Algerian energy industry runs out of steam

ALGIERS, Algeria, March 23 (UPI) -- Algeria's energy industry, backbone of the country's economy, is in trouble as President Abdelaziz Bouteflika struggles to avert a popular uprising while locked in a power struggle with the military.

Oil and natural gas production is slipping as foreign oil companies back off, largely because of a hefty 2006 windfall tax under which they have to hand 50 percent of their profits to the state energy monopoly Sonatrach if the price of oil exceeds $30 a barrel.

Since political upheaval in the Arab world erupted in neighboring Tunisia in January, Algeria's leadership has managed to head off a popular uprising by an increasingly restive population fed up with high food prices and the lack of social freedoms. But trouble still smolders.

Algeria has natural gas reserves of 159.1 trillion cubic feet. It's the world's fifth ranking pipeline gas exporter and supplies 13 percent of Europe's gas.

It has oil reserves of 12.2 billion barrels, about 1 percent of the world's total. So if serious trouble does erupt, with Libyan oil production halted, energy supplies would be badly hit.

In a bid to defuse tension, Bouteflika lifted a 19-year state of emergency Feb. 24, while maintaining bans on protest demonstrations in the capital, Algiers.

Bouteflika, president since April 1999, has also unveiled a $286 billion package of economic benefits to placate the disaffected, and largely unemployed, younger generation.

But hard-liners demand his ouster, sweeping political, social and economic reforms, and an end to rampant corruption.

The state of emergency was introduced in 1992, when the military-led government scrapped the second round of national elections that Islamists were set to win, triggering a decade-long civil war in which some 200,000 people died.

Many in Algeria believe it's the memory of those bloody events, including many massacres perpetrated by both sides, that has prevented trouble erupting on the scale of the turmoil that has swept Tunisia, Egypt, Bahrain and Yemen.

Bouteflika focused on reconciling a divided nation when he came to power. An amnesty for Islamic militants and his efforts to reduce the role of the military in public life have restored some stability.

But, except for a brief interlude, he is the only civilian president Algeria has had since independence from France nearly 50 years ago.

So even if Bouteflika, 74, was turfed out by protesters, the generals would remain and they've shown no inclination to relinquish power.

Amid all this turmoil, the energy industry has suffered, to a large extent because Sonatrach, a pillar of Algeria's economy, has been caught up in the power struggle between Bouteflika and the generals, and in particular Gen. Mohammed "Tewfik" Mediene, director of the Intelligence and Security Service.

They've been crossing swords for years but their feud intensified when Bouteflika sought to curb Mediene's power in late 2009. Mediene struck back by launching a high-profile anti-corruption campaign that targeted Bouteflika and his political allies.

Sonatrach Chief Executive Officer Mohammed Meziane, Energy Minister Chakib Khelil and Transport Minister Amar Ghoul were all forced out.

Sonatrach got new management but the giant state company and the energy industry as a whole were paralyzed for much of 2010.

Western companies have been increasingly dismayed with Algeria's energy policy for some time and the prolonged upheaval in Sonatrach has only intensified the problem.

An auction of new drilling concessions last week was a fizzle. Only four bids were made -- and one of those was from Sonatrach.

The companies were scared off by the windfall tax and the tough fiscal terms of the production-sharing contracts.

According to the BP Statistical Review, Algeria's oil production slumped by 10 percent, from 2.01million barrels per day in 2005 to 1.81 million bpd in 2009, the last year for which statistics were available.

Gas output fell from 3.1 trillion cubic feet in 2005 to 2.87 trillion in 2009 and trend is still downward.

At the same time, national consumption of gas has risen and this has compromised several export projects.

These include the undersea Medgaz pipeline to Spain, which should have been inaugurated in April 2010, and the Galsi pipeline to Italy, which has been in the planning stage since 2007. Both have a capacity of 282 billion cubic feet per year.