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Business News/ Economy / The Unexpected New Winners in the Global Energy War
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The Unexpected New Winners in the Global Energy War

wsj

Western nations are forging unusual alliances to replace natural gas from Russia. “We pushed the accelerator to the maximum.”

A natural-gas facility in the Sahara in Algeria. Premium
A natural-gas facility in the Sahara in Algeria.

BIR REBAA, Algeria—Once-obscure corners of the energy world, from offshore Congo to Azerbaijan, are booming as Europe finds new sources of natural gas to replace the Russian supplies that once powered the continent. The shift is redrawing the world’s energy map at a rapid clip.

In Bir Rebaa, deep in the Sahara, the Italian energy company Eni and Algeria’s state-owned energy company are drilling dozens of wells, producing gas from previously untapped fields in a matter of months.

Three pipelines beneath the Mediterranean Sea connect Algeria’s vast gas reserves to Europe. For much of the last decade, Russian gas giant Gazprom had kept prices low, pushing suppliers like Algeria out of the European market.

Algeria has long had a strong alliance with Russia, buying large amounts of weapons from Moscow. Europe’s sudden thirst for Algerian natural gas is challenging that relationship.

“We have friendship and political ties, but business is business," Mohamed Arkab, Algeria’s energy minister, said in an interview.

Algerian officials are negotiating new gas deals with buyers in Germany, the Netherlands and elsewhere in Europe. Italy’s Eni is making major investments in Algerian production. The Algerian government is in talks with U.S. giants Chevron and Exxon Mobil on deals that would enable the companies to produce gas in the country for the first time.

A consortium led by London-based BP is boosting gas production in Azerbaijan, located in the former Soviet republic in the Caucasus. A 2,100-mile string of pipelines connects Azerbaijan to the heel of Italy. Azeri officials say they are ahead of schedule on a pledge to double gas deliveries to Europe by 2027.

Eni is close to producing liquefied natural gas from a facility floating off the coast of Congo.

All the activity is redirecting the flow of natural gas around the world. Gas once flowed primarily southwest from Russia toward the Mediterranean. Now Europe is preparing to boost imports from Africa, with gas flowing up through Italy to Austria and other countries. Global exports of liquefied natural gas, or LNG, surged to a record high, fueled by a sharp increase in U.S. shipments to Europe.

Europe hopes that the new flows will provide an energy buffer over the next three years, a period when officials and analysts worry the supply crunch will be the most severe. The hope is that the new gas will bring down prices after the Nord Stream pipelines, the main conduit for Russian gas, were severed by sabotage in September 2022. The new supplies also would replace some of the more expensive fuel that Europe has relied on over the past year, including liquefied natural gas from the U.S. and Qatar.

Before it invaded Ukraine, Russia supplied 45% of the European Union’s gas imports. Now it accounts for just 13%. Still, Moscow could stress Europe’s energy supplies by cutting those shipments, as it did in the months before and after its invasion in February 2022.

The Russian invasion came at a precarious time for the energy industry. During the Covid-19 pandemic, companies had slashed investment because of cratering natural gas and oil prices. Producers were unprepared for a sharp rise in demand when lockdowns eased—or the market disruption sparked by the war.

Western officials and executives embarked on an intensive campaign of energy diplomacy. Italy’s Prime Minister Giorgia Meloni and her predecessor Mario Draghi traveled to Algeria to line up new gas deals. German Chancellor Olaf Scholz toured African nations with significant energy reserves in the months after the war. Eni Chief Executive Claudio Descalzi and Guido Brusco, who oversees the company’s oil and gas production, crisscrossed the continent seeking new sources of gas for Italy.

“We started immediately to connect with our neighbors, particularly the ones with the quickest possibility to react, like Algeria," Brusco said.

Luigi Di Maio, the populist politician who was Italy’s foreign minister when the war started, visited Azerbaijan to secure commitments for new supplies.

Eni’s oil-and-gas facility in Bir Rebaa lies in the Sahara nearly 500 miles southeast of the Algeria’s capital, Algiers. The government boosted security at the facility after Islamist militants affiliated with al Qaeda attacked a BP oil and gas plant in southeastern Algeria a decade ago and took workers hostage, killing 38 people.

The Eni compound is guarded by armed Algerian soldiers and security personnel. Workers stay on the grounds for multiweek shifts. A herd of cats fends off scorpions from the desert.

