Focus is Key to Algeria’s Energy Future
Introduction
By 2000, Algeria will be the Japan of Africa,” was a favourite quote of President Houari Boumediene’s powerful minister of industry, Belaid Abdessalam, back in the 1970s.
Algeria has largely failed to live up to that challenge: then, as now, oil and gas exports account for roughly 95% of the country’s foreign income and two thirds of its budgetary receipts. The risk of being caught in the trap of hydrocarbon dependence is heightened by Algeria’s policy of keeping oil in the ground (1); refusal to set up a wealth fund for future generations as many other oil producing countries have done (2); climate change and the accompanying global strategic realignment (3). Will Algeria’s oil and gas wealth turn into stranded assets?
The price of gas available to Algerian industry and private consumers (for which the price of a kilowatt/hour is a proxy) is one of the lowest in the world. In 2021, subsidies cost the state $ 13bn. State support for 12 key products, six of which are energy-related, is the bedrock on which the social and political stability rests. It came as a surprise therefore when the government announced last October that it was considering cutting back subsidies on gas for industry. The assumption had been that subsidies were inviolable as the 2019 Hirak protests demonstrated the regime might be vulnerable.
Algerian rulers have never relinquished the command-economy imposed after independence in 1962. This explains the persistent weakness of the country’s private sector, and its middle class, and the fact that a successful diaspora in Europe, the Middle East, and North America does not invest back home; its continuing incapacity to articulate a strategic economic plan, not least for the key oil and gas sector.
A second reason for muddled thinking about the future can be found in the catastrophic consequences of 20 years of Abdelaziz Bouteflika (1999-2019). Algeria is still paying a heavy price for the disastrous mismanagement of the state oil and gas company Sonatrach by Energy Minister Chakib Khelil during Bouteflika’s first two mandates. A company which had long been the pride of the country became synonymous with corruption and incompetence. Bouteflika not only damaged Sonatrach, he eviscerated the civil service, including the ministry of foreign affairs, the army general staff, and the security apparatus. And with all this talent dispersed and gone, it has been very difficult to find anyone capable of crafting a new economic strategy worthy of the name, despite the huge pool of Algerian talent available in both Algeria and in the diaspora. Gone are the cadres of bureaucrats who wrote the Cahiers de la Reforme, the clear-eyed economic blueprint launched in 1989. (1)
A little history
Oil was first discovered in the Sahara in 1956. This discovery had a direct impact on Algeria’s war of liberation from France which had begun two years before. France was intent on keeping exclusive access to oil and gas, but the Conseil National de la Revolution Algerienne (CNRA) refused to negotiate: oil and gas would Algeria’s to develop in its own interests. The 1958 French Petroleum Code (Code du Petrole) put strict limits on foreign investment in hydrocarbons, but the 1962 Evian Accords fashioned a compromise.
Enrico Mattei, head of the Italian state energy company ENI who had advised the CNRA died in a plane crash in 1963, presumed a victim of foul play – and proof (if proof was needed) of the bitterness of infighting among international oil companies for access to new oil and gas reserves. That remains true to this day.
A year after independence, Algerian leaders created Sonatrach, which would henceforth have a monopoly on oil and gas production and export. French shares of SN Repal were bought out and other foreign companies nationalised. Between 1967 and 1971 a generation of brilliant young Algerians engineers succeeded in producing and marketing 77% of Algeria’s oil and gas. The international stature of Sonatrach rose, and the company became a key player in Algeria’s economic development. The company’s rise was emblematic of an oil -fed nationalism, in which foreign partners played, at first, a very minor role.
The Valhyd Plan
When oil quadrupled in price with the Arab oil embargo in 1973, president Boumediene’s economic ambitions rose. Belaid Abdessalam turned to the US companies Bechtel and DeGolyer and MacNaughton to enhance production, notably in the Hassi Messaoud, the country’s largest oil field, and produce gas for export. The aim of the Valhyd (Valorisation des Hydraucarbures) Plan was to boost the production and export of oil and gas , directed by Chakib Khelil (who would later oversee, for the World Bank, the privatisation of the oil and gas sectors in Argentina and Bolivia, in line with the wishes of US industry bigwigs like Dick Cheney) followed the American strategy of maximising income from oil and gas exports, but ended up costing Algeria, in the end, as Sonatrach had to resort to loans to cover expensive international service contracts, and production declined.
