On Monday 10 and Tuesday 11 October the European Commissioner for
Energy Kadri Simson became the latest in a string of top European
officials to visit Algeria in search of more natural gas [photo credit:
@KadriSimson]
Is flaring a solution?
A recent report
argued that if North African gas producers - Algeria, Egypt, Libya and
Tunisia - were able to reduce gas from flaring, venting and leaking,
Europe could, “within 12-24 months, start to substitute up to 15% of
Russian gas via highly underutilised pipelines and liquefied Natural gas
(LNG) terminals in the region” but Algerian officials have contested
the statistics contained in a World Bank study on which this report is based. It is also worth noting that the July-August issue of
a respected energy publication notes that “Algeria delivered
significant decreases in overall flaring per barrel of oil equivalent
(BOE). The estimated reduction totalled 3m tonnes of CO2 (which) marks a
significant shift for a country where the norm has been a steady
increase in flaring over the last decade.”
Further reducing flaring will certainly allow more gas to be produced
in the future. For now, however, the more promising route is the fast
track approach taken in the recent contract
signed by Sonatrach and Italy’s national oil company, ENI, where
Italian technical teams are flown in to work in existing gas fields
where production can be increased within 12 to 24 months. Italy, too, is
the only European country which is benefitting from important increases
in gas deliveries from Algeria in 2022 thanks to the strengthening of
relations between the two countries resulting from the Italian
president’s state visit to Algiers last October followed by the then Italian prime minister’s visit last May and again in July.
Beyond that, there is no shortage of gas in Algeria as many areas of
this vast country have either not been explored or need re-exploring
with more modern techniques. Developing a new gas field however takes
between 3 and 5 years.
Europe pays the price for bad energy policy
For the past two decades Europe has pursued an energy policy which
helps explain the current lack of gas worldwide. EU buyers fought hard
to reduce the long-term gas contracts that had prevailed until then -
typically 15-20 years with Sonatrach. Those long-term contracts offered
security of supply and allowed the strategic development of new gas
fields, qualities that Europe now so urgently needs.
Another point is worth recalling. Four decades ago, US president Ronald Regan warned Europe,
and Germany in particular, to reduce its dependence on Russian gas. He
argued in favour of alternative sources, notably Norway and Algeria.
Norwegian resources were developed but some Europeans argued that
sources such as Algeria were no more reliable than Soviet gas. Granted
there was mismanagement of the energy sector throughout most of the
twenty-year presidency of Abdelaziz Bouteflika (1999-2019) but Algeria
cannot carry all the blame for the current levels of gas production.
Moving from the dollar?
According to well-informed sources in Algeria since last summer a new
clause is being inserted into gas contracts between Sonatrach and its
foreign customers. It will allow for a change in currency denomination
in each contract which both parties can alter every six months. The
clause gives Algeria much greater control over its foreign policy,
notably vis a vis the US dollar in which most oil and gas contracts are
traditionally labelled. It reflects the growing wariness in Algeria and
many other countries about the manner in which the US uses sanctions in
what some observers feel is a too overt political manner. Meanwhile
Algerian hard currency reserves
reached US$46.5 bn in July and with gas exports at high prices that
figure is expected to rise to $US80 bn (however given the opacity of the
government even that figure could be an underestimate.) As well, the
country’s already insignificant external debt has steadily declined
since July 2020. (The government spends heavily on weapons purchases.
It is the sixth largest importer of arms in the world and the largest in
Africa. Algeria’s weapons are sourced from Russia
(75%), Italy, France, Germany and China and its rulers practise a
policy on non-alignment internationally which has been out of fashion
for a generation but is part of the country’s DNA.)
Shifting geopolitics
The geopolitics of gas have shifted significantly in the Western and
Central Mediterranean over the past year. Escalating rivalry between
Algeria and Morocco closed the Maghreb-Europe pipeline,
which runs through Morocco and under the Straights of Gibraltar, on 1st
November 2021. The closure of the pipeline can be laid at the door of
the acrimonious tit for tat that has characterised relations between the
two North African countries for much of the past half century. However,
bad relations between the two neighbours are not likely to escalate
into anything more serious. Morocco has its own economic and political
difficulties and an ailing Moroccan king (see our newsletter of 28 September)
is unlikely to want to deal with a serious crisis with his eastern
neighbour. On their side of the border, the chief of staff of the
Algerian army, Said Chengriha is a safe pair of hands whose key purpose
is to modernise the country’s army while avoiding direct military
confrontations.
Spain’s diplomatic tilt
towards Morocco on the Western Sahara issue in March 2022 has not
seriously impacted Spanish imports of Algerian gas, despite the souring
of political relations between Madrid and Algiers. Flows of gas through
the Medgas pipeline which links Algeria directly with Spain are
currently running at an estimated 10.5BCM and Spain’s key importer, Naturgy, last week agreed to clear an estimated US$7.5bn backlog in payments on existing contracts due to Sonatrach.
The Italian hub
North African energy links with Europe were somewhat redrawn when
Italy signed a major contract with Algeria in November 2021 which
redirected some of the latter’s gas exports towards Italy. This contract
envisages the throughput of Algerian gas via the TransMed pipeline
increasing from 21BCM annually in 2021 to 30BCM by the end of 2023 but
current flows suggest the 30BCM figure could be reached much sooner. ENI
has become a privileged partner of Sonatrach (see our newsletter of 31 March)
and the $1.5 bn contract signed between the two companies includes
projects to explore and develop new sources of gas as well as produce
hydrogen and electricity from renewable sources. The hydrogen project is
a pilot scheme.
Italy’s growing links with Algeria are turning the former into the
Mediterranean’s new gas hub as pipelines feed gas from Azerbaijan, Libya
and Algeria to its southern shores while it also imports growing
volumes of LNG gas from Egypt. At the other end of the Mediterranean
meanwhile a German company has signed an agreement with Morocco to
supply it with LNG bought on the open market which is regasified in one
of Spain’s LNG ports and moved back to Morocco in reverse flow through
the Maghreb-Europe gas pipeline.
As for Algeria it seems fated to remain a reliable gas partner of
Europe but a rather dull one. For the country to become an exciting
partner, it needs to modernise the management of its energy sector,
revise its industrial policy and reform its Jurassic age banking system.
In other words, it needs to welcome foreign investors and allow private
Algerian companies to join the world economy.