Algerian LNG output falls

Algeria's liquefied natural gas output has fallen to about half of the country's installed capacity.

LONDON // Algeria's liquefied natural gas (LNG) output has fallen to about half of the country's installed capacity after sweeping leadership changes at the state petroleum company Sonatrach brought on by a government corruption investigation. Such low LNG production levels are highly unusual at a time when European utilities would normally be building up their gas inventories in preparation for the northern hemisphere's winter heating season.

They may indicate mounting problems with Sonatrach's gas production and pipeline system, exacerbated by a poorly timed shift in marketing strategy, suggest the energy analysts Samuel Ciszuk and Zoe Grainge at IHS Global Insight. According to separate studies by IHS and the US consultancy Waterborne Data Service, Algerian LNG output fell to about 40.6 billion cubic feet last month, compared with production capacity of about 81 billion cu ft per month, after several months of steep declines.

"While traditionally lower summer season demand in the northern hemisphere sees many LNG producers scheduling maintenance in the second and third quarters, the traditional window generally closes by September," the IHS analysts said in a research note. "The utilisation rate has rarely fallen below 65 per cent," they said. Other reports suggest Algeria is failing to take advantage of a recent rise in Asian spot prices for LNG but is instead sticking to a "strategy" of shifting its gas sales to long-term contracts indexed to oil prices.

"We are not selling in the spot market," Ali Hached, an adviser to the new Algerian energy minister, Youcef Yousfi, recently told an international gas and electricity conference in Paris, according to the gas industry newsletter World Gas Intelligence. Mr Hached defended oil-price indexation for gas contracts, which is increasingly resisted by European buyers, calling it "the key to stability and security of supply".

That contrasts with Algeria's decision in 2008, under its previous energy minister, Chakib Khelil, not to renew any of its long-term contracts but instead to opt for short-term deals that cashed in on near-record global LNG spot prices. "Since then Algeria has found itself increasingly in the position of receiving the lowest prices in the market for much of its gas, given the market weakness in the late 2008-09 demand climate," IHS said.

"Trying to move to long-term contracts now of course puts Algeria yet again in a tough situation, as it is negotiating those contracts at a time of low prices." Mr Hached has reportedly conceded that the marketing shift came "too late", which makes Algeria's avoidance of improving Asian and UK spot markets all the more bizarre. It "yields credit to persistent rumours about serious operational problems in Sonatrach's upstream and midstream sectors", IHS argued.

"Under-investment has been a problem for some time, and the almost complete contract award paralysis suffered by the company during the first half of this year, following the loss of almost all senior leadership as part of a wide-reaching corruption investigation, might have added delays in critical repair and upgrade programmes," Mr Ciszuk and Ms Grainge wrote. "Some reports have also indicated that growing production of sour gas has not always been matched by new pipelines able to handle increasing throughput of corrosive gas, leading to much higher attrition rates and falling infrastructure integrity."

Algeria's oil ministry has been "coy" on the subject of the reported problems with gas supply to its LNG facilities, the IHS analysts said. Lower-than-normal output from those facilities, meanwhile, has continued this month.