The Geopolitics of Natural Gas The Changing Geopolitics of Natural Gas: The Case of Algeria Harvard University’s Belfer Center and Rice University’s Baker Institute Center for Energy Studies November 2013 JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY RICE UNIVERSITY THE CHANGING GEOPOLTICS OF NATURAL GAS: THE CASE OF ALGERIA BY AZZEDINE LAYACHI, PH.D. PROFESSOR OF INTERNATIONAL AND MIDDLE EAST AFFAIRS ST. JOHN’S UNIVERSITY NOVEMBER 1, 2013 The Changing Geopolitics of Natural Gas: The Case of Algeria THESE PAPERS WERE WRITTEN BY A RESEARCHER (OR RESEARCHERS) WHO PARTICIPATED IN A BAKER INSTITUTE RESEARCH PROJECT. WHEREVER FEASIBLE, THESE PAPERS ARE REVIEWED BY OUTSIDE EXPERTS BEFORE THEY ARE RELEASED. HOWEVER, THE RESEARCH AND VIEWS EXPRESSED IN THESE PAPERS ARE THOSE OF THE INDIVIDUAL RESEARCHER(S), AND DO NOT NECESSARILY REPRESENT THE VIEWS OF THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY. © 2013 BY THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY OF RICE UNIVERSITY THIS MATERIAL MAY BE QUOTED OR REPRODUCED WITHOUT PRIOR PERMISSION, PROVIDED APPROPRIATE CREDIT IS GIVEN TO THE AUTHOR AND THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY. 2 The Changing Geopolitics of Natural Gas: The Case of Algeria Acknowledgments The Center for Energy Studies of Rice University’s Baker Institute would like to thank ConocoPhillips and the sponsors of the Baker Institute Center for Energy Studies for their generous support of this program. The Center for Energy Studies further acknowledges the contributions by study researchers and writers. Energy Forum Members Advisory Board Associate Members Accenture Direct Energy The Honorable & Mrs. Hushang Ansary Hess Corporation Baker Botts L.L.P. Tudor, Pickering, Holt & Co. LLC Baker Hughes Incorporated Members BP California Energy Commission Afren Resources USA Cheniere Energy, Inc. Air Products and Chemicals, Inc. Chevron Corporation American Air Liquide Holdings, Inc. ConocoPhillips Apache Corporation Deloitte Aramco Services Company EDP Renewables North America, LLC IPR - GDF SUEZ North America Energy Future Holdings Corporation Pioneer Natural Resources USA Inc. ExxonMobil Corporation Rockwater Energy Solutions, Inc. The Institute of Energy Economics, Japan (IEEJ) TOTAL E&P New Ventures, Inc. Marathon Oil Corporation TOTAL E&P USA, Inc. Saudi Aramco VAALCO Energy Schlumberger Shell Oil Company Supporting Members Shell Exploration & Production Co. Deloitte MarketPoint LLC Trinity Industries, Inc. Energy Intelligence Wallace S. Wilson 3 The Changing Geopolitics of Natural Gas: The Case of Algeria Acknowledgments The Geopolitics of Energy Project at Harvard University’s Kennedy School is grateful for the support it receives from BP, as well as the Belfer Center for Science and International Affairs. It also appreciates the work and contributions provided by the scholars who have participated in this program. 4 The Changing Geopolitics of Natural Gas: The Case of Algeria About the Study Some of the most dramatic energy developments of recent years have been in the realm of natural gas. Huge quantities of unconventional U.S. shale gas are now commercially viable, changing the strategic picture for the United States by making it self-sufficient in natural gas for the foreseeable future. This development alone has reverberated throughout the globe, causing shifts in patterns of trade and leading other countries in Europe and Asia to explore their own shale gas potential. Such developments are putting pressure on longstanding arrangements, such as oil-linked gas contracts and the separate nature of North American, European, and Asian gas markets, and may lead to strategic shifts, such as the weakening of Russia’s dominance in the European gas market. Against this backdrop, the Center for Energy Studies of Rice University’s Baker Institute and the Belfer Center for Science and International Affairs of Harvard University’s Kennedy School launched a two-year study on the geopolitical implications of natural gas. The project brought together experts from academia and industry to explore the potential for new quantities of conventional and unconventional natural gas reaching global markets in the years ahead. The effort drew on more than 15 country experts of producer and consumer countries who assessed the prospects for gas consumption and production in the country in question, based on anticipated political, economic, and policy trends. Building on these case studies, the project formulated different scenarios and used the Rice World Gas Trade Model to assess the cumulative impact of country-specific changes on the global gas market and geopolitics more broadly. Study Authors Rawi Abdelal Simon Henderson David Mares Luay Al Khatteeb Trevor Houser Kenneth B. Medlock Govinda Avasarala Amy Myers Jaffe Keily Miller Beibei Bao Robert Johnston Tatiana Mitrova Soner Cagaptay Ken Koyama Isidro Morales Charles Ebinger Azzedine Layachi Martha Brill Olcott Jareer Elass Michael Levi Meghan O’Sullivan