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Financial Times: Algeria: A big test of confidence

By Andrew England
Published: January 28 2008 06:10 | Last updated: January 28 2008 06:10

When Algeria’s next bidding round finally goes ahead, observers and investors will be watching closely, seeking to gauge the impact that amendments to the hydrocarbons law and the implementation of a controversial windfall tax have had on confidence in the north African state.

Chakib Khelil, the energy minister, had been hoping to hold the round – the country’s seventh – before the end of 2007, but the announcement for pre-qualification applications was only made this month. The government is thought to be offering 15 oil and gas blocks, but further details have not been made public. Mr Khelil has said the government wants to focus on the value bidders offer in terms of expertise, technology and management, as well as the potential for Sonatrach to expand its portfolio globally.

“The impact of the changes from an investment perspective has been negative and certainly would not have been welcomed by the industry’s major players, but will they still come to the table?” says Craig McMahon at Wood Mackenzie, the energy consultant. “It will be extremely interesting and it will give us the first tangible opportunity to see how the changes have affected investor confidence.”

In theory, interest in Algeria should be strong, given its importance and proximity to Europe. Adding to this attractiveness is the fact that some areas are still relatively under-explored compared with other big producers.

At the last round in 2005, 54 companies showed interest in 10 blocks offered, and companies that won included Shell, BHP-Billiton and BP, according to the US’s Energy Information Administration. Yet the windfall tax and law amendments could dull Algeria’s attractiveness, particularly in an environment where oil companies face rising production costs and shortages of equipment and manpower.

“We have a finite amount of budget money that goes around and Algeria still has to compete with other places around the world. With rising costs you may not be able to invest in as many places,” says one international oil executive. “It doesn’t necessarily mean that Algeria gets shorted, but a finite amount of funds will now not go as far.”

The delays for the bidding round are partly a result of the government amendments to the hydrocarbons law which mean that Sonatrach, the state oil company, will have a minimum 51 per cent stake in all new projects. The windfall tax does not affect the fiscal regime of the new hydrocarbons law, but has an impact on contracts when the price of oil is above $30 a barrel and is linked to production levels. It could reach 50 per cent depending on the structure of individual contracts, experts say. The changes were driven by political and public pressure as oil prices soared.

Some also saw the decision by Sonatrach to cancel the Repsol and Gas Natural contract to develop the 5,000bn cu ft Gassi Touil project as an example of increasing nationalism. However, Sonatrach cited development delays and cost overruns for its decision, and analysts say the reason was driven primarily by economics.

When the consortium won the contract in 2004, the deal’s economics were “marginal”, according to Wood Mackenzie analysis. Since then, rising upstream costs and the increasing cost of setting up liquefaction plants have raised the project’s overall costs by 127 per cent from $3bn to $6.8bn, according to the energy consultants.

Algeria, like other producers around the world, could struggle to meet targets for both oil and gas because of constraints in the market, but gas is the more sensitive issue as the government has long-term commitments. Mr Khelil told the FT last year that Algeria was on target to meet its goals, even if some liquefied natural gas projects may be delayed. But the government has yet to announce its new plans for Gassi Touil. There have been reports in the Algerian press that Sonatrach will develop the project alone, but the information has not been confirmed.

Analysts say Sonatrach probably has the resources to develop Gassi Touil if it chooses, but they point out that the project is highly challenging from a technical perspective. It was supposed to go onstream in 2009, but at best it will not begin producing until mid-2012, according to Wood Mackenzie, and observers suggest Algeria will struggle to achieve its production targets within the designated timeframes.

“Oil projects may be delayed, but if you have commitments to gas buyers, then you will have the government working hard to encourage development and production to fulfil those obligations,” says the oil official.

Copyright The Financial Times Limited 2008

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