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Interview

Ahmed Lateb – Executive Director, Advisory, EY Algeria

29.07.2015 / Energyboardroom

The country manager of EY Algeria discusses the future of the oil and gas industry in Algeria, the role of private players and the restructuring needed within Sonatrach.

EY and Algeria have been working together for 30 years. However, the Algerian office itself is relatively new. How does EY stand in Algeria today?

Today, EY is the leader in the market leader in consulting services in Algeria; in Audit we are co-leaders with one of our competitor, who has been present in Algeria for a long time. We are one of the few actors to have 100 percent Algerian staff in Advisory activities. Of course, we are also connected to EY’s network of centers of excellence, especially in the oil and gas sector, in which our Firm is very involved.

We have taken this first place in Advisory in Algeria for one simple reason: our clients purchase advice that is specific to the Algerian market. Even if they are in need of technical advice, they rely primarily on local partners that understand the native mentality and culture. Foreign consultants are only solicited as additional expertise on very specific issues. EY has been Sonatrach‘s privileged consultant for many years.

Algeria, for me, is truly the place where things are happening, because of the incredible challenges the country faces. Today we speak of oil and gas, but there is much to be said about challenges concerning society, the environment, territorial organization, demographic development, or the rise of the private sector, happening in spite of all the administrative and international obstacles.

In the past, you have been very critical about the future of the Algerian private sector.

The Algerian economy is in the process of initiating a transition comparable to those undertaken by India and China: after they opened their markets, bureaucracy and the omnipresence of public companies really made the private sector suffer. Algeria is not enduring this type of crisis, but the recent drop in petrol prices has made the situation here quite comparable to these examples.

Two or three years ago, the authorities made a political change by promoting and supporting private sector. I strongly believe in private initiatives, preferably local ones, but international ones as well, to initiate this transition. Our public sector is still quite heavy: a large amount of our public companies are inefficient and unfortunately I am not always convinced by their capacity to initiate this transition, at least not without the support of the private sector: the state alone cannot address these changes. It does not have the responsiveness and necessary governance to do so. However, it doesn’t have a choice: it will have to open up to the private sector, whether it is local or foreign through different partnerships.

More specifically, the energy transition cannot be done with Sonatrach and Sonelgaz as they are structured today. There are models from which we could inspire ourselves. They will have to find a way to rely on private partners.

Will there be room for foreign partners?

Accessibility to operations is a little more difficult for international investors in Algeria. There will probably be more possibilities for local private companies, and even for partnerships on a 51/49 percent basis, including for exploration and drilling. If we take the drilling example, ENSP and Enafor, both subsidiary companies of Sonatrach operating in this area, will not be able to keep up if the country increases the number of wells it wants to drill to 200 conventional wells and 200 other shale gas wells. In addition, drilling technologies have evolved a lot, meaning that even if these companies have the financial means to keep up with the plan, their technology will not be up to date. However, opening up to the private sector, which would necessarily open the market to foreign players, is a really promising hybrid model.

Wouldn’t public opinion see the restructuring of Sonatrach as the loss of a national treasure, as was the case in Mexico for example?

Public opinion really matters, especially when it comes to shale gas. However, as to the opening up of public companies, it seems that the Algerians are aware that today public sector must open and link up in order to respond to Algeria’s increasing demand for energy. It will not achieve this without help from partners.

In this context resctrucitng Sonatrach is a must. The company has gone through three different periods: the first one before the 1986 oil crisis in which the company had real capabilities, especially in the gas technologies. After this crisis a freeze in investments occurred, which was followed by the massive outflow of Sonatrach‘s collaborators towards the Middle East in particular. It was this loss of capabilities that impacted the strength of the company. The sector accumulated delays and made very little effort in terms of exploration – security conditions were also quite complicated at the time. Then, with the millennium came unexpected advantages: the price of oil began to rise again, but Sonatrach never caught up with the backlog they had. A more open, dynamic and better-managed company would have been necessary for this. Nevertheless it has managed to maintain its efforts in exploration all these years, but it lost what would have been its own substance, its internal expertise, which it was not able to reconstruct. Rise in production and conquest of new market shares remain its major issues.

