Algeria Is Boosting Hassi R'Mel Field For Big Increase In Gas Supplies To Europe.

Algeria's state concern Sonatrach is speeding up work to restore gas reservoir pressure at the Hassi R'Mel field as part of efforts for the company to cope with a major boost in gas exports to Europe. Exports are expected to increase by almost 30 BCM/year by 2010/12, with at least 8 BCM/year of additional supplies to this market to be ready by 2005/06.

Pressure at Hassi R'Mel has declined and without Sonatrach's enhanced recovery project the fall would be rapid. Sonatrach has been re-injecting 62 BCM/year of gas to keep reservoir pressure. But the field's gas liquids' recovery rate has fallen to a level close to the minimum rate of operation required for the gas treatment facilities.

Under a turnkey contract awarded recently to a Japanese consortium of Itochu Corp. and JGC Corp., the latter will install three major gas booster compressor stations and 11 compression lines at the field within 34 months.

This contract, worth AD27,538m ($359m), involves the first phase of Sonatrach's project. The second phase, to be completed in 2007, will add six compression lines to the enhanced recovery system. This will maintain pressure at a level allowing maximum recovery of condensates and LPG and will extend Hassi R'Mel's production life to 2020.

Sonatrach is already short of gas for export to the European market by pipeline and in LNG form. Its deliveries this year are expected to average 55 BCM, whereas contract commitments for 2000 total 60 BCM. With re-injection requirements and local market demand increasing, the shortage of gas production capacity in Algeria has become a serious problem.

If current negotiations for additional supply contracts and new pipeline projects translate into reality, Algeria would have to export almost 85 BCM/year by 2010-12. This means the country's gross production capacity for natural gas would have to be raised from 155 BCM/year at present to 165 BCM/year by 2005 and to 200 BCM/year by 2010, even if the gas re-injection needs remain at the present level of 70 BCM/year. Local demand for gas, mainly for power generation, will double by 2010 from the current level of 20 BCM/year. Sonatrach hopes that the volume of gas being flared and lost by shrinkage on liquids extraction would fall from 10 BCM/year now to 5 BCM/year by 2010/12.

Because of a shortage in its production capacity, Sonatrach has not been able to cash in adequately on the high gas price opportunities in Europe and the US. Spot and futures prices of natural gas in North West Europe are quite high. At the London IPE futures market, the January contract is over 30 pence per therm. At Bacton the spot price of natural gas is over 31 pence per therm. In New York, the NYMEX contract for January gas is above $6.30/m BTU, and the spot price could rise to higher levels when the winter cold gets harder. Gas prices are moving up sharply because of record low heating oil stocks in Europe and the US (see OMT).

Nor is Russia able to maximise income from such export opportunities. Russia's gas production capacity is about 20 BCM/year short of domestic demand and the shortage will remain until major gas fields come on stream in the course of 2002. Gas production capacity in North West Europe is about 12 BCM/year short of EU demand and the shortage will worsen unless additional gas supply pipelines reach this market from Africa, Central Asia and/or the Middle East (see the position of the oil majors in OMT No. 21).

Direct Algeria-Spain Gas Pipeline Appeals To ENI, Total & BP: A joint venture between Sonatrach and Cepsa of Spain, to have a direct gas pipeline built from Algeria to Europe through a marine section to Spain, are negotiating equity participation in this project with TotalFinaElf, ENI of Italy and BP Amoco. This venture now is owned 50-50 by Cepsa and Sonatrach but both are keen on getting the oil majors to join them together with Spanish and other European power firms.

Sonatrach and Cepsa are hoping the project - a version of the Segamo pipeline which Sonatrach, Enagas of Spain and Gaz de France (GdF) considered in the 1970s but this failed to materialise - would be on stream by 2005 with an initial capacity of 8 BCM/year. It will run from Arzew, the western Algerian LNG export zone which is linked to Hassi R'Mel by pipeline, to the coastal town of Almeira in south-eastern Spain. From there, the line would be extended to France and other European markets and run as far to the north as Sweden.

TotalFinaElf has a 45% stake in Cepsa and wants to join the venture as part of its strategy to raise its gas marketing profile in Spain, France and other European countries. GdF may also join the venture, holding talks with the partners as well. ENI's gas subsidiary Snam in early October 2000 signed a contract to supply Iberdrola, Spain's second largest power company, with 1.5 BCM/ year of natural gas. This was part of a deal with ENI under which Iberdrola was to acquire 10% in EniPower, the group's power generating company in Italy. By joining the Sonatrach-Cepsa company in the pipeline, ENI through Snam and other units will become a key player in a Spanish gas/power market now opening to competition. Iberdrola itself is negotiating a merger with Endesa, Spain's largest power company - and between them the two firms already control about 80% of Spain's power supply.

The partnership, established in September 2000 by Cepsa and Sonatrach, has also sought participation in the pipeline company by Endesa, Iberdrola, Spain's third largest power firm Union Electrica Fenosa and Hidroelectrica del Cantabrico which is the fourth largest utility.

The pipeline will be competing with the Maghreb-Spain gasline which passes via Morocco and the Strait of Gibraltar. Carrying Sonatrach natural gas, from the border between Algeria and Morocco this is run by Gas Tanural, a Spanish company controlled by Spain's biggest energy player Repsol/YPF. Cepsa intends to expand its gas activities and compete with Gas Natural in Spain. Eventually, the Maghreb-Spain gasline will have a capacity of 20 BCM/year. The Cepsa-Sonatrach project could have a similar capacity in the next decade, when total Algerian gas and LNG exports reach almost 100 BCM/year. At present, the Maghreb gasline is supplying 37% of Spain's gas consumption. With Sonatrach's LNG now supplied to Spain accounting for 22% of the country's use, Algeria holds a 59% share of the Spanish market. The Hydrocarbons Law issued in 1998 by Madrid says no single source may supply more than 60% of Spain's consumption. But the Spanish gas market is expanding rapidly and will exceed 30 BCM/year before 2010, while a major part of the Algerian gas passing through both the Maghreb line and the direct one will be going to France and other European countries.

BP Amoco, now developing seven In Salah gas fields in southern Algeria, has been approached by Sonatrach to join the direct pipeline venture. Although BP Amoco has close business links with Repsol/YPF and Gas Natural, with the rapidly expanding BP-led LNG venture in Trinidad supplying 6% of Spain's gas consumption, the supermajor wants to pump In Salah gas through both this and the Maghreb line. In Salah gas will be linked to Hassi R'Mel by pipeline, and first production will be expected before 2005. In Salah gas is also to be supplied to Italy through the 24 BCM/year TransMed pipeline system which runs from Algeria through Tunisia, a Mediterranean marine section and the island of Sicily.