The future of Algeria’s shale gas deposits

Pipeline in the desert
Source: DollarPhotoClub

With 707 trillion cubic feet of estimated technically recoverable shale gas, Algeria has a lot to gain from shale exploration. Many experts believe that in order to maintain the current level of exports, the government of Algeria will have to start relying on unconventional energy sources while conventional deposits deplete.

The government must ensure the export of energy products does not fall below 60 billion cubic meters per year in order to cover the expense of economic and social programs, the cost of wages and to complete the basal facilities. This may force Algeria to develop its huge shale resources within the next ten years.

Oil and gas production has been stagnating since 2010 due to a fall in exploration activity and a lack of investment from foreign companies, which have been wary of Algeria’s contract terms and security since a 2013 militant attack on a gas plant.

Luckily, apart from conventional deposits – the country produced almost 1.8 million bbl/d of petroleum and other liquids in 2013, which includes crude oil, condensate, natural gas plant liquids, and refinery processing gain – Algeria also has the third largest shale gas deposits in the world.

Unfortunately, Algeria also has no experience of developing shale gas, which involves new technologies such as multi-stage fracking and horizontal drilling. This forces it to look for partnerships with foreign investors who would bring to the table the required technology and know-how.

In preparation for foreign investment, in February 2013, the Algerian authorities passed amendments to their Hydrocarbon Law, easing the tax regime to promote foreign investment in the country’s shale gas reserves and making Algeria the only country with regulations on unconventional hydrocarbons in North Africa. According to the new law, foreign companies will have to work in partnership with the Algerian energy giant Sonatrach.

Ali Betata, president of Algeria’s national hydrocarbons agency ALNAFT, told Reuters: “With Algeria, it is clear only companies with experience in this area will be allowed to practice such activities in partnership with Sonatrach, and permit the state company to gain from the new experience.”

So far, three companies have signed exploration agreements in Algeria: Eni SpA, Shell and Talisman Energy, with ExxonMobil and Anadarko still holding talks with the government.

At the end of July this year, Sonatrach approved a $100 billion investment plan for 2014-2018 to increase oil and gas output. At the same time Sonatrach, announced that it intended to begin exploitation of the large shale gas fields in Algeria by 2020, with an estimated production capacity of 30 billion cubic meters in the first stage, or 40% of Algeria’s current production capacity (73.4 billion cubic meters in 2012).

Recently, however, the eagerness to explore Algeria’s unconventional deposits has been hampered by concerns of an environmental nature. As Al-Monitor portal points out:

“The decision to exploit this resource was made without any real discussion on its high cost — 4 or 5 times more than the cost of exploitation of conventional gas, according to a former general manager of Sonatrach — and on the threat it poses to underground water resources, as it needs huge quantities of water to break up shale to release the gas (so far there is no successful alternative technology for the so-called hydraulic fracturing). This is not to mention its environmental risks, most importantly, the contamination of underground water due to the use of toxic chemicals. This will eventually cause the demise of oasis agriculture.”

The opposition to shale exploration has been downplayed by the government which accused shale opponents of staging attempts at political destabilization.

“These attempts to demonize shale production target countries that advocate energy nationalism to assert sovereignty over their natural resources,” Minister of Energy and Mines Youcef Yousfi was quoted as saying.

Mr Yousfi swept aside any concerns related to potential environmental impacts of hydraulic fracturing, saying: “Regarding the use of hydraulic fracturing in shale gas extraction, it has been used for several years by Sonatrac to optimize crude extraction from the giant Hassi Messaoud oilfield.” With regard to the water use associated with shale gas extraction he said that the amount of water needed for large-scale shale projects was less than that currently used to increase pressure in some of the country’s conventional gas fields.

“We will not make the country thirsty,” he said.

The concerns about the impact of shale exploration become more pressing as Algeria prepares to open bids for a new oil and gas round, with 31 fields on offer. For the first time, the bidding includes blocks for unconventional resources, with tax incentives for foreign companies interested in investing in shale gas and shale oil.

In May, Ali Betata, president of Algeria’s national hydrocarbons agency ALNAFT, told Reuters that, with more than 50 firms joining in the early stages of the new energy round, interest in the potential fields was clear.

“Since we opened the data room sessions, the number of companies seeking different perimeters has not stopped increasing,” Mr Betata said. “From that rhythm of participation of the companies, we can conclude there is certainly interest.”

However, the date set for the submissions to tender for oil and gas blocks has been reset to 30th September from 4th September, as companies complain about investment conditions despite recent oil-sector reform. As Wall Street Journal reports, the main concern for bidders is a clause that allows national oil company Sonatrach to make investment decisions without consulting its foreign partners. But an Algerian official said the delay was due to the need to handle “numerous applications” for the licensing round.

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