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Algeria's Investments in Doubt as Recession Fears Drive Down Oil Price

As oil and gas prices rose, Algeria again invested heavily in its hydrocarbon industry, but before the upgrades have been completed, oil prices have fallen again.

August 8, 2022

Rabat - Algeria decided to invest heavily in its diminished oil infrastructure as oil and gas prices rose in 2022, yet before the work has been completed, prices are starting to fall over fears of a coming recession.

Algeria’s oil and gas industry was ill-prepared for the sudden jump in prices due to supply constraints and the Ukraine conflict. The country’s state-owned hydrocarbon producer Sonatrach announced $40 billion in investments in January as prices were rising after nearly eight years of relatively low oil and gas prices.

The vast investments were intended for new oil and gas exploration, production and refining “between 2022 and 2026,” according to Sonatrach’s CEO, Toufik Hakkar.

Poor timing

Even in January, the international market appeared not to be Algeria’s primary concern, as Hakkar stated that the investments focused on “exploration and production to preserve our production capacity, as well as projects in refining to meet national demand for fuel.”

Since then, Europe became embroiled in a vast energy crisis, with demand for gas skyrocketing following the renewed hostilities in the Russia-Ukraine war that started in 2014.

While Europe needed Algeria’s primary exports more than ever, the country’s hydrocarbon infrastructure still suffered from years of underinvestment, leaving it ill-prepared to take advantage of the sudden boom in gas prices.

Algeria still profited significantly from the sudden rise in gas and oil prices, but simultaneously brought its status as a reliable gas supplier into question as it failed to renew a gas transit pipeline contract due to its rivalry with its neighbor Morocco. European countries lamented the decision and its poor timing as Europe searched for new sources of gas.

Algeria effectively reduced its export capacity with the politically-driven decision and instead chose to invest in expanding capacity in a pipeline to Italy. But these new investments came only in April, with capacity expected to increase in 2023-2024.

While the Algerian government rushed to invest amid record prices, the timing of its reactionary approach appears doomed, as oil prices have now fellen back to pre-Ukraine war levels.

Investors fear that a coming global recession will impact the demand for oil. This factor likely contributed to the Organization of the Petroleum Exporting Countries’ (OPEC) recent decision to boost its production quotas only marginally, despite pleas from the US to increase production to lower energy prices around the world.

While investors and OPEC foresaw the coming economic downturn and its likely effect on oil demand, Algeria appears to have committed to billions in new hydrocarbon investments that will likely become operational as oil and gas prices are at much lower levels than they are today.

Although demand for gas in Europe is expected to remain high as long as the Ukraine conflict continues, gas prices are likely to similarly feel the pain of a coming recession.

Other countries, who were better prepared to make the most of early 2022’s gas price boom, have since increased their exports, leading natural gas futures to slide on August 5.

With Algeria embroiled in intertwined social, economic and political crises, the Algerian leadership has chosen to spend billions on investments that could prove costly, especially as the country direly needs investment in its healthcare, education, and social support sectors.