Sonatrach: Upstream Strategy Assessment

Sonatrach is currently implementing a $40 billion investment plan to maintain its total liquids and gas production. The company is keen on monetizing gas from vast untapped reserves in Algeria. Additionally, Sonatrach intends to invest in renewables to free up gas volumes for export, which otherwise are used as feedstock for power generation. To attain its objectives, the company is open for partnership projects with foreign E&P companies.

In 2021, Sonatrach's total marketable production was about 2.9 MMboe/d (59% natural gas). The production was almost entirely (99%) from Algeria. Sonatrach operates Algeria's two largest fields: the Hassi Messaoud oil field and the Hassi R'Mel gas field, which accounted for a combined 32% of Sonatrach's production in 2021 and have been operating for over 60 years. Remaining reserves are estimated to be around 39% and 30% of initial recoverable reserves for Hassi Messaoud and Hassi R'Mel, respectively. It is crucial for Sonatrach to offset the decline in these significant fields. Sonatrach is undertaking the Hassi Messaoud Satellite Fields Development Project, estimated to add 1,210 MMbbl of recoverable reserves. Production from Hassi R'Mel field has stabilized after a large gas compression project (Boosting III) came online in 2021. Moreover, in June 2022, Sonatrach announced a massive wet gas discovery at the Hassi R'Mel field.

Sonatrach is actively undertaking exploration activities and made 35 new hydrocarbon discoveries between 2020 and 2022. Of these, 34 were by Sonatrach alone and 1 in partnership with Eni. These discoveries added a total of 2,250 MMboe in reserves. It's crucial for Sonatrach to focus on increasing its production by fast-tracking development of recent hydrocarbon discoveries in order to meet growing domestic demand and generate export revenues.

2019 Hydrocarbons Law may attract new investments

Algeria's Law No. 19-13 of 2019 Hydrocarbons Law modified the country's legal/fiscal framework for the hydrocarbon sector, offering Sonatrach the flexibility to attract new partners capable of providing the financing and technology to develop new fields and redevelop aging fields. Under the new law, Sonatrach signed three production sharing agreements, the first one with Eni, the second with Sinopec and the last one with the consortium Occidental, Eni and TotalEnergies.

Russia-Ukraine crisis will allow Algeria to maximize gas exports to Europe, although absence of sizable new growth volumes limits the upside

Algeria's gas exports are primarily to the European market. Following Russia's invasion of Ukraine in February 2022, European countries have moved to reduce and eventually phase out gas imports from Russia. Additionally, Russia itself is reducing its supplies to Europe as a means of applying pressure. Consequently, Algeria has an opportunity to further maximize exports to its European customers. In April 2022, Sonatrach and Eni signed a long-term gas supply contract to boost an additional 9 Bcm/y of gas supplies to Italy via the TransMed pipeline in 2023-24. Sonatrach and Eni also signed an MOU to develop up to 3 Bcm/y of additional production from gas fields discovered by Sonatrach in Algeria, which will contribute to increasing the export capacity to Italy via the TransMed pipeline.

There are a few challenges that Sonatrach faces:
• Managing field declines and increasing production. Aboveground risks, unattractive contract terms, and insufficient investment in pipeline infrastructure have long impeded the development of new source projects. Whether improved regulatory and fiscal terms provided in 2019 Hydrocarbons Law has the potential to attract foreign companies is yet to be seen.
• Realizing potential of unconventional (mainly shale gas) and offshore hydrocarbon resources. Algeria's technically recoverable shale gas resources are estimated to exceed 700 Tcf. In its strategic plan to 2030 (called the SH2030 Transformation Plan), Sonatrach listed its goal to prove shale gas resources to support the production of 2 Bcf/d by 2030 and 7 Bcf/d by 2040. However, exploration of shale resources has been on hold owing to several challenges, including the high costs, lack of expertise, and opposition from locals concerned about the impact on Algeria's scarce water resources. Separately, owing to high investment costs and lack of technical expertise, Sonatrach has still not explored opportunities in domestic offshore basins.
• Morocco-Algeria-Spain tensions have serious repercussions on piped gas exports. Worsening diplomatic ties between Algeria and Morocco led Sonatrach to end its gas supply and transit agreement with Morocco via the Maghreb-Europe pipeline. The contract had allowed for the gas supply to Spain. Sonatrach is making use of the alternative Medgaz pipeline to directly supply gas to Spain. However, Spain's support for Morocco and an agreement to reverse flow gas to Morocco through the Maghreb-Europe pipeline raised tensions in 2022. Ongoing tensions resulted in a drop of gas exports to Spain by Sonatrach in the first half of 2022. Cutting ties with Spain could prove costly to Sonatrach in the long term.
• Challenges in undertaking renewable energy projects. Currently, gas provides over 90% of feedstock for power generation, thereby reducing the share of gas for exports. Consequently, the Algerian government wants to develop renewable energy to free up gas for exports. However, Sonatrach's renewable energy activities are at a nascent stage. The company lacks funds and technical expertise to diversify to capital-intensive renewable energy projects. Sonatrach will require foreign partnerships to scale solar projects. For the near term, Sonatrach is focused in decarbonizing its existing oil and gas operations in order to sustain partnerships as foreign companies prioritize their own carbon reduction efforts, limiting Sonatrach's activity for development of renewable projects.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.