Mediterranean Paper Series 2010

Can Algeria be a stable and

sustainable source of energy for Europe?
Trevor Witton
Independent MENA Energy Consultant
London
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 Can Algeria be a Stable and
Sustainable Source of Energy for Europe?

Mediterranean Paper Series

January 2010

Trevor Witton

Independent MENA Energy Consultant

London
What is Energy Security?
Energy security means different things to different
people. From a European perspective—as a
significant energy consumer and net importer of oil
and gas—energy security means access to reliable
sources of energy, at competitive prices, produced
in environmentally responsible and safe manner.
From an Algerian perspective, as a significant
energy producer and net exporter of both oil and
gas to Europe, the concern is not so much about
security of supply, but security of demand.
Five hundred million European consumers benefit
from what have been, to date, reliable deliveries
of Algerian oil and gas into a stable and growing
energy market. The European Union (EU) relies
on Algeria for up to 20 percent of its gas demand
alone, but despite Algeria’s prolific gas reserves and
its obvious geographical proximity to the European
market, its energy exports have had to compete
for market share in an increasingly global market
place. Winston Churchill said that “safety and
certainty in oil lies in variety and variety alone.”
The same principle applies to energy security today.
Diversity of supply—types of energy, its supply
chain geography and production technologies, all
help reduce reliance on any one source. Energy
diversity is, therefore, a founding principle of
energy security. It enables global markets to operate
by helping balance supply and demand.
Advantages of Open Energy Markets
The world has become steadily more dependent
on traded energy, volumes of which have roughly
doubled over the last 20 years. Europe is no
exception. Growth in energy trades is seen by free
markets as a good thing; it is an indication that
commoditized markets are deep, resilient, and
robust. Free trade between energy producers and
consumers creates mutual dependence and mutual
advantage between supplier and customer. Proof
that open, transparent, energy markets work can be
seen from the fact that despite recent geopolitical
disruptions, including two major wars in the
Middle East, 9/11, and several natural disasters,
there has been no major physical shortage of energy
supplies in the last 25 years. Energy is always
available, albeit at a price.
Anxieties about energy security arise when
existing market arrangements fail, or look likely
to fail. Specific supply disruptions can arise from
production shortfalls anywhere along the supply
chain—a major field, facility, or transport system
suddenly goes off-line due to unforeseen events; or
because of a contractual dispute between supplier
and buyer. Global shortages of energy caused
by imbalances between supply and demand are
usually signalled well in advance by the advent
or advance of high or higher energy prices. In
deeply commoditized markets like oil, the impact
of sudden outages is never usually serious, as
shortfalls can easily be made up in the market.
In gas markets, however, where supply is usually
tied to specific end-user contracts, making up
unexpected losses can prove more problematic.
Although the global energy market is deepening
all the time, to remain efficient and to signal the
need for investment, at the right place and at the
right time, the market has to be transparent and
operate without constraint. Protective measures, or
restrictions of scale or capacity of production, will
always send the wrong market signals, discouraging
investment with consequences for energy
security. Instead, the commercial conditions that
promote open and transparent markets need to be
encouraged and incentivized to ensure sustainable
and durable relationships between supplier and
consumer are maintained as an important plank of
energy security.
In open and transparent markets the economic
response to energy shortages is to invest in
additional sources of supply. Unfortunately, the
Can Algeria be a Stable and
3
Sustainable Source of Energy for Europe?
global energy market is not a perfect economic
system. The oil market is distorted, first by the
presence of the OPEC cartel and secondly by either
a reluctance or inability of non-OPEC producers
to make the necessary investments when signalled
by the market. Taken together, both dent economic
theory, leading to market-price dislocations. The
rise of energy prices between 2006 and 2008 was
an example of strong global demand chasing tight
supplies against a background of either under-
investment in production and delivery capacity
or reluctance to place available supplies in the
market. Whether this was due to a breakdown in
supply-demand theory or market manipulation has
been much debated, but either way, price was the
significant market response—there was always just
enough supply to keep the market fully liquid.
