Gas and a Reset Between North Africa and Europe

Summary: the war in Ukraine and gas as the fulcrum presents North Africa and Europe with a new possibility to reset relationships that seemed locked and impermeable.

Interview with Francis Ghilès, Arab Digest, 20 April 2022 | arabdigest.org

Let’s begin with a simple question, is the Algerian government capable of taking advantage of the opportunity that the war in Ukraine has presented to sell its gas to Europe?

Well, this is a very good question. In recent years, Algeria has had an energy policy where the price of electricity in Algeria – and it comes mostly from gas – is one of the lowest in the world; it doesn’t even cover costs. And the powers that be are reluctant to change that for fear of social unrest. This has led to an increasing proportion of Algerian gas production going to domestic use. And furthermore, until 2019, the laws were very restrictive about foreign investment. That has changed since the end of 2019. Of course, there was the COVID crisis. (But) we are now seeing major contracts and the first major contract was signed with Italy last November. This is attracting foreign companies back into Algeria, and in recent weeks of course, there has been a rush of foreign companies, to look at the possibilities of investing, particularly researchers searching for new oil and gas. So things are moving, how quickly they will move is difficult to say.

Sonatrach, the oil and gas company, is recovering from 10 years of very confused management, of corruption trials in the early 10s. Nonetheless, this company of 130,000 people, which is the largest in Africa, does boast many good engineers and there is no reason why Sonatrach will not recover in the next few years if it has the full backing of the state. So the answer is mixed. Another point to make, which I think is important, is that foreign investment wasn’t just reluctant to go into Algeria and to develop Algerian gas fields because of Algerian bureaucracy or very tight rules. Since the 2000s, the European Union has built a policy of energy liberalization, which has meant that gas contracts have become shorter and shorter. You cannot predicate the development of a gas field which might take 10 or 15 years on contracts of say two or three years. It is totally illogical. It doesn’t make economic sense. Of course, with what’s happened with Russia and Ukraine, the EU is thoroughly hoist on its own petard because it’s now desperate to find more gas. But if you have short term contracts that makes the life of the buyer very, very difficult indeed.

Well, that leads me then to my second question, which is supplementary to the first: is Europe capable of seeing the opportunity?

Well, Europe has seen the opportunity, at least Italy has seized the opportunity very quickly. Italy saw the crisis coming in a way when in November of last year, the president of Italy paid a state visit to Algeria and a major contract was signed, over $1 billion, between Eni (Ente Nazionale Idrocarburi) and Sonatrach the Algerian state company.
This is important for a number of reasons. One, the cooperation between the Italians and the Algerians in oil and gas predates independence in 1962. Why? Because Enrico Mattei the founder of Eni advised the provisional Government of Algeria, which was negotiating for independence from France in 1960 to 62, on oil and gas. History reminds us that General de Gaulle wanted to detach the Sahara where oil and gas had been found in the mid 50s, from what was going to become the new Republic of Algeria. He failed and the Italians helped the Algerian nationalists if you will, or freedom fighters as they were then called, to frame their oil and gas policy. So there is a deep political understanding between Italy and Algeria.

Second point, the first ever underwater gas pipeline was built with Italian technology provided by Saipem between Algeria and Italy via Tunisia and the Strait of Sicily. It was inaugurated in 1983. And it’s always functioned very smoothly ever since. Third point, which is important for Algeria, is that Italy has the technical ability, companies such as Saipem, Fincantieri, all kinds of companies. It has a know-how in oil and gas and LNG plants and all this chain of oil and gas and condensate. Italy can provide Algeria with all it needs in terms of technology, building pipelines and exploration. The Italians are very, very good at this game, not just Eni but all host of companies. So these are the reasons why the agreement with Italy is particularly important when you ask, is Europe appraised of what it might get out of Algeria. I would simply point out that the visit of the Prime Minister Mario Draghi to Algiers on Monday (April 11) accompanied by the head of Eni, the Minister of Foreign Affairs, etc is important. Why? Because Mario Draghi, as former head of the European Central Bank, a former member of Goldman Sachs is really a man of power, he is at the heart of the power structure of the West. So his visit to Algiers does not go unnoticed by anybody.

