Under the headline "In Algeria for the long haul", Gazprom's Corporate News (No. 9 2012) published a detailed interview with Sergei Panferov, director of Gazprom International's subsidiary in Algeria.
A deliberate policy
"Sergei Petrovich, what trends could you single out in the Algerian fuel-and-energy market?"
"The fuel and energy sector is the basis of Algeria's economy, its backbone. I have to remind myself that the Republic is in tenth place in Africa in terms of oil reserves, and as for natural gas - here, generally speaking, it is in the top ten in the world. Average annual gas production in the country reaches around 200 billion cubic metres. About 85 billion is on the market in saleable condition, from which 30 billion makes up domestic use, and 55 billion is exported, including 32 billion along pipelines and roughly 23 billion in the form of liquefied natural gas (LNG). Algeria is third after Russia and Norway as a supplier of gas to Europe, with which it is connected by three Mediterranean gas pipelines that lead to Spain and Italy. It also had a project to build a fourth pipeline, through Sardinia in Italy, the implementation of which has been delayed only because of the global financial crisis. These facts already indicate that Europe is the main focus for Algeria's foreign economic strategy in the field of gas production, and Algeria is a priority partner for Europe in this area. Accordingly, it is an established tradition to strengthen relationships along these lines, reflecting the partners' natural geography and so, if you like, this is a main trend.
In Algeria, modernisation of oil-refining facilities is underway, and new gas liquefaction complexes, ammonia and ammonium nitrate production plants, and facilities for producing plastics are being constructed. All in all, the country is striving to improve the share of added value in the use of its own hydrocarbon resources, so as to diversify and increase the profitability of its exports, which are currently practically single-commodity exports.
Algeria is trying to pursue a balanced and well-thought-out policy to develop its fuel and energy industry. According to published data, this policy includes both long-terms plans for preserving its share of the European gas market, and plans to develop petrochemistry. Modernisation of oil-refining facilities is currently underway in Algeria, and new gas liquefaction complexes, ammonia and ammonium nitrate production plants, and facilities for producing plastics are being constructed. In broad terms, the country is striving to improve the share of added value in the use of its own hydrocarbon resources, so as to diversify and increase the profitability of its exports, which are currently practically single commodity exports. The other distinctive trend is the focus on new and up-to-date developments and technologies. As I recall, Algeria is a pioneer in the field of LNG. The first commercial supply of this commodity was already being carried out from this country in the mid-1960s. Today, the country has significant facilities for the production of LNG, and also a well-developed export infrastructure, including terminals and its own fleet of methane carriers. The LNG sector is also continuing to develop steadily.
Algeria has also actively responded to calls for developing renewable energy sources, with solar energy naturally taking first place. So a combined solar-gas power plant with a capacity of 150 MW was put into operation at the end of 2010. This project, which is fully commercial, was implemented in partnership with the company BP. The power plant, working on natural gas, includes a solar concentrator, which during the daytime operates a turbine steam generator. Solar panels have over the last few years become widely used in rural electrification projects, and in communication networks, including mobile communications - at base stations in remote locations. There are plansto bring the share of renewable energy resources in the production of electricity to 10% over the next 10 years. To this end, large-scale local production of solar panels is planned in the country.
In June this year, an announcement was made concerning the successful construction of the first shale gas well in Africa. In the opinion of many experts, reserves of shale gas in the Republic enormously exceed conventional reserves, and, in all probability, this business area will become one of the key trends in the development of the Algerian fuel-and-energy industry in the foreseeable future."
"Tell us about the history of Gazprom's entry into Algeria and the development of Gazprom International's activity in the country."
"The decision to set up Gazprom's representation in Algeria was made based on the strong need to provide a constant presence for us in this North African country, which is one of the key players in the European gas market. The general logic for the growth of the business, overall, is simple: it is better to seek ways to collaborate rather than to compete relentlessly. This point is especially true in relation to the large energy companies, because both the risks and the stakes in this business are more than high. In 2006, the interests of Gazprom and Sonatrach in Europe were still not actually intersecting, but they had already come close to this possibility. In autumn that year, the companies managed to conclude a Memorandum of Understanding, defining a fairly broad range of areas and formats for establishing possible collaboration. This document, incidentally, made quite a lot of noise at the time, insofar as some European countries were quick to assess it as being close to a cartel deal between two main gas suppliers, directed against the interests of European consumers.
