Algeria - The E&P Management & Sonatrach Operations

APS Review Oil Market Trends, Feb 16, 2009

The Energy and Mines Ministry manages the country's natural resources and directs the national companies such as Sonatrach which partner with IOCs to develop the petroleum resources. The Ministry's new body which allocates and awards E&P blocks is Alnaft, created to end Sonatrach's monopoly in this respect (see the news6AlgFieldsFeb5-07). But even in the 7th round, Sonatrach remained involved and awarded three blocks, two to Gazprom and one to Eon Ruhrgas, as Alnaft still was not able to get the experts required to join the agency. Alnaft remains acutely short of people specialised in the field, with the real experts preferring to remain in Sonatrach (see gmt5AlgGeoFeb2-09).

Sonatrach, with an oil production capacity of 550,000 having fallen from about 700,000 b/d in recent years, until early 2002 used to bear the brunt of output cuts needed for Algeria's compliance with the OPEC quota system. But for the past several years, total oil output has been well over Algeria's quota. Its quota from Jan. 1 is 1.22m b/d, up from 782,000 b/d on Feb. 1, 2003.

The actual output in January was about 1.35m b/d, with Sonatrach producing 450,000 b/d and the foreign operators producing 900,000 b/d (their capacity of about 950,000 b/d having risen from 302,500 b/d in early 2001). If Saudi Arabia continues to raise pressure for full compliance with OPEC quotas, Algiers may force the foreign operators to lower their output to 850,000 b/d, with Sonatrach to cut its production further in line with the country's share of the organisation's collective ceiling.

Minister Khelil in October 2008 said Algiers was to renegotiate projects being developed with IOCs to make sure Sonatrach had a majority in the JVs. He said the move would be necessary to abide by the hydrocarbon law which limits the stake of foreign players to a maximum of 49%.

Sonatrach's final restructuring phase was announced in February 2006 with the creation of two main units: the Division for Co-ordination of International Group Activities (INT) was in charge of "developing the policies, strategy and monitoring of the implementation of development of all activities abroad" (see Part 4 in OMT 8); and the Central Division for Technical Co-ordination and Development (JEC) took charge of "development of the strategy and policies of the Group for studies, engineering, implementation and management of investment projects".

Sonatrach has more than 20 producing oilfields, with the country having about 2,700 oil and gas wells. Their oil recovery rate has declined, despite EOR systems installed in most of them. Sonatrach's capacity has fallen from more than 1m b/d in 1980 to 550,000 b/d. To boost their capacity through highly advanced EOR systems, Sonatrach has offered fields for further development, whereby foreign firms would have a share of production. It has offered JVs in fields it abandoned in the 1980s. There over 200 E&P agreements in Algeria.

Sonatrach has more than ten fields producing natural gas and condensates, including the super-giant at Hassi R'Mel. Sonatrach's capacity for gross natural gas production has risen to 150 BCM/y, including gas re-injected into oilfields.

Discoveries made by Sonatrach since the early 1980s had not justified the capital invested by 1990. Structural problems in old fields within the areas of Hassi R'Mel, Hassi Messaoud and In Amenas had worsened to alarming proportions by 1988.

Algiers had realised the limitations of the national effort to find and develop deposits and the problems faced by Sonatrach in being virtually the sole investor which lacked the technology required and the equipment to maintain old fields with reserver problems. As a result, Algeria's oil production capacity fell below its OPEC quota in late 1987 (see background in omt6AlgFieldsFeb5-07).

In late 1988 Sonatrach began to improve E&P offers and project tenders somewhat. Yet IOCs' confidence was so low that the law's amendment in 1991, allowing foreign participation in existing fields under production sharing agreements (PSAs), was described by then Agip President Sontoro Raffele as "a revolution".

Sonatrach offered 10 sets of important oil and gas fields - Hassi Messaoud, Rhourde el-Baguel, Zarzaitine, Haoud Berkaoui, Guellala, el-Adeb Larache, Ben Kahla, el-Gassi, oil producing structures around the Hassi R'Mel gas field and oil structures around the Rhourde Nouss gas field. This was a premium category for development on the basis of best E&P and EOR systems possible, with IOCs having to pay a non-refundable and high entrance fee like the $300m which Arco (now part of BP) in 1994 paid for its Rhourde el-Baguel PSA with Sonatrach.

The development of wet gas both in existing oilfields and in new discoveries required a small entrance fee.

For several oilfields abandoned by Sonatrach and small fields still in production but "in advanced decline", IOCs did not have to pay an entrance fee.

Things did not progress as was anticipated, with reforms implemented by liberal governments in 1991-92 reversed by a socialist-led administration. Bids made by majors like Mobil which was interested in Hassi Messaoud's EOR project, were rejected. Sonatrach later installed 15 water injection systems in 13 fields: Hassi Messaoud, Zarzaitine, el-Agreb, Rhourde el-Baguel, Mereksen, Stah, Edjeleh, el-Borma, Tin Fouye/Tabankort, Tigentourine, Guellala, Ben Kahla and Haoud Berkawi. It installed gas injection systems in several of these fields and in others, with 11 compression stations and a total capacity of 50 MCM/d.