EU-Algeria Energy Deal: A 12 Month Outlook

In the wake of Russia’s invasion of Ukraine, Europe has scrambled to find alternative sources of energy. Attention has turned towards Africa as a potential means of substituting Russian gas. Algeria holds roughly 159 trillion cubic feet of proven gas reserves, ranking 11th in world [source]. Al-Qaeda linked militants are on the retreat in recent years, potentially opening the country up to more foreign direct investment. Algerian gas may be the solution to diversifying Europe’s energy portfolio. However, production capacity limits and preexisting rivalries with Morocco could hamper efforts at developing Algeria’s energy sector.

KJ-1: It is highly likely that Algeria will increase energy production and exports to European markets in the next 12 months

• Algeria finalized a bi-lateral deal with Italy to supply over one billion barrels of hydrocarbons in July. Algeria also increased gas exports to Italy in the days following the deal [source]. 

• In order to meet the terms of the deal, the Italian energy company ENI agreed to a $4 billion deal with a US energy company to develop a site in the Berkine North Basin [source]. Substantial hydrocarbon deposits were discovered in July [source].

• Algeria announced a hike in gas prices in a deal with three undisclosed partner countries [source].

• Spain denied that gas flows from Algeria were halted after Algeria’s national energy provider claimed that the Medgaz pipeline was undergoing repairs [source].

• Following a dispute in 2021 over Western Sahara between Algeria, Morocco and Spain, Algeria suspended the flow of gas [source].

• Nevertheless, Spain has a long term import agreement with Algeria’s national gas provider Sonatrach [source]. The Medgaz pipeline’s operating capacity was expanded to 10.7 billion cubic meters a year [source]. 

• Sonatrach is hoping to increase gas sales to southern Europe in the next 12 months. This will be achieved by adding two new compression stations on pipelines running to Europe [source]. 

• Algerian exports to Tunisia have decreased, allowing for increased export capacity to Europe [source].

• Following a sustained counterinsurgency campaign last year, al-Qaeda linked militants lost the ability to credibly threaten material damage to Algeria’s energy infrastructure [source]. 

• Several AQIM commanders were either captured or killed within the 12 months [source].

KJ-2: It is likely that decreased water levels along major European rivers will enhance European reliance on Algerian gas imports in the next 12 months.

• Water levels along major European rivers such as in France, Germany and Italy have impacted the operation of hydropower plants throughout the summer months [source]. 

• The most common form of hydropower production in Europe is achieved by run-of-river plants. The worst affected plants this summer were run-of-water [source].

• Energy prices are expected to soar this winter. Accordingly, European countries are conserving water in reservoirs. This only further compounded the original problem [source]. 

• The EU proposed a 15% reduction to gas consumption to mitigate the effect of the hydropower shortage and the blockade on Russian gas. EU energy ministers are yet to settle on a concrete proposal [source].

• In order to deal with the falling hydro stock, European countries would need to replace the shortfall with hydrocarbons [source]. 

• Currently, the most drought affected countries, Spain and Italy, are also Algeria’s largest gas consumers [source]. 

KJ-3: It is unlikely that increased Algerian energy exports to Europe will weaken Algerian-Russian and Algerian-Chinese relations in the next 12 months.

• Despite Spain’s growing reliance on Algerian energy, Algeria suspended a friendship treaty with Spain in June over Madrid’s support of autonomy for Western Sahara [source]. 

• Spanish Foreign Minister Nadia Calvino cited Algeria’s close relations with Moscow as reason behind the suspension [source].

• Algerian President Abdelmadjid Tebboune indicated that his country may join BRICS, participating in the virtual summit in June [source]. 

• Algeria abstained from the UN General Assembly vote demanding Russia withdrawal its forces from Ukraine [source]. 

• Russian Foreign Minister Sergei Lavrov visited Algiers in may and boasted of Moscow’s strong trade links with Algeria [source]. 

• Gazprom assisted Sonatrach in boosting LNG production capacity [source].

• Although the US was once an important security partner, the Trump Administration’s recognition of Moroccan sovereignty over Western Sahara [source].

• Russian weapons constitute roughly 80% of all arms imports to Algeria. Moreover, Algeria joined Russia in military drills in South Ossetia in 2021 [source]. 

• Russia in turn will participate in military drills near the Moroccan border in November [source]. 

• Algeria is as strong supporter of the Belt and Road Initiative. China has secured the right to construct a $3 billion deep water port in Cherchell and El Hamdania [source]. 

• Like Russia, China has become an important arms exporter to Algeria, delivering at least 20 highly advanced reconnaissance drones since 2018 [source].

Intelligence Cut-Off Date: 2 September, 2022