Eni, BG, Gazprom, and E.ON Awarded Acreage in Disappointing Algerian Licensing Round

The Big Picture

Algeria's long-delayed seventh licensing round has become a great disappointment, with 11 out of 16 offered exploration and production (E&P) licences not receiving a single bid and only four licences being awarded (see Algeria: 14 July 2008: Seventh E&P Licensing Round Launched in Algeria). The failure to find willing investors is understood by IHS Global Insight not to be a result of low-quality acreage being offered, but rather because Algeria's terms have become increasingly tight, especially in a climate of lower oil and gas prices. A massive 73 IOCs had gone through the prequalification process at the outset of the licensing round, since most of the acreage was located close to tested high-potential areas that hitherto have drawn significant upstream investment from IOCs (see Algeria: 30 July 2008: Energy Minister Says 73 Firms Prequalify for Algerian Oil and Gas Block Tenders).

Signs that something was amiss with the tendering process came some weeks ago, when the official bid-opening and awards process was postponed from early to mid-December. This was later followed by the news that the licence widely regarded as the most promising one in the whole round, for the Ahnet prospect, had been withdrawn (see Algeria: 11 December 2008: Ahnet Prospect Withdrawn from Ongoing Algerian Licensing Round by Sonatrach and Algeria: 5 December 2008: IOCs Cast Doubt on Success of Algeria's Licensing Round, as Skikda Rebuilding Accelerates). The Ahnet licence was expected by Algeria's licensing authority ALNAFT to draw significant interest from some of the largest IOCs, prompting it to require the companies to offer international upstream asset swaps (preferably in Egypt, Libya, Nigeria, Venezuela, or Trinidad and Tobago) in order to secure the exploration and development rights. While several problems existed in ALNAFT's ability to come up with a transparent and fair way of comparing different assets in different countries as part of the bid evaluation process, it seems that the main reason for the withdrawal of Ahnet was that it failed to attract bids close to the level that Algeria had been expecting.

The Awards

Of the four E&P licences awarded, two have gone to large and established players in Algeria, Eni and BG Group, while Gazprom and E.ON Ruhrgas have expanded their Algerian operations with one licence each. Eni secured the 16,000-sq.-km Kerzaz licence in the south-western Gourara basin (close to the prolific Timimoun basin), consisting of Blocks 316b, 319a, and 321a. BG Group secured the Guern Guessa permit, also in the Gourara basin, consisting of Blocks 317a and 316a, spreading over a total 12,166 sq. km. Russia's Gazprom bagged participation in the 3,083-sq.-km El Assel permit in the prolific south-eastern Berkine basin, consisting of Blocks 236b and 404a1. The permit was offered as a partial assignment of interest only, with state-owned gas giant Sonatrach continuing to be the operator. The last awarded E&P licence went to E.ON's subsidiary Ruhrgas, which secured access to the 1,091-sq.-km Rhourde Yacoub permit, consisting only of Block 406a- in Berkine, also on a partnering basis with Sonatrach.

BG and Eni both have extensive experience of managing hydrocarbon projects in Algeria, while E.ON and Gazprom have not, although the permits for which Gazprom and E.ON bid were offered only as partnering stakes from the beginning.

Outlook and Implications

Blame Game

With the outcome of the seventh licensing round being hugely disappointing, the official Algerian line on the cause of its failure is that it was hit by the deteriorating market price of hydrocarbons and the deep economic crisis engulfing the world currently. While lower oil prices certainly have exposed the unattractiveness of Algeria's E&P licence terms, the argument is skewed. IOCs still have strong balance sheets from high previous revenues. While they have generally started looking at cutting project costs, they will continue to attempt replacing their reserves on a year-by-year basis; this will ensure that they are always on the hunt for attractive exploration acreage. With Algeria having a lot of attractive acreage and being one of the few Middle East and North African (MENA)-region countries allowing foreign investment in its upstream sector, it should always be in a good position to attract investment into its oil and gas industry –at the right terms.

Future

While the reversals of the 2005 oil law liberalisation in 2006—including the enactment of the windfall tax—did not in the end result in any company leaving Algeria, taking on new acreage seems to have become unappealing, especially with oil prices seemingly in freefall. Nevertheless, exploration acreage acquisitions are not made with the eye on the day's oil price, so it seems clear that the resource-nationalist tightening of terms seen in Algeria over recent years has lifted the perceived break-even level for new investment significantly above where oil is trading today and where most companies believe oil and gas prices will be in the long term. Off-the-cuff remarks by IOC officials to IHS Global Insight in recent weeks have suggested that few see new projects in Algeria viable with oil below US$100/b, although that should be read with a lot of caution. It is nevertheless very significant that of the six largest investors and acreage holders in Algeria (Anadarko, BP, Total, Hess, Repsol-YPF, and StatoilHydro), none ended up bidding for more acreage despite the fact that all were prequalified.