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20 May 2021

Algeria faces huge economic risk; solar resource remains unexploited

Population: 44,569,381

GDP per Capita (nominal): $3,980

Government Debt as % of GDP: 50.41%

Algeria – like many countries in the MENA region – has become a massive exporter of energy to satisfy a mushrooming demand in the developed world. The country itself, which some estimate has nearly 30% of its population living below the poverty line, has an economy which is hugely reliant on oil and gas prices. With virtually no presence in the renewables sector – neither domestically nor globally – the necessity for the country now faces an uphill struggle to counteract the waning value of its fossil fuel assets.

A country hooked on oil after years of supply to the west

At present, with a huge landmass of 920,000 square miles, the country benefits from proven oil reserves of 12.2 billion barrels and 4,504 billion cubic meters of natural gas – 0.74% and 2.30% of the world’s totals respectively. For Algeria, which is OPEC’s largest member country by landmass, 37% of its oil production and 24% of its natural gas production ends up as exports, accounting for over 85% of the country’s total, with a combined value of $38 billion each year.

Overall, hydrocarbons account for 20% of the country’s GDP. The country’s other natural resources include iron ore, phosphates, uranium and lead.

This reliance is also reflected in domestic consumption. Algeria’s energy supply is split in two – with around 60% coming from natural gas and the remaining 40% from oil. Electricity generation is almost solely attributed to natural gas in the country.

State-owned national oil company Sonatrach – the largest company in Africa – owns roughly 80% of the total hydrocarbon production in Algeria, while international oil and energy companies account for the remaining 20%, including the likes of Total, BP, Engie and Eni.

There is absolutely no doubt that Algeria’s resource richness has led to heavy economic reliance on global prices for natural gas and oil. When prices drop or stay stagnant, its economy and its people feel the effects. Algeria’s breakeven price for oil currently sits at around $135 per barrel – far higher than the average price of $64 per barrel from Brent Crude in 2019. With oil and gas prices falling, the intrinsic value of Algeria’s hydrocarbons falls in tandem.

This comes at huge cost to the Algerian government from two ends – the other being its huge subsidies for oil and gas for domestic consumption, which, alone, account for 18.3% of GDP.

Heightened domestic energy demands from a rapidly growing population; electricity demand in the country has been rising at between 8% and 20% per year since 2010. While production from aging assets has been reduced, falling exports have also been compounded by reduced demand from countries like France and the UK – the largest beneficiaries of Algerian hydrocarbons – where aggressive strategies are being implemented to reach net zero emissions by 2050.

The nation’s exports of crude and liquefied natural gas each declined around 30% in 2020, according to Bloomberg, a trend that has continued into this year. Oil sales abroad fell to just 290,000 barrels a day last month, 36% less than in December and the smallest figure since at least 2017.

With its production falling, Algeria is likely to have missed out on the recovery of crude prices since November, as it also failed to take advantage of surging LNG prices in mid-January because it lacked surplus gas to sell on the spot market.

Fear of change driving relentless persistence for exploration

However, with two-thirds of the country remaining largely underexplored for fossil fuels – with less than 20 wells per 10,000 square miles – Algeria remains keen to attract foreign investment for new fossil fuel projects, particularly in its North and deep South.

As such, the government, currently run by the National Liberation Front – a left-wing nationalist party – has primarily focused its energy strategy on making its fossil fuel offerings more competitive. New hydrocarbon laws are aiming to ease taxes, simplify licensing procedures and shorten the agreement timeframe for new oil and gas projects in the country.

Through state-owned licensing body Alnaft, Algeria opened a new tender for oil and gas leases to international bidders in January 2014. Of 33 concessions, however, only five were awarded. Algeria remains one of Africa’s most closed-off economies, with politicians reluctant to hand over control of national resources: The country achieved political independence in 1962 after more than a century of colonial rule by France, in one of the most bitter struggles in Africa’s colonial history.

Sonatrach has also recently signed several cooperation agreements with international oil companies to assess technical and commercial feasibility of increasing shale gas horizontal drilling in Algeria. The company, which has been hindered by four changes in CEO in just two years, is aiming to boost gas exports by around 25% this year, even while slashing spending.

The country is also hoping to reduce its domestic energy consumption growth to just 3% by 2030, hoping to revive its export economy, while maintaining a 99%+ level of electricity access to its population.

In reality, the country is likely to be flogging a dead horse here, with many – including several oil majors – believing that peak global oil demand may have already passed.

