Algeria talks tough on gas renegotiations
Industry observers had predicted changes to the structure of long-term gas contracts. But Sonatrach and the government appear uncompromising
Algeria's long-term pipeline gas and LNG supply contracts with European customers have been up for renewal in recent months. Received wisdom was that it would follow the lead of Russia and Norway in including a much larger element of hub-based pricing to replace some of the traditional oil price linkage in the contracts.
In return, customers were expected to concede some of the flexibility built in to the take-or-pay contracts, and potential reduce overall volumes to leave state-owned oil and gas firm Sonatrach with more gas production for its own LNG portfolio.
And this may have been how it played out in completed renegotiations or in those soon to conclude. But, if so, the Algerian government and Sonatrach are in no mood to admit it.
"The evolution of hub-based pricing has led to volatility and, ultimately to lower prices," Fatma Zohra Cherfi-Talantikite, Algeria's deputy minister of energy, told the Gastech conference in Houston in September. "This may hamper the development of new gas supply," she says, adding that Algeria was talking to its partners in the Gas Exporting Countries' Forum and the International Energy Forum on ho to solve this problem.
Sonatrach's CEO Rachid Hachichi, appointed in April, made a similar point when he spoke to Petroleum Economist in Abu Dhabi in September. But he remained positive more generally about the firm's prospects.
Was there any substantial move away from oil-linked pricing to European hub pricing in renegotiations of Sonatrach's European gas sales arrangements, and was this done in return for reduced volume flexibility?
Hachichi: Since last year, Sonatrach renewed its gas contracts with [Spain's] Naturgy, [Portugal's] Galp, [Turkey's] Botas, and [Italy's] Eni and Enel, and other announcements will come in the forthcoming months.
As you are aware, a gas contract is not only a question of pricing, it is a set of parameters—long-term security of supply, seasonal flexibility, short-term flexibility, and level of take-or-pay that all of our clients appreciate. Hub-based pricing does not offer this set of services. So, all in all, we think that Sonatrach continues to offer a balanced set of services in its long-term gas contracts, pricing being only one element.
"Our unconventional shale resources have similar or better production potential than their analogues in US basins"
What are the prospects for increased Algerian LNG exports in the coming years?
Hachichi: LNG offers us today a competitive advantage in terms of flexibility in our natural market in Europe and gives us a way to value our gas in distant markets that offer arbitrage opportunities.
Our current pipelines and LNG capacities, which total almost 100bn m³, can support our production volumes while offering us a valuable tool to secure our deliveries and to better monetise our gas. Our future LNG projects will be heavily dependent on our new production capacities, particularly from new resources.
Recently, domestic gas demand increased to half of Algeria's total production. How is Sonatrach balancing increasing domestic energy demand with maintaining and even growing its export volumes?
Hachichi: Sonatrach has two missions and cannot fail in either—to ensure energy supplies for the national market and to ensure the development of hydrocarbons by exporting them on international markets.
To support our objective of increasing our exports, we are working on several initiatives such as developing energy trading, increasing the capacity of our export infrastructure such as the Medgaz gas pipeline to Spain, and building a new LNG jetty in Skikda.
However, we do not forget the need to meet the growing national demand. To meet this, we are working on two dimensions—increasing the number of fields and making better use of existing ones.
The increase in new field discoveries is part of the improvement in the performance of the exploration strategy and should make it possible to increase the number and the volume of discoveries. As far as the existing system is concerned, we are currently working to better mobilise our reserves and improve our performance in drilling, wells and volumes. Our reserves will therefore be preserved and both the local and international markets will be supplied.
Sonatrach is also a company looking to the future. Our new strategy extends the organisation's scope to new markets and the exploitation of new resources such as offshore, unconventional and solar energy.
Can you give an update on progress in offshore exploration? And, in Algeria's shale prospects?
Hachichi: The Algerian offshore basin is a 1mn km² frontier area, located in the southern part of the western Mediterranean Sea. It consists of marine basin including Algero-Provençal basin and Alboran basin in the extreme western part of the basin.
Sonatrach is committed currently in partnership on two prospecting areas in this under-explored basin with Italy's Eni and Total, east and west of the basin. Targets include Oligo-Miocene carbonate build-up below the Messinian salt, as an analogue, those which have been prospective in the eastern Mediterranean, e.g. the Zohr discovery. The eastern part of the basin is thought to have gas, while the west may hold oil and gas.
"Our new strategy extends the organisation's scope to new markets and the exploitation of new resources such as offshore, unconventional and solar energy"
New 2D and 3D seismic acquisition programmes in the eastern zone have already been completed—the processing and interpretation of the acquired data is ongoing and will be finalised by the end of the year. The first exploration well is planned during the first half of 2020. For the western part, the 3D seismic acquisition campaign is being prepared—it will be acquired at the beginning of 2020.
The main shale gas and oil targets are the Silurian and Frasnian (Devonian) formations. Recent studies have again raised our resources, ranking Algeria among the top three countries in the world. And the results of the latest exploration studies and wells drilled between 2012 and 2015 revealed that our unconventional shale resources have similar or better production potential than their analogues in US basins.
What progress has Sonatrach made on increasing its oil and gas trading capabilities?
Hachichi: Sonatrach has been amongst the leading national oil companies (NOCs) in the area of oil and gas trading since the early 1990s. To give a few examples, Sonatrach developed crude hedging capabilities in the Asian market between 2004 and 2014. Sonatrach also developed a unique arbitrage and hedging model for LNG spot cargoes in the Atlantic basin until the arrival of shale gas on the US market.
The market currently offers further opportunities to strengthen again our capabilities in oil and gas trading. Blending Algerian ultra-low sulphur fuel oil with other fuels to comply with IMO 2020 is one opportunity. Sales and transformation of our naphtha into different grades of gasoline is another example.
You acquired the Augusta refinery in Italy last year. Has Sonatrach further ambitions to increase its footprint outside of Algeria?
Hachichi: International business is strategically important for Sonatrach—for realising the value of our hydrocarbons and our commercial management—and to take advantage of investment opportunities abroad. We are present today on the whole value chain, mainly in Africa, Europe and Latin America and we continue to assess new opportunities in upstream.
What are Sonatrach's ambitions around growing Algeria's petrochemicals sector? Is this important in terms of oil and gas contributing to Algerian society in jobs and technology?
Hachichi: As an NOC, Sonatrach's mission is to serve the country's energy demand, but also to drive the economic development in both the short and long-term.
Our investments in the petrochemical industry focus on high value-added products, such as PDH-PP in Algeria and abroad, LPG hydrocracking, as well as the further development of our portfolio of projects which includes methanol chains and MTBE units.