It's an ambitious aim: a 50 per cent LNG production capacity increase by 2012 and a US$60bn renewable energy programme by 2030. On the other hand, Algeria does have a few advantages.

Firstly it is not only a major oil producer but has a well-established and sizeable gas production industry. In fact official estimates indicate that there is more gas available, albeit much of it is likely to come from tight and shale gas. While actual figures are not yet available, exploration drilling until the end of 2014 could double to between 500 and 600 wells, and energy minister Youcef Yousfi has made it clear that he feels the quantities of gas involved could be vast.

The basic resources on the solar energy side do not even need to be proved: this is a very sun-rich country. Estimates that up to 200,000 jobs, as well as a new source of export earnings, could result are a major incentive to develop a renewable power industry. Nor, given the amount of sunlight available is this a fanciful notion — if, that is, enough research, expertise, technology, manufacturing resources and investment can be harnessed to develop a solar power industry in Algeria.

Up to the job?

But it’s a big if — and not just in the case of solar. Both renewables and the exploitation of unconventional gas resources are tricky areas to monetise, given such questions as whether the technology available is up to the job and whether the business models stand up.

Especially problematic in the latter context is Algeria’s apparent rejection, since the middle of the last decade, of liberalisation of the energy sector in favour of a more resourcenationalistic approach. It’s an approach that has made fiscal terms so tight that many would-be investors have been put off.

Nor is that situation likely to change.

Samuel Ciszuk, senior Middle East energy analyst with IHS* explains, “Right now, speaking up for liberalisation — improving terms in order to attract investment — comes at a political cost.”

But speaking up may eventually be necessary when many existing oil and gas fields are approaching maturity and new sources of gas in particular are needed. And there’s another problem: spiralling domestic power demand and the need for more and more gas to meet it. That, as Ciszuk notes, is where Algeria, like so many other countries, has brought problems on itself. “The general problem is the same as in the rest of the Middle East: subsidy-driven demand growth,” he says. And given recent regional unrest, cutting subsidies and trying to rein in demand is unlikely to be an option.

New gas sources needed

So new sources of gas are needed for the long term. The gas reserves being targeted are likely to be found in the south-central and south-western Sahara desert areas, where significant discoveries have already been made and there seems to be a high potential for more. But Algeria has already failed to unlock development, much of it of unconventional gas, in those areas. It's hardly surprising.

Getting at tight and shale gas is an expensive undertaking technically, and if they are a long way from centres of population, there are additional logistical demands, as equipment may need to be flown out to very isolated areas. This does not bode well for future largescale production of unconventional gas.

To make matters worse, Algeria’s ability to meet existing gas export commitments, even from gas-rich areas, does not inspire confidence. Ciszuk explains, “A lot more export capacity is coming on stream — but it is not being matched by upstream capacity, especially if we look towards 2013 and 2014 because so many of the projects that were supposed to have come on stream by that time are running very big delays.”

LNG capacity hold-ups after the explosion and fire in Skikda in 2004 (where new capacity has just come onstream) were obviously to be expected, but other projects have simply not happened on time or were delayed by the 2010 corruption scandal at state NOC Sonatrach and the Energy Ministry, which led to the departure of just about anybody who might be able to make a decision.

At the same time the running of existing export facilities over the past few years has not been at the production levels one might have hoped for. Ciszuk says, “That might have something to do with feedstock problems and transport problems, because they've saved money on their maintenance for years. The mid-stream infrastructure especially is said by some people to be a in a rather precarious state in many cases.”

Even if all these problems are overcome, gas market prices need to be high enough to compensate for the expense of tight or shale gas exploration and production. However, present indications are that they could be relatively low for some time, given the participation in the market as major players, now or in the future, of Qatar, Australia, the US, Nigeria and others. Official Algerian comment about future pricing and demand has been quite optimistic, but the reality, says Ciszuk, is, “We don't know; it's impossible to say."

It is also hard to say whether the market value of solar power will be worth the price of providing it. Non-Algerian renewable energy companies will presumably be encouraged to share their technologies. However, there may be little financial incentive for them to do so and the companies will probably have little influence over how their technologies are employed or monetised. At the very least, recent pronouncements indicate that the Algerian government would like a strong local component in manufacturing and research. Significant lack of project control could deter foreign partners from getting involved (or persuade them to focus on more businessfriendly countries like Morocco), adding to long-term costs.

But even if Algeria were an open, attractive investment environment for solar energy development, is solar at the moment a profitable business?

Sahara to the coast

To start with, there is the problem of the distance from the heart of the Sahara desert up to the Algerian coast. As Ciszuk says, “We might be talking about power transmissio over well over 1500 kilometres depending on where they start building these facilities.

Maybe they'll try to build them a bit closer of course but you still have transport losses of electricity.” It’s true, he adds, that new technologies can create and move renewable power much more efficiently than before, making the idea of potentially exporting power from Africa to Europe at least conceivable, but it is by no means a proven system. In any case, Algeria is a long way from making that happen. “They've struggled so far to be a good investment destination for other companies than upstream; they've even struggled with upstream companies,” says Ciszuk. “So to be a new Silicone Valley for the renewable industries is very ambitious.”

But even if the price the market is willing to pay per unit of solar energy can justify the effort, don’t forget too that these calculations need also to make room for domestic power supply, which is likely to be a drain on export earnings for solar as well as gas.

A lack of investment and relevant expertise, not to mention bureaucracy, affect many industries in Algeria and are especially notable in the oil and gas sector, not least in the case of Sonatrach, whose participation in all projects is mandatory. Ciszuk points out that Sonatrach is far from inept, and that it has worked hard in important areas like technology transfer, but in the case of unconventional gas sources, he says, it will need help. “It’s problematic for them to do it themselves, from a financing point of view from a technology point of view and from a cadre point of view – and especially,” he adds, “if they want to move towards shale gas, because they don’t know anything about that.”

Outside involvement needed

Which means outside involvement. But interest from IOCs in new upstream acreage has been falling in successive licensing rounds and, the most recent round — the ninth — has resulted in only two exploration licence areas out of ten on offer being awarded. But the international interest was even lower than this figure may make it seem: one of the two awarded areas was taken by Sonatrach.

Commenting on the very weak response to the ninth licensing round in a recent research note, IHS says: “IOCs increasingly have found

Algerian fiscal terms too tight and its politically driven strong resource-nationalism sentiments unhelpful, in an environment already massively characterised by high levels of red tape and slow-moving bureaucracy”.

Remember that these rounds do not involve the country’s unconventional gas reserves, which will require even more technically complex and demanding exploration and development. The Algerian renewables sector, meanwhile, has barely got off the ground. In both cases, however, there is no obvious sign of the government relaxing its fiscal terms of easing the regulatory environment.

So would-be investors will have to hope for a change of heart. Or, as Ciszuk puts it, “Given that companies are struggling to move forward under the very tough Algerian terms with far less complex projects, the question is 'What terms will the Algerians offer?'” 

*IHS is a leading source of information and insight in energy, economics, geopolitical risk, sustainability and supply chain management. www.ihs.com