Competition in an import dependent region: which role for exporters ?

The 17^th Annual European Autumn Gas Conference.

Khaled BOUKHELIFA, Director General
for Dr. Chakib KHELIL, Minister of Energy and Mines, Algeria.

Florence, Italy 4-6 november 2002.

M. President,

Ladies and Gentlemen,

Due to his governmental duties, His Excellency Dr. Chakib Khelil, Minister of Energy and Mines has not been able to attend this conference. He apologizes and has entrusted me to convey to you all his thanks and wishes of success, as well as to present to you, in his stead, the paper he was expected to read out to your honorable assistance about " competition in an import-dependant region, and which role for exporters ? ", in the field of natural gas.

It is my great pleasure as well, on behalf of the Algerian delegation, to thank the organizers of this 17th European Gas Conference, for the opportunity they are giving us to attend this event which is famous for the quality of its participants and the privileged space it provides to natural gas experts to exchange views about issues of the moment and common interests. This conference bears a special interest given the fact that it is held at a time when the European Commission is bringing up the role of natural gas in supply security.

My paper will essentially deal with natural gas and its perspectives in European countries, together with challenges which exporting countries, notably Algeria, are confronted with, in order to properly meet the growing requirements of Europe. And, clearly, one should not forget the specific nature of gas industry and the role of consumer countries in the development of the European gas market, a condition which is of prime importance for the security of supply.

To start with, I would like to give you a brief outlook about the process of reforms which started 2 years ago in Algeria, in the sectors of mines, hydrocarbons and power generation. In line with the government program, this process reaffirms the objective to diversify financing sources necessary to meet an investment requirement of 22 billion US$ in hydrocarbons (2006) and 12 billion US$ in power generation and gaz public distribution (2010).

The implementation of this process of reforms started 2 years ago and is well ahead. Two laws, one related to mines and the other one to power generation and gas public distribution, have already been promulgated, in 2001 and 2002, respectively. As for the third law related to hydrocarbons, the draft is at the level of government for review, and it should be adopted by the end of the year or early next year.

This institutional and legal adjustment will separate State and Commercial roles : the mission of the State will be to propose and oversee implementation of sector policies, whereas companies will have to improve their management and performance and to create wealth, under a transparent and competitive framework.

The new mining and energy policy favors recourse to national private capital and foreign alike.

Regarding hydrocarbons, with respect to partnership exploitation and production contracts with Sonatrach, new procedures have been introduced providing for a two phase easy and transparent process at the end of which the contract is awarded in an open session.

This lead to the conclusion of 10 partnership contracts in hydrocarbons exploration and production, in 2001 and 10 others in 2002, that is five times more than what used to be entered into per year, previously.

The new mining policy has boosted the activity and has allowed :

v to award 150 licenses for the exploitation of small and medium mines, v to sign an agreement with world known partners for the exploration and exploitation of gold in the area of Tirek-Amessmessa, and the exploitation of gold in the area of Hanane-Tiririne.

Beside, the steel plant of Annaba has been taken as the basis for the creation of a joint-company, ISPAT, between Sider (Algeria) and LMN (India).The foreign partner holds a stake-interest up to 70% in the company which will supply the iron mining product to the plant.

As for the promotion of export of electricity to Europe, the feasibility study which has been undertaken shows that a direct sub-marine connection between Algeria and Spain, with a capacity of 2000MW, is technically possible. However, given the highly strategic role it will have in securing supplies to Europe, its implementation should be financially supported by our European partners.

As you know, Algeria is expected to build, with partners, power generation plants with a capacity of 2000MW, of which 1200MW will be for export. This will increase the energy exchanges between the Maghreb and Europe and will set the basis for the creation of an electricity Maghreb-European market.

A similar project for a direct connection between Algeria and Italy trough Sardaigna is being worked out.

