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The Geopolitics of Sonatrach: A History Interwoven With Algeria's

13 MINS READMay 31, 2019 | 09:00 GMT
A Sonatrach gas complex in Skikda, Algeria.

A Sonatrach gas complex in Skikda, Algeria. Over the past 60 years, Algeria's national oil company has become a political actor in its own right.

(NACERDINE ZEBAR/Gamma-Rapho via Getty Images)
Highlights
  • Sonatrach, Algeria's state-owned oil company, was a product of a nationalist push in the 1960s, as postcolonial Algiers sought to introduce more independence from France and, by consequence, any other foreign power.
  • As the gatekeeper to Algeria's hydrocarbon holdings, Sonatrach serves as the key generator of economic rents for Algiers, which is why its power has largely stayed intact amid the economic downturns, political swings and liberalization efforts of the past several decades.
  • Today, Sonatrach remains a driving force behind policymaking in Algeria and has effective approval over any changes to the country's energy laws.
  • Thus, regardless of Algeria's next government, the competing interests of its political elite, combined with Sonatrach's entrenched political sway and patriotic appeal, will limit the extent of reforms to liberalize Algeria's oil and gas industry.

Algeria has long been described as a country whose political system is heavily managed by a few competing interest groups. At the heart of this system is the state-run energy company Sonatrach — the lifeblood of Algeria's oil and gas sector, which accounts for 40 percent of government revenue and more than 95 percent of its exports. Like many national oil corporations with a lengthy history and an outsized political role, Sonatrach has been described as being a state within a state because of its deep-rooted political influence and control over patronage networks that its government relies on for revenue.

The Big Picture

Algeria's ongoing economic crisis and subsequent paralysis of its oil sector set the stage for the protest movement that ultimately ousted longtime President Abdel Aziz Bouteflika in April. Whoever emerges from the fray to head Algeria's political system next will need to reform the country's oil and gas sector to boost its economy. At the same time, they will need to balance the political power and interests of its national oil company Sonatrach.

The evolution of Algeria's hydrocarbon sector has been deeply interwoven with the country's postcolonial political history. And many of the events that have shaped its past continue to shape its future. Therefore, an understanding of that history — and Sonatrach's role within it — is crucial to understanding to what degree any future reforms to the structure of Algeria's hydrocarbon sector are possible after the removal from office of longtime President Abdel Aziz Bouteflika.

Algeria's Nascent Energy Sector

As with most complicated political issues in Algeria, the current problems plaguing the country's economy and hydrocarbon sector date back to French colonial Algeria. During the first half of the 20th century, the global oil industry was dominated by companies from the United States, Russia and the United Kingdom. Continental Europe, meanwhile, had few natural resources — forcing France to rely on the United States and eventually the Middle East for oil. This lack of energy security eventually prompted Paris to create Compagnie Francaise des Petroles (CFP) in 1924, which would become today's supermajor Total.

France strived to find alternatives, particularly among its colonial possessions. And although only trace amounts of oil had been discovered in northern Algeria at the time, by the 1920s it was believed that the vast Sahara Desert was home to substantial hydrocarbon potential. After World War II, Paris created a legislative office to oversee researching the hydrocarbons sector in its territories, called the Bureau de Recherche de Petrole (BRP). To support these efforts, the BRP and the French colonial government in Algeria created a national oil company in 1945 to be jointly controlled by both entities called La Societe Nationale de Recherche et d'Exploitation de Petrole en Algerie (SN REPAL). SN REPAL then entered into agreements with CFP for exploration, culminating with the 1956 discovery of the Hassi Messaoud and Hassi R'Mel oil and gas fields in Algeria, making France a major oil producer almost overnight.

A timeline, 1954-71: Algeria's independence and the rise of Sonatrach

Meanwhile, Algeria's war for independence was breaking out. To ensure its oil and gas interests were protected regardless of its future relationship with Algeria, France broke off the Saharan half of Algeria (which is where the Hassi Messaoud and Hassi R'Mel fields were) and reorganized it with the rest of its Saharan possessions, creating the Common Organization of Saharan Regions (OCRS) in 1957. In doing so, France hoped that a possible independent Algeria would be confined to the Mediterranean coast and not the Sahara. France also took steps to protect its monopoly over oil and gas production in Algeria by adopting the Saharan Petroleum Code in 1958, which limited foreign investment into the OCRS regions — sowing the seeds for what, in essence, would later become Algeria's nationalist bent in its energy sector.

During the negotiations leading up to Algeria's independence, one of France's key goals was to continue to protect its oil supply. And the 1962 Evian Accords — the truce that ended the war between France and Algeria — did just that. In exchange for its independence, Algeria promised to recognize all of the terms of France's oil and gas concessions. It was a boon for Paris, but left the fledgling Algerian government with a relatively bad shake. Under the terms laid out by France in the agreement, Algeria ended up with far less in oil rents compared with other major Middle Eastern producers — a reality that postcolonial Algiers would quickly start to rectify with increasingly nationalist policies.

