In a significant development that underscores the evolving energy dynamics of North Africa and the broader Middle East, Algeria has successfully negotiated a $5.4 billion production-sharing agreement with Saudi Arabia’s Midad Energy to explore and develop substantial oil and gas reserves in the strategically important Illizi Basin. The landmark deal, which partners the Saudi company with Algeria’s state-owned energy giant Sonatrach, represents one of the largest foreign investments in Algeria’s energy sector in recent years and signals a major step forward in the North African country’s ambitious strategy to modernize its hydrocarbon infrastructure, expand production capacity, and attract substantial foreign capital to fuel economic development.
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The agreement, announced on October 13, 2025, carries implications that extend far beyond the immediate financial investment. It reflects deepening economic and strategic ties between two of the Arab world’s most significant energy producers, demonstrates Algeria’s commitment to leveraging its vast hydrocarbon resources to drive economic growth, and positions both nations as increasingly influential players in North Africa’s complex and rapidly evolving energy landscape. For Saudi Arabia, the deal represents a strategic foothold in North African energy markets and diversification of its international energy portfolio beyond the Arabian Peninsula. For Algeria, it provides critical capital and technical expertise to develop reserves that could help sustain the country’s position as a major energy exporter for decades to come.
The Structure and Scope of the Agreement
The production-sharing contract spans an impressive 30-year period, with an additional option to extend the partnership for another decade, effectively creating the potential for a 40-year collaboration between Midad Energy and Sonatrach. This extended timeline reflects the long-term nature of hydrocarbon development projects, which typically require years of exploration before production begins and then decades of operation to fully exploit discovered reserves and generate returns on the substantial upfront investments required.
The agreement includes a crucial initial seven-year exploration phase during which Midad Energy will bear full financial responsibility for exploration activities. This arrangement is particularly favorable for Algeria, as it minimizes the country’s financial risk during the exploration period when substantial capital must be invested with no guarantee of commercial discoveries. Midad has committed $288 million specifically for exploration activities during this initial phase, funding seismic surveys, exploratory drilling, geological analysis, and other activities necessary to assess the commercial viability of hydrocarbon deposits in the targeted areas.
The production-sharing framework means that once commercial production begins, revenues will be divided between Midad Energy and Sonatrach according to predetermined formulas that typically account for investment recovery, production volumes, and commodity prices. While the specific revenue-sharing terms have not been publicly disclosed, such agreements generally allow the foreign partner to recover exploration and development costs before profits are split, with the host country’s share typically increasing as cumulative production rises or as certain profitability thresholds are reached.
The Illizi Basin: A Hydrocarbon Frontier
The focal point of this major investment is the Illizi South perimeter, located approximately 100 kilometers south of In Amenas, in southeastern Algeria near the country’s border with Libya. The Illizi Basin has long been recognized by geologists and energy companies as holding significant hydrocarbon potential, with geological formations similar to productive oil and gas fields in neighboring Libya and other parts of the Sahara Desert region.
The region’s geology is characterized by sedimentary rock formations dating back hundreds of millions of years, created when the area was covered by ancient seas. These sedimentary layers contain organic material that has been transformed over geological time into oil and natural gas through heat and pressure. Previous exploration activities in the broader Illizi region have confirmed the presence of hydrocarbons, but much of the area remains underexplored compared to Algeria’s more established northern basins, creating the potential for significant new discoveries.
The location near the Libyan border adds both opportunity and complexity to the project. Libya itself possesses substantial oil reserves and has been a major oil exporter when political stability has allowed sustained production. The proximity suggests that similar geological formations and hydrocarbon systems may extend across the border, potentially indicating significant resources in the Algerian territory. However, the location also places the project in a region affected by broader North African security challenges, requiring robust security arrangements to protect personnel and infrastructure.
The harsh desert environment of the Illizi region presents its own technical challenges. Extreme temperatures, limited water resources, remoteness from existing infrastructure, and difficult terrain all complicate exploration and development activities. These conditions require specialized equipment, experienced personnel, and robust logistical support systems—factors that increase costs but also demonstrate the confidence both parties have in the commercial potential of the basin’s hydrocarbon resources.
