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Stable gas market in Algeria - exports declining, consumption growing

Global Arab Network - - Adam Turner

Thursday, 03 February 2011 22:17

Compared to the US, Algeria’s gas prices have tracked spot oil prices more closely. The contracted export prices for Algerian gas and spot oil (Brent in US$ per MMBTU) comove strongly, even in recent years. 10 Contrary to the US gas market there is no apparent decoupling between gas and oil prices. This is in line with anecdotic evidence that most of Algeria’s gas is purchased under oil-indexed contracts.

The recent recovery in Algerian gas prices has not been matched by volumes. The annual production has remained more or less stable during the last decade but exports have been declining while domestic consumption has been growing. In turn, neither type of gas exports (LNG or natural gas) has increased during the last decade and export volumes have decreased in the past years.

While exports have declined in recent years, export markets have become more concentrated. The gazoducs linking Algeria with Spain and Italy have made these two countries the largest export destinations.

The pipelines ensure very stable export destinations with long-term contracts indexed to oil prices and guaranteed minimum purchases. On the other hand LNG exports to the US and Belgium, which represented 10 percent of Algeria’s total gas exports in 2005, have stopped in the last years. In the case of the US, the lack of demand reflects higher nonconventional gas production.

Scenario Analysis
The previous section examined the interrelationships between Algerian gas demand, gas prices, spot oil prices, and industrial production in gas buyers. The link between the price for Algerian gas and spot oil remains strong even after the global crisis of 2008 and the increase in production of nonconventional gas in North America. However, some of the evidence hints at a slower recovery in gas prices for Algeria. Efforts to turn the Gas Exporters Countries Forum (GECF) into an OPEC for natural gas, is another indication of this potential trend. Moreover, in the case of Algeria the threat of lower gas prices is coupled with declining export volumes and growing domestic demand, making the issue all the more pressing for Algerian authorities.

To assess the potential impact of a fall in natural gas exports and prices, we evaluate a medium-term macroeconomic scenario which assumes that gas prices would fall to US levels and export volumes would decline. This scenario could be overly pessimistic due to the current long-term structure of Algerian gas contracts and the hitherto absence of substantial nonconventional gas production in Europe. However, it offers a good illustration of what could happen if nonconventional gas production would take off in Europe and across the world in five to ten years.

The first alternative scenario assumes an average gas price kept real at current US levels (the 2010 nominal price increasing with inflation in advanced economies) and constant export volumes. The second alternative scenario makes the same price assumption but incorporates an annual fall in natural gas export volumes of 5 percent per year.11 The data show an important deterioration of the fiscal balance (-0.9 of GDP and -2.0 of GDP in alternative scenarios 1 and 2 versus 3.2 of GDP in the base scenario in 2015), the current account surplus (4.0 and 2.5 percent of GDP in alternative scenarios 1 and 2 versus 10.1 percent of GDP in the base scenario in 2015), the oil stabilization fund (Fonds de Regulation de Recettes, FRR) (14.5 percent and 11.4 percent of GDP in alternative scenarios 1 and 2 versus 30.1 percent of GDP in the base scenario in 2015) and international reserves (US$191 billion and US$182 billion in alternative scenarios 1 and 2 versus US$247 billion in the base scenario in 2015).

This paper assesses recent developments in natural gas markets. Econometric analysis shows that the tight link between US gas and spot oil prices has weakened. This decoupling coincided with a significant increase in the production of nonconventional gas (especially shale gas) in the US. The additional supply has discontinued plans for sizable LNG imports into the US.

Conversely, the impact of spot oil prices on Algeria’s contracted gas price remains strong but export volumes are under pressure. Oil prices and industrial activity have a significant and important impact on Algerian natural gas prices. Although long-term contracts and pipelines to main markets ensure demand stability, recent developments in international gas markets and a slow recovery in partner countries has led to declining export volumes.

Even with a continued recovery of oil prices, Algerian gas priced at US levels and tepid demand would have a sizable effect on Algeria’s economy. A medium-term scenario analysis assumes an increase in nonconventional gas production on the European continent or a global glut in LNG supply. Under this constellation, natural gas prices are kept constant in real terms at current US prices and exports fall with 5 percent per year. Our current assumptions imply a significant negative impact on Algeria’s macroeconomic balances.

The development of alternative gas production in Europe is not imminent and would take five to ten years. However, this paper shows the dangers of relying on a limited basket of exports and the importance of boosting the diversification of the Algerian economy.

Global Arab Network

Extracted from study prepared by Reinout De Bock (MCM) and José Gijón (MCD) - INTERNATIONAL MONETARY FUND - Approved by Middle East and Central Asia Department - Development in Global Gas Markets – Challenges for Algeria

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