Spain Faces Energy Blowback, As Its Largest Natural Gas Provider, Algeria, Freezes Commercial Ties

Spain Faces Energy Blowback, As Its Largest Natural Gas Provider, Algeria, Freezes Commercial Ties 1

“Seldom in the history of Spanish diplomacy… has a foreign policy initiative had such disastrous results,” as Spain loses its grip on diplomatic relations with Algeria at the worst possible moment.

The quote above, from the Spanish financial daily El Confidencial, pertains to Spanish premier Pedro Sanchez’s unilateral decision, in late March, to endorse Morocco’s plan for “limited” sovereignty over Western Sahara, in the process putting an end to 47 years of Spanish neutrality on the issue while also poisoning relations with Spain’s biggest provider of natural gas, Algeria. On Wednesday, after Sánchez ratified the new policy in congress, Algeria announced it was severing its commercial ties with Spain.

It’s a decision that will hurt both economies. In 2020, the last year with full data available, when business activity was sledgehammered by the pandemic, Algeria exported just over €2.5 billion of goods and services to Spain. Spain, for its part, exported just under €2 billion to Algeria.

More importantly, the two countries’ bilateral trade includes a very large amount of natural gas, a commodity that right now is extremely scarce due to the fallout from the ongoing war in Ukraine and the US and EU’s ratcheting sanctions on Russia, the world’s second largest producer of natural gas. Last year, Algeria provided 41% of all the natural gas consumed in Spain. This year, Spain is already having to look elsewhere for supplies, including to the US and, irony of ironies, Russia.

Big Blowback

When, in March, Pedro Sánchez’s government called an abrupt end to Spain’s 47-year position of neutrality over the disputed territory of its former colony, Western Sahara, by publicly recognizing Rabat’s “autonomy” plan for the region, diplomatic and commercial blowback was all but inevitable. Morocco and Algeria are direct rivals in the rule of Western Sahara, 80% of which is controlled by Morocco. Algeria is the main supporter of the Polisario Front independence movement, which controls the remaining territory.

As I warned at the time, Madrid’s diplomatic u-turn risked torpedoing Spain’s commercial relations with its biggest energy provider, just as Europe faces its biggest energy crisis in at least half a century. Since then Algeria has gradually intensified its retaliation. First, it recalled its ambassador to Spain. Then it announced it would refuse the return of African migrants intercepted at sea on their way to the Spanish coast. It has said it will increase natural gas prices for Spain while maintaining prices for everyone else. It has also struck new energy deals with Italy and China, most likely at Spain’s expense.

But this week, the blowback went ballistic. On Wednesday (June 7), Algiers announced it was pulling back from a 2002 cooperation treaty with Spain that established the legal framework for bilateral relations between the two countries. The treaty is also meant to control immigration and human trafficking between the two nations. The reason cited for Algiers’ drastic move was Madrid’s “unjustifiable” reversal of its long-standing policy of neutrality on the Western Sahara conflict.

“The current Spanish government has given its full support to the illegal and illegitimate form of internal autonomy advocated by the occupying power, and has worked to promote a colonial fait accompli using spurious arguments,” the Algerian president’s office said, as quoted by Spanish news agency EFE.

At the stroke of midnight on Wednesday Algeria’s banking association (ABEF) announced it will block all bank direct debits for foreign trade operations to and from Spain, a move that will affect all economic sectors. As Reuters reports, Spanish exports to Algeria include iron and steel, machinery, paper products, fuel and plastics, while service exports include construction, banking and insurance. Algiers already banned imports of live Spanish cattle in April, a trade that was worth €55 million alone in 2021.

Sánchez has already set up a “crisis cabinet” to deal with Algerian relations and has even put Josep Borrell, a former Spanish socialist politician who is currently serving as the EU’s foreign minister, on standby, just in case the EU’s assistance is needed. Spain’s foreign minister José Manuel Albares said Thursday that the Sánchez government is analyzing the potential implications and impact, at both the national and European level, of Algeria’s severance of banking ties, which suggests that Algiers’ move could affect not only Spanish but also European businesses.

The EU Foreign Affairs Spokeswoman man Nabila Massrali said Thursday that the suspension of the friendship treaty with Spain signed in 2002 is “extremely worrying” and called on Algeria to “reconsider” its decision. She also described Algeria as an “important partner of the European Union” in the Mediterranean and “key to stability in the region”.

As the Spanish journalist Ignacio Cembrero said in an interview on Thursday, “These measure that Algeria took yesterday (…) in my view contravene the association agreement that is still in force between the EU and Algeria.”

