Will Algeria Be Able To Export More Natural Gas and LNG?

As the U.S. is set to become a major liquefied natural gas (LNG) exporter over the next few years, the uncertain ability of our competitors to export both LNG and piped gas is something we must continually understand.

Now exporting 4.6 Bcf/day of natural gas, internal conditions may transform Algeria into an importer sooner than most realize. Algeria's gas production has steadily declined in recent years thanks to slow governmental approval for projects, repeated delays, lack of investment partners, technical and infrastructure issues.

Like other long-time oil/gas producers, Algeria is plagued by maturing fields and a lack of new projects to compensate. Yet, state-owned Sonatrach believes $40 billion into field exploration and production can increase output 15% by 2019. Natural gas is nearly 70% of the country's hydrocarbon reserve base.

Perhaps the best chance to up production most significantly, Algeria is estimated to hold the 3rd largest shale shale gas resources in the world, at over 700 trillion cubic feet. But, shale development will be difficult: remote location of the shale acreage, lack of infrastructure, low water availability, and the need for more rigs because shale wells deplete quicker.

Algeria is not a great place for outside investment, a massive problem for more expensive, technically difficult oil and gas development like shale. And the situation appears to be worsening. In 2015, World Bank's "East of Doing Business" ranked Algeria 163rd out of 189 nations, when in 2013 it was ranked "higher" at 152.

Algeria also has one of the toughest hydrocarbon taxation systems in the world. Sonatrach has struggled to raise production in the aftermath of a corruption probe at the company and an al-Qaeda attack in 2013. These are root problems to attract international capital that will not simply go away.

The recent drop in oil prices really hurts Algeria, who like Russia prefers to sign long-term contracts with an oil-pegged price formula. Complicating goals of increasing production, the oil/gas sector accounts "for around 97% of merchandise exports and 60% of fiscal revenues."

Earnings from oil/gas sales were basically sliced in half in 2015 to around $35 billion, and fall again to $26 billion this year. And the sovereign wealth fund's assets worth $50-55 billion, will only be a short-term buffer to the budget.

As the U.S. is set to become a major liquefied natural gas (LNG) exporter over the next few years, the uncertain ability of our competitors to export both LNG and piped gas is something we must continually understand.

Now exporting 4.6 Bcf/day of natural gas, internal conditions may transform Algeria into an importer sooner than most realize. Algeria's gas production has steadily declined in recent years thanks to slow governmental approval for projects, repeated delays, lack of investment partners, technical and infrastructure issues.

Like other long-time oil/gas producers, Algeria is plagued by maturing fields and a lack of new projects to compensate. Yet, state-owned Sonatrach believes $40 billion into field exploration and production can increase output 15% by 2019. Natural gas is nearly 70% of the country's hydrocarbon reserve base.

Perhaps the best chance to up production most significantly, Algeria is estimated to hold the 3rd largest shale shale gas resources in the world, at over 700 trillion cubic feet. But, shale development will be difficult: remote location of the shale acreage, lack of infrastructure, low water availability, and the need for more rigs because shale wells deplete quicker.

Algeria is not a great place for outside investment, a massive problem for more expensive, technically difficult oil and gas development like shale. And the situation appears to be worsening. In 2015, World Bank's "East of Doing Business" ranked Algeria 163rd out of 189 nations, when in 2013 it was ranked "higher" at 152.

Algeria also has one of the toughest hydrocarbon taxation systems in the world. Sonatrach has struggled to raise production in the aftermath of a corruption probe at the company and an al-Qaeda attack in 2013. These are root problems to attract international capital that will not simply go away.

The recent drop in oil prices really hurts Algeria, who like Russia prefers to sign long-term contracts with an oil-pegged price formula. Complicating goals of increasing production, the oil/gas sector accounts "for around 97% of merchandise exports and 60% of fiscal revenues."

Earnings from oil/gas sales were basically sliced in half in 2015 to around $35 billion, and fall again to $26 billion this year. And the sovereign wealth fund's assets worth $50-55 billion, will only be a short-term buffer to the budget.

Meanwhile, domestic gas demand has been increasing rapidly, driven by generous subsidies, a population gain of nearly 1 million people per year, rising household use, and more gas processing industries. The annual cost of subsidies for oil/gas products recently has been $22-25 billion, a whopping 12-18% of gross domestic product.

Energy subsidies in Algeria have resulted in budget deficits. And there's so much more to come: the median age in Algeria is just 27 years, which is lower than India. Algerians generally have just 10% of the income of the Western nations.

Half of the gas consumed in Algeria is for electricity, and gas generates 92-95% of the country's electricity, one of the highest reliances on gas power in the world (here). Algeria still generates just 45 billion kWh, which with 42 million people, is less than what Kansas generates, with just 2.9 million people.

