Nourredine Boutarfa – CEO, Sonelgaz – Algeria
A public energy company, Sonelgaz is dedicated to the development, manufacturing and distribution of electricity and gas through its subsidiaries.The CEO of the company explains Algeria’s future energy mix and company’s future investments.
You have been at the head of Sonelgaz for nearly eleven years, during which fundamental changes have taken place, in the very organization of the company and in its mission. Sonelgaz is now a holding company, running some 40 subsidiaries. Can you shed some light on these big changes, and explain the various missions and businesses that are Sonelgaz’s today?
Sonelgaz, over the last eleven years, has actually undergone major transformations, which are considered among the most important in the electricity sector since 1946. This restructuring took place under the law of 2002 which clearly stipulated the transformation of Sonelgaz into a holding company.
By force of this law, we conducted these transformations in a very pragmatic way, more precisely from 2004 and on: our power generation and natural gas transportation businesses were then transformed into subsidiaries. Hiving off our distribution activities took a bit longer, this aspect being a little more complex than transformation. We completed it in 2006 through the creation of four distribution companies, endowed with broad autonomy. This was indeed a major restructuring phase, with transfer of assets, it was not the mere creation of wealth management companies. These companies are now responsible for their business, their development, their human resources and finally their management.
Sonelgaz continued, on top of creating its subsidiaries and launching a system operator later in 2006, to restructure a number of its businesses that remained with the company, including engineering: we recreated this activity, for we anticipated the major development plan that what decided upon in 2009. Similarly, we started again to activate in information systems, because it was interested to pool the involved subsidiaries’ needs, and create a company which would be able to manage this service, including IT management: we did complete this through our IT Company, called Elit.
Sonelgaz Group companies also engaged in major projects in order to meet the citizens’ needs in terms of electricity supply.
Understand that users do not always make the difference between Sonelgaz before, and Sonelgaz today. In practice, the customer still receives his invoice, without necessarily being aware that power is no longer delivered by Sonelgaz itself, as it is now a holding company, but by the group’s distribution companies. Sonelgaz is really rooted in the heart of Algeria, which makes it difficult, sometimes, to talk in place of our subsidiaries while they are the genuine traders who create the resource. The holding company only manages the portfolio, and of course decides on the strategic orientations of the group.
These strategic areas are essentially the same as yesterday: provide electricity and gas at the lowest cost and ensure development of the infrastructure. In addition, there are new missions and new strategies that we implement today, including those related to the development of national integration in the areas of research, engineering, manufacturing, maintenance and realization of industrial infrastructure.
We evolve in an industry that has undergone major changes. Production, transportation and distribution operations are handled by Sonelgaz subsidiaries. Regarding production, monopoly does no longer exist. Some of our businesses are open to competition, and the rest are regulated. That being said, in terms of production for example, despite the 2002 law, there has been no real market opening, in the sense of competition. The only operators who built power plants did it with long-term contracts, which are backed by a guarantee of purchase.
The reason for this is also that the opening requires pre-application conditions, in this case the opening on prices and tariffs in the distribution of energy. The question is yet to be addressed, tariffs being still regulated by the Electricity and Gas Comission, which refers to the state. Prices have not been revised upwards, for reason of social and political considerations.
All of this consequently means that the pattern imagined in the law has not been fully implemented. Moreover, in late 2009, the government decided to entrust Sonelgaz with taking the necessary decisions to meet future demand, via its subsidiaries and not by itself, being a holding company. As such, today, we do not have the right legally to produce nor to distribute power in the country. We can however export or import electricity, on behalf of our subsidiaries only. One of our main responsibilities today, as a holding company, is to promote national integration and therefore the Algerian industry.
In short, we have moved from a vertically integrated company to a group consisting of forty companies acting in all segments, power generation, power transportation, information systems, etc…
In 2010, a decision was taken to ask Sonelgaz to realize production plants by itself. Did it change the way the company works?
In the first quarter of 2010, our attention has indeed focused on this objective. However, Sonelgaz does not realize anything on its own, everything is done by its subsidiaries. Sonelgaz, as a holding company, has a main purpose which is to think and implement the development strategy and the financial policy for the group, and then to ensure conditions for conducting, through its subsidiaries, the production, transportation and distribution of energy.
We have medium and long term development plans to achieve, which we adjust annually. What changed with this decision in 2010 is that now, instead of planning to take shares in power plant projects, we realize them through our own subsidiaries. This allowed us to gain visibility. Indeed, we need to remain the master of our development plans, so as to control equipment volumes and make the best choice with regards to technology and business opportunities. Through this aggregated volume, we were able to complete the deal with General Electric, which would never had happened otherwise.