Regarding gas activity, which I will develop with more details later on, the first phase, that is the feasibility study of the gas pipeline project between Algeria and Spain, is about to be completed, and the launching of the second phase is expected during the first quarter of 2003.

The objective of this gas pipeline, due to be on stream in 2006, will be to meet the requirements of the Iberian market and those of north Pyrenees.

A similar project connecting Algeria to Italy via Sardinia is also under study.

M. President,

Ladies and Gentlemen,

Getting back to the core of my presentation of today, and before talking about natural gas market in Europe, I wish to point out that natural gas, with its fundamental role in economy, energy and environment, has become the high-grade energy of the 21st century.

Indeed, let alone its specific values and its fundamental contribution to the satisfaction of a growing energy demand, on the one hand, and the preservation of the environment on the other hand, natural gas offers extended possibilities of partnering and cooperation.

Energy balances do demonstrate that the share of natural gas is constantly rising in the world energy demand.

It is in the European countries that natural gas has recorded the highest growth over the last years. This rapid expansion is due to several factors such as technological progress and environmental concerns.

With respect to technological progress, I would only refer to the example of combined cycle power generation stations which have allowed natural gas to be very competitive, compared to coal and fuel oil, so far considered as the main fuels for power generation.

Other technologies, such as "gas to liquids" transformation process, are bound to reinforce the share of natural gas in the huge transportation sector.

Reliable studies on perspectives of the energy demand corroborate this trend of considerable penetration of natural gas in the energy demand, and its essential role in the energy supply for this century. All the experts are expecting natural gas to reach the highest growth, in terms of demand, compared to the other energy sources, and particularly in the course of the next three decades.

M. President,

Ladies and Gentlemen,

Natural gas has become an important energy source in the European consumption model. Its share in the primary energy demand within the European Union countries has reached 24% in 2000, whereas it was rather negligeable in 1960 (less than 2%).

According to some experts, such a significant penetration of natural gas should continue and even accelerate over the next years.

In that respect, the International Energy Agency, in its last edition of the " World Energy Outlook 2002 ", considers that natural gas demand in the OECD European countries would go from about 480 billion cm in 2000 to more than 900 billion cm in 2030, that is twice as much consumption in thirty years.

Consequently, the level of natural gas imports will more than triple, and would reach 625 billion cm in 2030. This means a level of dependancy of 60% by 2030, against 35% in 2000.

It is probably this level of dependancy on imported gas which lead governmental institutions and mostly the European Commission to stand for priority to supply security.

I would like to underline that natural gas producing countries have, so far, played an important role in securing energy supplies to Europe and have fully contributed to natural gas imports to that region.

Thanks to its geographical situation and its natural gas reserves, Algeria, right from the beginning, and through Sonatrach, has set the objective of increasing its production and its export capacity so as to meet the growing requirements of Europe. As early as 1964, its has embarked in the construction of the first LNG plant in the world, an opportunity which has allowed some countries, without any pipeline connection, to have the possibility to use natural gas. Besides those liquefaction units, Sonatrach undertook major transportation works, namely the laying of two gas pipelines connecting Algeria to Europe. Those are the Enrico Mattei pipeline linking Hassi-R'mel to the south of Italy via Tunisia, and the Pedro Duran Farell pipeline between Hassi-R'Mel and Spain, via Morroco.

No need to underline that constructing gas facilities, field production units, pipelines, LNG units, and buying gas tankers, have required huge investments, with all the risks connected with that.

Algeria, the third natural gas exporter in the world, has spared no effort to meet the natural gas needs of Europe, and has always fulfilled its commitments vis à vis its partners. It has to be recalled that, in spite of the tragic events which our country has gone through over the last decade, gas supplies of our clients have never been interrupted. On the opposite, gas exports to Europe continued to rise during that period. Today, more than 95% of our exports go to Europe.

