Algeria seeks to revive gas industry, banking on higher EU demand [Gas in Transition]

Algeria has not done itself many favours in recent years. Its 2005 hydrocarbon law, tax-heavy and loaded with restrictions, drove investors away, depriving the oil and gas industry of investment and leaving it now in need of modernisation. Furthermore, the country’s repressive political/economic system does little to encourage domestic local business and leaves its citizens dependent on the state. Nonetheless, Algeria proved vital for Europe following Russia’s invasion of Ukraine, and this role seems likely to expand as the EU looks again at its relationship with Algiers.

A visit to Algeria earlier this year by Italy’s new prime minister, Giorgia Meloni, appears to have created a new energy industry bond between Algeria and Italy. Italian energy giant Eni has been active in Algeria and North Africa for decades, giving weight to Meloni’s proposed ‘Mattei Plan.’ Named after Enrico Mattei, the founder of Eni who fostered energy relationships with North African countries in the wake of the Second World War, the plan is meant to work to the interests of both countries. Eni is making new investments in Algeria that should boost gas exports to Italy and perhaps eventually into the heart of Europe. For its part, Algeria needs the investment to revitalise its energy sector and lift its economy.

In recent weeks, Eni has taken a number of steps to expand its activities in Algeria and other North African states such as Libya and Egypt. In late February, Eni completed its acquisition of BP’s operations in Algeria, including the 45.9% share that BP held in the In Amenas gas field, and BP’s 33.2% holding in In Salah, both of which are located in Algeria’s southern desert.

This acquisition, plus the recent start-up of oilfields in the Zemlet el Arbi concession in the Berkine North Basin, where output is around 10,000 barrels per day, will push Eni’s production from Algerian assets to some 130,000 boepd during 2023.

Eni CEO Claudio Descalzi accompanied Meloni to Algiers in late January and met with Sonatrach CEO, Toufik Hakkar. During the visit, the two sides signed agreements concerning greenhouse gas (GHG) reductions and an increase in Algerian energy exports to Italy by expanding the capacity of existing gas export pipelines and the construction of a new pipeline straight to Sardinia (the Galsi pipeline) and on to mainland Italy. Discussions included eventual production and export of hydrogen, and an electrical cable, via this route.

Since the start of the Ukraine war and the stoppage of most Russian gas imports to Europe, Italy has managed to replace its Russian supply, which accounted for nearly half of the country’s demand, in part with increased gas imports from Algeria. During a follow-on visit by Meloni and Decalzi to Libya, that country’s National Oil Corporation (NOC) signed an $8bn agreement with Eni providing for increased gas output for domestic demand as well as boosting exports via the Green Stream gas pipeline to Italy.

Eni’s future plans with Algeria also cover security agreements, emissions reductions, and a new deal between Eni and infrastructure constructor Snam for the formation of a new company called SeaCorridor, which is expected to be involved in future pipeline infrastructure.

Algeria sold about 100bn m3 of natural gas during 2022, about half of which went to meet local demand with the other half exported. Of that, about 22bn m3 was shipped to Italy via the Trans-Mediterranean pipeline through Tunisia and Sicily. Some 9bn m3 went to Spain via the Medgaz pipeline, and 13bn m3 went to Europe as LNG. Following a political fallout with Morocco and Spain over the Western Sahara issue, Algeria closed the Maghreb-Europe pipeline (known also as GEM), which runs through Morocco and across the Strait of Gibraltar, in late 2021. That closure stopped gas exports to Morocco.

The Hassi R’Mel gas field, located in north-central Algeria, is the country’s main gas producer, and from there gas is funnelled into the export pipelines and to the coastal cities of Arzew and Skikda where LNG export facilities are located.

Reformed hydrocarbon law

Stung by declining foreign investment in its hydrocarbon sector, Algeria in January 2020 changed its 2005 Hydrocarbon Law, reducing taxes on exploration and production activity and removing customs duties and taxes on imported upstream equipment, along with other changes that could bring modernisation. With the reforms, Algeria hopes to address the problems of ageing oil and gas wells, as well as outdated infrastructure, and move into exploration and development of new fields in a country that is under-explored.

