Asian energy groups beat Brits in quest for Algerian renewables

British Energy companies are eyeing Algeria’s energy sector, but it’s still Middle and Far Eastern firms, not Europeans, that are closing the deals

A recent push by British companies and officials to break into Algeria’s lucrative energy industry is meeting stark competition from South Korean and Chinese business, according to corporate and diplomatic sources.

A high-level trade delegation led by the UK prime minister’s trade envoy, Lord Risby, in September saw companies such as Shell, Unicommerce, and Mott MacDonald received by the Algerian energy minister, Youcef Yousfi, to discuss furthering British-Algerian corporate relations.

Clarke Energy, a UK energy company, says it sees Algeria as a significant prospect for future business following the visit, especially in unconventional and renewable energy such as biogas.

“Our impression is that finally the renewables market in Algeria is taking off, and we’re targeting the state owned companies, Sonatrach and Sonelgaz,” says Stephane Michaut, a Clarke Energy representative who was part of the trade delegation.

“We are hoping to expand in Algeria next year in the form of power production for Sonelgaz, cogeneration, and renewable biogas. We also have plans for flare gas which we are hopeful of securing by September 2014.”

The visit was designed to be the “door-opening stage” for British access to Algeria’s energy industry, and included a visit to an Algerian solar development unit in Bou Ismail, diplomatic sources told This is Africa.

No contracts have yet been reached, but two memoranda of understanding were signed by delegates, including one arranging for Algerian engineers to gain qualifications from the UK’s Cranfield University. The visit was Lord Risby’s fourth in the last two years.

Eastern favour

International investors from the Far East are also eyeing Algeria’s renewable energy market, however, and it is in their favour that the tide appears to be turning.

Last week a similar delegation of South Korean companies visited the country, and have confirmed a major renewable energy deal. The energy division of Hanwha Corporation has established a contract with Sonelgaz worth almost $450m for the construction of a solar power plant in the province of Biskra, This is Africa has learned.

The deal underlines a growing trend in foreign investment in Algeria, which is increasingly coming from the Far East rather than Europe. China this year overtook France and Italy as the leading exporter to the country.

The Algerian government is seeking to greatly expand energy production from all sources in order to counter falling export revenues (down more than 8 percent this year) resulting from an increase in subsidised domestic demand.

Hydrocarbons are responsible for more than 95 percent of OPEC-member Algeria’s export earnings, but the amount of oil and gas available for export has fallen by more than $5bn this year, leading the government to look to private capital to finance unconventional exploration and production.

Officials have announced a target of sourcing 40 percent of the country’s electricity supply from alternative energy sources by 2030.

Middle Eastern investors are also developing ties to Algeria. The country attracted $3.1bn of foreign direct investment in the first two quarters of 2013, with the majority of the total coming from Qatar, according to the National Agency for Investment Development (ANDI).

The governments of Qatar and Algeria signed a deal in March worth at least $2bn for the construction of a steel complex at Jijel. In accordance with regulation, 5 percent is owned by Algeria’s National Investment Fund, and 49 percent split between Qatar Steel and Qatar Mining.

European investors are seeing their share of the Algerian market fall. Two European deals for construction in solar power have been cancelled this year alone.

In May the Desertec Industrial Initiative abandoned its 2011 plans to export solar power to Europe. A German consortium made up of Centrotherm Photovoltaics and Kinetics Germany then cancelled another solar project with a subsidiary of Sonelgaz known as CEEG.

Tough climate

Fierce competition between international investors for access to Algeria seems at odds with conventional wisdom on the country’s investment climate. Foreign companies have long seen Algerian energy as potentially lucrative, but have found the investment climate uncongenial.

In 2009, state regulation was enacted which was more stringent than any since the country’s oil supply was nationalised in 1971. The new rules mandated majority Algerian ownership of all foreign contracts, meaning the maximum interest foreign companies could hold in any Algerian operation was 49 percent. The World Bank’s Doing Business report ranks Algeria 152nd out of 185 internationally.

Security concerns are also serious. On January 16th 2013 a Sahel militant group known as al-Mulathameen led by renowned smuggler Mokhtar Belmokhtar attacked the Tinguentourine gas field near In Amenas taking 800 hostages. Forty oil workers, all but one foreign contractors, were killed.

In addition, corruption charges have been aimed at key industries. In July 2013, 17 executives in Algeria’s power sector, including head of Sonelgaz Noureddine Boutarfa, and his predecessor Abdelkrim Benghanem, were saddled with corruption charges relating to contracts awarded to two major internationals, the French firm Alstom and General Electric.

Analysts believe the charges may be linked to power struggles between senior officials in the Algerian intelligence service (DRS) and allies of President Abdelaziz Bouteflika, who is set to run for a fourth term in office in April’s presidential elections.

Western worries

“It’s fair to say we’re cautious on Algeria. On paper it’s a great prospect with huge gas reserves, but in reality there’s also political risk. Perhaps more importantly there’s not yet the political will to bring in the subsidies needed for renewables like biogas,” says a representative from a British Energy company looking at Algeria, who requested anonymity.

But large natural reserves, a GDP higher than any regional competitor besides Egypt, and levels of state spending on infrastructure totalling more than $250bn appear to be generating more than enough interest in Algeria.

Algerian officials have also signalled that some regulation will be loosened. The Algerian elite have vested interests in all production contracts, but while the 4 percent rule is here to stay, they have been willing to tweak the regulation in areas such as unconventional energy, analysts say.

At the end of October, the government announced the completion of a $2.3bn processing facility at El Merk designed to increase the country’s maximum production. Real growth is forecast to average 3.4 percent over the next five years.

Representatives from the trade delegation praised the British embassy’s role in organising access to Algerian officials but said problems remain in closing deals.

“On the one hand there was Sonelgaz saying they want to proceed by themselves and everything’s going to be run by the state, and on the other there’s the state regulator saying there will be feed-in tariffs and private companies will be able to sell to Sonelgaz, so it’s ambiguous,” says Clarke Energy’s Mr Michaut.

He stresses that the energy industry is highly competitive: “We’ve spent two years marketing biogas and landfill, and the need for private corporate financing. In a way we’ve been doing this job for us and our international competitors, but that’s how it has to be.”

The latest figures released by Algerian Customs confirm that in the first three quarters of 2013, the UK has risen to 10th among countries exporting to Algeria, but still trails behind France, the US, China, and even The Netherlands.

“Western companies are still a little more wary of the political and security risks in Algeria, where Middle and Far Eastern investors are more willing,” says Riccardo Fabiani, Middle East and North Africa analyst for Eurasia Group.

“Of course the traditional energy partnerships with southern Europe aren’t going anywhere, they’re reinforced by permanent pipelines, but Algeria is looking further afield for energy export revenue: to Britain, and especially to the Far East.”

This article was originally published with Financial Times: This is Africa on November 25th.

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About Tom Stevenson
Tom Stevenson is an Independent North Africa reporter

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