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26/09/2016

EU and Algiers look forward to more gas business

Energy

EU and Algiers look forward to more gas business

LNG tanker to be waiting to be uploaded. [Sonatrach]

Officials from Algeria, the European Union and energy firms meet in Algiers today (24 May) in an attempt to get their energy cooperation back on track and find ways to pump more gas north again after years of dwindling exports.

Algeria is seen as a natural partner for the European Union as it looks to diversify energy supplies,  after the Ukraine conflict once again exposed the risks of relying too much on the bloc’s top supplier, Russia.

At the moment, the North African country is the EU’s third biggest gas supplier behind Russia and Norway yet its export capacity through its three pipelines across the Mediterranean Sea is widely underused.

In 2013, the EU estimated Algeria exported 25 billion cubic metres (bcm) of natural gas via pipelines to Spain and Italy, or less than half the capacity of 54 bcm, while it exported 15 bcm of liquefied natural gas out of capacity of 40 bcm.

Declining European demand has been a factor cutting into Algerian exports, but the amount of gas for export has also been hit by a combination of depleting production from mature fields, and Algeria’s rapidly expanding need for gas to generate power.

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Algeria has dozens of projects the government expects to generate new production and help keep its flow of gas exports to Europe stable. But the problem has been attracting investment needed to discover and develop new fields and maintain old ones.

 Strategic dialogue

Oil industry sources say the problems Algeria has struggled with over the past decade have stemmed from a combination of a glacial bureaucracy, tough contract terms, security worries, delayed  projects and turmoil at state oil company Sonatrach.

Tuesday’s forum brings together Algerian and EU officials as well as oil companies to discuss gas, renewable energy sources and energy efficiency, though most recognize this will just be a first step on the road to better cooperation.

“There is perfect awareness on both sides of what the challenges are,” EU ambassador to Algiers Marek Skolil said.

“This is something strategic, that this is a first or second chapter in our strategic energy dialogue and it will continue.”

According to a Sonatrach document from a March meeting with EU officials, oil companies had six areas of concern, including lack of quality offers and clearer data, rigid contracts, fiscal
terms, taxes, and the need for more flexibility.

“They can’t do much about the price of oil, but they can something about the ease of operation,” said one foreign oil industry source.

Still, there have been signs of progress since last year, industry sources, EU and Algerian officials say.

Talks between technical teams are working on common ground.

Sonatrach, long hampered by rapid management turnover and scandals, is starting to appear a little more agile, offering direct negotiations as a more flexible approach.

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And gas exports to Europe are rising, Algerian officials say, helped by new fields. Sonatrach says shipments will grow 15% to more than 50 bcm in 2016. Shipments by pipeline and LNG were up 30% in the first 4 months.

 Government flexibility

The collapse in oil prices does risk making Algeria less attractive for companies just when the country needs them most, but analysts say the leaner times, and falling government revenues, may now also prompt more flexibility from the state.

“This is about how to make this more attractive and have more European companies investing,” Mustapha Hanifi, the energy ministry’s hydrocarbons director said when asked about any possible policy changes. “Any law can adapt to international environment, we are in the process of examining.”

Algeria’s economy is still emerging from the centralised, model after 1962 independence, and its gas and oil revenues pay for a vast welfare system of subsidies that has helped the government calm social tensions.

Algeria’s leaders are already debating how to manage after lower prices slashed the energy revenue that accounts for 60% of the budget. Analysts say reformers want to open up the economy while the old guard is resisting anything more than stop-gap measures.

Global oil price boom and bust cycles have prompted policy shifts in the past. A 2005 hydrocarbons law opened up the industry, only to be reversed by presidency with tougher terms, more state control and a windfall tax.

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After a poor 2011 bidding round for fields, Algeria changed its hydrocarbons law again to offer more incentives. But a bid in 2014 only got 4 offers, with some companies complaining about a lack of transparent, quality data. A 2015 bid was suspended.

Security also remains a concern after the 2013 al-Qaeda attack on In Amenas gasfield, which killed 40 oil workers and left the plant still without its third production train.

After In Amenas, Algerian forces reinforced security, allowing foreign contractors to return. But a rocket attack in March on Krechba gasfield showed how sensitive security remains, prompting BP and Statoil to pull out workers again.

“There are still concerns that they are not using better technology readily available for early warning systems,” one oil industry source said. “It’s not always easy to attract the right foreign, high-skilled contractors in this environment.”

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