Algeria: A major player in the Mediterranean gas market

Oct 06, 2004 02:00 AM

Algeria is a vast country (2,382 sq-km), one-quarter the size of the US, and is still considered relatively "underexplored", therefore offering lucrative opportunities to multinational energy companies.
Sizeable oil and gas reserves were first discovered during the mid-1950s. The main hydrocarbon provinces are Triassic-Ghadames or Berkine, Illizi, Grand Erg-Ahnet and the Reggane basin. The competitive edge lies in natural gas rather than crude oil. Algeria remains the gas powerhouse of North Africa, with excellent long-term prospects for exploration and development (E&D) and further discoveries.

The all-important hydrocarbons sector accounts for 95 % of total export receipts and two-thirds of central government finances, as well as contributing over one-third of gross domestic product -- which according to the International Monetary Fund (IMF) has risen to $ 76.4 bn, compared with $ 48.8 bn in 1999.
The state energy giant Sonatrach has been at forefront of the nation's economic and energy development over the past four decades. Sonatrach (created in 1963) is responsible for exploration, production, transport, and marketing of the full range of Algeria's hydrocarbons exports -- petroleum, dry natural gas, LPG, natural gas liquids (NGLs), LNG, and refined products.

Algeria is the world's second and third-largest exporter of LNG and natural gas, respectively. Sonatrach has invested more than $ 100 bn on developing oil/gas fields, refineries, petrochemicals and gas processing facilities, pipeline infrastructure, and export terminals at Arzew (which handles 40 % of total hydrocarbons exports), Skikda, Algiers, Annaba, and Oran. The company's investment programme for 2000-04 totalled $ 21 bn.
Foreign direct investment (FDI) continues to underpin expansion of Algerian energy sector. Chakib Khelil, Energy & Mines Minister, said: "FDI is key to achieving our goal. We got $ 8.6 bn between 1999 and 2003. We expect to attract more in the coming years."

In contrast with leading OPEC producers (notably Saudi Arabia, Iran, and Venezuela), Algeria's upstream oil sector is more open to inward investments. There are about 30-35 international oil and gas companies active in Algeria, including BP, Total (France), Statoil (Norway), ENI (Italy), the US independents (Amerada Hess, Anadarko Petroleum and Burlington Resources), Petrobras (Brazil), Wintershall (Germany), BHP Billiton (Australia), Repsol-YPE (Spain), Maersk (Denmark), Gaz de France, and Cepsa of Spain, among others. The liberalisation of European energy markets should offer new opportunities for North African and Middle Eastern producers, which together hold almost half of world's gas reserves -- totalling 6204.9 tcf.

According to EuroGas, the lobby group of European gas trade associations, Europe's reliant on imported gas is projected to surge from 40 % in 2001 to 75 % by 2020, and annual gas demand in the European Union (EU) member-countries could increase to 575 bn cm by 2020, compared with 409 bn cm in 2001.
Algeria, the second-largest supplier of piped gas to Europe (after Russia), is geographically located on the doorsteps to southern Europe and enjoys an extensive distribution networks into the EU -- including two pipelines under the Mediterranean basin to Italy and Spain. It accounts for about one-quarter of the EU's total gas imports per annum. The economy is reaping benefits of robust oil/gas export revenues since 2000, expanding hydrocarbons production and investments and the coming-onstream of gas projects. In 2003, the government spent $ 4 bn on energy-related activities.

For 2004 and 2005, the OPEC Secretariat forecasts real GDP growth at 6.5 and 8 %, respectively. External payments situation remains healthy, with the current-account surplus averaging $ 7 bn per annum over 2000-03, and gross official reserves totalling $ 34.5 bn in May 2004, up steeply from $ 4.5 bn at end-1999. Last year, Sonatrach generated revenues in excess of $ 24 bn, of which petroleum exports comprised $ 16.5 bn.
The US Energy Information Administration (EIA) estimates Algerian net oil export revenues at $ 20.8 bn this year and $ 21 bn in 2005. Whilst, total external debt stock -- estimated by the IMF at $ 19.9 bn in 2004 -- is equivalent to just 26 % of GDP.

