Algeria Faces Economic Crunch as Oil and Gas Revenues Fall

SEATTLE (Oil Monster): Weeks of protests in Algeria have revealed popular discontent at Abdelaziz Bouteflika, the ailing president. A less visible threat to Algiers is the looming economic crisis, as revenues from the north African country’s oil and gas exports continue to fall short of its expanding needs, politicians and analysts warn.

“The debate is now focused on politics, but the real iceberg is the risk of an economic crisis in the next couple of years and no one has a strategy to tackle this,” said Riccardo Fabiani, Algeria analyst at Energy Aspects, a London-based consultancy. “Foreign reserves are falling very quickly and they probably have less than two years of import cover left.”

The third-biggest natural gas supplier to Europe, Algeria depends on hydrocarbon exports to bring in more than 95 per cent of foreign currency receipts. Oil and gas revenue in 2018 accounted for an estimated 40 per cent of the budget.

Hydrocarbons also underpin the unwritten bargain of the Algerian political system under Mr Bouteflika, whose tenure since 1999 coincided with a long stretch of high oil prices. The government has poured money into subsidies and handouts in return for popular acceptance of autocratic rule. 

Since 2014, the government’s ability to keep its end of the deal has been fraying because of low oil prices, which have strained public finances and slashed Algeria’s reserves from $178bn in 2014 to $88.6bn in June last year, the last available figure. The budget deficit in 2018 was an estimated 9 per cent, according to the International Monetary Fund.

The vagaries of the oil price are not the only challenge to Algeria’s oil and gas industry. The hydrocarbons sector is grappling with reduced production from ageing oilfields, rising domestic demand for natural gas and a difficult investment climate that has discouraged international companies from exploration and production activities.

“Domestic gas consumption is growing very rapidly,” said Mostefa Ouki, senior research fellow at the Oxford Institute for Energy Studies. “The main reason is that electricity and natural gas prices are heavily subsidised. A kilowatt/hour of electricity in Algeria costs 12 dinars to produce but it is sold for four.” 

He said that while Algeria consumed an estimated 45 billion cubic metres of natural gas in 2018, domestic demand was forecast to reach 70 bcm by 2030. “That’s a jump in demand of more than 50 per cent, which needs to be compensated for by an increase in production if exports are to be maintained along with the fulfilment of domestic needs.” The country exported an estimated 50 bcm in 2018. 

“The people designing policy in Algeria are well aware of what needs to be done,” he said.” They know the solutions but phasing out subsidies is a very sensitive issue. The will is not there yet.” 

Political sensitivities appear to partly explain the difficult investment climate. In the last oil and gas licensing round in 2014, only four out of 31 blocks on offer were awarded. Analysts say security concerns were one reason after the al-Qaeda linked attack in 2013 on the Tiguentourine natural gas facility that resulted in the killing of 39 foreign hostages. The other reasons, however, related to unattractive fiscal and bureaucratic terms. Companies have had a range of complaints, from a heavy tax burden to the long wait for project authorisations to a rule limiting foreign ownership of joint ventures to 49 per cent.

Mr Fabiani said: “Terms were not viewed as very favourable and in the meantime there was an increase in oil and gas opportunities in other countries, which meant that the relative attractiveness of Algeria went down.”

Courtesy: www.ft.com