Algerian production is ramping up, but Italy may not want or be able to receive much more gas, writes Alexandra Vladimirova
Infrastructure constraints and low demand could forestall any tangible increase in Algerian gas exports to Europe this winter, despite a continued uptick in Algeria's upstream production.
The Italian government expects pipeline imports from Algeria to rise by 6bn m³ this year compared with 2021, and by 9bn m³ in 2024, according to a revised national energy and climate plan (NECP) it sent to Brussels in June. But flows are on course to fall well short of the expected increase. Deliveries at the Mazara entry point totalled 16.3bn m³ on 1 January-12 September. For aggregate Algerian pipeline receipts to total 27.1bn m³ — 6bn m³ more than in 2021 — flows would need to average 98mn m³/d on 13 September-31 December.
Pipeline deliveries to Italy have never reached that level over recent years, with maximum monthly flows of 83.9mn m³/d achieved in April this year. Bottlenecks in the Italian grid have prevented the Transmed pipeline between Algeria and Italy from operating at full capacity. Algerian flows are generally capped at 80mn-85mn m³/d, with some fluctuations depending on demand, Argus estimates.
Italian system operator Snam lists the pipeline's technical capacity as 108.7mn m³/d, but Tunisia typically absorbs about 11mn m³/d. Once Algerian gas reaches Italy, it blends with Libyan flows from the Gela entry point, where contracted capacity is about 13mn m³/d, and with domestically produced gas from fields offshore Sicily. Some of this combined supply is absorbed by consumers in the southern regions of Sicily and Calabria, which used 16.8mn m³/d in 2021. Flows from Sicily mix with up to 30mn m³/d of imports from Azerbaijan and additional supply from Italian fields. But the amount of residual supply that is able to reach Italy's larger demand centres in the north is capped at 126mn m³/d by a bottleneck in central Italy, preventing the three southern pipelines from operating at full capacity simultaneously. Combined flows from Algeria, Libya and Azerbaijan exceeded 126mn m³/d on only one day last winter, with Italy receiving 91.2mn m³ from Algeria, 26.6mn m³ from Azerbaijan and 11.4mn m³ from Libya on 19 December.
Similarly, Algerian flows to Spain have limited scope to rise significantly, particularly as most of the capacity on the Medgaz pipeline is allocated to long-term contracts. Algeria's exports to Spain averaged 254 GWh/d last winter, compared with overall contracted volumes through Medgaz of about 305 GWh/d. Flows only exceeded 305 GWh/d — by no more than 7 GWh/d — on 32 days during the period.
Contractual supplies vs physical flows
The increase in Algerian supply stated in Italy's NECP broadly matches the additional contractual volumes that Italy's Eni agreed with Algeria's state-owned Sonatrach in 2022, when the Algerian firm committed to add 3bn m³/yr from 2022-23, 6.2bn m³/yr from 2023-24 and 9bn m³/yr from 2024-25 to the existing long-term contract.
But there is potentially a mismatch between physical flows over a calendar year and deliveries under the contract, which includes a legacy component based on gas years — running from October to September — and the additional volumes agreed in 2022, which are instead meant to be delivered over storage years — from April to March. Moreover, an increase in contractual supply with one customer, albeit the largest one, may not necessarily translate into stronger aggregate flows to Italy, as it may reduce pipeline capacity available to other firms for spot deals. Sonatrach sold about 4bn m³ of spot gas last year, it says, without specifying the exact amounts purchased by Italy and Spain, or if the figure includes sales in the form of LNG.
But some firms may have opted to receive more Algerian volumes in the form of LNG, although this is likely to be primarily the result of spot deals. Italy's NECP does not foresee an increase in Algerian LNG deliveries, but the number of cargoes from Algeria unloading at Italian ports has risen so far in 2023. The 2.7mn t/yr Panigaglia terminal received 31 cargoes from Algeria in January-August, inching close to the 35 Algerian cargoes it received in the whole of 2022, and up from 25 cargoes in 2021. The 3.9mn t/yr OLT terminal received two ships from Algeria this summer, for the first time since 2021. And Algeria provided the first commercial cargo delivered to the recently commissioned 3.9mn t/yrPiombino terminal.
Demand is key
There is scope for an uptick in Algerian flows if Italian consumption is higher than last year. Supply from Algeria to Italy was expected to increase in winter 2022-23, but flows were lower than a year earlier because mild weather weighed on heating demand. Entry flows at Mazara totalled 11.2bn m³ over the six-month period, down from 11.5bn m³ in winter 2021-22.
Italian storage sites are close to 95pc full as of 13 September, and injection demand is expected to be lower than a year earlier until the end of the Italian stockbuild season on 31 October. This, coupled with consumption holding lower than in recent years in all months since June 2022, means that Italy may have limited need to boost Algerian flows before the end of next month. But below-average temperatures later in the year and into the first quarter of 2024 could push flows at Mazara above levels seen a year earlier.
But even if Italian demand is low, Italian firms may have an incentive to keep Algerian flows firm and reduce their storage withdrawals, or even to increase export flows to northwest Europe. This looks limited for the time being, as forward PSV prices for this winter still command a premium to corresponding TTF contracts at present, albeit a small one.
Upstream production stays strong
In any event, Algerian exports this winter will depend on how the country's upstream production performs in the coming months. Mazara flows fell sharply to 43.7mn m³/d in January from 74.3mn m³/d in December, before rebounding to 56.9mn m³/d in February. The drop may have stemmed from low Italian demand during a mid-winter mild spell, but it also coincided with a dip in Algerian production, which fell to 8.4bn m³ in January from 9.4bn m³ in January 2022.
Algerian production increased year on year in all months from February-May, figures from the Joint Organisation Data Initiative show. The rise in March output was especially large, reaching 13.1bn m³ from 9.1bn m³ a year earlier, although Algerian domestic consumption also rose sharply in March, to 8bn m³ from 4.6bn m³ a year earlier. Several new upstream projects came on stream in Algeria in late 2022, including the 2bn m³/yr South Berkine, 1.8bn m³/yr Tinhert 1 and 1.6bn m³/yr Hassi Guettara fields, as well as the initial phase of the Hassi R'Mel LD2 reservoir, which was first announced by Sonatrach in June 2022. These projects have supported Algeria's output, which totalled 72.4bn m³ in October 2022-May 2023, up by 5bn m³ from a year earlier.
Winter 2023-24 may bring about a further increase in production. The Hassi Bahamou field, which had been slated to start in 2024, has recently come on line with capacity of up to 2.2bn m³/yr, although output is expected to average 1.64bn m³/yr, Sonatrach said earlier this month. And Hassi R'Mel LD2 is expected to reach production of 5.5bn m³/yr by the end of 2023, having started production at 1.4bn m³/yr. Three more fields — TFT Sud, Ahnet and In Amenas Periphery — were expected to add 7.1bn m³/yr over 2023. And more than 3bn m³/yr of additional production capacity from three other projects could come on line in 2024.