The recent global economic depression and
associated collapse in energy demand quickly
quenched the high energy prices of 2008. For the
first time in recent memory, global demand for oil
and gas has fallen, not least in Europe, leading to
significant energy surpluses chasing weak market
demand and lower prices. Ironically, these current
energy surpluses are most likely to be the catalyst
to future supply shortfalls as investment in new
sources of supply is withdrawn or slowed in the
face of financial distress, exacerbated by lower
prices, particularly for gas. The long-anticipated
wave of new Liquefied Natural Gas (LNG) supply is
beginning to arrive in the market, boosting overall
supplies by 15 percent in 4Q09 and by as much
as 25 percent by 2010. With subdued Asian LNG
demand, most of the new LNG will continue to
price itself into Europe, causing intense gas-on-gas
competition for all players—not least Algeria.
Significantly, in the context of European energy
security, Algeria is both a member of the OPEC oil
cartel and a founder member of the relatively new
Gas Exporting Countries Forum—which some
believe is an attempt to form a sellers cartel with a
4 The German Marshall Fund of the United States
similar mission to that of OPEC. Membership of
such associations is notoriously prone to political
overtones outside of market forces and must
therefore be factored in to any assessment of energy
security by European consumers—though quite how
to characterise such risk often remains enigmatic.
Algeria’s Conventional Energy Potential
Despite these wider energy market concerns, few
doubt Algeria’s long term oil and gas potential.
Geology has blessed Algeria with several prolific
hydrocarbon basins that have been exploited by
the state energy monopoly, Sonatrach, since its
nationalization. At current rates of production
the state has about 20 years of remaining proved
oil reserves and around 40 years for natural
gas. However, Algeria has stated publicly its
commitment to grow both oil and gas production
through an aggressive program of new investment,
reported to be around $63 billion for the period
2009-2013. Sonatrach’s plan is to increase
sustainable crude oil production capacity from
about 1.8 million barrels a day (mbd) today to 2.0
mbd by 2010, and to further increase this figure
to 2.5 mbd by 2015. However, in reality these
targets appear unrealistic, both in terms of volume
and timing. Even if Sonatrach had established
proven reserves to back their policy aspirations, oil
production remains constrained by OPEC quota
restrictions (which show no signs of easing in the
short term) and exports are limited by existing
export facility capacity.
In terms of gas potential, as the world’s fifth
largest producer of gas, Sonatrach is a significant
global player and justly proud of its leadership
position. Algeria has stated that it plans to increase
gas exports from the present rate of around 61
billion cubic metres a year (bcma) to 85 bcma
by 2012 and to perhaps as much as 120 bcma by
2015. Again, these production targets appear to
be hugely optimistic and are unlikely to be met.
Despite all the talk, gas exports from Algeria have
been almost flat since 1999. Despite many small
discoveries, significant new reserves have not
been established over the last decade to support
Algeria’s gas export growth aspirations. A program
of multiple, multi-billion dollar investments in
upstream exploration will be required to establish
the reserves to back these targets if they are to be
realistic. Assuming such a campaign is successful,
further tens of billions of dollars will then be
required to build the field facilities and related
pipeline and export infrastructure if any new
reserves are to be monetised. The relatively poor
uptake of new acreage by foreign investors in the
last two licensing rounds, however, suggests that
securing new reserves and investment may further
delay these goals.
If energy security is about investment to
define additional reserves and to build energy
infrastructure to bring them to markets, it is
also about energy substitution. Algeria’s appetite
for domestic energy is making serious in-roads
into its production of both oil and gas. Generous
price subsidies encourage profligate use and
inefficiencies which limit the surplus available
for export. The more that can be done to improve
the efficiency of the domestic energy market via
investment incentives and fiscal measures, the
more efficient the use of domestic energy will
become, liberating valuable supplies for export and
improving security of supply.
Conventionally, energy efficiency has been about
the application of new technology, particularly in
the power generation and transport sectors—
both big consumers of Algeria’s domestic reserves.