What, according to you, is preventing the reconstruction of this expertise for subsidiaries?

Sonatrach’s main problem today is its size: it is difficult to initiate both its transformation and at the same time to respond to the need for diversification. Yet it has tried to achieve this whilst also setting up subsidiaries, which it has tried to do quickly, whether by joint venture, a share of earnings, or through public private partnerships. This strategy never really established independence, which means that new subsidiaries have remained inert and dependent, preventing them from expanding.

The difficulty for the organization of this transition was the way in which public companies are organized: they are subject to the laws of public markets, and managers work under permanent threat of criminal charges for bad performance. This naturally impedes any flexibility in terms of decision-making or investment.

We therefore have both a management problem and a governance problem as well: changes in political ideologies and ministers sometimes affect public companies, when they should be sheltered from these types of adjustments.

The state made a mistake in terms of strategy concerning state owned companies when it massively invested without guaranteeing their development, thus their contributions within the country’s GDP remains insignificant. Keeping emblematic companies’ property in order to apply a global strategy nationwide was a feasible choice, but when it comes to implementation, to taking projects out of partnerships, speed is necessary but this is definitely not the primary strength of these companies. As it happens, developing a new energy mix and operating such a transition takes time. The renewable energies market in particular won’t appear immediately, especially without the help of local or foreign private partners.

In addition to all these hardships, Algeria is a huge country and this creates logistical issues, which remain a difficult challenge, and one cannot ignore the safety and security issues as well. Sonelgaz must make a real effort to renew its distribution network, because each dinar invested in production requires four in distribution, because of the huge territory it operates in.

What is EY’s activity today within the field of Algerian oil and gas?

We advise foreign companies that come to Algeria in terms of structuring, organization, optimization of their administration (particularly in relation to public administration authorities). Algerian bureaucracy is heavy and we must deal with it. We also do market research, establish partnerships and advise Algerian and international private companies.

Furthermore, we support Algerian companies in their transformation. We conduct multi-year projects, allowing these companies to transform their organization and their processes, to set up an information system, to develop human resources policies, and so on.

What is, according to you, the most remarkable partnership made these last years in Algeria?

There is an actor that I must mention which is RedMed. They have been present for years and are particularly good at what they do. They are provide themselves with the means to go further, particularly by investing in training to help it catch up with what I mentioned earlier, but also to address the services wells need, a sector that demands partnerships with actors that have modern technologies.

It’s a good thing that Algerian private groups are interested in the energy sector. If the state helps the private sector, I am confident that the transition will happen. Many jobs in oil and gas can be set up locally as well as helping to prevent the import of foreign petroleum services, which have been increasing and represent a significant cost in the extraction of oil.

At the moment, almost all of our exports come from the energy sector: they represent over 95 percent of our foreign exchange earnings. Algeria’s objective is not to reduce these energy exports that it will have to maintain at the current level, but to come up with other exports such as petrochemicals and heavy energy consuming industries like cement, aluminum, gas derived industries (helium, benzene, fertilizer, glass, ammonia) in order to create higher revenues. Algeria will continue to depend on energy to grow, and diversification will not be able to happen faster, given Algeria’s national context and global forces. The main issue for Algeria is to develop its market share in exports, especially by securing contracts and making long-term agreements with Europe. In this regard, our exports will remain primarily focused on energy regardless of our efforts for the next 10 to 15 years.

On the other hand, Algeria’s GDP structure is much more diversified than what we think, agriculture having a substantial weight in the internal economy. Finally there is the issue of responding to internal demand, which is striving for rationalization. I believe that the future of the country is at stake.

Click here to read more articles and interviews from Algeria, and to download the latest free oil and gas report on the country.

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