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Beneath Algeria’s Political Stalemate, An Economic Crisis Smolders

On Thursday, Algerians are poised to boycott the country’s first presidential elections since ailing president Abdelaziz Bouteflika was forced out in April after 20 years in power. Protesters have dismissed the five presidential candidates vying to replace him, including two who used to be prime ministers, as familiar faces recycled from old regimes. Hopes of a political reawakening blossomed after Boutfeflika’s toppling, but instead a stalemate is now likely to ensue. 

Much the same could be said of Algeria’s economy. 

The oil and gas sector that powers Algeria’s economy badly needs a fresh injection of foreign investment, experts say, but an overhaul of key legislation that has been blamed for hampering new investment would only be a start. Ironically, another obstacle may be ongoing demonstrations by protesters sick of waiting for economic growth. Geopolitical instability is anathema to oil and gas investors. 

“It is unlikely that any significant positive output change will take place before the end of the next decade,” said Mostefa Ouki, a senior research fellow at the Oxford Institute for Energy Studies. 

Algeria’s oil production has sagged from 1.3 million barrels a day in 2007 to just 950,000 this year. Insiders chalk up the decline to maturing oil fields that yield oil in ever-diminishing volumes, sporadic terrorist activity and — the most commonly cited factor — an overweening hydrocarbons law, amended in 2006, that sent foreigners running. 

The upshot has been disappointing GDP growth and persistently high unemployment, with youth unemployment recently as high as 31%. For a country of 41 million where the average person is only 28, the figures are eye-watering numbers.  

Accounting for as much as 95% of all foreign export earnings and some one-third of gross domestic product (GDP), Algeria’s flagging oil and gas sector no longer provides the robust growth that the ruling political class, underwritten by the military, has counted on to sustain popular support. The government has long subsidized the costs of food and other staples, but it has been forced in recent years to begin to restrict those handouts. 

Nevertheless, Algeria has taken some steps recently to reinvigorate investment. Last month, the lower house of parliament, the Algerian People’s National Assembly, adopted a much-hyped overhaul of the country’s hydrocarbons law, which governs foreign investment into the sector. The new law would reduce taxes imposed on investors and give them more contractual flexibility in their relationship with the state oil company, Sonatrach. According to oil news agency S&P Global Platts, government officials tout the draft law as a return to the era in the 1980s when looser tax provisions lured a plethora of oil companies to Algerian shores. 

Crucially, however, the new law does not retract a provision viewed as sacrosanct: foreign oil companies will still be required to enter a partnership with Sonatrach in which they own no more than 49% of the business. 

Experts are doubtful that either the revamped hydrocarbons bill or other changes will bear fruit, at least anytime soon. 

“[T]here are many moving parts in this jigsaw of political risk and having the optimal conditions in place is a big ask,” said Anthony Skinner, a director at research and consultancy firm Verisk Maplecroft. “If the draft hydrocarbons law passes through the upper house of parliament, the presidential election takes place as planned on 12 December, Algeria witnesses political normalisation, and the momentum enjoyed by Hirak diminishes, then the administration will be in a strong position to boost production.” 

“[Oil and gas] investors need to feel that the investment climate is stable and predictable – conditions which do not currently exist,” Skinner said. 

Perhaps ironically, demonstrations by protesters are a big reason why investors hesitate to get more involved. Oil and gas companies fear that Hirak threatens to disrupt oil drilling and that local communities will resist unconventional exploration. In some cases this fear is only a suspicion, but it doesn’t help that protesters vigorously opposed passage of the revamped hydrocarbons law, arguing that the current caretaker government lacks the authority to pass it. 

“There is a pervasive sense within Hirak that increasing oil and gas reserves and production means ceding control of the sector to foreign firms and the movement is staunchly opposed to that,” said Geoff Porter of North Africa Risk Consulting, or NARCO. 

Porter said that, if the hydrocarbons law is passed and investors are inclined to open up new drilling sites, it could still be three years or more from before Algeria sees any additional oil production.

If Algeria similarly fails to resolve its political stalemate, it could be a long three years.

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