The opening of the representative office in 1998 more or less coincided with the holding of the first international tender in Algeria for the right to conclude contracts for hydrocarbon deposit exploration and development under new oil legislation conditions, and it would have been a sin to overlookthat sort of chance to actively enter the Algerian market. In this regard, the representative office actively supported Gazprom International's initiative to take part in this tender as an operator investor. In the final analysis, the bid made for the El Assel area in the Berkin geological basin was won after quite a serious competitive battle, and the corresponding contract was concluded and came into force during the first half of 2009."
"How did events unfold after that?"
"The hydrocarbon exploration and development project in the licensed area of El Assel presupposes that large-scale 3-D seismic acquisition is carried out, as well as the drilling of exploratory wells in the identified prospective structures. The initial area of the field amounted to around 3.1 thousand square kilometres and in geological terms it was under-investigated. As the project operator, Gazprom International took care of carrying out 3-D seismic surveys over an area of 2.7 thousand square kilometres - that is, in essence, practically within all the fields. In 2010, after testing the first exploratory well, a potentially commercial opening of an oil-and-gas deposit in the Rhourde Sayah structure was made. Two more exploratory wells were constructed at the licensed area last year, and the drilling of the fourth well is currently coming to an end. In June, the project entered its third and final phase of geological exploration work, which will last until the middle of 2014. During this time, an additional amount of seismic exploration is due to be carried out, to conduct drilling of one more exploratory well and a number of development test wells. When this is completed, we will have to present a plan for developing the open deposits and, in fact, to start to implement it. The effective term of our contract is 32 years. According to preliminary assessments, the project is commercially attractive, even if it is not the largest.
Two exploratory wells were constructed at the licensed area last year, and the drilling of one more well is currently coming to an end. In June, the project entered its third and final phase of geological exploration work, which will last until the middle of 2014."
"What are the conditions under which the company is working in Algeria? How do you assess the local investment climate?"
"According to Algerian oil-and-gas legislation, the government in the form of the national agency for the development of hydrocarbon resources (ALNAFT) admits foreign operators to its subsoil resources based on competitive tenders. The tender is declared as the conclusion of a contract for exploration and development. From a legal point of view, this document represents two agreements in one. First, it is a government permit to conduct geological exploration in a specific area. Second, in the event that commercial reserves of hydrocarbons are opened, the operator is obliged to conclude an agreement with Sonatrach regarding joint development of these reserves, with participation shares distributed 51:49 in the Algerian side's favour. As a rule, ALNAFT puts areas up for tender that are free from third-party rights, but there are instances where fields are offered in which Sonatrach is already working. In the first case, the operator independently takes on all geological exploration risks, and if oil and gas are not found, then it restores the licensed area without the right to compensation for any costs incurred. In the second instance, these risks are distributed in line with the parties' share participation. This was the type of contract that was concluded by Gazprom International. The operator is answerable to ALNAFT for observing the terms and conditions of the contract with regard to the terms, types, and volumes of geological exploration work. In addition, it interacts with Sonatrach according to the terms and conditions of the collaboration agreement. Our companies have formed an association under the project. The highest management body is the working committee, made up of representatives from Sonatrach and Gazprom International. It is this body that is authorised to make decisions, both with regard to the strategy and tactical implementation of the project, as well as in the larger area of other practical problems that come under its remit.
As far as the investment climate is concerned, it should be noted that in our case, it is completely defined by current oil legislation regulations, which are neither better nor worse than in other countries. As everywhere in the world, some companies consider that investors are granted too little stimulus and guarantees and that the tax burden is excessively high. However for some reason there are no fewer oil companies because of this in Algeria. Somehow they manage to survive. Incidentally, changes were recently announced here to the current oil-and-gas legislation, aimed at granting more favourable conditions for the activities of foreign investors. These will be particularly connected to projects in the area of non-traditional hydrocarbon resources, such as the development and production of shale gas."
