European politicians have been scouring their neighborhood to find new gas
supplies to replace those threatened by Russia. They have secured some promises
in their tour that took them from Azerbaijan via the Gulf to Egypt and Israel.
They have visited Algeria too – but Africa’s largest country and biggest gas
producer remains a prickly partner.
اضافة اعلان
Algeria exports gas via pipelines to Spain and
Italy, and by tankers from two liquefied natural gas (LNG) plants. It has long
played a critical role in Europe’s gas balance, as the third-largest supplier
(after Russia and Norway), providing 10 percent of the continent’s imports.
Outgoing Italian Prime Minister Mario Draghi visited
Algiers on July 18 and came back with a promise from President Abdelmadjid
Tebboune to supply $4 billion worth of gas. State firm Sonatrach says it has
delivered more than double the forecasted amount to Italy so far this year. The
TransMed pipeline that links the countries via Tunisia has been out for
maintenance; after its intended restart this week, flows will have to speed up
significantly to reach the target.
Algeria achieved record gas output last year, with a
leap to more than 100 billion cubic meters (bcm), a surprise after a period of
stagnation since 1999 when production has wobbled between 80-90bcm per year.
The country consumes about half of its produced gas itself, and rising domestic
use had been eating into exports, but the production boost saw exports at
levels not hit since 2008.
This may have been a false dawn. The ability of
Algeria to help Europe through its gas crisis — profiting handsomely in the
process — is hampered by two factors: capacity, and politics.
After the 2021 record, gas exports fell sharply in
the first half of 2022. While flows to Italy have risen a little, those via a
pipeline to Spain and Morocco, and LNG supplied by ship, have all dropped. The
culprit is a little puzzling. Supplies to Morocco have been cut off entirely
following the expiration of the contract for the Gaz Maghreb Europe (GME)
pipeline, and a major political bust-up between Algiers and Rabat over the
disputed territory of Western Sahara and Morocco’s normalization with Israel.
GME runs on to Spain and, though its loss has partly
been substituted by higher flows through another pipeline — the Medgaz line
that runs directly under the Mediterranean from Algeria to Spain — this is not
a complete replacement. Spain has begun supplying Morocco by running GME in
reverse, irritating Algiers which does not want its gas circuitously reaching
its rival. On July 24, Sonatrach reported that Medgaz suffered a breakdown in
the Spanish leg of its subsea route, but Spanish operator Enagas denied this.
The incident might have been intended as a warning.
Algeria could have directed the gas not going to
Morocco and Spain to its LNG plants, which are running at only 40 percent or so
of their capacity. Yet supplies from these also dropped. Domestic demand would
have risen and, as Algeria’s oil production ceiling under the OPEC+ deal rises,
it may need to re-inject more of the produced gas to support oil output.
At the start of July, Sonatrach announced a large discovery at its biggest gas field, Hassi R’mel, which will be developed speedily to add 3.65bcm of annual production from November, very favorable timing with the European winter looming.
None of these factors seem fully sufficient to
explain the drop, and with record-high European gas and LNG prices, Algeria has
every incentive to maximize sales. It may be trying to put pressure on its
customers to raise the prices in their contracts, and indeed it has signed a
revised higher-priced deal with Engie of France.
So far, therefore, Algeria’s contribution to
replacing Russia has largely been limited to cutting overall exports while
switching supplies from Spain to Italy.
That shift is not a bad thing for European energy
security: the Iberian Peninsula has surplus LNG import capacity and very
limited connectivity with the rest of the continent, while Italy has typically
obtained almost half its gas from Russia and a quarter from Algeria. But if
Algeria could get back to the export levels of the first half of last year,
another annual 10bcm would be a helpful if not a huge contribution to replacing
130bcm of Russian gas.
Algiers, though, dances to no-one’s tune but its
own. With high hydrocarbon prices, its shaky fiscal situation is improving, and
it holds the upper hand in negotiations. It has strong relations with Russia,
whose foreign minister Sergei Lavrov visited in May.
The country has long been accused of
underinvestment, unattractive fiscal terms and painfully slow bureaucracy,
hampering hydrocarbon sector development. But new deals have been signed since
a new oil law was passed in 2019, notably a $4 billion oil project with ENI,
France’s TotalEnergies, and the US’s Occidental. Italy’s ENI has been
particularly active, agreeing to take additional volumes of gas through the
TransMed pipeline and to invest in boosting Algerian production.
At the start of July, Sonatrach announced a large
discovery at its biggest gas field, Hassi R’mel, which will be developed
speedily to add 3.65bcm of annual production from November, very favorable
timing with the European winter looming. But other major new additions will not
arrive until 2024, while Sonatrach continues to battle rising domestic demand
and decline from maturing fields.
For Algeria to help alleviate the European gas
crisis, diplomacy will have to continue, which might require some awkward
concessions from Spain. European solidarity will be important to limit
competition between Madrid and Rome. Gas distribution companies will probably
have to bite the bullet on paying significantly higher prices.
On a more positive side, Europe can offer to help
tackle the 8 bcm of Algerian gas that goes up in smoke each year — flared at
the fields because of limited capacity to gather, process, and transport it. It
can save Algerian domestic gas by cooperating on Saharan solar power.
So, facing its own upstream constraints, non-aligned
stance, and complex and opaque decision-making, Algeria is no savior for
Europe’s gas needs. Still, with some intelligent diplomacy and investment,
Europeans may still be able to coax some more much-needed energy from the
Sahara.
Robin Mills is CEO of Qamar Energy, and author of The Myth
of the Oil Crisis. Syndication Bureau.
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