Spain's Naturgy says Sonatrach gas supply contract working 'normally'

The gas supply contract between Algeria's Sonatrach and Spain's Naturgy continues to work "normally", a Naturgy spokesperson said June 21, despite a deterioration in relations between Algiers and Madrid.

Algeria on June 8 suspended its 20-year friendship treaty with Spain over Madrid's changed stance toward the disputed Western Sahara region, ringing new alarm bells in the European gas market.

So far, gas deliveries have been unaffected, with Algeria saying it would respect its contractual obligations.

"The contract with Sonatrach works normally during the period," the Naturgy spokesperson said.

However, market observers have said there was still potential for the worsening relations between Spain and Algeria to spill over into the gas sector.

Algerian gas supplies to Spain were already affected late last year due to a row between Algeria and Morocco that saw supplies via the GME pipeline halted completely.

In 2021, Algerian gas exports via the Medgaz pipeline -- now the only pipeline route for Algerian gas to reach Spain after the GME line was suspended -- averaged 22 million cu m/d, according to data from S&P Global Commodity Insights.

But since the start of 2022, Medgaz flows have been higher at an average of 26 million cu m/d, the equivalent of 9.5 Bcm/year, going some way to offsetting the lost flows via the GME pipeline.

Flows were as high as 31 million cu m/d through Medgaz in early 2022, but in May fell to as low as 18 million cu m/d.

Supplies on June 20 were back up to 23 million cu m/d, the data showed.

Spanish gas also remains among the cheapest in Europe thanks in large part to its access to global LNG via its six operational LNG terminals.

The PVB day-ahead contract was assessed on June 21 at Eur111.50/MWh, with only the UK NBP day-ahead price lower among Europe's traded hubs, according to S&P Global pricing data.

The PVB day-ahead was also at a discount of more than Eur12/MWh to the Dutch TTF equivalent, the data showed.

Price negotiations

Central to the new dispute is Spain's stance toward Morocco and the disputed Western Sahara region -- Madrid altered its position regarding the autonomy of the region in March, reversing a decades-old policy of neutrality.

Madrid is now supporting a proposal by Morocco to allow Western Sahara to have limited regional autonomy, a stance that was condemned by Algeria.

A sign that gas relations had been strained first emerged in late April when Algeria threatened to terminate gas supply contracts between Sonatrach and Spanish buyers if Algerian gas was re-exported to Morocco.

The threat has seen Spain look to develop a new system of gas origination certification so that any molecules delivered to Morocco via the GME pipeline operating in reverse flow could be proven to be non-Algerian.

Also at stake is the price Naturgy pays for its Algerian gas imports. Spain said in April that it was expecting a "moderate increase" in the contract price for gas supplied by Sonatrach and that price negotiations, which started in October 2021, were "strictly commercial."

Naturgy has long-term import arrangements with Sonatrach -- the two are long-standing partners in the energy sector -- with the price paid by Spain recently at a discount to market prices.

Sonatrach and Naturgy also co-own the Medgaz pipeline, which previously had a capacity of 8 Bcm/year but has been expanded to have a capacity of up to 10.7 Bcm/year.