New head of Sonatrach is an opportunity for Algeria

Source : FT

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The recent attack on the Algerian military barracks close to the border with Mali is a reminder of the unresolved threat from Isis in north Africa and of the vulnerability of Algeria.

With a 1,500km desert border with Libya and Mali and a worsening economic situation because of falling oil production and lack of investment, the country needs radical change and the active support of the EU if it is not to become the next failed state.

The first step in a shift towards this came at the beginning of February with the appointment of Toufik Hakkar as the new chief executive at Sonatrach, the Algerian state oil and gas company, which is the country’s main source of public revenue.

Mr Hakkar faces intimidating challenges. He must shake off the allegations of corruption that have blighted the company in recent years, halt the fall in oil and gas production, bring in new foreign investment and develop new markets particularly for natural gas — all in the context of falling oil and gas prices.

If Mr Hakkar fails in these tests, Algeria could enter a spiral of decline, with falling revenues, an accelerating exodus of talent and security risks driven by civil unrest.

An agenda of reform deserves active support from the EU. Algeria has the potential to provide Europe with low-cost energy, but even more important is the need to stabilise a country that, if things go wrong, could be the source of large numbers of economic migrants.

Europe has begun to focus more attention on Africa — EU Council president Charles Michel spoke of looking at the continent with “fresh eyes” on a visit to Addis Ababa last week. But a flying visit is not enough. A substantive shift is needed, including in European energy policy, which instead of looking inward should acknowledge the importance of the bloc’s neighbourhood.

Algeria could be one of the wealthiest countries in Africa. It has more than 12bn barrels of proven reserves of oil, along with over 150tn cubic feet of natural gas. It also has extensive undeveloped shale resources, adding perhaps another 707 tcf of recoverable gas. But its oil and gas sector is in decline.

Oil production has fallen from almost 1.4m barrels a day to about 1m b/d since the 2008 global financial crisis. As in many Opec member states, attempts to diversify the economy have not worked. Oil and gas still account for 95 per of export earnings and 60 per cent of government revenue.

Mr Hakkar’s predecessor at Sonatrach, Kamel Eddine Chikhi, lasted only three months as CEO before becoming the latest victim of the swirling allegations of corruption around the state company.

Endemic corruption and the grip on Algeria of the military-backed elite provoked months of pro-democracy protests last year that presidential elections in December have done little to quieten. Abdelmadjid Tebboune, the new president after Abdulaziz Bouteflika was ousted by the military last April, has promised to “separate money from politics”.

Sonatrach’s privileged position, coupled with concerns about corruption and the uncertain security situation, given the civil conflicts in Mali to the south and Libya to the east, has deterred significant foreign investment in recent years.

This month, it was reported that BP, one of the leading investors in Algeria’s gas development at In Amenas in the desert 1,200km south of Algiers, was considering selling its stake.

A change in the oil law, in which Mr Hakker was closely involved, was passed at the end of 2019 and aims to attract new foreign capital — but that will be difficult, given the renewed security risks. The existing oilfields are maturing, and without fresh investment, production could begin to decline at a serious rate. The state of the economy has also encouraged many skilled Algerian workers to move out of the country.

More gas could be released for export if Algeria invested in solar energy to meet its rapidly growing electricity demand, but the gas will need to compete in the crowded European market. The logical, lowest-cost route would be to take more gas through the existing line across Spain and then into France, breaking into a market that so far remains resistant to open competition because of the strength of state monopolies.

Some of the necessary changes are in Mr Hakkar’s hands. He can force through reform in Sonatrach and improve its reputation, perhaps attracting back some of the lost talent and the missing investors. But he also needs the full support of the new government in Algiers and of the EU.

The region can seem remote from the concerns of Brussels. But neglect could allow the situation to deteriorate, with serious consequences for the region and beyond.

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