In my view, Algeria has not yet entered its mature phase, where the market can really develop by itself. I would say that we are still in a preliminary phase to the creation of an open market, in an environment that is both linked to energy but also to the industry. The objective of Sonelgaz is to engage in a long-term support of this movement towards market organization, which will last for a few years, or even a decade. We need this industry to establish itself, so the Algerian market of electricity can finally develop, and so the Algerian investors can engage in power generation by sourcing from the local market. This is the vision that we must have today, before the market can finally open: I do not think that the market opening is being abandoned as a target, I think that we are having a tactical repositioning, not a strategic one.
The idea to build IPPs dates back to 2002, but has eventually failed to materialize. Which fundamentals have been lacking? What should be put in place now for this to finally happen?
Algeria lacks maintenance. Spontaneously, the market choses the easiest solutions: importation of foreign machinery and services has dramatically increased, the plants are delivered with their turnkey. As a consequence, the added value in the local market is almost zero.
The system must be rebalanced so as to have something to trade in the future. The concern is that today, the flow is unilateral, Algeria having no investment abroad.
So we try to respond to this with inputs, in this case with the equipment involved in upstream operations. The big change which was brought by this 2010 decision is that Sonelgaz established itself as an industrial company, and not as an energy-only one any more.
This is a fundamental change, which results in a 60/40 percent distribution of revenue: 60 percent for energy, and the remaining 40 percent for industry / service. This rebalancing shows that we are building what we need: a genuine industrial and energy strategic vision.
The choice so subsidiarize raises the challenge of subsidiary competitiveness. Has this transition given birth to competitive subsidiaries? Can one assume that over time, these subsidiaries will cover not only the needs of the group, but also external demand?
This is indeed the ultimate goal. Today, among forty companies in the portfolio – apart from distribution companies for which the situation is different, since tariffs are regulated – the other companies have healthy accounts and are very competitive.
They are tools available to market needs, so there is no reason for them not to have a market outside the group, according to availability. For example, the abnormal load transport companies (Transmex) is a model of competitiveness, and intervenes in the external market. Our subsidiaries are involved, to date, up to 15 or 20 percent on the external market, and 80 percent for Sonelgaz.
The workload is so important that Algeria lacks tools, in other words companies with the appropriate know-how, because one should not forget that our companies operate where there is technological complexity. The country is in the process of creating new such companies, including in the private sector: every SME/SMIs involved, especially in distribution, are private companies today.
How is Sonelgaz Group’s turnover organized?
Sonelgaz group generates about DA 360 billion, including DA 210 billion in energy and DA 150 billion in service, industry and manufacturing. These numbers are obviously to be considered bearing in mind that distribution tariffs have been the same for the last ten years.
Regarding power generation, the figures are around 31 Tera Watt hours. The maximum power demand is around 11.000 MW. In southern Algeria, the maximum power demand is currently increasing, and estimated at 500 MW as of today.
To give some comparison elements, in 1962 Algeria would need 260MW in power demand! This represents a quite extraordinary evolution. In the early days of independence, the cumulative installed capacity in the country would be around 500 to 600 MW. Today, there are over 14.500 MW installed.
Even if the population quadrupled in the meantime, there is no direct correlation because power supply was multiplied by 20. Today, there are 8 million electricity customers and 4.3 million in gas. The Algerian public distribution rate for dual energy is among the highest in the world: 53 percent coverage in natural gas distribution via pipeline, and nearly 90 percent of electrification rate.
In 2014, investments amounted to DA 600 billion, in constant and significant increase if one remembers that the group had invested DA 400 billion in 2013.
Algerian press wonders about the huge investments that Sonelgaz will have to complete in the next fifteen years. On which areas is this money going to be invested? What will the energy mix be like in 2024?
If production increases, this extra energy needs to be distributed, which means developing downstream networks, in addition to gas-related upstream networks. This induces great workload on the gas transportation network, on the electricity transportation network, and on both electricity and gas distribution networks.
These are huge figures: the capacity will almost double between 2012 and 2017/2018. In less than five years, we will have to complete what was previously achieved in 50 years. This is a great challenge.
However, in recent years, we have only been catching up with a certain delay that had been accumulating during the black decade in particular, one period that was the cause for a major investment delay. Moreover, Algeria had lost its power generation spare capacity, so we had to rebuild the means of production, replace what could be rehabilitated and move on to more efficient means of production, in other words: complete the energy transition, in particular through combined cycles, and install less gas and steam turbines to favor turbine technologies with better returns.
In addition to these targets, we dedicated our efforts to improving the quality of service, i.e. to ensure that there would be less and less outages and shorter repair times.
