ALGERIA AT ENERGY TRANSITION CROSSROADS

Reda Amrani - Jun 01,2021

Pressed by lower-for-longer oil and natural gas pricing in an energy market demanding ever less carbon, Algeria is displaying energy transition ambitions that hinge on it becoming a dominant supplier of green hydrogen to Europe by 2030. Last year the country created a new ministry tasked with devising a strategy to meet these objectives. Progress is being made, and Algeria has many advantages when it comes to producing and distributing green hydrogen, including pipeline gas and LNG export infrastructure and a history as a reliable supplier of energy. But as the latest participant in the race, it will need to overcome some major obstacles. The outcome is vital to the future of the Algerian economy.

Only a handful of events have shaped the course of the energy industry as deeply as the Paris Agreement on climate change. It marked an unprecedented turning point in the history books. For the first time in decades, the movers and shakers of the world got together in December 2015 and agreed to curb the impact of global warming to a rise of less than 2°C from preindustrial levels. The rapidity of the transformation that immediately unfolded left even the most optimistic observers puzzled, as societies and economies outpaced one another in their march toward a more decarbonized energy model.

Since then, many Mena (Middle East and North Africa) countries that are blessed with vast hydrocarbon deposits have joined the pack of advocates and promoters of decarbonized energy sources, as decision-makers come to terms with the unveiled reality of the energy transition. Unable to hamper the tides of change, leaders within the Mena region have started shifting domestic strategies to cope with morphing energy market fundamentals and endeavor to reap the fruit of emerging opportunities that the energy transition is creating.

Long-term Opec member Algeria, which is also Europe’s second-largest gas exporter, is today entering the race for renewable energy and green hydrogen production. The country is poised to play a significant role as a reliable supplier to fuel Europe’s ambition to attain a dominantly renewables-based energy mix.

In 2020, the government in Algiers created a new ministry for energy transition and renewable energies and placed long-time sustainable development advocate and academically renowned professor Chams Eddine Chitour at its helm. Within months, the country started making swift inroads on a green hydrogen production strategy that takes account of the untapped existing potential, and it pledged to add hydrogen to its mix of energy exports by 2030.

Many industry experts argue that Algeria hasn’t lived up to its renewable energy potential, as illustrated by a meager 1% renewable share in its electricity generating capacity. Since independence nearly 60 years ago, a succession of oil and gas discoveries in the Sahara Desert has naturally fostered development of a predominantly fossil fuel-based energy industry to fill the country’s coffers with hefty cash flows while ensuring its energy security.

However, plummeting fossil fuel prices on international markets, particularly during the Covid-19 pandemic, coupled with a decline in reserves that squeezed export volumes as domestic demand grew, served as a wakeup call for decision-makers. Urgently pressed amid a long and painful economic crisis to maintain energy export income in a transitioning market -- even while fulfilling its own national energy appetite -- the country has embarked on a late yet vital energy diversification program.

Algeria’s shift towards displacement of fossil fuel by green hydrogen appears to many to be more a survival imperative than the optional outcome. However, despite the lack of capital invested in renewable energy projects -- resulting in marginal capacity and a widening gap when benchmarked regionally -- Algeria is well positioned to catch up and play a leading role alongside its hydrocarbon-exporting peers.

The country can leverage these key enablers to rapidly boost its green hydrogen production:

• Access to vast renewable energy production potential dominated by solar: Occupying a large area of the Solar Belt, Algeria is blessed with an abundance of solar energy and has a formidable opportunity to generate cost-effective, high-intensity electric power to fuel green hydrogen electrolyzers all year round.

• Proximity to an expanding hydrogen market: Located on the southern shore of the Mediterranean, Algeria has over the years developed a transcontinental gas pipeline network that delivers steady streams to Southern Europe, along with LNG. Consistent fulfillment of its long-term contractual obligations towards its European customers has also cemented Algeria’s reputation as a reliable energy supplier. As an emerging green hydrogen producer, Algeria could replicate the same export strategy by converting or expanding its existing gas distribution and storage infrastructure to cost-effectively ship locally produced green hydrogen to its target markets. Europe, with its projected hydrogen demand growth and limited solar potential, is poised to become an ideal offtaker for the North African producer as gas imports wane.

• Existing capabilities and skilled work force: To develop its hydrocarbon energy resources, Algeria has historically relied on its skilled national workforce while promoting in-country know-how and expertise. In the wake of the nationalization of its hydrocarbon reserves in 1971, Algeria embarked on an ambitious program to develop the skill profiles and human resource capabilities needed to manage its expanding upstream and downstream assets. Many of the skill sets it developed are viewed as transferrable to renewables, including large-scale project management, engineering disciplines and commercial functions.

• Expanding domestic market: Algeria’s growing population recently reached 43 million, resulting in spiraling electricity demand. In summer 2019, Algerian electricity demand hit an all-time high of 15.6 gigawatts. Besides rising household consumption, Algeria’s industrial ecosystem encompasses a number of manufacturing and processing hubs in such areas as petrochemicals, LNG, steel and fertilizers that are known to be large consumers of power and ammonia. This potential future domestic market for green hydrogen could foster entry-level private investors equipped to develop scalable and localized hydrogen production and distribution networks.

A report by McKinsey & Co. and the Hydrogen Council published in February, Hydrogen Insights 2021, singles out Algeria’s potential to produce and ship green hydrogen to Germany at a cost below $2 per kilogram, outperforming some of the most competitive developments already sanctioned in Central Europe.

In their quest to secure reliable green hydrogen as part of their long-term decarbonization strategies, many European energy officials and corporations are already courting their Mena counterparts to forge new alliances, carve out supply chains and position themselves early to grasp the benefits of upcoming business opportunities. Algeria is the latest heavyweight energy player to enter the race.

Long, Challenging Path Ahead

Despite all the factors favoring Algeria’s ability to fast-track its transformation from Europe’s second-largest gas exporter to a regionally dominant green hydrogen player, the path to delivering the first load of hydrogen remains long and paved with daunting challenges. The country lacks a tailored regulatory framework and tax regime governing green energy production in a sector still dominated by a public-sector monopoly.

Green hydrogen projects need to be large in order to be cost-competitive, studies indicate, due to the big upfront investments required for the renewable power generation. This implies that, in order to undercut already established suppliers in the regional green hydrogen arena and achieve best-in-class sales prices, Algeria must aim for large capacity production.

Success for such a strategy will hinge on Algeria’s ability to attract considerable project funding while offering fertile ground for foreign investors who can bring much-needed expertise to the table. In recent years, instability within the leadership and governance landscape of the energy sector has undermined Algeria’s ability to build long-lasting commercial partnerships and weakened its capacity to deliver its objectives.

As in many burgeoning industries, the road to a nationwide hydrogen production and distribution infrastructure is stacked with technological difficulties, resource shortages, inherent risks and intimidating uncertainties. This transformational journey must feature centrally within Algeria’s overarching future energy -- a strategy that successfully leverages the cash flow from fossil fuel sales to grow scalable renewable energy production and distribution with green hydrogen at its heart. In today’s evolving energy transition, the survival of hydrocarbon-anchored economies such as Algeria is at stake.

Reda Amrani is production technology discipline lead with Royal Dutch Shell in Oman and leader of energy management in petroleum engineering in Petroleum Development Oman's (PDO) energy transition strategy.

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