Why Algeria Remains Important For BP

by Trefis Team
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Sniffing around for oil and natural gas in politically volatile regions such as North Africa comes loaded with its share of risks and rewards and international oil companies are well aware of this. The recent news of the kidnapping of several BP (NYSE:BP) employees working in Algerian gas fields by a militant group serves as a sad reminder of the innately risky nature of fossil fuel exploration. But what could have been just another footnote in a routine state of affairs for BP now threatens to turn into an avalanche of bad PR for the oil major.

See our full analysis for BP

Investors can expect calls for closer scrutiny of BP’s operations and safety standards to flood the media in the coming weeks – especially considering the company’s track record over the last decade. Besides the recent kidnappings, the company also has a major oil spill and a series of refinery disasters it has had to account for in a span of ten years, and this makes it look more accident-prone than your average integrated oil company.

But more than media hostility and public outcry what should concern investors is how much the recent kidnappings are going to affect the company’s material output. Considering the present state of affairs, the answer is not a lot. Right now, BP’s Algerian investments are largely limited to a couple of partnerships with state-owned Statoil for extracting natural gas in In Salah and In Amenas fields. The company’s total natural gas volumes from the Saharan region account for only 1.5% of its worldwide output. Although the company has effectively suspended most of its Algeria operations following the militant attack, investors can take comfort in the fact that no real critical level damage has been done. [1]

But then again, investors should also be aware that the recent discoveries of shale fields in the country indicate that Algeria holds huge reserves of natural gas – 231 trillion recoverable cubic feet. If these estimates are accurate, it means Algeria’s natural gas reserves alone could supply the whole of Europe for over a decade at current consumption levels. BP would certainly not want to pack its bags in a hurry – and we have reasons to believe that the company won’t be scared off so easily.

For one, Algeria’s gas reserves are  now being valued at nearly $2.6 trillion. Being the largest foreign investor in the country, BP is perfectly placed to tap into a major chunk of this juice. With competitors such as Exxon already lining up for their own share of these reserves, the company can ill-afford to pass up such an opportunity. [2] Secondly, despite all the recent disasters, BP’s risk appetite shows no signs of waning – a key example here being the company’s recent proposal submitted to the Iraq government for a share of the country’s Kirkuk oil fields, which falls in a highly contested area. [3]

With the determination shown by BP in tapping into reserves in increasingly volatile areas, investors have reason to cheer despite the company’s recent failings. Our expectations for BP’s natural gas output are also very optimistic. Of course, the inherently risky nature of energy exploration means that any sudden emergencies will have a big impact on our estimates.

Our Trefis price estimate for BP is $43, just below the current market price.

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Notes:
  1. Terrorist outrage won’t scare BP out of Algeria“, The Independent, January 2013 []
  2. Europe’s Shale Boom Lies in Sahara as Algeria Woos Exxon”, Bloomberg, November 2012 []
  3. Iraq considering bid from BP to raise output at oil field in contested area“, Fox News, January 2013 []
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