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Algeria struggles to seize the moment as gas demand rises

This could have been Algeria’s moment: Europe’s efforts to wean itself off Russian gas should have provided the north African country with a golden opportunity to maximise exports and carve out a bigger share of the continent’s energy market.

In a sign of renewed western interest in the country’s oil and gas resources, senior figures, including Mario Draghi, Italy’s prime minister, and Antony Blinken, US secretary of state, visited Algiers in recent weeks to discuss energy security as Europe seeks to reduce its dependence on Russian gas.

This interest in the hydrocarbons exporter and the rise in oil and gas prices bring some welcome relief to a country that has been burning through its foreign currency reserves since the oil price plummeted in 2014.

But Algeria, which is the third-biggest natural gas supplier to Europe, with about 8 per cent market share, and supplies gas through pipelines to Italy, Spain and Portugal, does not have enough extra gas to make available quickly, energy experts say.

They blame a longstanding shortage of foreign investment in the country’s hydrocarbons sector which has left it with limited spare capacity. Some also point out that policy over hydrocarbons, its biggest foreign exchange earner, has often been a battlefield for factions within the opaque political elite, leading to frequent rule changes.

Eni, Total and others are already invested in Algeria. “Algeria missed an opportunity to realise its full potential,” said Anthony Skinner, a political risk consultant. “This is due to years of under-investment by international oil companies because of a history of difficult fiscal terms and the overall operating environment marked by bureaucracy and slow decision-making.” In the most recent oil and gas licensing round in 2014, only four out of 31 blocks on offer were awarded.

Mostefa Ouki, senior research fellow at the Oxford Institute for Energy Studies, said that “in the short term, Algeria could only provide Europe with a few additional billion cubic metres of gas”.

During Draghi’s visit on April 11, a deal was signed between Algeria’s Sonatrach and Eni, the Italian company, under which Algeria would gradually increase exports, hitting as much as 9bn cubic metres in 2023-24. This is on top of the current annual 21 bcm that Rome buys.

“Perhaps the new geopolitics of energy could enable the return of international partnerships in Algeria’s upstream hydrocarbon sector,” said Ouki. But the joint development of new gas supplies would be a long process and could be inconsistent with Europe’s decarbonisation plans. He also noted that increasing domestic demand for natural gas would put pressure on the quantities available for export.

One potential positive sign, some analysts say, is the establishment of a national energy council in recent days headed by Abdelmadjid Tebboune, the president, with the aim of co-ordinating hydrocarbons policy.

“It could help Algeria think about long-term strategy rather than just focus on current gains,” said Riccardo Fabiani, head of the North Africa programme at the International Crisis Group. He added that “the constant tinkering with the rules had reinforced the perception that Algeria was unstable in its investment conditions”.

Oil and gas export revenue rose in 2021 to $35bn, up from $20bn the year before, according to official figures. The extra cash has allowed Algeria to shelve plans for unpopular tax increases and subsidy reforms and to introduce a new unemployment benefit of $90 per month intended to “pacify aggrieved youth”, according to Skinner. Youth unemployment stood at 31.4 per cent in 2020, the latest figure cited by the World Bank.

Mario Draghi, Italy’s prime minister, left, meets Aymen Benabderrahmane, Algeria’s prime minister and minister of finance, in Algiers
Mario Draghi, Italy’s prime minister, left, meets Aymen Benabderrahmane, Algeria’s prime minister and minister of finance, in Algiers © Palazzo Chigi/AFP/Getty Images

The unwritten bargain underpinning the country’s political system is that the state provides subsidies and jobs to citizens in return for their acceptance of autocratic rule. But this arrangement frayed with the fall in oil prices in 2014.

Tebboune’s predecessor Abdelaziz Bouteflika was ousted by the military in 2019 after a wave of massive anti-regime protests by Algerians fed up with corruption, falling living standards and autocratic rule. These lasted for a year but eventually fizzled out under the impact of coronavirus and government repression.

“Every president who takes over has a limited power base, and only wants to make the difficult reform decisions when revenue is tight and when it is harder to make them,” said Fabiani. “Once the oil price has risen, they stop reforms and start distributing money to boost their popularity.” 

Adel Hamaizia, associate fellow with the Middle East and north Africa programme at Chatham House in London, said that while the Tebboune government had launched some reform initiatives to encourage private-sector investment in sectors such as agriculture and start-ups, it was still “in a hybrid situation. It wants to find ways to reform, but it is still stuck around the old expired social contract centred on rent distribution.” 

Growth, job creation, foreign and private sector investment were crucial to a necessary overhaul of the Algerian economy, argued Ali Harbi, an expert in sustainable development and the head of AHC consulting in Algiers.

“The opportunity we have today is to use the additional revenues for structural reform,” he said. “It should not be oriented to subsidies and the same state companies. But what we have here is a political issue. Our regime is authoritarian and it is based on bureaucracy and the military. They allow a level of private-sector development but they are always afraid of losing control.”

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2022-04-19 23:00:16

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