Andreas Goldthau Steven Lewis Ronald Ripple Peter Hartley Suzanne Maloney 5 The Changing Geopolitics of Natural Gas: The Case of Algeria Introduction Algeria, the largest country in Africa, is one of the three biggest producers of hydrocarbons on that continent, the other two being Libya and Nigeria. It produced hydrocarbons even before its independence from France in 1962. Its entire economy was built around such resources, and its exports are mainly oil and natural gas. After major capital investments in these industries in the 1960s and 1970s, it quickly grew into a major supplier of these energy products to Europe and other markets, including the United States. In the region of North Africa (also known as the Maghreb1), Libya is the only other major oil and gas producer whose key market is also primarily Europe, particularly Italy.2 Algeria is important in the global energy market due to several factors. It has the eighth largest natural gas reserves in the world with 159 trillion cubic feet (Tcf). With a production of 6.8 Tcf in 2010 (down from 6.9 Tcf in 2009),3 Algeria is among the top 10 producers of natural gas in the world and is also the third largest of OPEC member countries after Iran and Qatar. It exports gas through pipelines to Europe and by tankers of liquefied natural gas (LNG) to many countries. In 1964 Algeria was the first producer of LNG in the world; today it is the fourth largest LNG exporter (behind Indonesia, Malaysia, and Qatar), exporting around 13% of the world's total LNG, which is roughly 35% (682 Bcf) of its total gas exports. LNG is exported by 28 tankers for crude and products. Sonatrach,4 the national and sole hydrocarbon company, has commissioned 10 new tankers to be delivered in 2013. The long-term trends of Algeria’s gas industry rest on several factors, including the reserves, which have been dwindling due to maturing fields and slow discovery of new ones; the external demand, which recently has been affected negatively by the recession in Europe and the rising competition of other gas exporters, such as Qatar; domestic consumption of gas, which has been 1 The Maghreb, as a unique cultural and political region, includes Algeria, Libya, Mauritania, Morocco, and Tunisia. 2 Before the overthrow of Moammar Gadhafi in 2011, Libya provided Italy with 40% of its energy needs. 3 U.S. Energy Information Administration, Algeria Country Analysis Brief, last modified May 20, 2013, http://www.eia.gov/cabs/Algeria/Full.html. Of the 6.8 Tfc produced in 2010, 3.5 Tcf was marketed (exports and domestic consumption), 3.2 Tcf was re-injected for oil recovery, and 0.2 Tcf was either vented or flared. 4 Sonatrach is the acronym for the company’s French name, Société Nationale pour la Recherche, la Production, le Transport, la Transformation, et la Commercialisation des Hydrocarbures. 6 The Changing Geopolitics of Natural Gas: The Case of Algeria rising by more than 6% a year; and internal political dynamics, which affect the country’s hydrocarbon policy and foreign investment regulations. The prospect of shale gas development may offset a shortfall in conventional gas reserves, production, and exports, but that may take many years to materialize in spite of the government’s firm commitment to this source, which is said to be very abundant. Despite the challenges ahead for its gas industry, Algeria remains a significant player in the global gas market. It is the European Union’s third most important source of natural gas after Russia and Norway,5 and yet “[l]ittle is heard publicly or written about Europe’s third largest supplier of gas, Algeria, which accounts for 20% of the continent’s imports.”6 More than 97% of Algeria’s natural gas exports—an average of 2.118 trillion cubic feet (Tcf)—go to Europe where, as indicated in Figure 1, the main clients are Spain and Italy, which are supplied mainly via pipelines across the Mediterranean Sea with long-term contracts with oil-indexed prices. Figure 1. Importers of Algerian Natural Gas in 2007 (Billion cubic feet) Source: International Energy Agency 5 In 2012, Algeria was the second source of gas for the EU, providing 30% of its needs, while Russia and Norway provided respectively 40% and 25%. See “Geopolitics of EU Energy Supply,” EurActiv, last modified May 28, 2012,http://www.euractiv.com/energy/geopolitics-eu-energy-supply-linksdossier-188354. 6 Francis Ghilès, “Algeria: A Strategic Gas Partner for Europe,” Journal of Energy Security, February 2009. Among the EU members, France, the former colonial power, is the largest source of Algeria’s imports (19.7%) and hosts close to 2 million Algerian expatriates. 7 The Changing Geopolitics of Natural Gas: The Case of Algeria Most of Algeria’s LNG exports also go to Western Europe (see Figure 2), especially France, Spain, and Turkey. Other European clients include Portugal, England, Greece, and Slovenia. Figure 2. Top 5 Importers of Algerian LNG in 2007 (Billion cubic feet) Spain, 150 France, 280 Turkey, 155 USA, 74 Italy, 80 Source: U.S.