N Africa pipes more to Europe: TImera

North African exporters – mostly Algeria – have stepped up their deliveries to Europe, according to analysis from consultancy Timera Energy May 24. Norway and Russia, for different reasons, have been under-delivering despite the very high prices. Oil indexation makes Algerian gas relatively cheap for their existing customers, while spot sales command a premium.

"North African supply has been flying a little beneath the radar in recent years, but supply into Italy and Spain is increasing significantly in 2021," Timera said. 

Unlike Norway and Russia, which have adapted their sales to Europe's requirements for spot pricing, North African gas supply contracts remain dominated by indexation to Brent crude. Algeria accounts for 25-35bn m³/yr of European gas imports, which go roughly equally to Italy and Spain.

Six months ago, Dated Brent was trading in the low $40s/barrel, which at a generous 12% discount would be about $5/mn Btu, or just over Dutch hub prices. June gas was trading at the Title Transfer Facility at close to $9/mn Btu May 20.

Analysis shows that  buyers have been nominating oil-indexed gas as it is cheaper than hub gas. There is a six-month lag in the indexation, so when hub prices are low as they were last year, Algerian gas is less in demand. "But in 2021 they have shifted back deeply ‘in the money’, as hub prices soar, but oil-indexed contract prices remain low given the 6 month lag," Timera said. "These pricing dynamics have seen Algerian imports to Italy and Spain rebounding significantly in Q1, with 5.5bn m³ flowing into Italy alone across the first quarter."

High flows are likely to continue through 2021, given the ongoing impact of the oil price lag relative to rising hub prices.