Right place, right time?

Algeria Sitting in a Sweet Spot

Few exploration stories are as complicated as Europe’s interest in Algeria.

The overall accounting includes Russian natural gas, long-distance pipelines, German utilities, Italian law, Algerian license rounds and many other details.

But the bottom line is clear: Europe wants gas supplies from Algeria, and that demand likely will fuel exploration for years to come.

A confluence of interests has created this favorable outlook for Algerian exploration:

  • Algeria offers promising prospects, including plays in gas-prone basins.
  • Algerian state gas company Sonatrach will try to increase its gas exports to 77.5 billion cubic meters in 2009.
  • European countries want to diversify their natural gas sources and look to North Africa to supplement future supply.
  • Algeria hopes to attract more foreign investment to speed development of its natural resources.
  • Europe wants to avoid becoming overly dependent on Russian gas.
  • Algeria has launched a number of gas-delivery and LNG projects that depend on increased production.
A Cold Forecast?

When Russia briefly curtailed its westward gas shipments through Ukraine in 2006, Europe got the sniffles and a headache. Same in 2007.

Then, when Russia cut off gas shipments in a dispute with Ukraine at the start of 2009, Europe turned downright feverish.

Europe gets about a quarter of its natural gas from Russia – 80 percent of it shipped through Ukraine. European countries worry about the reliability of that supply – especially if Russian gas will be used to exert political and financial pressure.

German gas utility E.ON Ruhrgas followed the January events closely, because it draws 26 percent of its gas supply from Russia.

“Even if the dispute escalates further, there will be no cuts for our residential and commercial customers,” said Bernhard Reutersberg, E.ON Ruhrgas chairman.

But, he added, “If the supply restrictions prove to be serious and long-lasting, and the winter turns out to be particularly cold, our means of offsetting the shortfalls will come up against limits.”

The company emphasized the importance of the proposed Nord Stream Pipeline to secure future gas shipments.

The twin-line Nord Stream system would extend 1,200 kilometers from the Russian coast in the Gulf of Finland to Greifswald in northeastern Germany, carrying up to 55 billion cubic meters of gas per year under the Baltic Sea.

The venture is majority owned by Russian gas monopoly OAO Gazprom, with E.ON, BASF and Gasunie as partners.

Alternate Routes

While Nord Stream would help secure direct supply, it also would make Europe even more dependent on Russian gas.

One alternative will be available later in 2009, when the Medgaz Pipeline begins operation. The 210-kilometer system begins in Algeria’s giant Hassi R’mel Field and links to the Spanish coast.

Construction of the pipeline is complete and final hydraulic testing should be completed this summer. Total delivery capacity will be about eight billion cubic meters per year.

A second eight billion cm/year pipeline, from Algeria to Italy, could be operational by 2012. An already-completed expansion has lifted capacity of the existing Algeria-Italy Trans-Mediterranean Pipeline to 33.5 billion cubic meters per year.

Now officially named the Enrico Mattei Gas Pipeline, the delivery system is commonly known as the TransMed.

An Italian antitrust authority earlier fined Eni SPA for cutting competitors out of Italy’s gas market by limiting available capacity on a Tunisian gas pipeline and the TransMed, and ordered more open access in the future.

Promising Potential

Increased delivery capacity will be academic unless new gas sources are found in the country.

In that regard, Algeria appears well-suited for exploration.

Separate U.S. Geological Survey studies of the Grand Erg/Ahnet Province in Algeria and Morocco, the Trias/Ghadames Province in Algeria, Tunisia and Libya and the Illizi Province in Algeria and Libya found good prospectivity for both oil and gas.

Hassi R’Mel lies within the Tanezzuft-Benoud petroleum system in the Grand Erg/Ahnet.

The province contains the Timimoun, Ahnet, Sbaa, Mouydir, Bechar and Abadla basins, part of the Oued Mya Basin and the Benoud Trough.

According to the USGS, the Silurian Tanezzuft formation and Middle to Upper Devonian mudstone are the region’s principal source rocks.

Traps in this province are typically structural and associated with anticlines and faulted anticlines with origins in Hercynian deformation. Major reservoir rocks are Cambrian-Ordovician, Ordovician, Silurian, Devonian, Carboniferous and Triassic sandstone, with Paleozoic marine mudstone as the primary seal.

Of the three province areas within Algeria, the 200,000 square kilometer Illizi Basin could hold the largest share of undiscovered gas resources, due mostly to a relatively favorable thermal history and high organic content of source rock.

Generation in the basin took place from the Middle to Late Jurassic to early Tertiary. Primary source rocks are Silurian Tanezzuft and other mudstones; reservoir rocks include Cambrian-Ordovician, Silurian, Devonian and Carboniferous sandstone.

Exploration will target both structural and combination traps. More than 20 trillion cubic feet of gas already has been discovered in the Illizi Basin.

Algeria is still struggling with development of its 9 Tcf Gassi Touil gas complex. Current plans call for an LNG production facility, increased pipeline capacity to the Hassi R’Mel hub and other production enhancements.

Sonatrach has abandoned its 2009 production targets for the complex, however. First LNG production is now scheduled for 2012.

Winning Bids

In December, Algeria announced the winning bidders in its seventh upstream licensing round.

It awarded only four of the 16 offered licenses and blamed the global economic downturn and declining energy prices for suppressed interest.

But the license terms also carried stiff restrictions. Sonatrach retained at least a 51 percent equity share in future upstream contracts, and foreign producers faced a large tax burden.

Winning bidders were:

  • Eni, awarded the Kerzak license in the Timimoun Basin.
  • E.ON Ruhrgas, awarded the Rhourde Yacoub exploration permit in the Berkine Basin, the Algerian extension of the Ghadames Basin.
  • BG Group, awarded the Guern Guessa license in the Gourara Basin in southwest Algeria.
  • Gazprom, awarded rights in the El Assel area of the Berkine Basin.

“We see very significant exploration potential in the permit that could give rise to long-term gas supplies for E.ON Ruhrgas customers in Europe,” Reutersberg said.

“Algeria is a strategically important partner in this respect,” he added.

Gazprom said it will invest about $120 million in geological exploration at El Assel, including the acquisition of 2,500 square kilometers of 3-D seismic and drilling of four exploratory wells.

Much of the industry took the tepid interest in Algeria’s recent bid round as a negative sign for exploration.

But as recent events have shown, Algeria could be in just the right place for renewed exploration activity, at just the right time.

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