Algeria is pursuing a program to build new, more
efficient, gas-fired power generation plants by
upgrading and retiring older single-cycle units
and replacing them with modern combined-
cycle gas turbine technology. However, the state
generator, Sonalgaz, is severely debt laden and
capital-constrained because it can only levy state
prices for supplies of gas and electricity which
are below the cost of production. Algeria has
instead turned to commercial partners to help
Sonelgaz deliver new generation capacity. Although
several joint ventures have been involved in
building new plants, nearly all have suffered from
construction and commercial related difficulties.
The lack of a properly regulated, competitive
dispatch and transmission grid operating system
and state controlled gas feedstock and end-user
electricity prices makes it difficult for potential
inward investors to see an attractive return.
But with electricity consumption growing
at between 4–5 percent per annum, urgent
investment is required just to maintain current
domestic capacity, which offers little reserve
to meet periods of high seasonal demand or
outages—let alone meet strong demand growth.
The Future: Alternative Energy?
Despite the challenges presented by conventional
energy, Algeria has considerable potential for the
development of alternative and renewable energy
sources—principally solar and wind-energy.
According to publicly available sources, Sonatrach
and its subsidiaries have ambitious plans to
become a major generator and exporter of solar
power to Europe, provided that the vast investment
costs can be secured and a viable commercial
model can be developed. If such investment were
to occur, it would diversify the energy mix and
help free both oil and gas for export, contributing
to energy security through diversity of supply,
while also addressing the increasingly pressing
climate change agenda.
Headline projects to promote the development
of renewable energy schemes in Algeria based on
large-scale solar power generation with submarine
transmission links to Europe may look good
on paper, but in practice they face significant
Can Algeria be a Stable and
5
Sustainable Source of Energy for Europe?
commercial hurdles. Although undoubtedly
attractive to EU policymakers, the export of
solar generated power to Europe via submarine
cables is an enormously capital-intensive supply
option. The commercial assumption that solar
power generated in Algeria can be delivered to
demand centers in Northern Europe via Spain and
Italy, and at competitive prices relative to more
conventional alternatives, requires imaginative
thinking. Demand for electricity in the southern
sectors of Spain and Italy is only modest and grid
connectivity and line capacity northwards to key
demand centers is limited. Significant investment
will be needed to build new transmission capacity
required to reach more northerly energy demand
centers—always assuming that transit countries
adhere to European Energy directives that call for
unconstrained third party access to existing and
new infrastructure—by no means a given based on
current behaviors.
These economic assumptions—the price of solar
generated power, the cost and efficiency of subsea
transmission of electricity, and the restrictions in
transmission-grid connectivity—present Algeria
with a daunting commercial challenge and risk.
Algeria appears to be banking on one or other of
two EU energy policy development assumptions.
The first is that consumers in EU member states
are actually willing to pay the necessary premium
for ‘green’ solar power relative to alternatives.
Supporters argue that they must if member
states are to meet their agreed, and some believe
somewhat aggressive, EU 2020 emissions targets.
The second assumption, possibly linked to the first,
is that EU member states will somehow enter into
a protocol with Algeria to subsidise such ‘green’
generation capacity so that it can compete on price
with European alternatives, thereby underwriting
its commercial viability. These assumptions are far
from being tested in the market and until and unless
they firm up, external project finance for such
6 The German Marshall Fund of the United States
schemes is unlikely to be forthcoming, at least from
external private investors. But if these ambitious
projects do proceed, they pose serious questions
for Europe’s future energy security. Europe’s energy
dependency on Algeria would increase—not just as
a source of oil and gas, but under this scenario, for
supplies of electricity as well.
The Challenges Ahead
If Sonatrach is to achieve its growth aspirations
for increased production and export of energy, it
must overcome at least five major obstacles that will
challenge its ability to remain a long term and stable
energy supplier to Europe. The first is geology, or at
least difficult geology. Second, is access to sufficient
capital to underwrite urgently required investment.