Algeria’s Energy Sector Modernization Strategy
The Midad Energy agreement represents a key component of Algeria’s broader strategy to modernize and expand its energy sector, which remains the cornerstone of the national economy. Algeria ranks as Africa’s largest natural gas exporter and is a significant oil producer, with hydrocarbons accounting for approximately 95% of export revenues and roughly 60% of government budget receipts. This heavy dependence on energy exports makes sector development a top national priority, particularly as mature fields in northern Algeria experience declining production and the country seeks to maintain its export volumes and market share.
Algeria has set an ambitious target of investing $60 billion in its energy sector over the next five years, with a primary focus on upstream exploration and production activities. This massive capital deployment aims to discover and develop new reserves to offset depletion of existing fields, deploy enhanced recovery techniques to extract more hydrocarbons from mature fields, and modernize infrastructure throughout the production, processing, and export value chain. The scale of this investment program reflects both the critical importance of the energy sector to Algeria’s economy and the significant capital requirements of maintaining and expanding hydrocarbon production.
Sonatrach, as Algeria’s national oil company and one of the world’s largest hydrocarbon producers, plays a central role in implementing this modernization strategy. However, the company has increasingly recognized that achieving ambitious production and development targets requires substantial foreign investment, advanced technology, and operational expertise from international partners. This realization has driven a more welcoming approach to foreign investment in recent years, reversing earlier periods when Algeria maintained more restrictive policies toward international oil companies.
The country’s membership in the Organization of the Petroleum Exporting Countries (OPEC) adds another dimension to its energy strategy. As an OPEC member, Algeria participates in coordinated production policies designed to balance global oil markets and support prices. However, Algeria has also pressed for higher production quotas within OPEC frameworks, arguing that its significant reserves and investment in new capacity justify increased output allocations. The development of new fields like those in the Illizi Basin could strengthen Algeria’s case for higher production levels within the organization.
Deepening Saudi-Algerian Relations
The Midad Energy investment represents the latest and largest manifestation of strengthening ties between Saudi Arabia and Algeria, two significant Arab nations that have historically maintained cordial but somewhat distant relations. Earlier in 2025, the two countries signed five separate agreements covering energy cooperation, trade facilitation, industrial collaboration, tourism promotion, and legal services coordination. These agreements have moved beyond the purely symbolic protocols that often characterize diplomatic relations, with officials from both countries emphasizing their commitment to converting cooperation frameworks into concrete, actionable partnerships that generate tangible economic benefits.
For Saudi Arabia, developing closer relations with Algeria serves multiple strategic objectives. The kingdom seeks to diversify its international economic relationships and investment portfolio beyond its traditional Gulf Cooperation Council partners and Western allies. Algeria, with its significant population of over 45 million, substantial natural resources, and strategic location bridging Africa and the Arab world, represents an attractive partner for expanded cooperation. Additionally, strengthening ties with Algeria gives Saudi Arabia greater influence in North African affairs and in continental African organizations where Algeria plays an influential role.
The Saudi approach to Algeria forms part of a broader strategy of expanding the kingdom’s economic and diplomatic footprint across Africa. In recent years, Saudi Arabia has increased its engagement with numerous African countries, motivated by desires to secure political support in international forums, access African markets for Saudi exports and investments, and diversify the kingdom’s international relationships. Energy sector investments, where Saudi companies can leverage extensive experience and technical capabilities, provide a natural avenue for this expanded engagement.
From Algeria’s perspective, deeper relations with Saudi Arabia offer multiple benefits. Saudi investment provides crucial capital for development projects without the political conditions that sometimes accompany Western investment. The kingdom’s experience in developing hydrocarbon resources in challenging environments can benefit Algeria’s own development efforts. And strengthened ties with the Gulf’s wealthiest nation create opportunities for Algerian exports, labor mobility, and participation in Gulf-led regional initiatives.
Regional Geopolitical Context
The Saudi-Algerian energy partnership unfolds against a complex regional geopolitical backdrop characterized by shifting alliances, persistent tensions, and competition for influence among North African nations. Most prominently, Algeria maintains a long-standing rivalry with neighboring Morocco over issues including the disputed Western Sahara territory, maritime boundaries, and regional leadership. This Algeria-Morocco rivalry has intensified in recent years, with both countries seeking to strengthen their military capabilities and secure strategic partnerships with major powers including the United States, Russia, China, and European nations.
