Algeria launches hydrocarbon bidding round

Jun 17, 2007 02:00 AM

by Andrew England

Algeria plans to hold a bidding round for new hydrocarbon exploration blocks before the end of the year, with an eye to attracting companies that bring new technology to the sector and are able to help the national oil company diversify globally, according to the energy minister. Chakib Khelil told the government was keen to diversify the state oil company Sonatrach’s portfolio in both the upstream production sector and downstream ventures.
Sonatrach already has projects in Africa, Spain and Latin America, and the bidding round would “favour the companies that complement Sonatrach’s work around the world and in Algeria”, he said. “What do they bring in addition to the money? We don’t need the money. Do they bring technology?” Mr Khelil added. “Do they have something around the world that we need in terms of assets?”

Mr Khelil told the bidding round would be characterised not by investment but “more by what the partner will bring in terms of management know-how [and] in terms of markets”.
Algeria, which has the world’s eighth largest proven gas reserves, is a leading gas exporter and is critical to the European market, providing about 13 % of Europe’s total gas consumption. Its proven oil reserves, estimated at 12.3 bn barrels, are the third largest in Africa. The licensing round is likely to provide a key indicator of investment confidence in Algeria.

Craig McMahon, an analyst at Wood Mackenzie, said the results of the bidding round would not affect the country’s short-term production targets but said they could have an impact on the country’s longer-term-ambitions.
The round has been delayed while the government made controversial amendments to a 2005 hydrocarbons law and introduced a windfall profits tax on existing contracts. The 2005 law would have offered international companies a greater share in new projects, with Sonatrach’s stake as low as 20 %, and was seen to offer friendlier investment terms. But the amendments, adopted last year, now mean Sonatrach will have a minimum 51 % controlling stake in all new projects.

The windfall tax does not affect the fiscal regime of the new hydrocarbons law but will affect existing contracts when the price of oil is above $ 30 a barrel and is linked to production levels, Mr Khelil said. The tax could reach 50 %, depending on the structure of individual contracts, experts say.
The amendments were made as the result of political and public pressure as oil prices soared.

Another issue investors are having to consider is an increased security risk following a local Islamist group’s decision to associate itself with al-Qaeda. Mr Khelil said security issues would not affect future development but acknowledged that the amendments to the hydrocarbons law might have an impact. One international oil official said the combination of factors could well have an impact.
“In isolation you can easily say increasing the taxes to oil companies should not be an issue -- prices are close to $ 70, other countries do it – but actually, it doesn’t work that way,” the oil official said. While Algeria remains an important market for oil companies because of its exploration potential and proximity to Europe, the situation is “certainly going to slow down additional investment as people see what’s going to happen”, the official said.

In an effort to meet rising demand for oil and gas, Algeria has set targets of increasing gas exports from 62 bn cm to 85 bn cm by 2010 and increasing oil exports from the current 1.46 mm bpd to 2 mm, including oil and other liquids. Mr Khelil said Algeria was on schedule to meet its goals, with new discoveries jumping from 2 in 2000 to 18 in 2006 and 10 so far this year because of increased investment and drilling. However, the development of liquefied natural gas projects was likely to be delayed because of high costs, he said.
“The costs have tripled, so if you look at the rate of return of some of these projects we had to cancel, we cancelled the GTL, the gas to liquid plant, because it didn’t make sense any more because of the cost,” Mr Khelil said.

Source: The Financial Times Limited
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