Third, Sonatrach must somehow embrace properly
incentivized commercial terms that are grounded
in non-ambiguous and sustainable legislation to
ensure it can attract partners and investment and in
a sustainable manner. Fourth, the production from
new projects has to compete for markets, especially
incremental gas production. Finally, to make it
all happen, Sonatrach needs to secure, retain and
mobilise people with the necessary skills to drive
the projects to successful and profitable completion,
on time, and at the right time.
Securing New Reserves
The first of these essentials is to establish new
or incremental reserves. Algeria will have to
look increasingly to its mature fields to meet
its contractual obligations, let alone its growth
aspirations—at least over the short to medium
term. Although Sonatrach is keen to advertise its
many exploration successes, most new discoveries
have been located in difficult and remote locations
where the geology is technologically challenging
and the commercially recoverable reserves appear
only modest. The new basins to the southwest and
southeast of the established fields are difficult to
image and produce, and very expensive to develop.
Most new discoveries are characterised by very
‘tight’ reservoir formations that often require
pattern-type in-fill drilling and the application of
expensive and cutting edge completion technology.
The new discoveries are also located in areas
of extreme desert terrain, presenting daunting
engineering challenges for the transportation of
new reserves to the northerly gathering centers,
which are about 800 km distant. Establishing new
reserves in commercial quantities and transporting
them to the gathering centers is not, however, the
end of the story. Significant new investment will
be required to upgrade existing gathering and
processing facilities to ensure any new reserves
from the southern basins can be delivered to coastal
ports for export located some 1000 km to the
north. As volumes climb, new pipeline and export
infrastructure will also be required to supplement
even upgraded capacity—especially where existing
infrastructure is old and corroded.
Serious questions also need to be asked about
the potential for its existing sources of supply to
meet future demand growth. Reservoir depletion
in Algeria’s aging giant fields is increasingly
visible, particularly affecting gas production.
Faster than expected production decline rates
in the major fields is creating rising uncertainty
for the long term supply of both oil and gas to
Europe. Reservoir depletion management is an
expensive and exacting science at the cutting edge
of technology, computing power, and human
ingenuity. If properly applied, timely investment
in pressure support, in-fill drilling, or down-
hole completion technology may extend field life
for decades, especially in giant accumulations.
However, fields with enormous reserves and long
production profiles are equally vulnerable to
abuse. They are often used as ‘swing producers’
to make up shortfalls from smaller fields, or to
take advantage of favorable market conditions.
Algeria’s giant Hassi R’Mel field is an excellent
example; it provides the majority of Algeria’s gas
production (~80 bcma, with about a third re-
injected to support liquids production, leaving
around 50 bcma for export). Over the years, Hassi
R’Mel has been exploited by Sonatrach to balance
demand for Algerian gas, but there is now strong
circumstantial evidence that reservoir pressures are
declining faster than anticipated with implications
of ultimately recoverable reserves. The risk is that
if the field is produced beyond its physical limits,
reserves may be irrevocably lost and production
profiles will collapse even faster. Without proper
(and expensive) reservoir management, short
term gains may jeopardise ultimately recoverable
reserves in the longer term.
Attracting Sustainable Investment
The second prerequisite to underwriting increased
energy exports from Algeria is investment. Securing
the capital required to build new, integrated,
energy supply chains represents a major challenge
for Sonatrach. Tens of billions of U.S. dollars are
needed to ensure existing and new reserves are
brought to market; Algeria’s hydrocarbons are after
all worth nothing in the ground. Coordinated, long
term, planning is essential to building integrated
supply chains capable of linking new discoveries to
markets. Although Sonatrach’s overall production
record has been good, urgent investment is needed
in new technology to enhance the potential from
existing fields, to improve recovery rates and
to harness often remote, difficult and relatively
expensive new reserves. For example, if Sonatrach’s
recovery factor for conventional oil reservoirs could
be raised by just 5 percent, it would add significant
reserves and production capacity to Algeria’s slate.
