Russian, Algerian energy ties spur concern

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Originally published 12:15 a.m., May 25, 2006, updated 12:00 a.m., May 25, 2006

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Russia and Algeria, the two largest suppliers of natural gas to Europe, have stepped up cooperation in the energy sector and other areas, raising fears in Europe that the two could form a gas cartel to control prices.

Top natural gas executives from the two countries announced last month that they were preparing a memorandum of cooperation that would cover joint efforts in the exploration, production and marketing of Algerian gas.

Industry reports also say the Russian gas giant Gazprom has undertaken a project with Algeria's state-run gas company, Sonatrach, under which the latter would fulfill Russian contracts to deliver natural gas to France.

In March, President Vladimir Putin offered to cancel Algeria's $4.7 billion debt to Russia, while Algeria agreed to purchase advanced Russian jet fighters, air defense systems and other weapons in a deal worth $7.5 billion.

The growing coziness is a concern to European leaders, who began looking to North Africa as an alternative gas source after Russia abruptly cut off supplies to parts of the continent during a midwinter price dispute with Ukraine.

Algeria is the largest producer of natural gas in OPEC -- the Organization of Petroleum Exporting Countries -- and through Sonatrach is the most important supplier of gas and liquefied natural gas to southern Europe. Russia, through Gazprom, dominates sales to northern Europe.

Paolo Scaroni, chief executive of the Italian energy giant Eni, recently told the European Parliament that he fears the formation of a natural gas cartel similar to OPEC. "We are increasingly dependent on a small number of suppliers," he said.

Andrei Illarionov, a longtime adviser to Mr. Putin who resigned to protest the gas cutoff to Ukraine, also raised the prospect of a gas cartel in a recent interview with the Times of London.

Noting the debt-and-arms deal between Russia and Algeria, Mr. Illarionov said the value of the deal to Algeria was 12 percent of its gross domestic product.

"It is a huge amount of money," he said. "But Algeria produces gas and delivers it to Europe." A gas cartel has not materialized, he said, but he added: "It is appearing in another way."

After a decade of internal strife, Algeria has thrown open the doors to foreign investment, having publicly announced a goal of doubling the number of foreign companies doing business there.

The government hopes to direct much of that investment to its energy sector, where significant oil and gas discoveries have raised prospects for a major expansion in production, said Energy Minister Chekib Khalil.

However, Western analysts fear that Russia will exploit the opening to increase its control over energy sales to Europe. The United States and others have accused Moscow of using energy sales to reward friends and punish former members of the Soviet bloc that stray from its fold.

"Increasing our dependency on an authoritarian Russia that uses energy to regain control over its neighbors cannot be good policy, particularly when the Putin government continues to centralize control over energy resources in the Kremlin and when the business climate in Russia becomes less, rather than more, transparent," said Keith C. Smith, a senior associate at the Center for Strategic and International Studies, a Washington think tank.

Algeria has an estimated 160.5 trillion cubic feet of proven natural gas reserves, the eighth largest in the world, and 11.4 billion barrels of proven oil reserves, according to the Oil & Gas Journal.

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