Algeria's Medgaz gas link to Spain to operate at expanded capacity from Q4

The Medgaz gas pipeline that carries Algerian gas to Spain is to operate at an expanded capacity of 10 Bcm/year from the fourth quarter, pipeline co-owners Naturgy and Sonatrach said July 13.

The Spanish and Algerian companies agreed on the expanded pipeline operation at a meeting in Oran on July 13.

Algeria sends gas to Spain via two pipelines -- the direct Medgaz link and the the GME pipeline via Morocco -- with volumes totaling 9.06 Bcm in 2020, according to S&P Global Platts Analytics data.

Algeria has been working to expand the capacity of Medgaz from its current 8 Bcm/year capacity for some time, especially given a worsening of relations with Morocco and no certainty that a transit deal will be renewed before the current agreement expires at the end of October.

"The agreement provides for the expansion of the gas pipeline capacity by 2 Bcm/year, which is 25% more, to exceed 10 Bcm/year as of the fourth quarter," Naturgy said in a statement following the meeting with Sonatrach.

The expansion has involved an investment of approximately $90 million and the installation of a fourth turbocharger, it said, adding that once the expansion comes into operation, 25% of Spanish gas demand will be met by Medgaz.

"The expansion of the gas pipeline capacity strengthens the strategic alliance between Naturgy and Sonatrach," Naturgy said.

Medgaz is owned by Sonatrach with a 51% stake and Naturgy with the remaining 49% that it owns through a special purpose vehicle.

Medgaz 'loop'

At the end of June, Sonatrach CEO Toufik Hakkar said Algeria had taken all the "necessary measures" to ensure stable gas exports to Spain even if Morocco failed to renew the GME transit agreement.

Hakkar said discussions between all parties involved in the GME pipeline were ongoing, but that Sonatrach had already taken action to mitigate the potential loss of the GME pipeline.

"We were already prepared for all scenarios in 2018-2019," Hakkar said, referring to a new loop pipeline that can divert gas from the GME link into Medgaz.

Energy minister Mohamed Arkab on May 6 formally inaugurated the 197 km pipeline from El-Aricha on the border between Algeria and Morocco to Beni Saf, the starting point of the Medgaz pipeline.

The new El-Aricha-Beni Saf pipeline was designed as a tool for Algeria to be able to maintain exports to Spain should there be issues in future with supplies via the GME line.

Sonatrach began construction work on the new pipeline in 2018 to create the new "loop" between the export lines.

Morocco has reportedly opted to halt talks on the renewal of the transit deal due to worsening relations with both Algeria and Spain.

There have been signs that Algeria might be happy to stop using the GME pipeline, which enters Spain at the Tarifa interconnection point, and instead focus flows on the shorter, and cheaper, Medgaz line.

For Morocco, the stakes are high as it relies on Algerian gas to help meet its own demand, taking gas in kind for the transit service it provides under a 25-year agreement that came into effect in November 1996.

Rabat is also due to take over ownership of the line from current owners -- Naturgy and Portugal's Galp -- later this year.

Industry sources have also said that some of the delivery of Algerian gas to Spain has already been contractually moved away from the GME to the Medgaz pipeline.