Facing oil price drop, Algeria’s Sonatrach seeks service discounts

Algeria’s state energy company Sonatrach has demanded its service providers cut their prices by up to 15 percent as the OPEC member country tries to ward off the impact of falling oil prices, industry sources said.

The collapse in crude prices is testing Algeria’s economy, which relies on energy sales for 60 percent of state revenues and to pay for a welfare system and subsidies that have helped calm social unrest.

The government has already announced a freeze in state job hiring in most sectors and several infrastructure and transport system projects have been put on hold to save cash.

Companies providing services in the hydrocarbon sector in Algeria have received a letter from Sonatrach urging them to cut costs by 10 to 15 percent, an industry source said.

Another industry source close to Sonatrach told Reuters: “Sonatrach has urged its partners in the oil and gas services to cut the cost by 10 to 15 percent”.

A diplomat from country whose companies supply Sonatrach with services confirmed the demand. Both sources asked not to be identified. “I can tell you that the firms are not happy after getting the Sonatrach letter demanding a reduction by up to 15 percent,” the diplomat said.

Sonatrach is the heart of Algeria’s energy business and its financial health is a key indicator for the country’s economy.

Sonatrach official Abderahmane Belkacem told state radio this week that the state firm spends around $23 billion a year in service costs. It has also called on local firms to start looking at ways they can provide services for Sonatrach.

The company did not return a call requesting a response.

As part of measures to counter the crude price drop, the Algerian government is also looking at ways to reduce the country’s huge import bill and protect its foreign reserves.

The price drop arrived at a sensitive time for Algeria’s leadership. Questions linger over the health of ageing President Abdelaziz Bouteflika, who has rarely been seen in public since suffering a stroke in 2013, even after re-election last year.

With nearly $200 billion in foreign exchange reserves and little foreign debt, Algeria is unlikely for now to face any economic collapse or the type of meltdown analysts are concerned about in fellow OPEC member Venezuela.