The tension between Algeria and Morocco creates a delicate balancing act for external powers seeking relationships with both countries. Saudi Arabia has maintained generally positive relations with both nations, pursuing energy and investment partnerships with each while attempting to avoid becoming entangled in their disputes. This neutral positioning allows Saudi Arabia to pursue its economic and strategic interests across North Africa without being forced to choose sides in conflicts that do not directly affect Saudi interests. However, maintaining this balance becomes more challenging as Saudi investments and partnerships deepen, potentially creating perceptions that the kingdom favors one country over the other.
Libya’s ongoing instability also affects the regional context in which the Illizi Basin project will develop. Algeria shares an extensive border with Libya and has worked to prevent the spillover of Libyan conflict and instability into Algerian territory. The location of the Illizi Basin project near the Libyan border means that security conditions in eastern Libya, while improved from the worst periods of civil conflict, remain a consideration in project planning and risk assessment. Algeria has maintained relatively successful border security, but the fluid situation in Libya requires ongoing vigilance.
Broader competition for influence in North Africa and the Sahel region also provides context for the Saudi-Algerian partnership. France, the former colonial power in Algeria, remains significantly involved in the region but has faced growing pushback and competition from other powers. Russia has expanded its presence in North Africa through arms sales, energy deals, and political partnerships. China has become a major economic player through infrastructure investments and trade relationships. Turkey has increased its regional engagement, particularly in Libya. The United States maintains security partnerships focused on counterterrorism while competing for influence with other powers. This crowded field of external actors creates both opportunities and challenges for countries like Algeria as they navigate multiple relationships and competing interests.
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Energy Sector Partnerships and Foreign Investment
The Midad Energy agreement follows other significant foreign partnerships that Sonatrach has concluded as part of its strategy to accelerate hydrocarbon development. Earlier in 2025, the Algerian national oil company signed an $850 million contract with China’s Sinopec, one of Asia’s largest integrated energy companies, for hydrocarbon development and exploration activities. The Sinopec partnership demonstrates Algeria’s willingness to work with diverse international partners and its recognition that different companies bring distinct technical capabilities, financial resources, and market access to potential collaborations.
The pattern of international partnerships reflects a pragmatic approach by Algerian authorities, who have moved away from earlier nationalist policies that severely restricted foreign involvement in the energy sector. During the 1970s and early 2000s, Algeria maintained highly restrictive policies that required overwhelming Algerian state control of hydrocarbon projects and imposed unfavorable terms on international oil companies. These restrictions successfully limited foreign influence but also constrained investment, technology transfer, and production growth. Declining output from mature fields and growing domestic energy demand eventually convinced policymakers that attracting substantial foreign investment required more attractive terms and greater security for foreign partners’ investments.
Algeria’s reformed hydrocarbon legal framework, while still maintaining significant state involvement, now offers more competitive terms that have succeeded in attracting renewed international interest. Production-sharing agreements like the Midad Energy contract represent one model that balances Algerian sovereignty and resource control with the need to attract foreign capital and expertise. These frameworks allow the state to maintain ultimate ownership of resources while providing foreign partners with reasonable opportunities to recover investments and earn profits commensurate with the risks undertaken.
The diversity of Algeria’s international energy partnerships—spanning Saudi Arabia, China, European companies, and others—provides the country with multiple sources of capital, technology, and expertise while reducing dependence on any single partner or bloc. This diversification strategy insulates Algeria from potential pressure or sanctions from any particular country or group, while allowing access to the specific capabilities that different partners offer. European companies may provide advanced technology and connections to European gas markets, Asian companies offer substantial capital and connections to rapidly growing Asian energy markets, and Middle Eastern partners bring shared cultural understanding and regional strategic alignment.
Economic Implications for Algeria
The economic implications of the $5.4 billion Midad Energy investment extend well beyond the direct financial injection into the energy sector. If exploration activities successfully identify commercially viable hydrocarbon reserves and the project proceeds to development and production phases, the economic benefits for Algeria could be substantial and long-lasting. Increased oil and gas production would generate export revenues that flow into government coffers, providing resources for public services, infrastructure investment, and economic diversification efforts.