Burgeoning gas sector
Algeria owns the eighth largest provable natural gas reserves -- 160 tcf- primarily "wet gas" (i.e., associated with crude oil). Though its ultimate recoverable reserves may total 204-282 tcf, according to industry experts. The super-giant field is Hassi R'Mel in central Algeria (discovered in 1956). It boasts 85 tcf, representing almost the entire reserves of Norway (86.9 tcf) and Malaysia (85 tcf). The Rhourde Nouss region holds 13 tcf of proved reserves located in five gasfields. Also, reserves are found in the southern In Salah region (10 tcf); the Tin Fouye Tabankort (5.1 tcf); and Alrar (4.7 tcf) fields.
In October 2003, Sonatrach reported a large discovery in Reggane Basin in the Saharan desert. Natural gas production has risen tonearly 83 bn cmpy in 2003 from 56.1 bn cmpy in 1993. Hassi R'Mel field accounts for one-quarter of total gas production. Dry gas and NGLs comprise about two-thirds of total hydrocarbons output. Besides exports to Europe, gas provides vital sources of domestic energy and feedstock for petrochemicals and fertiliser industry.

The country's electricity is almost entirely generated by gas. In 2003, Algeria consumed 21.4 bn cm of natural gas. Today, Algeria ranks as the fifth largest gas producer, after Russia, the US, Canada, and Britain. Whilst in the Middle East & North Africa region, it ranks top producer and exporter. Last year, Algerian production -- representing 3.2 % of world's total exceeded Iran (79 bn cmpy); Saudi Arabia (61 bn cmpy); Abu Dhabi (44.4 bn cmpy); and Qatar (30.8 bn cmpy).
The Mideast Gulf producers, however, possess much higher reserve base than Algeria. Future production capacity should expand rapidly as new upstream projects such as In Amenas, Ahnet, Gassi-Touil, Ohanet, and In Salah, come onstream. Sonatrach is confident of hitting gas export target of 85 bn cmpy "before 2010".

Two projects -- In Salah-and-In Amenas -- have significant growth potential. The former in central Algeria contains 170 bn cm of mostly non-associated reserves in seven gasfields -- Garet el-Befinat, Gour Mahmoud, Hassi Moumeme, Krechba, Reg, In Salah, and Teguentour. The fields are linked by a new 287-mile pipeline from In Salah to Hassi R'Mel, from where gas will be transported to southern Europe.
Recently, the $ 2.5 bn project -- jointly developed by Sonatrach and BP, came online, with a potential capacity of 10 bn cmpy. The engineering work was implemented by US-based Bechtel and Kellogg Brown & Root and Japan's JGC. Whilst the In Amenas venture in southeast Algeria possessing 140 bn cm, plus 325 mm barrels of liquids, is being developed by BP in partnership with Sonatrach. The $ 1.8 bn project is expected to yield 9 bn cmpy at peak and 60,000 bpd of condensate/LPG from four fields by late 2005. It also includes a processing facility in Tiguentourine and three pipelines.

In July 2003, Statoil paid $ 740 mm for BP's 49 and 50 % stakes in the Salah-and-In Amenas projects. An other important E&D work is taking place in the Illizi province (60-miles west of Libyan border). BHP Billiton is heading the $ 1 bn Ohanet project -- with capacities of 6.8 bn cmpy of gas, 30,000 bpd of condensate and 26,000 bpd LPG.
Production of natural gas began in October 2003. BHP shall operate the fields in partnerships with three Japanese companies, Woodside Petroleum (Australia) and US-based Petrofac. Paris-based Observatoire Mediterranean de l' Energie (OME) projects Algerian gas output surging to 117 bn and 172 bn cmpy in 2010 and 2020. Some 70 % of total production will be exported.