Fluctuations in oil and gas prices in the midst of the last decade, coupled with a lack of investment, created economic hardships in Algeria, with the state having to tap into hard currency reserves to cover a running budget deficit.

An official from the energy ministry recently said on Algerian radio that the country would increase its natural gas production by 10bn m3 beginning in 2024 thanks to agreements signed with foreign firms, among them Eni. This is expected to make around 110bn m3 available to markets, including domestic, where demand is growing.

Miloud Mdjelled said contracts signed with foreign firms during 2022 amounted to $6bn, adding that the additional quantities of gas produced will allow Sonatrach to “meet demand, in particular, international contracts,” according to ANSAmed.

Crude oil production is slated to increase by 20mn metric tons to around 120mn mt, Mdjelled said. Algeria produced 130bn m3 of gas in 2022, of which 56bn m3 was exported, while 50bn m3 was consumed  domestically. The remainder was used in enhanced oil recovery (EOR).

Mdjelled added that $20-25bn would be invested in green hydrogen production by 2035 and that it would be transported to Europe via the new [Galsi] pipeline between Algeria and Italy.

Billions of dollars of investment are needed in Algeria, and to sustain exploration and development, Sonatrach is hoping to arrange medium to long term contracts from gas buyers. Prior to the energy security crisis created by the Ukraine war, Europe was particularly keen to wind down its use of natural gas, resulting in a reluctance by companies to commit to 10-to-20-year supply and purchase agreements. Having had to scramble for gas supplies during 2022, that attitude is not now so strong within gas markets.

Along with anticipating more upstream work and new infrastructure investment, Algeria has changed its mind on shale oil and gas exploration and development. The country is considered to have huge shale potential, but opposition to hydraulic fracturing (fracking) by locals prevented Algeria from moving into that field when that side of the industry was taking off. However, if Chevron’s expected efforts in shale exploration in Algeria prove successful, shale gas could have a huge impact.

Energy security

With security of supply now a bigger issue than ever due to the consequences brought about by the war in Ukraine, Algeria could wind up being an ever-larger contributor to the European market. Historically, it has been the number three source of gas to Europe after Russia and Norway.

During a recent visit to Algiers, EU representative for foreign affairs and security, Josep Borrell, described Algeria as a “major partner of the EU in the sector of energy.”

Borrell said that as Algeria is an energy reliable partner, it plays “a significant role in securing European energy supplies.” The EU “wishes to strengthen and deepen this mutually beneficial partnership by working together to face the double challenge of energy security and the sustainability of energy resources,” he said, adding that the country also has an excellent potential for renewable energy, which he said is under-utilised. Europe is ready to mobilise technology and capital to support renewable energy development in Algeria, he added.

Borrell also called for Algeria to end its dispute with Spain over the Western Sahara and return to normal trade ties.

A Trans-Sahara pipeline?

Algeria claims the potential to become a gas hub through involvement with the building of a gas pipeline across the Sahara Desert from Nigeria. The 4,200-km pipeline would run north through Niger and then connect with Sonatrach’s facilities in Hassi R’Mel. The project became a topic of discussion in 2009, but interest fell away and it has only resurfaced recently as a possibility. Algeria would benefit from the pipeline through transit fees and access to a new large volume of gas if it could manifest the infrastructure.

Also under consideration is the Nigeria-Morocco Gas Pipeline (NMGP) a 6,000-km pipeline that would run from Nigeria through a number of West African countries, providing them with gas in the process and winding up in Morocco, from where gas could be piped to Europe through the Maghreb-Europe pipeline.

But the EU continues to have its heart set on drastically cutting its use of natural gas by the end of this decade, and certainly by the middle of the next one. The war in Ukraine has been a hiccup in Europe’s energy transition plan, and whether companies, governments and lending institutions would see the viability of another very long gas pipeline to Europe will likely remain unclear for some time.