MARKET OVERVIEW

Algeria is the largest and one of the wealthiest countries in Africa. However, outdated perceptions mean that it is sometimes overlooked by UK companies. Opportunities exist across a range of sectors and the UK’s reputation for high quality and excellent service mean that we have an advantage. Algerians will currently describe their country as “terre vierge” – virgin territory.

Politically, remains stable. Historical and cultural factors, including Algeria’s violent civil war of the 1990s, mean that Arab-spring style has not taken place. The next Presidential Elections will be held on 17 April 2014, with several candidates having declared their candidacy. At the time of writing , it is not clear whether President Bouteflika will stand for a fourth term. He was first elected in 1999 and is seen as the leader who saw the country through the 1990s – Algeria’s dark decade.

In 2010, one year in to President Bouteflika’s third term in office, the Algerian government launched a five year investment programme worth US $285 billion. This programme aimed to connect the vast country by upgrading transport links, develop Algeria’s human capital by improving education and healthcare and respond to demands for housing by delivering 1.2 million new houses by 2014. The programme has been slow to be realised, with the healthcare elements in particular stillon the drawing board. The programme means that the Algerian government will need to procure a range of goods and services and creates significant opportunities for UK business.

This investment is funded by Algeria’s vast mineral wealth. The hydrocarbons sector is the backbone of the Algerian economy, accounting for roughly 60% of budget revenues, nearly 30% of GDP, and over 97% of export earnings (US$76.5 billion in 2012).

In the first eleven months of 2013, UK – Algeria bilateral trade in goods was over £3.5 billion. The UK imported goods worth £3 billion from Algeria and exported goods worth £420 million to Algeria

ENERGY IN ALGERIA

Algeria is an important exporter of oil and and is a member of the Organization of the Petroleum Exporting Countries (OPEC) and the Gas Exporting Countries Forum (GECF). The hydrocarbons sector is the backbone of the Algerian economy, accounting for roughly 60% of budget revenues, nearly 45% of GDP, and over 97% of export earnings. With reserves of 12.2 bn barrels of oil and 4.5 trillion cubic meters (tcm) of gas, Algeria holds the world’s 14th largest oil reserves and has the ninth-largest reserves of natural gas in the world and is the fourth-largest gas exporter. Algeria supplies some 14% of EU gas imports both via pipeline and as LNG, mainly to , Portugal, , Greece, France and the UK. Piped gas reaches Europe via the Medgaz (Algeria-Spain), Maghreb-Europe Gas (Algeria--Spain), Transmed (Algeria--Italy) and (under construction) Galsi (Algeria-Italy-France) pipelines.

1

Oil

Algerian oilfields produce high quality light crude oils with very low sulphur and mineral contents. The main areas of exploration for oil and gas are in the east, on the border of Tunisia and Libya and the central area where large gas discoveries have been made.

Algeria uses seven coastal terminals for the export crude oil, refined products, liquefied petroleum gas (LPG) and natural gas liquids (NGL). There are facilities located at Arzew (Algeria's largest crude oil export port), Skikda (Algeria's second largest crude oil export port), Algiers, Annaba, Oran, Bejaia, and La Skhirra in Tunisia. Arzew handles about 40% of Algeria's total hydrocarbon exports, including all of its NGL, LPG, and oil condensate exports. Algeria's oil pipeline network facilitates the transfer of oil from interior production fields to these export terminals. Sonatrach operates over 2,400 miles of crude oil pipelines in the country. The most important pipelines carry crude oil from the Hassi Messaoud field to export terminals.

The map below shows the location of the principal hydrocarbon fields and the pipelines. A larger version can be found online at: http://mem-algeria.org/hydrocarbons/deposits_hydroc.htm

The Ministry of Energy and Mines oversees all activities related to the oil and gas industry in Algeria. The Algerian national oil company is Sonatrach and it plays a key role in both upstream and downstream oil and gas industries. It is responsible for exploration and production, transport, refining, processing, marketing and distribution. Through its subsidiaries, the company has a domestic control on oil production, refining, and transportation. Sonatrach aims to invest USD 70 billion over the next five years, with 80% in upstream.

2

All foreign operators must work in partnership with Sonatrach. The 2006 amendment to the hydrocarbons investment law required the National Oil Company Sonatrach to be a majority partner in all oil and gas projects.

