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Algeria to maintain gas supplies to Spain despite dispute

Algeria's announcement concerning the immediate suspension of the treaty of friendship and good neighborliness concluded with Spain in October 2002, after Madrid’s radical change of position on the Western Sahara issue on March 18, will not have negative consequences on gas contracts signed by the two countries.
Algeria's President Abdelmadjid Tebboune speaks.

The ongoing political crisis between Algeria and Spain has directly impacted economic and trade relations between the two countries.

On June 8, Algiers announced the immediate suspension of the treaty of friendship and good neighborliness concluded with Spain in October 2002 after Madrid’s radical change of position on the Western Sahara issue on March 18.

In the wake of the announcement, all banking operations to and from Spain were suspended. On June 9, the Association of Banks and Financial Institutions notified directors of banks and financial institutions to proceed with the immediate freezing of direct debits of foreign trade operations of products and services from and to Spain.

However, gas deliveries to Spain are not affected by this escalation.

Indeed, Algeria has rejected “insinuations and questions” relating to the issue of gas supplies to Spain.

Algerian President Abdelmadjid Tebboune had to solemnly affirm the determination of the Algerian side to fulfill its contractual obligations.

“This issue, which concerns companies of both countries strictly on commercial grounds, does not arise in the context of energy relations with other buyers of Algerian gas in the Euro-Mediterranean area, which meets their contractual obligations with the same good faith as Algeria,” a statement from the Algerian Foreign Ministry read.

Asked by the German magazine Der Spiegel about the crisis between Algeria and Spain and its energy consequences, Algerian Minister of Energy Mohamed Arkab recalled that his country has “renewed contracts with Spain and there has been no problem,” stating that “Algeria respects and will always respect its contractual obligations. We have always been a reliable supplier to Europe, even when our country was at war.”

Regarding a possible increase in the price of Algerian gas exported to Spain, Arkab said that “supply contracts are re-evaluated every three years, both in volume and price.”

“We have recently renewed the contracts with Italy and increased capacity. Now it’s Spain’s turn. The global price of gas follows the price of oil, and when the price of oil rises as it is doing now, so do gas prices. So it is clear that an increase is being discussed,” he added.

Algerian gas prices set to rise

“There is no risk for Algeria to disengage from its contractual commitments to its gas customer, which is Spain,” Mourad Preure, an oil expert, told Al-Monitor.

“In fact, in addition to legal protections guaranteed by the contracts, Algeria is also keen on keeping its image of a reliable supplier,” he explained.

During the 10-year civil war that plagued Algeria all throughout the 1990s, there was no disruption of supplies to European gas customers.

“It is not today that we will take on such an attitude, especially since gas customers have no stocks. They do not have the means to store. And if the gas supply is cut, these customers will face serious difficulties,” Preure said.

For him, Spain is in an “extremely embarrassing” situation because the Algerian gas it buys is cheaper compared to the spot market price, which is around $40/MBtu.

It increased by 600% in 2021. The substitute for Algerian gas will therefore be more expensive and not at all economically interesting for Spain.

This complex situation that Spain is experiencing coincides with a period in which gas contracts are being renegotiated.

“These are long-term contracts. Supplies will certainly not be cut, but as gas prices are indexed to those of oil, which have increased in recent months, Algeria decided to up its gas prices,” Preure said.

This will be done in accordance with the signed contracts. In other words, Algeria will not sell its gas at $10/MMBtu when it is being sold for between $30 and $40 on spot markets.

Meanwhile, the Algerian negotiators are within their absolute rights to renegotiate an increase in price.

Spain benefited from the last negotiation of 2019 as prices stood around $1.5/MMBtu.

Algeria can even renegotiate decreasing the volumes of its supplies and redirect them to Italy, which expressed a demand for gas.

What’s more, Italy’s strong connection to the European gas network and regasification plants and the Algeria-Tunisia-Italy gas pipeline (30 billion m3/year) are all strong assets that would allow Italy to consume Algerian gas and supply Europe.

In clearer terms, Algeria could sell its gas to Germany, for example, via Italy.

“Economically speaking, the decision has serious consequences on both sides of the Mediterranean. As Algeria’s fifth supplier, behind China, France, Italy and Germany, Spain makes more than 2 billion euros from its exports to this major Maghreb market,” Algerian energy expert Rabah Reghis told Al-Monitor.

“Spain is also Algeria’s third-largest customer with 2.3 billion euros, mainly driven by gas purchases,” he added.

Immediately after it was announced, the decision to freeze direct debits threw Algerian importers into panic mode.

Heavily impacted by the pandemic and the suspension of air and sea links, some are already planning to close shop.

Spanish companies that export mainly machinery, electrical appliances, fuel, paper and plastic materials also fear the financial impact on their trade with Algerian partners.

“More than 4,600 Spanish operators could suffer the full impact of this suspension and the freezing of banking operations,” Reghis said.

“The Spanish livestock export sector, for instance, already shows a loss of 66 million euros following the ban on imports of Spanish meat decreed by the Algerian authorities in April,” he added.