The only way to do this is obviously investment: in electricity, it is a question that we develop parallel networks, which come as a backup when material shortcomings occur. The equation is more complicated regarding gas: to ensure production, you need the network, the transportation pipelines need to be available… Indeed, when one wishes to move large amounts of this energy, one must be able to make such transfers from East to West, etc.
This led us to adopt new technologies, like 400 kV: the transportation network has been completely transformed. It now consists in over 3.000 kilometers of 40 0kV lines. Many 400 kV transformer stations have been installed, and continue to be, and distribution itself has changed. The effort is such that today, the GRTE (our subsidiary in charge with electricity transportation networks) cannot meet the workload only on their own. Some of the work, as well as the 60 kV network, will therefore soon become the responsibility of our distribution subsidiaries.
Algeria is undergoing a transition into digital economy, and we are discovering that digital also requires not only energy but quality energy. The problem is that we cannot hope to move towards economy of intelligence if the energy is inadequate. The quality of energy is a prerequisite to the development of everything else.
Let us talk about natural gas: you mentioned upstream investment needs in the gas chain. Can you elaborate on this?
The gas transportation system is made of 12 to 48 inch sections. By 2024, 13.000km of complementary network should be installed, or 1.500 km per year on average, which is important. This will not be done by Sonelgaz companies alone, about two thirds of the workload will be contracted to third parties.
As for electricity transportation, the situation is similar: 27.000 km must be realized. Two of our subsidiaries are working on this (Kahrakib and Kahrif). As for gas, they will probably not be able to cover the entire workload on their own.
There are about ten companies only with sufficient qualification to work on transportation in Algeria, which is still insufficient. In addition, working methods are shifting progressively to new methods, which are more complex but also provide work to more companies, especially SME/SMIs. As a public company, giving work to private operators and helping them grow is also a role incumbent to Sonelgaz.
What are the energy consumption figures of the country?
Regarding gas, domestic and industrial combined, in 2014 27 billion cubic meters were consumed. By 2030-2040, the forecasts announce about 100 billion cubic meters of demand, 40 to 45 billion among which shall be used for transformation into electricity. This leaves about 60 billion cubic meters to distribute, hence the crucial character of gas production.
Sonelgaz constantly thinks of the best possible energy mix for this country. From the company’s perspective, if it turns out, tomorrow, more interesting to consider different primary energy sources, including coal, we will have to consider it in the mix of 2030 or 2040. The most important is to find the best balance between consuming the gas, that is to say give up the annuity, and export and therefore diversify our fuel for energy production.
What to replace this production fuel with, that is the question: there is not an unlimited number of alternatives in the world today, between coal, nuclear, and renewable, which gradually make their way through. Let us not forget that hydropower is not a relevant alternative in Algeria, for resources are very low. The data on which we are working today show unequivocally that we will have, in 2030 or 2040, to shift to another form of primary energy.
Today, power generation is mainly based on natural gas, for 95 percent. Gas is still available, which is good, but still we get back to one problem that Sonelgaz had already raised in the early 80s: will there be gas in thirty years from now? That said, as an industrial and energy group, we need to look towards the future: in the event that tomorrow, the internal price of gas would become equivalent to the export price, then we would adjust accordingly. Similarly, if the state has to import gas to meet demand, the only conversion tool will be the power generation tool as it exists. Finally, on renewable, there is reason to be realistic: these technologies will not be able to provide more than a third of our needs, ultimately, how are we then going to cover the remaining two thirds?
According to the scenarios, we expect 200 billion cubic meters in demand in the long term, half of which for power generation purposes. Therefore, we must look at all the options. This is a challenge, and the advantage provided by our industrial strategy: with this long-term visibility, we now have all the elements on the table, ready for arbitration.
About renewable energies: what are your targets in this regard?
We aim to cover a third of the needs, depending on the evolution of technology. In view of the capacities input by Sonelgaz, by 2024 we will have 3.500 to 4.000 MW of renewable capacity, mainly focused on wind and solar power.
Yet, in the event, still distant as of today, that CSP with storage would become not competitive but at least economically viable, we could then accelerate its introduction, and bet on a somewhat larger penetration rate.
The program includes 22.000 MW in renewable by 2030, in order to reach 30 percent of coverage, which depend very much on the evolution of technology. Whatever happens, it is clear that we will remain in conventional generation, with combined cycle technology, and that regarding renewables, nothing significant is likely to happen without the evolution of CSP with storage.
One objective of Sonelgaz is the production of photovoltaic cells, which would make Algeria one of the very few countries in the world to have such a production tool. Is this just a wish to bring added value at this point, or will it really materialize?
