Unrest hits Europe gas strategy

02 August 2011

Civil war in Libya and uncertainty over available gas from Egypt and Algeria means major additions to supply from the three major North African markets is unlikely

Key fact

Annual gas demand among European members of the OECD could rise to 667 billion cubic metres by 2035

Source: MEED

For several years, one of the key aims of Europe’s energy strategy has been to secure a diverse and reliable gas supply. The continent’s own gas production is declining, and there is a presently an over-reliance on Russia to make up the shortfall. Europe has increasingly looked to North Africa as a potential means of diversifying its sources of gas. But civil war in Libya and uncertainty over available gas from Egypt and Algeria may mean it has to rethink its plans.

Europe has increasingly looked to North Africa as a potential means of diversifying its sources of gas

In a report published in early June, the Paris-based International Energy Agency (IEA) forecast that annual gas demand among European members of the Organisation for Economic Co-operation and Development (OECD) could rise to 667 billion cubic metres by 2035, a 20 per cent increase on the 555 billion cubic metres consumed in 2008.

Even under an alternative scenario, in which greater emphasis is placed on the development of substitutes for fossil fuels, the IEA predicts energy demand among these countries will rise to at least 628 billion cubic metres, a 14 per cent increase.

Gas production falls

Meanwhile, indigenous supply is expected to fall dramatically. Gas production in the UK, historically the region’s largest producer, has dropped every year since 2000, from 108.4 billion cubic metres to just 57.1 billion cubic metres in 2010. At the current rate of production, it has just 4.5 years of reserves remaining, according to UK oil major BP’s latest statistical review of world energy, published in June.

Today, the two largest gas producers in western Europe are the Netherlands and Norway, both of which increased supply in 2010. But at the current rate of depletion, the reserves of both will be exhausted in the next 30 years. Gas production in OECD Europe is expected to fall from 307 billion cubic metres in 2008 to 213 billion cubic metres in 2035, a drop of more than 30 per cent, according to the IEA report. By this rationale, by 2035 the shortfall in production will be 415-454 billion cubic metres.

A quarter of the EU’s gas demand is currently met by Russia, but European officials have long been keen to develop new sources of supply. The urgency of the search was heightened in 2006-07 when interruptions to Russian gas supply, first through Ukraine and then Belarus, highlighted the precarious nature of the continent’s energy supply.

The abundance of gas in North Africa and its proximity to Europe make it an obvious choice for Brussels to look there for additional supplies. Algeria has proven gas reserves of 4.5 trillion cubic metres, Egypt 2.2 trillion cubic metres and Libya 1.5 trillion cubic metres, according to BP. Between them, they account for 5 per cent of the world’s proven gas reserves.

Moreover, Libya is significantly underexplored, meaning that the official reserve figures substantially understate the country’s gas potential. Libya’s actual gas reserves could be about 3.3 trillion cubic metres, according to the UK’s Oxford Institute of Energy Studies.

A major offshore block north of Mellitah, known as Block NC-41, has estimated raw gas reserves of 577 billion cubic metres, according to figures from Libya’s National Oil Corporation. The Ghadames basin on the border with Algeria and Tunisia also offers potential for a further increase in reserves.

In both Libya and Egypt, gas production has been on an upward trend for the past decade. Egypt’s output has almost tripled, from 21 billion cubic metres in 2000, to 61.3 billion cubic metres in 2010. In Libya, production has increased from 5.9 billion cubic metres in 2000, to 15.8 billion cubic metres in 2010. Algeria’s output has been more stable, remaining in the 80-90 billion cubic metres range throughout the past decade, but development work in the southwest offers the potential for additional production in the coming years. Similarly in Egypt, offshore exploration offers the hope of increased production in the medium term.

Unfortunately for Europe, the potential for a substantial increase in gas exports from North Africa is unlikely to be realised any time soon. The dramatic political events of recent months and the realities of gas exploration and domestic demand mean that incremental gas supply from any of the three major North African gas markets is likely to be negligible at best.

Libya oil and gas production at a standstill

Civil war in Libya has brought oil and gas production to a near-standstill. In 2010, Libya pumped 9.4 billion cubic metres of gas to Italy via the subsea Greenstream pipeline. Aside from 0.3 billion cubic metres of liquefied natural gas (LNG) exported to Spain, the 11 billion-cubic-metre-a-year (cm/y) capacity pipeline accounted for all of the country’s gas exports last year. But Greenstream has been closed since 22 February.

The conflict has also forced the closure of almost of the country’s production facilities. Italy’s Eni, the largest foreign operator in Libya and a 50 per cent shareholder in Greenstream, has lost all output from the giant offshore Bouri field, and although it has kept production flowing from the Wafa field, this has been used to supply local power demand.