A map of France's Common Organization of Saharan Regions

The Rise of Sonatrach

Just one year after earning its independence in 1962, Algeria created Sonatrach, a state-run oil company whose initial job was to build a key pipeline to transport and commercialize the country's hydrocarbons. Two years later, Algeria and France negotiated a successor to the Evian Accords that generally reaffirmed the Saharan Petroleum Code. But this time, Sonatrach ended up acquiring the 50 percent stake in SN REPAL that Algeria had inherited from its French colonial government. To Paris, Sonatrach's gains were the first sign that its hold over Algeria's energy sector was tenuous, regardless of agreements made on paper — a fear that would be confirmed just six years later when Paris would lose all of its hydrocarbon holdings in the country.

Houari Boumediene seized power in 1965 after orchestrating a bloodless coup. Almost immediately, the new leader took an authoritarian knife to Algeria's energy sector. In 1967, he nationalized almost all non-French oil and gas holdings and gave them to Sonatrach, before eventually nationalizing Algeria's entire hydrocarbon industry in 1971 — taking a 51 percent stake while handing over all of the sector's resources to Sonatrach.

Over the next decade, Sonatrach's status as a state within a state was cemented. Algeria had already embarked on a Soviet-style economic strategy that used oil rents — all generated by Sonatrach — to finance development projects, which essentially made the company and its patronage networks crucial for almost all of Algeria's political actors. As a result, Sonatrach quickly became the main player throughout the Algerian energy sector — overseeing upstream oil and gas production, petrochemicals, fuel distribution and the refining process, as well as many regulatory functions. In just eight years, Sonatrach had gone from an Algerian experiment to one of the Middle East's most important energy producers.

A timeline, 1973-95: Algeria after oil nationalization

Algeria After Oil Nationalization 

By the time of Boumediene's death in 1978, Sonatrach had consolidated its control over the entire Algerian energy sector, including all of France's remaining holdings. However, Sonatrach's size, expanse and power also led to systemic corruption, mismanagement and inefficiency that, in some ways, remain to this day. During the 1980s and 1990s, there was a series of reforms that aimed at reversing some of Sonatrach's strength as a part of the country's overall shift toward a market economy, which included converting Algeria's state-owned enterprises to more market-oriented firms. Over the next two decades, Algeria transitioned from a single-party socialist state dominated by close ties between Sonatrach and Boumediene's National Liberation Front (FLN) toward a multiparty state with a variety of stakeholders driving policy.

Meanwhile, however, the country was suffering from declining oil production that eventually culminated in prices bottoming out below $10 per barrel in 1986. Desperate for revenue, Algiers passed a hydrocarbon law that year, which reopened Algeria's larger energy sector to international oil companies (albeit on difficult investment terms). However, Sonatrach's power remained largely untouched from the economic and political changes to its role in such a financially crucial sector. In fact, its influence was reinforced in some ways during this period, since the hydrocarbon reforms still required foreign companies to work with Sonatrach — solidifying its place as the gatekeeper to Algeria's oil and gas sector.

Algeria's plummeting oil prices and downward economic spiral in the 1980s forced Algiers to look at ways to open its economy in search of relief. But the country's test with liberalization — which included the 1986 Hydrocarbon Law — quickly went awry. In 1988, the government promised to hold multiparty elections in response to large riots. But just four years later, the army prevented such elections — giving way to the disastrous 1990s, which saw a decade-long civil war and two painful International Monetary Fund stabilization programs.

A timeline, 1999-2019: Algeria under Bouteflika

Bouteflika's Algeria and the Stagnation of Sonatrach

This dark time led to a new impetus for economic development and stability by the Algerian government, which Bouteflika (who assumed office in 1999) was largely able to help bring about — albeit on the back of rising oil prices, which spiked from an average $18 per barrel in 1999 to $111 in 2011.

Under Bouteflika, policymaking and Algeria's economic and political direction were largely the product of competition between a handful of entities making up "le pouvoir" ("the power"), including Bouteflika and his political allies, the FLN, the government's intelligence agency (known by its French acronym, the DRS), the military, Sonatrach and several other civil society groups (such as unions). Bouteflika sought to introduce economic liberalization, and saw bringing in Algeria's business elite into the fore as a way to push back against the dominance of the DRS. In doing so, he recruited Chakib Khelil — a Texas A&M-trained petroleum engineer who had spent the previous two decades at the World Bank — to become the country's oil minister and implement significant reforms for the energy sector.

Khelil would later introduce the 2005 Hydrocarbon Law, which stripped away Sonatrach's regulatory functions and gave them to a newly created body. The law also allowed international oil and gas companies (IOCs) to take full ownership of projects in the country, forcing Sonatrach to compete with IOCs for contracts. Such reforms, however, risked exposing and cutting out the valuable patronage networks underpinned by Sonatrach's dominant political role, which served as the primary generator of government revenue. Thus, protecting Sonatrach's piece of the pie was critical for Bouteflika's clan, as well as the FLN, which had few other means to fill its coffers.

