Algeria’s Gas Exports to Europe
Algeria is one of the OPEC member countries and joined the OPEC in 1969. It is one of the Gas Exporting Countries Forum (GECF) member countries, as well.
The country is classified as an upper middle-income country, mainly due to its oil and gas resources. The oil and gas sector is the backbone of the economy, accounting for about 20% of the gross domestic product, and 85 % of total exports.
According to the 2018 data, Algeria’s proven natural gas reserves stand at 4,504.0 bcm. Its natural gas exports stands at 51,424.0 mcm. However, Algeria’s natural gas pipeline exports to Europe are getting squeezed due to cheaper Russian supplies and a global abundance of the liquefied form of the fuel.
Algeria's state-owned Sonatrach has long-time experience in natural gas and LNG exports. Italian companies are among its major customers. Recently, Sonatrach has agreed with Italy's Edison to renew their gas supply contract for eight years to 2027, with volumes set at 1 bcm/y. Renewal of gas supply contracts by Sonatrach was the latest in a string of with its European buyers in the past 18 months as the Algerian state-owned company looks to lock in long-term supplies to the end of the next decade amid an increasingly competitive European gas market.
The new eight-year supply contract with Edison followed a deal signed in 2008 for the supply of 2 bcm/y of Algerian gas to the Italian company via the TransMed pipeline. The new agreement - like the previous ones with Enel and Eni - is for lower volumes.
"Through this agreement, the two sides confirm and consolidate their long-term partnership in the supply of gas to the Italian market," Sonatrach said.
Edison said: "This agreement, strengthening the long-term relationship between the two companies, provides Edison and Italy with more diversified and reliable sources of natural gas, diversifying its supply sources, increasing security and gaining access to a reliable source of gas."
ENEL, ENI Deals
The Enel deal in May saw Sonatrach renew its supply deal until 2028, with the possibility of adding a further two years to the agreement at a later date. Enel's previous long-term gas import deal with Sonatrach from 1997 was due to expire at the end of 2019.The renewed Enel agreement - set to come into effect January 1, 2020 - is for the supply of 3 bcm/y of Algerian gas, down from 7 bcm/y. That deal followed another new long-term contract Sonatrach agreed with Eni in mid-May. That new agreement is for the import of 9 bcm/y of Algerian gas through 2027 with an option to be extended by a further two years to 2029.As well as renewing its import agreements with Enel, Eni and Edison, Sonatrach has also signed new deals with Portugal's Galp, Spain's Naturgy and Turkey's Botas.
Algerian supply
Italy last year imported a total 16.8 bcm of gas from Algeria, slightly down on the 18 bcm imported in 2017. Algeria accounts for around 25% of Italy's annual gas supply. Eni's gas import contract with Sonatrach is still thought to be oil-indexed, though Eni has worked to introduce more hub indexation into other gas import contracts. Algeria's oil-indexed gas contracts have been well out of the money this year compared with European hubs, given the sharp fall in European gas prices. Oil indexation remains sub-economic versus the European gas hubs given the sustained oil price strength and the sharp fall in gas prices across Europe due to a well-supplied market and dampened demand.
New Law
In line with the intention for development of its hydrocarbon reserves, Algeria has approved a new Hydrocarbon Law aimed at attracting foreign investment into its oil and gas sector. The Hydrocarbon Law was drafted in collaboration with five major international oil companies operating in Algeria.
Algeria relies on hydrocarbons, which represent 40% of government revenues and 95.6% of its exports. Backed by state-owned Sonatrach, the new Law comes at a time where the country needs increased activity in its reserves and exploration fields.
European clients of Sonatrach have “greatly reduced their demand” for conventional gas from Algeria, resulting in a 25% drop the level of sales expected this year, said one of the officials at the state-owned energy company.
Algeria is the third-biggest gas supplier to Europe. Its lower pipeline exports are evidence of how new LNG supplies from the U.S. to Australia and Russia are overwhelming the market and driving prices lower. That has reduced the competitiveness of the North African country’s pipeline gas contracts, which are mostly tied to oil prices, according to the energy consultant Wood Mackenzie.
To compensate, Sonatrach turned more of its gas into LNG. It’s selling those supplies on the spot market for immediate delivery at a rate about a quarter higher than expected this year, Mazighi said. It’s the first time that spot sales represented 30% of the company’s LNG exports.
“In 2019, the trend was completely reversed due to the warm winter in Europe,” said Mazighi. “2020 is expected to be a difficult year too. If we have a warm winter as last year, we will have to do a lot of spots, too.”
Sonatrach’s LNG sales are set to reach 5 billion cubic meters this year, an “historical record” over the past 20 years, and representing about 60 shipments. More than half of the company’s LNG volumes were sold in Asia.
To wrap up it can be argued that there are some important factors which significantly influence the Algeria's exports trend: Algerian pipeline-gas prices are about $2.5/mmbtu higher than northwest European prices, according to Wood Mackenzie. Lower Algerian pipeline-gas exports have created room to help balance the European LNG market oversupply. Cumulative Algerian gas pipeline exports to Italy are down about 1.3 billion cubic meters since Oct. 1, compared with the same period last year, according to a "Bloomberg NEF report". Algerian exports to Italy will be down by 3.7 bcm winter-on-winter based on the quantity of capacity booked at Mazara del Vallo, the entry point of Algerian gas to Italy.