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Algeria in the Global Energy Markets

Algeria in the Global Energy Markets. Selected Topics. SONATRACH’s remarkable story The growth in total liquids production Production forecast through 2010 Openness to foreign investment Challenges of the Mediterranean Market Sonatrach goes global At the forefront in LNG

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Algeria in the Global Energy Markets

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  1. Algeria in the Global Energy Markets

  2. Selected Topics • SONATRACH’s remarkable story • The growth in total liquids production • Production forecast through 2010 • Openness to foreign investment • Challenges of the Mediterranean Market • Sonatrach goes global • At the forefront in LNG • Earnings outlook: record earnings are providing breathing space for adaptation • Reform of the petroleum sector

  3. SONATRACH joins the modern world • Among oil producers, within or outside Opec, Algeria has managed the entry into a higher price environment without jeopardizing its position as a hospitable locus for foreign investment • SONATRACH’s track record in the growth of liquids and gas production has been steady and remarkable • Long anticipated reform of the hydrocarbon sector is creating a major challenge and opportunity for SONATRACH to emerge as a modern, competitive international firm • Despite higher prices, the oil markets in the Med and the global LNG market have become more difficult, more competitive, and SONATRACH is poised to hold its own here as well

  4. Higher output, prices are well timed 100%+ growth over 20 years • Well-positioned to take advantage of the recent expansionary phase of the petroleum cycle • Turned to international investment to achieve these goals • Reopened to foreign investment long before current cycle turned

  5. Making significant contribution to European natural gas

  6. Algeria has a major position in European gas, global LNG

  7. Most European Gas Exports are within the Mediterranean Basin

  8. Major LNG expansion program

  9. Makes SONATRACH a large niche player…. • Algeria is second smallest oil producer in Opec • But it is: – The # 1 exporter of condensates – The # 2 exporter of LPG and of LNG • Challenges – Maximizing value in the Med – Defending market niche in the Med against new contenders (Egypt, Qatar in LNG) – Building markets elsewhere

  10. …. But a global player as well • In 2004 sent 3.41-bcm to US, 22.04-bcm to Europe and 0.3-bcm to Asia • In 2005 took lead with BP in re-opening UK LNG import market • Well positioned to take advantage of Atlantic Basin arbitrage opportunities between Europe/ N. America • Well positioned to move cargoes East when winter opportunities arise • As the most flexible supplier it is adept at taking advantage of opportunities as between term and spot sales – last year sold LNG into Asia at very high price premiums

  11. Algeria Opens to Foreign Investment (1986) • More than 35 foreign companies explore, produce in Algeria • Leader is are Anadarko, with contributions from: Hess, BHP, BP, Burlington, Cepsa, Repsol, Total • Others include Gaz de France, PetroCanada, Statoil, CNPC, Sinopec, ExxonMobil, PetroVietnam, Medex, PetroCeltic, Shell, Gulf Keystone, First Calgary • Wide geographic diversity of investors, also provides potential international partners for SONATRACH

  12. With continuing output growth through 2010

  13. Growing revenues are providing a solid cushion • Growing volumes will sustain higher government revenues for the rest of this decade • Revenues grew 52% in 2005 • If oil prices continue to rise at their recent rate, or even if that rate of growth decelerates, total government revenues would double by 2010

  14. With the good news comes the challenge • Total Maghreb oil output increasing by 2.5-mmb/d 2000-2010; Russian output into Europe rising by 5-mmb/d in period beginning 1998; other FSU output rising by 2.5-mmb/d; Iraqi ‘European’ flows may begin as well • Where is this oil going? The Med is the most saturated market in the world, with European demand flat, even with the decline in N. Sea • The relative loss in value is creating major marketing challenges to SONATRACH

  15. As a result, more oil is being sold “long haul” • Exports to the US have risen substantially: • 1990 – 0 • 1995 – 25-kb/d • 2003 – 30-kb/d • 2005 – 230-kb/d • So have exports to China, Korea, Indonesia, Australia • 2002 – 0 • 2003 – 2.5-kb/d • 2004 – 18-kb/d • 2005 – 25-kb/d

  16. Moving oil long haul has required innovation, opportunism • Moving oil over long distance requires developing new niches • SONATRACH helped by building VLCC facilities • SONATRACH leads the way among Opec state-owned firms in creating an active risk management trading team • The forward curves facilitate use of storage in long-haul markets, and again SONATRACH leads the way, with leased storage in Korea

  17. Algeria also leads the way in oil sector reform • In an age or revival of resource nationalism, Algeria is curtailing the domestic role of SONATRACH, creating market competitive conditions at home, but championing the position of SONATRACH abroad • Algiers overcame ingrained opposition to petroleum reform, following a five year battle • Higher prices enabled government to placate unions, vested interests • Implementation of reform legislation has begun

  18. Key elements of Algerian Hydrocarbon Reform • New hydrocarbons regulatory authority created to regulate industry, taking power away from SONATRACH • New hydrocarbons promotion agency create to manage license awards and implementation and set gas reference prices (Al-Naft) • Article 48 changes – SONATRACH no longer guaranteed <50% of foreign company development projects, no will achieve 20-30% • Article 35 – sets standards 32 year E&P contract, with 7-year exploration period • Ends SONATRACH’s responsibility for commissioning, running all pipelines, open sector to private contractors • Ends SONATRACH’s personnel responsibility for foreign contractors, enables foreign firms to hire Algerians competitively • Opens refining and product distribution and retail to private sector

  19. Many challenges lie ahead, but the process has begun • SONATRACH remains bloated (>100,000 staff), in danger of losing best staff unless salaries are raised significantly • Rule of law is not well established in a military dominated country • It will take a great success – including sustained growth in per capita income and reasonable electricity prices, to enable the private sector to emerge as a legitimate actor in Algeria’s energy arena • Recent IMF Article IV Consultation report highlights many of the challenges

  20. Meanwhile, SONATRACH is • Expanding abroad • Expanding international exploration and production globally, including Latin America (Peru), N. Africa (Libya) and the Far East • Searching for downstream assets, especially in LNG (Isle of Grain, UK, US) and LPG • Reorganizing at home • Streamlining operations • Providing incentive compensation • Established risk management unit

  21. HESS ENERGY TRADING COMPANY LLC A PROFILE HETCO is a proprietary trading company and market maker focusing exclusively on the energy business, created in mid-1997 as a joint venture between Amerada Hess Corporation and Stephen Hendel and Stephen Semlitz, two former partners of Goldman Sachs & Co., who built the J. Aron trading group in the 1980s and 1990s. It has rapidly become a major presence in both the paper and physical markets, especially in the Atlantic Basin, with offices in New York, London and Boston. HETCO has the ability to create an array of derivative market instruments to satisfy customers’ needs. At the same time, the link to Hess Corporation and the Hess system provides the group with a presence and understanding of the physical markets as well as the full credit support of the Fortune 100 company. HETCO’s professional trading team undertakes transactions in international and US-domestic crude oils, natural gas, and petroleum products. It is also active in energy swaps and derivatives, and in weather risk management. It is one of the largest participants on both the London International Petroleum Exchange and the New York Mercantile Exchange. HETCO works with complete discretion with its clients and partners, which include independent refiners and producers, pension funds, endowments, hedge funds, and sovereign entities.

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