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OIL
Overview
Algeria contains an estimated 11.8 billion barrels of proven oil reserves. With recent oil discoveries and plans for more exploration drilling, proven oil reserve estimates could climb upward in coming years. Algeria should also see a sharp increase in crude oil exports over the next few years, due to the rapid substitution of natural gas for oil in domestic energy consumption.

Analysts consider Algeria underexplored, even though the country has produced oil since 1956, and Algeria's National Council of Energy believes that the country still contains vast hydrocarbon potential. Over the last few years, there have been significant new oil and gas discoveries, largely by foreign companies: Algeria's oil sector, unlike that of most OPEC producers, has been open to foreign investors for more than a decade. Algeria hopes to increase its crude oil production capacity significantly over the next few years by attracting more foreign investment. Energy Minister Chekib Khelil has stated that his goal is to double the number of companies operating in Algeria, restructure the domestic oil industry, and establish new regulatory bodies independent of the Energy and Mining Ministry.

Sonatrach, owned by the Algerian government, dominates Algeria's oil sector. Through its subsidiaries, the company has a domestic monopoly on oil production, refining, and transportation. However, Algeria has aggressively sought foreign investment in its oil sector, and the share of Algeria's oil production controlled by foreign companies has increased steadily over the past several years; in the third quarter of 2004, foreign companies controlled some 44% of Algeria's crude oil production. Algeria's oil sector, though, is not completely open to foreign companies. All foreign operators must work in partnership with Sonatrach, with Sonatrach usually holding majority ownership in these production-sharing agreements.

Sector Reforms
In late 2001, President Boutaflika introduced an important hydrocarbons reform bill. The bill would reform Sonatrach along corporate lines, allow foreign operators to act independently of Sonatrach, and possibly private Sonatrach or its subsidiaries. Progress on the bill stalled in 2003, when labor unions demonstrated against the law and Parliament rejected it. The Algerian government re-introduced the hydrocarbons bill in 2004, and meetings between Algeria's largest labor union, UGTA, and the government seemed to produce some consensus. In February 2005, the president's Council of Ministers approved the hydrocarbon bill, which included some amendments but mostly resembled the 2001 proposal. If Parliament approves the bill this time, and political analysts predict that it will because of these new amendments, then the hydrocarbons reform bill will become national law. Passage of the hydrocarbons reform would be an important, concrete step towards Algeria's goal of increasing crude oil production.

Exploration and Production
Algeria's average crude oil production during 2004 was 1.23 million barrels per day (bbl/d). Together with 445,000 bbl/d of lease condensate and 250,000 bbl/d of natural gas plant liquids, Algeria averaged about 1.93 million bbl/d of total oil production during 2004, up steadily from 1.86 million bbl/d in 2003 and 1.57 million bbl/d in 2002. Algeria's crude oil production is running well above its OPEC quota of 862,000 bbl/d (as of November 1, 2004), though the OPEC quota only applies to crude oil production. In coming years, it is likely that Algeria's oil production capacity will rise, as the country plans to increase investments in exploration and development efforts. Algeria's production goal is 1.5 million bbl/d of crude oil by 2005 and 2.0 million bbl/d by 2010, a level it will likely reach at current levels of production growth.

With domestic oil consumption of 246,000 bbl/d in 2004, Algeria had estimated net oil exports (including all liquids) of 1.68 million bbl/d. Approximately 90% of Algeria's crude oil exports go to Western Europe, with Italy as the main receipient followed by Germany and France. Algeria's Saharan Blend oil, 45° API with negligible (0.05%) sulfur content, is among the highest quality in the world, and European countries have relied upon Algerian oil to help meet increasing stringent EU regulations on sulfur content of gasoline and diesel fuel.

Sonatrach operates the largest oil field in Algeria, Hassi Messaoud. Located in the center of the country, Hassi Messaoud produced about 350,000 bbl/d of 46° API crude in 2004, down from 550,000 bbl/d in the 1970s, but up from 300,000 bbl/d in 1989. The Hassi Messaoud area contains an estimated 6.4 billion barrels, just under 60% of the country's proven oil reserves, and Sonatrach hopes to double production at the field to 700,000-750,000 bbl/d within 5-7 years. Sonatrach also operates the Hassi R'Mel field (north of Hassi Messaoud, south of Algiers), which produced 180,000 bbl/d of 46.1° API crude in 2004. Other major fields operated by Sonatrach include Tin Fouye Tabankort Ordo, Zarzaitine, Haoud Berkaoui/Ben Kahla, and Ait Kheir. In February 2004, Sonatrach announced that it had discovered a new oilfield near Rhourde El Baguel, east of Hassi Messaoud, with possible oil reserves of 360 million barrels.

