Why Can’t Algeria Solve Europe’s Gas Woes?

Robin Mills

Image courtesy of Fethi Belaid / AFP

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.

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 80-90 bcm 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 2021’s 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 expiry 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.

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 10 bcm would be a helpful if not huge contribution to replacing 130 bcm 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 3.65 bcm of annual production from November, very favorable timing with the European winter looming. But other major new additions won’t 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 M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis.