Oil Report

ANALYSIS-Algeria steps towards resource nationalism

LONDON, July 14 (Reuters) - Algeria, long seen as an energy investment hot spot, has taken a step towards resource nationalism with plans to unravel a reformist law and claw back some profits from foreign operators.

But analysts predicted foreign oil companies, which have steadily increased their share of Algerian production, would still consider the OPEC member attractive for want of better alternatives.

“My feeling is oil companies will make some noise, but it is not going to deter them. Algeria is a major resource holder. Reforms elsewhere are blocking foreign companies,” said Saad Rahim of PFC in Washington.

The biggest foreign operator is U.S. Anadarko Petroleum Corp APC.N. Others include Royal Dutch Shell RDSa.L, BP BP.L, BHP Billiton BLT.L, ENI ENI.MI and Hess Corp. HES.N.

Algeria’s cabinet earlier this month approved a bill that would give state-run company Sonatrach a more central role and introduce a windfall tax on international oil companies.

If made law, it would reverse hydrocarbons legislation passed in 2005 that was meant to overhaul Algeria’s oil and gas industry and to turn Sonatrach into a purely commercial entity.

“Clearly, it is a step back,” said Rahim of the amendments.

Emboldened by record high oil prices, South American countries have led a wave of resource nationalism, or producer countries seeking a greater share of their resource wealth.

One of the prime exponents of the trend, Venezuelan President Hugo Chavez, earlier this year visited Algeria and met its president, Abdelaziz Bouteflika.

Analysts said Bouteflika was playing to a domestic political agenda through the amendments to the hydrocarbon law, which were announced on July 5, a national holiday to commemorate the anniversary of independence from former colonial power France.

“It points to a worrying new trend for investment,” said Valerie Marcel, analyst at the Royal Institute of International Affairs in London, of the Algerian amendments.

“Now what we see more and more is that really high prices are becoming a disincentive for investment. It’s a perverse effect. There’s a market signal to invest, but it’s having the opposite effect.”


Algerian Energy and Mines Minister Chakib Khelil, who played a major part in bringing in the 2005 hydrocarbons law, was not available for comment on the day of the announcement.

Speaking in London this week he said the changes could deter international firms and added they were “a political decision”.

“It may be that we are the victims of our own success. People saw lots of money coming into the coffers of the state and some people said maybe we don’t need that much money,” Khelil said.

“The political debate was that we need to leave some reserves for future generations.”

Some analysts dispute that slowing foreign investment would achieve that and say Sonatrach needs international expertise, even if it is considered a very successful national oil company.

They also say Algerian oil production might not be too far from its peak, although its gas reserves are very healthy.

“This idea of leaving the oil in the ground is a bit of a concern to companies ... but, in any event, Algerian oil output is expected to start to peak around 2010,” said David Butter of the Economist Intelligence Unit.

“A slow down could be recognition that it is going to get quite difficult to meet targets.”

Algeria has said it aims to increase oil output to two million barrels per day (bpd) by 2010 from around 1.4 million bpd now and to produce 85 billion cubic metres (bcm) of gas per year in the next five years from 62 bcm now.

The amendments must be passed by parliament and approved by Bouteflika to become law.

Algeria’s reformist 2005 hydrocarbons law has not entered into force because an annexe that lays out the practical details of liberalisation has not been signed by Bouteflika.

At the same time, the situation in Algeria has changed markedly as its foreign exchange reserves have climbed to more than $60 billion.

“The whole context has changed since the reforms were first thought about in the late 1990s when there was a capital and technology deficit,” Butter said.

“Now there is no capital deficit and they have managed to attract a fairly high level of investment.”

Butter said his understanding was that the proposed windfall tax would be effective retroactively, though oil companies said they hoped it would only affect future revenues and BP and Shell said they were awaiting clarification of the details.

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