The time of the contracts, a key factor in the negotiation of Algerian gas

Naturgy is risking its present and future in Algeria.

Thomas Osborne
Thomas Osborne
06 September 2022 Tuesday 04:42
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The time of the contracts, a key factor in the negotiation of Algerian gas

Naturgy is risking its present and future in Algeria. The Spanish gas company is holding intense bilateral talks with Sonatrach, the energy giant controlled by the Algerian government, to try to close the ordinary review of the price contracts for the supply of gas to Spain through Medgas. The key is the duration of these agreements at a time of maximum energy uncertainty. The supply is guaranteed until 2032, there is no doubt about that since the quantity contract is independent; what is at stake is the price of that supply and therein lies the conflict between the Spanish and Algerian negotiators.

The talks are taking place at the highest level, with the president of Naturgy, Francisco Reynés, personally involved with Algiers. Company sources limit themselves to pointing out that the negotiations "continue" and that the relationship with Sonatrach is "good", after more than thirty years of intense joint activity. The Algerian firm also owns 4% of Naturgy.

The regular revision of gas supply prices between Algeria and Spain had traditionally been negotiated for three years. Both parties began to sit down in November 2021, at which time the previous agreement expired -a contract supporting low prices in better conditions than the current ones-, to try to close the pact for the years 2022, 2023 and 2024. But, close to being fulfilled a year after the first scores, the handshake still hasn't arrived as Algeria has done with Italy and France. With Spain the scenario is different. They are not simple or comfortable conversations, since Sánchez's turn with the Sahara flies over the relationship at all times. That is why the claims of both companies do not end up converging.

Naturgy, sources linked to the negotiation indicate, is in favor of an ordinary price review contract of shorter duration than the usual three-year period. Negotiating economic agreements year after year would be ideal for the Spanish gas company. The uncertainty caused by the energy crisis, aggravated by the war in Ukraine, is the reason why the listed company wants to reduce that period. Time, therefore, is the key because it would not be the same for Naturgy to seal economic conditions for one than to do it three years ahead, with the volatility to which the price of gas is subject at the moment. Algeria, for its part, wants the economic agreements to continue for three years.

Naturgy is aware that the price to be paid for Algerian gas from November 2021 (the agreement will be applied retroactively from that date) will be higher than what it has paid so far. They count on it because of the market situation. How fat will that bill be? The negotiation continues and will depend on the duration over which these ordinary contracts are finally closed.

The time is emergency. With Russia closing the key to Nord Stream 1 and with Brussels preparing the emergency intervention of the electricity market, the price of gas has shot up again in recent days. This Monday in the Dutch futures market (TTF) it reached 284 euros per megawatt hour. At the moment in which Naturgy and Sonatrach began the conversations, it was posting figures close to 90 euros/MWh. Doubling the prices of the previous contract is a possibility contemplated in the negotiation.

Naturgy's objective is to try to close an agreement before the start of winter. It will not be easy because the aforementioned political interests come into play and time is running in favor of Algeria. In the first seven months of 2022, the gas that has arrived in Spain from the North African country has accounted for 24.5% of the total, according to official data from Enagás. A dependency that has been reduced in the last year, since between January and July the Algerian quota represented 48.8% of total gas purchases.

The solution of resorting to international arbitration to solve a possible conflict with Sonatrach if there is no price agreement has been contemplated by the leadership of Naturgy, but at this time it is an option that is bordered. There is some precedent, moreover, lost. The Spanish company also considers that the supply until 2032 is not in danger because the contract includes a 'take or pay' clause. As Reynés himself explained in 'La Vanguardia', "you have to take the gas with you or you have to pay for it anyway".

The Spanish Government remains on the sidelines of the negotiation, sources from the Executive indicate, despite the "gesture" that Pedro Sánchez wanted to have last week from Berlin by opening himself to a visit to the Algerian capital. That trip at this time is seen as "impossible", they indicate from the environment of the president. The Algiers ambassador in Madrid still hasn't returned.