ALGERIA - Algerian-Russian Partnership.

At any rate, Algeria which is a founding member of the Gas Exporting Countries' Forum (GECF), is entering into lasting partnership with Russia in both their domestic petroleum sectors and abroad. When Minister Khelil and his Russian counterpart Viktor Khristenko sat down in Algiers on Jan. 21 to sign a memorandum of understanding (MoU) on energy co-operation, the eyes of European gas consumers were trained firmly on them. The prospect of collusion between its two largest gas suppliers is a nightmare for an EU desperate to establish a secure and diverse energy supply to replace its dwindling resources. MEED recently quoted an industry source in the US as saying: "The worry is that Russia and Algeria will get together and work out the best way to squeeze Europe on gas prices. The worst case scenario would be the formation of a gas OPEC, which could lead to attempts to artificially raise prices".

Russia and Algeria together account for about 35% of Europe's gas imports, and in Italy dependence on the two countries has reached 72%. It is a proportion likely to increase. Gas production in the UK, Europe's largest producer, has fallen every year since 2000, and the European Commission predicts that EU dependence on energy imports will rise to 70% by 2030 from 50% now.

Europe's energy supply fears are exacerbated by a mistrust of Russia, which alone accounts for 25% of the EU's gas imports. In recent years, Moscow has increasingly used energy as a tool to claw back the influence lost since the collapse of the Soviet Union in the early 1990s. Interruptions to Russian gas supply to Ukraine in January 2006 and Belarus in January 2007 highlighted EU's vulnerability.

At the opening of Algeria's energy conference in Oran in November 2006, EU Energy Commissioner Andris Piebalgs said: "The energy supply problems earlier this year were a wake-up call for the EU. We should not take the security of our energy supply for granted". In response, the EU has turned its attention south.

MEED quoted an "Algiers-based country manager of one European oil and gas major" as saying: "If Europe wants to diversify, the North African energy suppliers - Algeria, Libya and Egypt - are key markets". Algeria, to export 85,000 MCM/y of gas by 2010, is central to Europe's diversification. Piebalgs told the Oran conference: "[The EU and Algeria] are interdependent on each other in terms of security of energy supply and security of energy demand. There is great potential for development of energy relations between the EU as the world's largest integrated energy market and Algeria as one of the world's largest energy producers".

Brussels and Algiers in 2006 agreed to develop a strategic energy partnership. The planned MedGaz and Galsi pipelines, which will supply 8,000 MCM/y of gas to Spain and Italy respectively, are prime examples of the joint infrastructure being developed as a result. Both are being funded by European firms. European players are equally prominent upstream. BP is Algeria's largest foreign investor, operating two of the country's largest gas fields. A Spanish team of Repsol/YPF and Gas Natural has a $4,000m gas E&P/LNG venture (see gmt7AlgerGasExprtFeb12-07).

In November 2006, Sonatrach signed an LNG MoU with Eon Rhurgaz of Germany for gas marketing JVs in Europe and elsewhere. In August, Sonatrach signed co-operation agreements with Gazprom and LUKoil. And in January, Rosneft announced it had submitted plans to develop two of its discoveries in Algeria, requiring an investment of $1,300m. Rosneft General Manager Valery Rusakov then said: "Algeria is a strategic market for us and is an important part of our overseas strategy. It was a partner in the Soviet Union period, and good relations have continued". These and other Russian companies are to participate in an international oil and gas licencing round in Algeria later this year.

Gazprom wants to tap Sonatrach's long experience in LNG. The recent MoU highlighted the potential for Sonatrach involvement in Gazprom's plans to export LNG from its huge Shtokman field on the Barents Sea, and Rosneft's development of its Tesselit North gas discovery in Algeria may include an LNG venture. The MoU included provisions for asset swaps which are most likely to involve trade of piped gas from Russia for Algerian LNG. Gazprom will swap LNG volumes from Algeria which it can sell on the spot market to the US in return for piped gas to Europe.

The MoU calls for development of oil and gas projects in Algeria, Russia and beyond, including E&P, commercialisation and transport. A key focus will be the $1,000m Gazprom project to provide LNG to the Baltic region. The two states also agreed to co-operate on developing nuclear power in Algeria, which has been operating two experimental nuclear reactors since 1995. Under the terms of a separate MoU signed in August, Sonatrach is negotiating an asset swap by which it will take a share in four oil and gas fields in Russia owned by Gazprom in return for petroleum assets in Algeria.

Gazprom Deputy CEO and head of GazExport Alexander Medvedev on Jan. 25 said his company's deal with Sonatrach was not an attempt to create a cartel. EU Commissioner Piebalgs on Jan. 25 said close co-operation between Gazprom and Sonatrach could lead to a gas cartel. Medvedev said: "such a statement has no ground. It is natural that gas producers...co-operate...in upstream and downstream" businesses. Medvedev was speaking in an interview broadcast by CNBC from the sidelines of a conference in Davos, Switzerland.

Gaz de France (GdF) and Sonatrach have a 50-50 JV called Med LNG & Gas which is marketing gas in Europe. GdF has four LNG supply contracts with Sonatrach since March 1962: (C1) for 500 MCM/y until end-2002, extended to 2013 in May 2001; (C2) for 3.5 BCM/y from January 1973 to end-2013; (C3) for 5.15 BCM/y from March 1982 to end-2013; and (C4) for 1 BCM/y until 2002, extended in late 2000 to 2013. Actual GdF purchases have been higher. The C4 volume was in 2000 assigned to Med LNG & Gas to sell the gas on any market of its choice provided that the price is higher than the one under the C1-4 contracts.

Sonatrach has a stake in the Reganosa LNG terminal in Galicia, north-western Spain. The company has been negotiating stakes in similar ventures elsewhere in Europe.

Sonatrach on Feb. 9 signed a $11m contract in Bamako to explore for oil in Mali. In a press release, Sonatrach said the contract was hammered out by its Mali-based branch Sonatrach International Petroleum Exploration and Production (Sipex), which is responsible for international E&P activities. The contract was signed by Mali's Minister of Mines, Energy and Water Ahmed Daian Semegha, and Sonatrach CEO for International Affairs Mohamed Ben Hamo. Under the four-year deal, Sonatrach will carry out geological and geophysical works and prospect for oil in a 118,000 sq metre block in Mali adjacent to the Algerian frontiers. Sonatrach had earlier won 25% of a deal to exploit five oil blocks in Mali in partnership with two Italian and Malian companies. Sonatrach has a stake in an E&P area in Niger, as well as other projects in Niger and Mauritania.

Sonatrach (Sipex) and Statoil of Norway are partners in two offshore E&P blocks in Egypt. Egyptian Natural Gas Holding Co. (EGAS) in late 2006 awarded the two partners offshore Block 10. Statoil has an 80% working interest and the operatorship. As with the previously awarded neighbouring Block 9, Sipex holds a 20% interest. Block 10 - Ras el-Hokma - covers 9,802 sq km with depths of 1,000-3,000 metres.