Sticky Situation

North Africa has a wealth of resources that remain under utilised after years of political turmoil and insecurity

Political turmoil, ANALYSIS, Industry Trends

North Africa has a wealth of resources that remain under utilised after years of political turmoil and insecurity. While the dust from the Arab Spring may be settling down, security remains a major challenge for downstream investors.

North Africa has the potential to become a global hub for oil and gas production and refining. The region is made up of Algeria, Egypt, Libya, Tunisia and Morocco. Algeria and Egypt are the two largest producers and consumers of gas, holding four of the continent’s largest gas reserves along with Libya and Tunisia.

The region is yet to reach its full potential as a major petroleum center of the world due to perpetual security issues. Its inability to deal with the challenges of an ailing upstream sector has been a major drawback to its downstream sector development.

The resource-rich region has gained notoriety over the past five years having been plagued by security crises, political unrest and infrastructural sabotage. Its energy infrastructure remains a prime target for terrorist groups and political saboteurs.

The Maghreb region has seen a significant number of attacks on it energy facilities in recent time; 146 attacks in Libya, 51 in Algeria and 17 in Tunisia. Beyond the Maghreb, Egypt has also had its fair share of unrest.

The 2013 In Amenas Hostage crisis in Algeria which saw a group of terrorists take more than 800 people hostage at the Tigantourine gas facility was a rude awakening and a harsh reminder of the dangers that are prevalent in the region. Despite the intervention of Algerian Special Forces, who succeeded in rescuing 685 local workers and 107 foreigners, the four-day standoff left at least 39 foreign workers dead.

The security situation has proved costly to North African governments, who are highly dependent on revenues from energy exports as the cost of protecting production facilities and their personnel has sky rocketed.

The Libyan National Oil Corporation chairman, Mustafa Sanallah recently reaffirmed the country’s commitment to restore uninterrupted petroleum production and safeguard its human resources, saying that they are “areas of utmost priority” for the corporation.

Protests and terrorism in Libya have caused major drops in both oil production and refining output. The country lost $30 billion in revenues as a result of ten months of protests at oilfields and export terminals that led to a series of closures and unplanned shutdowns.

Musbah Al-Akkari, managing director of Financial Markets at the Libyan Central Bank said that Libya’s oil earnings currently stand at $1 billion a month, compared to $4 billion to $5 billion per month in periods leading up to the protests.

The ripple effects of North Africa’s woes can be felt even outside the troubled zone. A customer such as Jordan, a major importer of oil from Egypt is losing revenue. The Jordanian Prime Minister Abdoullar Ensour stated that attacks on Egyptian facilities have cost Jordan nearly $5 billion.

One might assume that North Africa’s security challenges would spill over to neighboring Europe and threaten security there, given its proximity to the region. While the physical security threats have not been experienced in Europe, the globalization of the energy supply chain has highlighted how vulnerable European refiners are to international events.

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The Maghreb is a key source of oil and gas for European Union countries such as Italy, Spain and France. Algeria is the EU’s third largest supplier of natural gas, after Russia and Norway, accounting for 13% of the region’s imports. Italy, with 62% of natural gas pipeline imports coming from Algeria, is particularly reliant on the country and is Algeria’s single largest importer of gas.

European imports of crude oil and gas from Egypt, Libya and Algeria have also increased in recent time following the EU’s inclination towards decreased dependence on Russian reserves.

North Africa’s looming security issues have also deterred potential investment in the region. The frequency of attacks and even the threat of future attacks on oil facilities have put a damper on the enthusiasm from international companies and foreign governments to invest in the region, with financial insecurity and personnel safety remain key concerns.

Security issues in remote areas of the Sahel for example, have delayed the development of major projects such as the Trans-Saharan Gas Pipeline. Problems of this nature can erode investor confidence or cause scale-backs in on-going projects as seen in the case of BP during the In Amenas gas plant attack. Although the company did not scale back its operations in Algeria, it was forced to re-evaluate previously planned expansion and exploration prospects in region.

North Africa relies heavily on foreign investment for development of new refining facilities and oil production upgrades. With rising domestic demand for fuel, and consumption expected to double over the next decade, the region will need to rapidly develop its oil and gas infrastructure if it intends to meet its energy needs.

Production capacity will have to be ramped up and substantial technical and financial investment will be required.
Failure to attract new foreign investment could affect domestic start-ups and result in unfavorable outcomes in the manufacturing sector and demand for polyolefins.

Yet another area of concern for foreign investors is the safeguarding of their financial assets given the plight of the struggling central banks in the region, particularly in Egypt. Algeria and Libya play a vital role as producers on the continent; therefore their apex banks must remain in good standing for banking instruments such as Letters of Credit to be recognised by foreign banks.

Financial instruments are important for the growth of the petrochemical sector, especially for the purchase of essential products like PE (Polyethylene) and PP (Polypropylene), two of the most widely used plastics in the world.

Despite the troubles in North Africa, Egypt is well position to be the region’s leading-light. With its oil & gas and petrochemicals industry growing steadily; domestic abundance of ethane; and large demand for energy; Egypt has immense potential to be an investors’ haven notwithstanding the high investment risk.

Egyptian-Indian Polyester Company (EIPET), an Indo-Egyptian joint venture commissioned a Polyethylene Terephthalate (PET) bottle resin plant in Egypt early 2014. The two-line PET plant which is the first of its kind in North Africa is located in deep sea port on the Red Sea at Ain Sokhna.

With a combined capacity of 420,000tpa, the facility is one of the largest of such units in the region. The plant is expected to grow Egypt’s PET exports and satisfy domestic demand which is currently being met by imports.

Experts believe that while the expansion of Egypt’s natural gas sector will possibly be domestically focused, Algeria’s growth will be export focused, mainly targeting new reserves and infrastructure in the southwest and northern areas of the country.

With Egypt’s population expected to continue growing over the next half century, and Europe beginning to recover from the economic recession, both markets will soon be ripe for development. Until then, investors will have to think long and hard about their risk appetite, and how hungry they are about going into North Africa.

Factbox:
- 13% Algeria meets this much of European demand for natural gas.
- 62% Italy buys this much of its natural gas from Algeria.

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