Algeria is set to overtake Russia as Italy's largest gas supplier thanks to a deal struck Monday by Italian Prime Minister Mario Draghi as Rome scrambles to replace Russian gas.
Russia supplies about 40 percent of Italy's natural gas, but that dependence is now seen as a danger following Russia's invasion of Ukraine. Indeed, although Draghi is highly committed to Italy's role as a close U.S. ally in NATO, Rome's long-standing reliance on Russia for hydrocarbons has tied Italy's hands when it comes to economic countermeasures against President Vladimir Putin.
“Right after the invasion, I announced that Italy will move with speed to reduce dependence on Russian gas. This agreement is a significant response to that strategic objective. There will be others,” Draghi said after meeting Algerian President Abdelmadjid Tebboune.
Under the deal between Algeria’s Sonatrach and Italy’s Eni, Algeria will send an additional 9 billion cubic meters of gas to Italy by next year year and in 2024.
In 2021, Italy imported approximately 29 bcm of gas from Russia, and 22.5 bcm from Algeria, according to Italy's economic development ministry. If the deal is upheld, Algeria would replace Russia as Italy's top gas source by next year.
Italy’s Foreign Minister Luigi Di Maio and Eni boss Claudio Descalzi have been on a diplomatic charm offensive, visiting gas producers Azerbaijan, Mozambique, Republic of the Congo, Qatar, Angola and Algeria.
“Unfortunately we are late, we should have diversified much earlier but we have plenty of partners and friends around the world,” Di Maio said ahead of Monday's visit.
Visits by Draghi to Mozambique, Angola and the Congo in the next few weeks are under discussion, according to an official.
More investment needed
Algeria needs cash to ramp up its gas output, as it hasn't invested much in new production in the past three decades while domestic consumption has soared, said Davide Tabarelli, an energy analyst for Italian consultancy Nomisma. The Transmed pipeline linking Algeria and Italy is not running at full capacity because Algeria doesn't have the extra gas to fill it.
Alessandro Lanza, a professor of energy policy at Luiss University in Rome, said Algeria will need new investment in infrastructure to increase production as it cannot divert gas that it currently sends to Spain. “Natural gas is not just a tap that you can open.” He estimated it would take 12 to 18 months to boost production.
Last month, Eni and Sonatrach announced that they found a “significant” oil and gas field in the Algerian desert, which they will jointly exploit.
While Italy is boosting ties with Algeria, relations with Spain, the other main buyer of Algerian gas, are in the deep freeze.
Spain annoyed Algeria by backing a Moroccan effort to grant limited autonomy to Western Sahara, a former Spanish colony. Morocco annexed the territory in 1975, while Algeria supports Western Sahara’s independence.
Last year, Algeria shut down a gas pipeline running across Morocco to Spain, although it insists that supplies to the Iberian Peninsula will continue through the remaining undersea Medgaz pipeline.
Algeria can’t divert its gas commitments away from Spain to Italy, although Madrid could voluntarily renounce some of its share and replace it with liquefied natural gas, Tabarelli said.
If it has to, Italy could replace much of the Russian gas it buys by boosting gas imports from Africa and increasing LNG capacity, Lanza said, although that will come at a cost. “In two years, Italy could have reduced its dependence on Russian gas from 40 percent to a safe 20 percent.”
