Manohar Parrikar Institute for Defence Studies and Analyses
मनोहर पर्रिकर रक्षा अध्ययन एवं विश्लेषण संस्थान

Can Algeria Be Europe’s Quick Fix for the Energy Conundrum?

Anandita Bhada
read more
Cover Story

Africa’s gas production has steadily increased since 1970, from 0.3 per cent of global output to approximately six per cent in 2020. The leading contributor to this African success story is Algeria. It accounts for 35 per cent of Africa’s total gas production and is also accredited for being the largest gas exporter in the continent. In 2020, nearly 4.5 per cent of the global gas trade came from Algeria and unsurprisingly, its biggest recipient was Europe, given the geographical proximity.1

Europe has been among the most loyal customers of African hydrocarbon trade. Algeria trades 63.5 per cent of its gas through pipeline and the rest through LNG tankers, but Europe is the dominant recipient in both the markets. Spain imports 30 per cent of its energy from Algeria, followed by Italy, which after the Russia-Ukraine crisis, relies heavily of Algerian gas imports. Italian leadership was in news recently for inking new gas deals with Algeria and talks about increasing the gas flows in the Trans-Med pipeline to its full capacity.

Pipelines Connecting Algeria to Europe

Currently, there are three pipelines connecting Algeria to Europe. MedGaz Pipeline, Maghreb-Europe Pipeline and the Trans-Med Pipeline in ascending order of capacity. First is an undersea pipe, which exports gas to Spain and has an annual capacity of eight billion cubic metres. Owing to the energy crisis in Europe, its flow has been increased by two bcm per year. 2

Maghreb-Europe Pipe currently stands closed due to the geopolitical tensions between Algeria and Morocco, over Western Sahara. It connected Algeria to Spain via Morocco and supplied Europe with 12 bcm of gas annually before closure. 3 Trans-Med Pipeline connects Algeria to Italy via Tunisia. It had an earlier capacity of 22 bcm, which was increased to 32 bcm, following the negotiations between the Algerian and Italian leadership. 4 Certain analysts view the decreased exports of Algerian gas to Tunisia, as an opportunity to divert more gas towards Europe in the short term. This re-routing will involve a maximum of 8-10 bcm of gas, which is a drop in the ocean of European demand.

The question then arises – can Algeria be a quick fix for Europe’s energy conundrum? The answer is a simple no.

Constraints Facing Algeria

Even though several new energy projects have come online in the last few years and pipeline capacities are expanded to increase gas flows between the two continents, Algeria cannot provide Europe with the required quantities of gas in the short term. North Africa’s combined reserves equal only 10 per cent of Russia’s and its gas output is just 15 per cent of the Russian capacity.5 This clarifies any argument of Algeria replacing Russia in supplying energy to Europe.

Europe may also be critical of trading excessively with Algeria, due to the revenue indirectly circling back to the Russian economy. Russia is Algeria’s top arms exporter and a close strategic ally. From 2015-2019 Russia remained Algeria’s top arms supplier, providing 67 per cent of its defence imports.6 In October 2021, Russia abstained from voting on the issue of Western Sahara in the UN Security Council. Consequently, on 3rd March 2022, Algeria abstained from the UN General Assembly vote on Russia. The Algerian government has even stayed clear of condemning Russia for its special military operation in Ukraine.

Algeria is walking a tightrope of balancing two conflicting principles: maintaining the sanctity of territorial and international borders and supporting its ally Russia in the current times. Such close ties with Moscow might question Algeria’s reliability for Europe.

On the domestic front, energy consumption within Africa, especially Algeria, is also on a rise. Domestic energy demand has steadily increased by 10 per cent from 2013- 2018.It is further projected to increase by 50 per cent by 2028.7 The consumption rate has far exceeded the production rate, thereby creating a deficit. This has led to a decreased capacity to focus on new export contracts. Algeria’s state-owned energy firm, Sonatrach’s CEO has clarified that the firm will focus on fulfilling its current export obligations and catering to the growing domestic demand, which leaves out increasing exports to Europe in the short term.

