Abdelaziz Bouteflika, the Algerian president whose candidacy fuelled weeks of protests in his nation, announced on March 11 that he would not seek a 5th (!) term in office. If the reader is not interested in Foreign Politics, this may seem a dull issue, nevertheless it gains another importance if I tell you that Spain imports more than 50% of its gas from Algeria and that we are speaking about the largest country in Africa and in the “Arab World”.
Algeria and its hydrocarbon resources
Oil was discovered in the Sahara in January 1956 – 12.2 billion barrels of it. Not just that, it also had the 10th largest proven natural gas reserve in the World.
At that time, Algeria was French territory, and the French spent no time in blocking access to these deposits to all except French companies (exceptions made to foreign companies that partnered with the French). After the Algerian war, the country achieved independence in 1962, but alas, the agreement between both nations established a joint body, responsible for “the development of the wealth of the Saharan subsoil” (i.e. guaranteeing the supply of France with Algerian oil and prevent Algeria from creating other commercial links) and SONATRACH (nowadays the largest company in Africa) was born.
Even after joining the OPEC in 1969, it would have to wait until 1971 before achieving the nationalization of most of its oil fields and the totality of its natural gas fields through its national company – SONATRACH.
With 20 trillion cubic meters of technically recoverable shale gas, Algeria sits in 3rd place in this category. The country also exports 540 thousand bpd (or 49%) of its total production of about 1.1 million bpd. Its biggest customer is Southwestern Europe, and its massive hegemony derives from the Maghreb-Europe (MEG) High Pressure Gas pipeline, which connects mainland Europe (Cádiz/Cordoba in Spain and the onto Campo Maior/Leiria in Portugal) to Africa’s Gas fields via Morocco and Algeria, and from TRANSMED, which connects it to Italy via Tunisia.
Figure 1 – Natural Gas Interconnections between Africa Southwestern Europe | Source: SNAM
The exports of Natural Gas from Algeria to Spain increased 26% in the last 15 years, sitting now at roughly 50% of the entire countries’ imports, and it’s the only country which apparently hasn’t addressed this dependency in more depth. This may be understandable, since Spain sells the idea that Algeria represents an alternative to Russia, in Europe’s apparent effort to reduce its dependency from Putin’s government. Nevertheless, the limited physical connection to Central Europe (no more MIDCat) makes this point hard to sell.
Portugal, which is evermore dependant on oceanic LNG cargoes, may have a more significant problem according to the year, with the dependence on SONATRACH reaching 60% in some cases.
Italy is also a massive importer, with 30% of its total imported volume arriving from Argelia. The decrease during the years of 2014 and 2015 was an anomalous situation, generated by a sharp decrease in demand and by a decision from ENI, which holds long-term contracts with both GAZPROM (Russia) and SONATRACH, giving priority to Russian flows, while postponing withdrawals from Africa, reducing the pressure on Algerian production by growing domestic consumption, winning time for a much-needed increase in upstream investments by the African country and thus contributing to the long-term reliability of its exports.
Figure 2 – Algerian Imports as a % of Total Imports and Total Consumption in Spain, Portugal and Italy | Sources: CORES (ES), DGEG (PT), MISE (IT)
Curiously enough, France – way better interconnected and with more historical relations – depends much less on Algeria, with most cargoes from the country coming in via the Mediterranean.
What lies beneath
Remember that big spike in the Spanish and Portuguese energy markets back in early 2017 that originated so many headlines? As we mentioned then, it was not just about the cold and the issues with French nuclear power – a major factor was an unexpected problem at the liquefying terminals in Skikda and Béthioua that lasted 3 weeks. Also, after coming back into operation, the supply closed again due to a problem on a gas pipeline. Mix that with a very bullish gas market and a plagued French nuclear system and you have a recipe for financial disaster.
Figure 3 – OMIE & MIBGAS SPOT prices during the first quarter 2017 | Sources: mtechapp.com
One may say that there’s nothing to it, after all the terminals resumed operations and all went back to an (expensive) normal. But it does work as a wake-up call of our dependence on Algeria and it should prompt the question “how safe is 50% of our gas supply”? Well, let’s look at Argelia’s recent past for some clues.
Depending on how you see it, Algerian may or may not still be in a Civil War with rogue Islamist groups. This Civil Conflict lasted officially from 1991 up to sometime around the early 2000’s (depends on the source). It derived from the suppression of the win (by a slim majority) of an Islamist political group and reached its peak during the mid-90’s. Nevertheless, the rise in popularity of the IS and Al-Qaeda has brought back some of the Islamist fervour, for example, with large suicide attacks in 2007 in 2008 and a range of smaller ones since then – the last one in 2017.
These bombings even splashed onto its Natural Gas explorations. In January 2013, 32 militants seized control of the Tiguentourine gas plant (STATOIL, BP and SONATRACH) in Amenas (southern Algeria), beginning a four-day siege that killed dozens of foreign hostages. Investigations indicated that the terrorists benefited from some insider knowledge in their planning of the attack. Another plant managed by this same join venture was attacked in 2016, this time the In Salah Gas Plant, which was targeted by several rockets.
Algeria also felt some of the phenomenon now known as the “Arab Spring”, where demonstrators protested over unemployment, high food costs, poor housing and corruption – similar issues to those in other north African nations. This ended with its current president, which by the way sits in office since 1999 (not usually a good indicator for a Democracy) shutting down a 19-year-old state of emergency initially imposed to help the authorities combat the above mentioned Islamist insurgents. Nevertheless, it degenerated into standard political repression.
In fact, only a couple days ago the recent Algerian movement against the current president entered a phase very similar to that seen almost 10 years ago, with (mostly young) demonstrators now asking for a full change in their system of government. As these demands go unchecked, who knows what can happen to Algeria, since all scenarios become probable – including the hijacking of the movement by Islamist organizations – although the army apparently has no intention of allowing this to happen and obviously the foreign interests are much larger than in the case of Egypt or Tunisia.
Although there hasn’t been a major disruption in Algerian supply since the civil war, all these examples imply that, although Algeria is a solid country, its stability keeps being compromised and, with it, more headaches for Southwestern Europe. What is our alternative then? Russia? LNG cargoes from the increasingly more competitive US?
One thing is clear: the MIDCat project was rejected based on the assumption that Spain’s supply is well assured, even without a connection to central Europe. Although that might be true quantitively, as we’ve seen back in 2017 even a short problem with Algerian supply can result in massive price spikes under the right circumstances. Now imagine the effects a structural problem may have – leading to Spain, Portugal and Italy competing for LNG cargoes on a price basis. Compound that with Spain’s increasing demand of gas, as coal and nuclear are phased out, and the results could be disastrous.
Where are you energy storage projects?
Hugo Martins | Analyst