African Oil And Gas Popular In Europe After Phaseout Of Russian Energy

During a visit to Algeria earlier this month, the European Union’s foreign policy chief, Josep Borrell, called for closer energy cooperation between the EU and the North African country, which happens to be the largest natural gas exporter on the continent. To the east of Algeria, in Libya, oilfield major Halliburton and Honeywell International are in talks with the National Oil Company to develop an oil field and build a refinery in the war-torn country. The talks concern deals worth $1.4 billion, according to NOC’s chairman who spoke to the Wall Street Journal.

For decades, North Africa has been the source of much migrant trouble and some gas. It has been part of the “jungle” that that very same Josep Borrell referred to in a controversial speech that described Europe itself as a “garden” that needs to be protected from the “jungle.” Until he discovered the jungle has oil and gas, it seems.

Algeria sells more than 80 percent of its natural gas to Europe. It is already one of the continent’s largest suppliers of the commodity. Yet analysts were quick to point out that Algeria can hardly replace Russian gas volumes.

First, the country had limited production capacity, which later became obvious when its gas exports to Europe rose to a near record in 2021, only to slump by 10 percent in 2022, right when Europe was most thirsty for gas.

Second, the country needs major investments in production expansion, and it cannot afford them on its own. So others are stepping in to supply that investment: the Wall Street Journal reported last month that Chevron was looking into gas exploration in Algeria, which happens to hold even bigger shale resources than the United States.

Directing investments to such resource-abundant locations is a big positive, and Algeria would certainly welcome these, but the EU is putting obstacles in its own way. Last year, the bloc agreed on what effectively amounts to a price cap on the natural gas it buys from abroad. And Algeria was not happy about it.

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A day after the EU announced the cap, Algerian energy minister Mohamed Arkad said Algeria “doesn’t support the idea of limiting prices,” adding that “Energy markets must stay free” if investments in more production are to continue flowing.

“Algeria is seen as a reliable and secure supplier to Europe and we are in full agreement with our European partners on long-term pricing,” the Algerian official said, and his European counterparts will have to agree with him, one way or another. 

Meanwhile, in Libya, Italy’s Eni and the National Oil Corporation recently sealed a deal worth $8 billion that Eni will invest in two offshore gas fields as Italy, like its parent organization, seeks to diversify its sources of energy.

“Libya is clearly for us a strategic economic partner,” Italy’s Prime Minister Giorgia Meloni said, even as the Libyan oil minister slammed the Eni deal as illegal and said NOC had not consulted his ministry with regard to it.

The deal, by the way, has a 40-year duration and envisages boosting Libya’s natural gas production to 800 million cu ft daily. In return for its investment, Eni will retain ownership over 38 percent of the gas it produces under the deal for a period of 15 years.

The reaction of minister Mohamed Aoun is a reminder that Libya is not a politically stable country, and this could make for a challenging investment environment. Yet the truth that Europe has been made aware of over the past year or so is that it needs gas, and this gas has to come from somewhere.

“North Africa has been slow to develop its potential because of political risks, either related to insecurity or bureaucracy,” the president of a U.S.-based firm, North Africa Risk Consulting, told the WSJ. Yet, as Europe urgently looks for replacements for Russian energy, “this is their moment,” Geoff Porter also said.

Algeria has an estimated 707 trillion cu ft of natural gas trapped in shale formations—the third-largest in the world after China’s and Argentina’s. Libya holds some 1.5 trillion cu m of natural gas, or around 53 trillion cu ft.

These are certainly volumes worth the interest of companies the size and stature of Chevron, Eni, and Halliburton. Especially with European demand just having awoken and despite the EU leadership’s insistence on reducing the bloc’s dependence on hydrocarbons in short order.

This insistence is certainly strong, and the EU has been busy drafting legislation to that effect in the past months. Yet now that it has realized it needs hydrocarbons to survive, Europe might be prepared to realize something else as well—that you cannot get countries to produce more gas for you without providing something in return.

Italy has figured that out, hence the deal with Libya’s NOC. The U.S. supermajors seem to have figured it out, too, and are making a North African bet. The chance of it proving a successful bet is quite decent. Europe already knows it cannot survive on U.S. LNG alone.