As a neighbour to the EU, North Africa has had ample opportunities to secure its role as a key energy supplier to the gas-poor region across the Mediterranean.

But political uncertainty and corruption scandals have seen North Africa’s major gas exporting countries fall short of their potential as global suppliers.

Gas demand among the European members of the Organisation of Economic Cooperation and Development (OECD) could rise by as much as 20 per cent between 2008 and 2035, according to forecasts by the Paris-based International Energy Agency (IEA). The agency expects demand to be about 628-667 billion cubic metres a year (cm/y) by 2035.

Algeria gas production potential

North Africa’s three major gas suppliers, Algeria, Egypt and Libya produced 157.5 billion cubic metres in 2010, according to BP’s Statistical Review of World Energy.

Of the three countries, Algeria has by far the largest reserves and potential to boost production, but the country’s hydrocarbons development has been crippled by high-level corruption and a lack of investment.

Algeria is strategically important as the third largest supplier of gas to the EU after Russia and Norway. It produced 80.4 billion cubic metres of gas in 2010, while consumption stood at 28.9 billion cubic metres, making it a major net exporter. With 4.5 trillion cubic metres of proven reserves, it holds about 2.4 per cent of the world’s gas resources.

But Algeria’s share of global production has fallen to 2.5 per cent, from 3.7 per cent in 1999, and output has dropped significantly from a peak of 88.2 billion cubic metres in 2005.

About half of Algeria’s proved reserves are found at the Hassi R’Mel gas field in the east of the country, which will also act as the logistical hub for the gas fields being developed in the southwest through a series of pipelines.

The biggest project currently under way is the North Reggane gas project, which is being developed by state-owned Sontrach in partnership with a consortium led by Spain’s Repsol Group.

Sonatrach holds 40 per cent stake in the project, while Repsol has 29.25 per cent ownership and Germany’s RWE Dea and Italy’s Edison respectively own 19.5 per cent and 11.25 per cent stakes.

The Spanish-led consortium is expected to drill 104 wells across the project’s six development areas: Reggane, Kahlouche, Sali, southeast Azrafil, South Kahlouche and Tiouliline.

The scope of the project is expected to cover a gas treatment plant, a gas accumulation system, a pipeline for export and associated infrastructure. The scheme will require a total investment of about $3bn.

The project is expected to start commercial operation in mid-2016 with an initial capacity of 8 million cubic metres a day of gas. Front-end engineering design (feed) work is currently being carried out at the site.

The deal with Repsol was signed in November 2011 and it shows some positive momentum in Algeria’s gas sector. However, the project is already two years behind the schedule originally set out for it.

Investment in Algeria’s gas and infrastructure has been hampered by allegations of corruption against high-level officials at Sonatrach in recent years.

Foreign oil companies have also been reluctant to invest in new exploration work due to the production-sharing agreements on offer being less attractive than in other countries in the region.

Corruption scandal in Algeria

Sonatrach was embroiled in a corruption investigation over contract awards in 2010 that resulted in the sacking of its chief executive officer (CEO) and several senior managers.

In November 2011, Sonatrach appointed Abdelhamid Zerguine as CEO, the fourth since the scandal began. Potential investors in Algeria will hope this is the start of a more transparent investment process.

Sonatrach showed a new willingness to compromise on profit sharing earlier this month, when it approved a $4.4bn agreement with US oil firm Anadarko Petroleum Corporation, ending a six-year dispute.

Sonatrach says it intends to invest $68bn in its gas industry between 2012 and 2016. The government is also looking at reforming Algeria’s hydrocarbons law to attract further foreign investment.

Youcef Yousfi, Energy and Mines Minister, told Algerian newspaper El-Moudjahid in December 2011 that new legislation was being looked at. “We are studying all of these aspects. We have to adapt ourselves to the international stage,” Yousfi said. “We have largely comfortable reserves of hydrocarbons, but we have to assure security of supply for the long term and strengthen Algeria’s role as a major player in the international energy trade.”

In mid-April, Yousfi told the El-Khabar newspaper that the government intended to change the way it levies tax on foreign oil companies, so that it would be paid on profits and not revenue.

He also said that there were now questions over the delayed Galsi pipeline, a project to supply gas to northern Italy.