Foreign oil operators have steadily increased their share of Algeria's oil production. The largest foreign oil producer is Anadarko, with output of 530,000 bbl/d. The company operates the Hassi Berkine South (300,000 bb/d) and Ourhound (230,000 bbl/d) fields in eastern Algeria. Anadarko is developing seven new oil and gas fields in Block 208 of the Berkine Basin; first production from the fields (EKT, El Merk, El Merk N, El Merk E, El Merk C, El Kheit, and El Tessekha) is possible by 2007, with output eventually reaching 150,000-200,000 bbl/d of crude oil and condensate. Exploration success rates in the Berkine Basin have been high, and several billion barrels of oil may lie within 15 miles or so of the area.

Besides Anadarko, there are many foreign companies active in the country. BHP-Billiton operates the Rhourde Oulad Djemma (ROD) project in eastern Algeria, a series of six satellite fields that should produce 80,000 bbl/d once fully on-stream in late 2005. Amerada Hess has operated the Gassi el Agreb/Zotti field since 2000, with annual production of 40,000 bbl/d. In July 2000, several companies (Burlington Resources, Talisman, and Sonatrach) announced that they would develop the MLN (Menzel Ledjmat North) field in Block 405a. MLN should produce around 35,000-40,000 bbl/d when completed, with initial output of 14,000 bbl/d. Other major foreign producers in Algeria include Cepsa (Ourhoud, Rhourde El Krouf), and Agip (Bir Rebaa).

Although Algeria has experienced a significant influx of foreign investment in recent years, it still has many oil fields in need of additional foreign capital and enhanced oil recovery (EOR) investment. Halliburton has an eight-year contract to provide EOR services and boost production at Hassi Messaoud, which saw production fall sharply beginning in the mid-1980s. In February 1996, Arco (now owned by BP) signed a $1.3 billion partnership with Sonatrach to increase production at Rhourde El Baguel. The Rhourde El Baguel field is Algeria's second-largest, containing about three billion barrels of proven oil reserves, but the field has produced less than 450 million barrels since 1963. BP expects to raise the field's output from 27,000 bbl/d to 125,000 bbl/d by 2010. In September 2003, Brazil's Petrobras signed a deal with Sonatrach to explore for oil in Algeria, and in December 2003, Algeria and China's CNPC reached a similar agreement. Also in December 2003, Cepsa and Total won drilling and exploration rights on the Bechar block in the Sahara desert. Sinopec won a $525 million contract in October 2002 to help increase the crude oil recovery rate at Zarzataine, near Hassi Messaoud. In November 2002, the Kuwait Foreign Petroleum Exploration Company (KUFPEC) and Anadarko announced a partnership to further explore the Berkine Basin; KUFPEC has not been active in Algeria for over 10 years.

During 2004, Algeria held its fifth licensing round for foreign development of oil and natural gas reserves. The country received eight bids for ten blocks in various parts of the country. Companies that won exploration rights included Amerada Hess (U.S.), BHP-Billiton (Australia), CNPC (China), Petroceltic (Ireland), Repsol-YPF (Spain), Sinopec (China), and Statoil (Norway). During its fourth licencing round in 2003, the country awarded 12 blocks for exploration. Algeria held its sixth licensing round in late 2004, and the country planned two more rounds in 2005.

Pipelines and Export Terminals
Algeria uses seven coastal terminals for the export crude oil, refined products, liquefied petroleum gas (LPG) and natural gas liquids (NGL). There are facilities located at Arzew (Algeria's largest crude oil export port), Skikda (Algeria's second largest crude oil export port), Algiers, Annaba, Oran, Bejaia, and La Skhirra in Tunisia. Arzew handles about 40% of Algeria's total hydrocarbon exports, including all of its NGL, LPG, and oil condensate exports. Algeria has ambitious plans for the expansion of the Arzew port area, including the construction of a petrochemicals complex, a condensate refinery, and a desalination plant.

Algeria's oil pipeline network facilitates the transfer of oil from interior production fields to these export terminals. Sonatrach operates over 2,400 miles of crude oil pipelines in the country. The most important pipelines carry crude oil from the Hassi Messaoud field to export terminals (see chart). Sonatrach also operates oil condensate and LPG pipeline networks that link Hassi R'mel and other fields to Arzew. Currently, Sonatrach is expanding the Hassi Messaoud-Azrew pipeline, the longest in the country. The project will build a second, parallel line that will more than double the capacity of the existing line.

