The hydrocarbons sector
The development of the sizable hydrocarbon industry started in 1958 after the discovery of two giant oil and gas fields at Hassi-Messaoud and Hassi R' Mel. Crude oil production was at the center of the expansion of the sector during the 1960s and 1970s, even though natural gas production started already in 1961. Algeria became the main Liquefied Natural Gas (LNG) producer in the world in 1964 and expanded its refinery capacity during the 1970s. Export shares of crude oil declined rapidly from the 1980s onwards, dropping from almost 80% to under 30% of exports, while the export share of refined petroleum products, condensates and LNG tripled. Exports of dry gas and LPG gained importance in the 1980 and gas production and exports more than doubled during this decade as a result of the development of gas liquefaction and pipeline capacity.
Up to the mid-1980s, Algeria followed a policy of central economic planning, aimed at transforming the hydrocarbon sector into an integrated, state-owned complex, Sonatrach. In 1982, Sonatrach was restructured and its mission restricted to upstream oil and gas activities and hydrocarbon exports. The hydrocarbon sector was gradually opened to foreign participation in 1986 and foreign investors engaged in oil exploration, under the terms of concession agreements, service contracts or production-sharing contracts. A major investment plan was launched in the early 1990 with the objectives to boost exploration activity, adopt enhanced recovery techniques and expand the existing infrastructure. In recent years, Algeria has been increasingly successful in attracting foreign capital and technology, although foreign companies participate in only about 12% of production.
Proven crude oil reserves are estimated at 11,3 billion barrels, about one percent of global proven crude oil reserves. At current extraction rates, reserves will be depleted within the next 26 years, although numerous new discoveries have been made in recent years. Algeria is indeed still considered to be relatively under-explored and recoverable crude oil reserves may range as high as 27,7 billion barrels. Production stood at almost 1,2 million barrels per day (b/d) in 2003. Including 0,45 million b/d of condensate and 0,25 million b/d of natural gas plant liquids, total oil production reached more than 1,8 million b/d, about 2,4% of world oil production. The authorities are implementing an ambitious plan to increase oil production capacity in the coming years. The target is to expand capacity to 1,5 million b/d by 2010. Increased exploration, the development of new fields and the introduction of enhanced oil recovery systems in existing fields will necessitate the inflow of foreign investment.
More than 80% of the country's total oil production is exported, mainly to Western Europe (Italy, Germany, France). In 2003 , 45% of total oil exports, were crude oil, 22% condensate, 20% refined products and 13% LPG.
Algeria has proven natural gas reserves of about 4,5 trillion cubic metres(tem), ranking 7th in the world with just under 3% of global reserves. Known reserves will last for approximately 57 years at current extraction rates, yet significant reserve growth is expected in the coming years and recoverable reserves could potentially be as high as 7.4 tcm. Around 60% of Algeria's reserves are associated gas.
Total dry gas production reached 79 billion cubic metres (bcm) in 2003. Natural gas is exported via pipeline and LNG tanker, mainly to Western Europe (the country accounted for 20% of European gas imports in 2002). The authorities expect gas exports to reach 85 bcm by 2010, which would imply an annual growth rate of 5.5% .Several major projects are currently under development, expected to increase natural gas production to up to 140 bcm by 2020.
Feasibility studies are also under way for new pipeline projects to link the country to Spain and Italy. A third potential project is a Trans-Sahara gas pipeline from Nigeria to the Mediterranean coast.

Economic outlook
Economic developments in 2005 are expected to be positive. The real economic growth rate should remain at about 5% inflation is under control and the unemployment rate will continue its downward trend. The rise in oil prices has further enhanced the country's financial position and major structural reforms have been implemented in 2005, in particular the Association Agreement with the European Union, the modernization of the legislative framework in the hydrocarbons sector and the beginning of tax administration modernization.
The robust outlook for hydrocarbon exports represents an opportunity to speed up the pace of economic and social development. The gradual opening up of the economy calls fir accelerated reforms, modernization of the infrastructure, strengthening of the available human resources and increased support of the private sector.
The government's economic programme is based on increasing public investment in the key sectors, such as infrastructure, housing, education and health, and completing the transition to an open market economy through the acceleration of structural reforms.
Transition to a competitive market economy also calls for streamlining the tax system and a dynamic monetary policy in order to control inflation. This requires a strengthening of control by the Bank of Algeria over the banking sector. The priorities are to privatize the targeted public banks and to intensify the efforts to rationalize the financial relationship between the banks and the public enterprises.
Regional integration is also considered to be important for drawing the greatest advantage possible from the Association Agreement with the European Union and for attracting more foreign direct investment. In November 2005, a conference in Algiers on facilitating trade in the North-African region provided an excellent opportunity to strengthen regional cooperation.

The European Union and Algeria signed an Association Accord in 2001 and the agreement was ratified by the European Parliament in 2002. The agreement envisages the gradual removal of import duties on EU industrial products over 12 years (25% following ratification of the treaty, 40% after a seven-year period and the balance after 12 years). Many Algerian agricultural products will be granted duty-free access to the EU. Algerian industrial products already enjoy duty-and quota-free access to the European markets, but the country must in return cut tariffs on EU farm imports.
The EU accounts for over 60% of Algeria's exports and more than 65% of its imports.

Basic Economic and Financial Indicators, 1999-2003

Source.: Algerian authorities, International Monetary Fund

Sectoral Distribution of GDP, 1999-2003

Source.: Algerian authorities