Gas flaring threatens Algeria’s energy exports to Europe
Algeria has long been a major gas flarer but time may be running out for the practice as the EU moves to enforce its carbon border adjustment mechanism.
This article was authored by Ajay Ubhi and was originally published in issue 441 of African Energy and has been reproduced here with permission. The original article is available at this link.
Algeria’s consistently high level of gas flaring could start to threaten its gas export market to Europe once the European Union’s carbon border adjustment mechanism (CBAM) comes into force. The initiative will effectively introduce a tax on some products imported into the EU based on their carbon content and this could include crude oil or petroleum products. The full details are due to be finalised next month and the mechanism would then come into effect by the end of 2022.
All this could prove problematic for Algeria which, in 2020, exported 35% (364,000 b/d) of its total crude oil production to the EU. It poses awkward questions for national oil company Sonatrach given that “consumers will be tracking the embedded emissions in oil and gas imports” and will know “there are choices”, said Capterio chief executive Mark Davis.
Data from the World Bank Group’s Global Gas Flaring Reduction partnership showed that Algeria flared some 9.3bcm in 2020, making it the fifth-largest flarer in the world. While last year’s figure was a slight reduction on the 9.34bcm recorded in 2019, the overall trend has been one of steady increases since 2016. Algeria’s flare intensity – gas flared per barrel of oil produced – was 22.7 m3/bbl, the second-highest worldwide behind Venezuela, and far higher than the global average of 5.1 m3/bbl.
Data from Capterio’s free flare tracking tool “FlareIntel“ shows that Sonatrach-operated fields account for the highest proportion of flared gas; some 2.3bcm/yr is flared at the Hassi Messaoud oil field alone.
Issues around gas flaring and other climate change-related concerns are rising up the agenda for oil companies around the world, with many producers looking to offset their emissions with carbon credit purchases and other schemes. In July 2020, Stockholm Stock Exchange-listed Lundin Energy received independent certification from Intertek that oil produced from its Edvard Greig field in Norway is low-carbon; as of 16 June this year, every barrel from Lundin’s Johan Sverdup field is also certified as carbon neutrally produced. In January this year, US-based Occidental Petroleum Corporation sold what was described as the first ‘carbon neutral’ shipment of crude oil.
Despite cries of ‘greenwashing’ from critics – and questions over the validity of some of these claims, given that ‘scope 3’ emissions covering the impact of staff travel, waste disposal and other business operations are often excluded – these moves could be a sign of a new market reality for international oil companies (IOCs) and state exporters alike.
Davis argues that Algeria has a “unique opportunity” to capture its flared gas and make progress with its energy transition. In an as-yet-unpublished white paper titled “Accelerating the Energy Transition in Algeria: A Practical Roadmap to Reduce Flaring“, Capterio argues that reducing flaring could boost state revenues by up to $2bn/yr and increase gas production by up to 12%. During a period when investors are looking for sustainable investments, Davis argues that flare capture projects are some of the best available in terms of CO2 emissions removed per dollar invested.
Historically, there has been limited commercial incentive for Sonatrach or international investors to commercialise flared gas, given that Algeria has one of the world’s highest government takes and that flared gas capture projects are not a part of the core business of Sonatrach and IOCs.
Industry insiders suggest that Sonatrach and regulator ALNAFT may not be fully aware of the scale of flaring, since flared gas is generally not metered in Algeria. Flaring estimates quoted by Sonatrach are often much lower than those estimated by the World Bank Group’s satellite data, meaning the flaring penalties levied by ALNAFT on Sonatrach may be lower than they should be.
There are signs that change may be imminent. Sonatrach has renewed its commitment to delivering on the World Bank Group’s Zero Routine Flaring by 2030 initiative and there is a growing appreciation that gas flaring often takes place close to existing and planned gas infrastructure. These include the pipeline completed by Eni and Sonatrach last year between Bir Rebaa Nord and Menzel Ledjmet Est in the Berkine Basin to allow the transport of an estimated 7 mcf/d of associated gas.
Improved fiscal terms and new commercial contracts offered in Algeria’s new hydrocarbon law, which is finally entering its implementation phase, may bring further investment. With its foreign reserves plummeting, Algeria needs to generate more revenue. By tackling flaring it could improve sustainability while also protecting existing income streams.