The Prime Minister in a statement on October 1st, 2017 to the National Assembly has indicated that going for Shale Oil and Gas in Algeria is an option for the immediate future.
Opportunities and Risks of fracking
I remember that under my supervision, a study to which participated international experts with decades of experience in the field of energy, resulted in a report of 620 pages entitled “Oil and Shale Gas: Opportunities and Risks”. It has been handed over to the Prime Minister of the time on February 25, 2015. It is a report meant to be as objective as practicable, measured with analyses and proposals of all the then on-going trends. In the opinion of most of the involved experts, energy being at the heart of national security, it is an opportunity for Algeria, which must first assess its potential, and analyze all risks and profitability at term; the strategic objective would be to move towards a well-balanced energy Mix. These experts, noting that this sensitive issue requires specialized knowledge and in any case poses a social problem that would require good communication with the whole society. To avoid disturbing the management of SONATRACH, the state oil company as a strategic commercial company, the experts wanted that its leaders avoid exposing themselves to debates, and leave it to the Department of Energy that is politically empowered to present its arguments. As such, the experts have called for a new independent institution, not from a Ministerial Department but rather to be under either the President of the Republic or the Prime Minister and to involve civil societies of all each region, independent experts and representatives of the Department of Energy and other government departments, working closely with the institutions. Dialogue with the affected populations is vital.
Nature of Shale Gas
Unconventional Oil and Gas is contained in very compact and very waterproof, clayey sedimentary underground rocks containing at least 5 to 10% of organic matter.
Why the move towards Shale Gas?
Oil and Gas are the backbone of the Algerian economy. They have allowed the State to build foreign exchange reserves although down from $194 billion, to less than $97 billion at the end of 2017, allowed a revenue to SONATRACH of $28 billion in 2016 for an outflow of $60 billion and between $55 / 60 billion by end of 2017. According to SONATRACH’s CEO by end of 2017 it could be $31 billion. This has allowed over the years 2000 through 2016, an unprecedented public spending estimated between $950 / 1000 billion for an average growth rate not exceeding 3%.
Our widely media published calculations as of Customs statistics therefore official, of a year-on-year basis, show that between 2000 and 2016 currencies outflows for goods imports have been about $520 billion ($560 billion to July 2017 according to some sources), and $120 to 140 for services often forgotten in official statements (10/11 billion Dollars a year between 2010 and 2016) to which legal capital transfer of more than $730 billion have to be added, for an inflow of foreign exchange of about $850 billion, the difference being the currency reserves that stood on December 12, 2016 at $114 billion. The Algerian economy being a rentier economy largely based on crude oil export and a diversified industry that is embryonic with 70 to 75% of all household and public and private companies (with an integration rate not exceeding 15%) needs are sourced from overseas.
All these statistics could, however, hide the reality on the ground. That of apparently controlled unemployment (10%), of the predominating unproductive administrative jobs in the real sphere and more than 50% of the active population in the informal sphere according to the Government report of the National Statistic Office (2012).
Also, the Government has recently ruled that Algeria would be a net importer of oil in less than 10 years and in 20 years for conventional gas with domestic consumption tripling by 2030 and quadrupling by 2040, according to the Energy Minister. In case of undiscovered substantial and above all profitable according to the international price vector, Algeria could start importing oil from 2025 and gas from 2030 to only meet local demand.
Could the solution therefore be in Shale Gas?
And, considering both exports and a strong domestic consumption due to the low price, as per the on-going policy of fuels and energy subsidies and with the gas for instance sold to SONELGAZ, a state power utility provider between the sixth and the tenth of the international price; this rate varying according to the fluctuations in international prices, largely influenced by the US Shale Gas, at currently between three and four Dollar a MBTU. Financing needs of SONELGAZ according to the CEO statements would by end of September 2017 be $30 billion per year or $150 billion for the next five years not counting the financing needs of SONATRACH itself as per the drop from $100 billion to $70 billion for the same period.
Where then to find this capital money of about $45 billion per year with 70% in hard currency, the Dinar part contributing just under 30%, and the share of payroll in Dinar in value added is relatively low, for these two companies and all their subcontractors are dependent of imports paid in large part in hard currency and revenues between 2017-2020 may not exceed $35 billion if the price of a barrel of oil is around $55. For SONELGAZ, this amount takes into account the newly decided upon additional capacity of electricity plants. Indeed, following the increasingly recurring power cuts, it was decided to plan to produce additional MW of electricity by 2017.
With this increase in domestic consumption, the fact of the decision would not change domestic prices and there is a risk to go to more than 70/75 billion cubic meters of gas by 2030 for domestic consumption. Indeed, if one extrapolates for exports to be 85 billion cubic meters (m³) of gas and 70 billion cubic m³ of gas of for domestic consumption, there should be more than 155 to 160 billion m³ gas assuming significant investments in this area of business. Here costs must seriously be taken into account; market competition, substitutable energy and major global energy mutations are and will be there.
The interest of the Algerian authorities for non-conventional hydrocarbons would be to foresee the need to ensure the transition energy of the country but to also be guided always by increasing revenue so as to avoid any social turmoil. But is it not the focus for Algeria to go towards an energy Mix combining the traditional gas/oil, Shale oil/gas and renewable energy in which Algeria has significant potential.