Sonelgaz, the public utility, is turning to "international capital markets to finance" a large-scale program to almost double generation capacity in the next few years to over 30,000 megawatts. This expansion will focus on eight or nine combined cycle gas turbine power plants, with one recent project capable of supplying power for 4 million Algerians.

And low power efficiency will mean that Algeria's real GDP rise of $8-10 billion per annum will devour more gas than would normally be the case. Nearly 20% of Algeria's generated electricity is lost in transmission/distribution, double North African competitor Egypt and on par with desperately poor nations like Ethiopia (here).

"CREG, the Algerian energy regulator, has increased electricity and gas tariffs for high-voltage electricity and high pressure gas (industry) by 20% and 35% respectively" to slow spiraling demand. The goal to meet 20% of power from renewables by 2030 is largely to control incremental gas consumption and free up more gas for export.

With overall exports down 30% in recent years, Algeria has still been 2nd or 3rd place in supplying gas to Europe, along with Russia and Norway. LNG is 45% of Algeria's gas exports, accounting for 2 Bcf/day, or 5-6% of global LNG. Although Algeria has the 4th largest liquefaction capacity, it's just the 7th largest exporter. Algeria has had just a 50% utilization rate for liquefaction, far below the global average of around 85%.

Algeria's two liquefaction plants are located in the coastal cities of Arzew and Skikda. LNG is sourced from the giant field Hassi R'Mel field, which produces over 9 Bcf/day and holds over half of proven reserves. Yet, this aging giant has been producing gas since 1961 and is "in free-fall for want of development and maintenance."

There are, however, new fields being developed, and some optimistically believe six new fields could eventually double Algeria's gas output . There are no liquefaction plants under construction, being planned, or being studied in Algeria.

Algeria covers 30% of Europe's LNG imports, and Europe receives over 85% of Algeria's LNG exports, mostly Spain, Turkey, and France. Europe could also be more interested in Algerian gas if the pricing formula changes to a spot-based price.

Sonatrach has opposed these changes in the past, but the low current oil prices mean spot prices could actually be more profitable. And with the known desire for Europe to lower reliance on Russia, natural gas is seen as perhaps the most important area of energy cooperation between Europe and Algeria with a memorandum of understanding signed in 2013.

Fast growing Turkey is responsible for nearly half of the gas power plant projects under construction in Europe. Starting last year, Turkey has agreed to import LNG from Algeria for 10 years, upping current imports a bit to 0.5 Bcf/day of LNG from Algeria. But, outside of Turkey, Europe isn't thought of as a growing market as more renewables, efficiency, coal, and slow economic growth have cut into demand. Thus, "Algeria to Supply Six LNG Shipments to Egypt."

It is quite possible, however, that faced with "More Than Half of U.S. LNG Is Destined for Europe," Algeria, Russia, and other big European suppliers of natural gas might start a "price war" against American gas to maintain market share, not all that different than what Saudi Arabia s is doing against our shale oil.

Ultimately though, Algeria will also be looking to supply its LNG to Asia, where customers typically pay a premium using more oil-indexed, long-term prices. "Algeria to Boost Gas Shipments to Asia on Expanded LNG Capacity." Today's sunken oil and LNG prices of course are making this more remote, and Asia accounts for less than 15% of Algeria's exports.

But, the energy-hungry economies of Asia, which account for 75% of all LNG demand, hold the highest future growth rates, driven more so by China and India than traditional LNG giants Japan and South Korea. Algeria now exports just 0.3 bcm of LNG to China and 0.2 Bcm to India. And there will be plenty of new opportunities for ALL LNG exporters: already with 33 importing nations, WoodMac sees 50 new LNG markets possible by 2025.

Still, Algeria is challenged to diversify its list of customers outside Europe for a few reasons, higher transport costs, intense international LNG competition (namely from Qatar, Australia, and the U.S.), and the re-direction of exports of piped gas to LNG would mean new and costly infrastructure since they would come from different fields.

The good news for Algeria is that some of the trends flattening/lowering Europe's natural gas demand appear temporary, namely demand destruction from stagnant economic growth. For example, pushing other European nations to follow, "France is preparing to introduce a floor price for carbon emissions" to curb coal and favor gas. And Western leaders in general continue to overstate the ability of non-dispatchable renewables to displace dispatchable natural gas.

With known limitations in new domestic production, Europe's LNG imports could double by 2020, to 10-12 Bcf/day. Europe has significant spare import capacity to take more supply, and LNG demand in 2015 was up a hefty 16% (here). So, although facing a shrinking gap between production and demand, Algeria can at least known that the import needs of its most vital customer aren't going away.

Most importantly for us, Algeria's gas export predicament is just another example of how those involved in the business of exporting U.S. LNG must simply do a better job at telling us of the widening opportunities in this quickly globalizing market. For example, I've also documented problems in Norway and the Middle East in supplying gas and LNG, and the growing imperative for us to help supply natural gas in our post COP21 world.

Source: Forbes