As a result, Khelil's original 2005 Hydrocarbon Law — which would have made Algeria the first Middle Eastern and North African country to allow IOCs to independently develop oil and gas projects — was short-lived. In 2006, Bouteflika walked back the reforms by saying IOCs could only carry out exploration and production activities in conjunction with Sonatrach, who would receive a 51 percent stake. And ever since, Algeria's hydrocarbon code has more or less stayed the same.

Khelil's attempts to reform the energy sector, along with Bouteflika's broader liberalization efforts and Sonatrach's own patronage networks, eventually became the target of the DRS as a way to undercut Bouteflika's influence as well. In 2010, the intelligence agency launched an investigation into the top cadres of Sonatrach — detaining its chief executive over corruption charges that ultimately resulted in Khelil resigning. While the DRS has since been dismantled, these two Sonatrach scandals — dubbed the Sonatrach Inquiries — nonetheless demonstrate the ways that different members of the Algerian political elite compete for power and influence through Sonatrach and the energy sector.

Today: A Suffering Hydrocarbon Sector 

And it is this political competition over Sonatrach's direction that has continued to weigh down Algeria's hydrocarbon sector in recent years by slowing attempts to introduce much-needed energy reforms. The changes needed to properly address Algeria's economic crisis have also fallen by the wayside amid the country's slew of political crises over the past five years.

When oil prices are high — roughly above $100 a barrel, as they were between 2010 and 2013 — the revenue windfalls have been able to mask the mismanagement and inefficiency of the Algerian political economy and its energy sector. But when oil prices are below $100 — roughly the price Algeria needs to balance its budget — those problems soon become apparent. Plagued by a lack of reforms and investment, oil production declined from its 2007 peak of 1.99 million barrels per day (bpd) to 1.54 million bpd in 2017. And while Algeria's natural gas production has recovered to 91.2 billion cubic meters (bcm) per year since bottoming out in 2009, it has yet to return to the 2003 peak of 93.9 bcm.

While different forces may periodically gain the upper hand, Algeria's political system — and Sonatrach's role within it — will likely remain in place regardless of who succeeds Bouteflika.

The challenges facing Algeria's energy sector is something that Sonatrach and the energy ministry are well aware of, and have been trying to resolve through another update to the country's Hydrocarbon Law. In January, former Sonatrach CEO Abdelmoumen Ould Kaddour reportedly finalized reforms to improve Algeria's harsh fiscal terms offered to IOCs. But Algeria's protest movement — followed by the removal of Bouteflika in April and now, the uncertain trajectory of a post-Bouteflika transition — has since stalled these efforts.

But perhaps most importantly, there has been a systematic push by army chief Ahmed Gaid Salah and the Algeria's judiciary branch to go after corrupt businessmen and Sonatrach — many of whom are within Bouteflika's inner circle. Since April, Salah has called for the reopening of the Sonatrach Inquiries. This has so far included Ould Kaddour (who lost his job at Sonatrach in April) and Khelil, the former oil minister (who's now up for investigation). Should this indeed be the start of a third Sonatrach crackdown, it's likely to turn into a deep and lengthy affair — in which case, any substantial reforms to the hydrocarbon sector will likely be delayed to next year at the earliest.

Sonatrach in an Uncertain Future

That said, once Algiers transitions to a new government, whoever ends up in power will still need to try to stem the decline of Algeria's oil production, as well as increase its gas production via reforms, since the energy sector (and by proxy, Sonatrach) remains the primary generator of the economic wealth and patronage that Algeria's new leadership will need to consolidate power.

But regardless of who takes the helm next, the structure of Algeria's political landscape can still evolve only so much. While different factions of le pouvior may periodically gain the upper hand, the system — and Sonatrach's role within it — will likely remain in place. And because of this, any new reforms that Algeria's next government introduces will probably be limited to only bare-minimum efforts — and not the kind of sweeping overhauls needed to fully bring the country's oil sector and economy back up to speed. Already, Algeria's new energy minister has announced that the currently proposed reforms will not remove Sonatrach's mandated 51 percent stake in foreign projects.

Sonatrach was a key part of Algeria's revolutionary transition, endowing it with a nationalist luster that it maintains — and still benefits from — to this day.

In addition to its political sway and economic power, Sonatrach also harnesses a patriotic pull that will further temper a push for increased foreign ownership in Algeria's oil and gas sector. When Boumediene nationalized Algeria's oil sector in 1971, he initially heralded the move as cutting the final tether from France — portraying Sonatrach's consolidation of power as a key part of Algeria's post-revolutionary transition. In essence, Algeria was a revolutionary state, and Sonatrach was the poster child of its revolutionary fervor.

This endowed the national oil company with an ideological luster that it still maintains to this day, as evidenced by Algeria recently expressing its intent to block a proposed acquisition that would have made the French supermajor Total the largest foreign oil producer in the country. Indeed, for many Algerians, Sonatrach remains a vivid reminder of the revolutionary struggle it underwent and the risk of having its oil and gas wealth being taken overseas.

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