What profitability for Algeria?
The Algerian group SONATRACH had already drilled its first Shale Gas wells in the basin of Ahnet, located south of In Salah, which was to be followed by others. To develop these reserves, it (SONATRACH) should form partnerships with international groups including Shell, Exxon Mobil, Total, Talisman, INIE etc. According to recent field exploration and studies undertaken by this group during the second quarter of 2012 in an area of 180,000 km², it was reported that a potential of Shale Gas exceeding 19,800 billion m³ with a recovery rate of 25% is there.
But did Algeria establish a reliable geological map confirming these findings?
As for conventional gas, thousands of deposits but not profitable financially can also be exploited. Economic and hence profitability calculation of the reserves, is function of the growth of the world economy and its model of consumption, domestic consumption, the costs of extraction and transport, competitors and substitutable energy.
According to recent estimates by the International Energy Agency (IEA), a new assessment holds that technically extractable gas reserves in the world would be up by 40% and would bring them to 640,000 billion m³, which is more triple of the world reserves of conventional gas of today.
Since the revolution of unconventional gas that will make of the USA the world’s largest exporter before Russia by 2020 knowing that Russia holds a third of the world’s reserves of conventional gas (more than 33%), and is the main competitor of SONATRACH despite the recent freezing of South Stream supplying 30% to the European market.
Other competitors like Iran (15 / 20% of the world reserves) potential competitor since the lifting of the embargo, and Qatar (10 / 15%), besides China which holds first global gas reserves of Shale, that combined with its investments in renewable energy will make it a global leader. Mozambique that could become the second or third holder of gas reserves, the discovery of more than 20,000 billion cubic m³ in Eastern Mediterranean and the return of Iraq and Libya’s production, the competition is likely to be even tougher for Algeria. As this market is segmented like conventional gas where the pipes represent about 70% of the global gas marketing, competition in Asia of Russian and Qatari plans, arise the whole profitability of the Algerian LNG with its weak capacities in addition to the significant investments that are required in transportation. As it will need to amortize the Transmed, Medgaz, project Galsi via Sardinia and the Nigal (Nigeria – Europe via Algeria) including increasing costs of the delays by more than 50% compared to the initial cost, that are still in gestation.
What is in it for Algeria, knowing that gas accounts for about a third of the revenue of SONATRACH?
However, between 2017-2020-2025, beside the USA exporting to Europe, many contracts in the medium term would have expired and according to credible reports, the European partners will be requiring a revision to the price of conventional gas. This can influence the price of assignment of the unconventional gas.
One must also take account of the dispersion of the deposits whose life unlike conventional gas is limited, according to the intensity of extraction that rarely go beyond 5 years of fracking. The United States bore approximately 2000 wells a year in a relatively same geological area and 500 to 600 wells can give 28 billion m³ of gas. However, in Algeria, even in the traditional gas/oil extraction, it never went more than 200 wells. According to the head of Department of analysis of the basins of SONATRACH, during an international workshop on Shale Gas in 2014, the production costs of a drill in Algeria varied between $10 and 15 million, whereas in the USA the average cost it was between $5 million to 7 million. Also marketing for Algeria could only be undertaken, according to the former Minister of energy currently Minister of industry not earlier than until 2020/2025, assuming a perfect mastery of technology to reduce costs. Moreover, in addition to the mastery of technology, which should be included to the cost notably through the purchase of the required know-how, the advantage of some countries such as the USA is the availability of a network of transport of gas virtually throughout the country and more of the fact that the deposits are not deeply set.
What will all additional costs of all pipelining and related infrastructure be for Algeria?
Profitability depends on the future evolution of the transfer price of gas to the international market which is currently low on the open market by the unconventional gas revolution. Operations management is complex, drilling losing 80% of productivity at the end of 5 years, unless new technologies are brought to about. Besides the technological expertise, the issue of cost-effectiveness refers to the global energy, the energy consumption map of the world by 2030/2040 whilst taking account of the costs of renewable energy which can decrease if there is massive investment and the willingness to get out of nuclear power, the dynamics of the emerging big energy consumers, if they maintain the current model and this is not obvious, as well as China, France and the UK taking the initiative to reduce all vehicles running on diesel and petrol/gasoline as from 2020.
Will the reformulation of the hydrocarbons law be able to revive exploration on operational bases? Unless, and as it happens for most of public companies structurally to be loss-making, the Treasury bears additional costs of shale gas that 70% of the companies returned to the starting square. Thus, arises the opportunity to do away with the restrictive rule of 49 / 51% hence to amend the law on hydrocarbons including the taxation.
Social dialogue and new model of energy consumption
Algeria must think of a new model of energy consumption under the auspices of the National Council of Energy which must be reactivated, SONATRACH being a commercial enterprise (1). About Shale Oil and Gas, it must meet three criteria: protection of the environment, avoid any pollution of the water, the transfer of the exploitation of the Shale Oil and Gas price must cover the costs with a margin of reasonable profit.
For Algeria, it is however the protection of the environment that matters the most, hence the importance of the location of training centres and recruiting in priority those population from the South which must be involved for any possible operation of the kind in the first place.
We will get back for more on this vey aspect of the Shale Gas exploration in the near future.