Meanwhile, Sonatrach’s target of 70bn cubic metres of Algerian LNG for the US market, disappeared after Jimmy Carter deregulated the domestic gas sector. The volume would rise to 60bn cubic metres in 2008 but fall back to $45bn in 2019. In late 1978, Algeria cancelled an important LNG contract with Germany’s Ruhrgas, wasting a golden opportunity to enter the prized European market and damaging Sonatrach’s reputation in Germany for decades. The reason for Sonatrach’s abrupt change of mind sat with Chadli Benjedid’s new Minister of Energy Belkacem Nabi, following the death of President Boumediene. Nabi told Ruhrgas that Algerian gas would be delivered to Germany via the TransMed pipeline then under construction between Algeria and Italy, not by LNG carrier. Ruhrgas refused. During a state visit to Germany in 1974, President Ronald Reagan attempted to sell the virtues of Algerian gas to Helmut Schmidt, explaining that the US was actively lobbying for a pipeline to carry gas from Algeria to Spain and Portugal. He cautioned Germany not to depend on the USSR for more than 30% of its gas supplies. The German chancellor responded that Algeria was not a a trustworthy partner.
As the price of oil tumbled in 1985, Sonatrach was unable to boost reserves and production, leading to a decision in 1991 to liberalise ruled governing exploration and production. The key actor here was incoming minister of energy Nordine Ait Laoussine, whom Nabi had had unceremoniously sacked in 1979. Trained as a geologist, Laoussine was the only Sonatrach executive who knew the upstream as well as the downstream of the gas industry inside out, having been responsible in the 1970s for marketing Algerian gas abroad.
Liberalisation resulted in a rush of foreign investment into Algeria and the discovery of new fields such as Hassi Berkine. Oil production increased from 0.8m barrels a day to 1.8m but the bold economic reforms promoted between 1989 and 1992 failed, with the result that the state command economy and the Sonatrach’s management were never modernised. Despite a decade of civil war in the 1990s, however, Sonatrach did not default on any of its gas export contracts. In partnership with British Petroleum, Statoil, and other oil majors, and despite the violence that had engulfed the country, Sonatrach developed a major new field at In Salah, near the Libyan border.
Descent into hell
After his appointment as minister of energy and director of Sonatrach in 1999, Chakib Khelil attempted to liberalise the code governing investment in oil and gas, but was opposed by a strong consensus in a key sector where technical battles were fought behind closed doors. The king of Saudi Arabia and President Vladimir Poutine intervened directly with Bouteflika to block a project which many saw as Khelil’s capitulation to his friends in Washington, not least Dick Cheney, now Bush’s Vice President. The all-powerful minister was finally dismissed in 2010 in the midst of corruption trials which saw several Sonatrach vice presidents jailed. (2). His American passport and the protection of Dick Cheney allowed Khelil a comfortable exile in Washington far from the reach of Algerian courts. In the months that followed, many senior Sonatrach officials were sacked or demoted, and a lethal game of musical chairs ravaged a company where officials never dared take a decision. The unprecedented 2013 attack on the In Amenas gas field by terrorists who infiltrated Algeria from Libya was another blow to a company that had recently seemed to be getting its balance back.(3).
The broader context of the 2000s was not favorable to Algeria. Western oil majors, including Total and the French state, which carried great weight in the EU, opposed the idea of a trans Sahara pipeline which could have fed Nigerian gas into Algeria, thereby helping to develop poorer Sahel countries (4). At the same time the liberalisation of gas markets in Europe promoted buy-side gas contracts shorter than the 15 year term that had prevailed before, serving as a brake on exploration and the development of new gas fields. Meanwhile Algeria’s refusal to cut subsidies (its electricity prices are among the lowest in the world) fuelled domestic consumption leaving less gas for export.
