This article was prepared for and first featured in Infrastructure Journal
As a result of the BP Deepwater oil spill disaster off the Gulf of Mexico earlier this year, increased attention and scrutiny has been paid to the oil and gas markets around the globe. Following on from a recent line of articles by the authors examining the oil and gas industries in America, Canada, the UK and Europe, this article examines those industries in North Africa, with a particular focus on Algeria, Libya and Egypt and how they are likely to develop and become more sophisticated as the global economy heals and improves.
The continued strength in oil and gas prices has given a boost to exploration and development activities in North Africa, which in turn has led to an increased focus on the rules and regulations which govern them. As noted at the recent North Africa Oil and Gas Summit 2010, North Africa is set to play a key role in UK and European gas security and is a key region in Africa’s overall oil and gas sector.
It has played and continues to play a major role in the development of the global oil industry. Algeria, Egypt and Libya are significant exporters and are home to large oil and gas reserves which are rendered more valuable by their proximity to Europe. Libyan oil reserves account for nearly three quarters of North Africa’s total, with Algeria following in second place. Algeria is also the region’s main source of natural gas reserves. Significant finds in Egypt allowed the country to join the category of LNG exporters in 2005, helping to cement North Africa’s increasing prominence in this sector.
On a very general level, North African countries either have little legislative framework governing the oil and gas sectors, or legislation that is both primitive and in its infancy. Furthermore, countries such as Algeria, Libya and Egypt operate largely unsophisticated refineries. Due to this there is a growing emphasis on updating old refinery equipment and investing in technology that will allow the refining companies to improve fuel quality for domestic and international markets.
Algeria houses the eighth largest natural gas reserves in the world and its hydrocarbons sector is instrumental to its economy, accounting for over 95 per cent of income derived from exports. Its huge hydrocarbon potential remains relatively untouched which means it is an attractive market for the international oil and gas sectors and offers substantial opportunities for foreign investors.
In 2005 the Hydrocarbon Reform Bill (‘the Bill’) was passed with the primary aim of liberalising the Algerian oil exploration and exploitation industry. The Bill ensured the separation of Sonatrach’s, the country’s national oil company, commercial role from its previous regulatory functions. The legal and fiscal system relevant to the hydrocarbons industry was also considerably relaxed. Prior to the Bill Sonatrach had the domestic monopoly on oil exploration, production and transportation although now it is a commercial entity like any other oil company and is required to bid on domestic projects alongside international firms.
The three major Algerian national oil companies are Sonatrach, Naftal and Naftec and the three major national gas companies are Sonatrach, which dominates natural gas production and wholesale distribution, Sonelgaz, which specialises in transportation and supply of gas and retail distribution and Cogiz which packages, stocks, markets and transports industrial gas. It is interesting to note that Sonatrach has numerous partnerships with foreign companies, including Enel, Statoil, BP and BHP Billiton.
As part of the important legal and fiscal amendments introduced, two regulatory agencies were created to support the Bill. ALNAFT defines the competitive environment in which energy companies, including Sonatrach, operate and ARH is the regulatory agency for hydrocarbons and monitors compliance by international firms with various health, safety and environmental regulations. Three further legal instruments were also implemented at this time, these being the prospecting licence, the exploration and exploitation contracts and the pipeline transportation concession.
Unlike Algeria, Egypt’s petroleum industry plays a key role in its economy and is vital for its stability and viability (although its natural gas output has risen steadily over the past decade). Its oil production capabilities come from four main areas, the Gulf of Suez, the Western Desert, the Eastern Desert and the Sinai Peninsula. Egypt is also strategically important because of its operation of the Suez Canal and Sumed Pipelines, the two main routes for export of Persian Gulf oil.
The Egyptian oil and gas industry is governed by little legislation with a distinct lack of general oil or gas law. Much like other North African countries Egypt’s infrastructure is unsophisticated compared to its Western counterparts. The key legislative channels are concerned with the establishment, duties and functions of state-owned companies operating in the oil and gas sector.
It is understood that the Government is planning to reform the system and establish an independent gas regulator. Currently no organisation exists to ensure and monitor energy efficiency whilst renewable energy has its own governing authority. The Supreme Council of Energy maintains a slight coordination of energy supply and demand ministries, but this is ultimately coordinated by the Prime Minister.
Libya has the largest proven oil reserves in Africa, is Europe’s largest oil supplier and Africa’s fourth largest gas supplier. However, only 25 per cent of its surface territory has been explored to date, thus making it an attractive option to international investors, much like Algeria.
More than fifty international oil companies are present in the Libyan market and together with subsidiaries of the Libyan National Oil Corporation (‘NOC’) they contribute to the country’s current overall production. Libya has adopted a more stringent local content requirements compared to its neighbours in the recent past. This distinctly sets it apart from Algeria and Egypt. This is largely viewed as an attempt to ensure that the benefits derived from the oil sector are passed onto the native population. As an example, a law passed in 2006 requires foreign investors to establish joint ventures with local companies, who must take at least a 35% stake in the joint venture.
Despite the local content requirements, Libya’s legislative framework is far from comprehensive and informal pressures on the NOC generally exceed the legal requirements. Despite its desire and aim to progress local content regulations towards respectability and transparency since the removal of international sanctions, its legislative framework is still questionable and viewed by many as inadequate. Colonel Qadhafi’s directives, such as that to abolish almost all government ministries on the basis they had ‘failed’ Libyans, continue to deter international investors and the establishment of joint ventures.
The Libyan local content requirements are likely to become considerably stricter in the next few years as the Government appreciates and learns to take advantage of international interest in the country’s resources to maximise national control.
North African countries such as Algeria, Egypt and Libya play an instrumental role on the global oil and gas stage, primarily due to the abundance of natural resources they contain. However, a major hindrance to their commerciality is the relatively unsophisticated and uncoordinated legislative and regulatory frameworks that have been implemented over the years. Developments are taking place to help improve the situations, but a variety of challenges still remain.
With oil and gas regulation becoming tighter and stricter in many Western countries, international companies are increasingly looking at North Africa as an alternative and attractive business option. However a more advanced infrastructure is required in the region if countries such as Algeria, Egypt and Libya are to not only attract but more importantly retain international investment and confidence.