Amid leadership changes in the energy sector, Algeria announced that it will attempt to increase the output of oil and gas by conducting exploration projects and investing $50 billion in the operations of its state oil company, Sonatrach. Algeria’s economy remains dependent on oil exports, and its slow decline in production has cut both government revenue and foreign investment. Now the country plans to diversify its economy to provide a buffer for the volatility of the oil market while investing in Sonatrach
On March 22, the Algerian energy minister appointed a new chief executive of Sonatrach, marking the sixth appointment in seven years. A day later, the company announced its $50 billion investment plan to increase oil and gas production. Of the $50 billion, $9 billion will be channeled into exploring the desert areas for new reserves, with the rest going towards expanding its current operations and adding 100 wells a year. Furthermore, the Italian oil and gas company Eni committed to investing further in Algerian offshore and solar programs as part of its partnership with Sonatrach.
On the other hand, Algeria is abiding by OPEC decisions to temporarily cut oil production. The energy minister, Noureddine Boutarfa, declared his support of the “oil freeze,” expressing hopes that this would bolster both oil prices and the oil market. Algeria, as part of the freeze, reduced output by 50,000 barrels a day. Boutarfa also supports extending the production cuts, along with 6 other OPEC nations, for at least six more months. OPEC anticipates that the cuts will drain oil stockpiles and drive prices back up.
Algeria’s reliance on oil to support the economy has proven to be troublesome in the past. When the oil prices were higher, the country used its revenue to subsidize a large social welfare system. This program proved to be unsustainable when prices dropped and revenue was slashed, forcing the government to cut back on subsidies and heavily consider economic diversification. However, the prices of fruits and vegetables increased dramatically, some by 1000%, in response to the government’s plans.
In the fall of 2016, Algeria passed laws that encourage business investment and private sector development, marking a shift to a more austere social welfare program that targets the poor but allows for more economic growth. However, the year before, Algeria created a task force to promote economic diversification, but it has accomplished little.
The country continues to add to its diversification plan. On March 13, the European Union and Algeria signed a Partnership Priorities joint agreement outlining political and economic cooperation. These priorities include economic diversification and sustainability, strengthening the economic ties established in the 2005 Association Agreement. As part of the deal, the European Union will invest nearly $43 million in natural gas, renewable energy, and energy efficiency.
Algerian government officials have stressed the importance of economic diversification for years to mitigate the negative effects of oil and gas price fluctuations. Although some reforms have been put in place to stabilize the economy, such as cutting subsidies and decreasing spending by ceasing infrastructure projects, the structure of the economy hasn’t changed. Sonatrach’s increase in spending to bolster oil outputs undermines the hopes of decreasing reliance on such a volatile resource.