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Following the Russian military invasion of Ukraine, Europe has embarked on plans to reduce its energy dependency on Russia and has shown a growing interest in Algeria in recent weeks. European countries are mainly interested in gas, but according to various analysts, Algeria will struggle to quickly meet the increased demand for gas and oil due to technical and bureaucratic problems, largely due to the country’s little work to implement and strengthen reforms distribution networks.
Algeria was the subject of much talk in Italy last week after a key deal was struck between the Italian and Algerian governments to increase gas supplies. By 2024, Italy will receive around 9 billion cubic meters of Algerian gas annually, compared to 22.6 billion cubic meters imported in 2021.
For the agreement involving ENI and the Algerian company Sonatrach, the Italian government had initially tried to get more supplies more quickly, but the plan had proved impossible due to some technical and bureaucratic problems. Similar factors could influence agreements between the Algerian government and other European countries in the coming months.
Algeria is Europe’s third largest natural gas supplier with a market share of around 8 percent. The leader is Russia with almost 40 percent, followed by Norway with almost 20 percent. The heavy reliance on Russian gas has been the subject of much debate in the European Union in recent weeks, with proposals to end imports from Russia to make existing economic sanctions even tougher. However, this path has proved difficult precisely because Russian gas is used by European countries for heating, industrial activities and to produce an important part of electricity generation.
The ability to have larger supplies of gas from other countries in the short-term could mitigate the problem, but as some analysts told the Financial Times, Algeria doesn’t seem poised to increase supply by that much at the moment. This could be a major economic opportunity for the country after years of being hit by low oil prices on its balance sheets.
Increased deliveries of Algerian gas will not be possible in the foreseeable future due to various factors. In recent decades, major foreign oil companies such as ENI and Total have not made many investments in Algeria due to the difficult political situation and difficulties in doing business, mainly due to the presence of many bureaucratic constraints and the lack of reforms for them to overcome.
The gas pipelines connect Algeria with Portugal, Spain and Italy, but the infrastructures are limited in scope and some modernization activities have only recently started. For example, the larger deliveries agreed with Italy are handled via Transmed, the gas pipeline that connects Algeria to Italy via Tunisia.
The Transmed Gas Line (ENI-Sonatrach)
Aware of the current restrictions, the Algerian government recently set up a National Energy Council, led by President Abdelmadjid Tebboune, to allow better coordination of activities related to the export of gas and oil. The board should focus on studying medium to long-term strategies to provide foreign companies with coherent and reliable plans for evaluating their investments. In fact, the strong political instability of recent years has contributed to the uncertainty of numerous investors.
The difficult economic situation in Algeria caused by the low oil price, the high level of corruption and severe restrictions on personal freedoms led to large demonstrations in 2019 against then President Abdelaziz Bouteflika, Tebboune’s predecessor, which then led to his resignation. The new presidency then managed to keep the situation under control, both by suppressing protests and exploiting the need to impose restrictions due to the coronavirus pandemic.
Since his tenure as president, Tebboune has embarked on some reforms to boost private sector growth, albeit tentatively, and to attract foreign investment. However, it has not yet completely abandoned the policies of its predecessors, based on distributing subsidies to the population from the sale of hydrocarbons, an important consensus machine that has, however, been exposed to the sharp fluctuations in oil prices in recent years.
Revenue for Algeria from the sale of oil and gas in 2021 was $35 billion, up $15 billion from the previous year. The government has used a significant portion of the new revenue to avoid tax hikes and introduce a new unemployment benefit targeting younger people in particular.
Interest in Algerian gas could help accelerate reforms and prove a major development opportunity for Algeria, but it will be longer before European countries want more supplies and abandon Russian gas.