In March, Eni evacuated all its staff and suspended exploration and development activities. The company says that its infrastructure remains intact and that production can resume once fighting has ceased. But in the short term Europe cannot look to Libya for additional gas.

In Algeria and Egypt, the constraints are of a different nature. Although both countries hope to increase gas production in the coming years, incremental supply is likely to be all but exhausted by rising domestic consumption.

Algeria and Egypt

Algeria has three export pipelines to Europe: the Transmed pipeline to Italy via Tunisia, which has capacity of more than 30 billion cm/y; the 12 billion cm/y Maghreb-Europe pipeline to Spain via Morocco; and the 8 billion cm/y Medgaz subsea pipeline to Spain. In 2010, Algeria exported 27.6 billion cubic metres of gas to Italy and 12.1 billion cubic metres to Spain through a combination of pipeline transfers and output from LNG export terminals at Skikda and Arzew, as well as smaller volumes to other markets.

Algeria’s capacity to increase its exports has become increasingly challenged. In 2005, then-energy minister Chakib Khelil outlined ambitious plans to increase exports from about 60 billion cm/y to 85 billion cm/y by 2010 and 100 billion cm/y by 2015. But these targets have now been scrapped in favour of preserving the country’s gas reserves for as long as possible. In the past five years, gas production has actually declined, from 88.2 billion cubic metres in 2005 to 80.4 billion cubic metres in 2010. Exports have fallen too, to 55.8 billion cubic metres in 2010, according to BP.

Circumstantial factors played a role in the reduced flow of exports from Algeria last year. The global downturn led to a drop in European gas demand and a fall in prices, making it a less attractive market for exporters. At the same time, investigations into alleged corruption at state-owned Sonatrach exacerbated the situation. But these are not the only problems.

The country’s pipeline network – substantial parts of which are as much as 40 years old – has fallen into disrepair. A planned rehabilitation programme has been significantly downsized, according to industry sources. Local demand is also rising rapidly, while exploration has stagnated. The most recent three exploration rounds have attracted scant interest from international oil companies (IOCs), with only nine contracts awarded from the 36 concessions on offer.

Development work on several gas fields in the southwest, while repeatedly delayed, offer better prospects. When the fields eventually come on stream, most likely in 2013-15, they are expected to add capacity of at least 10 billion cm/y. But any increase in export potential will be offset by rising domestic demand and declining production from the country’s largest gas field, Hassi R’Mel.

Algeria is still developing plans to increase its export capacity. A total of 12.5 billion cm/y of LNG capacity is due to come on stream at the Skikda and Arzew terminals in 2013-14. A longstanding scheme to build Galsi, an 8 billion cm/y subsea pipeline to Italy, is still under consideration. But industry sources fear that by the time new LNG capacity comes on stream, gas supply will be insufficient to meet both domestic demand and export commitments. The Galsi scheme, already delayed by several years, is unlikely to be undertaken in the medium term.

Egypt faces similar problems. Domestic gas demand has more than doubled in the past 10 years, according to BP. It is forecast to increase from 45.1 billion cubic metres in 2010, to an estimated 60 billion cubic metres in 2015 and almost 80 billion cubic metres in 2020, according to Cedigaz, a Paris-based international gas association.

Exploration has stagnated in Egypt too. Much of the country’s remaining gas is either deep or ultra-deep offshore, making it expensive to extract. But low, subsidised local gas prices make it difficult for the government to offer a competitive rate of return to IOCs for exploration work.

Concessions unlikely

BP signed a landmark deal in 2010 under which it will earn $4.1 a million BTU for new gas from its deepwater concessions in the Mediterranean, substantially more than the previous upper limit of $2.65 a million BTU. But the economic impact of political instability in recent months and the impossibility of raising domestic gas prices in the current climate, may prevent the government from making similar such deals in the near future.

A series of bomb attacks on the country’s gas export infrastructure in recent months has shown how delicate the issue of gas exports is in a country where many locals feel even their basic needs are not being met. Exports through the Arab Gas Pipeline, which supplies gas to Jordan, Lebanon and Syria, and via a separate spur to Israel, are likely to continue in the medium term. But the prospects of Egypt supplying enough gas through the network to create a surplus for export to Europe, via Turkey, can all but ruled out.

According to analysts, it is just as likely that in the future the Arab Gas Pipeline will be used to bring gas to the Near East, or even to Egypt, from third parties such as Iraq, Azerbaijan and Russia. Europe too would be wise to look east, rather than south, for new sources of gas.

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