Employment creation represents another significant potential benefit. The exploration, development, and production phases of major hydrocarbon projects require thousands of workers across multiple skill levels, from highly trained geologists and engineers to construction workers, drivers, security personnel, and support staff. While international energy projects typically bring some expatriate workers for specialized roles, the scale of employment needed means that substantial numbers of Algerian citizens would find employment opportunities, both directly with project operators and with the numerous service companies that support energy sector operations.
The development of the Illizi Basin could also stimulate broader economic activity in southeastern Algeria, a region that has historically received less investment and economic development than the more populated northern parts of the country. The infrastructure required to support energy operations—roads, pipelines, power supplies, telecommunications networks, housing facilities—benefits local communities beyond the direct project activities. Local businesses can provide goods and services to energy workers and their families, while improved infrastructure enables other economic activities in agriculture, commerce, and tourism.
For Algeria’s government budget, increased hydrocarbon revenues would provide welcome relief from fiscal pressures that have intensified in recent years. Like many oil-dependent economies, Algeria experienced severe budget strains when oil prices collapsed in 2014-2016 and again during the COVID-19 pandemic. While prices have recovered, the government continues to face challenges in balancing ambitious spending on public services and subsidies with the need for fiscal sustainability. Additional energy revenues from successful new field development would expand the government’s fiscal space and reduce pressure to cut spending or raise taxes.
However, the economic benefits depend entirely on exploration success and subsequent development decisions. The $288 million exploration investment represents risk capital that may not yield commercial discoveries. Even if hydrocarbons are found, various factors including technical challenges, market conditions, and political considerations will influence whether development proceeds. The 30-year contract timeline reflects realistic expectations about how long it may take to move from initial exploration through development to sustained production.
Technical and Operational Challenges
Developing hydrocarbon resources in the Illizi Basin will present significant technical and operational challenges that will test both Midad Energy’s capabilities and Sonatrach’s experience. The harsh desert environment imposes extreme conditions on equipment and personnel, with summer temperatures regularly exceeding 45 degrees Celsius and winter nights dropping below freezing. These temperature extremes stress drilling equipment, pipeline materials, and electronic systems, requiring specialized materials and designs to ensure reliable operation.
Water scarcity represents another critical challenge for hydrocarbon operations, which typically require substantial water volumes for drilling operations, hydraulic fracturing if employed, equipment cooling, and other purposes. In the arid Sahara environment, every drop of water must be carefully managed, often requiring water to be transported from distant sources or produced through desalination of brackish groundwater. Environmental regulations and community concerns about water use also require operators to minimize water consumption and implement recycling programs.
The remote location of the Illizi Basin, far from Algeria’s coastal population centers and existing energy infrastructure, complicates logistics and increases costs. Equipment, materials, and personnel must be transported across vast distances, often through areas with limited road infrastructure. If commercial production is achieved, new pipelines would need to be constructed to transport oil or gas to processing facilities and export terminals, representing massive capital investments in addition to field development costs. The isolation also requires operators to maintain self-sufficient facilities including power generation, medical services, and other support systems that would be readily available in more developed areas.
Security considerations add another layer of complexity to operations in southeastern Algeria. While the Algerian military has maintained effective control and security in most of the country, the broader Sahara region has experienced security challenges including terrorism, smuggling, and occasional armed groups. Energy infrastructure represents high-value targets, requiring robust security measures including facility protection, transportation security, and coordination with Algerian security forces. These security requirements add to project costs while requiring specialized expertise in operating in challenging security environments.
From a technical perspective, the geological characteristics of the Illizi Basin will determine the specific challenges exploration and production teams face. Depending on the depth of hydrocarbon reservoirs, the geological complexity of the subsurface, the types of rock formations involved, and the physical properties of the oil or gas discovered, different technical approaches may be required. Deep reservoirs require more expensive drilling and specialized equipment, while complex geology may necessitate advanced seismic imaging and sophisticated reservoir modeling. High-sulfur crude oil or gas with high CO2 content would require additional processing before export, adding to development costs.
