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Exclusive Interview: Mr. Said Sahnoun – Acting Chief Executive Officer, Sonatrach

26.02.2015 / Energyboardroom

The acting-chief executive of Algeria’s iconic National Oil Company unveils ambitious plans for adapting the firm to a new era of oil and gas volatility. Fleshing out the strategic lines of a 90 billion USD five-year investment plan, he speaks out about rendering Sonatrach an innovative and versatile entity well equipped to leverage Algeria’s bountiful unconventional and complex reserves.

Sonatrach has unveiled a 100 billion USD investment plan for 2014-2018. What constitutes the main strategic lines of this five-year plan? Has there been adjustment to your spending strategy in response to the dramatically falling price of oil?

The figure for the 2015 to 2019 period has actually now been adjusted to USD 90 billion. The bulk of this spending will actually take place over the first three years of the investment plan: USD 15.5 billion allocated for 2015, USD 22 billion for 2016 and USD 23 billion for 2017. A significant portion of these funds will also be channeled towards upstream development.

With expenditure on exploration kept above USD 3 billion per year, our expectation is to drill an average of 125 exploration wells per year. This year, I am proud to say that we managed to cross that frontier for the first time in Sonatrach’s history and we now enjoy the highest concentration of rigs ever: some 93 rigs in total shared between our exploration and development activities.

Important field developments that we are focusing on include the Touat project with GDF Suez acting as main partner, the Reggane Nord venture with Repsol as lead entity and the Timimoun gas initiative in conjunction with Total. Meanwhile we are pressing ahead with construction of the GR5 pipeline to export the production from those fields. We are also completing two fields in more northerly areas, all of which will feed the same pipeline.

For oil, we have two projects in Bir M’Sena that will be commissioned during the first quarter of 2015. One constitutes a collaboration with two national oil companies from the Far East: Vietnam’s PVEP and Thailand’s PTTEP. The other involves partnering with Petronas and Cepsa for a comparatively smaller volume of assets. Together these two projects should generate around 40,000 bpd of production.

We further plan to launch a number of new projects in 2016 such as the Tinhert gas project and are taking advantage of existing infrastructure to rapidly develop a number of satellite fields across the Berkine basin. Our field development strategy accords high importance to the aspect of ‘time-to-market.’ This is an element we value highly and aspire to ultimately shrink our time-frames through sustained investment in specific activities that foster high value and increased yields. Our approach is absolutely not about cosmetic investment merely for the sake of change. On the contrary, it’s about fostering real value addition.

The rationale behind the leap in investment between 2016 and 2017 is because we have committed to rolling out three new refineries. Two, in Tiaret and Biskra, will each contribute capacity of five million tons per year. A third, in Hassi Messaoud, close to the traditional fields and existing refinery, will possess a four million ton capacity and will leverage existing utilities. By exploiting this legacy infrastructure, we can optimize our costs while adding an additional 14 million tons of refining capacity in the mid-term to the current level of 26 million tons today.

What will be the source of this USD 90 billion that are to be invested? Will you need to resort to international capital markets?

USD 11 billion of the overall USD 90 billion investment plan will be sourced from our international partners. The rest will come from both our own coffers and alternative domestic financing channels. Our new petrochemical plants, for example, will require substantial expenditure so we have adopted an approach whereby our own equity will fund part of the projects with the remainder met via bank loans. In the past, we have successfully built a number of urea and ammonia plants using a set-up in which we contributed 30 percent directly and the remaining 70 percent was contracted through local banks. We want to deploy essentially the same scheme for our forthcoming spending on petro-chemistry.

Despite the recent volatility in oil prices, we resolved not to dramatically change our spending plan because we saw our operational strength and abilities becoming somewhat eroded mainly through loss of talented personnel who had retired or left to work for competitors. We are keen to replace those resources and are simultaneously in the process of ramping up the scale of our operations. It’s important to consider that we used to drill 35 to 40 exploration wells in 2010 and now we manage 100 or so per year.

Furthermore we have launched a process of improving operational efficiency and the end outcome has been a momentum that is radically optimizing our performance. We certainly don’t want to break that momentum, which has already cost us a considerable amount of money. It would represent a huge loss to interrupt this process and the danger, if you do so, is that you may not be able to rebuild it. We have seen multiple examples of oil companies deliberately deciding to reduce their production output, then finding it exceedingly difficult to raise it again when called upon. We are investing in activities that yield a huge value and we don’t want to risk altering a process that’s reaping results.

There are a variety of ways to pursue operational efficiency: what role do technology and innovation play in Sonatrach’s goals in this area?

