Algeria’s Natural Gas Policy: (2)

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This commentary provides evidence of a significant and unsettling shift in the supply and demand of natural gas in Algeria and draws attention to the urgent need to address domestic pricing and subsidy reforms.

The first part provides a trend analysis and projection to highlight the shift in supply and demand and how a rapidly growing domestic gas market has become a much bigger factor in the gas balance. The second part discusses the current gas pricing rationale and exposes the extent of supply underpricing in the context of MENA. The third part shows the degree to which prices are divorced from the costs they are supposed to reflect.

Our overall findings suggest three main policy implications and recommendations:

The first is to avoid the ‘Egypt gas syndrome’. After a long period of denial, the Egyptian government suddenly woke up to the stark reality that production could no longer keep up with fast-growing demand fueled by massive and unaffordable subsidies. Surely, policy makers in Algeria realize that policy changes are slow and incremental while domestic demand growth is exponential and unrelenting. The snowball effect that is created eventually leads to adverse outcomes, not the least shrinking export volumes and lesser government budget. A demand response deserves as much attention and as much focus as the supply response highlighted in the introduction.

Following from this, the second implication is that domestic pricing must be tackled at both the design and implementation levels. Notwithstanding occasional assertions about the need to rationalize energy consumption, abnormally low – and below cost – domestic prices have continued to act as a disincentive to reining in fast growing demand. However, while dealing with gas prices is necessary as a matter of urgency, it is not sufficient. Building on that action, policy makers need to ensure that a broader framework is in place to tackle energy price and subsidy reforms in a coordinated and coherent manner.

To this end, the third implication is that the changing political economy and social contexts must be factored in. Reviving old frameworks such as the national ‘energy consumption pattern’ (ECP), which is regarded by some as still capable of providing a sound rationale for employing the energy resources available in the most economically and socially efficient manner, is not the best option. ECP was devised in the early 1980s, in a context of single political party rule, mild social climate, and centralized top-down policy-making. In today’s would-be participatory environment, policy makers need to inform public debate and shape a more holistic, consensual vision to guide and support a fundamental energy paradigm shift that would guarantee long-term security of supply and contribute to economic stability and sustainability. … 

 

 

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