Algeria's Depressed Gas Exports See Spring Surge on Priceby
Exports into Spain, Italy jump as contract prices tumble
Contract allows Eni to take 400 million euros of `make-up gas'
Spring has revitalized Algeria’s gas industry, boosting pipeline exports to Italy to a three-year high last month.
Pipeline flows from the European Union’s third-biggest supplier into Italy more than tripled from a month earlier in April, data from Italian grid Snam Rete Gas SpA show. Algerian prices under long-term contracts indexed to oil with a six- to nine-month lag are beginning to reflect crude’s 35 percent drop last year, making the fuel more attractive in Spain and Italy, the two largest markets for Africa’s biggest producer of the fuel.
The price-driven jump may just be a respite. Before April’s surge, exports were languishing near their lowest since 2013 after a terrorist attack that killed 38 foreign workers curbed output. Recovery was slow after a new hydrocarbon law repelled outside investor interest and the plunge in oil prices forced cost cuts.
The lower prices may also have encouraged European buyers such as Enel SpA, Italy’s largest utility, to import volumes delayed after a slide in domestic demand. An Enel spokesperson declined to comment by e-mail.
“With prices so favorable, end-users may have ramped up their nominations to take advantage,” said Wayne Bryan, a senior energy analyst at Alfa Energy Ltd. in London. “Algeria is exporting at elevated levels of late.”
Flows from Algeria into Italy’s Mazara del Vallo entry point rose to 1.9 billion cubic meters (67 billion cubic feet) in April, the biggest monthly volume since January 2013, as Russian supplies slowed to the lowest level for at least five years. Algerian exports to Spain into the country’s Tarifa entry point rebounded from the least for March in at least three years, offsetting lower imports of liquefied natural gas.
Mustapha Hanifi, general director of the hydrocarbons department at Algeria’s Energy Ministry, declined to comment. The National Agency for the Development of Hydrocarbon Resources in Algeria and the media office at Sonatrach didn’t respond to requests for comment.
The conditions of a long-term contract between Italy’s Eni SpA and Algeria’s state-owned oil company Sonatrach may favor higher imports this year. They agreed in 2013 to reduce the volumes Eni was required to import as Italy suffered from weak demand while in Algeria a corruption scandal and the terrorist attack hurt production.
Under the deal Eni was also allowed to pre-pay for gas to collect in later years. During the beginning of 2016, Eni can collect 400 million euros ($457 million) of so-called “make-up gas” from its suppliers, which also include Russia’s OAO Gazprom, Chief Financial Officer Massimo Mondazzi said in a presentation in March. Mondazzi didn’t specify which contracts the provision covers and Eni declined to provide details in a follow-up request.
“Italy simply has the option to take more or less of either Russian or Algerian gas, and is doing it,” said Moses Rahnama, an analyst at Energy Aspects Ltd. “I think it is mostly related to very low liquefied natural gas prices and the take-or-pay agreement between Eni and Sonatrach.”
In April, gas demand in Italy remained mostly flat from a year earlier at 4.4 billion cubic meters, according to Snam. It was 37 percent lower than in March.
The increase may also be connected with an effort to defend Algeria’s market share in Europe, according to Elchin Mammadov, a European utilities analyst at Bloomberg Intelligence.
Russian gas exports to Europe are forecast to rise to a record this year while the volume sent from Norway is set to expand from a historic high in 2015. An additional 23 billion cubic meters of liquefied natural gas is set to come onto the global market this year as export facilities in the U.S. and Australia start production, according to Timera Energy, an industry consultant based in London.
“Historically Algeria has been diverting some of the gas that was bound for exports towards LNG,” Mammadov said. “Now, with the LNG glut worsening, it looks like Algeria’s focus is shifting back to pipeline exports to Europe.”