2/23/13, "North Africa’s Prospects as Energy Goliath Are Fading," NY Times, Stanley Reed, London
"A deadly attack by militants on an Algerian natural gas plant last month has dealt a major setback to a group of North African countries whose prospects as oil and gas producers were already cloudy.
A few years ago, Algeria, Libya and Egypt looked like they would provide
much of the solution to Europe’s declining natural gas production and
its uneasy reliance on Russia for supplies of a fuel widely used in
industry, power generation and home heating.
But well before the early morning assault
by dozens of raiders on the In Amenas gas facility, deep in the Sahara,
the difficult political realities of the region were creating doubts
about how big a role North Africa could play in the world energy
equation.
Both oil and natural gas production have been in decline in Algeria, the
region’s biggest gas producer, since the mid-2000s. In Libya, the
rebellion that ousted Col. Muammar el-Qaddafi and its chaotic aftermath
have disrupted oil and gas exploration.
In Egypt, rising domestic
consumption, encouraged by government policies, has cut into exports.
During the militants’ attack on In Amenas, and the Algerian military’s
action to retake the facility, 40 workers and 29 insurgents were killed.
The plant — jointly owned by BP, Statoil of Norway and Sonatrach, the
Algerian national energy company — has yet to reopen. Its gas field and
processing center accounted for about 10 percent of Algerian production,
but so far the shutdown has had little impact on exports....
Sonatrach is pressing to repair and reopen the plant, which suffered blast damage.
“What we find in troubled geopolitical hot spots is that gas
infrastructure and pipelines are the most vulnerable targets,” said Rob
West, an analyst at Bernstein Research in London. “Pipelines are very
hard to protect.”
He noted that in Yemen, Iraq and other countries, anti-government forces
had succeeded in cutting pipelines on numerous occasions, disrupting
oil and gas supplies.
The worry for Algeria and other North African countries is that the
attack on In Amenas, coming after two years of political instability,
will further discourage the foreign investment the countries need to
maintain their positions as oil and gas exporters.
Western energy companies were already turning up their noses at
Algeria’s tough contract terms, which give the government more than 90
percent of the proceeds from oil and natural gas production and require
that Sonatrach get a majority stake in all projects. The country also
has high costs and lengthy regulatory procedures.
In Algeria’s most recent auction of oil and gas leases, in 2011, only
two of 10 exploration blocks found takers — and one of those went to
Sonatrach.
“The fiscal terms are so tough that international oil companies don’t
think they will be able to make any money,” said Mr. Oso, the Wood
Mackenzie analyst.
Chakib Khelil, the Algerian minister of energy during the 2000s, tried
to make investing in the country’s smaller oil and gas fields more
attractive to international companies by allowing them larger stakes in
energy projects.
“But this went against the grain of control by Sonatrach,” he said in a telephone interview. His changes were rolled back, and a windfall tax imposed on oil and gas
production. At the end of the last decade, Sonatrach was rocked by a
corruption investigation that led to the departure of its chief
executive, Mohammed Meziane, and several of his top lieutenants.
Recently, the investigation spread to Saipem, the oil services
subsidiary of ENI, the Italian oil company. Italian and Algerian
prosecutors are looking into whether Saipem paid Sonatrach officials
kickbacks on billions of dollars in contracts. Saipem’s chief executive,
Pietro Franco Tali, a target of the investigation, resigned in
December. Oil executives say that the Algerian energy bureaucracy has
been paralyzed by the investigation.
Algeria’s gas production has declined about 12 percent since 2005, while
domestic consumption has grown rapidly, thanks in part to subsidized
prices. That has helped to erode exports. Algeria has seen its share of
the world market in liquefied natural gas, which it pioneered in the
1960s, decline to less than 5 percent, according to PFC Energy, a
Washington-based energy research firm. That is down from 19 percent in
2002.
The country’s slice of European gas imports has also fallen, to 9
percent in 2012 from about 12 percent in 2002. Algeria’s biggest
customers are Italy and Spain, whose weak economies have sapped their
demand for gas.
After watching the Arab Spring sweep away neighboring regimes, the
Algerian government is doing some soul-searching. A new prime minister,
Abdelmalek Sellal, is trying to rebuild the country’s reputation with
foreign investors. He has pushed through changes in the tax structure
for oil and gas to ease its most punitive aspects.
“Up until In Amenas, this was looking like a good year,” said Geoffrey
D. Porter of North Africa Risk Consulting, a New York-based company that
advises business about the region.
Libya, too, has been a disappointment to Western oil concerns.
Executives believe the country may have huge oil and gas reserves, but
they were disappointed with the results of exploration in the years
before Colonel Qaddafi’s ouster in 2011.
Libya is back to around 90 percent of its prerevolution output, but an
uneasy atmosphere prevails. BP acquired the right to explore huge swaths
of desert in 2007 but recently decided to delay drilling its first
exploratory well in an area not far from the In Amenas plant.
Four BP employees were killed at In Amenas. The company’s chief
executive, Robert Dudley, said this month that BP may begin its Libyan
explorations offshore, where there is little to fear from militants.
The central government in Tripoli is weak. Companies like ENI, the
largest producer in Libya and North Africa, rely on militias to protect
their operations.
Libya’s neighbor to the east, Egypt, came on strong as a gas producer in
the mid-2000s. But Egyptian exports peaked in 2009 and then dropped off
quickly.
Government policy, not security, is the main concern in Egypt. The state
prices gas for domestic sale around 20 percent of what it costs in
Europe. That encourages domestic consumption, leaving little for export.
At the same time, oil companies are no longer finding much gas on land
and in shallow waters, where it is cheap to extract.
Some executives believe there are plentiful supplies in the deeper
waters of the Mediterranean, but say Egypt’s price structure does not
give them a sufficient return.
Taken together, these circumstances “cement the view in Europe that
North Africa is not going to be a reliable and cheap source of supply,”
said Mariam Al-Shamma, an analyst at PFC Energy.
The United States is now close to being self-sufficient in gas thanks to a boom in shale gas, but Europe is heavily reliant on imports. That reliance is likely to increase in the coming years as domestic production dwindles and — once the Continent’s economy rebounds — demand begins to rise again. The International Energy Agency forecasts that the European Union will have to import 80 percent of its natural gas needs by 2030, up from about 60 percent now.
If Europe cannot turn to North Africa, it can look elsewhere.
The global liquefied natural gas market is likely to grow. The United
States and Canada are also likely to become major exporters. Big new
fields have been found in the waters off Israel, and exploration is
starting off the coast of Cyprus. But the most obvious source is Russia,
which already has 54 percent of the European gas import market.
“We would expect there to be an increasing share in Europe for Russian
gas,” said Catherine Robinson, an analyst at IHS Cera in London.
Gazprom, the gas giant controlled by the Russian government, is under
investigation by the European Commission, which is looking into whether
the company imposes unfair prices on customers in central and eastern
Europe. But Gazprom’s ability to influence the market may only increase.
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