All figures below are derived from BP’s Statistical Review of World Energy 2012 unless otherwise noted.
Algeria’s Hydrocarbon Reserves
Algerian oil reserves presently stand at 12.2 billion barrels of oil. For comparison, Nigerian proven reserves stand at 37.2 billion barrels of oil and Saudi Arabian reserves contain 265 billion barrels. Of this, Algeria produces 1.7 million barrels a day, compared to Saudi Arabia’s 11 million barrels a day. Comparing the ratio of reserves to production, Algeria is relatively high producer of oil.
According to OPEC Figures, Algeria exported 698,000 barrels daily in 2011. Of this total, 41.69% (291,000 barrels) went to Europe, 41.4% (289,000 barrels) went to North America, and 16% (112,000) went to Asia with the rest, .08%, going to Latin America.
However, one should note that oil is a fungible and liquid global commodity subject to wide speculative markets. As a result, the origin of a barrel of oil is often uncertain as it may have had multiple owners.
All crude oil is not identical and can range widely in quality. Algerian oil, referred to as the Saharan Blend, is sweet and light, the most desirable of oils. The oil has a low sulfur content, giving it a slightly sweet taste. It is also light, referring to its density and viscosity, meaning that it flows easily. These two qualities are superior because refining and processing the petroleum becomes easier and yields larger quantities of different petroleum products. In contrast, much of the Middle East produces heavy sour crude oil, which imparts additional costs to extraction and refining. The BBC has a quick explanation of the dynamics of this market, while the US Energy Information Administration has produced an excellent resource comparing the quality of different petroleum deposits around the world.
If there were any losses in Algerian oil production, a greater quantity of inferior oil would likely have to be brought to the market to make up for the superior quality of Algerian oil. Prices for sweet crude would likely rise, which itself would have an impact on producers and consumers alike. According to the US Energy Information Administration, OPEC crude oil spare production capacity stood at the relatively low level of 2.5 million barrels per day in Q1 2013, dipping from post-2008 heights of 4.35 million barrels per day in Q4 2009. This stands in stark contrast to spare capacity figures of .99 million barrels a day in Q3 2008. As such, OPEC could withstand a supply shock in Algerian production, despite the superior quality of Algerian oil. One may examine the effects of the Libyan Civil War, in which Libyan oil production, also light and sweet, collapsed by 71% in 2011, to predict the effects of disruption of Algerian production. Although OPEC production increased to offset the loss of Libyan production, Brent crude prices increased sharply, reaching a high of $126.46USD/bbl in April 2011. One should note that infrastructure in place to refine such oil is static in the short term and cannot use heavier oils as a substitute, making prices highly sensitive to supply changes.
Effects on Europe
In 2011, Europe imported 12,086,000 barrels of crude oil daily. 6,039,000 or 49.96% came from the Former Soviet Union (FSU), 2,543,000 or 21.04% came from the Middle East, 1,001,000 or 8.28% came from North Africa, and 1,159,000 or 9.05% came from West Africa. Coupled with the ability of OPEC to absorb sudden supply shocks and the possibility of buying oil on the spot market rather than a long term contract, Europe is not wholly reliant on Algerian oil imports. Of course, however, European energy consumers would suffer from increased crude and refined product prices due to any such supply shocks.
Algeria is one of the major suppliers of gas to Europe, particularly Western Europe. Algeria’s proximity, existing pipeline and LNG infrastructure, large reserves, and low domestic consumption allow it to be a major exporter.
