Algeria Shunts Gas from Italy Into Global LNG Exports

Algeria's output of liquefied natural gas (LNG) may rise after officials agreed to scale back piped gas deliveries to Italy, signaling a shift in export strategy for Africa's biggest gas producer.

A lack of foreign investment in new upstream projects due to unattractive fiscal terms has left Algeria relying on ageing gas fields to maintain output as domestic demand surges and cuts into exports.

But recent deals with Italian energy groups Eni, Edison and Enel to cut pipeline supplies of gas from Algeria by up to 10 billion cubic metres (bcm) per year look likely to support a rise in LNG sales to other countries.

Eni, Europe's biggest wholesale gas seller, imported 14.5 bcm from Algeria last year but said this year it had reached a deal with Algeria's Sonatrach to take less.

Data from grid operator Snam shows Italy imported half as much gas from Algeria on Aug. 22 at 15 million cubic metres than at the same time last year.

Italy took around 20.5 bcm of gas from Algeria last year. With imports down by half on average this year,Algeria has around 10 bcm of extra gas to play with.

As a result, Sonatrach recently launched a number of tenders for the supply of spot and medium-term LNG to buyers in Asia and the Atlantic Basin, trade sources said.

It started offering single cargoes to buyers in June after starting up its new 4.5 million tonne/year liquefaction train at the Skikda LNG plant, but is now looking to sell a strip of six cargoes from October, as well as a 12-month supply commitment after that, traders said.

LNG is ordinary gas that has been chilled to liquid form for transport via tanker across the globe.

"The increased availability of Sonatrach LNG is largely to do with the reduced take-or-pay volumes contracted to Italy, but also probably attributable to the fact that they are more confident in their new train at Skikda," an industry source said.

A rise in marketed volumes from Algeria has been greeted by a mixture of surprise and caution among traders, concerned at the country's declining energy output and not always spotless track-record of meeting its obligations.

Some traders say they would think twice about longer-term supply deals with Algeria in the absence of certain reassurances.

Wood Mackenzie energy analyst Massimo Di-Odoardo also raised concerns about future supply fromAlgeria.

"There's a big Eni contract that expires end-2019 and we'll have to see if Sonatrach can fulfill its obligations beyond if investment decisions continue to disappoint," Di-Odoardo said.


How much extra LNG can be shipped out of Algeria is uncertain given plans to keep exports from its two plants below capacity as a means of easing pressure on ageing infrastructure, traders say.

Others say the offer of additional LNG volumes may end up being conditional on Sonatrach fetching a high price. Given that the LNG market is in a softening phase, doubts remains over whether all the cargoes on offer will be sold.

"Everyone else has been making off like bandits in recent years, but not so Algeria," the industry source said, referring to bumper profits made by many LNG exporters.

Although rich in oil and gas, Algeria needs investment in pipeline capacity to connect smaller, more remote fields in desert areas with the export hubs dotted along its coast.

Sonatrach has also struggled to repair a commercial strategy that backfired spectacularly in the last decade.

It committed a chunk of export capacity with the intention of selling all the volume on the spot market. However, its decision to abandon a formula of indexing LNG supplies to oil prices proved costly for Sonatrach as spot LNG prices collapsed in the wake of the global economic crisis in 2008.

"If you do some back-of-the-envelope maths, Algeria was $3 billion less well off in 2008 because of that decision," an analyst who asked to remain anonymous said.

The company has since recommitted to long-term contracts linked to oil.

After 2005, Algeria's gas production began to fall as key but mature fields such as Hass R'Mel went into terminal decline.

BP data shows Algerian gas output of 81 bcm in 2012 and around 80 bcm in 2010, versus 88 bcm in 2005.

Italy receives gas from Algeria through two sub-sea pipelines, but demand in the recession-hit country has fallen sharply and utilities want to turn down imports.

Italy, which imported almost 70 bcm of gas last year, took around 20.5 bcm from Algeria, down on the previous year. Imports have halved again this year.

Article Credits : MARex

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