More work to do for Algeria

A new energy minister and a new Sonatrach investment plan are still not enough to make Algeria attractive to IOCs

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For a government keen to bolster the image of its oil industry in the eyes of wary foreign investors, sacking a popular energy minister is not necessarily the way to go. Yet that is what Algeria did in May, dumping Noureddine Boutarfa, despite his high-profile and lauded role in sculpting Opec's recent production cuts agreement. The new minister is Mustapha Guitouni.

Boutarfa's unexplained removal came as Algiers sought to persuade international oil companies (IOCs) to get involved in an ambitious oil and gas expansion programme. But those firms will likely remain wary, put off by political uncertainty, onerous investment conditions and the ever-present risk of terrorism.

The Sonatrach plan

On 22 March, Algeria's state-owned Sonatrach, responsible for 80% of hydrocarbons output, unveiled a bold new plan. The company will invest $9bn in exploration, drilling an average of 100 new wells a year for the next four years in a bid to raise production by 14%. That exploration is only part of a hoped-for $50bn investment in the hydrocarbons sector, including new refineries, aimed at reversing production declines.

The plan is seen as the answer to a looming public spending gap caused by falling oil prices. Oil and gas account for 94% of exports and the post-2014 price crash has hit the economy hard. Hydrocarbon exports account for 60% of government revenues, and those receipts have fallen from $60bn in 2014 to $27.5bn last year.

Meanwhile, hydrocarbon production is falling, a result of decaying facilities and lack of investment. Oil production has dropped from 1.4m barrels a day in 2014 to 1.1m b/d. Natural gas production is down from 145bn cubic metres in 2010 to 132bn cm last year.

This in turn has put a heavy strain on a centralised economy in which the ruling National Liberation Front (FLN) has kept a lid on discontent with generous state wages, subsidies and public housing. The fall in oil prices means that system is now unsustainable, and keeping it in place since the oil crash has nearly halved foreign reserves, from $192bn in 2013 to $106bn.

Cuts have resulted in 9% lopped off public spending, and taxes on gasoline raised 4%, but fear of social unrest has deterred further belt-tightening. In that, at least, Algiers has the support of the World Bank, which says: "The possibility of social discontent resulting from government spending cuts and tax hikes poses a risk for Algeria." Hence the enthusiasm to bump up oil production, in the hope that the books will get closer to balancing. But attracting IOCs will be a hard sell, not least because of uncertainty about who will govern, and what policies they'll pursue, when ailing President Abdelaziz Bouteflika dies.

For many Algerians, it is hard to reconcile the once dynamic figure of their 80-year-old president with the timid recluse he has become. In his youth, he fought the French for independence in 1962 as part of the FLN, the party that has ruled Algeria ever since. In 1999, Bouteflika emerged from the political wilderness to win the election, the first of four, smoothing over the wounds of an eight-year civil war that left 100,000 dead.

But since suffering a minor stroke in 2013, Bouteflika is rarely seen in public. Indeed, rumours of his death spread when a planned visit in February by German chancellor Angela Merkel was cancelled after her plane had landed. To demonstrate that he was, in fact, alive, a short video on state television showed him, wheelchair-bound, sitting in a political meeting behind closed doors.

The FLN is ailing as fast as its president. In May, parliamentary elections saw its vote slashed by 44%, clinging on with the help of a coalition partner. Constitutionally, the result hardly mattered, as power is concentrated in the presidency, but symbolically it showed that many Algerians are losing faith in their ruling party.

With the president incapacitated, power resides among a shadowy and squabbling galaxy of generals, politicians and business leaders collectively nicknamed le pouvoir—the power. Their machinations and ever-changing dynamics are thought to be behind the sacking of Boutarfa. Potential investors worry about what happens when the president finally succumbs, with no deputy in place, and the expectation of a fierce succession struggle.

Wary IOCs

Political uncertainty is only one question for investors eyeing the Sonatrach plan. The company, like its government, has a reputation for inefficiency and cronyism. It has yet to shake off the stain of multiple corruption investigations earlier in the decade, or a mind-set attuned to times, pre-oil crash, when its executives could play hard-to-get with oil-hungry IOCs.

Those firms also have a list of practical complaints about working in Algeria, top of the list being a law requiring investors to have an Algerian partner with a controlling 51% stake.

Algeria has had modest success in tackling cronyism and red tape, moving up the World Bank's Ease of Doing Business list of 190 states from 163rd most difficult two years ago to 156th last year; but more progress is needed. "The difficulty in moving money in and out is a constant grievance among foreign investors," said Jalel Harchaoui, Magreb politics researcher at University of Paris 8. "Despite some reforms, foreign direct investment is still hesitant."

IOC reluctance to invest in Algeria was demonstrated in previous exploration auctions. In 2011, just two of 11 blocks found buyers, and a second auction in 2014 did even worse, with only four of 31 sold. A planned auction for the following year was postponed, potential investors put off in particular by restrictions on repatriation of capital.

Terrorism is also deterrent for IOCs. Al-Qaida in the Magreb (AQIM) and Islamic State (IS) are both active in the interior, and in neighbouring Libya, Niger and Tunisia. The 2013 attack on the In Amenas gas plant that left 39 foreign hostages dead was carried out by al-Qaida units operating from Libya.

Investment push

While IOCs wait to see published details of the Sonatrach plan, there are questions on whether the government can get a return on its planned $50bn investment. Having been at the forefront of states pushing for oil-production cuts, Algeria intends the extra production primarily to soak up rising domestic demand, not to increase exports. As a result, much of the $50bn would be paid back by Algerian customers, many subsidised by the government itself.

On the plus side, Sonatrach hopes to circumvent the oil-price ceiling by investing in oil refineries, and strike better gas contracts with Europe. It also aims to exploit its huge shale deposits, the third largest predicted in the world after China and the US. But on this it is boxed in because water is scarce in the southern desert where the shale lies, and test sites have triggered protests from farmers worried about irrigation problems and contamination of the water table.

Both the IMF and World Bank suggest economic liberalisation as a cure for Algeria's ills, allowing the non-hydrocarbon economy to flourish. With low debt, the IMF says Algeria has "a window of opportunity to smooth the adjustment to the shock and reshape its growth model". But for the moment le pouvoir, as fractious as ever, are unenthusiastic about changing an economic model where the state is the key player.

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