Algeria has for decades been a difficult and costly investment environment for foreign energy companies. An Islamist militant insurgency underway since the civil war of the early 1990s has transformed into a broader regional threat from al Qaeda in the Islamic Maghreb, which has its headquarters in the northeastern Algerian region of Kabylie and has nodes spreading across North Africa. The years since have seen insurance and labor costs increase while Algiers' repayment terms have remained relatively unchanged.
Rising Production Challenges
Algeria became the world's first exporter of liquefied natural gas in 1964 and currently fulfills about 20 percent of Europe's natural gas needs through both liquefied and piped natural gas. However, with production plateauing at its largest fields, Hassi R'Mel and Hassi Messaoud, Algiers has to develop costlier and more technologically demanding tight oil and natural gas formations deeper in its vast southern Saharan territories, such as Ain Salah and Ain Amenas. At the same time, the global natural gas supply has increased as a result of technological developments in shale and offshore natural gas extraction. In addition to the challenges of development, these southern fields, which are largely isolated and surrounded by vast expanses of the Saharan desert, are more vulnerable to militant attacks like the one carried out at Ain Amenas.
Algiers badly needs the investment and technology of firms such as BP and Norway's Statoil in order to develop Ain Salah and Ain Amenas, which each account for about 20 percent of Algeria's natural gas production, as well as other regional natural gas sites. While BP has not formally ended its relationship with Algiers and has hinted that more attractive investment terms could alter its decision regarding planned production coming online in 2014, the May 2 announcement casts significant doubt over Algeria's ability to meet future production targets, which includes a 50 percent expansion of liquefied natural gas production and exports currently scheduled to be met in the latter half of 2013.
But Algeria may not have the political flexibility to adapt its investment laws, due in part to a convoluted political system and a need to fund costly social spending programs aimed at controlling popular unrest.
Perhaps the biggest obstacle to Algerian energy production, despite long-term, fundamental European interest, is the uncertain political and security environment in the region. In particular, Algeria's political system reduces the ease of addressing the other issues affecting reform in Algeria. Algeria's isolationist, military government has resisted giving up too much control to foreign powers. It has been only relatively recently, since about 2010, that President Abdel Aziz Bouteflika began the first serious attempt to bring the military under civilian control. The outcome of the process is still in doubt, with Bouteflika's health problems leaving many investors, including BP, wondering whether Algeria will revert to its traditional protectionist, military-dominated economic model after Bouteflika.
Britain's Energy Plan
Britain's energy needs are rising due to the terminal decline of its own oil and natural gas fields, especially offshore fields in the North Sea — a challenge also faced by Norway, Europe's second-largest natural gas supplier. Britain's status as an island makes it more dependent on costlier liquefied natural gas, resulting in mounting energy import costs.
The volume of British natural gas consumption has left the country vulnerable to the whims of a few key suppliers, most notably Qatar. Doha supplies nearly 50 percent of Britain's natural gas needs, albeit almost entirely on a spot market basis. The result is that British liquefied natural gas expenses are at a nearly 30 percent premium compared to other European states.
However, with the addition of several new natural gas suppliers on the global market, the United States' switch from consumer to producer and Gazprom's possible extension of its North Stream pipeline to Britain, London is attempting to leverage this buyer's market to its favor in Algeria. And unlike Qatar, Algeria has a tradition of signing long-term supply contracts with generally favorable rates, despite its historically difficult production repayment terms.
How BP deals with Algeria's pressure to meet its contractual demands will determine how much difficulty Algeria will face in trying to maintain political stability and a conducive environment for foreign investment in its oil and natural gas industry. Despite the security threats and expenses of exploration and production, other European and Asian firms are continuing to make new oil and natural gas discoveries in Ain Salah and Ain Amenas and are working with Algiers. But these smaller firms will be powerless if BP's decision invites other large foreign investors in Algeria — ENI, Statoil and Royal Dutch/Shell — to coordinate their stances on Algerian investments in order to pressure Algiers to reform. This strategy is not devoid of risk, however. Europe could bet on unproven suppliers of energy developing global markets at the expense of losing access to the nearby Algerian market, or the companies' pressure could exacerbate the protectionist tendencies that they are trying to overcome or trigger broader social unrest in Algeria. In the immediate term, Algeria will have to find a compromise between subsidizing domestic stability and establishing a long-term relationship with the technologically advanced foreign investors it needs to keep its oil and natural gas industry relevant.
