ALGERIA - Geology.

The Talsinnt area in eastern Morocco near the Algerian border has become of major interest to companies and to Algiers. This is where Lone Star Energy of the US in August 2000 found oil and gas equivalent to 1.5-2 bn barrels of oil. Its Jurassic and Paleozoic reservoirs lie in a geologically-complex region encompassing the Moulouya Basin, South Oran Meseta and the Atlas which straddles Morocco, Algeria and Tunisia. Lone Star has identified 11 prospects in that region. The Moroccan monthly magazine Economie & Entreprises in late 2000 said the desposits in that region were equivalent of 20 bn barrels of oil (see Vol. 56).

There are also hydrocarbon-rich areas in the Atlantic off Morocco, the disputed Western Sahara and Mauritania which are attracting international oil companies. These are part of a potentially prolific province stretching from northern Moroccan waters down to the Gulf of Guinea.

The geology of Algeria is dominated by a major unconformity at the base of the Mesozoic. Triassic and younger Mesozoic rocks lie unconformably on Carboniferous and older sediments.

Beneath the unconformity in the eastern part of Algeria, the Paleozoic section rises from the axis of the Ghadames Basin south-easterly towards Zarzaitine and north-westerly towards the Hassi R'Mel arch which is very rich in natural gas, crossing en route the ridge upon which Hassi Messaoud oil accumulations are located.

Within the main petroliferous area, hydrocarbons occur in two major reservoir sequences. In the south-east, most of the oil and gas is reservoired in Paleozoic sandstones ranging in age from Cambrian to Carboniferous, although within the area some reservoirs are in Triassic sandstones where the post-Paleozoic seal has been breached.

In the north and north-west, in contrast, the Triassic sandstones are the major reservoirs, sealed often by Triassic evaporites. Regardless of the age of the reservoir and the hydrocarbon type, the sources are believed to be bituminous Silurian shales.

The trapping mechanism is anticlinal with associated faulting. But there is also a stratigraphic component involving pinchouts on pre-existing highs. Stratigraphic traps identified since the late 1980s are believed to have fairly good potential, proving wrong previously held theories about the negative prospectivity of many structural traps explored in the past.

A small oil play in Cretaceous limestones, possibly sourced from Mesozoic shales, has been established to the south of the Atlas at Jebel Onk. There, too, stratigraphic traps in deeper areas are said to be promising. Discoveries have been made south-west of the main producing region, in the Reggane depression.

The synclinal area in the far west of the country has barely been touched by exploration. Sonatrach experts believe the prospects for finding oil and gas in that part of Algeria are good, particularly on the Atlas border with Morocco.

There would seem to be scope for adding to Algeria's oil reserves by infill exploration in the main play areas in the east. The size of individual new oilfields are likely to be small, however, and deeper formations are more likely to contain gas than oil. Yet the discovery of light condensates in some of these areas since the second half of the 1980s has substantiated theories about the presence of light oil in deep formations. Further discoveries should be expected in the Reggane area which is rich in gas.

While the far west is virtually unexplored, however, the distance to existing infrastructure would require oil and gas discoveries there to be substantial, as in the case of the major discovery on the Moroccan side. Foreign companies could respond favourably to Sonatrach offerings in that western part of Algeria.

As in the case of Morocco, there may be potential for deep gas/condensate plays associated with the thrust front of the Atlas mountain chain. On the Moroccan side, for example, the prospects discovered lie in a deep "Rocky Mountain" type overthrust play. This would involve very advanced seismic surveying and interpretation, together with high risk and ultra-deep wells which would be expensive to drill.

Among oil discoveries are several major ones made since February 1993 by Anadarko of the US in the Hassi Berkine and Merk regions. They are mostly in the Ghadames Basin between Hassi Messaoud and the Tunisian border. Oil of 42o API with very low sulphur content was found in the company's Block 404 in Lower Triassic sandstones at depths of 3,238-3,272 metres (see Vol. 56, Gas Market Trends No. 5).

In the oil-producing Illizi basin, about 1,000 km south-east of Algiers, Petro-Canada's first exploration well on its Tinhert block on Sept. 9, 1994 tested 5,650 b/d of 44o API oil and 4.2 MCF/day of gas from a 15-metre thick Siluro-Devonian formation (called F6) at a depth of 2,660ymetres. A second pay zone was struck subsequently in an Ordovician formation at a depth of 3,100 metres and flowed 4.2 MCF/day of sweet gas during an eight-hour test.

The Sbaa basin is of major interest. This is next to the District 3 licence held by BP in the gas rich In Salah. Other basins of interest are the frontier areas of Bechar, Ohanet and Timimoun, on which Gustavson Associates of Colorado has done further geological studies. E&P Regime: Under a programme launched in 1996, about 300 exploration wells were drilled by 2000 in various parts of Algeria. Half of these were drilled by foreign companies, with the rest drilled by Sonatrach. But only seven exploration wells have been drilled per 10,000 sq km in Algeria. In North America there are 500 wells per 10,000 sq km.

Exploration in Algeria began in 1953. The giant Hassi Messaoud oilfield and the Hassi R'Mel gasfield, a super-giant, were found in 1956. After a bloody war, Algeria gained its independence in 1962. Sonatrach was set up in 1963. In mid-1970 the government nationalised the operations of all non-French companies affecting Shell, Mobil, Phillips, Newmont, Amif and Elwerath. The French companies were allowed to hold 49%, and Sonatrach held 51% of any upstream partnership in the country. These included Petrobras, Hispanoil (later to become Repsol), Sun Oil, Deminex, Amoco (now part of Amoco), Copex and a German group led by Veba.

Due to tough E&P terms, exploration fell considerably in the second half of the 1970s. As a result, the government in 1980 improved its terms somewhat by offering new production-sharing agreements (PSAs), JV concessions and service contracts. But no foreign company could hold more than 49%. As the foreign companies' response in the subsequent years was below Algiers' expectations, with fields poorly maintained by Sonatrach, Algeria's oil production capacity fell.

After a long debate, a new upstream law was issued in August 1986 to attract foreign companies and for oil exploration to be resumed. All three types of E&P contracts were improved and foreign companies were allowed to act as operators. But the law preserved Sonatrach's right to hold at least 51% in any venture. Because the response was poor, further improvements were made in 1986-87, while other states in North Africa and the Middle East were offering better terms and foreign firms still were apprehensive of Algeria's tough socialist approach.

The law was amended in late 1991. Foreign companies then could take up to 49% equity in producing oilfields and in E&P for gas, whereas before only Sonatrach could develop and operate gas fields. Transport pipelines and related facilities were no longer a Sonatrach monopoly. Disputes were to be resolved by international arbitration and not by Algerian courts. Further improvements of the regime were made in the subsequent years. In 2000 the Ministry of Energy and Mines, under Shakib Khelil, proposed a new law which he had to revise in 2001 because of opposition from within Sonatrach and powerful trade unions. With Khelil saying this will be passed soon by parliament, the law will change Sonatrach and allow foreign companies to hold the majority in new E&P ventures.

Khelil, also CEO of Sonatrach, is using the Petrobras and Statoil models for expansion of the state company outside Algeria. The proposed law will to strip Sonatrach of its monopoly on negotiating and awarding E&P deals, will liberalise the pipeline system it controls and will give new incentives for foreign investors to invest in expanding Algeria's oil and gas production capacities.

The Sonatrach shake-up will lead to more efficiency and reduce red tape to bring increased foreign capital and better technologies to the petroleum industry. Khelil wants a concentration of foreign operators in Algeria similar to that in the North Sea.

The driving forces behind Khelil are President Bouteflika and the military establishment. Khelil says commercialising Sonatrach's operations should help it raise finance for upstream projects on the international market without the need for government guarantees.

The proposed law still draws opposition from the unions, which fear the move will mean massive job losses, with the energy sector employing more than 50,000 workers. Now the unions want state guarantees that Sonatrach will keep control over the fields it is developing and that it will hold a stake in any future foreign partnership. (Sonatrach controls 75% of Algeria's oil output. It is the world's fourth largest exporter of natural gas by pipeline and the second largest LNG supplier).

The new law will put Sonatrach on an equal footing with its international peers in bidding for E&P contracts. It will also allow free competition in the midstream and downstream sectors and establish the legal framework for a liberalised operating environment. That would guarantee fair treatment for all operators, whether public or private and regardless of their nationality. A new agency called Alnaft will oversee the award of E&P deals. A separate regulatory unit will enforce technical, environmental and safety standards. Both will be under the Ministry of Energy and Mines.

To encourage competition, Sonatrach's future stake in any E&P contract will be limited to 25%. This will reduce its growth opportunities in Algeria and drive it towards international expansion. One option would be for Sonatrach to raise funds on the international capital markets, which implies that the state company will have to demonstrate a capacity to improve its operational and financial performances.

Separation between the state and Sonatrach will be a first step. Although Khelil has since late 2000 been compelled to deny repeatedly that his aim was to privatise Sonatrach, this might become inevitable. But changing the form of its ownership by opening its capital to equity investors may be a lengthy process - to involve far-reaching, costly and difficult measures to restructure the company.

The most important factor will be the evolution of the new legal and institutional framework. Until the agencies proposed to be in charge of licencing and regulation become strong enough to take over the roles previously delegated to Sonatrach, the government will continue to exercise full control of the company.

Algeria's powerful National Federation of Workers of Oil, Gas and Chemicals (FNTPGC) in mid-2002 suspended talks with the government over the proposed law. Mohammed Lakhdar Badredine, its secretary general then said: "The changes we have demanded to be introduced in the draft law were not taken into consideration and...we are in a deadlock". (The FNTPGC groups workers from all the state-owned energy companies, including Sonatrach and Sonelgaz). He added: "I call on Chakib Khelil to review all the articles on which we have reservations in the interest of the country and Sonatrach; otherwise it would be up to the workers to decide" - hinting at the possibility of nationwide strikes like those in Venezuela.