Algeria, the world’s fifth largest gas producer, is supplying around a quarter of the EU’s gas imports, and is hoping to expand further into that market. Its valuable position is firming with pipelines under construction to southern Europe and liquefied natural gas (LNG) deals with northern Europe. And although Russia remains the major gas supplier for the EU, Algeria’s flexible gas sector and geographical location are factors playing in its favor.
On July 12, Algeria and the EU finalized an agreement dealing with territorial restrictions, allowing companies of EU member states that import Algerian gas the right to resell it either within their own domestic markets or to third-party countries.
In return, Sonatrach, Algeria’s state oil and gas company, will have the right to a share of the profits earned by European companies, for LNG contracts only. Sonatrach will also be allowed to sell LNG shipped by tanker directly on the European market.
The deal will consolidate Sonatrach’s position as one of the main suppliers of natural gas to the EU, with Algeria behind only Russia and Norway.
Deepening the Algeria-EU relationship
Chakib Khelil, the Algerian minister of energy and mines, said the agreement was a further step toward deepening the strategic relationship between Algeria and the EU. “Algeria supports the establishment of Sonatrach as an active player in an open, transparent and competitive EU gas market,” Khelil said at a signing ceremony in Brussels, where the final details of the deal were hammered out after lengthy negotiations.
The EU’s Competition Commissioner, Neelie Kroes, also attended the ceremony. “The agreement reached constitutes a major breakthrough in our relations with one of Europe’s most important suppliers of natural gas and eliminates an important obstacle for the creation of a single EU-wide market in gas,” said Kroes.
The agreement with Algeria was essential for the EU, having launched the fully deregulated energy market within the bloc on July 1, allowing clients to choose their preferred suppliers of electricity and gas, rather than be tied to state operated utilities that continue to dominate energy markets in some EU member states.
Algeria agreeing to allow the unrestricted sale of its gas to third parties means that its present and future contracts are now in keeping with the EU’s new open market policy. Algiers had long held out against the ending of destination restrictions, fearing the move could result in wholesale reselling of its gas without any benefits coming its way.
Algeria’s long running dispute with Spain, over restrictions on how much of the gas piped through the Medgaz gas pipeline Sonatrach is allowed to sell directly on the Spanish market, appears headed to the courts.
The Algerian company has been limited to selling no more than 1 billion cubic meters of gas annually in Spain, despite being the largest single shareholder in the Medgaz project, with a stake of 36%. Sonatrach hoped to sell up to 3 billion cubic meters of gas a year.
At the beginning of July, Khelil said that Algeria would lodge an appeal against the Spanish energy watchdog’s ruling to limit Sonatrach’s sales.
“We will lodge an appeal with the higher authorities in Spain … as well as the European Commission,” Khelil said. “What we are asking is to be treated like any other operator, Spanish or otherwise, whether for the distribution of gas or for the shares in the Medgaz project.”
Algeria and Spain are also involved in international arbitration over Sonatrach’s demand that the price of Algerian gas imports be increased in two stages by 20%, to keep the tariff in line with world prices. At the present rate, Algeria stood to lose around $300 million annually, according to Khelil.
Only days after the agreement was signed, Algeria moved to strengthen its energy production infrastructure, announcing more than $4 billion worth of construction tenders for new processing facilities.
In mid-July, Algeria awarded French firm Total the $3 billion tender to construct and operate a cracking steam facility with the capacity to produce 1.4 million tons of ethane annually. The plant will also produce polyethylene and ethylene glycol, with Sonatrach funding 49% of the project and Total the remaining 51%.
The same day, Sonatrach and a consortium of foreign firms, including Mitsui of Japan and Kuwaiti company Qurain, were awarded the contract to build and operate a $1 billion methanol plant with a projected output of 1 million tons a year. Again, Sonatrach will hold 49% of the project, with the other members of the consortium combining to take the rest. With so many projects in the pipeline, the future of the petrochemical industry in Algeria seems to be brighter than ever.
