Naturgy completes $3 billion gas purchase agreement from Algeria

The Spanish group is holding high-level meetings with the Algerian monopoly to renegotiate the price of gas supplies, a perennial headache for the two commercial partners.

Naturgythe first Spanish gas company and SonatrachAlgerian hydrocarbon monopoly is conducting intensive negotiations on conclude a new agreement on gas supply prices as soon as possible.

At current market prices, The cost of the new agreement will be at least 3 billion euros.although it depends on its time span, may exceed 5000 million. In principle, negotiations are underway for a retroactive price review that will affect Sonatrach supplies to Naturgy throughout 2023 and at least until 2024. The agreement, however, It could cover the entire year 2024 and even last until 2025.

Sources close to the talks indicate they are at an advanced stage and that high-level meetings between directors of Naturgy and Sonatrach took place last week in Algiers, the Algerian capital.

The agreement is decisive in the commercial relationship between Naturgy and Sonatrach. for more than half a century now. This would mean review of the agreement concluded at the end of 2022. At that time, in the context of an unprecedented rise in gas prices, contracts were revised upward. Now, when prices are falling, the situation is exactly the opposite.although it would be necessary to see the extent of this volatility and who bears the risk of fluctuations.

These conversations take place in full negotiations of the Emirati Taka group to enter the capital of Naturgy.

Two problems

In 2022, when the latest agreement was reached, prices skyrocketed due to Russia’s war against Ukraine.. In the Dutch TTF market, which serves as the benchmark for most contracts in Europe, gas reached prices above 200 euros per megawatt hour. TTF is currently trading at just above 30 euros.

There are two problems in negotiations. First, Nobody knows what gas prices will be in the future.and secondly, in 2023year falling within the scope of the rate revision, even if it has already expired, Prices ranged from a maximum of 90 euros to a minimum of 25 euros.

Russia’s war against Ukraine and other geopolitical events They later completely disrupted energy markets, introducing unprecedented volatility.

From triennial to annual

It also did The way Naturgy and Sonatrach contracts were verified was broken.. At the end of 2022, an agreement was reached after several months of discussions and with all sorts of twists and turns in the negotiations, including some friction at the diplomatic level.

But the important thing is that We went from mandating triennial reviews three years earlier to leaving them as annual reviews after the end of the year. Thus, in October 2022, an agreement was signed to revise the prices in force that year. As Naturgy explained to the National Securities Market Commission (CNMV), the agreement “will apply retroactively for supply volumes up to the end of 2022 and that, as established in the contracts between Sonatrach and Naturgy When revising prices, market conditions are taken into account.

5 billion meters

Naturgy further explained that The two companies “continue negotiations under contractual pricing terms effective January 1, 2023.”. Right now they are trying to close this review.

In any case, these are changes within the normal framework of the historical contracts that Naturgy has entered into with Sonatrach.

The contracts currently in force between the two groups were signed more than 20 years ago, valid until 2030, for an annual volume of about 5 billion cubic meters. m. (5 billion cubic meters).

They represent firm commitments on supply volumes for both Sonatrach and forced gas withdrawals for Naturgy through regulations. take it or pay (they are paid even if they are not used).”

Second place after the USA

At reference prices in 2022, these 5 billion cubic meters were valued at more than 10 billion euros.. Now there will be about a third of them if they are limited to one year, although they could be half that amount if they also apply to 2024. There is a lot of money at stake, vital for both sides. Algeria continues to be one of Naturgy’s leading gas suppliers with 19% of supplies, behind the United States with 30%.. The US has been ahead of Algeria for two years now.

Half a century of love and grief

Negotiations between Naturgy and Sonatrach have always been difficult. But not once, since the first supply agreement was signed in the 70s of the last century, have the two severed relations. In fact, over time, Naturgy and Sonatrach have strengthened ties that go beyond buying and selling gas. In 2011, after a serious disagreement over prices, an arbitration took place between the two, which ultimately proved Sonatracha right. The problem was resolved by entering Sonatrach into Naturgy, where it is kept at 4%. Sonatrach and Naturgy are the owners of Medgaz, a gas pipeline connecting Algeria to Spain across the Mediterranean Sea. For Algeria, gas is a national issue, so political or diplomatic differences are preventing price negotiations. Sometimes it was tension in the Sahara over the Polisario Front and Morocco. Now we are talking about tensions between Algeria and the Emirates. Abu Dhabi owns Taqa, which is preparing a takeover bid for Naturgy that is allegedly causing hives in Algeria. With every diplomatic tension, the market considered the possibility of reducing gas supplies from Algeria to Spain. But this is difficult to understand if one analyzes the Algerian economy and other trade relations. Algeria’s reserves account for more than 2.2% of world reserves. The country’s annual natural gas production is about 132.2 billion cubic meters. About half is exported. Spain is one of the main clients. Algeria already does business with the Emirates. Abu Dhabi-controlled Cepsa owns $1.2 billion in oil wells in Algeria.

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