However, in Algeria, calls for urgent investment in
existing facilities must compete with more headline
grabbing projects that may be politically favored,
including overseas investment that confers upon
Sonatrach international prestige or helps the state
Can Algeria be a Stable and
7
Sustainable Source of Energy for Europe?
reinforce its bilateral relations. As a consequence,
reservoir management may be relegated in order of
investment priority despite the fact that in terms of
long term value it should be top of the list.
Despite Algeria’s huge foreign exchange reserves—
officially estimated to be in excess of $140 billion—
reduced income from hydrocarbon exports has
put pressure on the capital available to Sonatrach
to meet its investment aspirations. Weaker energy
prices have severely impacted Sonatrach’s foreign
exchange earnings, which make up 97 percent
of the state’s revenues and 40 percent of GDP.
Sonatrach must also cope with prevailing high
contractor costs. Without sovereign guarantees,
Algeria’s access to capital from commercial lenders
will remain limited. It must instead continue to
rely on domestic sources drawn from reserves—
reserves upon which there are many competing
demands. For example, the many tens of billions
of dollars required to underwrite Algeria’s planned
programme of upstream investment must compete
for capital to fund downstream projects that are
urgently needed to grow and sustain Sonatrach’s
domestic downstream position. Over a decade of
under-investment in the refinery sector has left
Algeria with serious shortfalls in some products in
its domestic market. Over the last few years Algeria
has had to import unleaded motor fuel and diesel at
times of peak demand because its domestic refinery
base is aging, its volume is limited, and it lacks
the necessary technological upgrades required to
produce advanced products.
Taken together, the competing demands for
investment capital are placing additional strain
on the Algerian Treasury. With limited access to
foreign capital markets, Sonatrach will either have
to continue to finance new projects on its own
balance sheet, or look to foreign joint venture
partners as a source of funding. In all cases the
capital demands are enormous, representing a
major challenge for Algeria as it wrestles with
8 The German Marshall Fund of the United States
competing demands for precious capital, skills
and people. Although Sonatrach professes to
have access to all the capital required to finance
its ambitious plans from domestic sources, there
is plenty of evidence of project deferments and
cancellations. Political uncertainties at the top
have slowed important decision making as budgets
come under pressure due to lower than expected
energy receipts. Perceived political and commercial
risk associated with foreign direct investment in
Algeria, exacerbated by recent changes in Algeria’s
foreign investment laws, is further limiting inward
flows of capital. Failure to secure the investment
required to bring the next generation of Algerian
projects to the market, and at the right time, is
therefore a significant threat to Europe’s future
energy security.
Partnerships of Mutual Advantage
The third hurdle that Sonatrach must clear if it
is to meet its ambitious targets is the ability to
work in long term and harmonious partnerships
with foreign investors. If Sonatrach is to achieve
its production goals, working along the entire
supply chain with strategic partners is likely to be
essential if new resources are to be unlocked and
exported to the European market in an efficient
and competitive way. Strong, durable partnerships
between Sonatrach and international energy
partners will ensure that technology, capital, market
access, and project management skills are aligned
along the value chain and applied on time.
To attract such partners, Algeria must promote
stable and incentivized commercial and contractual
terms to encourage foreign investment. However,
despite the urgent need for investment, and the
obvious advantages of joint venture activity,
recent developments in Algeria’s energy policy
show a marked trend towards greater energy
nationalism. Foreign investment in the energy
sector is becoming more, not less, complex.
Commercial contract structures have moved
from ‘tough but fair’ to ones burdened with
commercial risk and fiscal disincentives. Recently
revised commercial terms leave little on the table
for partners relative to upstream investment
opportunities available elsewhere (as evidenced
by the limited interest shown by foreign investors
in the last two licensing rounds). The existing
hydrocarbon law, the legislation related to taxes
applied to hydrocarbons and the commercial terms
on offer, make it difficult, if not impossible, for
energy partners to invest along the value chain in a
commercially attractive way. In addition, punitive
and retrospective windfall profit taxes have been
levied on foreign energy investors without recourse.
Such measures are seen as counter-productive
and a deterrent to foreign investment with serious
implications for Algeria’s long term energy
relationships with Europe.