Gas

Algeria’s 2010 natural gas production totalled 145.8 bcm, in which 57.3 bcm was exported. LNG production reached 31.1 bcm in the same year. This LNG export capacity is expected to increase when the 4.5mn t/y train at the Skikda LNG complex will come on stream within the next few months. In addition, a 4.7mn t/y unit at Arzew will be added by 2013 to increase Algeria’s LNG export capacity to 36 bcm/y. Consequently, Algeria’s total gas export capacity (including pipelines) is expected to reach 85 bcm/y.

Unconventional gas

Algeria has significant reserves of unconventional gas, particularly shale. Extraction is unlikely to raise the same environmental concerns as in other regions of the world. However, the technology will require substantial investment and a more attractive regulatory environment than now offered for conventional hydrocarbons. A pilot shale gas project in the south-west will be launched this year. Also, the government has announced its ambition to explore offshore and other less known areas.

Sonatrach has revealed its 2015-2019 investment development plan totalizing USD 100 billion, with 80% on upstream activities. The new investment plan is a result of the Algerian Government’s desire to maintain its current level of exports, while facing spiralling domestic demand and at a time when existing fields are nearing the end of their life spans. The fact that the Algerian Government is dependent on hydrocarbons for almost 98% of its hard currency earnings puts into perspective their need to come up with a viable development strategy.

The Algerian government amended the hydrocarbon investment law by introducing some new tax measures and allowing development of Algeria’s huge unconventional resources, last year. The law aims to make investment in the Algerian oil and gas industry attractive for foreign companies by providing some tax incentives and new commercial terms. Algeria has yet to explore its offshore reserves but for many, unconventional gas is the future for Algeria. The Head of Sonatrach said that Algeria has 600 tcm of shale gas (over an area of 180,000 km2). This represents four times Algeria’s current gas reserves and a comparable amount to the US’ non conventional hydrocarbon reserves. Algeria also has the advantage of having plentiful supplies of fossil water under the Sahara and virtually all reserves being in remote uninhabited areas.

Sonatrach launched the 4th hydrocarbon exploration and exploitation bid round on 21 Feb 2014. They offered 31 perimeters including 17 for shale gas. Another bid round will b put out this year.

Refining

Energy Minister Yocuef Yousfi announced that 32 million tons of refining capacity will be installed, while modernizing and developing the petrochemical industry will be key to maximise the added value of hydrocarbons. In 2013, the Government announced the construction of five new refineries located in different regions of the country. Each refinery will have an output capacity of 5 million tons per year (Mt/y) enabling Algeria to double its production to 60 Mt/y within the next five years. Another important 10-Mt/y refinery will be built in the central of Algeria.

3

Two refineries will be built in Hassi Messaoud and Illizi mainly to meet the need of the unconventional hydrocarbon industry that Algeria is about to develop. All refineries will be totally owned by Algeria.

Electricity

Algeria has a population of around 38 million. Their demands, plus growing numbers of industrial projects, mean that demand for electricity is growing at around 7% per year. Much domestic generation is by gas turbine, but the government wants to boost gas exports by 60% (to 100 billion cubic meters) by 2015. This has prompted the development of a renewable energy plan, of which gas-solar hybrid generation plays an important part. This programme partly aims to divert gas to the more lucrative export market.

Algeria is determined to reinforce its power generation capacity to meet the growing domestic demand which is expected to double by 2030. In 2012, the Algerian Energy Minister Youcef Yousfi announced that Algeria will invest USD 24bn over the next 5 years to enhance power generation and distribution in order to avoid power shortage and outages especially during picks of summer seasons. The programme aims to double the country’s electricity production by 2016, adding an additional 12,000 MW of capacity.

Sonelgaz’s power generation programme based mainly on combined-cycle gas power stations will lead to a significant increase in gas demand. Therefore, the country has decided to amend the hydrocarbon investment law to provide some tax incentives to boost upstream investment to reinforce gas reserves and allow unconventional gas development.

Renewable Energy

Algeria aims to invest USD 60 billion to produce 22 GW of electricity from solar, wind and geothermal sources, by 2030. 12 GW will be for domestic consumption, and 10 GW for export. By 2030, 40% of Algeria’s electricity production for domestic market will be generated from renewable energy sources. The Renewable Energy Development Programme (REDP) provides for the construction of 67 renewable energy power plants including: 27 PV power plants, 27 hybrid power plants, 6 solar thermal power plants and 7 plants. Solar thermal power plants will be a focus with the most powerful of these plants having a 400 MW production capacity from solar alone.

