IHS Global Insight Perspective | |
Significance | The pace of development within Algeria’s energy sector has slowed down during the second half of the past decade, after the energy minister’s strategies were shot down one-by-one by powerful factions of the ruling elite, forcing him increasingly to pursue policies not of his choosing and to focus on details in order to unlock particular project bottlenecks. |
Implications | While launching initiatives to liberalise the country’s energy sector during the first half of his tenure, Khelil’s second tenure saw him having to defend resource nationalistic policy paths chosen by Algeria’s parliament and increasingly trying to balance slowing investment inflow by cutting red tape on certain projects. Yousfi might fare better in the post, given his closer relations with the more protectionist-leaning elite, while still not being entirely against foreign investment. |
Outlook | The new energy minister will in fact be well placed to instill reforms in Algeria’s upstream and downstream sectors in order to raise efficiency and unlock sector bottlenecks, given that his strategic reforms will likely be greeted with much less suspicion by increasingly powerful parts of the ruling elite, which in general see him as one of their own. |
Out With the New…
Algeria’s president, Abdulaziz Bouteflika, on Friday (28 May) dismissed his close ally Chekib Khelil from the energy ministerial post, which he had held since 1999 after having spent a considerable period of time abroad, ending in senior positions at the World Bank. Khelil was from the outset seen as a reformer, bringing with him very market-friendly views, or even free-market views, according to many of his detractors within the traditionally statist-leaning Algerian elite. He immediately set out to revitalise the Algerian energy industry, culminating in his 2005 new hydrocarbons law, which took a great step to opening up Algeria’s giant NOC Sonatrach to competition by vastly improving investment terms for foreign companies in the upstream sector as well as their ability to gain controlling stakes in projects. The law was passed, however almost immediately came under heavy political fire and was reversed in 2006 with a law restoring much of Sonatrach’s dominating role, restricting foreign companies’ ownership stakes substantially, watering down investment terms, and even introducing a windfall tax on oil production.
The 2006 set-back—which at the time was understood to have prompted Khelil to tender his resignation only to be persuaded by President Bouteflika to remain— set the tone for subsequent years, with Khelil’s freedom of manoeuvre on virtually all strategic issues becoming almost completely curtailed, forcing him to try to unlock the slowly building bottlenecks throughout the whole energy sector by direct project interventions, in what increasingly became labelled a micromanagement regime, blurring responsibilities between Sonatrach, the regulator Alnaft, and the Energy Ministry and in a vicious circle that increased the amount of red tape and caused a decision making malaise that the minister himself ultimately had been trying to counteract.
Becoming virtually a lame duck on the energy strategy and reform scene, he was additionally forced to champion ultimately resource nationalist policies, although trying to some extent to weave market-oriented approaches into particular issues. Such ultimately contradictory policies resulted in the creation of further dilemmas for Algeria, like when Khelil’s hopes for a gas export price set through greater trading of the commodity, which was branded as a way of securing higher gas prices for the country by increasingly ditching the long-term contract approach for short- or medium-term deals, backfired as the high prices of 2007-2008 gave way to today’s low international gas prices, damaging Algeria more then most other gas exporters. This further forced Khelil to push for effectively turning the Gas Exporting Countries Forum (GECF) into more of a price-controlling cartel and for other producers to restrain their exports, against any of its other members’ interests at this point, making Khelil look even more out-of-touch with reality of late.
Ultimately, Khelil’s position was seriously weakened in a practical way by the accusations of corruption in the highest echelons of Sonatrach, forcing its chief executive Mohamed Meziane and four out of the company’s five vice-presidents, as well as a number of other senior executives, to resign. Meziane and many of the others were seen as very close to Khelil and although no accusations seemed to taint him directly, the fact that Sonatrach had become so permeated by corruption at the highest levels on his watch could not fail to undermine his position in the most serious way. The corruption allegations and revelations have from the start been seen as part of the intensifying power struggle between the country’s powerful military and security establishment and the more civilian-dominated circles around President Bouteflika, with Khelil being targeted for his closeness to the president, as IHS Global Insight has reported.
…In With the Old
The replacement of Khelil with Yousfi, on the face of it, further strengthens the influence of more traditionalist elements of the elite within the government and weakens Bouteflika’s position. For the energy sector, however, the change can hardly be a negative one. Yousfi will bring with him a new ability to introduce structural and strategic reform, which, while not focusing on market liberalisation—or precisely because of avoiding that approach—will be met with less suspicion from the increasingly powerful resource nationalistic and statist factions within the Algerian body politic.
In fact, there is an increasing realisation in many quarters that some form of reform is needed in order to revitalise development and attract investment to both the upstream and downstream sectors. But unlike Khelil’s initiatives, which always produced a knee-jerk opposition reaction from important political groupings, Yousfi might be able to tread both more diplomatically and freely and not carry Khelil’s ideological baggage.
Outlook and Implications
Algeria needs to reform the terms it offers foreign investors, as the global oil and gas price environment has changed significantly from the 2006-2008 period and as more and more of its future large-scale gas production will come from its remote and relatively tight gas reserves in the south-west and south-central Sahara regions. The increasing production and development costs mean that foreign companies are less interested in proceeding at the offered terms, while Sonatrach lacks some of the technical skills and know-how to develop the more complex formations on its own. The upstream delays that have developed over the past few years—evident in the increasingly poor turnout and bidding in Algeria’s last two upstream licensing rounds—will soon start to have a knock-on effect on integrated gas export schemes, as both gas pipelines and LNG facilities will lack the volumes promised. While the shortfall today might be too late to completely satisfy, a swift reversal in Algeria’s perceived attractiveness is needed in order for the situation not to deteriorate any further.
Similarly, Algeria’s oil production, and even more so its refining sector, needs to see projects moving ahead more quickly, with many of these issues being addressable by reforming the Energy Ministry, regulator Alnaft, and Sonatrach’s chain of command and creating a climate where the large bureaucracies don’t have to rely on the highest levels for too much of their decision making. The corruption crisis at Sonatrach has further exacerbated this problem, creating a situation where the decision-making system is in near paralysis. The recent naming of new Sonatrach leadership means that this process hopefully already has been set in motion, with Yousfi possibly being able to take hold of the strategic issues and build on the gains from Khelil’s first half in his post—particularly gas export diversification and attracting a large number of investors to Algeria’s upstream—while giving the new Sonatrach executives the freedom to rebuild the company’s operative leadership system with more efficiency.