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Italy and Spain Hold Talks to Head Off Tension Over Algerian Gas

Italy and Spain Hold Talks to Head Off Tension Over Algerian Gas

Diplomats from Italy and Spain are holding talks after Rome’s move to secure large volumes of Algerian gas stoked concerns in Madrid that its own access to the key fuel could be affected, according to people familiar with the situation. 

Europe is scrambling to displace Russian sources of energy following Moscow’s invasion of Ukraine. Italy’s deal for extra volumes from Algeria -- equivalent to about 12% of its demand -- is a significant step toward easing dependence on Russia. 

But the deal has raised concern in the Spanish gas industry that it may strengthen Algeria’s hand in talks with Spain, with which it’s been locked in months of negotiations over price. There’s also concern it could strain Algeria’s ability to keep up supplies to Spain, two of the people said. 

Senior Spanish and Italian officials discussed Italy’s gas agreement in recent days and intend to meet again later this month, according to people who asked not to be identified as the conversations were private.

Italy and Spain Hold Talks to Head Off Tension Over Algerian Gas

Both European countries have long-standing gas-purchase partnerships with Algeria, and both have pipelines that connect to the North African nation. The agreement announced Monday sees Italy buying an extra 9 billion cubic meters annually by 2023-2024, and Italian energy major Eni SpA said the extra volumes would be the “the result of the close collaboration in the development of upstream gas projects.” An Italian individual familiar with the plans said the agreement won’t affect Spanish supplies.

But Algerian production has stagnated in recent years amid under-investment, and it’s unclear how much -- and how quickly -- capacity can be added.

“For two decades now, Algeria has been a declining export country,” said Matteo Villa, a senior research fellow at the Italian Institute for International Political Studies. With shipments dropping more than 40% over that time, the competition for exports “will continue to ruffle feathers between EU countries.”

Spain’s Naturgy Energy Group SA, which operates the Medgaz pipeline from Algeria, has been in tense contract talks with Algerian producer Sonatrach Group since October. Divisions deepened late last year after Algeria -- at loggerheads with neighboring Morocco -- stopped shipping gas through another pipe that runs through its neighbor to Spain. That forced Madrid to increase its purchases of more expensive liquefied natural gas.

“The timing of the Italy-Algeria agreement comes at a sensitive time for Spain,” Villa said. Spain sees a risk that its Algerian shipments could decrease and the possibility that “gas currently going to Spain is diverted to Italy.”

The Spanish government and Naturgy officials have repeatedly said Algeria is a reliable supplier and is not expected to breach contracts. Spain’s government declined to comment on Tuesday. Energy Minister Teresa Ribera has previously said the price talks are a private matter, not a government affair, though Sonatrach is state-owned. Naturgy declined to comment. 

Italy and Spain Hold Talks to Head Off Tension Over Algerian Gas

An Italian Foreign Ministry spokesman said that ministers from Italy and Spain plan to meet in the coming weeks. The two countries have “constant diplomatic contacts” and a “great relationship,” he said.

In recent months, Spain has ramped up its LNG imports from other markets, notably the U.S., reducing its reliance on Sonatrach. The country has more than a quarter of Europe’s LNG processing capacity, though much of that isn’t used. 

Read more: Spain LNG Imports Jump to 71% of Total Demand Amid Algeria Spat

Italy itself is looking at ways to help Spain secure more cargoes of LNG and ensure that its deal with Algeria doesn’t undermine Spanish supplies, according to one of the people. Yet Naturgy’s presence in global LNG markets is already extensive, and it’s unclear how much Italy would be able to assist.

In the longer term, Algeria may have more capacity to bolster exports. In February, Spanish gas-network operator Enagas SA said it’s working with Algeria on a planned expansion of the Medgaz link. Sonatrach Chief Executive Officer Toufik Hakkar has also said the pace of exploration should double the country’s output capacity in four years, according to state news agency APS.

Yet for the time being, Sonatrach has just a “few billion additional cubic meters” available, Hakkar said earlier this month. The dearth of investment -- as well as fast-growing domestic demand -- are likely to keep a lid on shipments for now, meaning competition for supply will remain fierce.

©2022 Bloomberg L.P.