Enhancing Europe’s energy security is therefore
not just about the scale of Algeria’s remaining
energy reserves and avoiding supply disruptions,
important though these are; it is also about
bringing new reserves to market efficiently and
properly priced to make them competitive. To
create the conditions for mutual cooperation
and investment, the energy market needs trust,
confidence, and optimism—qualities that are
difficult to secure in Algeria’s current political and
economic climate. For investment projects to be
sustainable they must offer commercially realistic
terms that provide foreign stakeholders with
enough ‘rent’ to ensure that the business is on a
sound and long term footing.
Capturing Future Market Demand
Securing new markets for incremental supplies,
particularly in gas markets, is the fourth essential
to meeting Algeria’s energy plan. During the
recent period of high energy prices, Sonatrach
moved towards a preference for shorter term
gas-supply contracts priced against prevailing
market conditions as opposed to more traditional
long terms agreements secured directly between
supplier and consumer. Shorter term gas supply
contracts are particularly vulnerable to periods of
over-supply and price competition as buyers are
not committed to long term off-take provisions.
By moving to a regime where Algerian gas is sold
on more speculative basis, Sonatrach has been
exposed to immediate market risk. Sonatrach has
had difficulty competing on price against suppliers
with significantly cheaper cost of production. Such
gas-on-gas competition has enabled those from
farther afield to absorb higher transport costs. For
example, LNG from Qatar and Australia’s North
West Shelf have landed in Europe, displacing more
proximal traditional suppliers such as Sonatrach,
which has seen a 10 percent decline in gas sales in
2009 alone.
Timing is also crucial. Even in the best managed
environments it can take upwards of five years to
bring a new discovery to market. Consequently,
decision-making must be not only swift and
joined-up, but also forward thinking, anticipating
market demand. If new Algerian gas supplies are
to compete in a European energy market currently
spoilt for choice and over-supplied, Sonatrach will
have to be ready to serve new demand as it arises
and at competitive prices. This is particularly true
for gas developments where lead times tend to
be longer and where markets must normally be
secured via direct term contracts with specific end-
users before final investment decisions are taken.1
The principle of investment ‘reciprocity’ between
Sonatrach and its foreign partners in projects
outside of Algeria is likely to gain ground as
pressure builds to bring new resources to market.
1
However, neither Gassi Touil nor the Skikda LNG plant re-
developments have secured markets; both projects were self
financed by Sonatrach who decided to take market risk.
Can Algeria be a Stable and
9
Sustainable Source of Energy for Europe?
Reciprocal arrangements play to Sonatrach’s
avowed intent to internationalize its energy
investment portfolio. Access by Sonatrach to more
open and transparent overseas energy markets
via properly incentivized commercial terms may
help reinforce the benefits of cooperation based
on mutual trust and respect, opening the doors to
a more equitable relationship between themselves
and potential investors in Algeria. In this respect,
Algeria cannot afford to be complacent about its
relationships with European energy partners or
Europe’s half-a-billion energy consumers. Although
Europe represents a large and stable energy market
right on Algeria’s doorstep there is no shortage
of equally viable, equally attractive, alternative
suppliers—something that Sonatrach does not
always appear to fully appreciate.
People and Skills—an Essential Ingredient
Finally, to create the conditions for better energy
security requires an abundance of skills and human
ingenuity—the fifth prerequisite to delivering
Sonatrach’s strategy. Skilled technicians are needed
to help unravel increasingly complex geology;
production engineers must be capable of working
at the very edge of technology if difficult reserves
are to be brought to the surface, processed and
transported to export facilities. As projects
become larger and more complex as they integrate
along the value chain to stay competitive, project
management expertise becomes a core competence.
Marketing skills will also be required to help build
a deep knowledge of and access to new markets,
particularly gas markets, including the ability to
deploy an increasingly complex and sometimes
bewildering arsenal of risk management and
hedging tools to help protect the downside and
secure the upside.