These actions have translated into a significant increase of the Algerian natural gas penetration in the European countries consumption model. The share of Algerian gas represents 88% in Portugal, 64% in Spain, 38% in Italy, 24% in France and 26% in Greece, as well as other smaller percentages elsewhere.

With such a policy, and taking into account the promising perspectives of the gas market in Europe, Sonatrach is determined to pursue the same strategy, and that is to commit to considerable investments along the entire gas chain in order to remain a securing and reliable supplier of Europe.

These investments will first be allocated to increase the level of annual exports which will be added up by 25 billion cm, and therefore will reach to 85 billion cm by 2010.

To reach this objective, a number of projects to extend the existing export capacities, as well as new others, are either ongoing or under study.

The upgrading of existing facilities is well ahead.

As for new export routes, the first phase of the Medgas pipeline project connecting Hassi-R'Mel to Spain is already completed, and a company has been set up with the target of achieving all the studies by the end of 2002.

In line with this project, Sonatrach is envisaging to undertake, with partners, the laying of another gas pipeline which would directly connect Algeria to Italy via Sardinia.

All these projects would be new routes of imports to Europe, and, as such, would reinforce the security of supply.

In addition, Sonatrach is envisaging to undertake an integrated project. This one relates to Gassi-Touil project and provides for the development of fields in that area, the laying of transportation facilities, the construction of a new liquefaction train with a capacity of 4 to 5 million tons per year, and the marketing of the LNG which would be produced.

Efforts of Sonatrach are not limited to the construction of all these facilities. Other actions are also carried out, and particularly the reinforcement of its tankers fleet, and the acquisition of new ships for LNG exports.

M. President,

Ladies and Gentlemen,

I wish to point out that, either for investments or supplies, the capital intensive gas industry development has always been based on long term commitments. This means that it requires the involvement of all the players : the exporting country, companies, financial institutions and the importing country.

It is such a spirit of solidarity among the various players of gas industry which lead to the development of the international gas marketing and the security of customers supplies.

The new regulatory process which the European Commission intends to implement through the liberalization of the European gas markets, as proposed under the gas Directive, is likely to jeopardize the stability of the existing deals, and could, in particular, challenge the economic equilibrium of said deals as well as distort the very principle of a long term contract and its "take or pay" clause. This is why, in our view, a change in the regulatory framework governing gas markets should be carried out progressively and in a concerted way, in order to enable all players to adapt to the new situations and identify the ways to preserve their respective interests. We consider dialogue and concentration as the most appropriate means to reach this objective.

Algeria is convinced that cooperation between the various players of gas industry should be reinforced.

This cooperation and this dialogue should focus on the need to preserve long term contracts with a "take or pay" clause. This concern was at the core of the Round table, held in Algiers last September, and in which representatives of gas exporting countries, gas companies, financial institutions and the European Commission, agreed about the necessity to maintain long term contracts, precisely because of their role in supply security and smooth operations in natural gas markets.

That was an encouraging signal from the European Commission which seems to recognize the important role of long term "take or pay" contracts in the development of European gas markets. On the same line, the recent Directive proposal made by the European Parliament and the Council for supply security, has also acknowledged the significance of these contracts for Europe, as a stability element for external suppliers who can extend their capacity and undertake the development of major projects.

Allow me to recall that long term contracts have been acting as a guaranty for natural gas supplies to Europe.

On the hand, we consider that a gas market where spot transactions would be substituted to long term contracts, with all the risks of volatility and instability pertaining to that, cannot be the appropriate solution in a region so greatly dependant on gas imports, such as Europe.

M. President,

Ladies and Gentlemen,

As a conclusion, I would say that markets laws alone do not seem as being sufficient to secure the supply of a source of energy, as strategic as natural gas, and which is bound to play a significant role in the consumption model of the European countries.

Given that, I believe that it is more than needed for the various players in natural gas industry to work together in a spirit of dialogue, partnership and cooperation so as to continue to secure the development of this industry for the well-being of all of us.

Thank you for your attention.