The European Union looks to North Africa for energy security

by James Griffin

14-08-07

With energy security one of the most pressing concerns for the European Union (EU), particularly given the periodic gas disputes Russia continues to have with its neighbours, such as Ukraine and Belarus, the European Commission and many of its member states are increasingly looking towards North Africa.
The region has for many years been a significant contributor to European gas supplies, but recent deals and current market noises point to this contribution witnessing sizeable growth.

The main mover in North Africa has been Algeria. In June the EU and Algeria released a statement that Algerian gas supplies to the EU could increase by 23.5 bn cm per year by 2010 if the common infrastructure projects currently under construction go according to plan.
Algeria is currently the third largest supplier of gas to the region and in 2005 it exported more than 55 bn cm of gas, equivalent to 19.1 % of the EU's imports. New gas may come through two new pipelines: Medgaz that wouldconnect Algeria to Almeria on the south-east coast of Spain, and Galsi, which would connect Algeria to Cagliari, Sardinia in Italy. Each pipeline would have a capacity of 8 bn cm per year. A project to increase the capacity of an existing pipeline that links Algeria and Italy through Tunisia could add 7.5 bn cm to current supplies.

The relationship was further strengthened when, following years of negotiation, agreements were recently reached on the often spiky issues of profit sharing mechanisms (PSMs) and gas destination clauses. Sonatrach, the Algerian state gas company, will now scrap destination clauses that prohibit buyers of Algerian gas from reselling the gas to a third party outside a designated market.
Neelie Kroes, the EU Competition Commissioner said: "The agreement reached constitutes a major breakthrough in our relations with one of Europe's most important suppliers for natural gas and eliminates an important obstacle for the creation of a single EU-wide market in gas."

The potential benefits are two-way. Firstly, for the European Commission it bolsters efforts to liberalize European energy markets, as it believes such clauses to be anti-competitive allowing gas suppliers to carve up territories and prevent a liquid market from developing across the EU. With the two largest gas suppliers to the EU, Russia and Norway, respectively, already having relinquished destination clauses, there is certainly potential to advance European gas market liquidity and extend competition as exporters are forced to compete with their own gas.
Secondly, though Algeria and other gas exporters have viewed destination clauses and PSMs as a necessity for minimising investment risk, and in respect to PSMs, providing exporters with some access to consumers, the agreement may help Algeria secure more foreign investment and provide Sonatrach with the means to set up marketing firms that would in effect allow it to sell directly into European markets.

A statement from Algeria's Energy and Mines Ministry said that the agreement would contribute further to the supply security of the concerned countries, and in a clear sign that it is looking to extend Sonatrach's footprint in Europe, it also urged the further opening of the EU gas market.
It stated: "European Commission support is obviously desirable and expected so as to make the liberalisation conditions of the energy market in Europe, and that of gas in particular, of a kind that would allow Sonatrach to be an active player in a transparent and non-discriminatory environment."

Sonatrach certainly sees significant benefits associated with European expansion and this was further expressed when the group and Energias de Portugal (EDP) recently agreed to set October 31, 2007 as the date for the finalization of the global execution of their previously announced gas partnership. The venture will cover natural gas supply, joint marketing of natural gas, and partnerships in combined-cycle gas turbines, as well as providing Sonatrach with a place on EDP's general and supervisory boards.
Elsewhere in the region, the EU also recently signed a memorandum of understanding with Morocco that provides a grant of EUR 654 mm over four years, with part of this being used to join Morocco's energy sector to its northern neighbours.

A joint declaration on energy cooperation was also signed and EU Commissioner for foreign relations and neighbourhood policy, Benita Ferrero-Waldner, said that Morocco is important as a transit country for EU natural gas supplies and that "by developing our energy cooperation through a gradual integration of our respective energy sectors, we will contribute to improving the security of our energy supplies, both in the EU and in Morocco."
For Morocco the partnership is also critical as the Moroccan government has stated that it needs to spend between EUR 1.1 bn and EUR 1.5 bn on its power sector to meet surging demand.

Libya too, particularly after the country's recent decision to release five Bulgarian nurses and a Palestinian doctor, is very much on the EU's radar. Following the release decision, EU officials said they were optimistic that it would clear the way for the EU to invest in Libya's substantial oil and gas reserves.
Libya is looking to foreign investment to further develop its resources and at the start of August unveiled technical details of its first post-sanction exploration licensing round to focus on gas. This follows on from three earlier rounds focused on oil. The country also has big plans for liquefied natural gas.

The EU appears to be laying some solid foundations in its links with North Africa countries as it looks to ease energy security concerns. Looking to the future, it is also easy to see why trekking south makes sense. On the horizon is the proposed 4,000 km Trans-Saharan Gas Pipeline, planned as a joint venture between Sonatrach and the Nigerian National Petroleum Company and slated for 2015.
The pipeline is designed to allow Nigeria to export its huge natural gas reserves -- the pipeline's capacity should reach up to 30 bn cm -- and the focus is very much on the European market.

At a recent conference, Andris Piebalgs, the European energy commissioner, emphasized the importance of energy cooperation through the existing Euromed framework and the EU-Africa energy partnership and stressed that "the Trans-Sahara gas pipeline could constitute a promising supply source and route for the EU."
And with a more concerted push for EU gas and electricity market liberalization, it would be hoped that the development of more interconnectors would mean that gas from this and other pipelines would reach much further than the Mediterranean countries of Spain and Italy.

The link up is mutually beneficial. With natural gas imports anticipated to reach 85 % of EU gas consumption by 2030, compared to 50 % in 2000, the EU can be viewed as a stable source of demand for North African supplies in the years to come.
For the EU, North Africa will be a key component of its energy future. The region has many benefits. It is closely linked to southern Europe and with the hoped development of new EU interconnectors this linkage could extend to the entire EU, it has much gas to export, and it has for many decades been a reliable source of supply.

For many in the EU this latter point is particularly significant given Russia's intermittent energy squabbles with its neighbours.
The EU-North Africa relationship will be essential in helping further diversify supplies and routes, and its importance to the EU's energy supply security strategy will continue to grow.
 

Source: UtiliPoint's IssueAlert