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IMF Report on Algeria: Hot and Cold

As part of the customary Article IV consultations, the International Monetary Fund (IMF) team completed its mission, which began on December 3, on December 14, 2023. This team led by Chris Geiregat makes statements that she describes as preliminary. The opinions contained therein โ€œare those of the IMF staff and are not necessarily those of its Executive Board.โ€ 

This supreme body of the IMF has other sources that can adjust these preliminary conclusions, which will be subject to appreciation by their management before bringing them to the board of directors’ level for a final decision.  

This team notes an appreciable effort in progressive rebalancing which could โ€œpreserveโ€ the strength of finances but risks not absorbing external shocks. She returns as in each of her passages advocating the buoyancy of the exchange rate to subject it to supply and demand. As this is an economy at the very beginning of its competitiveness, this flexibility would force it, as usual, to devalue its currency to rebalance its budget. 

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It turns out that the Algerian economy each time it devalues โ€‹โ€‹its currency, deviates further from the parallel exchange rate which has become a real headache for decision-makers.   

The immediate economic situation is on track but could be disrupted by fairly high inflation. As for that in the medium and long term, it remains “dependent” on the reforms in progress, the most important of which is that which aims at the diversification of the economy which is confirmed from year to year. Encouraging โ€œinclusiveโ€ growth in which the private sector must contribute and promote job creation. For the team, the firmness of inflation, the instability of hydrocarbon prices, and climatic hazards โ€œconstitute a major riskโ€ for maintaining the course of its gigantic efforts.

1- Growth of 4.2% driven mainly by hydrocarbons

The team seems, according to the speaker’s statements, to note with satisfaction the efforts of the government program to first clean up the business climate, and the latest outings of the President of the Republic to encourage investors and reassure them of the support of the State. A new strategic orientation is consistent with Algeria’s particular constraints. What are these constraints? 

First, everything suggests that the new law on hydrocarbons has not attracted enough investors to explore virgin areas, but rather seems interested in existing deposits for less risk. These virgin zones, all forms of hydrocarbons combined, namely conventional, tight, and even non-conventional thus explored, could have expanded the mining domain by increasing the reserves. 

This area is under-explored and is only exploited at 40% of its surface area re-evaluated at over 1,750,000 km2. For Alnaft, โ€œthese figures demonstrate the diversity of opportunities present and the scale of investments to be considered with a view to the optimal valorization of existing resourcesโ€. 

Taking into account the importance of hydrocarbon revenues to finance the economic and social circuit, the country aims to increase gas exports to 100 billion cubic meters. The second constraint is the internal consumption of petroleum products which is increasing at a breakneck pace according to figures revealed by the Hydrocarbons Regulatory Agency (ARH). Thus, according to its manager in the first half of 2023, the growth rate of this consumption approached 6.7% with 8.69 million tonnes consumed which she attributes โ€œto the economic dynamics experienced by the countryโ€. 

This frantic increase in internal consumption punctuates the volume of exports which serves not only to support the energy transition but also to increase the production of non-hydrocarbon products to counter this strong dependence of the national economy on hydrocarbons. 

The third constraint would be the natural decline of mature deposits. Too preoccupied with expanding an area as vast as mining, we have perhaps neglected our existing deposits, and now there is an opportunity to take them back, maintain them, and increase their recovery rate by encouraging highly interested foreign investors. These three constraints were put into the equation by the President of the Republic to postpone the 5th call for tenders and โ€œopt for a multiplication of partnerships for the intensification of exploration, to discover new deposits and for the optimization of certain Sonatrach fields, called mature fields (fields at the end of their life), in decline.

In all likelihood, it favors direct contact with large companies rather than waiting for the results of a call for tenders. It is announced that โ€œSonatrach is in direct negotiations with a multitude of companies, some of which are large companies.โ€

2- Why the IMF welcomed this approach

In addition to the position of the International Energy Agency (IEA) is in favor of a slowdown in investments in fossil fuels and the difficult compromise found at COP28. The analysis was published at the start of Covid-19 in February 2020 and is confirmed to date. Indeed, a sudden interruption in oil exploitation could potentially halve the projects under development. 

For what? The oil giants, notably the Americans like ConocoPhillips, BP, ExxonMobil, and Chevron, have been watching for the slightest opportunities in the field of hydrocarbons in particular and energy in general for a long time and have counted on their enormous investments made in development projects. tar sands and especially gas from clay source rocks, remain the most exposed to this surprising drop in demand that could result from late climate regulations. 

In simple terms, it supports the think tank Carbon Trucker, a think tank, whose conclusions are widely listened to in the world of energy and the environment. โ€œOil companies that rely on the status quo to plan future investments risk seeing the value of their new projects cut in half due to stricter policy. 

They risk ending up with stranded assets if they assume that governments will not take strong action to limit climate change. Therefore, oil projects developed before 2025 may never generate the expected value if policy responses are not anticipated.  

With the entry into force, in December 2019, of a new European executive insisting on making this continent one of the first climate-neutral by 2050, European oil companies are not spared the consequences of this regulation either. strict enshrined in a binding law and complicates their task a little more with the entry into force of the reduction of greenhouse gas emissions in a much closer deadline, that of the end of the current decade.

The think tank believes investors should demand a higher rate of return from companies developing expensive projects, such as tar sands mining. These projects are also among the most polluting and are the most sensitive to price volatility. In addition, the risk of ending up with stranded assets remains, regardless of whether barrel prices fluctuate up or down. Experience in the oil and gas sector shows that when the company has less expensive projects, automatically the risk they carry is lower and their return will remain higher.ย 

This is certainly what attracts the most capital in these circumstances. Oil companies are indeed accustomed to doing in poor countries what they do not do at home, but this last decade has shown that social networks pursue them even outside their borders, where they are reluctant to take this very capital-intensive risk. 

Contrary to the approach that the giant TotalEnergies is developing, for example through announcement effects, such as showing its interest in the Algerian shale blocks, it is working hand in hand with European political decision-makers to contain climate threats by 2025 by reorienting its investments with less risk to avoid situations like that of In Salah in Algeria. It is not the only one in Europe, Eni and Equinor are considered the least exposed to climate risks, as they have started to diversify their portfolios by investing in renewable energies or charging stations for electric vehicles. 

This report cites the example of the state oil company, Saudi Aramco, which has low production costs and remains one of the least exposed with a sensitivity to oil prices approximately 30% lower than that of the rest. of the sector’s industry. Conversely, the value of Exxon Mobil’s existing and modeled oil projects is approximately 40% more sensitive to the price of oil than the rest of the oil production industry. This should cause oil giants to rethink their investment strategies. 

Growing public pressure on climate change and falling costs of renewable energy technologies will ultimately force every oil company to act even beyond its borders. It must also be said that social networks are very contagious. 

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