No one will hand over technology for free and it is essential to ensure that we pay an appropriate price for it. We have a number of operators in Algeria who have been here for the past 40 years and we have been hard at work developing special relationships with them. We want these relationships to truly reflect win-win principles. R&D for a service company is the same as exploration for an operator. In other words, it guarantees the fundamental sustainability of the business. What Sonatrach wants to do is to lock an applied R&D arm dedicated to value creation onto the core of our business.

We want to be able to deploy our own R&D personnel to the fields to analyze how operations can be optimized, to structure their thoughts and to offer cutting-edge solutions. This is not about jumping on the ‘research bandwagon’ and indulging in an area that is currently in vogue just for the sake of it; it’s about spending money on specific research areas that we consider highly likely to add real tangible value.

We have already started by deploying a laboratory group to conduct core analysis and sampling, which we believe represents the right place to start the R&D process. Meanwhile, we have acquired USD 35 million of equipment over the last two years to ensure we have latest generation technology, and have been engaging in dialogue with the service companies that have mastered competencies in niche areas such as shale, tight gas and tertiary recovery. We have simultaneously been teaming up with research institutes. This obviously takes more time than if we simply outsourced the work but, at Sonatrach, we are adamant about doing things properly and are fully prepared to pay the price to learn.

Many NOCs choose to establish R&D centers in partnership with OFS companies. Is this an approach you might be tempted to follow?

We have developed a fundamentally different approach. We want partners that will share the learning with Sonatrach while simultaneously gaining an appropriate share of benefits, not someone that will simply perform the work on behalf of Sonatrach. For example, we are due to sign a contract with CGG for seismic acquisition; we have gone out of our way to select a real leader in the field that we can ultimately learn from. This may not be the cheapest option, but it will be the one that delivers the greatest long-term benefit.

Similarly, we have signed an MoU with Petrofac because we want to upgrade our engineering capabilities. We will establish an office with 10 percent Petrofac employees and the remaining 90 percent will comprise Algerian nationals working in true collaboration in the pure sense, so there is real technology transfer.

In the past, we have signed EPC contracts where much of the engineering work has been contracted outside of Algeria to places like India and the Philippines. This does not make logical sense because we already possess a human capital base that is fit to deliver, albeit with a little additional targeted training first required.

Naturally we want to optimize our own human capital and have resolved to avoid a scenario in which we are excluded from the technological process. We offer attractive opportunities to those that have real assets to offer and want to build from that starting basis. Our plan is to internalize the learnings that are captured from joint ventures and then to spread that know-how throughout our organization so that it eventually becomes part of our institutional memory.

Sonatrach’s production has been declining slightly since 2006. How do you evaluate the company’s exploration performance in recent years?

The supposed decline in production has been much exaggerated. A proper decline would be when you have lost 50 percent of your production capacity. In 2014, we produced 5 percent more than in 2013, so the gap is not so wide in real terms. Preconceived ideas of our hydrocarbons industry being in decline are simply not borne out by the facts. We have actually increased our reserve base by a full 10 percent from 2010 to 2014. Meanwhile, we have produced almost an additional 8 million tons of oil equivalent, which leads me to calculate that our ratio of discoveries to production is in excess of one.

There are many other positive indicators as well. In 1993 Algeria was credited with around 9.2 billion barrels of oil, but in 2013 that figure was revised to 12.2. These statistics don’t come from us, but from BP’s Annual Statistical Review, which has come to be regarded as something of an authority across the industry. Then, in 2014, we accumulated 540 million tons of oil equivalent through a mix of new exploration and asset reevaluation. Meanwhile we drilled 100 wells and made 32 commercial discoveries giving us a success ratio of approximately one out of three. We are not blind to the fact that we face a variety of future challenges, but all in all I would say we have enjoyed some notable successes and can see that definite progress is being made. Credit needs to be given where it is due.

What then, are those future challenges that you allude to?

Well, we certainly need to learn how to operate more efficiently in more complex environments such as tight formations. Many of the new discoveries involve tight oil and gas, so we’re working in tandem with research groups and subsurface companies to harness the technology and expertise to be able to exploit those resources. Energy Minister Yousfi announced new discoveries last year and we have the means to step up to that workload, and are now setting about developing the know-how to develop them in an optimal way.

Another challenge constitutes adapting to change. How we have transformed the manner in which we go about exploration is a case in point. What used to be pure exploration now actually involves a production component because we have expanded our scope to act as pioneers for subsequent partnership contracts. In the past, we would have drilled conventional vertical wells and then moved on. Nowadays we tend to apply the recipe for non-conventionals – which means highly slanted or horizontal drilling – so as to essentially conduct a more comprehensive evaluation of the formation that produces more reliable results.

