GIF INSIDE STORY: Transmed capacity auction signals Sonatrach’s interest in European gas market

Additional reporting by Luka Dimitrov

Algerian producer Sonatrach may be looking to fill some of the gap left by dropping Russian flows to Europe by increasing its own piped supplies to Italy via the Transmed pipeline transiting Tunisia. Sonatrach started offering more flexible supply deals but the uncertainty of Tunisian transit fees remains a key obstacle for smaller shippers.

LONDON (ICIS)–Italian-Algerian pipeline operators Transmed and Trans Tunisian Pipeline Company (TTPC) started offering firm transportation capacity on 28 June on the PRISMA platform.

The Transmed pipeline has a nameplate capacity of more than 100 million cubic meters (mcm)/day and around 35mcm/day could now be booked by participants through these auctions.

The offer contains multi-year, yearly, quarterly and monthly products, as well as weekly and weekly working days products on a first-come-first-served basis.

Annual and multi-annual capacity to 2029 will be offered from 28 June to 15 September while Q4 ‘23 and October ‘23 capacity will be offered from mid-September.

Requirements for this auction do not strictly follow European standards for transparency as the operators are based outside Europe, therefore offered capacity and price of the auction were not disclosed ahead of the round. Results of the first round of auction could be available by 30 June.

As this is a bundled capacity offer on both interconnected transmission systems, interested shippers must have an assignment in place not only with Transmed but also with TTPC. Shippers registration begun in early June.

Transmed joined PRISMA as transmission operator earlier in June, increasing its presence in the European gas market.

Multiple sources said they expect this auctions to boost Italian and European supply amid drastically diminishing pipeline flows to the continent from Russia.

Algerian flows

In 2023 to date Algerian flows to Italy at the Mazara del Vallo entry point have averaged 62mcm/day, accounting for 35% of Italian imports during the period, according to data published by Italian transmission system operator Snam.

This was in line with the previous two years but three times higher than in 2020.

ICIS understands that out of the current volume flowing on the Algerian route around 30mcm/day is under long-term contracts running from 2019 to 2026 and 2027, while the rest may be split between a previous long-term deals (around 60%) and spot flows (40%).

Additional capacity on the north African route could help improve supply to Europe even if competition for LNG between Europe and Asia increases and reduces European LNG sendout.

Tunisian transit fees

Small players have historically faced obstacles in accessing the pipeline due to complex registration processes along the way.

The pipe crosses Tunisia before entering Italy, which means higher transportation costs for shippers but also uncertainty around the level of transit fees.

Participants said Tunisian operator Société Tunisienne de l’électricité et du gaz (STEG) that sets transit fees on the route sometimes makes abrupt changes in transit cost based on a complex formula, limiting shippers’ visibility on actual hedging activity costs.

ICIS understand STEG has also overriding powers on existing import agreements between Algerian producer Sonatrach and shippers, which means that if Tunisian demand picks up STEG can keep some of the flows already being secured by others to meet its domestic demand.

Big players have a better negotiating position because they have a variety of agreements in place and can boost their imports from other routes to make up for lower flows from north Africa – Austria and Germany to mention two – but also Azerbaijan and the newly expanded LNG capacity.

Small players, however, do not have the same flexibility becoming more exposed to unexpected price spike and flow reduction on the import route.

More clarity on the Tunsian factor in the route price formation requires a great deal of confrontation between market participants, the transmission system operators and the local government.

ICIS asked STEG about the transit fee underpinning formula and how frequently it gets updated but it did not receive an answer by the time of writing.

The transit fee to Italy is currently Tunisia’s biggest source of revenue.

Sonatrach supply

Another condition for accessing the Transmed pipeline is heaving a supply agreement in place with Algerian producer Sonatrach.

Sonatrach owns 50% of the Transmed pipe along with SeaCorridor (a joint venture owned by ENI-SNAM), in order to book capacity at the new auctions.

The company has already increased its presence in the European market as a supplier and is working towards expanding its LNG capacity.