The project had been on hold partly due to delays in obtaining permits from national and local government in Italy, but it now appears there are concerns over the level of demand in Italy, which has been hard hit by the aftermath of the global economic crisis. 

Supplying Europe

Algeria has three existing pipelines connecting Hassi R’Mel to Europe. The Maghreb-Europe and Medgaz pipelines connect to Spain (the former via Morocco), while the Trans-Mediterranean pipeline connects to the Italian mainland via Tunisia and Sicily.

The progress on the North Reggane project should open up other gas fields for development. The Timimoun and Adrar fields form another promising gas project in Algeria’s southwest region.

Sonatrach recently signed a deal with French oil major Total and Spain’s Cepsa to invest $1.5bn to build infrastructure at eight sites between the cities of Timimoun and Adrar to collect and treat gas. The project is now expected to start up in late 2017 or 2018, compared with an original target of 2014.

Investment in Algeria’s gas output has been hampered by allegations of corruption at Sonatrach

The third major project under development in Algeria is the 4.5 billion-cubic-metre-Touat development by Sonatrach and GDF Energy International. Like the North Reggane and Timimoun projects, Touat will be connected to a planned pipeline connecting the southwest fields with Hassi R’Mel.

Unlike Algeria, gas production in Egypt and Libya has increased significantly over the past decade. Egypt’s output almost tripled from 21 billion cubic metres in 2000 to 61.3 billion cubic metres in 2010, according to BP. In Libya, output rose to 15.8 billion cubic metres from 5.9 billion cubic metres over the same period.

Like Algeria, North Africa’s second largest producer Egypt has overseas firms worried about the risks of investing in gas infrastructure, but in a different political environment.

In Algeria, the lack of growth in gas output is due to significant underinvestment in exploration and infrastructure, but in Egypt supplies are under a more immediate physical threat.

Since the overthrow of President Hosni Mubarak in February 2011, there have been 14 attacks on the Arab Gas pipeline in the Sinai peninsula that transports Egyptian gas to Israel, Jordan, Lebanon and Syria. The pipeline has been out of action since the attack on 5 February.

Uncertainty surrounding the outcome of Egypt’s presidential election might also see investors hold back until there are signs of a stable operating environment. “There are worries that a [Muslim] Brotherhood-led government will be hostile to Western companies operating in Egypt and will alter contract terms and hike tax and royalty rates to raise revenues,” says Barclays Capital analyst Helima Croft.

Officials from the Brotherhood-linked Freedom and Justice Party have tried to calm nerves. They have said they will adopt free market principles, seek overseas investment and only review contracts that are linked with suspected corruption by the former government.

“Despite efforts to alleviate the anxieties of investors, concerns remain about certain natural gas contracts, especially those related to Israel,” Croft says. In April, Cairo terminated its gas supply deal with Israel, which had been in place since 2005.

Egypt gas production

Egypt produced 61.3 billion cubic metres of gas in 2010, while consumption stood at 45.1 billion cubic metres, making it a less significant exporter than Algeria.

Although Egypt is a relatively small gas producer compared with other countries in the Middle East, it is a key supplier to the Levant. It supplies all the gas consumed in Lebanon, nearly all the gas consumed in Jordan and until February about 60 per cent of Israel’s demand.

Egypt also has disproportionately large liquefied natural gas (LNG) exports, supplying 5 per cent of total trade last year, despite producing just 1.9 per cent of the world’s gas supplies.

In January, UK/Dutch Shell Group took the final investment decision to develop the Alam el-Shawash West (AESW) gas project, giving impetus to new development in the Assil/Karam gas fields 300km west of Cairo. Shell Egypt and Badr el-Din Petroleum Company have a 40 per cent stake in the project, with the local Vegas and France’s GDF Suez holding 35 per cent and 25 per cent respectively.

Overall, Egypt has less potential to develop its gas exports than Algeria. Much of the country’s remaining gas will be expensive to extract because it lies deep or offshore.

At the same time, consumption more than doubled in the past decade, from 20 billion cubic metres in 2000 to 45.1 billion cubic metres in 2010. If Egypt’s economy returns to growth, domestic gas demand growth is likely to outpace production.

Meanwhile, with Libya in a state of political transition following last year’s civil war, the unstable political environment will deter new investment in the immediate future.

Given the challenges, North Africa looks to be an unlikely source of new gas supplies for Europe in the short term.