Algeria - Oil Policy Position.

Now producing over 920,000 b/d, compared to an OPEC quota of 693,000 b/d until end-2002, Algeria this year was the first member to demand an increase in its share of the organisation's output ceiling.

Algeria's Energy Minister, Chakib Khelil, has said his country now had a production capacity of more than 1.1 million b/d and this should exceed 1.5 million b/d before 2005. He has also warned that, with the number of foreign oil companies involved in Algeria's oil production capacity rising and accounting for a major part of the output, his government may no longer afford to be limited by a low OPEC quota.

However, Algeria would be among the last member-states to abandon OPEC. It depends heavily on OPEC's price defence because it is one of the world's biggest exporters of natural gas and LNG, whose market value is set by that of oil. In OPEC Algeria has always been an active price defender. Algeria is Europe's second largest gas supplier next to Russia, providing 13% of the continent's gas and 3% of its crude oil. The state concern, Sonatrach, this year intends to export more than 62 BCM of gas: 35 BCM by pipeline to Europe and over 27 BCM in LNG form to Europe, the US and Turkey. Because of a global economic slowdown in 2001 after the Sept. 11 terrorist attacks, Algerian gas exports fell to 56.7 BCM - 31.1 BCM by pipeline and 26.6 BCM in LNG form - compared to 61.6 BCM in 2000.

Algeria is a founding member of the Gas Exporting Countries' Forum, which groups 15 gas producing countries and was formed in Tehran in May 2000. Unlike OPEC, the forum is loose without a secretariat and its role is only consultative. It met in Osaka last September and in Algiers in February.

One main issue raised through the forum is the European Union's first gas directive which came into force in 2000. Algiers says this "was worked out without co-ordination with gas suppliers and heavily handicap-ped gas investments" as it threatened long-term take-or-pay gas contracts, on which expensive pipelines and LNG plans depend commercially. The EU's directive also threatens "destination clauses", which Algeria, Russia and other exporters have built into their EU contracts to prevent the resale of their gas from one EU country to another. Brussels says these clauses infringe the EU single market.

Russia, a fellow member of the forum, has joined Algeria in trying to preserve both the destination and take-or-pay clauses, the latter obliging term customers to pay for the gas whether they take it or not. Norway, another forum member which is the EU's third biggest gas supplier, is finding it harder to resist Brussels because as a member of the European Economic Area it is subject to EU competition law. Algiers has suggested that, if it cannot prevent resale, it should be allowed to benefit from it through profit-sharing schemes. But Brussels argues this also runs against the single market's logic.

The EU has forecast that Europe will need up to 170 BCM/year of additional gas by 2010, with imports to rise to 60% of demand from 46% in 2000 and to over 70% by 2020. To meet this increase, Algeria is racing to raise its gas export capacity by pipeline from 35 BCM to between 64.5-74.5 BCM/year by 2006. Together with about 30 BCM/year of LNG, Algerian gas exports would exceed 100 BCM/year by 2010.

New projects to be built is a second gas pipeline to Italy with a capacity of 8-16 BCM/year, with the first line TransMed to be expanded from 25 BCM to 30 BCM/year, and the second line to Spain with a capacity of 8-10 BCM/year. The first pipeline to Spain, running through Morocco and the Straits of Gibraltar, is being expanded from almost 10 BCM to 13 BCM/year by September 2004 and should reach 18.5 BCM/year by 2006. The second line to Spain is being built directly across the Mediterranean and this, Medgaz, is a joint venture between Sonatrach and Cepsa.

The government has decided to attract as many foreign operators to Algeria as possible to raise the country's oil and gas reserves as well as its oil and gas production capacities to the maximum. Creating a concentration of operators like that of the North Sea, it is not inconceivable for Algeria to see its oil production rise to 2m b/d by 2010-2012 together with almost 500,000 b/d of condensates. In that case Sonatrach could account for less than half of Algeria's oil output, having produced 650,000 b/d in 2000.

Under a new hydrocarbons law being pushed by Minister Khelil, Sonatrach's share of all E&P ventures involving foreign companies is to be reduced from 51% to 30%. The law will end Sonatrach's dual status as both a partner and regulator, with a separate agency in charge of all E&P ventures to be set up within the Energy Ministry.

For foreign investors in the country's petroleum sector, the situation keeps improving. Algeria's oil and condensate production capacity - with condensates excluded from OPEC's quota system - has risen to 1.55m b/d and will exceed 1.75m b/d before 2005, compared to a little over 1.1m b/d in the 1990s. Foreign firms have been responsible for the rapid expansion and, eventually, will account for more than half of Algeria's oil output. As proven in the North Sea, the concentration of operators in Algeria will help reduce E&P costs, raise petroleum reserves and make even the small oil and gas discoveries commercial.

The country remains under-explored, with the Western Sahara still being virgin territory. Less than ten wildcat exploration wells have been drilled per 10,000 sq km in Algeria. In North America there are 500 wells per 10,000 sq km. According to Sonatrach, there have been over 35 oil and gas discoveries since 1997. There were more than 15 new oil and gas discoveries in 1998 as Algeria reaped the rewards of a revised E&P regime. The number of foreign oil companies operating in Algeria will increase after the new law is passed.

The country's proven oil reserves are estimated independently at less than 10 bn barrels. In addition, there are about 7-10 bn barrels found in the past ten years to be tapped. Independent estimates of Algeria's recoverable gas reserves put them at more than 5 TCM. Exports of high quality crude oils, condensates and refined products will rise steadily. The government is investing in market share assets in Europe and the US. To secure additional markets, Sonatrach is investing in other sectors, such as the power business in the EU.

Those parts of Algeria where foreign oil companies operate are safe. The other parts are in civil war, which has resulted in more than 100,000 deaths since January 1992 and $4 bn worth of losses, with very radical but marginalised Islamic militants still bent on overthrowing the government (see a comprehensive 2001 survey of Algeria, including a who's who in the petroleum sector, in Vol. 56, Nos. 5-8).