Algeria operates one crude oil pipeline connection to a foreign country. The 160-mile, 304,000-bbl/d OT1 pipeline connects the In Amenas oil field in the southeastern part of the country to the export terminal in La Skhira, Tunisia.

Downstream
Naftec, a subsidiary of Sonatrach, operates Algeria's crude oil refineries. The country has four refineries, with combined capacity of 450,000 bbl/d, supplying most of the country's refined oil product needs. The Skikda refinery (300,000 bbl/d) provides the bulk of Algeria's refined products production. The 30,000-bbl/d Hassi Messaoud plant supplies products to southern Algeria, while the 60,000-bbl/d Algiers refinery processes crude from Hassi Messaoud for consumption in the capital. Finally, the coastal 60,000-bbl/d Arzew refinery produces products for domestic consumption and export. In January 2001, Algeria issued a tender for an integrated production and refining project in the central Adrar region, near the Sbaa basin, and in May 2003 contracted with China's CNODC to build it. Algeria also wants to upgrade and restart the currently-idle In Amenas refinery. In addition to its domestic production of oil products, Algeria imports around 20,000-35,000 bbl/d of sour crude and specialty products for specific industrial applications.

Although Algeria has a substantial petrochemical and fertilizer industry, low capacity utilization rates mean continued reliance on imports. Algeria's largest petrochemical plants include Annaba (a 550,000-ton-per-year (t/y) ammonium phosphate fertilizer plant. ammonium nitrate facility, and nitric acid complex), Arzew (365,000-t/y ammonia, 146,000-t/y urea, and 182,500-t/y ammonium nitrate), and Skikda (130,000-t/y high-density polyethylene unit, 120,000-t/y ethylene cracker, and a substantial aromatics complex). Sonatrach has undertaken a number of petrochemical and fertilizer expansion projects, including a new methyl tertiary butyl ether (MTBE) complex and a polyester resin complex.

NATURAL GAS
Overview
As of 2005, Algeria had 160 trillion cubic feet (Tcf) of proven natural gas reserves, the eighth-largest in the world. Algeria's recoverable natural gas potential, however, may be as high as 282 Tcf. Most of the country's natural gas reserves are associated (they occur alongside crude oil reserves). Algeria is a founding member of the Gas Exporting Countries' Forum, a loose group of 15 gas-producing countries formed in Tehran in May 2000.

Sonatrach dominates natural gas production and wholesale distribution in Algeria, while another state-owned company, Sonelgaz, controls retail distribution. Algeria has increasingly allowed greater foreign investment in the sector, and foreign gas producers have entered into numerous partnership agreements with Sonatrach. There are also plans to allow foreign participation in the retail natural gas sector. In order to attract foreign investment, the government has pushed efforts to liberalize domestic natural gas prices; unfortunately, the latest push at price liberalization in 2005 coincided with record freezing temperatures in Algeria, and there were protests and riots against the liberalization plans in several cities.

Exploration and Production
Commercial production of natural gas in Algeria began in 1961. The country produced 2.8 trillion cubic feet (Tcf) of natural gas in 2002, the fifth-largest in the world and the largest among OPEC member countries. In 1997, Algeria's natural gas production exceeded the country's crude oil production for the first time. In 2002, natural gas production accounted for 54% of Algeria's total hydrocarbon production. Algeria consumed 0.72 Tcf of natural gas in 2002, some 26% of its production. The Algerian government has encouraged the domestic use of natural gas, which now represented over 63% of the country's total energy consumption in 2002.

Algeria is a major natural gas exporter, mostly to Europe and the United States. Algeria accounting for one-fifth of the EU natural gas imports in 2000, second only to Russia. One complication in Algeria's natural gas export strategy to Europe has been EU market liberalizations, which have challenged the legality of traditional "destination clauses" for gas deliveries. Such clauses prevent the offtaker of the gas from reselling it to another EU state, and this has complicated Algeria's attempts at signing agreements with EU purchasers. Traditionally, natural gas suppliers have prefered destination clauses as a way to prevent competition from re-suppliers. In January 2005, Algeria reached an agreement with the EU over these destination clause. Under terms of the agreement, the EU will continue to allow destination clauses, and Algeria will share the profits of any gas sales to third parties with the original buyer.

