Naturgy finalizes a 3 billion gas purchase agreement from Algeria

The Spanish group is holding meetings at the highest level with the Algerian monopoly to renegotiate the price of gas supply, an eternal headache for the two commercial partners.

Naturgythe first Spanish gas company, and Sonatrachthe Algerian hydrocarbon monopoly, are in intense negotiations to close a new agreement as soon as possible on gas supply prices.

At current market prices, The new pact would be valued at at least 3,000 million eurosalthough it depends on its temporal scope, could exceed 5,000 million. In principle, a retroactive price review is being negotiated that affects Sonatrach’s supplies to Naturgy during 2023 and, at least, until 2024. The agreement, however, It could cover all of 2024 and even extend to 2025.

Sources close to the negotiations indicate that they are in an advanced phase and that last week there were meetings at the highest level between directors of Naturgy and Sonatrach in Algiers, the capital of Algeria.

The agreement is crucial within the commercial relations between Naturgy and Sonatrach for more than half a century now. It would mean the review of the agreement that was sealed at the end of 2022. At that time, and with an unprecedented rise in gas prices, contracts were revised upwards. Now, with prices falling, the situation is just the opposite.although it would be necessary to see the extent of this volatility and who assumes the risk of oscillations.

These conversations occur in full negotiation of the Emirati group Taqa to enter the capital of Naturgy.

Two problems

In 2022, when the last agreement was sealed, prices had skyrocketed due to the impact of ’s war against Ukraine. In the Dutch TTF market, which serves as a reference for the majority of contracts in Europe, gas reached prices above 200 euros per megawatt hour. Now, the TTF is trading at just over 30 euros.

There are two problems in the negotiations. First, Nobody knows what gas prices will be in the future.and second, in 2023a year that falls within the rate review, even if it has already expired, Prices ranged from highs of 90 euros to lows of 25 euros.

The Russia’s war against Ukraine, and other geopolitical events Later, they completely disrupted the energy markets, introducing unprecedented volatility.

From triannual to annual

This also made The way of reviewing the contracts that Naturgy and Sonatrach had was broken. At the end of 2022, an agreement was reached after months of discussion and with all kinds of ups and downs in the negotiations, including some friction at the diplomatic level.

But what is relevant is that We went from sealing triannual reviews three years before, to leaving them in annual reviews after the year expired. In this way, in October 2022 an agreement was signed to review prices that affected that year. As Naturgy then explained to the National Securities Market Commission (CNMV), the agreement “will be applied retroactively for the volumes supplied until the end of 2022 and that, as established in the contracts between Sonatrach and Naturgy For price revisions, market conditions are taken into account.

5,000 million meters

Naturgy further explained that The two companies “continue to negotiate within the framework of the contractual clauses the prices applicable from January 1, 2023”. It is precisely now this review that is being attempted to be closed.

In any case, they are revisions that fall within the normal framework of the historical contracts that Naturgy has had with Sonatrach.

The contracts currently in force between the two groups were signed more than 20 years ago with validity until 2030 for an annual volume of the order of 5 bcm (5,000 million cubic meters).

They represent firm volume commitments, both for supply for Sonatrach and for forced withdrawal of gas for Naturgy via clauses. take or pay (they are paid even if they are not used)”.

Second after the USA

At 2022 review prices, those 5,000 million cubic meters were valued at more than 10,000 million euros. Now, they would be around a third if they are limited to one year, although they could represent half of that figure if they also apply to 2024. There is a lot of money at stake, vital for both parties. Algeria continues to be one of Naturgy’s leading gas suppliers, with 19% of its supplies, behind the United States, with 30%.. The United States has been surpassing Algeria for two years.

Half a century of love and heartbreak

The negotiations between Naturgy and Sonatrach have always been complex. But never, since the first supply agreement was signed in the 70s of the last century, have both broken relations. In fact, over time Naturgy and Sonatrach have strengthened ties beyond the purchase and sale of gas. In 2011, after a major disagreement on prices, they had an arbitration that ended up proving Sonatrach right. It was settled by entering Sonatrach into Naturgy, where it continues with 4%. Sonatrach and Naturgy are the owners of Medgaz, the gas pipeline that connects Algeria with Spain through the Mediterranean. For Algeria, gas is a matter of state, which is why political or diplomatic friction interferes with price negotiations. Sometimes it has been the tension in the Sahara due to the Polisario Front and Morocco. Now, it is Algeria’s tension with the Emirates. Abu Dhabi owns Taqa, which is preparing a takeover bid for Naturgy, which supposedly gives Algeria hives. With each diplomatic friction, the market has considered a cut in gas supply from Algeria to Spain. But it is difficult to understand if you look at 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 around 132.2 billion cubic meters. About half goes for export. Spain is one of the main clients. Algeria already has business with the Emirates. Cepsa, controlled by Abu Dhabi, has oil wells worth 1.2 billion in Algeria.

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