Overview of Algerian Gas in 2011:
- Proven Gas Reserves: 159.1 tcf
- Gas Production:75 tcf (78 bcm)
- Gas Domestic Consumption:98 tcf (28 bcm)
- Gas Available for Export:13 tcf (60.2 bcm)
- Total Gas Exports: 82 tcf (51.5 bcm)
- Gas Pipeline Exports:21 tcf (34.4 bcm)
- Gas LNG Exports:6 tcf (17.1 bcm)
Algeria has the tenth largest natural gas reserves, amounting to about 2.2% of the world’s proven total. However, Algerian gas production has been in decline since hitting a peak of of 3.11 tcf (88.2 bcm) in 2005, averaging 2.9 tcf (82.24 bcm) annually between 2001 and 2011. Domestic consumption is up 36% between 2001 and 2011 to 0.98 tcf, putting the gas exports under pressure as domestic consumption takes an ever larger portion of production.
Algeria’s energy sector is centralized and the government determines energy prices through the Sonatrach monopoly. As a result, domestic gas prices have not kept up with inflation and remain below marginal production costs. These price controls serve as subsidies and encourage the same consumption that erodes exports. Oil and gas exports constitute an overwhelming majority of Algerian exports, and provide hard currency earnings for the government. Disruptions to the system of government revenues could impact stability and further disrupt supplies to consumers in Europe.
2011 European Recipients of Algerian Gas
- France: LNG – 0.2 tcf (5.7 bcm)
- Italy: LNG – 0.05 tcf (1.6 bcm), Pipeline – 0.75 tcf (21.3 bcm)
- Spain:LNG –14 tcf (4.0 bcm), Pipeline – 0.33 (9.4 bcm)
- Turkey: LNG – 0.14 tcf (4.0 bcm)
For comparison, Italy received 15.4 bcm (0.54 tcf) from Russia by pipeline while France received 8.6 bcm (0.3 tcf).
2011 Dependence on Algerian Gas:
- France: 14% – Consumed 1.42 tcf, of which 0.2 tcf originated in Algeria
- Italy: 11% – Consumed 2.52 tcf, of which 0.8 tcf originated in Algeria
- Spain: 74% – Consumed 1.13 tcf, of which 0.47 tcf originated in Algeria
For comparison, the United Kingdom is well insulated from Algerian supply shocks; it produces about half of its gas consumption domestically and imports the rest mainly from Qatar and Norway. Germany similarly produces some gas domestically and relies on Russia, Norway, and the Netherlands for imports. Germany further provides for its own energy security through a large emergency gas storage agency, (Germ. Erdolbevorratungsverband, or EBV) which supplies 90 days’ worth of natural gas. Many other countries in Europe have storage facilities, serving as reservoirs for peak shaving for electricity generation and strategic reserves.
Quantity of Gas Stored as of January 1st, 2012:
- France: 0.55 tcf (15.49 bcm) – 38.7% of yearly consumption
- Germany: 0.72 tcf (20.43 bcm) – 28% of yearly consumption
- Italy: 0.55 tcf (15.6 bcm) – 22% of yearly consumption
- Spain: 0.083 tcf (2.37 bcm) – 7% of yearly consumption
Source: Eurogas Statistical Report 2012
In Amenas Gas Facility Attack and Potential Disruptions
On January 21, 2013, militants crossed over the Libyan border and captured an Algerian gas facility in In Amenas, taking a multitude of hostages. According to Norway’s Statoil, In Amenas is the fourth largest gas development in Algeria, a joint venture between BP, Statoil, and Algeria’s national oil company (NOC) Sonatrach.
Disruptions in Algerian natural gas production pose a significant economic and political threat to the Western European countries. These countries can weather localized and temporary disruptions of gas, but replacing even a few percentage points of their Algerian imports for a longer term would require a reevaluation of the domestic energy policies and long term infrastructure.
The problem becomes more difficult as several countries rely on the same Algerian gas imports, compounding the effects of gas disruptions. This is an especially salient problem for Spain, which remains underprepared in terms of its strategic reserves, depends highly on Algerian gas, and remains isolated from the Russian gas pipeline network. Spain is one of the few European countries that do not import gas from Russia and would have to rely on indirect Russian imports or look to the LNG markets to make up a shortfall.
