Petroleum

Algeria’s Tenuous History in the Fossil Fuel Industry

Colonial Rule and Oil Assets

Since gaining independence from France in 1962 after more than a century of colonial rule, Algeria has worked diligently to uncover its abundant natural resources. Underneath its 919,600 square miles of land, Algeria is well endowed with oil and natural gas fossil fuel reserves. In terms of total land area, Algeria is the largest member country of the Organization of the Petroleum Exporting Countries (OPEC) and the largest country in Africa. The oil and gas industry is the primary driver of the Algerian economy, with it accounting for more than 20 percent of the country’s gross domestic product (GDP) and 85 percent of total exports (OPEC, 2019). Algeria is home to the tenth-largest proven reserves of natural gas in the world, has the third largest reserves of shale gas, is the sixth-largest natural gas exporter, and also ranks sixteenth in the world for proven oil reserves (ITA, 2019). However, while Algeria has become one of Africa’s largest economies, as well as one of the most influential fossil fuel producers in the world, the country has struggled to make meaningful political and economic progress.

Algeria’s first commercial oil discovery was the Edjeleh oil field in 1956, which was immediately followed by the Hassi Messaoud oil field during the same year (OPEC, 2019). After two years of planning and development, oil production officially began in 1958. Following years of heavily investing in its oil and gas industry, Algeria has achieved a leading role within OPEC and more broadly within the global south for its support of the New International Economic Order (NIEO), which was a set of proposals developed during the 1970s by the United Nations Conference on Trade and Development to promote the interests of developing countries by improving terms related to international trade, development assistance, tariff reductions, and other international development strategies. Although, Algeria’s struggle to gain independence from France, followed by the subsequent decision to nationalize its fossil fuel industry and its efforts to internationalize a battle with raw materials producers, have hindered the country’s ability to maximize the efficiency of its fossil fuel industry (Garavini, 2019).

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Source: Wikipedia

An OPEC Leader

In 1971, during a time when oil and gas resources were used as weapons in a struggle for international cooperation and development, Algeria was the first OPEC country to successfully gain complete control over its oil and gas industry. Sonatrach, its state-owned national oil company, would become the largest company in Africa, with control over roughly 80 percent of total fossil fuel production in Algeria. Other International Oil Companies (IOCs) control the remaining 20 percent of Algeria’s fossil fuel industry (ITA. 2019). In 1975, Algeria was the country that took the lead in petitioning that OPEC hold its first conference of sovereigns and heads of state, which helped to achieve solidarity between non-oil-producing and oil-producing developing countries following the 1973 Arab Oil Embargo.

Prior to becoming a leader of OPEC and working to enhance collaboration between the world’s oil producers, Algeria’s fight for independence from France was one of the most tenuous struggles in Africa’s colonial history (OPEC, 2019). Since oil was discovered in the Edjeleh and Hassi Messaoud oil fields shortly before the country’s independence, France was eager to keep control of Algeria to ensure that it would have a stake in the newly uncovered oil fields. The discovery of large oil reserves in the Sahara Desert presented a unique opportunity for France to initiate the development of a domestic oil industry to reduce reliance on oil from the Middle East. Conversely, for Algeria’s lead political party at that time, the National Liberation Front, the new oil reserves became a symbol of economic independence against the clutches of European powers.

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Source: Pixabay

Natural Resource Complications

The discovery of oil in Algeria prolonged the decolonization struggle and complicated negotiations over the control of the Sahara Desert. The prospect of making use of oil reserves that were produced so close to mainland France made French leaders consider the possibility of allowing Algeria to be independent if that meant that France would not be denied access to the fossil fuels reserves. France argued that it should remain in control of the oil because of historic French control over the region. Moreover, France claimed that it was as a result of their sustained investments that oil was ever discovered in the Sahara. The political entanglement between France and the National Liberation Front continued to embroil North Africa in a series of conflicts and wars throughout the 1950s and 1960s.

As France was entangled in Algerian-related conflicts throughout the 1950s and 1960s, Europe struggled with a major energy deficit. Between 1954 and 1956, European oil consumption had skyrocketed by upwards of 20 percent (Smith & Jeppesen, 2017). Because of the surge in oil consumption, European leaders became progressively more anxious about the need to continue to increase oil imports from the Middle East. If Europe was unable to meet the rising energy demands, a widening energy deficient could have led to another financial crisis. While reports from the Organization for European Economic Cooperation (OEEC) suggested that increasing energy demand could be met by increases in the domestic production of coal and nuclear energy, this didn’t ease fears specifically related to a lack oil resources, which were critical for everything from transportation systems to industrial development.

As the United States became the world’s largest consumer of oil, American oil exports to Europe began to steadily decline, leaving Europe dependent on the Middle East for roughly 90 percent of its oil needs (Smith & Jeppesen, 2017). Therefore, when French oil drills struck crude oil under the sands of the Sahara Desert in 1956, it became imperative for European leaders to identify opportunities to secure these reserves to reduce dependence on the Middle East. Following the end of the Second World War, France began to dedicate vast financial resources toward fossil fuel development in North Africa. On an autarchic basis, France had hoped to discover oil reserves in a foreign land and then exercise their colonial authority to exclusively extract those resources. After 100 million tons of oil was discovered in Edjeleh and 600 million tons were uncovered in Hassi Messaoud, France initially suspected that their sustained efforts would come to fruition.

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Source: Pixabay

The Battle for Control

Only weeks after the discoveries in Edjeleh and Hassi Messaoud, French Prime Minister Guy Mollet made an announcement from Algiers, Algeria that “the development of the desert is the great task of our generation” (Smith & Jeppesen, 2017). Retaining control over the Sahara Desert and its accompanying oil reserves became the single biggest priority for the French government. In order to assist in the development of Saharan oil production, France granted concessions to a handful of American and British oil companies so that the cost of oil-related exploration and infrastructure could potentially be shared with international partners. By 1958, with the help of American and British companies, France was producing 1,200 tons of crude oil each day (Smith & Jeppesen, 2017).

From 1959 to 1960, four new oil pipelines were constructed through the Sahara. In addition to France, the U.S., and the United Kingdom, other European oil companies from Germany and Italy joined in the venture after it was revealed that oil production was expected to surge to 20 million tons per day by 1963 (Smith & Jeppesen, 2017). The initial production of Saharan oil seemed to be immune from the conflict between French forces and Algerian nationalists in the northern part of the country. However, as the oil infrastructure started to become more visible throughout Algeria, attacks on production sites, pipelines, and railways started to become widespread. Following the formation of the Maghreb Union (a federation between Algeria, Morocco, and Tunisia), the war for independence from France intensified. The Maghreb Union garnered support for the movement by claiming how religion and oil were the unifying factors that would help North Africa defeat the neo-colonial powers. However, the Maghreb Union would prove to be short lived.

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Source: Pixabay

Agreement Followed by Nationalization

After it was revealed that France had developed an agreement with the Tunisian government to construct a pipeline from the Edjeleh oil field to the Tunisian port of Gabés, internal conflict among the Maghreb Union created even more conflict in the region. Oil infrastructure and international investment became increasingly fractured as the war intensified. Although, after all sides of the conflict came to realize that nobody was benefiting from having a fractured oil industry, sovereignty negotiations started to take place.

On March 18, 1962, the Évian Accords were finalized, which granted Algeria full sovereignty from France. In exchange for this agreement, France made a commitment to continue to manage the oil industry and provide 25 percent of oil revenues to the Algerian Development Fund (Smith & Jeppesen, 2017). The oil agreement lasted nearly a decade until Algeria, with the support of OPEC and other international oil companies, nationalized all oil assets in the country and took full control of the industry in 1971. After the oil rents were increased from 25 percent of all revenue to 55 percent, France was forced to abandon its efforts in the Sahara (Garavini, 2015). Thus, the Eurafrican dream of enhanced collaboration between North Africa and Europe had ended.

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Source: Pixabay

Today’s Oil Industry Struggles

In the decades following the Évian Accords and the nationalization of the Algerian oil industry, Algeria has been able to amass approximately $75 billion in foreign currency reserves as a result of its oil industry investments (ITA, 2019). Furthermore, according to the International Trade Administration, Algeria’s external debt is considered very low at just under two percent of its GDP. Today, Algeria maintains oil production at around 1.1 million barrels per day, while it exports over 540,000 barrels per day (ITA, 2019). Along with these production statistics, the country also has proven reserves of 12.2 billion barrels of oil. Even though the oil industry remains robust, falling oil prices have had a severe impact on the Algerian economy in recent years. Since the Algerian government relies predominantly on oil revenue, a collapse in prices has severely hindered the country’s internal finances. This coming year, the fiscal deficit is projected to hit ten percent of its GDP, which is particularly disconcerting for a developing country (Constable, 2019).

With the economy at the forefront of Algerian government concerns, policymakers have started to implement new strategies to attract international investment in its fossil fuel industry. Since most of Algeria’s oil fields are maturing and being rapidly depleted, it will be essential for investment to be made to explore for new reserves. Overall, the country is still considered to be relatively unexplored in terms of oil production, with less than 20 wells per 10,000 square miles (ITA, 2019). Additionally, all of Algeria’s proven oil reserves are located onshore. Offshore exploration for oil is still in the very early stages in Algeria.

Sonatrach, the state-owned oil company, has attempted to entice international investors by releasing reports that highlight how two-thirds of Algerian territory remain unexplored for fossil fuel reserves (ITA, 2019). However, even if fiscal incentives are developed to encourage foreign companies to explore for more oil reserves, low oil prices will continue to be a major challenge. According to Garbis Iradian, the chief economist for the Middle East and North Africa at the Institute of International Finance (a Washington DC-based research firm), as long as oil prices remain below $80 per barrel, Algeria’s economy will continue to deteriorate (Constable, 2019). To put this into perspective, oil prices in 2019 hovered between $50 and $60 per barrel for most of the year.

Sources

Akacem, M., & Cachanosky, N. (2017). “The Myth of the Resource Curse: A Case Study of Algeria.” The Journal of Private Enterprise 32(2), 1–15.

BMI. (2019). “Algeria Oil and Gas Report.” BMI Research.

Constable, S. (2019). “Economic Disaster Threatens Algeria As Oil Revenues Sink.” Forbes.

Garavini, G. (2015). “From Boumedienomics to Reaganomics: Algeria, OPEC, and the International Struggle for Economic Equality.” University of Pennsylvania Press Volume 6, Number 1,

ITA. (2019). “Algeria – Oil and Gas – Hydrocarbons.” International Trade Administration.

OPEC. (2019). “Algeria facts and figures.” Organization of the Petroleum Exporting Countries.

Smith, A., & Jeppesen, C. (2017) “Britain, France and the Decolonization of Africa: Future Imperfect?” UCL Press.

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