Algeria's largest gas field is the super-giant Hassi R'Mel, discovered in 1956 and holding proven reserves of about 85 Tcf. Hassi R'Mel accounts for about a quarter of Algeria's total dry gas production. The remainder of Algeria's gas reserves center around associated and non-associated fields in the south and southeast regions of the country. In southeastern Algeria, the Rhourde Nouss region holds 13 Tcf of known reserves in the Rhourde Nouss, Rhourde Nouss Sud-Est, Rhourde Adra, Rhourde Chouff, and Rhourde Hamra fields; also in southeastern Algeria, near the Libyan border, the In Amenas region contains the Tin Fouye Tabankort (TFT; 5.1 Tcf), Alrar (4.7 Tcf), Ouan Dimeta (1.8 Tcf), and Oued Noumer fields. The In Salah region in southern Algeria holds smaller, less-developed reserves (5-10 Tcf). In October 2003, Sonatrach announced a major natural gas discovery in the Reggane Basin in southwestern Algeria. In order to increase production from associated natural gas fields, the Algerian government has announced the banning of natural gas flaring after 2010.

Development of the In Salah region is crucial in Algeria's plan to increase its natural gas production. The In Salah Gas consortium, a partnership of Statoil, BP, and Sonatrach, was the first major natural gas partnership between Sonatrach and a foreign operator. The consortium has development rights for seven of the twelve existing fields in the In Salah region, including the Garat al-Bafinat, Teguentour, Krechta, Reg, In Salah, Hassi Moumeme, and Gour Mahmoud fields. In Salah Gas will also appraise existing wells and explore for new gas reserves in the region. The fields controlled by the consortium contain proven reserves of 6 Tcf, with potentially 10 Tcf in total recoverable reserves. Initial production at the In Salah fields began in July 2004, and once fully on-stream, they should produce some 880 million cubic feet per day (Mmcf/d) of natural gas. Even prior to initial startup, the consortium had already signed gas supply contracts with European customers. In May 1997, In Salah Gas sealed its first natural gas sales deal with Italian electricity generator Enel. The deal enables In Salah Gas to take over an existing contract to supply Enel with 390 Mmcf/d of gas. Other than Enel, the venture is marketing gas to other potential clients in Europe, Turkey and North Africa.

Besides In Salah, other important Algerian natural gas projects have centered around three blocks in the Illizi province of southeast Algeria, near the Libyan border: Ohanet, In Amenas, and Gassi Touil. Ohanet, led by a consortium of BHP-Billiton and Sonatrach, is in Illizi on the northern edge of the Sahara desert. Production of natural gas, NGL, and liquified petroleum gas (LPG) at Ohanet began in October 2003. The Ohanet project includes a natural gas processing plant with capacity for 30,000 bbl/d of condensate, 26,000 bbl/d of LPG, and around 700 million cubic feet (Mmcf)/day of natural gas.

In November 2002, Sonatrach and BP signed a deal to develop natural gas production in the In Amenas region. The $1.8 billion project is due to come on-stream in late 2005 and should produce around 900 Mmcf/d of "wet" (i.e., associated with oil) natural gas, plus 50,000 bbl/d of condensate and LPG. The project includes construction of three pipelines to carry the hydrocarbons to the Sonatrach distribution system at Ohanet. In 2003, Statoil purchased 50% of BP's stake in the project.

In November 2004, Algeria awarded a tender to Repsol-YPF and Gas Natural for a natural gas project at Gassi Touil, a field containing 9 Tcf of proven reserves. The $2 billion integrated project will consist of 52 development wells, a 780-Mmcf/d gas processing facility, a 630-Mmcf/d natural gas pipeline, and a 500-Mmcf/d gas liquefaction terminal at Arzew. Initial production at Gassi Touil should begin in 2009, with the bulk of its gas destined for Spain and other European markets.

Pipelines
Domestic System
Algeria's domestic pipeline system centers around the Hassi R'Mel gas field. The largest pipeline systems connect Hassi R'Mel to liquefied natural gas (LNG) export terminals along the Mediterranean Sea. A 315-mile, 4.38-billion-cubic-feet-per-day (Bcf/d) system connects Hassi R'Mel to Arzew, while a 360-mile, 1.98-Bcf/d system connects Hassi R'Mel to Skikda. A smaller pipeline (270 miles, 690 Mmcf/d) also runs between Hassi R'Mel and Isser, near Algiers. Hassi R'Mel is the center of Algeria's entire natural gas transport network, so pipelines connect to it from the country's major gas-producing regions. A 600-mile, 3.29-Bcf/d pipeline links the In Amenas region; a 330-mile, 774-Mmcf/d pipeline connects the In Salah region; and a 90-mile, 610-Mmcf/d system runs from the gas fields surrounding Gassi Touil.

