Date first published: 21/08/2020
Key sectors:oil & gas; mining; ports; infrastructure
Key risks:Business disruption; contract frustration; credit risk
Introduction: A change was going to come
The economic profile of Algeria is changing alongside its politics. Algeria possesses massive natural resource reserves, including the third largest phosphate reserves in the world behind Morocco and China. However, such reserves remain unexploited and Algiers remains dependent on its hydrocarbon reserves, which on average comprise around 95 per cent of export earnings and 80 per cent of government revenue per year. The economic policy of former long-time President Abdulaziz Bouteflika can only be described as protectionist, with the disproportionately dominant hydrocarbon industry almost exclusively dominated by state oil and gas company Sonatrach. In recent years, however, Algeria’s gas balance has been worsening as mature fields plateau and domestic consumption rises. Algeria is the third largest gas exporter to Europe behind Russia and Norway. However, mass protests erupted in February 2019 over Bouteflika’s announcement that he would run as president for a fifth term, triggering his resignation that April. This ushered in a period of prolonged political instability and civil, peaceful unrest known as al-Hirak – the movement. In 2019 these factors alongside a lack of investor confidence saw gas exports diminish by up to 20 per cent over the year.
In December 2019 Abdulmajid Tebboune – a continuation of Bouteflika’s cabal known as ‘Le Pouvoir’ – was elected in what many believe were sham elections. Following a severe economic decline off the back of 2019 protests the country faced critical shocks of cratering oil and gas prices, COVID-19 and the resultant impact on oil & gas consumption, especially in Algeria’s biggest market, Europe. Against this backdrop Tebboune’s administration recognises the need to shore up the country’s economy. This is why in recent months, Tebboune has started announcing widespread sweeping economic initiatives alongside a referendum on changes to the constitution. If he can manage both successfully, this could serve to go some way towards legitimising him as the continuing president of Algeria. However, there are still many pitfalls to be navigated, not least the ongoing opposition to his rule.
Algeria’s gaseous history
Algeria’s largest natural gas field, Hassi R’Mel, was discovered in 1956, with the country’s oil production beginning in 1958. As of 2019, the field held proven reserves of around 85tn cubic feet (TcF). In 1964 Algeria became the world’s first liquid natural gas (LNG) producer when the Arzew LNG facility came online. Algeria also holds vast untapped shale gas resources but faces many obstacles to developing these. Oil and gas became the driver of growth for Algeria over the decades, more so after Algeria’s independence from France in 1962 after a brutal six-year war. The following year state oil company Sonatrach was established, and in 1971 the hydrocarbon industry was nationalised. Algeria’s National Liberation Front (FLN), who led the war against the French, became the ruling party, which is still technically in power now. These facts demonstrate how the systems of power and economy which pervade Algeria’s modern history almost exclusively dominated and depended on the exploitation of natural gas reserves.
The country therefore has been producing, consuming and exporting natural gas for several decades. The lessening of the civil war in the latter half of the 1990s enabled the rapid expansion of the gas sector. Policy reforms were implemented of the late 1980s and early 1990s and the country stabilised further in 1999 with the election of General Abdulaziz Bouteflika, who presided over the end of the civil war in 2002. GDP expanded rapidly, with World Bank figures indicating continuously strong growth from US$54.7bln in 2000 to US$200bln in 2011, with a dip in 2009 amid the global financial crisis. However, from the mid-2000s gas production declined, with oil becoming an increasingly large part of exports. Interestingly, the early deterioration of natural gas production coincided with the 2005 promulgation of a controversial hydrocarbons law and its subsequent inauspicious revision in 2006. The decline was due to a variety of reasons, including the maturing of old fields that had been in production for several decades, especially the largest field Hassi R’Mel. Some of the Berkine basin’s fields which started producing in the early 1990s also matured earlier than expected and production plateaued. Secondly there was insufficient investment in technologies to improve low recovery rates. The number of new gas discoveries also plateaued mainly owing to a distinctly unfavourable climate for international investments in upstream developments. Furthermore, bureaucratic problems inherent in the administration resulted in long delays in project development and implementation. The latter three points have not yet been addressed and will continue to remain a challenge for foreign investment in the country.
Over the years to 2018, however, a number of developments were taking place internationally which increased the strategic value of Algeria’s gas in the international markets. Europe had for many years relied on multiple sources to meet its gas consumption requirements. Domestic production including Norway had typically satisfied 50 per cent of European regional demand, with the remainder met by pipeline gas from Russia, Algeria, Libya, Iran and Azerbaijan (the last two via Turkey) as well as LNG from diverse supplier countries. the US shale gas ‘revolution’ in the mid-2000s, coupled with the eruption of the 2014 tensions between Russia and Ukraine turned attention to the European Union’s increasing dependence on Russian gas. Algerian gas, however, connected to Italy from the south, remained a steady source of gas, albeit overlooked on the geopolitical front.
