Algeria Eyes Expanded Position Thanks to Relative Stability

After a steady decline in foreign interest thanks to fluctuating development terms and volatile tax agreements, Algeria is eyeing their relative stability in the region as key to both encouraging a return of international partners and a strengthening of their position in energy marketplace.

Currently the seventh largest provider to the US and the third largest provider of natural gas to the European market, behind just Russia and Norway, Algeria has witnessed a significant decrease in interest in foreign investment and partnerships in the last few years thanks to a steady flow of new government regulations and financial demands on the part of the state and its official energy arm Sonatrach. The result has been viewed as increasingly hostile to firms from outside Algeria, despite the country hosting the third largest proven oil reserves in Africa, behind Libya and Nigeria, with about 12.2 billion barrels.

According to a report released by the Eurasia review, the decline in interest and overall production has arisen from, “the frequent delays involved in Algerian projects, stringent financial terms, and a windfall tax on foreign oil producers whenever the price of oil exceeds $30 per barrel have dampened international companies’ interest in bidding rounds.” Last March, Algeria awarded just 2 of 10 oil and gas permits in a licensing round that marked a third such decline and further hindering the country’s overall production levels.

However, as much of the North African and Middle Eastern region has suffered from bouts of instability, Algeria has remained relatively stable and calm. The country experience only modest protests from student and labor groups last years as neighboring Libya and Tunisia experienced sweeping shifts in political leadership. Resulting production and output delays in these countries and the lingering threat of further shutdowns of oil and gas deliveries resulting from tensions with Iran have pushed leaders in the United States and Europe to reevaluate the country’s place as an energy actor in the region and as an increased producer for the global market.

Writing in the Financial Times earlier this month, Stephen Snyder of Ergo intelligence services suggested that amid security concerns, Algeria’s growing importance as a provider of natural resources had allowed greater acceptance of the country as a regional energy actor and production partner, even in light of questionable domestic actions. Citing a visit by U.S. Sec. of State Hillary Clinton to Algiers, where she met with President Abdelaziz Bouteflika, Snyder said that the volatility seen across the region and the uncertainty about the Iranian situation and the Gulf of Hormuz allowed for new view on the country’s potential.

For their part, Algeria and their state-backed firm Sonatrach have moved towards greater cooperation with foreign firms, opening up the possibility of repairing existing partnerships and easing the restrictions that kept interested parties at bay over the last few years. In December of last year, the country announced a plan to introduce revisions to their Hydrocarbon law that would amend profit sharing agreements and exceptional profit taxes first introduced in 2006.

Speaking in December, Minister of Energy and Mines, Youcef Yousfi stated that the review was aimed directly at garnering much-needed support from international partners with the experience and technological know-how to adequately exploit the country’s reserves. That technical knowledge will be pivotal to the country’s ability to pursue a planned shale campaign in the coming years. Already linked with Italy’s Eni to explore Algeria’s deep-set, shale potential, the country and Sonatrach must first dedicate significant funds to the costly infrastructure and tools required of shale extraction efforts.

“We hope to develop partnerships with all interested stakeholders who have the required technological expertise to develop these resources in our country,” said Algerian Minister of Energy and Mines, Youcef Yousfi at a shale workshop held in Oran in late February, according to Al Monitor. He added that, “this is why we would like to work with companies that have demonstrated expertise in this field.”

In a more specific example of mending fences, earlier this month, US-based Anadarko, announced an amicable end to a long-standing conflict with Sonatrach stemming from the 2006 tax. With the US company insisting that their existing contract required the Algerian firm to bear the brunt of the tax burden and Sonatrach seeking to restructure profit structures originally agreed upon when crude prices were lower, according to the Wall Street Journal, one of the country’s largest foreign operators found themselves at odds with local officials and their production plans. With arbitration initiated in 2009, the two parties finally came to an agreement this month with a plan that would provide about $4.4 billion in funds over the next few years and include stipulations protecting the US company’s tax and profit sharing status. According to the Financial Times, Anadarko is responsible for about quarter of all oil production in Algeria.

The Algerian government’s push and seemingly new willingness to ease restrictions on profit-sharing and tax regulations with foreign firms appears to be part of a larger push to open the country to international cooperation. This past week saw Algiers open the country’s modest stock exchange to foreign buyers for the first time, though they are still required to partner with local buyers for the purchase.

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