Sonelgaz has committed to install 400MW of photovoltaic per year. Regarding production, we are about to conclude a partnership, however, the entire chain must be established.
For the production of Wafer to be profitable, a plant must be able to produce 1.000 MW per year, while five or six years ago, 100 MW would be enough to ensure competitiveness. The size effect is a real limit. However, the market is changing very quickly, and new production technologies have been introduced in the world, allowing profitability from only 200 MW of panels produced, which completely changes the game. Therefore, it seems to me unlikely that the global players will let China keep their monopoly as is today. Algeria will be part of those players, and put means on the way, not on its own obviously but through partnerships.
At the heart of your news, there is your partnership with General Electric, which appears to be the cornerstone of your new strategy. Can you tell us more about this?
This project is the result of an ambitious strategy. Until now, we have integrated our activities from below, penetrated market niches through contracts, EPCs, which ultimately is not enough.
We concluded that we needed more structure in our integration strategy, and that we had to aim to manufacture the main equipment for our power plants. A 8.400 MW program was started, representing 24 new turbines. Taking this opportunity to join equipment manufacture has many underlying benefits. This is a tremendous opportunity to unify the production base, simplify the management of spare parts, launch training programs, and so on.
Some people raised, rightly, the question about being prisoners of one technology. To this, I answer that in order precisely not to be prisoners, it is imperative that we manufacture here. This is the second leverage for structuration, and the reason why we engaged in the implementation process of a production complex in Batna. Production should start from 2017, and its integration will certainly last about ten years in total.
Even if this is already significant, these efforts alone are far from enough. Indeed, in addition to turbines, we will also need boilers, transformers, EPCs… Additional partnerships will be announced shortly. In the case of EPCs, we have already created a company with a consortium of international companies, Korean in this case. This will enable us, through the direct use of the equipment, to detect the needs directly from the field for the products that will be manufactured in the country, by Algerian operators.
Ultimately, the framework has been implemented, the plant is simply one essential and structuring element for the grid, however insufficient on its own.
We are developing our manufacturing capacities, especially through one of our subsidiaries that engaged in the manufacturing sector of spare parts, more specifically on hot turbine parts. We are also building a medium size foundry. Understand that without the control of steel and manufacturing, the power industry can do nothing. Now, it happens that there are openings, great opportunities in the market arising today.
The next issue is of course a matter of training and development of expertise. Our strategic policy intends to manufacture locally, but not on our own! It is essential for our projects that we be always accompanied by technologist partners. For this reason, our partnerships focus on technology first. We do not associate with investors if they are not technology carriers.
Also, if the first years will focus mainly on the domestic market, the Algerian market is also part of an international environment and soon, we will witness the emergence of a market, very substantial in its size, namely the African market. Africa is a completely virgin market, it is tomorrow’s market and African countries will need to find the necessary supply on the continent to meet their energy development.
The Algerian economy has long been driven by Sonatrach, the national oil company. Even if there is no competition between the two, the actors emphasize on the increasing economic role of Sonelgaz in the health of the Algerian economic fabric, considering that the group now has the capacity, too, to drive the industrial sector, both private and public. Do you share the analysis that Sonelgaz has succeeded in its strategic shift? What are the growth areas in which you call for SMEs and foreign companies that master the technology to come and invest in quickly?
You are right to say that there is absolutely no question of competition between the two groups. The role of Sonatrach is to be understood in a historical perspective: this company had a very specific mission to export a maximum of hydrocarbons so as to bring cash into the country. As such, Sonatrach could not worry about industrial integration or about how implementation of the tools was carried out.
Its situation was much unlike Sonelgaz’s, which in the late 60s had incorporated industrialization and national integration into its policy. We created this way, many structures, contractors, service companies, manufacturing plants, etc.
Between 2000 and 2010, this impetus was relatively constrained, for reasons of political choices, among other things: the authorities would then consider that it was not for Sonelgaz to foster integration, and that the company had to focus only on electricity delivery.
The large processing industry, for instance structural steel, tanks and boilers, weakened mainly because Sonelgaz was not there to bring its driving energy.
Thus, power plants that were built during these years hardly relied on national participation, except for cement and a bit of steel. Everything else would be imported, and the market completely escaped local businesses.
The revision of our statutes in 2011 has proved essential: it makes us an obligation to promote our domestic industry, exclusively through our subsidiaries and as partners holding investment shares.
Finally, I am convinced that Sonelgaz indeed has a significant capacity to positively drive the Algerian industry. The industrial actors have high expectations when it comes to Sonelgaz, and they are right to: throughout history and continents, all powerful economies have relied on the development of their power industry, in addition to railway. There is absolutely nothing that could stop it to be the case also in our country, Algeria.