The government is implementing the REDP in three phases: the first phase (2011-2013) consists of the construction of pilot projects to determine which technology will best suit Algeria. The second phase (2014-2015) will see the building of different power plants with tested and suitable technologies. The final phase will be a large scale development of the programme.

The REDP aims to help meet Algeria’s growing domestic demand and to preserve fossil resources for export. This will allow Algeria to honour its existing international commitments and reinforce gas export earnings. The Algerian authorities also hope to use this programme for economic and social development through the ancillary industries associated with the programme.

The state-owned utility company Sonelgaz, which is leading the renewable energy programme, will open soon its first solar module manufacturing facility with annual production capacity of around 116 MW, in addition to the few private enterprises that have already started production. Sonelgaz is already running a 150 MW hybrid power plant. The government is also planning a renewable energy

4

and energy efficiency institute to improve domestic capacity and will encourage foreign partners to include strong training elements in future projects in Algeria.

Key players in the energy industry

 The Ministry of Energy and Mines oversees all activities related to the oil and gas industry, electricity and mining in Algeria.

 The Algerian national oil company is Sonatrach and it plays a key role in both upstream and downstream oil and gas industries. It is responsible for exploration and production, transport, refining, processing, marketing and distribution. Through its subsidiaries, the company has a domestic control on oil production, refining, and transportation. Sonatrach aims to invest USD 70 billion over the next five years, with 80% in upstream.

 Sonelgaz (Socièté Nationale de l'Electricité et du Gaz, National Company for Electricity and Gas) is a state-owned utility in charge of electricity and natural gas distribution in Algeria. Sonelgaz is also in charge of carrying out Algeria’s renewable energy programme.  ALNAFT is an agency of the Ministry of Energy in charge of the promotion of hydrocarbon upstream investments, delivery of prospection authorizations, launch of exploration and exploitation bid rounds, allocation of research and exploitation perimeters, conclusion of research and exploitation contracts, monitoring and control of the signed contracts, approval of field development plans and hydrocarbon tax collection.

5

Algeria / UK energy relationship

Algeria and the UK have a long energy relationship. The world’s first shipment of LNG took place between the UK and Algeria in 1965. Since then, Algeria has been a steady but low level supplier of gas to the UK. Last year, exports amounted to The UK imported 0.2 bcm of LNG worth some £84 million (0.5% of UK imports). Algeria has shown itself to be a reliable supplier, even during the civil war in Algeria, the hydrocarbons sector was not subject to attack.

At the Embassy over the past few years, we have tried to reinject some momentum into our energy relationship. This started in March 2010 with the signing of a Roadmap by the then respective energy ministers on future energy co-operation between the UK and Algeria. Since then we have had visits by Lords Howell and Marland for high level energy talks and the Algerian Energy Minister, Yousef Yousi, has recently visited the UK. Lord Risby has been appointed the PM’s trade envoy for Algeria while Yousfi has been chosen to be his Algerian counterpart. This aims to facilitate trade between the two countries.

In addition to the prosperity agenda, the focus of our energy work in Algeria has been directly towards securing a long term gas deal between the UK and Algeria. To this end, Noureddine Boutarfa, Head of Algeria’s state owned gas/ electricity conglomerate, Sonelgaz, visited last year the UK and the Head of Centrica visited Algeria for a day of talks with Algerian officials.

Senior Algerian energy officials have traditionally been well disposed to the UK. They value our long term relationship and are open to expanding on it. However, they are clear that this must be done on a commercial basis.

ALGERIA’S PROCURMENT PROCESS

Algerian government institutions, including ministries, agencies and local governments, buy foreign- made goods and services by way of competitive or restricted tenders. Most government contracts are awarded through a two-step tender process: first, technical bids are reviewed to ensure compliance with tender requirements and to evaluate competing specifications, and then financial bids are reviewed. Competitors are sometimes short-listed after the technical offers are opened, and sometimes companies are pre-qualified for large tenders, particularly in oil and gas development. Lowest bids are not always accepted, as government agencies place heavy emphasis on technology and know-how transfer, local investment, and the diversification of suppliers. It’s important to mention that Algeria has taken steps to reinforce and improve the transparency of its contracting process.

6