Algerian attack signals dwindling prospects of North African oil and gas production

The tragic and dramatic events at the BP/Statoil In Amenas gas plant in Algeria provided a shocking reminder of the vulnerability of major energy installations to terrorist attacks.  The incident prompts a whole series of questions about the physical security of oil and gas workers and installations in dangerous environments, as well as raising the inevitable concerns about Europe's security energy of supply. The implications of the attack certainly seem disquieting for the international oil companies. But how worried should Europe be about the security of its oil and gas supplies from North Africa in the wake of the In Amenas horror? Here there may be less cause for serious concern. David Drury, Managing Consultant with Gas Strategies and former General Manager of BP Algeria, reflects on the immediate and longer-term implications of the In Amenas attack.

The basic reason that the IOCs decided that it was safe to continue operations was that the oil and gas installations are in the Sahara desert (c) BP
Algeria has been considered one of the more dangerous operating environments for foreign oil companies since the period in the 1990s when the country was in the grip of horrific and murky internal conflict which bordered on civil war. More than 150,000 Algerians are thought to have died in this violence, and foreign workers left the countries in droves in the wake of death threats, which were made horrifyingly credible by a wave of assassinations of foreigners.

But despite the general chaos, the international oil companies continued with their operations. And, indeed, it was in this period that BP cut its first major deal in Algeria - the $2.7 billion In Salah Gas project, which was signed up in 1995, and started contributing 9 billion cubic metres (Bcm)/year of gas to Sonatrach's supplies to Europe from 2004. In 1998, US oil company Amoco signed the In Amenas contract. The ownership of this project - which became operational in 2006 and also produces 9 Bcm/year of gas as well as substantial volumes of liquid hydrocarbons - subsequently passed to BP with the merger of BP and Amoco.  In 2003, Norway's Statoil acquired 49% of BP's stake in In Salah and 50% of its stake in In Amenas.

The basic reason that the international oil companies (IOCs) decided that it was safe to continue operations was that the oil and gas installations are in the Sahara desert, hundreds of kilometres away from the violence in the populated area of northern Algeria. The Algerian government announced that it had erected a "ring of steel" around the oil and gas operations, and deployed substantial military resources to safeguarding what was, and remains, Algeria's practically only source of export income. And these stringent security measures were largely successful. There were no terrorist attacks on the Saharan installations, nor on the pipelines and LNG plants which Algeria relies on for its exports, apart from one attack on the Transmed gas line to Italy, which was put out of action for 5 days in 1997 following an attack.  So in the light of this track record, what went so tragically wrong at In Amenas? To attempt to answer that question we need to sift through what sparse details have so far emerged.

Inside knowledge

The first point to make is that the security of the In Amenas facility was firmly in the hands of the Algerian security forces.  According to reports in the British press, there were around 100 soldiers or gendarmes guarding the In Amenas facilities. But despite this, the terrorists - numbering 35 apparently - were able to overrun the facility with apparently little resistance, essentially taking the majority of the some 800 staff on the site hostage - although the Algerian staff were fairly rapidly released. And while the security forces were clearly able to mobilise themselves to crush the terrorists in fairly short order, there seems to have been a major initial failing of the military protection in allowing the incursion in the first place into what should have been a securely guarded complex.

There have been several reports - some from official Algerian and Norwegian sources - that the attackers had inside knowledge and possibly help, and this may provide a part of the explanation.

All this is very worrying from the point of view of the security of oil and gas installations across North Africa. The faith in the ability of the security forces in Algeria to safeguard foreign workers and investments has been severely shaken. And the concerns will extend also to Libya, and probably to a

 The faith in the ability of the security forces in Algeria to safeguard foreign workers and investments has been severely shaken
greater extent: the Algerian security forces at least are a well-organised force with a sadly long history of anti-terrorist operations. The ability of the Libyan forces and militias to provide adequate coordinated protection might be more questionable. Moreover, although the attack on In Amenas seems to have been carried out by a group controlled by the veteran Algerian terrorist/smuggler Mokhtar Benmokhtar, reports in the Algerian press suggest the attackers may have entered Algeria from Libya, and may have been armed with heavy weapons acquired in Libya after the collapse of the Ghadaffi regime.

