Minister Yousfi and the new Sonatrach Chief Executive Cherouati both prioritise the attraction of foreign investment to Algeria. The failure to improve investment terms—Algeria has been largely viewed as increasingly unattractive for the small and tightening margins awarded investors over the past years, however, is unlikely to change the willingness of IOCs to invest, although this of course is largely outside what the new leadership could have done anyway. It remains to be seen if the new energy leadership will start building political consensus in Algeria for term improvements, but in the meantime their hope is that the offering of more oil-prone acreage than gas-prone acreage compared to the last licensing rounds will do its bit to attract at least some more bids then previously, given the relative ease of oil monetisation and the likely cheaper development costs compared to Algeria’s frontier areas. All in all, however, a real change in the trend of falling investor interest in Algeria should not be expected until the political currents in the country start changing and upstream investment terms start being improved.
Additional Reading
Algeria: 1 June 2010: End of an Era: Father of Failed Liberalisation Ousted from Algerian Oil MinistryAlgeria: 4 May 2010: New Permanent CEO of Algeria's State-Owned Oil Company is Named
Algeria: 20 January 2010: Algeria Suffers Upstream Deceleration as Investors Lose Interest, NOC Engulfed by Turmoil
Algeria: 15 January 2010: Sonatrach in Turmoil as Corruption Probe Slashes Algerian NOC's Senior Leadership
Algeria: 3 December 2009: Energy Minister Confident of Targets Despite Signs of Slippage in Algeria's Gas Projects
Algeria: 22 December 2009: Three Blocks Awarded in Latest Licensing Round in Algeria
Algeria: 16 December 2008: Licensing Round Disappointment in Algeria to Be Reversed by Aggressive Projects Launch