Our thinking is that if it takes an extra two weeks to assemble more reliable data sets and construct a more complete picture of the formation, then we should do so because this enhances our internal E&P decision-making and creates a much more robust and reliable foundation that investors can commit to in the eventuality that the prospects are put up as blocks for bidding on by ALNAFT during future licensing rounds.

How important do you consider Algeria’s unconventional resources? To what extent are they commercially viable especially, given the prevailing low oil price?

We kick-started the process of getting into shale back in 2009 when prices were good. The IEA in their last report calculated that Algeria possesses 700 tcf of technically recoverable reserves, with an expected recovery factor of 15 percent. Average recovery worldwide tends to be between 5 and 30 percent, yet we know that in some places such as Texas, the recovery rate reaches 40 percent, which is more or less comparable to conventional reserves. This means that the 700 tcf estimation could well turn out to be on the conservative side.

Sonatrach’s stance is that, if Algeria is blessed with such resources, it certainly shouldn’t ignore them. Hence we started off, step by step, with some studies conducted by Schlumberger that achieved very encouraging results. The oil and gas community took note and we subsequently signed a number of cooperation agreements. The logic was to align with companies that have dealt successfully with the shale segment elsewhere, to share our data with them, and for them to tell us whether our resources were worth pursuing especially over the long term when the cost of technology can be expected to tail off. We therefore signed contracts with Anadarko, ENI, Shell, BP and Talisman and generated some encouraging findings that have whetted our appetite.

In 2010, we moved on from these studies to a new phase of data acquisition and the compilation of a quality database. We have two main reservoirs and luckily their depth will not cause too much concern to investors because they lie within the 2,000m to 2,500m band, so firmly within the window that makes non-conventionals commercially attractive. We have already drilled two vertical wells 80km apart and discovered that the upper formation extends across the two.

The next step involves a pilot study that goes beyond static geological data and tests the technical and operational feasibility of the local shale business. This should give some indication of the economic parameters and afford us a sense of what it takes to make development cost effective and commercially viable. We’ve drilled two pilot wells, one of which has been producing clean gas for the past two months and the second of which is almost complete. The idea is to have the wells flow for a sufficient time period to give us an indicator of plateau duration and the overall rate. Then we will take some time to analyze the results and perhaps apply the same technology to other basins where we can potentially realize liquid production.

By 2018, we should have a much clearer picture of what it will take to make Algerian shale reserves a truly successful business and the sorts of technical services we will need to bring in to achieve the right level of scale and volume. One significant external factor will also be the price environment and whether we can achieve a fit that makes economic sense. We are, after all, talking about an entire ecosystem that would need to be put in place.

Can you please elaborate further on the ecosystem that would be required?

At present we don’t yet have enough fracking units, cementing units and rigs to scale up the sort of technology required. We would need to create an entirely new structural network that co-opts the local industry in the process so that rigs are constructed locally. We would also need to find ways of sourcing the sand or proppant locally, because for our shale activities to date we have had to resort to importing treated sand and ceramic hydraulic fracturing proppant, which is unsustainable economically. Though this may take a couple of years, it would be worth it because it would bolster the local economy and foster job creation and sustainable livelihoods. The message is that we will not be overly hasty. We want to press ahead, but in a sensible and disciplined manner.

By 2018, we hope to have established a training center in the south of the country that would enable us to expose the next cohorts of oil and gas graduates to new practices relevant to the shale business. So far, our graduates are good at creating logs and doing cement operations, but what makes a success of shale is not just the technology but also the mastery of supply chain management. It is, after all, a supply-chain-driven business and it would be foolhardy to ignore that fact.

Another important element that we have to factor in is the care shown for the environment. Sonatrach is committed to embracing the highest HSE standards and is willing to pay what it takes to make operations environmentally friendly by recycling water used, investing in solid treatments for flow back, water and so on. Already we strictly abide by what exists in terms of regulations and we want to reach beyond that and become even more attentive wherever there is scope to do so. We must remember that in Texas, federal laws for safe drinking water and the clean water act were direct consequences of the development of the industry and the need to render local communities comfortable with the activities taking place. It’s not as if they started out with a perfect regulatory framework. In a similar vein, we are looking towards suggesting improvements to Algeria’s own regulatory landscape wherever we see the opportunity arise.

We also have to better communicate that we are not doing anything harmful to people’s health or the environment. Algeria actually possesses ample water reserves in the south, contrary to common perceptions. If you consider that each operation could potentially take up to 3 or 4 million cubic meters of water, and regional water reserves currently stand at around 40,000 billion cubic meters, then you will discover that shale development doesn’t pose a genuine problem on that front.

