Industry Trend Analysis - Gas Output Resurgent, Yet Unsustainable - APR 2018

BMI View: Algeria's gas output will increase to the early 2020s, buoyed by the completion of the current project pipeline due to start-up through 2018. As production slips into decline during the mid-2020s, increased flexibility and a move away from oil-indexation in gas contracting will be crucial in order to protect export market share.

The addition of new gas from the Touat, Reggane North, Timimoun and Tinhert fields will be the driving force behind modest production growth in Algeria over the short term. Slightly delayed from planned start up through 2017, we expect the new fields to ramp up over 2018, providing a combined output of just over 17bcm once all the field reach their respective peak production. Sonatrach has pledged a further USD250 million investment to the Tinhert field, focussing on increasing the overall production potential. This investment follows earlier announcements at the end of last year, which focussed on allocating capital in order to improve recovery rates at Hassi R'mel, the super-giant gas field at the core of Algerian gas production.

Gas Outlook Buoyed By New Fields
Algeria Field By Field Gas Production, bcm
e/f = BMI estimate/forecast. Source: BMI

Hassi R'Mel Central To Outlook

Sonatrach will attempt to stabilise natural gas production at its largest domestic field, Hassi R'Mel, with a USD2.0bn programme of investment into the field's compression facilities. We previously adjusted our gas production forecast from 2020 to reflect a softening of the rate of production decline at the field. In the second half of our forecast period, whilst we expect compression work at Hassi R'Mel to help offset some of the declines in production, we maintain that overall output will inevitably decline. As an older field and having undergone two previous phases of compression, we are sceptical over the ability of Sonatrach to find enough investment and expertise to prevent further declines at both the field and at many other legacy sites in the country. We now expect gas production to remain stable over the first few years of the 2020s before falling back into decline over the back-end of our forecast period.

Algeria Remains Key Supplier To The South
Algerian Gas Exports By Destination, 2016 % Share
Source: TradeMap. BMI

Contract Evolution

The more positive outlook over the next two to three years will be crucial for the maintenance of gas exports to Europe as well as further afield through Algeria's LNG terminals. Over 2017, Algerian gas exports remained relatively stable compared to 2016 levels, where the country exported 54bcm. However for Algeria to maintain its exports, it must continue to adapt to evolving market dynamics as well as ensure a steady domestic output. We continue to see a growing willingness for Sonatrach to become more flexible in its gas contracting and move away from oil-indexation which has long been the norm for the company. However, as competition in Europe grows, particularly in major importer Spain which has a higher exposure to LNG cargoes, consumers are pushing for even more flexible contracting with Algeria. In regard to Algeria's LNG contracting, in order to defend market share, we believe a greater focus on spot trading would benefit the country, particularly with regard to capitalising on arbitrage opportunities to the middle east and Asia. This may be particularly useful considering our outlook for a decline in domestic gas production from the early 2020s, which may dissuade consumers from locking into longer term contracts.

LNG Exports Also Important To Europe
Algerian LNG Exports By Destination 2016, bcm

A Note Of Caution

Despite an improved outlook to the early 2020s we continue to remain cautious over the longer term sustainability of gas output in the country. Firstly, increasingly aggressive fiscal consolidation from Prime Minister Ahmed Ouyahia's new administration is expected to weigh on growth (see 'Growth To Slow On New Fiscal Plan', October 21 2017), adding downside risk to proposed investment from state-owned Sonatrach.

As a state-owned entity, a concerted crackdown on spending by the Ouyahia administration, to address the costly budget deficit, will weigh on Sonatrach's ability to allocate capital into the upstream. Similarly, whilst proposed reforms to the dated and unattractive energy law would add noticeable momentum to foreign direct investment in the upstream sector, progress on said reforms remains sluggish and Sonatrach will remain the driving force behind investment into the sector. Despite recognition by Sonatrach's CEO, Abdelmoumen Ould Kaddour of the need to push reforms through, we remain sceptical on the development and scope of reforms, with the ability to pass new legislation hindered by inefficient bureaucracy and opposition from political hardliners wary of allowing foreign influence.

Secondly, foreign investment into the Algerian upstream sector is poor. A challenging business environment, the heavy dominance of national oil company (NOC) Sonatrach in the industry and unfavourable fiscal and licensing terms have all acted to deter investment in recent years. Whilst there has been efforts recently to reconcile with foreign majors, with limited technical and financial might of foreign oil companies we continue to predict a lack of tangible progress in new exploration blocks, as well as glacial progress in the country's nascent shale exploration.