High Algerian piped gas flows to Spain expected until March 2022

Author: Cem Bektas

2021/08/05

LONDON (ICIS)--Algerian pipeline gas exports to Spain are likely to remain high until March 2022, when the increases linked to the oil indexation of imported gas prices are expected to factor in, ICIS understands.

Algerian flows to Spain have been at multi-year highs since the beginning of the third quarter of 2021. This and the announcement of a 2 billion cubic metres (bcm)/year expansion to the Medgaz pipeline connecting Algeria and Spain are likely to offset any shortfall due to low LNG volumes delivered to Spain.

ALGERIAN EXPORTS

Algerian exports to Spain averaged 21.2 million cubic metres (mcm)/day between 1 July-3 August, 7.3mcm/day above the average during the same days in 2020, data form ICIS showed.

Algerian gas flows in the third quarter have also been higher than levels recorded between 2010-2020 for the same period.

“All oil-linked gas contracts are in the money and nominations must be (at maximum levels) daily,” a trader told ICIS, referring to Algerian 6-0-3 oil-indexed contracts.

In a 6-0-3 oil-indexed contract, the average price of oil in the previous six months factors into the price of gas for the following three months, with zero-time lag between the end of the reference point and the start of the delivery period.

Sources active in the Spanish market said that the current level of Algerian exports is likely to become unfeasible by March 2022 due to the rising cost of the 6-0-3 contracts.

The price of the rolling ICE Brent front month averaged $63.81/bbl during the first two quarters of 2021.

In contrast the ICE Brent front month averaged $74.29/bbl during July.

MEDGAZ PIPELINE EXPANSION

In July 2021 Spanish energy company Naturgy and Algeria’s Sonatrach announced an agreement that will see a 2bcm/year expansion of the Medgaz pipeline capacity from the fourth quarter of this year, reaching a total of 10bcm/year.

This, along with the multi-year high level of Algerian gas exports to Spain, are likely to make up any potential shortfall in supply caused by falling LNG arrivals and sendout for the rest of 2021.

LNG sendout to Spain averaged 40.4mcm/day between 1 July–4 August this year, 25.1mcm/day lower than the average for the same period last year, according to Spanish grid operator Enagas.

Spain imported 15 laden LNG cargoes in July, seven less than the same month in 2020, data from ICIS LNG Edge showed.

27 LNG arrivals are scheduled into Spain during August according to a monthly operational plan by grid operator Enagas, five more than in August 2020.

It remains to be seen how much of an impact the Medgaz pipeline expansion will have on Algerian exports to Spain for the rest of this year.

“It is difficult to say because no one knows what is going to happen with the (Maghreb-Europe) pipeline coming from Morocco,” explained another trader.

The agreement for the Maghreb-Europe pipeline, which goes through Morocco and connects with Spanish and Portuguese gas networks, expires in October this year.

IMPACT ON PVB-TTF SPREAD

Ongoing high flows of Algerian piped gas to Spain pressured the PVB near-curve premium to the benchmark TTF.

At the beginning of July, the PVB front-month contract was assessed €1.150/MWh above its TTF counterpart. By 4 August, the Spanish premium had shrunk to €0.950/MWh.