Iran and Venezuela shoulder the moniker of the price hawks at the Opec oil cartel, but in their shadow, Algeria is emerging as the über hawk.
Ahead of Thursday’s meeting, Youcef Yousfi, the Algerian oil minister, warned that “Opec faces a real risk”, suggesting the country is in favour of a production cut.Algeria’s growing hawkish voice is important because it is giving firepower to the other countries calling for higher oil prices at Opec. Take the acrimonious collapse of the cartel’s meeting in June 2011. The disagreement was largely blamed on Iran, but in fact it was the north African country which led the opposition against Saudi Arabia’s call to lift production to lower oil prices.
Algeria’s interests used to be aligned to that of Saudi Arabia. The change in its position is due to two main factors: first, after a decade of rapid increase in oil production, output is now falling; second, higher prices are needed to shore up Algeria’s deteriorating financial situation.
During the last decade, Algeria was one of the main stars of the Opec oil cartel, raising its output steadily – so much so it often violated the group’s self-imposed production limits.
The country pumped 800,000 barrels a day in early 2000. Following large investments by state-owned Sonatrach and foreign companies, oil output rose until it peaked at 1.4m b/d in early 2008. Since then it has fallen back to 1.1m b/d, according to estimates by the International Energy Agency.
Algerian oil production has been paralysed following the corruption scandal at Sonatrach in January 2010, which cost the jobs of almost all the company’s upper management, including its chief executive. Soon afterwards, Chakib Khelil, one of Opec’s most respected policy makers, was ousted as Algeria’s oil minister after more than a decade in the post.
“Bureaucratic delays within Sonatrach appear to have become entrenched as new management grapples with institutional inertia, which is further delaying long-planned expansion projects,” the IEA said in a recent report.
Algeria made things worse after it changed the provisions of its contracts with international oil companies, triggering complaints of “uncompetitive contract terms”. The country’s last three rounds of exploration contracts have attracted lacklustre interest from international companies. As a result, the IEA believes Algeria’s maximum oil production capacity would continue declining until at least 2016.
Worse still for the country, the kind of oil it produces is no longer in high demand, leading to lower prices compared to other streams. During the last decade, refiners bid up Saharan Blend, the main export grade of the country, because its low sulphur content made it attractive to produce environmentally friendly fuels such as gasoline. The stream sold at premiums as high as $3 a barrel over Brent in 2008. But the increase in US shale oil production and the closure of refiners in the Atlantic has led to a big rise in supplies of crude oil of similar quality. Thus, Saharan Blend is selling now at its biggest discount to Brent in at least a decade, trading $2.10 a barrel below Brent.
After years of rising public spending, exacerbated by the Arab Spring, the International Monetary Fund has warned that Algeria’s financial outlook has “seriously weakened”. The IMF believes that oil prices would need to rise to $100 a barrel to balance the budget – excluding salary back payments. This is more than double the $44 a barrel in 2006.
Last year, Algeria registered the second biggest budgetary deficit among oil producers in the Middle East and north Africa with a shortage equal to 3.6 per cent of its GDP. Only Yemen, with a deficit of 4.4 per cent of its GDP, fared worse.
The rise in the budgetary break-even oil price has prompted Algeria to break away from its old allies, Saudi Arabia, Kuwait and the United Arab Emirates, and to defend prices alongside fellow-hawks Venezuela and Iran.
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