The much-delayed $3bn project to build an 837-kilometre gas pipeline from Algeria to Italy has found new momentum, as Europe scrambles to secure a reliable source of gas and relations with Russia deteriorate over the conflict in Ukraine.
Italian pipeline development company Galsi have named 30 November as the date for the final investment decision (FID) that would trigger the engineering, procurement and construction (EPC) phase of the project.
The permitting process in Italy has almost been completed, says Stefano Bosco Galsi, chief financial officer (CFO) at Galsi. [The] construction phase will start approximately six months after FID.
The company says it is expecting authorisation from the Italian authorities in October or November and all necessary documents have been submitted to the Algerian authorities.
Bids have already been issued for procurement contracts including for offshore line-pipe supply and offshore pipe-lay. Bids have also been submitted for an EPC contract for a compression station in Algeria. Galsi says the bid evaluation process is almost complete and proposals will be disclosed to preferred bidders ahead or the 30 November FID deadline. It also says more tenders will be issued immediately after the FID if a positive decision is made.
Over recent years, demand for Algerian gas in Europe has declined due to cheap supplies from Russia, the EUs biggest supplier. The worsening crisis in Ukraine, however, has revived interest in securing alternative suppliers.
If we hadnt had the Ukrainian crisis, the Galsi project would be effectively dead, says Trevor Sikorski, natural gas analyst at UK consultancy Energy Aspects.
The Italians were effectively doing without Algerian gas. They wanted keener pricing [and] there was a real structural problem with the relationship between Eni and Sonatrach. But now the Italians want to look again to North Africa and get the pricing sorted out to the extent that they can extend capacity.
The conflict in Ukraine and the downing of the Malaysia Airlines flight MH17 saw the US and EU announce a raft of sanctions on 29 July, cutting off state-owned banks from European and US capital markets. Transactions with Russian defence companies were also banned and new sanctions were introduced limiting exports of hi-tech oil exploration and production equipment, a move aimed at curbing the countrys ability to develop new resources.
The new phase three sanctions have heightened fears that Russia could cut gas exports to Europe in retaliation pushing the continent into an energy crisis at a time when the economy remains fragile.
Speaking at a Supreme Eurasian Economic Council summit in Minsk on 30 April, Russias President Vladimir Putin said the country was already thinking about steps to hit out at the EU and hinted that new restrictions to energy supplies could be used as a weapon.
I consider these not necessary. But if something like this continues [sanctions], then of course we will have to consider whos working and how in the Russian Federation, in the key sectors of the Russian economy, including energy, he said.
Russia is the EUs biggest supplier of natural gas, providing about 30 per cent of all imports. Italy imports about 88 per cent of the natural gas it consumes, with Russia providing about a third of all supplies, according to the International Energy Agency (IEA).
Changes to the route of the planned South Stream pipeline from Russia to Europe are also helping to drive new interest in the Galsi project.
On 30 April, officials from Russian energy firm Gazprom told Reuters it had abandoned plans to build a section of the South Stream pipeline to Italy, and was instead going to terminate the route in Austria.
I dont think the Italians were actually involved in much of that decision-making, says Sikorski.
From a pure projects standpoint, for South Stream it made much more sense because making the pipeline to Austria is cheaper and it is well connected with the rest of Europe. So from a pure projects perspective, it made a lot of sense to do that. But at the same time, it was a big change for the Italians, who will now not be receiving direct supplies from the pipeline.
The Galsi project has also become more attractive for Algeria over recent months according to Energy Aspects.
[Algerian state energy company] Sonatrach has had a hard time recently, says Sikorski. In Amenas [terror attack] was a big blow to the gas sector and it hasnt really recovered its volumes since then, but it does have a number of investment projects that are coming online in the next couple of years and finding a way to monetise those would be very useful. The Galsi pipeline would give it some demand it doesnt have because it would go through Sardinia.
Galsi was created in 2003 and is owned by several stakeholders:
- Sonatrach (Algeria) 41.6 per cent
- Edison (Italy) 20.8 per cent
- Enel (Italy) 15.6 per cent
- Hera (Italy) 10.4 per cent
- The region of Sardinia 11.6 per cent
The pipeline will have a capacity of 8 billion cubic metres each year and sections of the pipeline will be laid at a depth of 2,885 metres.