Eni, Sonatrach Tackle Gas Contract Extension

Algerian state Sonatrach and Italy’s Eni have agreed to strengthen their gas sector cooperation and broached the thorny issue of what to do when a major gas deal between them lapses next year.

The two companies agreed commercial conditions for the 12-month gas year starting October 2018, and further agreed to begin “negotiations to look into extending the gas supply beyond the contractual deadline of 2019,” both said.

Both CEOs also signed an agreement July 17 in Milan to create a gas hub in Algeria’s Berkine basin from their existing BRN (block 403) and MLE (block 405b) fields by building a 180km pipe between them. Sonatrach said the pipelay would be a “fast track” construction.

Eni CEO Claudio Descalzi remarked: "This is a further step forward in the strategic expansion of our upstream activities in Algeria and in Eni's renegotiation of long-term gas supply contracts; it also demonstrates a strong spirit of collaboration between Sonatrach and Eni.”

Also both firms agreed July 17 to further strengthen cooperation in petrochemical, renewables, offshore projects in Algeria, and other international opportunities. Sonatrach has been trying to interest foreign firms in exploring Algeria’s onshore shale potential. That’s unlikely to interest Eni. However, it and ExxonMobil last year agreed to invest jointly in offshore conventional exploration. 

Eni has been present in Algeria since 1981 and says it has equity production of over 100,000 barrels of oil equivalent per day, making it the country's main international player.

The context behind the contract that runs to 2019

Descalzi in late 2016 acknowledged a breakthrough for Eni when it persuaded Sonatrach to align pricing of its long-term gas contract with Sonatrach away from oil indexation for the first time since deliveries began in 1983. But it's likely that the contract's pricing was instead revised to a hybrid, where oil-indexation is partly maintained but within a price corridor set by gas hub prices, such as was recently explained by a recent IGU report on wholesale gas prices.

Eni’s original long-term contract with Sonatrach was for some 20bn m³/yr (it almost offtook that volume in 2012). However in recent years its offtake has been much lower: Eni's annual reports show it imported 13.18bn m³ in 2017 from Algeria (including some LNG), up from 12.9bn m³ in 2016, but only 6.05bn m³ in 2015.  

In October 2017, Sonatrach CEO Abdelmoumen Ould Kaddour said his company was thinking of setting up joint ventures with foreign firms to sell its gas; such a move would effectively end its monopoly over piped gas sales. It’s not believed this has yet happened, but Eni's strategy is to have more of its gas import portfolio in Europe made up of 'equity gas', rather than purely bought-in supplies. It has explained that 'equity' can mean gas produced under partnerships. At present, Sonatrach markets all gas produced in Algeria, even by joint ventures, and remunerates partners in oil or NGLs.

Eni has alternatives to simply renewing the Sonatrach contract on a long-term basis at the same volume; for instance, it is aiming to co-develop the Mamba LNG venture in Mozambique with ExxonMobil which, if sanctioned in the coming months, might start up in 2023/24. So it could offtake from there; or instead seek to build up equity production elsewhere such as in Norway or Libya, and even Russia. 

(The banner photo shows Eni CEO Claudio Descalzi on the left and his Sonatrach counterpart Abdelmoumen Ould Kaddour on the right and comes courtesy of Sonatrach)