Environmental and Climate Considerations
The development of new hydrocarbon resources in Algeria’s Illizi Basin inevitably raises environmental and climate considerations at a time when the global energy sector faces increasing pressure to reduce greenhouse gas emissions and transition toward lower-carbon energy sources. The tension between the economic imperative of developing valuable hydrocarbon resources and growing concerns about climate change creates complex policy dilemmas for producing countries like Algeria.
From Algeria’s perspective, its substantial oil and gas reserves represent national wealth that should be developed to support economic development, provide government revenues, create employment, and improve living standards for its citizens. Algerian policymakers argue that developed nations built their prosperity through decades of unrestricted fossil fuel consumption and that expecting developing countries to forego resource development for climate reasons is inequitable without substantial compensation and technology transfer. Algeria emphasizes that its natural gas, in particular, represents a cleaner-burning alternative to coal for electricity generation in importing countries, potentially contributing to global emission reductions.
However, environmental considerations must be addressed in project design and operations. Modern hydrocarbon projects face requirements to minimize environmental impacts including air emissions, water pollution, soil contamination, and ecosystem disruption. International best practices in environmental management, which Midad Energy and Sonatrach are expected to follow, include measures such as zero-flaring policies that eliminate the wasteful burning of associated gas, water management systems that prevent contamination of groundwater resources, and reclamation programs that restore affected areas after operations cease.
The International Energy Agency and other global energy organizations have emphasized that even in scenarios involving rapid energy transition, significant oil and gas production will continue for decades to meet ongoing demand while lower-carbon alternatives scale up. This perspective suggests that responsibly developed hydrocarbon resources can coexist with climate objectives, particularly when production features low emissions intensity, when produced gas substitutes for higher-emission fuels like coal, and when producing countries invest energy revenues in economic diversification and renewable energy development.
Algeria has taken steps to position itself within evolving energy markets by developing plans for renewable energy expansion, particularly solar power where the country’s extensive desert areas offer excellent potential. Revenues from hydrocarbon development, including projects like the Illizi Basin partnership, could help finance this renewable energy development, creating a transition pathway where fossil fuel revenues enable investment in the post-carbon economy.
Looking Ahead: Implications for North African Energy
The Algeria-Saudi Arabia partnership in the Illizi Basin represents more than just another energy development project; it symbolizes evolving patterns in North African energy development, regional cooperation, and the changing dynamics of global energy investment. The deal demonstrates that despite global energy transition discussions and climate concerns, substantial capital continues to flow into hydrocarbon development, particularly in regions with significant underdeveloped resources and favorable investment terms.
For North Africa as a region, the project highlights the area’s continued importance in global energy markets. The region’s proximity to European markets, substantial proven and potential hydrocarbon resources, and improving investment climates position North African countries as increasingly significant players in global energy supply. As European nations seek to diversify energy supplies away from excessive dependence on any single source, North African producers including Algeria, Libya, and Egypt offer geographically proximate alternatives with existing or potential pipeline connections.
The involvement of Saudi Arabia, a Middle Eastern rather than Western energy partner, also reflects changing patterns in international energy investment. While major Western oil companies remain active in North Africa, the rise of national oil companies from producing countries as significant international investors represents a shift in industry structure. These companies bring different perspectives, priorities, and approaches than traditional Western majors, potentially offering more flexible terms and greater sensitivity to host country priorities.
As this ambitious project moves forward from signing through exploration and potentially to development and production, it will provide important indicators about the future of North African energy development, the viability of frontier basins like Illizi, and the durability of partnerships between Arab energy producers. Success could trigger additional investment in underexplored Algerian basins and encourage similar partnerships elsewhere in the region, while challenges or disappointments might lead to more cautious approaches to frontier exploration.
For now, the $5.4 billion commitment represents a vote of confidence in Algeria’s energy future, Saudi Arabia’s regional strategy, and the continued importance of hydrocarbon development in Africa’s economic evolution. As exploration drilling begins in the coming months and years, the true potential of the Illizi Basin will gradually be revealed, determining whether this ambitious partnership fulfills its promise of decades of production or becomes a costly reminder of the uncertainties inherent in energy exploration.
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By: Montel Kamau
Serrari Financial Analyst
14th October, 2025
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