Algeria’s limited production from the maturing fields and lack of investment in the energy sector are further pulling down its output capacity. Energy studies experts are of the view that its production is further projected to decline, due to the decreasing pressure at the oil fields. Moreover, it indulges in a complex and opaque decision making, which does not score well with the Europeans. Corruption scandals linked to Sonatrach, workers’ strikes, and citizen protests further complicate the domestic scenario.

Trans-Saharan pipeline, running from Nigeria to Algeria via Niger, provides some hope in the situation. It can feed additional gas volumes into the Trans-Med Pipeline or deliver gas to Europe via LNG cargoes. But this too has shortcomings. Firstly, the region that the pipeline runs through is riddled with security concerns. Assuring stable and secure supply is a critical factor, which seems to be a challenge in the entire Sahel region. Not to sideline, the difficulties in reaching an agreement with all the transit countries and the sheer scale of investment required to bring the project online. Owing to the geopolitical tensions between Algeria and Niger, this project has been delayed by twelve years, from the time its plans were inked in 2009. If the delicate balance of relations between the two nations were to dwindle even a bit, it would again put this project on a halt.

Algeria has the potential to increase its gas production and hence, export quantities. For that, it requires immediate investments, not only for increasing production, but also for export infrastructure. Due to a global emphasis on renewables, there has been a lack of enough incentive for foreign investment in the Algerian hydrocarbon sector, resulting in limited production from the resource-rich continent. Due to the renewable sector in Algeria not being as lucrative as the hydrocarbon one, it has lost on those renewed investments too. Algeria needs to make its energy market more investor friendly to attract more foreign capital investment and increase exports, especially to the energy-hungry continent of Europe.

Algiers too did not make any timely and constructive investments in its renewable sector earlier, for it to reap the benefits now. Due to its high spending on social programs and providing heavily subsidized energy to domestic customers, especially in the era of high fuel prices, it has fallen short of the required investment in the renewable sector. The country also has shale gas recoverable reserves of about 20,000 bcm.8 Although, it is a good prospect for the long term, it is not an immediate means to increase exports.

The main problem facing Algeria is investments. Currently, it is stuck in a cycle, where only an external stimulus can help it break out of it. If Algiers wants to significantly increase (and not miniscule amount) exports to Europe, then it will have to increase its production capacity. In order to do that, it needs to increase exploration or discover new gas fields (preferably large fields). Since the biggest energy firm in Algeria is a state-owned firm, it requires huge investments on the part of the state to increase explorations. But the state is facing a crunch, for large amounts of capital goes in providing domestic market with heavily subsidized energy, especially in times of stagflation and skyrocketed fuel prices. It cannot exploit the increased market prices of energy in the export market, for it only has limited exports and does not have the capacity to bring aboard new export contracts.

Europe can come to Algeria’s aid in two ways here. First, by providing the required investment and fast tracking increased Algerian exports to Europe. Another aspect which Europe can help tackle, is the flaring of gas. Algeria has featured amongst the global top 10 gas flaring nations for over a decade. Due to its limited capability to gather, process and transport the gas which is otherwise flared, it loses eight bcm of gas annually.9 Europe, with its technological advancements, can help Algeria reduce this wasteful practice of flaring and export this gas to European coastlines. This serves a dual purpose of decreasing Algerian carbon footprint and increasing its exports, thereby increasing the revenue. For Europe, it adds another stock of natural gas, which can be easily imported without any infrastructural constraints.

Conclusion

Any additions to increase Algerian production will not arrive till 2024, and Europe is looking for an immediate solution. Even if Algeria manages to push its boundaries and keep up with the record production of the first half of 2021, it can only provide a cushion to Europe and not fill the vacuum created by Russia.

Algeria is already in a delicate position of maintaining balance between its energy trade with Europe, and close strategic ties with Russia. Europe is looking for stable and secure energy partners in the current crisis and this is a golden opportunity for Algeria to increase its exports and attract European investments in its hydrocarbon and renewable energy sectors.

Ms. Anandita Bhada is a Research Analyst at the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), New Delhi.

Keywords: Algeria, Europe
  • Visitor No: 000058457
  • © Manohar Parikar Institute For Defence Studies and Analysis
  • XHTML validation2.0 Level Double-A Conformance
    CSS Validator
    Explanation of WCAG 2.0 Level Double-A Conformance