Edward Robinson (Independent Commentator, London, UK)
Last May, the European Commission launched a “high level political dialogue” in Algiers aimed at extending cooperation and knowledge-transfer between the EU and its third largest external provider of natural gas. All three major European institutions are keen to use the tools of Energy Union, as well as the narrative of energy security strategy, to heighten cooperation with states in the European neighbourhood. The overall aim is to reduce European energy prices and to diversify imports away from the Russian gas. Algeria is therefore a natural fit for closer cooperation. So what are the opportunities and challenges for deepening this longstanding relationship? Let’s start with the challenges.
The first is the macroeconomic climate and the damage being done to Algeria’s medium-term outlook from the sustained fall in global oil prices. Despite an ambitious (and much needed) investment plan, the Algerian government now expects a significant shortfall in its revenues and a widening trade deficit. The government’s budget for 2015 was based on an estimated oil price of around $100 (around double today’s level). And as Professor George Joffé of Cambridge University recently noted, “for every 1 dollar decline in the global oil price, Algeria, which produces around 1.37 million barrels a day of crude and some 85 billion cubic metres of gas per year, loses $560 million in revenues”.
Exacerbating this is the problem (common across the MENA region) of rapidly rising domestic electricity demand eating up production gains. In Algeria especially, there is concern about social strife should electricity subsidies be curbed too quickly, although the government has slowly begun the process by cutting the subsidy entitlement large companies receive and levying additional taxes on cars.
A third challenge is the perceived difficulty of doing business in Algeria, particularly for new entrants. Opinions vary but some cite the continued existence of the 49/51 per cent rule as a disincentive to invest. The law stipulates that any enterprise must be majority-owned by Algerian companies. But it hasn’t stopped numerous IOCs setting up lucrative Joint Ventures with the state energy company Sonatrach in the past and – in many cases – planning to extend their investments.
And what about the opportunities? The most obvious is the vast production potential that still exists in Algeria, whether that be in unconventional oil and gas, the reserves of which may be the third largest in the world, at 20-35 trillion cubic metres, or – more interestingly for the long term – in renewable energy, in which case the Algerian government has set a target to expand to 27 percent of electricity generation by 2030. European experts in the field have most likely noted that Algeria has been named as having the highest concentrated solar power potential in the world.
Both these areas will be the focus of two new expert groups being set up by the European Commission and the Algerian government. The aim of the groups is simple: to help Algeria generate much more renewable energy (principally from solar and wind) to meet its domestic demand, thereby freeing up additional oil and gas production for export – potentially into an embryonic Mediterranean gas hub. It is even conceivable that – similar to projects being planned in Tunisia and Morocco – some utility-scale renewables projects could export renewable electricity into a liberalised European grid. And it is certainly good news to see the first IPP PV joint venture announced recently. There will also be a renewed push on energy efficiency.
A second opportunity is the government’s pledge to work closely with European investors and experts to overcome bureaucratic and technical challenges and to set up a new Business Forum to deepen cooperation. If European companies can help Algeria achieve its renewable energy aims, while securing continued production of oil and gas to Southern Europe, the relationship could work well for both parties, especially if European companies can help young Algerians gain the new skills they need to succeed in the growth sectors of the future, particularly in the renewable energy supply chain, something the Algerian government – as well as IOCs – is keen to promote.
As Isaac Valero-Ladron, a senior adviser to the EU’s Energy Commissioner, told a group of experts at a seminar in Brussels last week [note: the consultancy of which I am a director hosted the seminar], “these are exciting and interesting times to be involved in EU-Algeria relations”. Despite the technical and political hurdles, it makes sense for Europeans and Algerians to hope the Commission’s optimism is well placed.