Verisk Maplecroft; Bath, UK
This year could be pivotal for independent oil companies (IOC)
in Algeria as the country’s energy executives work to amend
the national energy law to encourage upstream investment.
With the International Monetary Fund (IMF) estimating Algeria’s fiscal breakeven oil price at $64.70/bbl for 2017, the Algerian state urgently needs to boost oil and gas earnings. The
Brent price was $4.37/bbl more than the breakeven estimate
in mid-January 2018.
The Algerian government is nonetheless unlikely to do a full
u-turn and adopt uniformly attractive contract terms for foreign
oil and gas companies. At least some members of Algeria’s political, business, and security elites are expected to push back
on draft legislation which threatens the country’s longstanding
policy of economic protectionism.
Government talk has, by Algerian standards, been encouraging
for IOCs. In mid-October Energy Minister Mustapha Guitouni
announced to the press that the first draft of the amended hydrocarbons law would be ready by May or June 2018. While not
elaborating on the full scope of changes, the minister indicated
that tax incentives and measures to both reduce the administrative burden and shrink Algeria’s cumbersome bureaucracy were
on the way.
Softening Algeria’s tough fiscal terms and increasing the efficiency and speed of business processes would help improve
investor confidence. Algeria is classified as high risk with a score
of 3.01/10 in Verisk Maplecroft’s Regulatory Framework Index.
Scores closer to zero indicate greater risk.
IOCs are also encouraged by the reportedly good working relationship and alignment of thinking between Guitouni and Abdel-moumen Ould Kaddour, CEO of national oil company Sonatrach
SPA. Like Guitouni, Kaddour has advocated the need to improve
the energy law and attract more investment to boost production.
Sonatrach is due to unveil its first ever comprehensive strategy,
outlining its priorities and objectives through 2030.
Preliminary action has accompanied the positive signals about
reform. The local oil and gas investment community says that the
government since 2016 has increasingly consulted with foreign
partners and demonstrated greater flexibility in negotiating the
terms of bilateral deals.
Despite Algeria’s budget squeeze, the state’s weak reform record
over recent years has dampened expectations about the depth
and breadth of the reform agenda. Continuously tough fiscal
terms, punctuated by Algeria’s notorious oil windfall tax, help
explain why Algeria was only able to award four of 31 oil and gas
blocks on offer to foreign consortiums in 2014.
Resistance from protectionists will likely stifle liberalization
efforts. Divergent views within Algeria’s ruling elite over both how
far to push domestic economic reform and the size of the bait
dangled in front of foreign investors reduce the likelihood that
amendments to energy legislation will be far-reaching. The Algerian government has already signaled that the existent ownership
structure for oil and gas projects, centered on Sonatrach’s majority stake, is not on the table for discussion.
The identity of President Bouteflika’s National Liberation Front
(FLN) is still underpinned by its role in spearheading the Algerian
war of independence from France between 1954 and 1962.
Economic nationalism has gone hand-in-hand with a general
aversion to foreign intervention.
Leading reform can therefore be hazardous in Algeria. Ab-delmadjid Tebboune was replaced as prime minister earlier this
year by Ahmed Ouyahia after just 3 months in office. It is widely
assumed Tebboune was forced out after he demanded that
influential business executives refund the state for construction
contracts they were paid for but failed to deliver. His campaign to
increase transparency was clearly too aggressive and Bouteflika
was forced to replace him.
Sonatrach is not immune to sudden change. It has seen the
highest executive turnover rates in the country. The NOC has had
as many as seven CEOs in 10 years, partly accounting for the
delay of new field launches. The associated disruption has been
a source of frustration for IOCs, which under the energy law cannot hold more than 49% of any project.
Nonetheless, Algeria’s energy minister and Sonatrach’s current CEO appear to have good buy-in from other senior members
of the political elite. Prime Minister Ouyahia seconded both
officials in October by confirming the need to amend the energy
law. Low oil prices and insufficient investor appetite forced the
government to cut spending by an estimated 14% in 2017, following a 9% reduction in 2016.
If the price of oil moves down in 2018, reformists’ position will
be strengthened and should ease the case for more aggressive
changes to Algeria’s energy legislation in principal. But economic
policy is still not driven by purely economic realities. Ideology and
vested interests will continue to factor heavily and foreign investors will still work in an opaque business environment.
Anthony Skinner ( firstname.lastname@example.org)
is director, Middle East and North Africa, at Verisk
Maplecroft, Bath, UK. Prior to joining Maplecroft,
Anthony worked across the Middle East and North
Africa as a senior editor and political risk analyst. He
holds an Honors Degree from the University of Edinburgh (2000) and an MS from the London School of