Declining oil and gas production since the mid-2000s and globally low oil prices since 2014 have punched a big hole in Algeria’s economy. Continuing to pin its hopes on a recovery of oil prices, the North African nation is propping up its massive hydrocarbon industry by tapping into the country’s promising renewable energy potential.
For years, Algeria has been the third-largest oil producer in Africa and a major producer of natural gas in the continent. Exporting over 80 percent of its natural gas to European countries, it remains vitally important to Europe’s energy supply security.
This North African nation is believed to sit on top of the third-largest shale gas resources in the world, which have not yet been tapped. Meanwhile Algeria’s oil and gas production has been declining since the mid-2000s (see Figures 1 and 2) due to technical problems, lack of infrastructure, and bureaucratic foot-dragging that has hindered involvement of international investors. Foreign investments in fossil fuel projects in the country have fallen, largely because of high taxes on foreign partners and tough terms embedded in the current hydrocarbon legislation, resulting in a majority of joint venture shares (51 percent) being held by the state-run oil company Sonatrach.
A new hydrocarbon bill, which has been in the making for years but has not yet passed into law, seeks to sweeten the contract terms for foreign investors by offering tax incentives. Nevertheless, Algeria is expected to deplete its oil and gas reserves in about 20 to 50 years, respectively, unless it makes a technological breakthrough to produce these resources from shale formations or discovers new fields.
However, exploitation of shale oil and gas in Algeria is fraught with challenges. Lack of necessary infrastructure (roads and pipelines) to access and move the hydrocarbons across the country, remoteness of shale areas, water scarcity, security issues, and political uncertainty inhibit Algeria from becoming an important shale producer.
The country’s economy is now barely staying afloat given the dwindling oil and gas production as well as shrinking revenues from hydrocarbon exports due to the collapse in global oil prices over the past five years. Because oil and gas constitute more than 60 percent of its budget earnings and close to 98 percent of its export income, economists warn about a complete paralysis of the country if reforms are further delayed. Diversification of industries and energy sources has been a recurring theme in Algeria in recent years as it seeks to avoid a fiscal crisis and reduce domestic dependence on fossil fuels. Oil and gas are not only the backbone of Algeria’s economy, but they are also its lifeline. Domestic consumption of oil and gas has been steadily increasing since the mid-2000s, as shown in Figures 1 and 2. Oil consumption in the country has jumped up from 210,000 barrels in 2010 to 420,000 in 2017. And it currently relies 98 percent on natural gas to provide electricity for domestic consumption.
Algeria could meet its growing electricity demand, which is increasing 7 percent a year, from renewable sources given its vast untapped renewable energy potential. Although the government has promoted solar and wind power projects for years, the pace of introduction of renewable energy has been slow. But the risks associated with low oil prices since 2014 and domestic dependence on natural gas-generated electricity prompted the former Prime Minister, Abdelmalek Sellal, to embark on a series of reforms to diversify the energy sector. The Renewable Energy and Energy Efficiency Development Plan, an official strategic energy plan rolled out in 2011 and updated in 2015, envisions incorporating large-scale photovoltaic solar systems, onshore wind, hydropower, geothermal, biomass, and cogeneration technologies into the country’s energy mix until 2020. According to the Plan, Algeria’s renewable energy projects aim to reach 4,500 megawatts (MW) by 2020 and 22,000 MW by 2030 (see Figure 3). If these targets are met, power generation from renewable sources could constitute 27 percent of total electricity production.
However, the political uncertainty over Abdelaziz Bouteflika’s presidency has cast a long shadow on reforms. With both protesters and Bouteflika’s opaque regime having dug in in a standoff over Algeria’s political future, that even with his resignation on April 2 remains uncertain, prolonged unrest may further paralyze the economy, derail reforms, and drive away investors.
With its energy efficiency plan, Algeria hopes to save 42 billion USD by 2030 and reach a 9-percent cut in energy consumption. The Algerian government intends to develop up to 150 MW of solar energy in the central and northern part of the country through the first solar tender launched in November 2018. Since 2017, the country has been trying to launch a 4 gigawatt (GW) tender to generate solar power, but it still has not been issued. State-owned Sonelgaz will be the sole entity that will buy electricity generated from renewable energy projects through power purchase agreements. Created in 2017, Algeria’s Ministry of Environment and Renewable Energies will facilitate the integration of renewables into the country’s energy mix.
Algeria has great conditions for developing renewable energy. Electricity derived from sun is its most promising source of renewables, with the availability of more than 2000 hours of solar insolation per year in the northern rim and up to 3900 hours a year in the vast Sahara region of the country. Solar power could also help in water pumping for irrigation and water purification efforts, particularly, in remote and rural regions. The southwestern region has the best wind energy potential, while forest residue and crop and solid waste constitute valuable biomass resources for Algeria. Harnessing these energy sources could help meet its rising domestic electricity demand.
Notwithstanding all this tremendous potential renewable energy, Algeria’s development of its renewable energy sources does not necessarily mean that it would lead to a cut in the production of fossil fuels. On the contrary, the state-run oil company, Sonatrach, aims to take advantage of renewables to boost the extraction of oil and gas.
Sonatrach announced in December 2018 that it planned to use solar power in 80 percent of its oil fields. It launched its first large-scale solar project with 31,320 photovoltaic panels in November 2018 in the central region of the country. The company intends to utilize these solar panels, instead of natural gas, to electrify its Bir Rebaa North oil field. Since gas is heavily used to generate electricity in Algeria, an additional rationale for Sonatrach to invest in renewable energy at home is to free up oil and gas – the main revenue generators for the country – for exports. With the help of renewable energy, Sonatrach plans to significantly increase its production of oil and gas in the next decade.
Despite the rhetoric about diversifying the economy, the Algerian government appears to be committed to ramping up its traditional economic engine – the oil and gas industry. It is planning to pass a new hydrocarbon law that would be more appealing to international investors. Sonatrach has been trying to resolve a number of disputes with foreign oil majors to bring their investments into the country’s oil sector. It is looking for technology transfers to develop the country’s shale oil and gas reserves. Because Sonatrach and Sonalgaz have influence on Algeria’s energy policy, they can limit the terms and the scope of renewable energy’s penetration in the domestic economy to maintain their own market share. Besides, the country’s political elite has not indicated its readiness to do away with oil and gas production any time soon. Therefore, the growth of the renewable energy industry is likely to be limited. Instead, renewables are likely to complement and aid in the production of oil and gas.
However, if the current economic crisis deepens, the persistent low oil price environment will test how much longer Algeria wants to rely on dwindling petrodollars and the extent to which it is willing and able to implement industrial diversification and economic reforms. The ongoing political crisis is likely to push back the adoption of the hydrocarbon law (a measure crucial for reviving the hydrocarbon sector) until the middle of this year or into 2020. International energy giants, such as Exxon, Equinor, and BP, are also delaying investments, citing the political uncertainty. With its economic and political future hanging in the balance, Algeria has a chance to avoid a deeper crisis if the government steers it carefully from the brink and embarks on bone fide reforms.