Can Europe turn to Algeria to replace Russian gas?

While Norway provides a good deal of the continent's gas, discussions are increasingly turning to cross-Mediterranean neighbour Algeria as a potential source for Europe

Algeria is looking to fill the gap left by the EU cutting its supply from Russia. Bloomberg
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With Europe unveiling plans this week to end its reliance on Russian gas by 2030, Algeria is keen to boost its output and become a major player.

However, with long-term Russian contracts and structural issues in Algeria, that will prove to be a challenge, experts say.

About 40 per cent of Europe’s natural gas imports come from Russia at a cost of about $118 million a day — a valuable source of hard currency for the now heavily sanctioned Russia.

As political tension reaches at new highs, the EU has committed to reducing that reliance, saying this week that it would reduce its consumption of Russian gas by about two thirds within a year and eliminate it entirely by 2030.

“People are always talking about Russia turning off the gas” but it won't be easy for Europe to wean itself off, said Jonathan Stern of the Oxford Institute of Energy Studies.

“These contracts are negotiated to run over long terms, with huge penalties stretching into the hundreds of billions of euros if they're broken,” he said.

“That's why, at every opportunity, the Russians are saying they remain ready to honour their commitments. It's us who are turning them off.”

In the short term, at least, the strategy of “turning off” Russian gas requires finding alternates — something that's not easy to do, Prof Stern said.

While Norway provides a good deal of the continent's gas, discussions are increasingly turning to cross-Mediterranean neighbour Algeria as a potential source for Europe.

Already the world’s 10th largest gas supplier, Algeria sits on Europe’s southern border and already has three pipelines to the continent, one of which was closed following an increase in tensions with Morocco.

Last year, Algeria provided Europe with 11 per cent of its gas needs and the CEO of the state-owned energy giant Sonatrach, Toufik Hakkar said the firm stood ready to pump any additional gas to Italy via an existing pipeline.

Sonatrach is "a reliable gas supplier for the European market and is willing to support its long term partners in the event of difficult situations," Hakkar was quoted as saying in the daily Liberte, AFP reported.

But experts say Algeria should temper its hopes of a massive increase in exports to Europe.

“Algeria alone will not be able to fill the gap left by Russian gas,” said Intissar Fakir, senior fellow at the Middle East Institute. “Algeria is unlikely to meaningfully increase gas volumes through pipelines.”

One possibility, Ms Fakir explained, might be for Algeria to increase exports of liquefied natural gas, which can be carried by container ship.

However that would depend on being able to locate and process the gas, she said, and with Algerian gas exports to Europe already having increased significantly over recent years, “it is unlikely that they can increase production further".

A flare stack burns excess emissions at the Algiers refinery complex in the Algerian capital's south-eastern suburb of Baraki. AFP

Algeria's own gas needs are a further challenge to potential exports.

Increasingly, large volumes of gas are being absorbed by local markets, with that trend looking set to increase.

Oxford Energy reported that domestic consumption in Algeria increased by 10 per cent between 2013 and 2018, before being derailed by the pandemic. Overall, it is predicted to grow by 50 per cent by 2028, placing further strain on a finite commodity.

One alternative may be shale gas. With significant reserves to call upon, shale is a good prospect for the future but developing the industry will take years.

While there are extraction limits to boosting output, there are also questions as to Sonatrach’s ability to increase supply.

State energy company Sonatrach says it can increase capacity. Reuters

Experts say Sonatrach requires significant investment to increase a capacity that it hasn’t reached since the start of the oil price slump in 2014.

The company's has generally been swallowed by Algeria's extensive subsidy programme, the most generous within Opec.

The current price boom will do little to reverse years of underinvestment.

That said, Algeria has announced a $40 billion investment package that may boost exploration and extraction but the money will be spent over four years.

Foreign investment may help but a series of corruption scandals at Sonatrach as well as widespread social instability following former president Abdelaziz Bouteflika's removal from office in 2019 has drained international confidence.

While Algeria may be looking at how it can make short-term gains, there is a long-term benefit to the conversation now happening in Europe.

“This also makes Algeria suddenly part of a global discussion about how to support Europe during this crisis which gives the country’s leadership the international relevance or clout they crave,” Ms Fakir said.

Updated: March 11, 2022, 5:13 PM
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