These are the core capabilities needed to explore,
develop, and produce Algeria’s reserves today
and tomorrow. They are not easily learned. Nor
10 The German Marshall Fund of the United States
can they be bought ‘off-the-shelf ’ despite what
Algerian officials may think or say in public. They
are earned from experience and application, via
team work and cooperation. Competition for these
core skills is increasing the mobility of those that
possess them; Sonatrach must be willing to pay a
price determined by a global market if it is to retain
its top talent. However, circumstantial evidence
suggests that Sonatrach is finding itself increasing
short of highly skilled people; it is struggling to
train and maintain the required skills, at least
in sufficient numbers, to meet its domestic and
increasingly international project demands.
Any deficits in Sonatrach’s ability to access and
retain the required skills can be mitigated by
working in partnership with international energy
companies. The role of the foreign investor is to
help Sonatrach provide safe, reliable, and affordable
energy through cooperation; by deploying their
capabilities to manage risk (geological, commercial,
and market); by acting as a source of expertise
(skills and human resource); and by being an
informed supplier of key technologies. Cooperation
with partners via joint venture agreements as a
form of risk mitigation does, however, assume
that mutually advantageous commercial terms can
be agreed to making a joint venture an attractive
incentive to the overseas investor and their
shareholders. If these conditions can be met, the
international energy companies are well placed to
help Sonatrach fill any gaps in its skills or human
resources required to tackle the frontiers of geology,
geography, and technology.
Sonatrach should also help itself by equipping a
new generation of energy professionals with the
skills required to bring increasingly difficult and
expensive resources on stream. Although there is
no shortage of Algerians who possess the skills and
aptitude to fill these roles, some appear unwilling
to endure an operating environment that some
believe still favors appointments and progression
based more on nepotism and regionalism than
professional merit. On top of this, prevailing
domestic hardships are encouraging skilled people
to leave the country to seek a better life elsewhere.
Unfortunately for Algeria, highly-skilled people are
always the most mobile.
Future Euro-Algerian Energy Cooperation
In conclusion, five essentials are required to ensure
Algeria remains a stable and sustainable energy
supplier to Europe. First, material new reserves
that can be produced at competitive prices must
be booked with certainty. Second, access to capital
is required to drive urgently needed infrastructure
investment. Third, secure new markets must be
won for any incremental production. Fourth,
to attract foreign investment in a competitive
environment Algeria must develop a more
open and cooperative model of working with
foreign investors based on properly incentivized
commercial terms that are attractive to all parties.
And finally, and most important, Sonatrach needs
to secure and retain staff with the right skills to
ensure projects are properly phased and completed
on time—a risk to European energy security that is
often ignored.
Even if all these conditions can be satisfied, the
frontiers of geology, geography and technology
will always tax the ingenuity of the Algerian energy
industry. Meeting these challenges in a way that
guarantees Europe’s long term energy security
is the new frontier and the new opportunity.
By adopting the right policies to help promote
significant investment in facilities, skills, and
people, Algeria has the potential to remain a major
energy supplier to Europe. But Algeria will have to
learn to compete in an increasingly global market
if it is to deliver its projects to market on time and
at competitive prices. Long term partnerships with
foreign investors based on equitable risk sharing
and fair commercial returns for all parties offer the
best way of securing this future. Such cooperation
confers mutual advantage and access to technology,
capital, markets, and skills. In this way, Algeria will
earn the demand security it needs to prioritise and
manage its future economic development. Equally,
European consumers will also feel assured that their
long term energy needs will be met with the help
of an enduring, reliable and trustworthy Algerian
partner. In these circumstances, protracted
negotiations towards an EU-Algerian Energy
Accord designed to underwrite this increasingly
important energy relationship look likely to
succeed. Without such an agreement, both sides
will undoubtedly be the poorer.
Can Algeria be a Stable and
11
Sustainable Source of Energy for Europe?
12 The German Marshall Fund of the United States
 Offices
Washington • Berlin • Bratislava • Paris
Brussels • Belgrade • Ankara • Bucharest
www.gmfus.org