Another aspect that will be worrying is the growing possibility that the attack was planned in advance and held ready to be activated at a given time. One clearly wonders whether other such plans are in place. If they are, and if British prime minister David Cameron's assessment that "this is a global threat and it will require a global response", adding that this could be a matter of "years, even decades, rather than months" is correct, we may fear further incidents of this sort.

New assessments

The game has clearly changed for the international oil companies. They will be making new assessments of their operations in North Africa, and are likely to be more circumspect in expanding their operations in the region. But how does that affect the region as an energy supplier, particularly to Europe?

Algeria and, to a greater extent, Libya, are major oil exporters, with Europe as the main markets. But the international oil markets have already coped with a major disruption of supply from Libya - albeit with a significant effect on prices. The main worry will be gas supply, which is much less flexible and less easily replaced - as the cutting of Russian supply to Europe in 2006 and 2009 as a result of the dispute with Ukraine graphically demonstrated.

Algeria is the EU's third largest external gas supplier (after Russia and Norway), and supplied 11.1% of EU gas demand in 2011. Algerian supplies are even more crucial for southern European countries. Algeria's share of the Spanish gas market was 41.6% in 2011, and of the Italian market 32.1%.  These countries will now start to look afresh at the security of these gas supplies - and not for the first time.

In the 1990s the southern European countries took the threat of disruption of gas supply from Algeria very seriously as the North African country descended into a downward spiral of violence. Contingency plans were put in place to cope with a disruption, and Spain took the step of legally mandating that no one country (for which read Algeria) could supply more than 60% of its national requirements. But in the event, apart from one short-lived incident on the Transmed line to Italy, there was no disruption to Algerian gas supply to Europe during Algeria's years of violence. And although Algerian imports got close to Spain's 60% limit, a combination of market growth and declining production reduced that share substantially.

Now, with the shut-down of In Amenas, Algeria has lost around 10% of its production and it is far from clear how long it will be before the plant restarts. It appears that the attackers had the intention to damage the production facilities, but do not seem to have been successful in that aim - the risk of this

In the 1990s the southern European countries took the threat of disruption of gas supply from Algeria very seriously as the North African country descended into a downward spiral of violence
happening and putting the facility out of action for a prolonged time might have had something to do with the Algerian army's desire to put a swift end to the siege. In the immediate aftermath of the crisis, Algerian energy minister Youcef Yousfi predicted that In Amenas, which seems to have been shut down in a controlled fashion when the attack happened, would be up and running again in a few days. But BP is now being more circumspect, and is refusing to speculate when the plant could restart, saying that it is too soon to judge, as the site is effectively still a "crime scene".

Welcome relief

But - at least so far - the loss of In Amenas supply does not seem to be causing too many problems in the markets. Indeed, it seems that Algeria is managing to maintain at least its pipeline supplies to Italy and Spain, and may have some flexibility on its LNG supply. The fact is that at the moment the European gas markets can probably cope with a supply disruption better than for any time in the recent past. A combination of recession and low carbon prices has cratered European gas demand, which fell some 9.9% in 2011, and a further few percentage points in 2012.  With buyers already looking to reduce their contractual take, a limited loss of supply from Algeria would probably come as a welcome relief in that sense.

So in the short term it seems likely that the European gas markets will cope with whatever limited effects the - hopefully very temporary - loss of In Amenas production will have on Algerian exports - just as they did with the more prolonged loss of some 11 Bcm/year of Libyan exports through the Green Stream pipeline to Italy.

Even if the market recovers, Algeria's main pipeline customers in Spain, Portugal and Italy have a greater range of supply options than they did in the 1990s, and Algerian supply has anyway been a reducing proportion of the overall market. And, with Spain being mostly dependent on LNG imports for its gas supply, any loss of supply from Algeria could be compensated for with increased LNG imports. This would be quite expensive in today's market, with LNG spot prices being high as Japan pulls in short-term LNG supply because of its nuclear shut-downs, but the very fact that Japan was able to draw on LNG to counter its nuclear disruption shows how today's markets can react to minimise the impact of such events. LNG would have a much more restricted role in countering any supply disruption in Italy, but even there the capacity to import LNG is increasing beyond what was available a decade ago.

