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Sonatrach, has allocated $65 billion for its five year plan. Oil & Gas Middle East meets North Africa’s most dynamic oil company CEO, Mohamed Meziane
Sonatrach, Algeria’s state-owned oil company is rightly portrayed as a North African behemoth. The firm, by most standard indicators, is the giant continent’s largest company, Europe’s second largest gas supplier, and the third largest LNG exporter worldwide. The company retains control over all oil and gas exploration, production, and refining activities. Its importance to the national economy cannot be overstated.
The hydrocarbon sector is not only the backbone of the economy, but also the country’s engine room, providing the foreign exchange and wealth to fund the ambitious diversification efforts of the government. Oil and gas related activities account for roughly 60% of budget revenues, 30% of the national GDP and a massive 95% of Algeria’s export earnings.
Steering the national ship Sonatrach is chief executive officer Mohammed Meziane. Given the astonishing ambitions he has for the next five years, and the money that will be spent to get the job done, he’s fast gained a reputation as one of the hardest men to get a sit down meeting with in the industry. Oil &Gas Middle East managed just that recently in Abu Dhabi, and discovered February’s reports of a US$60 billion investment chest over the next five years was wrong. It’s now $65 billion, and the upstream business will be the principal benefactor.
“We aim to invest US$65bn on the energy sector in the next five years, with an average of $1.5 billion each year for the next five years on exploration activities alone. It may be higher in some years, but the average is $1.5bn,” reveals Meziane.
Pressed on which fields would be developed first, Mezian revealed that the countries twin giant oil and gas fields will be allotted considerable funding. “We have important development in Hassi Massoud field and we continue the improvement of production in Hassi R’Mal. The other developments will concern all the discoveries we have made within recent years, which is between 70 and 75 discoveries of different sizes.”
The Hassi Messaoud oil field, located 630 kilometres southeast of Algiers, produced around 400,000 bbl/d of crude in 2008, and the Hassi R’Mal giant gas field holds 2.415 trillion cubic metres of natural gas, and probable reserves of around 2.7-3 trillion cubic metres. The annual producing capacity is around 100 billion cubic metres of natural gas.
Existing projects are also pushing ahead, and Meziane says a raft of deals signed recently will expedite the project development process. “Sonatrach has been already awarded and signed contracts for the Menzel Ledjmet East (MLE) field and Al-Merk field this year with Saipem, Petrofac, ABB and other companies. There are other major projects which are also under way like Haoud Berkaoui phase II, Menzel Ledjmet among others. We will start the development on these projects in the coming weeks and the contracts have been already signed.”
The project development plans are in place to achieve some lofty, but Meziane says, realistic targets. “Our goal is to reach 1.5m bpd by 2005- 2007, we have now capacity of 1.45m bpd, but our real production is around 1.2m bpd, in accordance with the OPEC decision. For gas, real production is 150bn cubic metres per year, condensates 13 to 14 mtpa. For LPG it currently stands at 8.69 mtpa, but these production figures will be increased through the
development plans that I outlined earlier.”
The $65 billion price tag on investment to 2014 may have been born in an extremely high price environment, but the subsequent collapse and stabilisation in 2009 has not forced the figure to be revised. Meziane says that these projects are cornerstones of Algeria’s economy, and will go ahead regardless.
However, when asked for a sensible benchmark for the oil price, Meziane points to the $65 – $75 price range. “This is a fair and reasonable price for oil today.” This would deliver a favourable margin to Algeria. Earlier this year Chakib Khelil told the UK’s Financial Times that Sonatrach needed an oil price of $40-50 a barrel for its investments to pay off.
Going Global
Algeria’s national oil giant has ambitions and goals beyond its own borders. Its oilfield experts have been lending their skills to producers around Africa as well as operations as far away as South America.
“Sonatrach has international investment programs in sub-Saharan countries Mali, Niger, Mauritania, Egypt, Libya and Tunisia, and also in Peru at the Camisea field in the Amazon Rainforest. These investments are ongoing, and seismic works in Mali and Niger have been completed, along with a seismic and drilling project in Libya.”
Sonatrach is operating in two blocks (095 and 096) located in the Ghadamès Basin in neighbouring Libya.
Egypt is also an exciting operation for Sonatrach. In what was a first offshore venture for Sonatrach, the company partnered with Statoil in the exploration of an 8,368 sq km block in the Mediterranean Sea back in 2007. El Dabaa Offshore lies in 1km to 3km of water in an area west of the Nile Delta. Statoil operates with an 80% interest, while Sonatrach holds the remaining 20%.
“In Tunisia, Sonatrach is an equal partner in a joint venture company with the Tunisian company ETAP. We have made small discoveries with this joint venture, one in Algeria and the other one in Tunisia – both of which we are going to develop,” explains Meziane.
In Europe Sonatrach is also making its presence felt, with a hand in several refining and downstream marketing projects, mainly in Spain, the United Kingdom, Italy and France.
Financing
The oil industry in general is facing quite a conundrum. Whilst project build, labour and material costs have plummeted since 2008, the lines of credit necessary to seize the opportunity have evaporated along with many a banker’s ego. Sonatrach, unlike many IOCs however, has the cash to available to fund its ambitious development plans.
