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Algeria gas export growth may disappoint Europe

Algiers, February 10, 2009

Growth in Algerian gas exports may disappoint European states trying to cut reliance on Russia because of the modesty of recent finds and a cautious approach to resource development.

The supply crisis sparked by Russia's stand-off with Ukraine has added urgency to European attempts to diversify gas sources.

Algeria, the European Union's third-biggest foreign gas supplier, is poised to step up exports by adding a pipeline to Spain and upping capacity of existing links to Spain and Italy.

But mixed recent results attracting foreign oil firms to invest in new exploration and production suggest big output increases could be hard to achieve in the longer term.

Only four foreign firms won oil and gas exploration permits in a licensing round in December and 11 zones attracted no bids.

The round was the first to be held under a 2006 law that gives Algerian state energy giant Sonatrach a mandatory minimum 51 per cent share in every oil and gas exploration contract awarded to foreign companies.

Analysts said the law echoed a global trend towards resource nationalism and fitted with an environment of high oil prices, but seemed too restrictive since energy prices tumbled.

'It's raised questions over whether there will be enough investment to maintain Algerian gas production in the longer term,' said Jonathan Stern of the Oxford Institute for Energy Studies. 'I think we're going to see a hiatus but it's hard to know how soon.'

Energy and Mines Minister Chakib Khelil said last month Algeria was ready to increase gas exports to Europe if existing contracts allow.

He blamed the weak global economy for the mixed results of the December licensing round.

'It is undeniable that a very unfavourable situation on the world market was one factor,' he said on January 17 at a signing ceremony for the four winning bidders, Eni, E.ON's Ruhrgas, Gazprom and BG Group.

Speaking at an industry workshop recently, Khelil said the volume of discoveries was below the world average and new approaches were needed to revitalise oil and gas exploration.

Algeria needs 'to discover intermediate deposits between the giant ones at Hassi Messaoud and Hassi Rmel and the other small wells discovered in the last decade', Khelil said.

Jon Marks of industry newsletter Africa Energy said the weak results of the latest licensing round had opened up a quiet debate in Algiers over whether Sonatrach needs the foreign oil majors to achieve its ambitions.

'There is one view that Sonatrach has the capabilities and the people and that it can always bring in engineering contractors to carry out the work,' he said.

Over-ambitious

Industry executives said on condition of anonymity that there had been real interest in many of the blocs on offer but the Algerians may have been over-ambitious.

Some of the zones up for grabs were not the country's most promising, they said.

'There is a growing perception that Algeria is not such a competitive place to operate and margins are not as good as with other exploration frontiers,' Marks said. 'It all means there should be some softening of the Algerian terms if they want people to come in.'

Analysts say infrastructure investment seemed to be progressing well despite some problems last year, including a disagreement with Spanish partners that slowed development of a major gas project at Gassi Touil.

Sonatrach, in common with many other gas producers, also met with problems as production costs rose and a global labour shortage in the energy industry increased competition for staff.

It is now pushing ahead with Gassi Touil and the redevelopment of a liquefied natural gas facility at Skikda port after it was damaged by fire.

The 8-billion-cubic-metre Medgaz pipeline to Spain is due to begin op


Tags: Algeria | Europe | Gas Exports |

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