Civil war

The plain fact is that North Africa is figuring much less in Europe's future gas supply plans that it would have in early 2000's.  At that time Algeria's then energy minister, Chakib Khelil, was talking of increasing

The plain fact is that North Africa is figuring much less in Europe's future gas supply plans that it would have in early 2000's
exports from the then nominal level of 60 Bcm/year to 85 Bcm/year by 2010, and perhaps 100 Bcm/year by 2015. New pipelines would be built to Spain and Italy, and new LNG plants constructed. And in fact, some of this infrastructure has materialised: the 8 Bcm/year Medgaz line from Algeria directly to Spain started up in 2011 and a new 4.7 million tonnes per annum (mtpa) (or 6.4 Bcm) LNG train at Arzew is in an advanced stage of construction. Another 4.5 mtpa (6.12 Bcm) train is nearing completion at Skikda - this will replace output from three older trains which were destroyed in a (non-terrorist related) explosion and fire in 2004.

But despite this, Algerian exports have been going down, not up, as production has been flat or declining for the last decade, while the needs of a growing domestic market inevitably take priority over exports. As a result, Algeria's total gas exports in 2011 were only 51.5 Bcm - considerably below the previous nominal level of 60 Bcm. And nobody is talking about the 85 Bcm/year target any more.
 
The gloss has also gone off Libya as a potential source of extra gas for Europe. Following Ghadaffi's rapprochement with the west in 2004, both BP and Shell pitched into Libya with huge exploration deals. In the case of BP the $900 million deal entailed the biggest exploration programme the company had ever planned. And both these deals were aimed primarily at gas and, in particular, at new Libyan LNG export schemes. Additionally, ENI, the main incumbent major in Libya, also had its own LNG scheme based on its existing assets in Libya. At one stage it seemed to be a race as to who would launch the first new Libyan LNG scheme.

But things have not gone according to plan. Shell and BP's programmes suffered considerable delays, and the technical prospects seem also to have been downrated. And with the US no longer needing LNG as a result of the shale gas revolution, and Europe's gas demand being in the doldrums, the very attractiveness of new Libyan LNG seems to have substantially diminished. Operations were suspended following the civil war and overthrow of Ghadaffi, and Shell decided to exit its deal in May last year, saying that results had been disappointing and that further exploration could not be economically justified. BP stayed in, and was due to resume exploratory drilling this year, but this too has been put on hold following the In Amenas incident, compounded by specific threats against foreigners in Benghazi.

Suspended animation

So Europe's future gas balance may not, in fact be greatly impacted whatever is the fall-out from the In Amenas attack. But it is clearly very bad news for Algeria's attempts to re-establish growth in its gas output, and for Libya's attempts - to the extent they still exist - to boost its gas production. Algeria's main hope to increase gas production is with foreign investment, and several projects are under development. But these schemes are bound now to suffer a set-back, although it remains to be seen how serious this will be.

Attracting new players will probably become very hard. Algeria's track record in awarding new exploration contracts is already lamentable - the programme of new licensing rounds launched by Khelil has gone into suspended animation, and in the last round in 2011, only two of the ten properties on offer were actually awarded - and one of these was to the state company Sonatrach.  Last week, the Algerian parliament passed new hydrocarbons legislation which is intended to boost the attractiveness of foreign investment, particularly in shale gas, of which the country apparently holds huge resources. But it will now take rather more than this for foreign companies to look favourably on the prospect of sending their employees out on exploration projects in the Sahara.

Statoil has said that the attack will not blunt its international ambitions. As for BP, the company has reiterated its commitment to staying in Algeria, although for the present it has withdrawn staff. But the strategic attractions of Algeria are now much less than when the then-CEO of BP Lord Browne pushed through the In Salah deal in 1995. Back in 2010 negotiations were under way to divest BP's Algerian assets to its Russian TNK-BP joint venture. Nothing came of that move, but it would not be very surprising if, after a suitable period, BP again reconsidered the value of continuing to operate in Algeria.

 

David Drury (d.drury@gasstrategies.com) is a Managing Consultant with Gas Strategies Ltd., and is a former General Manager of BP Algeria.