Given the recent low levels of confidence in European governments, particularly those of Spain and Italy, gas disruptions could carry significant political risk as it could undermine confidence in the government and its ability to provide for its citizens.
A foreign intervention to help secure Algerian hydrocarbon exports would not be feasible. Given Algeria’s bitter colonial history, any such interventions would be unacceptable to the regime and the people. Moreover, launching such a long-term intervention where European citizens would be targets for rebels and terrorists would also be politically untenable for European populations. With few options, an Algerian gas disruption could easily lead to domestic instability and the fall of governments. The secondary effects of such instability would likely rattle bond markets creating a feedback loop of instability.
It is important to note that Germany’s restructuring away from nuclear power and toward cleaner energy sources could put further strains on Algerian supply and LNG if it chooses to diversify future gas imports away from Gazprom. Given the cleanliness of natural gas, a German shift to additional gas could be a large burden on a complex system.
Disruptions to gas production could have dire consequences for Western Europe, particularly for Spain. Spain is underprepared in terms of supply, highly dependent on Algerian gas, and lacks the preexisting infrastructure to diversify gas supplies. The fate of Spain is tied to that of Algeria in the short term. By contrast, Italy is less dependent on Algerian gas, remains integrated into the Russian supply network, and has substantial enough strategic reserves to weather a short-term disruption. France is even more prepared for Algerian disruptions and has substantial shale gas reserves, despite its refusal to exploit them.
The secondary effects of disruptions to Algerian gas production give rebels an ability to project power beyond what their actual physical capability allows. By attacking Algerian gas, they realize the potential to attack Western Europe and exert an undue influence on Western targets. Given the recent political instability in Southern Europe, the rebels’ power is magnified. The situation in Mali, in which half of the country is effectively outside of governmental control, and the power vacuum in Libya left in the wake of Qaddafi’s death provide additional avenues to launch attacks. Libyan weapons caches remain outside of provisional government control and Qaddafi’s former Tuareg mercenaries remain in the country and without a steady income stream. These factors come together to foster an environment of heightened risk as rebels gain further ability to launch strikes on energy infrastructure in Algeria.
Algeria’s ruling party, the National Liberation Front, has been in power since 1962 and remains oppressive. As typical for states reliant on hydrocarbon revenues, the government uses these revenues for a mixture of largesse and repression designed to stem unrest. The regime’s tactics against terrorists and rebels are notoriously brutal and the government is not reluctant to use force and is already predisposed to repressive measures. As such, if Algeria were to be deprived from oil and gas revenues, its system of governance could potentially unravel, further compounding supply disruptions.
As a result of the Algerian government’s dependence on energy revenues and repression to remain in power, a threat to the present system would likely lead to instability and additional repression. Primarily, the government could increase domestic repression in attempt to prevent attacks to keep hydrocarbon exports secure. This could lead to instability within the country or an uneasy order maintained by repression. In light of recent Arab Spring events, the government would suffer a decrease in its legitimacy as a result. This brings forth the possibility of a positive feedback loop in which discontent begets further repression which causes more discontent. The risk of regime collapse would increase greatly.
If the Algerian regime were to collapse altogether as a result of attacks or the response to attacks, the secondary effects on North Africa would have a great impact. In such a scenario, large swathes of the Sahara in Algeria, Mali, and Libya would remain outside of the control of any government. The effects of the power vacuum have the potential to empower rebel and terrorist groups across the region and legitimize the effectiveness of asymmetric attacks and movements in general. Furthermore, this instability would threaten the uranium production of Niger, which would greatly increase the chance of French intervention in the region due to its reliance on this uranium, and even the hydrocarbon production of Nigeria; these events would have worldwide impacts. Moreover, the contagion effects of such developments could easily move eastward to destabilize Egypt and Sudan.
If the rebel threat is left unchecked and these groups become bolder and more organized, the secondary and tertiary effects of wide disruptions in Algerian energy production would be far reaching.