ALGERIA - Sonatrach Oilfields & Legal Framework.

Sonatrach has more than 20 producing oilfields, with the country having about 2,600 oil and gas wells. Their oil recovery rate has declined, despite EOR systems installed in most of them. Sonatrach's capacity has fallen from more than 1m b/d in 1980 to 550,000 b/d. To boost their capacity through highly advanced EOR systems, Sonatrach has offered fields for further development, whereby foreign companies would have a share of production. It has offered partnerships in fields it abandoned in the 1980s. There are more than 200 E&P agreements in Algeria.

Sonatrach has more than ten fields producing natural gas and condensates, including the super-giant at Hassi R'Mel. Sonatrach's gross production of natural gas has risen to 150 BCM/year. Gas production from Tin Fouye/Tabankort in a joint venture (JV) operated by Total is averaging 6.5 BCM/year and in the BP/Statoil operated In Salah fields has reached 9 BCM/year. The BP/Statoil gas fields at In Amenas are also producing 9 BCM/year.

Sonatrach is still being restructured in a process begun in 1996. Now it is functioning much better. But socialists within the company, as in the ruling FLN and trade unionists have prevailed over the government by imposing a minimum participation of 51% for Sonatrach in all E&P ventures in Algeria, under the 2006 amended hydrocarbons law (see above).

Background: Discoveries made by Sonatrach since the early 1980s had not justified the capital invested by 1990. Structural problems in old fields within the areas of Hassi R'Mel, Hassi Messaoud and In Amenas had worsened to alarming proportions by 1988. The government had also realised the limitations of the national effort to find and develop new deposits and the problems faced by Sonatrach in being virtually the sole investor.

Sonatrach lacked the technology required to develop new discoveries or enhance the recovery rate of existing fields. It lacked the equipment to maintain those old fields which had reserver problems and lost pressure. As a result, Algeria's oil production capacity fell below its OPEC quota in late 1987, and development capital available was inadequate. State funding was short of the needs of a sector requiring much capital and advanced technology. E&P terms on offer were judged unfavourable by qualified foreign companies. Contractors with advanced techniques were not interested in projects subjected to tight budgeting.

In late 1988 E&P offers and project tenders were a bit better so a few foreign companies could bid. By then Algiers had improved the law of Aug. 19, 1986, with six decrees issued in 1987 and 1988. It allowed Sonatrach to loosen project budgeting and seek credits.

Yet companies' confidence in Algeria's willingness to improve E&P terms was so low that the law's amendment in 1991, allowing international participation in existing fields under production sharing agreements (PSAs), was described by then Agip President Sontoro Raffele (signing a PSA in December 1991) as "a revolution". PSAs under the new system required firms to pay in advance for the right to recover oil from producing fields, and pay an "entrance fee" that was not refundable.

The offers were as follows:

Ten sets of important oil and gas fields - Hassi Messaoud, Rhourde el-Baguel, Zarzaitine, Haoud Berkaoui, Guellala, el-Adeb Larache, Ben Kahla, el-Gassi, oil producing structures around the Hassi R'Mel gas field and oil structures around the Rhourde Nouss gas field. This was a premium category for development on the basis of best E&P and EOR systems possible, with foreign companies having to pay a non-refundable and high entrance fee like the $300m which Arco in 1994 paid for its Rhourde el-Baguel PSA with Sonatrach.

The development of wet gas both in existing oilfields and in new discoveries. This category required a small entrance fee.

Several oilfields abandoned by Sonatrach and small fields still in production but officially described as being "in advanced decline". For this category, foreign companies did not have to pay an entrance fee.

Things did not progress as was anticipated, with reforms implemented by liberal governments in 1991-92 reversed by a socialist-led administration. Bids made by major companies, including Mobil which was interested in the Hassi Messaoud EOR project, were rejected. Sonatrach later installed 15 water injection systems in 13 fields: Hassi Messaoud, Zarzaitine, el-Agreb, Rhourde el-Baguel, Mereksen, Stah, Edjeleh, el- Borma, Tin Fouye/Tabankort, Tigentourine, Guellala, Ben Kahla and Haoud Berkawi. It installed gas injection systems in several of these fields and in others, with 11 compression stations and a total capacity of 50 MCM/d. But problems first encountered in 1984 and worsened in 1988 - when re-opened wells lost pressure - led to serious reserver damage in some fields. At times total oil production fell to 600,000 b/d, with Edjeleh's recovery factor having dropped drastically.

It was then estimated, it would cost over $2 bn for every 100,000 b/d of addition to existing oil production capacity in Algeria. This was to involve larger-scale EOR systems for the old fields like Hassi Messaoud and Edjeleh, expensive reservoir engineering, and development of new oil finds made in the same fields through re-exploration. Development of new fields was to be less expensive; each 100,000 b/d of additional production capacity from such fields was estimated to cost $600-900m, depending on the complexity of the structures (see background in Vol. 56, OMT No. 6).

By 2000, only a few of the field sets offered in the first category had been taken up by foreign firms. Five sets of fields - Tinhert, Zarzaitine, el-Adeb Larache, the Hamra Quartzite of Rhourde Nouss, and the south-east Illizi Basin oil and gas fields' development and re-exploration project - were offered again in May 2001 in an open auction. Talks with Petro-Canada over the Tinhert set were broken off in early March 2001, after two years of negotiations over tough Sonatrach terms. The latter project called for appraisal/development of 19 Tinhert fields containing gas and condensates. Now Petro-Canada is producing less than 3,000 b/d from its Tamadanet area.

The following are brief profiles of Sonatrach's main oil producing fields, including those offered to contractors or for foreign equity and EOR investment, and those which have been taken up by foreign companies:

Hassi Messaoud is Algeria's first and largest oilfield, discovered in 1956 by the French Compagnie de Recherches et d'Exploitation de Petrole du Sahara (which found most fields before Algeria's independence in 1962 - including the huge Hassi R'Mel gas field, also found in 1956 - see Gas Market Trends). Hassi Messaoud is 1,600 sq km and has two distinct zones: HM North and HM South. It produces 46[degrees] API oil exported through the Bougie terminal. It has two thick plays, separated by a fault zone, producing from Cambrian and Ordovician Fms at depths of up to 10,500 ft.

Problems at Hassi Messaoud were encountered in 1984, with some experts at Sonatrach having warned about them since 1982, in view of restrictive budgeting for maintenance. In 1989 the field's output fell to 300,000 b/d, compared with more than 660,000 b/d in the 1970s. Its installed capacity now is 350,000 b/d, an output level dependent on EOR facilities. A larger scale EOR system and at least four years of additional work would be required to raise Hassi Messaoud's capacity to 600,000 b/d level desired and to maintain it for years. Sonatrach has turned down PSA offers for the field made by several foreign firms (see background in Vol. 56).

Sonatrach's management in early 2004 said it could raise the field's sustainable capacity to between 600,000 b/d by drilling 32 new production wells by 2009.

Petroleum Argus on April 19, 2004, quoted a "senior Sonatrach official" as saying his company "will live and die by Hassi Messaoud" and making this fore-cast: "By reinforcing new wells with enhanced oil recovery techniques from old wells, 1m b/d is a realistic long-term target".