Energy Cooperation With Europe - Rhetoric Or Reality?

BMI View: Greater cooperation in energy between Algeria and the European Union, promised by a memorandum of understanding (MoU) signed by the two parties, cou ld benefit both signatories on paper. It could promise greater foreign investment into Algeria to support development of its oil and gas resources so as to boost production. However, given the domestic political difficulties that Algeria could face in strengthening energy relations with the EU, we are cautious about the extent to which this collaboration could be carried out. This is particularly in view of the scarcity of details surrounding the means through which this cooperation would come about .

Algeria and the European Commission have signed an agreement for energy cooperation during EC president Jose Manuel Barrosso's visit to the North African country over July 6-7 2013. The two parties entered into a memorandum of understanding (MoU) to further energy-related cooperation, in what the EC describes as a 'priority area for the European-Mediterranean partnership'. This agreement will cover the following areas according to the EC's press statement:

  • Oil and gas, renewable energy and improving energy efficiency;

  • Tight Dependence
    Italian Gas Imports By Country Of Origin (%), 2012

BMI View: Greater cooperation in energy between Algeria and the European Union, promised by a memorandum of understanding (MoU) signed by the two parties, cou ld benefit both signatories on paper. It could promise greater foreign investment into Algeria to support development of its oil and gas resources so as to boost production. However, given the domestic political difficulties that Algeria could face in strengthening energy relations with the EU, we are cautious about the extent to which this collaboration could be carried out. This is particularly in view of the scarcity of details surrounding the means through which this cooperation would come about .

Algeria and the European Commission have signed an agreement for energy cooperation during EC president Jose Manuel Barrosso's visit to the North African country over July 6-7 2013. The two parties entered into a memorandum of understanding (MoU) to further energy-related cooperation, in what the EC describes as a 'priority area for the European-Mediterranean partnership'. This agreement will cover the following areas according to the EC's press statement:

  • Oil and gas, renewable energy and improving energy efficiency;

  • Reform for legal and regulatory frameworks;

  • Gradual integration of energy markets;

  • Infrastructure development;

  • Technology transfer.

This cooperation will also spill into other areas, such as cooperation in labour mobility within the two jurisdictions and improving regional security.

Key Partners

The European Union (EU) is Algeria's largest trading partner while Algeria is the EU's third largest source of natural gas imports, after Russia and Norway. Italy, which is the world's third largest gas importer according to the US Energy Information Administration (EIA), sources 43% of its gas imports from North Africa, of which Algeria accounts for 33%.

Tight Dependence
Italian Gas Imports By Country Of Origin (%), 2012

A political agreement to further energy cooperation will enhance the two parties' close economic reliance on the other. Although there are no available details on the specific aspects which cooperation can be expected, if Europe does provide assistance to Algeria in energy infrastructure and regulatory development, this could provide hope that Algeria's oil and gas sector could see a renaissance.

Despite possessing some of the world's largest reserves, Algeria's oil and gas production have stagnated in recent years as the country fails to attract new foreign investment to deve lop its below-ground resources alongside national oil company (NOC) Sonatrach . A reform of its oil and gas law, introduced in February 2013, threatens to further erode private investor interest. Characterised by a consolidation of Sonatrach's dominance of the upstream, downstream and midstream segments, we have warned that increased state ownership of assets will only deter foreign companies from making additional commitments into the domestic oil and gas sector.

Rhetoric Or Reality?

A political understanding between EU and Algeria could help advance investment in Algeria at the p rivate level. The promise of an gradual integration of energy markets and prospects for cooperation in energy regulatory frameworks could see greater European involvement in shaping the operating environment in Algeria to one more conducive to investments by European companies.

However, we caution against a massive and sudden opening of Algeria's oil and gas sector that could see exports to Europe increase . This is particular in light of a possible threat of a shortfall in Algerian gas supplies to meet domestic needs, which the Saudi Arabia-based Arab Petroleum Investment Corporation (Apicorp) had warned in a July 2013 report. Although our ten-year forecasts are less bearish than that of Apicorp, we similarly expect Algeria's exports to trend downwards at the tail-end of our forecast period as production growth falls behind the increase in the country's gas consumption.

Rising Domestic Requirement Could Hit Exports
Algeria Gas Production, Consumption & Exports (bcm)

Indeed, we believe that Algeria's rationale for strengthening Sonatrach's position in the domestic oil and gas industry in its new law is to ensure that sufficient gas is reserved for the domestic market. While our Country Risk team believes that Algeria's government - which the military wields large power in - looks to be relatively stable in the short-term, the Arab Spring that originated in Egypt have had spillover effects as the state increased its spending in order to maintain regime stability. In the longer term, its political outlook is less certain. Hence, the government could prioritise domestic supply certainty over exports to prevent gas shortages or high gas prices that provide ammunition for political unrest.

In addition, the promise of greater cooperation in regional security could be a double-edged sword if greater European involvement invites retaliation from the region's extremist groups. France's intervention in Mali appeared to have motivated the Islamic terrorist siege of In Amenas gas production complex in January 2013. Greater European presence could exacerbate instead of improve the security situation that has similarly weakened investor sentiment in Algeria.

Therefore, we do not expect the EC's MoU with Algeria to produce any significant improvement in oil and gas trade given the considerable political challenges standing in way of greater gas exports to Europe. Until further details are made available as to the means through which cooperation in oil and gas - whether commercial or regulatory - will come about, we hold a neutral view on the success of this MoU.

Significant r esults in cooperation in renewable energy are also not likely to materialise in the nea r future. Although there is room for renewable energy development in Algeria, the recent cancellation of Desertec Industrial Initiative (Dii) - a solar power project based in the deserts of North Africa - highlights that commercial considerations are likely to trump political rhetoric in the short-term while Europe's economy continues to flounder ( see 'Desertec Deserted And Helios Halted', July 1 2013 ). As in the case of oil and gas, we will wait for more detailed outline on the means through which renewable energy cooperation will take place before we factor in the possible impact of greater EC-Algeria energy cooperation into our renewable forecasts.

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Sector: Oil & Gas
Geography: Algeria
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