Alessandro Tiani, Eni’s managing director in Algeria, arrived weeks after the war began, with a mission to ensure that Italy—and by extension the entire continent—would have enough gas to withstand a cutoff of Russian supplies. “We pushed the accelerator to the maximum," he said.

Algerian officials say this year the country could export 100 billion cubic meters of gas—equivalent to about 65% of the nearly 160 billion cubic meters the EU imported from Russia in 2021, before the start of the war.

Years ago, before the advent of inexpensive Russian gas, Algeria was Italy’s top supplier. Now, it once again holds the top spot, helping Italy almost completely replace the gas it was getting from Russia, which in 2021 accounted for 40% of its imports.

Italy wants to parlay that success into exporting some of its supplies across its northern border to Austria, Germany and other nearby countries. The government recently fast-tracked the building of a new pipeline to carry gas north.

Snam, the company that controls Italy’s gas grid, manages the flows from a nondescript building a few miles south of Milan. Inside, a wall of LED lights shows gas flowing into and out of Italy and across the peninsula. Last year was the first time Italy sent large quantities of gas abroad—to Austria.

Given Algeria’s new importance as an energy supplier, the U.S. and Europe are attempting to nudge the government away from Russia. Algeria is one of the world’s biggest buyers of Russian military equipment, and generations of Algerian officers have trained in Russia. In June, Algerian President Abdelmadjid Tebboune met with Russian President Vladimir Putin in Moscow, where they agreed on what the two nations called an “enhanced strategic partnership."

Algeria’s budget for this year outlines a plan to use profits from oil and gas to nearly double its defense budget. Western officials worry that a big chunk of that spending could go to Russia’s arms industry. U.S. officials have warned Algeria that significant purchases from Russia would put it at risk of U.S. sanctions, under a law aimed at countering weapons sales by Russia, Iran and North Korea. The U.S. and European military powers say they can help fill the gap.

“Military procurement can’t be reversed overnight," said a U.S. official in Algiers. “However, Algeria can avoid making significant additional purchases of Russian military equipment, and we’re encouraging them to diversify away from Russian defense purchases."

When the invasion began, Algeria’s authoritarian government gave conflicting signals about how it would respond, analysts say. Days after the war started, the chief executive of Sonatrach, Algeria’s state-owned oil-and-gas company, was quoted in the Algerian newspaper Liberté saying that the company was ready to boost gas exports to Europe to replace Russian supplies.

Sonatrach quickly backtracked, saying the CEO had been misquoted, and filed a complaint against Liberté.

In the weeks that followed, Algerian authorities made clear they were eager to take back market share from Russia. In April 2022, Italian Prime Minister Draghi met with the Algerian president in Algiers, where executives from Eni and Sonatrach signed a deal to increase gas deliveries to Italy.

In Azerbaijan, the consortium led by BP is working to boost production from the country’s Shah Deniz project in the Caspian Sea. The companies also are working to extract gas trapped underneath oil reserves at the ACG field, about 60 miles east of Baku in the Caspian. Together, those new supplies will help the country meet an agreement signed last year to boost deliveries of gas from 10 billion cubic meters of gas to 20 billion by 2027.

In Congo, Eni has been producing oil from offshore fields for decades, pumping excess natural gas into a storage reservoir under the sea floor. When the global economy emerged from Covid lockdowns, executives hatched a plan to sell that gas and produce more by using a boat that could liquefy the fuel for LNG tankers.

It began negotiations to buy one of the few such vessels on the market, from Exmar, a Belgian company. It was sitting unused in a port in Uruguay. Competitors, though, had the same idea.

“Everyone was going after this asset," said Jonathan Raes, executive director of infrastructure for Exmar.

Eni announced a deal to buy the vessel in August 2022. The company said it is on track to start liquefying gas this year.

Some European lawmakers worry that the continent’s growing dependence on Algeria and Azerbaijan could expose it to the whims of an authoritarian energy supplier once again. Roberto Cingolani, the former Italian environment minister who helped lead the country’s diplomatic response to the energy crisis after the start of the war, said the best policy is to keep the continent’s suppliers diversified.

“Have as many suppliers as possible," he said, “so you diminish the risk that someone uses the gas as a lever in a geopolitical fight."

Write to Matthew Dalton at Matthew.Dalton@wsj.com and Eric Sylvers at eric.sylvers@wsj.com

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