Will Algeria lose its gas moment?
Summary: Italy and Europe look to Algeria to reduce their
dependence on Russian gas, but the North African country’s lack of
strategic economic thinking has reinforced the perception that it is an
unstable partner.
We thank Francis Ghilès for today’s article which is a version, edited for length, of a paper delivered at the Africa Energies Summit
in London 18 May. He is a specialist on security, energy, and
political trends in North Africa and the Western Mediterranean and an
associate senior researcher at the Barcelona Centre for International
Affairs (CIDOB.) From 1981 to 1995 Francis was the North Africa
correspondent for the Financial Times. He is a regular contributor to
the Arab Digest newsletter and podcasts. His most recent podcast Algeria and Europe’s scramble for gas is available here.
With about 8% of market share, Algeria is the third-biggest natural
gas supplier to Europe. It has direct pipelines to Italy and the Iberian
Peninsula. It also supplies gas in Liquefied Natural Gas (LNG) form to
France, Belgium, the UK, Greece and Turkey. It has always honoured its
contracts since it started exporting gas in 1964.
As Italy has been working to reduce its dependence on Russia, it has
been looking to Algeria, its second-largest gas supplier, which has
agreed to increase its deliveries with the aim of reaching 30 billion
cubic metres/annum by 2024 rather than the current level of 21
bcm/annum. Whether it can seize the moment offered by the war in
Ukraine as Europe’s Faustian pact with Putin unravels spectacularly will
depend on the capacity of the country’s rulers to construct a long-term
strategy. That will only happen when they rewrite the rules of the
command economy which have prevailed since independence.
The military and missed opportunities
Fifty years ago, the minister of industry, whose remit included
energy could boast that “Algeria will be the Japan of Africa in the year
2000.” Nothing of the sort happened and Algeria’s military never learnt
the lessons from the economic success of countries such as China, South
Korea and Turkey. It persists in its refusal to allow major Algerian
companies to integrate into the world market. Many private
entrepreneurs, economists and engineers have left a country which excels
at cannibalising its elites.
For a generation, Algeria has been deindustrialising. Investment in
industry amounted to 30% of GDP until the early 1980s. Today it amounts
to less than 10% - compared to an average of 30% in emerging Asian
economies. The economic ambitions of Algeria’s second president, Colonel
Houari Boumedienne (1965-1978) may have been exaggerated but he must be
turning in his grave when he contemplates the economic illiteracy of
his successors. The result is that the next generation is being deprived
of jobs and - more importantly - hope. To enhance its role as gas
supplier to Europe would offer the country more regional influence.
There are plenty of new gas reserves to be found in Algeria. The war
in Ukraine offers the country a unique opportunity to modernise its
energy sector and, by developing the production of hydrogen, ammonia and
solar power, to insert its economy into global networks. Do Algeria’s
leaders appreciate that a well-equipped army is no substitute for a
diversified and open economy? I very much doubt so.
A problem in plain sight and a potential solution
The outlines of Algeria’s energy problem lie in plain sight. Gas is
supplied to Sonelgaz, which has a monopoly on the production and sale of
electricity at less than $0.30/MMbtu, a price which does not cover
(state-owned energy company) Sonatrach’s production costs. The
efficiency rate of its old power plants is very low (around 36%) and
grid losses are high. Exports will start to decline after 2025 due to
lack of output and could grind to a halt after 2030 as production may
have to be reserved for domestic consumption.
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