“Generally we self finance. The decision of project financing abroad of course depends on the fiscal situation of Sonatrach, but on the national level, we finance our projects using our own cash flow or through Algerian banks. Internationally we largely invest through our own cash flow as well, but also sometimes turn to banks for financing.”
Midstream development
Algeria expects to boost its exports of natural gas to 100bn cubic metres by 2015, up from 62bn today. In order to get that gas to market, Sonatrach is driving forward substantial midstream developments projects, including a landmark sub-Saharan pipeline which will connect Nigeria to the Mediterranean markets through Niger and Algeria.
“We have three main pipeline projects underway. For the Med Gas project, between Algeria and Spain the pipeline has already been laid, and will be operationally ready by the end of 2009. The pumping stations in Beni Safa (western Algeria) and the reception station in Almeria in Spain are being built now too.”
The second pipeline project is Galssy, which will link Algeria to Italy. “All of the feasibility studies have been completed, and we are in the process of getting the authorisations and the permits, this will take time, but I hope that we will receive all the permits by the end of this year and then we will start the construction in early 2010.”
Linking Nigeria to Algeria through Niger, using the Algerian gas grid to transport the Nigerian gas to supply the European market is certainly the most challenging midstream project in Meziane’s portfolio.
“We are currently in the process of the feasibility study and the related work, and preparing the studies of the framework of the project (Feuillet de route). This takes a bit more time as it crosses three countries, and each country has its own legislations. We are looking closely at the financial side of this project too, as there are European countries which are interested in financing this project.” The complexities do not daunt Meziane, who says that he hopes to see this pipe operational by 2015.
Key contracts for the Trans-Saharan network are scheduled to be awarded in 2011, assuming the cross-border agreements between Sonatrach and Nigeria can be arranged in time. The project is estimated to come in at around $12 billion.
Meziane says that whilst the pipeline will be funded by several entities, including producers and consumers, he is keen to see the company play an active role in the whole production and delivery cycle.
“Sonatrach wants to invest in upstream activity in Nigeria to produce the gas and secure the supply of the pipeline. We are working hard to secure the participation of Niger, and also to control the whole value chain, from producing the gas, to supplying the gas and transporting and marketing it in Europe.”
IOC’s in Algeria
Sonatrach has worked with many of the oil majors throughout the years, and Meziane expects to see existing partnerships grow, and new ones be formed in the busy years ahead.
“We have many international partners, including Shell, Total, Statoil, Petro-Vietnam, Petro-Canada, Halliburton, Repsol, and Schlumberger, a lot of the big names. They are investing and are very satisfied with their business in Algeria,” smiles Meziane.
Looking ahead, the CEO says that Algeria’s policy towards new ventures and partnerships is very much one of an open door. “We are proposing that when we have projects bidders should approach us and begin discussions. It’s best to have a good dialogue and establish what both parties can bring to the table.”
Meziane points to the regulatory reforms in 2005 as a good, workable model which will further encourage foreign participation in Algeria’s upstream sector, without jeopardising the national interest.
“The legislative hydrocarbon laws 005 and 007 of 2005 give an excellent umbrella for foreign companies in Algeria. I think the regulations are very good, and the conditions are clearly and openly declared. The legislation states that Sonatrach, or any other Algerian company, should have a 51% stake, while a foreign partner, or partners will control the remainder,” he explains. “For example, in the downstream projects, the feedstock gas is allocated at an incentivised rate, which will be very lucrative for downstream investors, but the overall project is controlled by Algeria.”
Other policies have been enacted which make investment in Algeria very attractive, says Meziane. “Favourable conditions such as tax exemptions are very important and act as good incentives to not only invest in Algeria, but also to build a good ongoing partnership,” he adds.
Race is on
In order to capitalise on the current cost-benefit of growing the oil industry in Algeria, Sonatrach has committed to pushing ahead with its key projects, and the CEO is keen to stress that projects will not be put on hold, despite the fact that volatility in the oil markets has become part and parcel of the 2009 experience so far.
“Our decision going forward is to not delay any project. Sonatrach will not delay, freeze or cancel any projects. We are taking every step to maintain the rhythm of investment. I have declared many times that our budget, our predictions and our plans are on track and have not changed.”
The second bid round
The second upstream bid round will offer ten blocks, three gas fields and seven oil fields. The number of participants at the general presentation held by ALNAFT “l’Agence Nationale pour la Valorisation des Ressources en Hydrocarbures” on July 27th stood at 52 companies.
Bid round agenda:
• 27th July 2009: General presentations of technical data and the modalities of participation at the data room for interested companies
• 15th August to 22nd August: data room session and technical file and delivery of specifications related to each interested company.
• 2nd Sep to 26th Oct: Clarification meeting where companies can make written proposals for desired changes to the contracts.
• 9th Nov: ALNAFT transmits the final contractual documents and informs all companies about the modifications made.
• 20th Dec at 10am: dead line for offer’s submission and the publicly opening of envelops at 10:30am.
• 16th Jan 2010 at 14 00 pm: the signature of contracts in Algiers.
Number Cruncher: Sonatrach
• Largest company in Africa
• 1st commercial producer and exporter of LNG in the world*
• 2nd largest LNG exporter in the world
• 3rd largest natural gas exporter worldwide
• 11th largest oil & gas company in the world
• $12 billion – estimated cost of Trans-Saharan pipeline
• 16 – Number of new discoveries in 2008
• 7 – Number of discoveries made with foreign partners
