Algeria Eyeing More US Access To Balance European LNG Sales

Algeria Eyeing More US Access To Balance European LNG Sales

Natural Gas Week
Monday, November 11, 2002

Algeria is too dependent on natural gas sales to Europe and is eager to expand its liquefied natural gas (LNG) business in the US as a way to counter that reliance, Algerian Minister of Energy and Mines Chakib Khelil told Natural Gas Week in an interview last week before signing an accord with US Energy Secretary Spencer Abraham pledging efforts to accomplish this.

"We'd like to see more involvement in the US because we are overexposed in the European market. Most of our gas goes to the European market," he said.

Algeria's desire to increase its share of stateside LNG exports comes at a time that many in the industry acknowledge a growing role for the fuel source to meet future US gas demand. This has led many US companies to investigate new ways of getting LNG into the US and to reactivate and expand existing terminals.

Ironically, it was Algerian LNG imports that paved the way for the construction of the four existing LNG receiving terminals in the US in the 1970s and 80s. However, the collapse in US natural gas prices during the 80s forced most of those terminals to close and Algeria to redirect its LNG imports to Europe.

Now Algeria is again looking to the US as a way to diversify. The country is confronting new competition in Europe from Norwegian and Russian supply sources, though it has a number of long-term supply arrangements worked out with Spain, France, and Italy, as well as other countries near the Mediterranean Sea.

With the exception of Algeria's long-term supply contract with Tractabel at the Everett, Massachusetts, receiving terminal, most LNG into the US comes from Trinidad and Tobago. Some spot cargoes have arrived from Qatar, Australia, and Nigeria if US gas prices were high enough and surplus shipping capacity was available.

US energy policy rests upon expanding supply options to include a number of different countries. For Algeria, the key is expanding its export options.

"Diversification is important for the US. US policy is that you are going to import more but you want to import more from different countries, from different areas. So we have basically the same concerns," said Khelil.

To expand its exports, Algeria is currently accepting bids for a massive project to exploit its 7-Tcf Gassi Touil field. Khelil said that Algeria is hoping to find investors willing to construct a roughly 500-MMcf/d liquefaction plant and is looking to export some 900 MMcf/d of gas from the area. The project would also include field development and the construction of an export pipeline.

Khelil admits that this kind of project could only be undertaken by a supermajor such as Exxon Mobil or BP, and would fit in well with plans to move LNG to the US.

"This project is probably the typical one where the output would be natural to go to the US," he said, adding that the winning bid will be announced next March.

While the accord signed last week demonstrates the resolve of both the US and Algeria to work together on the LNG issue, both countries face strong challenges in making the accord a reality. For Algeria, the challenge is investment to get its gas to market as the bidding for the Gassi Touil field shows, while the US faces regulatory and policy challenges pertaining to the construction of new import terminals.

Algeria is tackling the investment hurdle with new hydrocarbon legislation that is being discussed by Algeria's parliament. The new law, if passed, "will open the whole sector to direct investments by companies and for companies to build their own gas pipelines and their own liquefaction plants," Khelil said. The new law would also allow direct investment by foreign companies in Algeria's upstream projects, which had been limited to associated investments with the state-owned oil company Sonatrach.

The US market faces opposition from not-in-my-backyard (NIMBY) hostility to new infrastructure and disputes over regulatory policy.

To get around the NIMBY concerns, companies have turned to offshore projects, such as El Paso's Energy Bridge plan that would place the regasification facilities on tankers that could connect to pipeline buoys offshore. Others are targeting established industrial zones, such as Dynegy's Hackberry LNG terminal in Louisiana or Cheniere Energy's proposed terminal in Freeport, Texas.

The argument over regulatory policy involves the Federal Energy Regulatory Commission's (FERC) open access rules for LNG terminals. Under present regulations, any LNG shipper should have access to any terminal.

However, at a recent meeting on US natural gas policies, speakers from BP, Shell, and Exxon urged FERC to change this policy, saying that they prefer having proprietary terminals where they control the supply of LNG (NGW Oct. 28,p3). Their thinking is that the cost of investment in an LNG terminal in the US demands that the company should not have to respond to potential operational disruptions that catering to outside shippers might entail. They also do not want to relinquish title to the gas that often is borne from their investments in overseas supply sources.

FERC Chairman Pat Wood recently said that the Oct. 25 meeting would not result in any new policy paper; but he has expressed interest in expanding LNG imports to the US as a way to meet natural gas demand.

Another dynamic at work is the collapse of the energy merchant sector. Dynegy and El Paso both face severe liquidity crises that may hamper their LNG efforts. With the heavy capital outlays that a new LNG terminal would require, this means the likely investors in a new plant are either the integrated majors, such as Conoco Phillips, or a supermajor.

The best-case scenario for both the US and Algeria would appear to be that the new Algerian hydrocarbon law passes -- prompting investment in a project like Gassi Touil -- and FERC changes its open access policies to include proprietary LNG terminals. The door would then open for a company such as Exxon or Shell to place a winning bid for Gassi Touil and give them a supply center overseas to serve a proprietary terminal in the US.

Christian Schmollinger