Tuesday, January 22, 2013

Algeria’s New Security Risk Profile Unlikely to Be a Dealbreaker for IOCs

The terrorist attack on the In Amenas gas field in Algeria on January 16, 2013, has caught the country and foreign companies operating the field completely off the guard and left them shocked at the ability of militants to bring down layers of security to take hostages. Algerian authorities invoked cooperation between militants and an insider(s) at the gas field to plan the assault. Some say the attack has either been a response to the French military operation against Islamists in Mali earlier this month, while others believe that it may have taken place regardless and the French intervention in Mali was a trigger. The fact that In Amenas was targeted by an assortment of jihadists from Mauritania, Mali, Algeria, Egypt, Tunisia and Egypt, who crossed Algeria from its loose border with unstable Libya, is unsettling at best.  

The move by Algeria’s parliament last week to endorse an oil and gas law, which cancels windfall tax on profits of foreign firms that sometimes reached up to 50 percent on some contracts, was seen by some Western companies as a tad bit late in the wake of 80 deaths in In Amenas and foreign firms anticipated high costs of operating in such an unstable environment. No date has been set to restart the In Amenas gas complex. As much as the terrorist attack has been unprecedented and extremely bloody, it is hard to bet that foreign energy companies will pull out from oil and gas operations in Algeria.  As the world’s “eighth largest natural gas producer in 2010 and the third largest gas supplier to Europe,” primarily to Italy and Spain, Algeria is an important energy player in OPEC and outside it. Because dependence between Algeria and its energy importers is mutual, with hydrocarbons constituting nearly 98 percent of this North African country’s export revenues, all is not lost and a lot still can be gained.

This is important in the context of the rise of resource nationalism and national oil companies (NOC) since the 1990s, along with the steady increase in oil prices. Unlike a few decades ago, NOCs, such as Sonatrach of Algeria, Petróleos de Venezuela, S.A. (PDVSA), Gazprom and Rosneft of Russia, Pemex of Mexico and Saudi Aramco in Saudi Arabia, are better consolidated, maintain stronger control over resources in their home countries and they are in a position to change rules and regulations, limit foreign ownership in joint ventures, alter contract terms and increase taxes and royalties for IOCs.  So, the ability of IOCs to compete with NOCs on the latter’s home turf has been vastly curtailed. Consequently, IOCs deal with greater uncertainty, more unfavorable investment conditions, have lesser access to new oil reserves, and seek profits in politically riskier and geologically challenging environments. For these reasons IOCs have not left notoriously unstable places like Nigeria, rather the opposite, they boosted their presence there. In fact, despite high political and operating risks, Africa is the next big hot market for IOCs. Quarter of ExxonMobil's production came from West Africa since 2000. Maintaining technological edge and eyeing relatively better contract terms, IOCs will beef up physical security and continue operating in unstable parts of Africa, including Algeria.

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