Regional cooperation stalls
The inauguration of the Enrico Mattei pipeline in 1983 was followed by a thaw in relations between Algeria and Morocco which allowed the building of the Maghreb Europe gas pipeline from Algeria to the Iberian Peninsula. Hopes rose that a genuine industrial cooperation between North African countries and with the European Union would bring prosperity and jobs to the West Mediterranean. Natural gas from Algeria and phosphates from Morocco, if combined with ammonia and sulphur could form the basis of many industries – from fertilisers to plastics, building materials and transport. But Algeria and Morocco have long feared each other while Europe and especially the old colonial power, France not only lacked strategic vision but felt more comfortable with a policy of divide and rule. The lack of political vision of the EU would open the doors of North Africa to China and Turkey – both where trade and investment in industry are concerned. (5)[EC1]
Back in 2009, in the midst of the financial crisis engulfing the West, Algeria failed to set up a wealth fund whose strategy would be to invest in international companies which were vital to Algeria’s industrial development. Since then, other oil producers such as the UAE, Qatar and more recently Saudi Arabia, following in the footsteps of Norway, have realised that the only way to try to ensure prosperity for future generations is to set aside a sizeable chunk of the proceeds aside to invest in economic diversification. Algeria’s thinking smacks of Jurassic Park. Sonatrach found bold strategic thinking difficult though plans to develop blue hydrocarbon for export to Spain and Italy are underway. The quality of the company’s engineers has however been demonstrated by their capacity to recover previous levels of gas production at the giant gas field of Hassi R’Mel which had been badly damaged by forcing production in the early 2000s.
Recent Developments:
The flow of gas through the Maghreb Europe pipeline was interrupted in 2021 but Spain did not suffer, as direct pipeline had been built between Algeria and Spain a few years before (6). Russia’s invasion of Ukraine pushed Italy to enhance its cooperation with Algeria’ Eni [EC2] and Sonatrach have signed multiple contracts to develop the production and export to Italy of oil, gas and hydrogen, thus transforming southern Italy and the TransMed pipeline into the central Mediterranean’s energy hub (7), enhanced by a fibre optic cable linking Tunisia and Sicily. Despite these advances, dreams of broader industrial cooperation between North Africa and Europe, which, back in the mid 2000s, the IMF and certain studies forecast would add 2% to GDP growth (5)) have stalled, impacting the stability of the northern and southern rim Mediterranean countries.
Algeria’s Key Oil and Gas Infrastructure
Source: MEES Energy
A diminishing percentage of Europe’s imports of gas are originating in Algeria. Before its invasion of Ukraine in 2022, Russia was Europe’s major foreign supplier of gas, followed by Norway and Algeria. In 2024 Algerian gas accounted for 14.9% of European imports as against 18.2% for the US and 32% for Norway. Sonatrach launched the Boosting Hassi R’Mel plan a year ago, to boost production in its major gas field. Declining Russian exports to Europe offered Algeria a unique opportunity to promote itself as a reliable source of gas, which it has always been since the first shipment of gas by Sonatrach to British Gas in 1964. Characteristically, its leaders failed to seize the opportunity of opening up their country - to foreign investors and to foreign journalists. The country thus remains little known to outsiders. Algerian leaders insist that senior Sonatrach officials are seldom allowed to attend international forums.
What is current economic policy?
Since the end of the massive Hirak protest movement, Algerian leaders have promoted projects requiring massive capital investment, partnering with foreign companies to build ports and railways, notably to the south western iron ore deposits of Gara Djebilet (China)) with mechanised farms in the Sahara (Turkey and Italy); textile and steel plants (Turkey). Food processing has attracted some local private capital. The problem with such ventures, of course, is that they create very few jobs. Alternate ventures like food production in the desert proved disastrous in the 1980s and continues to pose a risk of contaminating the desert aquifers; Attempts to develop unconventional gas and shale in the Sahara led to popular revolts a decade ago. Some question Algeria’s competence in developing new opportunities, and point to the absence of public debate on how best to do this.
Where hydrocarbons are concerned, Algeria has reverted to two key principles which were enacted in the early 1980s. The first is that the country’s oil and gas reserves must be kept in trust for future generations and not developed too fast, at the risk of becoming stranded assets. The second is that the state wishes to retain control of the ultimate foreign buyers of gas produced in Algeria, even when such production is the result of joint ventures with international oil major. Algeria’s shale reserves are very enticing to some of international companies, notably American but the state’s policy on commercialisation is a major brake on joint ventures.