With exports of expensive Algerian oil set to fall in tandem with waning demand, the country is threatened by a potential repeat of the mass demonstrations that toppled the country’s president two years ago. Painful decisions will need to be made for an entire economic shift away from fossil fuels.

The economy also faced climate-related difficulties associated with desertification, which is reducing agriculture’s ability to generate revenue.

Hope found in mammoth Saharan solar resources; modest targets set

For the energy sector, there is hope in the prospect of renewables in Algeria. As a country with high levels of desertification, solar irradiation – particularly in the south – can often exceed 6.6 kWh per square meter. In theory, the country’s 76.2 TWh electricity demand would be satisfied if 200 square kilometers were covered in solar panels. To do this, around 38 GW of solar capacity would be needed, paired with adequate amounts of battery storage.

Wind power offers a more modest opportunity, with average speeds of just 4.2 meters per second in the country.

Despite this potential, however, renewables in Algeria remain far less exploited that its natural gas industry. Unlike most African countries, Algeria has no significant hydroelectric power generation capacity, with upper estimates indicating just 228 MW across the country.

This contributes towards just 686 MW of renewable energy capacity as of the end of 2020, with the remaining capacity consisting of: 10 MW of wind power from a single, 12-turbine wind farm in Adrar that was installed in 2014; and 448 MW of solar power, 25 MW of which is from CSP. This accounts for just 2.8% of electricity generating capacity across the country.

In 2011, Algeria outlined a Renewable Energy and Energy Efficiency Program to produce up to 40% of its domestic power generation capacity – along with 30% of actual generation – from renewable power by 2030, although it is clearly struggling to make any headway. The program also set out a target to install 4.5 GW of renewable capacity by 2020, which has been missed catastrophically.

While a wind capacity program is in place to bring 5 GW of wind capacity online by 2030, and this is dwarfed by plans for 15.6 GW of solar capacity (including 2 GW of CSP) by the end of the decade. Other plans include 1 GW of biomass and 400 MW of cogeneration capacity, although over 90% of actual power output from these renewables is expected to come from high-yielding solar assets.

The renewable energy program aims to install 22 GW of power generating capacity from renewable sources by 2030, of which 10 GW would be available for export. Currently, natural gas capacity sits at 21.4 GW in the country – a figure that is expected to grow to 36 GW by the end of the decade.

In cooperation with Russia, plans have also been laid for Algeria to build its first nuclear power plant in 2025.

An early stumble with tenders, plagued by content requirements

For its renewables, Algeria operates a reverse tender scheme, where it awards long term power purchase agreements for companies to sell electricity to the national grid, via Sonelgaz, at the lowest available price.

The country’s first tender took place in 2019, but only saw 90 MW of bids for an available 150 MW of capacity. Only eight of 93 prequalified bidders were shortlisted, with the largest project awarded to Condor, an Algerian solar manufacturer, for a 50 MW plant in the Biskra region. The project’s power purchase agreement set its price at $69 per MWh.

This undersubscription was largely attributed to a lack of government transparency regarding the process, and limited presence of domestic renewable energy companies: the auction mandates that participants and joint ventures involved an Algerian stake of at least 51%. The tender also included local content requirements for modules, mounting structures, and cables, despite limited manufacturing capacity in the country, while financing also has to come from Algerian institutions.

The Algerian Government is currently holding another 50 MW tender for the development of off-grid hybrid gas or diesel and solar projects. Several weeks ago, it also announced that another 1 GW tender for renewable energy capacity would be initiated in the coming months, split into 100 MW chunks. Another three tenders of the same size are expected to be issued each year between 2022 and 2024.

One of the most promising projects within these tenders will be the 4,000 MW Tafouk 1 solar project, which should be awarded in five tenders of 800 MW in the coming years. The project could cost as much as $3.6 billion, with hopes to have the first phase online by 2024.

With the local content requirements in place, such tenders should provide investors with the certainty required to prompt a boom in the nation’s manufacturing capacity for solar components. Algeria already has three solar panel facilities totaling 260 MW of annual solar panel production capacity (about 40% of which became operational in 2020).

Rather than decarbonizing its own grid as a priority, it is likely that much of the renewable power capacity from Algeria will be allocated for export in an attempt to offset the decline of its oil and gas industry. Situated on the Northern coast of Africa, as the wealthiest country in the region, Algeria shares borders with Morocco, the Western Sahara, Mauritania, Mali, Niger, Libya and Tunisia, all providing immediate export opportunities. Across the Mediterranean Sea, Europe beckons with its high demand for both electricity and green hydrogen in the future.