As Russian gas has left a supply gap, Sonatrach could have a chance to further expand Algerian share in the European gas market.

In the year to date Italian imports via the Austrian TAG pipe, which traditionally brought Russian flows to Italy, have averaged 11mcm/day, mostly in line year on year but 84% lower than in 2021.

Participants reported more shorter-dated and long-term contracts with a greater percentage of hub indexation signed in the past with Sonatrach and the producer has been making available more frequently shorter term products compared to previous years under these new terms.

This, in theory, increases the possibility for shippers to secure spot volumes from Sonatrach and access transport capacity in the new Transmed auction on Prisma.

However, the uncertainty around Tunisian fee affecting the route could prevent market players from signing agreements with STEG for a time frame shorter than three months at least to minimise potential cost issues, a source told ICIS.

ICIS understands the first Transmed auction attracted mainly big companies with significant capacity already booked on the route.

SeaCorridor was commissioned in January with providing strategic development directions for the commercial offer of both Transmed and TTPC.

Snam acquired a 49.9% stake directly and indirectly held by Eni in companies operating two groups of international gas pipelines connecting north Africa to Italy.

The transaction included TTPC and Transmediterranean Pipeline Company Ltd. (TMPC).

Eni and Snam exercise joint control of SeaCorridor under joint governance arrangements.

Eni Neptune deal

The Italian utility Eni could also bring an additional 4 billion cubic metres of (bcm) to the continent, the company chief executive Claudio Descalzi said on 23 June, as it reached an agreement with Norwegian energy firm Var Energi to acquire independent exploration and production Neptune Energy.

Neptune operates oil and gas fields across several countries including the UK, Norway, Germany, Algeria, Egypt, Netherlands and Indonesia.

“[The deal] will contribute predominantly gas resources to Eni’s portfolio,” said Descalzi.

However, the additional volumes would not be deliverable to Europe in the short term due to existing capacity restrictions and bottlenecks between the southern and northern regions of Italy.

This could make less palatable booking additional capacity on the Transmed pipeline.

“Flows via 10bcm/year Trans Adriatic Pipeline (TAP,) Lybia, and Algeria should not get higher than 130mcm/day,” one participant told ICIS.

At the moment, combined gas flow from the southern routes rarely surpass 120mcm/day, Snam data showed.

“The Italian government is swinging much political weight on the redesigning of the Italy-Africa energy connections,” added a third source.

In January Eni announced a new $8bn deal with Libyan state-owned company NOC committing to developing Structures “A” and “E” gas fields off the Libyan coast by 2026.

“Eni’s seeking to expand Mellitah complex in Libya could boost further Italian and European supply,” added a gas trader.

Under the terms of the proposed deal, Eni will acquire Neptune (excluding the German assets), while Var Energi — Eni’s Norwegian listed subsidiary — will acquire the Neptune’s operations in Norway.

Italian utility owns 63% shares in Var Energi. The transaction is expected to be completed by the end of first quarter of 2024, contingent on regulatory and governmental approvals

GALSI revival

Developers never really started working on the 8bcm/year Gasdotto Algeria–Sardegna Italia (GALSI) pipeline project, which was firstly envisioned in 2005 and intended as a Transmed extension that would connect Algeria directly to Italy. This was in part due to some financial challenges throughout the years, including the European Commission’s decision to halt its financial support to the project, but also due to the wider market condition at the time.

The project would have allowed to remove uncertainty of Tunisian transit fees and grant Sonatrach direct access to the European market, giving shippers a better opportunity to hedge their positions.

A renewed interest in the pipe seems to come from Eni and Sonatrach increased partnership in the fields of green hydrogen, carbon dioxide storage, and renewable energies developed over the past years.

In this context the GALSI projected could be upgraded to accommodate hydrogen transit, meeting both Algerian and European transition goals.

In its 2020 Ten Year Network Development Plan (TYNDP), the European Network of Transmission System Operators for Gas (ENTSOG) listed GALSI pipeline among the infrastructure projects, although in the 2022 release this does not appear.