Government sweetens Naturgy's relations with Algeria

The President of the Government, Pedro Sánchez, travels this Wednesday to Algeria, where he will close one of the most acrimonious points in Spain's foreign relations in recent months. He will focus, above all -as they assure from Moncloa-, on energy matters. In this sense, the key is the new gas supply agreement from the African region, but it contains more edges. Naturgy will be the great beneficiary, after months of hard negotiations with the Algerians. Although it will not be the only one, given that the Spanish delegation is made up of other large businessmen. Finally, the alliance should also unleash two other political problems between the two countries: the maritime borders and Western Sahara.

A clash between the two countries that comes from behind. Specifically, the Algerian authorities decided to plant the Spanish Minister of Foreign Affairs, Arancha González Laya, in an unexpected manner at the end of February this year. A few days earlier, González Laya herself had raised her voice against a decree approved (in 2018) by the government of Algeria establishing the delimitation of its 200 maritime miles (370.4 kilometers) of its exclusive economic zone, over which the country claims sovereign rights for its exploitation. A delimitation that overlaps with the waters of the Cabrera National Park, in the south of Mallorca.

Although the real background is another: natural gas. At this point, Algeria is vital for Spain and vice versa. Thus, nearly half of the gas consumed on Spanish soil comes from the African region. In turn, this relationship is very lucrative for Algerians, since Spain is the third largest exporter behind France and Italy. But those relations were shaken when the operator who acts as an intermediary between one and the other, Naturgy, calculated that his accounts were no longer correct.

Interestingly, for those who believe in it, days before relations between one and the other went sour, Naturgy announced that he would review (and renegotiate) all the major supply contracts he had. An audit which obviously included the agreement to export natural gas from Algeria with the state company Sonatrach. And that, moreover, was to be closed in the second half of 2020. With their swords held high and so little time, both parties were quick to accuse each other to make their positions clear.

In his years at the head of Naturgy, Francisco Reynés has always tried to comply with a golden rule which has been to only execute those investments from which a much higher return is obtained. A requirement impossible to meet in the case of Sonatrach. The reason is that this type of long term contracts were well seen. After all, they reduced the risks for the buyer and seller, since both ensured a stable exchange that allowed the former to negotiate a downward price when acting in wholesale. All that has changed dramatically in the last year as the market has become flooded with US gas. Today, prices are up to three times cheaper than those negotiated years ago, forcing the buyer to renegotiate downwards. As a result, Naturgy has refused to renew the recently expiring contract, despite Algeria's efforts. In fact, the executive director of the Algerian state firm, Toufik Hakkar, pointed out that "we are in the final phase of negotiations and we hope that we will soon reach an agreement between the two parties".

The Algerian effort has had no effect. Thus, "Naturgy has decided not to extend the first gas contract that expires in 2020," Barclays said. And now the fight is on what happens in the face of the second contract (called Sagane) whose extension ends in 2021. A negotiation that will be, again, difficult and that will lead as years ago the same Reynés. Although industry sources point out that the Spanish firm will manage to "reduce" the volumes of natural gas coming from the region, which will allow the Spanish company to "reduce" its risk profile.

However, there is a problem in this dispute between the company and the Government, and that is that the supply of gas along with the gas pipelines originating in Algeria and passing through Morocco (in which Naturgy participates through the company Sagane) are "strategic assets" for the Spanish State. A classification that forces the Spanish Government to take part in the dispute and a trump card they had in Algeria. In fact, a month and a half ago Hakkar pointed out to the Efe agency that "before looking at the market and prices, the other parameters that exist must be considered. For this same reason, Sanchez and his team have had to go in person to close negotiations that may include new partners in this relationship, according to industry sources. Although what is certain is that the new agreement will not only serve to ease the tensions on the maritime borders of both countries, but will be presented as one of the pillars in the new energy transition plan. After all, natural gas should serve as a complement and solution for the take-off of renewable energies in the country and the problems of intermittence that they still present.