The past and future of public tax preparation


The past and future of public tax preparation


Algeria field report: Developing shale gas in North Africa

For over a year, strained relations with Russia over the turmoil in Ukraine have led European policymakers to call for diversification of natural gas supplies away from Russia. Yet earlier studies have shown that the most regularly-cited alternatives–increased LNG imports, the southern Corridor via Turkey, increased domestic production–all have limitations. Some discussion but little recent analysis has focused on one of Europe’s main existing natural gas suppliers, Algeria–the 3rd largest source of European imports after Russia and Norway. Algeria is believed to possess one of the world’s largest technically recoverable shale gas resources, according to the EIA. Consequently, it seems high time to assess when–and if–Algeria can be expected to tap into these reserves. In early March I had the privilege of visiting the country, and interview stakeholders about the prospects of Algeria becoming a major shale gas producer.

Algeria has been a prominent gas producer for a long time. In 1956 the state oil and gas company Sonatrach discovered the giant Hassi R’Mel gas field, among the world’s largest with estimated recoverable reserves of around 2.5 trillion cubic meters (or 90 tcf). Production of natural gas started in 1961, and in 1964 Algeria became the first country to export liquefied natural gas (LNG). Natural gas from Hassi R’Mel is supplied to Morocco, Spain, Portugal, Tunisia, Italy, and Slovenia through three major export pipelines.

Still, though Sonatrach continues to be the largest supplier of natural gas in Africa, in recent years its share of the European market has declined. One key driver is rising domestic demand–local consumption (especially for electricity production) nearly doubled from 20.4bcm in 2003 to 50bcm in 2013. At the same time, natural gas exports have faced competition from readily available coal and increased renewable sources in Southern Europe.

With its conventional gas supplies in decline, Sonatrach launched a search for new supplies in 2009. As part of this search, and with the help of international companies, the company also carried out an initial exploration of Algerian shale gas potential. Last January it completed its first exploratory well using hydraulic fracking technology; four wells have been drilled to date. Though even Sonatrach officials do not expect commercial production before the end of this decade, they are confident that commercial exploitation is a question of “when,” not “if,” as geological conditions at first glance appear highly favorable.

Geology aside, a number of above ground factors support this view.

First and foremost, Algeria has, as described, an established natural gas industry. Sonatrach has in-house knowledge about natural gas extraction as well as long-standing business relations to tap into new resources. Many potential partners are familiar with operating in Algeria, both in terms of the Sahara’s geophysical conditions and the political climate. The bulk of necessary pipeline infrastructure and service industry is already in place, with extensive pipeline systems and dozens of drilling rigs available. In addition, Algeria has sufficient liquefaction capacity to serve international markets.

Also, regions of expected shale gas extraction are not densely populated, possibly minimizing social resistance. The authorities expect that current demonstrations (as discussed below) will not last–at a minimum it will be easier for officials to contend with isolated communities than major urban centers.

Finally, in 2013 Algerian authorities substantially revised the existing legislative framework to incentivize shale gas extraction further, providing for relatively low service taxes as well as attractive royalties schemes.

Still, a number of uncertainties require further study.

First, local protests against shale gas extraction have garnered a degree of media attention, particularly in In Salah, the town close to the test drilling sites. It is unclear to what extent the unrest has been caused by a lack of knowledge about hydraulic fracturing (the view of Sonatrach officials), environmental concerns, worries about water pollution, or broader dissatisfaction amongst the population in this part of the country.

Though these protests are limited, they underscore questions about political risk in Algeria, and exacerbate a perceived north-south divide in the country. Current President Bouteflika is frail, rarely making public appearances, and has reportedly ordered members of the army to negotiate with protesters to head off potential conflict. It remains to be seen whether channeling projected returns on fracking–into investments in schooling, housing, or healthcare–will take away the dissatisfaction.

Violence is also a concern, especially after the 2013 terrorist attack on Tigantourine gas facility that was operated by Sonatrach, BP, and Statoil near In Amenas. Algeria’s huge desert borders are difficult to seal off, and mayhem thrives in neighboring countries like Libya and Mali. One of the narratives in Algeria is that the country had its Arab Spring in the 1990s, and President Bouteflika is credited for keeping the country relatively calm during the 2011-2012 uprisings that began in neighboring Tunisia. In this line of reasoning, the imposing security apparatus is seen as a necessary feature to keep the country from sliding back into the chaos of the 1990s or the present turmoil of its neighbors. Other sources however regard the omnipresence of gendarmerie and security forces as outdated, and giving false impressions to visitors. Still, historically speaking, international companies were largely willing to weather the violence and turbulence of the 1990s in Algeria in pursuit of potential profits, and that does not appear to have changed. At present, their main concern is not security, but substantial red tape that complicates operations in the country.

With regard to markets, future demand is hard to predict. Downward pressure on traditional demand in Southern Europe–particularly due to the successful application of renewable energy in Spain, Italy, and Portugal–will likely continue. This is exemplified by the continued delay of the proposed Galsi pipeline to Italy. If European demand is out, then a bet on Algerian shale gas is a bet on global LNG demand for the years to come, particularly in Asia and Latin America. Even here, though the long-term trend is upward, demand is difficult to predict, as LNG competes with other options in Asia, such as increased pipeline imports from Russia and Central Asia, coal, renewables, nuclear, LNG from other parts of the world, as diverse as Australia, Mozambique, the United States, and Russia, and, possibly, domestically produced unconventional gas (e.g. in China).

As noted, domestic demand is expected to rise rapidly due to continued population growth, with the Algerian Electricity and Gas Regulation Commission projecting domestic consumption to grow by another 50 percent to 50 bcm by 2020. However, this is not where profits are made. This projected growth is further incentivized by continued energy subsidies. These subsidies do not hurt international companies operating in Algeria–they receive an “international price” for domestic sales–yet they weigh heavily on state coffers. It is unclear how sustainable this subsidy regime is, with over 10 percent of GDP–some $22 billion–going to fuel subsidies alone in 2012. In recent months, falling oil prices have been a harsh reminder that Algeria’s economy remains overly dependent on fossil fuel revenues, with authorities often at the mercy of volatile price swings. Additionally, continued subsidies hinder the exploitation of Algeria’s huge solar potential in the country (with over 320 days of sun per year), an opportunity that many of its Mediterranean neighbors have started to seize.

In sum, initial findings and local conditions are a cause for modest optimism amongst those involved in shale gas extraction in Algeria, although it is still in its infancy. Despite falling oil prices, there are currently no indications that domestic energy subsidies will be addressed. Arguably, this helps pave the way for continued hydrocarbon exploitation, though it prohibits the development of other obvious opportunities.

I would like to acknowledge Andrew Leber for his excellent research assistance, and thank Sultan Barakat and Charles Ebinger for their helpful comments and suggestions.