OME report says Algeria requires $ 25 bn of investment in the period to 2010 on gas infrastructure. LNG pioneer Algeria is the world's first country to produce LNG from its Arzew plant- built in 1964. Capacity now amounts to 29.2 bn cmpy from four LNG facilities and exports totalled 26.7 bn cmpy in 2003- representing 17.2 % of globe's total (155.2 bn cmpy), according to Groupe International des Importateurs du Gaz Naturel Liquefie (GIIGNL).
Algeria ranks second-largest LNG exporter (after Indonesia), which exported 32.85 bn cmpy. Sonatrach supplies almost half of Europe's LNG imports, which totalled 30.4 mm tons in 2003. Gaz de France, Enagas (Spain), BOTAS (Turkey), Distrigaz (Belgium), Snam (Italy) and DEPA (Greece) have signed long-term purchase contracts with Sonatrach. Algeria intends to boost exports to America, where Trinidad and Tobago and Qatar are fast emerging as principal LNG exporters.

Algeria's share of US LNG imports has plunged since 1980-95 when it was the sole supplier of LNG. Meanwhile, Sonatrach is planning Gassi Touil integrated project. It aims to extract natural gas from six Berkine basin fields -- containing 9 tcf of proven reserves -- and build a new liquefaction plant at Arzew, with installed capacity of 6-8 mm tpy, mainly targeted at the US market.
ExxonMobil, Petronas (Malaysia), Total, Shell and British Gas are keen to participate in the $ 2.7 bn Gassi-Touil project.

Pipeline networks
Currently, Algeria pumps gas to southern Europe via two pipelines -- the 1,013-mile Maghreb-Europe "Pedro Duran Farell" line to Spain, with a capacity of 8 bn cmpy and the 667-mile Trans-Mediterranean "Enrico Mattei" line to mainland Italy, with a capacity of 24 bn cmpy.
The latter -- built in 1983 -- also supplies Tunisia and Slovenia and Pedro Duran Farell line via Morocco to Cordoba, Spain (onstream since 1996) links into the Spanish and Portuguese gas transmission networks. The capacities of both lines are being expanded and two new pipelines are under active project review in order to tap the booming EU market for imported gas.

The EIA anticipates that natural gas should account for one-quarter of EU's energy consumption by 2010. Enrico Mattei line (which carries gas from Hassi R'Mel via Tunisia) and Pedro Duran Farell should be capable of pumping 32 bn and 11.5 bn cmpy, respectively, from 2006.
Swiss-Swedish ABB is building a compressor station on the Pedro Duran Farrell (costing $ 93 mm). The country's two existing pipelines account for about two-thirds of Algerian gas exports to Europe.

In December 2002, Cepsa, Spanish energy company and Sonatrach, agreed to construct a new trans-Mediterranean pipeline "Medgaz"-- connecting Hassi R'Mel gasfields directly to Almeira, southern Spain and onwards to France. The $ 1.5 bn project could be operational by end-2007, with a maximum handling capacity of 16 bn cmpy, though initial capacity is expected at 8 bn cmpy.
Houston-based (Intec) Engineering and Ramboll Energy (Denmark) were awarded the front-end engineering design work for the offshore-and-onshore elements of the project, which also involves a power cable. The Medgaz consortium includes Sonatrach and Cepsa -- each holding a 20 % stake and the remainder divided equally between BP, Total, Gaz de France, and Spanish utilities (Endesa and Iberdrola).

Once the pipeline is fully operational, Algerian piped gas will account for 60 % of Spain's gas imports. The Spanish energy regulator anticipates that natural gas usage could almost triple between 2001 and 2005 to 41 bn cmpy. The other planned pipeline, "Galsi" (costing $ 2 bn) envisages an initial capacity of 10 bn cmpy, whereby gas flows from eastern Algeria under the Mediterranean Sea to Cagliari, Sardinia, and entering central Italy.
The main shareholders are Sonatrach (40 %); Italy's Edison (20 %); Germany's Wintershall and Italy's privatised utility Enelpower, each with 15 %; and Eos Energia -- the Italian energy trading company (10 %). The consortium plans to build a power line along the proposed route. The pipeline could be onstream by 2008. Algerian gas should account for at least half of Italy's consumption in the coming years.

