10 February 2021

 

Full Report: Algeria

Predictions

  • Government will likely approve hydrocarbon law by end of March as pressure increases to boost growth and attract investment
  • New rules will prompt greater investment in oil and gas sector but impact of COVID-19 will continue to depress economic growth
  • Expansion of hydrocarbon sector will limit incentives to diversify economy and reduce dependency on oil revenues in longer term

 

Event

Football fans stormed the offices of state-owned oil company Sonatrach on 1 February, following the poor performance of MC Alger football club and comments by the team’s coach that Sonatrach, which owns the team, had not paid players’ wages for seven months. Separately, two days earlier, Energy Minister Abdelmadjid Attar vowed that the long-awaited hydrocarbon law, which is expected to raise foreign investment in the oil and gas sector, would be approved by the end of the first quarter of 2021.

Context

Algeria’s oil production declined to around 1 million barrels per day (bpd) in early 2020, from a peak of 1.4 million bpd in 2008. Hydrocarbons accounts for more than 90% of the country’s total exports and the decline, combined with low global oil prices, has significantly reduced government revenues. In turn, this has limited government spending at a time when restrictions imposed to halt the spread of the coronavirus (COVID-19) have depressed economic growth. The hydrocarbon law, proposed in 2019, is intended to encourage foreign investment to develop the oil and gas sector, but political instability in the wake of the protest movement delayed its implementation. Attar, however, has made implementing it a priority since he took over the energy portfolio in June last year.

Algeria: Chart illustrating Algeria’s daily curde oil production. Source: OPEC.

Analysis

The 2019 law eliminates bureaucratic hurdles, reduces administrative costs for foreign investors and reduces taxes on exploration operations. It introduces production sharing arrangements and expands contracts for partnering with Sonatrach, though it continues to limit foreign companies to minority stakes. These changes should make Algeria’s oil and gas sector more attractive to foreign companies and indeed the government has signed a series of memorandums of understanding with oil companies in recent months. The government will hope that highlighting these successes and underlining its efforts to attract foreign investment weakens the protest movement by appealing to some within it, and wins back some popular support at a time when much of the population is experiencing economic hardship.

Outlook

The government will prioritise moves to boost the economy, including efforts to attract foreign investment to the oil and gas sector, making it likely Attar will make good on his promise to have the hydrocarbon law approved by the end of March. That said, although the reforms will prompt greater interest from foreign companies, it will take time for new projects to mature and come online, while the impact of COVID-19 will continue to depress economic growth, particularly if the government’s vaccine rollout remains slow. As a result, economic grievances will continue to fuel anti-government sentiment in the coming months, ensuring sporadic protests will continue, albeit without a return to the previous level of demonstrations. Meanwhile, the planned expansion of the hydrocarbon sector will limit incentives to diversity the economy, which the government will need to do if it is to reduce its dependency on oil and gas revenues in the longer term.

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