International confidence in the country took a hit in January 2013 over the In Amenas terror attack and hostage crisis in Tiguentourine, operated by Sonatrach, the UK’s BP and Norway’s Statoil – now Equinor. Al-Qaeda-linked militants took personnel on the gas plant hostage, killing at least around 39 foreign nationals in the process. The attack significantly increased the cost of operating in Saharan provinces and introduced a greater element of risk assessment in new ventures. Following this, the Algerian military did devote considerable resources to protect key hydrocarbon assets. However, in mid-March 2016 militants fired explosive munitions on Krechba, part of the In Salah gas scheme. Anti-shale protests also erupted at this time, initiated by local residents expressing concerns over the impact of shale fracking on the region’s scarce and precious water resources. Indicative of the results of such incidents, no potential shale blocks at all were bid for by international oil companies (IOC) in 2014.
From 2017, natural gas accounted for 42 per cent of all exports, with crude oil accounting for another 35 per cent and refined products another 20 per cent. Around 60 per cent of all gas exports went via the Trans-Mediterranean pipeline to Europe. By 2018 gas comprised only 34 per cent of export value, with crude accounting for 42 per cent, in a sign of the myriad issues facing Algeria’s gas balance. A declining or, at best, stagnating natural gas production and rapidly growing domestic gas consumption combined to dangerously constrain the country’s gas export potential. This in December 2018 led the former Algerian energy minister to declare in a statement to parliament that ‘if domestic gas consumption continues at the current rhythm, Algeria runs the risk of being unable to export natural gas within three years.’ GDP growth in 2017 and 2018 remained stagnant, below 1.5 per cent.
At the beginning of 2019, however, all eyes turned to Algeria, where the ailing 82 year old Abdulaziz Bouteflika stated his intention to run for a fifth presidential term in elections that year, 20 years after he took power. The populace en masse across of all swathes of society took to the street in the knowledge that the election would be rigged, and the fact that Bouteflika was not well enough to run the country, having been seen in public less than once a year since a stroke in 2013, earning him the moniker ‘Ghost President’. The country’s increasingly young and educated population were suffering from high levels of unemployment and a lack of political freedoms as well as an economy dominated by the political elite. Some estimates put the number of protesters in the capital at over one million. Bouteflika was forced to resign in April 2019 but the protests continued for over 200 consecutive days, calling for not just his dismissal but the dismantling of the whole system of clientelism.
Fast forward to December 2019 when after three postponed elections that year, elections finally took place. Abdulmajid Tebboune, former prime minister became head of state in elections Abdelmajid with 58 per cent of the vote, precluding a second-round vote. Turnout was at record lows of around 40 per cent, but the actual number is thought to have been even lower. Tens of thousands continued to protest, questioning the election’s legitimacy. Tebboune had been backed by Army Chief of Staff Ahmad Ga’id, Salah’s preferred candidate and close to the military elite. Nonetheless, in a surprise turn, Salah died of a heart attack the following week, alleviating fears that he might finally clamp down with force on the protests movement as previously indicated.
Nonetheless, and despite an ongoing protest movement, since curtailed by the COVID-19 restrictions, Tebboune has ostensibly recognised the critical need to diversify Algeria’s economy, even before the dual shocks of cratering hydrocarbon prices, COVID-19 and its resultant impact on consumption. Algeria’s natural gas exports were reported at 42,497m cubic metres in December 2019, a 17 per cent decrease from the previous number of 51,424m cubic metres in December 2018, attributed to the wide-ranging protest movement and an increase in domestic demand. Sovereign wealth reserves sat at a mere US$62bln versus US$180bln in 2014, and many were falling into poverty. Algeria analysts were watching the decline with anxiety, concerned that dwindling government revenues might trigger a military backlash to halt the protests and restore order and perhaps investor confidence. It was, however, COVID-19 that drove the movement indoors, following which activists began disappearing from their homes.
Reforms ostensibly began in May 2020 when Tebboune’s government submitted a report to parliament to overturns Algeria’s 51/49 per cent ownership rule. The law stipulated that foreign investors could not own more than 49 per cent of any given company and would, therefore, be obliged to enter into a majority partnership with an Algerian national. However, the proposed legislation prompts a number of questions, the first being over changes of the text allowing the state the right to buy all sales of shares in the capital of the company carried out by or for foreign entities – which may enable the potential to open foreign investors up to forced divestment risks. Furthermore article 51 of the draft law outlines that ‘strategic sectors’ will remain unaffected, including ‘national mining operations, all underground or surface resources within the scope of the extractive industry, upstream energy and ‘activities governed by the law on hydrocarbons and the operation of networks for the distribution and transportation of energy.’ Defence, transport, and pharmaceuticals also remain under the 51/49 rule. Independent power producers are not excepted, thus meaning that foreign investors can hold majority ownership. Algeria’s solar power potential could make this a fruitful economic prospect.