Many big-picture questions remain unanswered. Will the income from these projects simply be used to buy social peace rather than invest in diversifying the country’s economy? Will the holders of private domestic capital be given a broader say in the elaboration of industrial policy? Will the leaders cling to a failed economic strategy? And why, at a time of unprecedented geopolitical realignment, is the government keeping its diaspora, which includes many successful entrepreneurs, and specialists in the private sector and academia at arms-length? For its part, Sonatrach must live with the legacy of the Khelil years when fear stalked the company and forced many middle and high ranking officials to run for cover - and refuse to taken decisions. This gummed up the system, to the intense frustration of international companies which needed a smooth and quick decision-making process.
With respect to oil and gas, we have other big questions and no ready answers. Should Sonatrach keep its monopoly upstream? How will the company be modernised and made more efficient? Why does Sonatrach not cut flaring which costs it, according to a recent Capterio study, between $ 2-3bn every year? Even if hydrogen takes off in a limited way, Algeria is extremely well placed to be at the forefront with its climate, sea water, energy expertise and proximity to Europe. Why has Algeria failed to develop downstream industries such as plastics and building materials? Despite its massive oil and gas and reserves (including the third largest shale deposits) in the world, Algeria is experiencing an exodus of its best and brightest. The dream of the country becoming the Japan of Africa remains, in 2025, a dream.
Focus is Key To Algeria’s Future
Energy is, for better or worse the sector where Algerian leaders must craft a new bold policy. They will fail if they cannot establish a broader dialogue with international oil and gas companies. They will fail if they do not enlist the support of private sector Algerian companies and an often well-educated youth. Even if Algeria does not hit peak oil this decade, it will fail if it keeps its head buried firmly in the sands of the Sahara which is where most of its oil and gas seem likely to remain. Its leaders will fail if they are unwilling or unable to reduce domestic subsidies on gas and electricity and thus free more gas for export.
Climate change presents both large challenges sand opportunities for bold policies and international cooperation, which can only be realised if Algeria engages more with the world, on mitigation strategies as well as green tech and industry.
Building a pipeline to Niger will add more gas to Algeria’s own but a pipeline to Nigeria is most unlikely in view of the growing terrorist attacks in Sahel countries.
The army remains the first pillar of security for 45m Algerians, but a strong army is of limited use if the state command economy it buttresses misreads the future of oil and gas and remains so suspicious of foreign companies that it cannot deliver the economic growth and job creation required to keep social peace.
Algeria’s future feels uncertain in a world where alliances in place since 1945 rare being overturned, where the influence of the Europe is eroding and that of China, India and Turkey increasing. The largest country in Africa holds some strong cards but, in the absence of a clear strategy, Algeria will be unable to play them to its best advantage.
L’armee Algerienne a t elle une strategie economique? Francis Ghiles POUVOIRS, Automne 1995
Ahead of Spring in Algeria:Tough Energy and Economic Challenges await, Francis Ghiles NOTES32, Cidob, May 2011
Algeria Faces Three Challenges, Francis Ghiles MIDDLE EAST ECONOMIC SURVEY, 1 March 2013
Business as usual is not a viable energy option in the Mediterranean but is likely to prevail, Francis Ghiles Spanish Institute of Strategic Studies, MINISTRY OF DEFENSE, 2009; Europe’s Southern Escape, An alternative to annual gas fights with Russia may lie in North Africa, Francis Ghiles THE WALL STREET JOURNAL EUROPE, 9 January 2009
Maghreb regional and Global Integration: a Unified North Africa could play a role on the World Stage, Francis Ghiles, THE PETERSON INSTITUTE, Washington DC 28 May 2008
Escalating rivalry between Algeria and Morocco closes the Maghreb-Europe pipeline, Francis Ghiles, FRONTIER AFRICA E&P ENERGY SUMMIT, London 23-24 September 2021
As North African Energy Links are Redrawn, Italy Becomes Europe’s Southern Gas Hub, NOTES276, Cidob, July 2022
[EC1]Is 1983 the right date here? Why are we going back in time?
[EC2]Is this a subsidiary?
Ethan Chorin
The views expressed in this article are those of the author and do not necessarily reflect the views of the Frontier Energy.
