Algerians’ Hardball Tactic in Natural Gas Threatens Jobs and World Prices

This disagreement is high stakes and complicated. On one side is Algeria’s state-owned gas production company, Sonatrach. On the other is Spain’s Gas Natural Fenosa, a major international power-generating firm. The two sides disagree over modifications made from 2007 to 2009 in the price of natural gas under two, long-term gas supply agreements between Sonatrach and Gas Natural Fenosa. The Algerians are claiming that the Spanish firm owes them nearly $2 billion. The Spaniards are disputing the figure and have made repeated attempts to reach a negotiated settlement. In the meantime, European arbitration courts are hearing the case in Geneva.

If the full $2 billion is forced upon Gas Natural Fenosa, not only will the company suffer, but so will Spain’s already tottering finances. European energy markets, already stressed because of disruptions in Libya, would be put under pressure. Prices would rise and jobs, already in short supply, could become even harder to find. Such are the dominoes that would fall – and there are many more to come.

With 20 million customers in 17 countries, Gas Natural Fenosa is the largest independent power producer in Puerto Rico. It is also the U.S. territory’s only liquid natural gas (LNG) importer. Three major energy-related projects in Puerto Rico could be threatened if the Algerian assessment is ever collected by Sonatrach. They are: developing a natural gas pipeline, creating a new truck-supply network and building more floating storage facilities in the San Juan area. The ultimate result, if these projects are nixed, would be an increase in natural gas prices for Puerto Rican consumers, job losses in the island’s energy sector and a drop in credit ratings and market capitalization for Gas Natural Fenosa. The Barcelona-headquartered Gas Natural Fenosa would also have to slow its investment plans around the world and add to its existing provision fund, which was established to settle the Sonatrach claim. While Gas Natural Fenosa does not disclose the total current value of the fund, the company has put aside $423 million from its 2010 gross profits, according to public documents.

Recent natural gas discoveries in the Gulf of Mexico as well as new shale rock fields elsewhere are making it possible for the U.S. to contemplate becoming a major gas exporter. With European and Asian natural gas prices roughly double those in the U.S., the opportunity for arbitrage has not escaped the attention of private operators. In particular, a Houston-based energy company, Cheniere Energy, Inc., is upgrading itself and turning its LNG import terminal at Sabine Pass, Louisiana into a major LNG export facility. Cheniere recently signed a non-binding memorandum of understanding with Gas Natural Fenosa to provide as much as 1.5 million metric tons of LNG processing capacity per year. If Gas Natural Fenosa’s cash position is severely constricted by the Algerian dispute, the promise of an economic benefit and job boost in Louisiana could dry up.

Algeria is the world’s fourth largest LNG exporter, the ninth largest oil exporter and the third largest exporter of liquefied petroleum gas (LPG). Algeria plans to invest about $60 billion over five years in developing further hydrocarbon production and export capacity and, as a result, it will be able to deliver natural gas at prices competitive with the U.S. That means the real reason behind Sonatrach’s inflexible position on the $2 billion claim against Gas Natural Fenosa may have more to do with Algeria’s ambitions to compete and gain market share in the international natural gas export markets than any other cause. If the Algerians weaken Gas Natural Fenosa through a punishing claim, they would reduce the company’s ability to develop projects that might compete with them on the world market. A weak Gas Natural Fenosa would create an opening for other operators, including Algeria’s Sonatrach, to sell more natural gas without low-price competition. In this protracted dispute, Gas Natural Fenosa could lose twice unless the Algerians relent. Louisiana and Puerto Rico would be collateral damage.

Article Contributed by Eugen Iladi.

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