The majority ownership rule, enshrined in law in 2009, reflected Algeria’s image as a closed country and was seemingly designed to protect the financial interests of the Algerian population by maintaining Algerian control over Algerian resources. Further reforms announced started with the energy and finance ministries. Abdulmajid Attar, former CEO of state oil company Sonatrach, is the new energy minister and Central Bank Governor Ayman Benabderahman is the new finance minister. While there were no changes to the top levels of government Tebboune attempted to alleviate this by opening an investigation into Sonatrach’s acquisition of the Augusta refinery in Italy. Furthermore, in crisis-hit Lebanon a Sonatrach subsidiary was targeted for corruption by a court. Ahmed El-Hachemi Mazighi, former vice president of marketing at Sonatrach, was placed under a committal order at El Harrach Prison and has been charged on allegations of “squandering public funds and impersonating a public official”. These were blatant attempts to deflect blame from Sonatrach and the corrupt political elite, rather than holding them to account, underscored by the fact that former Sonatrach CEO Abdelmoumen Ould Kaddour from March 2017 until April 2019 did not receive a summons.
Reform announcements continue. In July Tebboune announced a new ‘economic and social revival plan’ which will also come with an overhaul of the burdensome bureaucracy that deters investors. The following day he instructed the exploitation of two large ore deposits: iron deposits in Ghar-Djebilet (Tindouf Province) and zinc deposits in Oued Amizour (Béjaïa Province). The project should generate 30,000 jobs. On 1 August the Minister of Mines Muhammad Arkab announced that a roadmap is being developed to replace mining legislation in order to facilitate opportunities for national and foreign investment in the mining sector, and on 12 August Tebboune called for the preparation of constitutional amendments – partially reflective of protesters’ demands to open political space in the country. The following day Minister of Public Works Farouk Chiali announced a series of regional investment projects aimed at modernising public infrastructure, including the completion of Algeria’s 1,216km East-West Highway, the construction of the Trans-Saharan Highway and the expansion of the metro networks in Algiers, Mostaganem and Constantine. Furthermore, airport infrastructure and maritime ports will be modernised. This will allow the country to meet the expected growing domestic demand for freight and service the reform plans. Many see these reforms attempting to rival Morocco as Africa’s gateway to Europe and make use of Algeria’s vast coastline.
Are Tebboune’s reforms serious?
These developments, while costing billions, have the potential to create thousands of jobs, and aside from joint ventures with international partners, Algeria has the potential to seek billions from international debt markets, with an external debt level of 3 per cent. Further massive gas projects are likely as Algir seeks to maintain its existing position as Europe’s third largest gas provider and on 1 September a free trade agreement with the EU comes into effect. Nonetheless, conscientious investors seeking to do business in Algeria’s burgeoning economic offerings must be wary. Throughout global history the liberalisation process has been fractious at best and many times violent. Furthermore, economic liberalisation may come at a price to the democratic changes that the protest movement has demanded – the opposite of the tired mantra repeatedly espoused by global north nations in the 1980s and 1990s.
While there is no doubt that wealth disparity remains an issue in countries with a long history of democratic progress, apportioned incorrectly, Algeria’s nascent democratic transition may be quashed before it really began. Tebboune remains part of the political cabal that the populace rejected. On the other side of its fractious neighbour Libya, Egypt’s President Abd al-Fatah al-Sisi, a close ally of former president Hosni Mubarak, is congratulated by the International Monetary Fund for his brave economic reforms. Sisi uses his wins on Egypt’s economic progress since 2015 to increasingly tightening the already claustrophobic political space, having passed constitutional changes that enable him to remain in power until 2034. The same could happen in Algeria. The hope is that foreign direct investment does not only proliferate through the political elite and/or military complex to propagate its hold on power. It can be assured that Tebboune wants these reforms – the country needs money, jobs, progress and has the resources to achieve these goals. Nonetheless the reforms, announced so quickly, must come with a genuine overhaul of the administrative and bureaucratic red tape, a concerted change in legislation and a real overhaul of the constitution to allow political space for the new and youthful generation. The EU as Algeria’s biggest market has the potential to work with Algiers to achieve this. What is more likely, however, is that the already inherent issues of clientelism and increasing repression to counter political activists of the protest movement could proliferate further with Algeria’s potential new-found wealth.