Sonatrach in Landmark agreement with BP-Amoco

Sonatrach in Landmark agreement with BP-Amoco

Algeria Interface , March 3, 2000

The $2.4 billion BP-Amoco is to invest in the In Salah gas field is just one part of Sonatrach’s ambitious modernisation plan. But will the plan succeed?

Paris, 3/3/00 – BP Amoco’s confirmation that it will invest $2.4bn in the development of the In Salah gas field between now and 2002 is a landmark deal. It is the largest ever foreign investment made in North Africa’s largest economy.

Investment is $600m less than initially planned as BP Amoco has managed to cut costs. The deal covers provides for the production of 9bcm of gas. That covers an existing contract under which Sonatrach supplies 4bcm to Italian electricity utility Enel and leaves only an additional 5bn to be exported.

In spite of the limited geological risk, the In Salah gas field is of only marginal financial interest. Because it is a dry gas field it will not bring in any of the additional revenue yielded by the natural liquid gas fields from southwest Algeria.

Because In Salah is remote, a 550 km pipeline will have to be built to link it to the Hassi R’Mel production and distribution complex. It will benefit from tax breaks, however, while the proximity of southern European markets should help to make it economically viable.

Changing face of Sonatrach
News of BP Amoco’s plans comes at a time when, in a major departure from previous government positions, the Minister of Energy, Chekib Khelil, has indicated that Sonatrach is no longer off-limits for privatisation. The liberalisation of European gas markets, which account for virtually all Sonatrach’s 60bcm of gas exports, a mounting foreign debt burden and increased expenditure have forced the Algerian government to seek alternative sources of funding for the national budget. Oil and gas taxes provide 60% of budget revenue.

Two years ago, Sonatrach became a joint stock company in a move to free it from political interference and make it more competitive. The state is still its only shareholder. Chief executive, Abdelhaq Bouhafs, has stated at length that partnership with foreign companies is essential if Sonatrach is to implement its plan to invest $20bn over the next five years (16bn of which is earmarked for upstream development).

Sonatrach’s new objective is to exploit the potential capacity of the TransMed pipeline to Italy and the Maghreb Europe pipeline to the Iberian Peninsula to boost exports to Spain and Italy by 15 billion m3.

Although proven reserves may sustain an export profile of 65bcm per year beyond the initial horizon of 2015, any further increase in exports will require both the expansion of Sonatrach’s gas resource base and a higher market share. Which in turn poses questions.

Algerian companies could internationalise
Sonatrach’s gas strategy was drawn up a decade ago in a climate of pessimism about oil prospects. It did not take into account the possible revival of this sector. Now, as a result of the oil-production boom in the region of Berkine, output is expected to reach some 1.5 million barrels of crude daily by 2005 – double production levels in 1995 when partnerships with foreign companies began. Developing remote gas fields may not be the best option either for the government (lower tax revenue) or for Sonatrach (lower returns on investment).

Abdelhaq Bouhafs recently said, « partnerships involving cross shareholdings could allow Algerian companies to gradually internationalise their operations ». They include companies like Naftec and Naftal that operate downstream in refining and petrochemicals, where Sonatrach is sole shareholder. Foreign companies like Anadarko, Arco, ENI, Repsol and Cepsa Total Fina that have both the capital and the managerial expertise could also be involved.

President Bouteflika talks tirelessly of putting foreign capital to work in Algeria. How the Sonatrach saga unfolds will be a litmus test.

Francis Ghilès