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A weakening Sirocco?

Hydrocarbon Engineering,

Two years ago, in 2011, this magazine presented a feature article on North Africa titled ‘Winds of Change’, in which the social and political unrest was likened to a wind like a sirocco, coming out of the Sahara Desert and bringing regime change in Tunisia and Egypt, a civil war in Libya, and protests also in Algeria and Morocco. The question was posed: ‘As the winds blew some sand away, what will the winds bring in replacement?’ In the greater North African and Middle Eastern regions, the protests became known as the ‘Arab Spring’. The situations varied from country to country, but the common element was disaffection with the government’s willingness and ability to meet its promises to the people. The desire to replace these governments with ones more representative of, and responsive to, the people was seen as a major step forward for democracy in the region. Two years later, many of the reforms are unfinished, and a lack of unity has slowed progress. The slow pace of change has caused observers to lament that the ‘Arab Spring’ has turned into the ‘Islamist Winter’.

Oil and gas reserves and production
The social and political turmoil in North Africa has hampered developments in the oil and gas industry. Because oil and gas contribute so much to the local economies, this is having a cyclical impact on the ability of governments to meet the expectations of the citizenry. According to the Economist Intelligence Unit, oil and gas revenues in 2011 accounted for 10% of government revenue in Egypt, 67% of government revenues in Algeria, and a whopping 91% of government revenues in Libya. For the governments now in transition in North Africa, reviving and stimulating the hydrocarbon industry is critical.

It is typical for oil and gas rich countries to use the revenues from the hydrocarbon sector to subsidise other sectors and programs. It is also common for governments to subsidise fuel prices. This is viewed as a way of sharing the wealth with the citizens. But it also creates its own set of market problems. For example, demand for the subsidised fuel or fuels may grow so disproportionately that the pattern of fuel demand is skewed and encourages inefficient energy use. The domestic refining industry may not be able to satisfy the lopsided pattern of demand, and subsidised fuel prices may discourage the investment needed to change this. Subsidised fuels may also be smuggled out of the country, giving rise to organised crime. Eventually, the government bill for fuel subsidies may outweigh the benefits, yet removing long standing subsidies may be tantamount to political suicide. As North Africa’s share of oil and gas reserves have fallen, oil and natural gas production has fallen also. In 1970, North Africa produced 92% of total African natural gas plus 79% of African crude oil. These shares have fallen considerably. By 2012, North Africa accounted for 71% of the continent’s natural gas output and only 42% of the crude output. In 2011, the drop in Libyan crude production had caused North Africa’s share to drop to just 34%.

Refining industry
Mirroring the situation seen in the upstream oil and gas sector, the social and political changes sweeping North Africa also have detracted from the downstream sector. There have been a number of refinery upgrades, expansions, and even grassroots projects planned in North Africa, but the past two years have proven challenging, and many projects have been postponed or shelved.

The winds, like a sirocco, have swept through North Africa, bringing changes of leadership in Tunisia, Libya, and Egypt once again. This included an end to the infamous Qaddafi regime in Libya. Protests and demonstrations have taken place in Algeria and Morocco as well. The ageing president of Algeria held on to power, but may hand over the reins to a successor in early 2014. The King of Morocco allowed peaceful demonstrations and has made many concessions toward more open government. Throughout North Africa and in the Middle East, this movement became known as the ‘Arab Spring’. The situations vary from country to country, but there are many commonalities in what the people are protesting: high levels of unemployment, a widening gap between rich and poor, crime, violence, and corruption. The people’s disaffection stems from a long standing failure of the governments to deliver on promises. Some of the economic problems, however, were exacerbated by the global economic downturn, which local governments were powerless to combat. Other social and political ailments were so deeply rooted that reforms will come only slowly. After the first whirlwind of change, the slow pace of reform and rebuilding has caused frustration, leading observers to speak of how the ‘Arab Spring’ turned into the ‘Islamist Winter’.

North Africa’s oil and gas sector is critically important to the region’s economic health, and also to government stability and basic function, since the governments run the energy industry and derive a major share of their operating revenue from it. Yet for all of its importance, the North African governments receive very poor ‘grades’ when it comes to how they manage their natural resources. When evaluated according to the criteria of the Resource Governance Index, the two main producers, Libya and Algeria, received failing scores, and Egypt received a ‘weak’ score. Libya ranked 55th out of 58 countries examined, with consistently low scores attributed to decades of mismanagement and corruption. Yet in a way there is cause for optimism. The same inefficiency and corruption that typified the energy industry was endemic across the government, and this was its eventual undoing. The new regimes hope to change this and build stronger, healthier economies, and the same principles that improve overall governance of the countries will improve governance of the energy industries. Although the changes may take time, and the sirocco winds may have weakened, it can be hoped that a gentler breeze will fill the sails and transport North Africa’s energy sector to smoother seas.

The full article from Nancy Yamaguchi can be found in the December 2013 issue of Hydrocarbon Engineering.

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