Export Pipelines
There are two natural gas pipeline connections between Algeria and Europe. The 670-mile, 2.32-Bcf/d Trans-Mediterranean (Transmed, also called Enrico Mattei) line runs from Hassi R'Mel, via Tunisia and Sicily, to mainland Italy. Completed in 1983 and doubled in 1994, there are plans to construct an additional compressor station along the Transmed that could increase capacity to 3.48-Bcf/d. An international consortium, led by Spain's Enagas, Morocco's SNPP, and Sonatrach, operates the 1,000-mile, 820-Mmcf/d Maghreb-Europe Gas (MEG, also called Pedro Duran Farell). MEG, completed in 1996, connects Hassi R'mel with Cordoba, Spain via Morocco, where it ties into the Spanish and Portuguese gas transmission networks. In August 2001, Sonatrach awarded ABB a $93 million contract to build a natural gas compressor station on the MEG line in order to increase the line's capacity to 1.78 Bcf/d by 2006.

In July 2001, a consortium led by Spain's Cepsa (20%) and Algeria's Sonatrach (20%) agreed to build a new natural gas pipeline linking Algeria and Europe: Medgaz. The 120-mile Medgaz will link Beni Saf, Algeria to Almeria, Spain, with an eventual extension to France. In September 2002, the consortium completed a study of the line's feasibility, but delays have pushed initial construction on the project to July 2005. The $1.3 billion Medgaz, which should be completed by 2008, will have an initial capacity of 390 Mmcf/d, increasing to a maximum of 1.55 Bcf/d. There are also plans to run a parallel power cable. In November 2002, Cepsa said that it had signed a letter of intent to purchase 35 Bcf/y of natural gas via Medgaz, and in 2004, Iberdrola also agreed to purchase 35 Bcf/y from the line.

In 2002, Sonatrach signed a deal with Italy's Enel and Germany's Wintershall to form Galsi, a consortium to build another natural gas pipeline from Algeria to Italy. Current plans call for an onshore pipeline from Gassi R'Mel to El Kal, Algeria, then an underwater section to Cagliari, Sardinia. This is to be followed by an onshore section to Olbia, Sardinia, then a final, offshore pipeline to C.D. Pescaia, Italy. Galsi estimates initial capacity on the 910-mile line will be 770-990 Mmcf/d, and, as with Medgaz, there are plans for a parallel power cable. The $2 billion project could come on-stream by 2008.

Sonatrach and NNPC, the Nigerian state oil company, formed the Trans-Saharan Natural Gas Consortium (NIGEL) in 2002. The NIGEL consortium aims to construct a 4,550-mile natural gas pipeline from Warri, Nigeria to Hassi R'Mel, via Niger. There are also plans to construct a road and fibre optic cable parallel to the pipeline. The NIGEL pipeline would utilize the proposed Medgaz and existing Transmed pipeline to carry Nigerian gas to European markets. The Nigerian and Algerian governments have sought financial assistance for the $7 billion project from the World Bank and the New Project for Africa's Development (NEPAD). In 2004, both governments expressed their continued commitment to the project, promising concrete action in 2005.

Liquefied Natural Gas
With the start-up of the Arzew GL4Z plant in 1964, Algeria became the world's first producer of liquefied natural gas (LNG). During the first nine months of 2004, Algeria exported 2.43 Bcf/d of LNG. Algeria is the second largest exporter of LNG (behind Indonesia), with around 17% of the world's total. Most of Algeria's LNG exports go to Western Europe, especially France. Sonatrach has LNG export contracts with Gaz de France, Belgium's Distrigaz, Spain's Enagas, Turkey's Botas, Italy's Snam, and Greece's DEPA. In 2003, Algeria exported 53.4 Bcf of LNG to the United States, some 11% of total U.S. LNG imports. Algeria's largest LNG export terminal is the Arzew facility, whose two facilities produce a combined 840 Bcf/d of LNG. Other important terminals include Skikda (275 Bcf/d) and Algiers.

On January 19, 2004, a boiler exploded at the Skikda LNG export terminal. The blast killed at least 27 people and shut operations at several adjacent facilities, including a refinery and oil loading terminals. Three of six LNG trains at the Skikda terminal were destroyed, though the other three also suffered some damage. As a result of the accident, LNG production at the Skikda plant declined 76% during 2004. Sonatrach completed repairs on the last damaged LNG train in November 2004, and the company decided to replace the three destroyed trains with a single, larger one, upon which construction should finish by mid-2007. Sonatrach stated that, while Algeria's LNG exports would remain at a reduced level through 2007, its overall natural gas exports would remain the same due to expansions of its export pipelines.