Looking to escape economic rut, Albania pins hopes on yet uncertain oil bonanza
Story Highlights
- Exploration phase in Albania's Shpirag oil site moves towards final testing. If positive, Albania could expect a massive inflow of funds for public coffers.
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TIRANA, Aug. 30, 2023 - Faced with a GDP per capita falling far behind even the poorest EU members, lackluster foreign investments and a growing budget deficit that has to be financed by an ever-shrinking and aging population, Albania’s government is hoping for a miracle: a winning lottery ticket that comes through a major oil exploration find in the country’s territory.
Prime Minister Edi Rama held a special press conference last week, boasting oil exploration as the miracle cure that could lift Albania into a prosperous place. He had just returned from a visit to a drilling site in the Shpirag region, where Shell, the global conglomerate, has been conducting oil and gas exploration for several years.
Shell has passed several exploration phases at the Shpirag oil site over the years, each leading to optimistic boasts from the government. But this would be the final and decisive test, and the Albanian people will know in October if the land underneath their feet could lead to a stellar future, economically speaking.
Prime Minister Rama said tests so far had shown there was high quality in the discovered oil reserves, which he believes could have historic implications for Albania.
Rama stated that the process is now a step away from confirming the continuation of operations for extraction and subsequent trade. Final testing is slated to commence in October to evaluate the sustainability of oil flow pressure and the ensuing financial feasibility of all forthcoming operations.
"The reserves lie at a depth of 6,000 meters below the surface. We have reached the reserves after an arduous exploration due to the geological formation of the area and substantial investment necessitated by repeated drilling setbacks caused by the geological structure,” Rama said at a press conference. “The intriguing news is that water has not yet been tapped as it lies beneath the reserves. This implies that the scale of the reserves might be even greater. We're not in a position to discuss concrete figures at this moment, as it would be premature."
Rama further disclosed that analyses conducted by the company indicate that the discovered oil is of an exceptionally high quality, comparable to premium Saudi Arabian oil.
-Government plans Sovereign Fund to manage potential new wealth-
From an economic perspective, the investment by the company in infrastructure and logistics alone is estimated at 3 billion euros, which, over time, could rise to 7 billion euros according to the company's own projections.
Direct benefits to Albania are anticipated to be substantial, prompting the government to initiate preparations for establishing a sovereign wealth fund, following the model of countries with significant oil resources.
"It's not just about 500 million euros of annual revenue that directly feed into the state budget to cover needs; we're talking about significantly higher revenues that cannot be managed by the state budget and will be managed by the Sovereign Fund, as seen in the cases of oil industry in Norway, Saudi Arabia, Azerbaijan, and elsewhere," said Deputy Prime Minister and Minister of Infrastructure and Energy Belinda Balluku.
A portion of the projected revenues is earmarked for the pension fund, education, and healthcare investments, while another portion will be invested in domestic and international markets to further grow the Sovereign Fund's portfolio, Balluku added.
-Experts say potential numbers are huge, but urge caution-
Economists predict that taxes generated from oil extraction in Shpirag and beyond could reach several hundred million dollars annually should everything go well.
A six-fold increase in oil production is projected, according to Fatos Çoçoli, an economic expert.
"Considered an oil-bearing field similar to Italy's Valt Dargi, quite similar to Shpirag. If we were to double our daily production, reaching 20,000 barrels per day, it would translate to around $9.2 million in daily earnings for the company. With the contract in Albania, we could potentially receive up to 40%, or $4 million per day. If it performs like Valt Dargi, we could even sextuple our production by mid-next year," Çoçoli told Albania’s A2 television.
Based on the contract, Shell is expected to pay the Albanian state a 10 percent mining royalty and 50 percent profit tax.
One thing is for certain, experts say, the effectiveness of new government policies needs to be closely monitored in the months ahead as Albania navigates its potentially new oil-driven economic trajectory.
Experts commenting in the Albanian press have also noted that the government’s financial projections in terms of income it will get from the find, if it materializes, seem overoptimistic and will take time to be felt by the population at large.
But they all agree that Albania could use a major infusion of public funding as pensions linger at below subsistence level, while the country is suffering a major emigration wave due to low wages and bad public services
Others argue that with the preliminary focus on oil, when production has not started and remains yet uncertain, Albania’s government is seeking a domestic PR victory after several high ruling party officials have been entangled in major corruption scandals, and news of the find is simply an attention diversion tactic.
Olta Xama, an Albanian economic journalist, dissects the idea in a post on social media, for example, writing that it is unethical on the part of the government to “repeatedly attempt to deceive the public,”
“Shell's most recent official statement on exploration progress dates back to 2019,” Xama said. “Shell is a publicly-traded company, and news indicating it is near to reach oil extraction could only increase its stock value. However, Shell is not the one sending out an [official press release] on this, it's the prime minister instead.”
She further explained that the potential for oil in the Shpirag area was discovered two decades ago, and optimistic news about its potential has been ongoing for years without concrete results.
“The initial drilling didn't prove economically viable and was abandoned. Subsequently, Petromanas resumed exploration, identifying significant potential and quality oil, leading to the sale of exploration rights to Shell,” Xama wrote. “Through a supplementary contract signed with the government last year, Shell granted itself an additional seven years for further exploration.”
Cover photo credit: Albanian government social media.