Algeria's Falling Oil Output Shifts Focus to Shale Gas



Algeria's Falling Oil Output Shifts Focus to Shale Gas
The region's oil problems of late stem from a long list of factors.

After peaking at over 2 million b/d in 2007, BP reports that Algeria’s oil production was at 1.5 million b/d in 2018. The oil problems of late stem from a long list of factors, namely aging fields, too low prices, misguided economic policies, repeated project delays, not attracting investment partners, and infrastructure gaps. And all of these have been exacerbated by mass protests against the state and eroding economic conditions.

In turn, Algeria has been in crisis mode. Energy is the backbone of the Algerian economy, accounting for 95 percent of export revenues and 35 percent of GDP. New production will remain elusive unless oil prices can get to the elusive $75-80 per barrel mark. The deepening political crisis is also complicating future output. Joining Angola, Iran, Libya, Nigeria, and Venezuela, Algeria has joined OPEC’s “Shaky Six” that face involuntary production cuts. Proven reserves have remained stagnant over the past decade at just 12 billion barrels.

For the U.S., falling supply from Algeria helps open the door for more crude exports, particularly to Europe. Algeria yields a light, sweet crude, mostly getting exported to European refineries. The tight oil flowing from U.S. shale fields can more easily replace Algerian crude than has been the case for the heavier grades lost from Venezuela and Iran. For the Europeans, however, U.S. replacement shipments have to travel some 10 times farther, even more disrupting to a European market that has been forced to find substitutes for the crude lost from U.S. sanctions on Iran.

For Algeria, the most similar case for its oil predicament is probably Libya. Civil unrest in Libya has led to numerous attacks on oil infrastructure, with destroyed storage tanks limiting the country’s capacity to export. If the situation in Algeria further deteriorates, it could suffer some of the same types of disruption.

The hope now is that low oil prices amid falling production help spur greater innovation in Algeria. Pressure is intensifying on the Algerian government to install reforms to help modernize society and spark economic growth. At a median age of just 28 years, Algeria has a rather young population. De Tocqueville’s “Revolution of Rising Expectations” ensures that leadership must meet the mounting needs of the emerging generation. With peaked production, diversifying away from oil will be a primary task.

Most of Algeria’s new projects in the energy space focus on natural gas, increasingly becoming the world’s go-to fuel. Production has held strong in recent years at about 9 Bcf/d, and shale gas is the primary focus to grow supply. Algeria has an estimated 710 Tcf of recoverable shale reserves, or nearly five times the level of conventional ones.

The new long-term strategy (SH 2030) for the state oil and gas firm Sonatrach is to facilitate foreign involvement, develop huge shale gas despoits, and revitalize downstream markets. The goal is to make some $70 billion in additional revenue by 2030, 50 percent of which will be reinvested in new production. SH 2030 aims for Sonatrach to produce 2 Bcf/d of unconventional resources in 2030 and 7 Bcf/d by 2040.

The problem is that shale gas development is highly politicized in Algeria. The best gas regions are also the most fragile in terms of water availability. Sonatrach’s first shale test well (Ahnet-1) in 2014 was met with protests across the southern and central provinces. The protesters demanded a moratorium on hydraulic fracturing, fearing further depletion of already scarce water resources.  

To illustrate, the multi-stage fracturing of a single horizontal shale gas well can devour several million gallons of water. As a desert nation, Algeria's per capita water availability is well below the threshold for the UN definition of water poverty. In any event, shale production will be essential to meeting mounting domestic gas demand, up 40 percent over the past five years to 4.4 Bcf/d.



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