As the crisis deepens in Ukraine and the relationship between the Kremlin and the West continues to deteriorate, Europe is now looking to Algeria to help it reduce dependence on Russia. However, it is uncertain whether the North African state will be able to fully capitalise on a golden opportunity to ramp up gas exports and increase its European market share, despite having the resources to do so.
Security concerns, a history of corruption, ageing gas assets with declining output as well as scarcity of available new supply all count against Algeria. In its favour is the fact it is already Europes second-largest supplier after Russia and boasts the third-largest shale gas reserves in the world.
On 5 May, Deputy Industry Minister Claudio De Vincenti said Algeria could quickly ramp up exports to Italy if Russian gas stopped flowing but this is looking increasingly unlikely, according some analysts.
I dont see Algeria being able to ramp up production in a short period of time due to several issues. The first is declining gas production in some of its biggest fields. The second is problems with gas quality, says Siamak Adibi, a senior analyst at energy consultancy FGE.
Even though Algeria has large untapped natural gas deposits, its gas exports have steadily declined over the past decade due to delays in production and infrastructure projects, and languishing efforts to locate and develop new fields. After peaking at 2.3 trillion cubic feet in 2005, exports had dropped to 1.7 trillion cubic feet in 2012.
Not only has underinvestment in the sector and the absence of discovered reserves already reduced overall gas production, but due to the surge in domestic energy consumption, exports have been falling, says Mansouria Mokhefi, a special adviser for the Middle East and North Africa at the French Institute of International Relations. Domestic consumption increased by more than 50 per cent between 2002 and 2012, and continues to rise.
Compounding Algerias problems are also increasing concerns over the quality of Algerian gas. In late January, Italy temporality cut gas imports from the Transmed pipline by 80 per cent due to the methane being excessively wet.
In an effort to get projects moving and increase the amount of high-quality gas reaching foreign markets, Algeria announced a $100bn five-year plan on 21 July, but analysts have doubts over whether the scheme will effectively increase exports.
In 2012 [state energy company] Sonatrach announced a plan to invest $80bn over five years, but it never happened, says Geoff Porter, the founder of North Africa Risk Consulting. This time, I expect that only a percentage of the headline figure will be invested.
High leadership turnover at Sonatrach is also slowing down gas field development. In July, the companys CEO was dismissed and replaced by the vice-president for production, Said Sahnoun, becoming Sonatrachs fifth CEO in less than five years.
High turnover at Sonatrach and within the Energy Ministry has meant that there are often delays when it comes to dealing with things such as pricing or legal issues connected to big projects, says Porter.
Although Algerias El-Merk oil project and the Gassi Touil gas project have both come online in the past two years, other large schemes have seen significant delays. These include four major gas projects Timimoun, Reggane North, Touat and Ahnet. All have been disrupted by delays to the $3bn GR5 pipeline project to connect the South West region to the main pipeline network.
Aside from delays to major projects failure of recent oil licensing rounds is one of the biggest factors curtailing efforts to ramp up production. The last round took place in 2011 and saw minimal interest from international oil companies (IOCs) due to onerous terms. Only two of the 10 exploration licences on offer were awarded, leaving great swaths of the country that are potentially rich in hydrocarbons unexplored and undeveloped.
In 2013, Algeria amended its hydrocarbon law to make it more attractive to IOCs and the country is now preparing for a new licensing round that is set to open bids in early September.
Whether the amendments will be enough to entice the super majors to snap up new licences is yet to be seen, but even if they do the latest round comes too late to help Algeria to ramp up exports in the short term.