Laws without exception
"What are the specific features of working in the republic?"
"There are special features here, of course. Our licensed area is located practically in the very centre of the Berkin geological basin. The special features of the terrain are the frequent ridges of the high sandy dunes, the seriously complex construction of the access roads, the areas for drilling, and the take-off and landing strips for light aircraft. There is a desert climate, which is sharply continental: in summer, during the day the temperature exceeds +50°C in the shade, and at night in the winter, it is not rare to see light frosts down to -10°. Sand storms that last two or three days are regular occurrences here - transportation ceases, aircraft do not fly, but we do not stop drilling. There are also geological characteristics: the target horizons for drilling our exploratory wells are at depths of 4,000 to 5,500 metres, which dictates its own demands both in terms of well construction, and in terms of drilling, logging, and testing equipment. We must have powerful well drills, and equipment must work at temperatures reaching 180°C at the bottom hole. Naturally, the key issue is the lack of professionals. Nevertheless, 70% of our staff are Algerian. We attract the best on the market and we train our own specialists. Specific difficulties arise when working with local administrations: bureaucracy here holds its own with the Russian system - procedures are complex, multi-stage, and protracted. Decisions are hardly ever made quickly. One good thing is the health and disease control situation: there are no specific infections in Algeria, even malaria which is standard for the tropics, therefore no one needs inoculation. So there are positive aspects to working in the middle of the desert.
Speaking about the legislative field, it must be noted that the laws in the republic in the hydrocarbon field are adhered to completely, without exception. Recent events with a consortium of Spanish companies can be viewed as a striking example. They concluded a contract to carrying out the integrated gas project Gassi Touli, having intended to drill a large number of operational wells and construct surface infrastructure, including machinery for the liquefaction of natural gas. The contract was received for the tenders, and the terms and costs of carrying out the project were fixed firmly. The Spaniards invested around 1 billion dollars in the implementation of the project, but schedules were not met, and indeed serious miscalculations had been made regarding money, apparently. When they tried to negotiate with Sonatrach regarding extending the terms and raising prices, citing "external circumstances" as a basis, they received a firm and unequivocal refusal. Any attempts by the Spaniards to review the original terms of the contract proved to be fruitless. Incidentally, the international commercial arbitration court in Geneva recognised that right was on the Algerians' side, and the Spaniards were forced to leave the project without any compensation. So difficulties here should be resolved generally through proper execution of the commitments undertaken."
A range of possibilities
"How do you rate the future prospects for Gazprom International's work in Algeria?"
"In terms of the priority and sequence of steps, our project is completely conventional: exploration - assessment of reserves - analysis of commercial attractiveness - preparation of development plans - transition to operations. According to the appearance of the raw materials, it is possible to say that in all probability, liquid hydrocarbons and gas will be produced. In accordance with current legislation, liquid hydrocarbons are subject to distribution between partners at the oil flowmeter in line with the partner's participation share in the project. In addition, each participant in the project purchases the title to its own share in the raw materials and, after payment of tax owed, can dispose of it at its discretion. With gas, in light of its specific character as a commodity, the story is somewhat different. The contract binds us from the start of production either to agree with Sonatrach regarding the method and conditions for selling our share of the gas to it, or to form a joint enterprise with an Algerian company to sell the raw materials. However, up until then, we are faced with solving yet more sizeable problems in the project."
"Has the possibility of broadening the company's activities in Algeria been considered?"
"We naturally do think about our prospects. Provisional contacts on this subject have already taken place, particularly during working trips to Algeria in spring this year with the head of Gazprom International, Valeriy Gulev, and negotiations with top management at Sonatrach. The range of possibilities is quite diverse: it might be collaboration in the oil service sector, both in promoting new technologies on the Algerian market and prospective development, or indeed along any other routes that are not closed off. One thing is clear: We must do everything that we can to ensure that the Gazprom brand remains in Algeria for the long haul."
Interview conducted by Dennis Kirillov