There is then this opportunity, as everyone scrambles for gas, for Algeria. But to go back to Sonatrach, can Sonatrach meet the challenge?

I think there are two or three points to be made. The first is that Algeria has plentiful reserves of gas. Half the territory of this country, which is the largest in Africa geographically, has not been explored. Even in the areas which have been explored, many areas have not been explored with the modern methods available in the last 10-15 years. Recent discoveries near Berkine by Eni suggests that there is a lot more gas to be found, because geologically the areas which have not been explored are very similar to the ones which have.
The second point: the Algerians boast, according to American statistics – which are very reliable – the third biggest reserves of non-conventional gas in the world, ex aequo with Argentina, on top of that, conventional resources. So Algeria is a vast reservoir of gas. Sonatrach has the technicians. What Algeria lacks is an economic policy which accepts reforms all across the range. Now, there is a case for arguing that the only way to move the Algerian leadership and the generals in particular, is to get Italy and other Western countries, notably Germany, which is discussing buying gas from Algeria. If these countries really put money on the table, and as I understand it, the offers being made, the preliminary offers being made to Algeria to develop gas are well over $100 billion. Now, all these are large figures. Nonetheless, if developed countries show a real willingness to put their money where their mouth is and to say we’re going to engage in long term contracts, i.e. 10-15 year contracts, we’re going to develop this and that gas field that might be the one way of moving Algeria towards a more modern, a more transparent management, not just of the oil and gas sector, but of its economy.

This is why I would argue that when you look at Europe/ Algeria, Europe/ Africa, in terms of oil and gas, everything is up for grabs today. What has happened in Ukraine has fundamentally changed the tectonic plates. They’re moving. How they will move, in what direction, the years ahead will tell us. But it is an extremely interesting situation. The crisis in Ukraine has thrown open a game, which seemed to be a closed game and a foregone conclusion, short term contracts and all the rest of it. Now we are in a different world, it’s going to be messy, it’s going to be complicated.

How complicated?

Let us remember that in Europe, there are at least 15, if not 20 million citizens of North African origin, let us remember that there is an enormous amount of trade between Spain, Italy, France, Belgium, Germany, and North Africa. And if we want to confront the problem of illegal immigration and poverty in Africa, we are going to have to take some very bold decisions in Europe, in Brussels.

These are difficult decisions. But gas is one of the key factors in this and may be rejigging our geostrategic thinking. That’s the point, really, gas is part and parcel of a serious rethink, which will not only have to occur in Europe, it will have to occur in North Africa. So maybe this crisis will force the European leaders to change their software, because they have to change their software.

Algeria became independent 60 years ago, Tunisia, and Morocco more than 60 years ago. The Moroccans will always be polite vis a vis Europeans. But what they think about Europe’s economic policies towards them in private, you’d be surprised. The Algerians are much more upfront, and they just go for the jugular. And the Tunisians basically say nothing today, because they’re dependent on Europe and America and the IMF, to help them through a very difficult economic phase. So I think that maybe this crisis, which is going to force a reset of many clocks, on many subjects, on many issues of economics, maybe this is the opportunity. And Europe will have to learn in the process that preaching democracy is of absolutely no use. Because for the last 30, 40, 50 years, the West, I include America, have been preaching democracy selectively. What has been done for Palestine, what has been done in Libya, what has been done in Iraq: the Arabs are very sensitive to this. And Europe is going to have to decide what it wants in the next few decades. That requires clear thinking. That requires new ideas. I don’t think it’s impossible. It does require bold leadership.

Francis Ghilès is a specialist on security, energy, and political trends in North Africa and the Western Mediterranean and an associate senior researcher at the Barcelona Centre for International Affairs (CIDOB.) From 1981 to 1995 he was the North Africa correspondent for the Financial Times and has written for numerous publications including the New York Times, Wall Street Journal, Le Monde, El Pais and Middle East Eye. He is a regular contributor to the Arab Digest newsletter and podcasts.