(MENAFN - Gulf Times) Algeria needs to exploit its shale gas resources to offset a surge in local energy consumption that is eating into vital exports, but developing the industry will take time and require far-reaching reforms at the state energy firm.
The North African country is a key gas supplier to Europe, but exports have suffered from delays to several gas projects and a steep rise in the use of subsidized gas at home as the population has grown.
Algeria's gas exports are expected to fall to 54bn cubic metres in 2017 from 57bn in 2016, the state energy firm Sonatrach has said.
In the decade to 2014, domestic gas consumption has more than tripled.
To reverse the fall in exports, Sonatrach has started talks with France's Total and Italy's ENI, Sonatrach officials say.
The aim is to exploit shale resources estimated at 22tn cubic metres, the world's third largest.
The foreign firms have not confirmed this, although Total's CEO said in December his company was open to greater cooperation after Sonatrach said it would work with Total on shale gas.
The talks are part of changes pursued by Sonatrach's new chief, Abdelmoumen Ould Kaddour, a US-trained engineer who took office in March aiming to overhaul a sprawling group hit by inefficiency, delays and corruption scandals.
Sonatrach declined to comment for this article.
But new shale gas projects will not happen overnight as only limited geological survey data exists and Algeria needs to change legislation to offer more attractive terms to foreign firms, which are selective about investments at a time of low energy prices, industry sources say.
Key Western firms are anxious about gas supplies as Algeria's exports drop.
They are also keen to break the link between what they pay for Algerian gas and the oil price, which can result in losses if crude prices are high.
But the bigger challenge for Ould Kaddour will be to shake up Sonatrach, no easy task in a country where senior figures wary of foreign influence can resist reforms.
'Algeria should have launched shale exploitation years ago but lacked consistent and coordinated leadership, said Geoff Porter, head of North Africa Risk Consulting and an Algeria energy expert.
'What Ould Kaddour is trying to do is risky, but necessary. He wants to wake Sonatrach up from its slumber, he said. 'But the changes...may cause some pain. They will mean loss of prestige for some Sonatrach stakeholders and it will mean longer hours for some Sonatrach employees.
Algeria also needs to invest in oil projects to keep its crude output at 1mn bpd.
Pumping has become more difficult as surface reservoirs have been exploited at some fields.
Algeria shied away from change in its energy industry until European gas buyers started wondering whether to renew contracts as they fear Sonatrach might struggle to meet its obligations.
Domestic gas demand is expected to rise further due to Algeria's growing population, industry sources say.
Algeria, which sells mainly to Italy, Spain and Portugal, is the third most important gas supplier to the European Union after Russia and Norway.
Any reduction in supplies from Algeria could increase European reliance on Russia. Algeria's oil and gas exports make up 56 % of GDP but have more than halved since 2014.
Keeping local gas prices cheap is important for the government, which wants to preserve its welfare model to discourage any popular discontent.
'Algeria needs the export revenue to support the state budget but the lack of investment and declining production trends are very worrying, a source at one of Algeria's main gas buyers in Spain said.
A source at a French importer of gas from Algeria said declining production threatened its ability to maintain flows.
'We are looking at this closely and have been for some time, he said.
Algerian oil and gas output has stagnated due to delays in projects and lack of foreign investment.
The Touat and Timimoun gas projects were due in 2016, but both will not come online until 2018, Ould Kaddour has said.
The Reggane gas field is the only project to do so in the past three years.
Even with new fields planned to open by 2020, Algeria will only maintain gas output at the current 94bn cubic metres a year unless it can make big strides in shale exploitation, Sonatrach sources say.
As cheap reserves get tapped out, Algeria risks becoming less competitive, especially if it sells gas on an oil-linked basis, industry sources say.
Such deals are unpopular with buyers because they tie the price of gas to that of crude oil.
When oil is high and gas prices on freely traded European markets are low, buyers of oil-linked gas incur big losses.
The trend now is for long-term gas contracts to reflect gas prices at European trade hubs.
Norway and Russia are moving to this model but Algeria has been slower to make the shift.
In November, Francesco Starace, chief executive of Italian utility Enel, said his company's long-term gas contracts with Sonatrach had begun to expire and it wanted to switch to deals not linked to the oil price.
In a sign that it sees need for change, Sonatrach is willing to offer more flexible short-term contracts in future instead of long-term deals, company sources say.
Ould Kaddour has made tough statements, warning that Sonatrach might fail to meet some client obligations and calling production delays unacceptable — unusual talk in a country where officials rarely express criticism in public.