Algeria's Gas - No Change Yet for Worried Companies

New security concerns have only added to the woes of Algeria's natural gas sector, as investment falls due to a deteriorating operating environment.

By targeting expatriates in Algeria’s gas sector, jihadist terrorists went for the jugular. Energy accounts for 98 percent of the country’s exports and 70 percent of tax revenue, with the In Amenas plant accounting for 12 percent of Algeria’s gas output. Hence the government’s uncompromising response, killing the captors (and, unintentionally, some of their hostages) to comprehensively dissuade other armed groups from trying their luck.

Beyond cautious statements about ‘reviewing security’ and communicating grave concern for still-missing workers, the major international oil companies in Algeria - including BP and Statoil - have not said much of substance yet about whether and how the tragedy has affected their views about the country in the long term. It is unlikely to prompt any large-scale pull out, but these events cap a longer term deterioration in the operating environment of Africa’s biggest natural gas producers, where new investment has all but dried up, with steadily decreasing numbers of successful oil round awards.

On the regulatory side, a windfall tax in 2006 marked the beginning of increased resource nationalism, says Anthony Skinner, head of the middle east and north africa region for Maplecroft, the risk management consultancy. While the government later cancelled the tax, the new draft law on oil and gas offers little grounds for optimism for companies.

Tax incentives are present, but for unconventional gas resources which state-owned Sonatrach lacks the capacity to deliver. At the same time, the draft law - in keeping with earlier regulatory measures - would strengthen Sonatrach’s role in everything from pipeline infrastructure to oil processing. “By and large, the business feeling is that it is not going to significantly improve the regulatory environment to attract conventional investment,” says Mr Skinner.

Of course, tax revenues are needed by government for its own diversification and development agenda. The government is using a portion of its revenues for a $23 billion programme of public grants, lending programmes to boost the SME sector, and a steady increase in public spending of 27 percent annually during the past 5 years. Spending on education has been particularly impressive, at 6 percent of GDP over the decade up to 2011.

But companies have their own criteria for investment at a time when Algeria’s attractiveness diminishes just as gas resources elsewhere - from Mozambique to the US - provide alternative opportunities.

Now, security worries add a new dimension to these challenges. Companies present in Algeria will have higher costs reflected in insurance premiums, for one thing. “This provides companies with the context to push all the harder for more attractive terms,” says Mr Skinner.

Yet currently, security is not an area companies can much do about directly. “Under Algerian law, state security forces are mandated to protect facilities,” says Mr Skinner.

They have made headway in fending off threats in recent years, especially from Al-Qaeda in the Islamic Maghreb (AQIM). But risks have increased since the Arab Spring, which led to a proliferation of weapons, smuggling and lawlessness in the Sahel.

The In Amenas fiasco has not been too reassuring in this regard.

“International oil companies are in many cases concerned because what is perceived by Western companies and governments as the ‘duty of care’ to hostages was possibly not met in a case where 37 foreigners were killed,” says Jon Marks, associate fellow at Chatham House.

There are measures companies can take, such as establishing multiple perimeters around facilities, but power to protect still lies with the state. That is unlikely to change. Even when the In Amenas raid was taking place, officials said they would not allow private security contractors in the sector.

“This follows the vein of not wanting to involve external players in what is considered a domestic issue. In light of the civil war experience, authorities want to feel they really are in control of situations and that this is their mandate,” says Mr Skinner.

Controversies surrounding the operations of private security firms in Iraq and Afghanistan may feed into this overall calculation, he adds.

More broadly, there is no sign of a major change of the regulatory climate to compensate companies for the latest security worries either.

“I don’t think government will change its approach,” says Mr Skinner.

“We would need for there to be a second or third incident similar to In Amenas. Government strategy is to try to ensure it is bolstering security, rather than having to fundamentally change the terms of oil and gas regulations,” says Mr Skinner.

Jon Marks agrees, saying the government does not look likely to change its overall posture to foreign investment. “I don’t think we can in any way expect to see a more radical opening up. All the indications are that the Algerian government is satisfied with its own investment performance and doesn’t necessarily want to see huge numbers of foreign companies coming into the country even though it needs jobs...You are not suddenly going to become economic liberals just because a few Islamic radicals shot up a gas facility”.

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