In the 1960s, when Algeria set about pioneering LNG technology, many commentators were skeptical and nervous. They said that Sonatrach was a guinea pig for LNG and yet today this is the experience we can be most proud of. The fact is that today it represents a business generating a cash flow of hundreds of billions of dollars. Why then not give us the benefit of the doubt in view of what we have achieved in the past?

How relevant is the offshore domain to Sonatrach when the company’s track record has been almost exclusively in onshore plays? Wouldn’t you face the same lack of ecosystem that you face today in the area of unconventionals?

Initial seismic studies in 2010 suggested that Algeria is endowed with sufficient offshore reserves for us not to disregard that domain. We see that aspect as potentially and interesting addition to our portfolio so, in 2014, we commissioned CGG to conduct 3D seismic data acquisition for a 5,000km2 area. The choice of CGG as contractor was logical given their excellent track record in Brazil’s offshore sphere. After all, for Algerian offshore reserves we’re talking of depths of around 2,500m, so this is a serious business requiring the best expertise.

We have been talking to a number of potential operators already active locally about participation in offshore development. As always, our approach is not to commission outside entities to conduct the work by proxy, but for us to learn the techniques through equitable partnerships based on sharing and win-win principles. Again safety and environmental care will be accorded upmost importance. If it takes a full nine casing strings to ensure environmental protection then we will have no hesitation in investing the necessary funds to achieve that outcome. We don’t want to rush in and take risks we cannot live with: further decision-making should be taken by the end of the fourth quarter 2015.

Over the past five years, the gas market, which has always been a source of cash flow for Algeria, has undergone a sweeping transformation. Competition is more intense and contracts are now being conducted in a much more dynamic way- some in detriment of gas exporters. Do you feel your marketing strategy has evolved as fast as the market has restructured, or does Sonatrach still need to make some readjustments?

Today it is more important than ever to be capable of managing change because the oil and gas landscape is evolving rapidly. When we consider gas markets and how risk was apportioned in early days, with the producer shouldering the price risk and the client assuming the volume risk (what was referred to as ‘take or pay’) then it is obvious that today we live in a very different contextual environment.

Nowadays, if you want a gas project approved, you have to show you have market for such capital-intensive activity. You have to provide the certainty that you can sell that gas. We understand this. I agree that competition is now more intense though not necessarily on a gas-to-gas basis. My personal analysis is that there is now much more competition from cheap coal which is finding its way onto European markets as a direct result of the shale revolution in the US. Coal has thus taken a share of a market traditionally reserved for gas and this explains why Sonatrach’s gas exports to Europe have diminished over the past years. We are not alone in this.

The solution is to instill an ability to adapt rapidly to these sorts of market realignments. So far we have elected to target the spot markets in Asia and that has afforded us new opportunities: currently, the economic fundamentals support trading with Asia. In the future, that too might change and our best preparedness is to render ourselves sufficiently versatile to be reactive to the slightest changes.

The landscape for NOCs is changing profoundly: today, they control much of the world’s hydrocarbon resources and are increasingly extending out into overseas ventures. What competencies does Sonatrach need to acquire to be a protagonist of these trends?

We must ensure we are not left on the margins. That means we should harness JVs as a lever to improve our performance and invest deeply in our human capital. We consider it vital to not only invest in people for technological and operational matters, but equally in managerial roles that will be capable of steering this company forward.

As an NOC, we already have a good reputation internationally and the task will be to use those solid foundations as a launch pad to attain new heights. Sonatrach recently celebrated its 50-year anniversary and the moment is coming for a generational change, with many of the stalwarts who have built up an exceptional company now reaching retirement age. I personally remember being involved in the grand-scale development of Hassi R’Mel in the 1980s when we had 17 rigs at work all at once. Many of my colleagues back then are still with Sonatrach, giving decades of excellent and highly professional service. One of our priorities is to replace them with young personnel of an equivalent caliber who can take on the mantle and buy into the spirit of generosity, pride and dedication inherent to Sonatrach’s identity.

We will also be smart in developing the competencies that we require by putting new recruits through tailor-made, professional development schemes. The traditional way is to put graduates through a standardized and uniform induction process and it might take three years before they can match expectations in terms of skill sets for the particular roles that need performing. Personalized training programs, where new personnel receive in situ training and exposure to the tutelage of our best experts, mean that they can achieve mastery for specific functions in a much shorter time period. We want our staff to be operational as soon as possible, and they come to us for precisely the same reason and because it can be seen that we invest in trust and in our people. That is very much in the DNA of Sonatrach.

Finally, we will be placing a lot of emphasis on HSE and our alignment with international norms and standards and that will also help to position us as a partner of choice abroad.

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