Oil capacity
Proven oil reserves (11.8 bn barrels) are relatively modest by standardsof core OPEC producers. However, estimates for recoverable reserves are being revised upward thanks to the ongoing E&D programmes, sizeable new finds -- like in southern region of Hassi Dzabat -- and greater use of enhanced oil recovery (EOR) techniques. Therefore, probable reserves could be as high as 43 bn barrels.
The main productive oilfields are Hassi Messaoud containing 6.4 bn barrels; Rhourde el-Baguel (3 bn barrels); Tin Fouye Tabankort Ordo, and Zarzaitine. Algeria produces one of the highest qualities crude in the world. Its light "Saharan Blend" -- containing a paltry (0.05 %) sulphur content, thus favoured by refineries -- sells at much higher premium in international petroleum markets.

In the year to end-August, Saharan Blend averaged $ 34.3 per barrel, compared with $ 28.5 in 2003. Last year, total production rose to 1.89 mm bpd, of which crude oil comprised 1.2 mm bpd, condensates (445,000 bpd) and NGLs (250,000 bpd). Crude oil output -- 1.24 mm bpd last July -- well exceeded its OPEC quota of 830,000 bpd (as of August 1st, 2004). About 90 % of Algerian crude is exported to the EU and major offtakers are Italy, Germany, France, The Netherlands and Spain.
The EIA estimates export volumes for this year and next at 1.7 mm and 1.8 mm bpd, respectively. Sonatrach, the 13th largest petroleum company worldwide, plans to increase overall capacities to 1.5 mm and 2 mm bpd by 2005 and 2010, with help from its foreign partners -- notably Anadarko, BHP Billiton and Cepsa. The US independent Anadarko -- the largest foreign operator with output of 500,000 bpd -- is developing seven new oilfields in the Berkine Basin. Sonatrach intends to double output at Hassi Messaoud field to 750,000 bpd within five years.

Downstream assets
Algeria has a small-thriving petrochemicals industry run by the Societe Nationale de la Petrochemie (Enip), a wholly owned Sonatrach subsidiary. Enip operates facilities at Annaba (an ammonium phosphate fertiliser plant and ammonium nitrate complex with annualisedcapacity of 550,000 tons); Arzew (365,000 tpy ammonia, 182,500 tpy ammonium nitrate and 146,000 tpy urea complexes); and Skikda (a 130,000 tpy high-density polyethylene unit and 120,000 tpy ethylene cracker).
More recently, Enip has built methyl tertiary butyl ether (MTBE) and polyester resin complexes. There are four refineries located at Algiers, Arzew, Hassi Messaoud, and Skikda, with a nameplate capacity of 462,000 bpd. The 300,000 bpd Skikda refinery is the biggest, followed by Algiers (60,000 bpd) and Arzew (60,000 bpd).

Sonatrach is now looking to build a condensate refinery. The Algerian group also owns downstream assets in Europe. Sonatrach controls one-third stake in Cepsa's gas distribution business, and its power-generation unit, as well as a regasification terminal in Galicia.
Gas holds pivotal place in Algerian economy, however, Sonatrach requires sustained inward investments and foreign technologies in order to achieve its long-term goals of becoming a major global energy player.

The UK-based investment analysts, Bayphase, estimates that optimal E&D of Algeria's considerable hydrocarbons potential will require total capital investment of $ 50 bn-$ 73 bn over the next 10 years.
The consultancy envisages opportunities for multinationals in upstream (oil/gas fields), midstream (pipelines/export terminals), downstream (gas processing, petrochemicals and refineries) sectors, as well as transportation and power.

Source: Oil Review Middle East
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