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Medgaz ready to flow: Bad news for LNG

The Medgaz gas pipeline, linking Algeria directly with Spain, was being commissioned last month – prompting forecasts of heightened competition in the European LNG market, Martin Quinlan writes

SPAIN's second pipeline connection to Algeria's vast gas reserves – and Algeria's third pipeline link to Europe – should be ready to flow before year-end. But, with the Iberian gas market already copiously supplied, deliveries through the new Medgaz pipeline seem destined to back-out Spain's extensive liquefied natural gas (LNG) imports, adding to the woes of sellers in the European LNG market.

The Medgaz project fulfils the 40-year dream of Spain's energy planners for the country to have a direct pipeline link with Algeria, although the Mediterranean crossing – involving pipelaying at depths of up to 2,165 metres – was far ahead of pipelaying capability when it was conceived (see box). Even when the first gas pipeline between the two countries – the Pedro Duran Farell system, which started flowing in late-1996 – was constructed, the authorities opted for a mainly overland route across Morocco, with a short crossing of the Strait of Gibraltar at depths of up to 400 metres.

But Spain's ambition behind the direct link – for the country to develop as southwestern Europe's gas hub, trading to the colder countries further north – still seems a long way off. Although a fairly extensive network of transmission pipelines has been built within Spain, there is still no significant export link to France and beyond. The only export connection is at Irún, west of the Pyrénées, which allows a small volume of gas to be piped to France in winter, and there are two-way connections with Portugal's pipelines.

It is said that the fault lies less with Spain's ambitions – there are long-running plans for substantial export pipeline connections across the Pyrénées – and more with France's reluctance to build the necessary links south to the mountains. France's gas demand is concentrated in the north of the country, where pipeline supplies are readily available from Norway, Russia and the Netherlands. Sedigas, the Spanish gas industry association, has been pushing hard for interconnections with France and says there is now an "essential need" for gas to flow north, "allowing those countries heavily dependent on Russian gas to increase their diversification".

Medgaz, if fully utilised, will add 8.0bn cubic metres a year (cm/y) to Spain's gas supply, of which the larger marketers will be Algeria's Sonatrach, refining company Cepsa and gas and electricity utility Iberdrola (see Table 1). The volume is equivalent to nearly a quarter of Spain's gas consumption last year of 34.6bn cm, according to Cedigaz (see Figure 1). Although gas use has been increasing rapidly – consumption doubled over the seven years to 2008 – there was a decline of 10.3% last year, attributed by Sedigas to the downturn in the economy.

With few energy resources of its own, Spain turned to gas in a big way in the 1990s. Extensive import infrastructure has been constructed – the Pedro Duran Farell pipeline has a capacity of 10.9bn cm/y, and there are six LNG terminals with a capacity of 60.1bn cm/y (see Table 2).

But it seems that Spain's infrastructure construction has moved ahead of market development. Last year, the Pedro Duran Farell pipeline carried 6.94bn cm to Spain and 1.33bn cm to Portugal, indicating its capacity was only 76% utilised. LNG imports amounted to 27.01bn cm, indicating an overall utilisation of capacity of only 45%.

The problem is that if Medgaz is to be well-utilised, LNG imports must decline sharply – but, as Spain is such an important player in the LNG business, this will have significant consequences for the trade in Europe and beyond.

Spain's 60.1bn cm/y of regasification capacity represents 36% of Europe's total, while its LNG imports last year accounted for 39% of Europe's imports and for 11% of world LNG trade. Spain has five large suppliers of LNG – Algeria (5.19bn cm last year), Nigeria (4.99bn cm), Qatar (4.98bn cm), Trinidad and Tobago (4.18bn cm) and Egypt (4.10bn cm), with other contract deliveries coming from Norway, Oman and Libya (see Figure 2).

According to Sedigas's latest market forecasts, consumption growth will not solve the problem in the foreseeable future. Sedigas envisages gas demand increasing by an average of 3.31% for the coming few years, which points to a consumption of 39.4bn cm in 2013. Even if this rate of growth is achieved, the increment will be less than half of Medgaz's capacity.

But much depends on a recovery in Spain's remarkable economic growth. With its warm climate, heating is not the primary market for gas so industrial use and electricity generation predominate. Last year, industry accounted for 44.9% of total consumption and the electricity sector for 40.1%, with residential-commercial use accounting for just 13.8% and non-energy uses for 1.2%.

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