The biggest concern, of course, is that Algiers ends up cutting off natural gas supplies to Spain. According to the Spanish news website El Independiente, ABEF’s statement does not specify what repercussions the freeze on transactions could have for Algeria’s gas exports to Spain.

US, Israeli Fingerprints

As one might expect, this diplomatic crisis is largely of Washington’s making, though Israel has also played a role. The US, in the last few months of Donald Trump’s presidency, became the first major country to recognize Moroccan claims to Western Sahara — but on one condition: that Morocco agreed to establish diplomatic relations with Israel, becoming the sixth Arab league member to recognise the Jewish State, which it did in December 2020.

In November 2021, Morocco became the first Arab state to publicly sign a military cooperation agreement with Israel. There are even plans to set up a joint military base near Melilla, one of two autonomous cities of Spain, on the Morocco–Spain border. As I noted in my April 29 article, Morocco Is a Major Client State of the US Arms Industry, leading the MENA region in terms of the percentage of arms acquired from the US. Since 2017 it has sharply increased its arms purchases from the US, as part of a five-year plan to attain “regional military supremacy.”

None of this has gone down well in neighboring Algeria. On Aug 21, 2021 Algiers cut diplomatic ties with Rabat, after accusing Rabat of supporting the separatist Movement for Self-determination of Kabylie, a region that extends along the Mediterranean coast east of Algiers. On November 1, Algeria closed the Maghreb-Europe Gas Pipeline (MGE) which passes through Morocco into Spain and was a major source of natural gas for both countries. For Morocco it was also an important source of income:

The Biden Administration has so far maintained Trump’s policy of recognizing Moroccan claims over Western Sahara. It has also managed to convince France, Germany, the UK and now Spain to also back Morocco’s territorial claims, regardless of the harm it may cause to Europe’s economic, energy or geostrategic interests. Sánchez even alluded to the fact that most other A-list EU Member States are on board with the plan in his address to Congress on Wednesday:

“France supports Morocco’s proposal, in the same way that the German president recognised that the Moroccan proposal is serious and credible, as did the United States, and the Netherlands joined in this position in May.”

Now, the ball is in Algeria’s court. And all eyes are on the gas pipeline connecting Algeria with Spain. The Spanish government insists that Algeria will not turn off the tap, given the country’s state-owned oil and gas company, Sonatrach, has signed a contract to supply Spain with gas until 2032. If it did cut off the gas, the company will face arbitration in international courts.

It is also true that if Algeria cuts off the gas, it will be hurting its own economic interests, not just Spain’s. That is something that only EU Member States seem willing to do. There is also the fact that Algerian reserves have stagnated in recent years and are in dire need of outside investment to open up marginal fields. It also has limited LNG capacity. As such, it may struggle to find buyers quickly enough to replace Spain.

But it’s not just economic interests that appear to be driving Algiers’ decision making; so too are geopolitical considerations. Algeria and Morocco, the two dominant countries of the Maghreb, have been locked in a diplomatic standoff since 1975, when Rabat occupied the lion’s share of Western Sahara, in the process lighting a fuse that could go off at any moment.

While Morocco has forged closer ties with the US, Israel and the EU in recent times, Algeria appears to be in the process of strengthening its already deep ties with Russia. In early May Russia’s Foreign Minister Sergey Lavrov met with the president of Algeria, Abdelmadjid Tebboune, to mark 60 years of diplomatic relations between the two nations. During his visit Lavrov extended an invitation from Russian President Vladimir Putin for Tebboube to visit Moscow.

It’s not clear how much of the discussions between Lavrov and Tebboube concerned energy issues. The stated purpose of the visit was to enhance bilateral ties in all domains, including militarily. As Morocco News reported in 2021, Russia agreed to write-off Algeria’s debt in 2006 exchange for an agreement on future Russian equipment sales. Since then ties between the two countries have only deepened.

Algeria has already integrated 14 advanced Su-57 fighter jets into its air force, making it the first foreign military to use Russia’s most advanced fighter plane. There has also been talk of Russia providing its S-500 long range air defence system to its closest strategic allies, including Algeria, which in turn could make Algeria a target for US sanctions.

At the same time, Spain’s Sánchez government has consistently underestimated Algeria’s willingness to retaliate for what it perceives as Spain’s “unjustifiable” betrayal over Western Sahara. While Algiers may not cut off the taps, it is certainly well within its rights to hike gas prices for Spain through the roof, given that Sonatrach is currently in the process of renegotiating the terms and conditions of its contract with Spain’s energy company Naturgy, which owns 49% of the Medgaz pipeline; the remaining 51% is owned by Sonatrach.

But the problem for Spain is not just its curdling relations with its traditional provider of natural gas; it is that it now depends more than ever on the US for its energy supplies, together with many other EU Member States. In the last five months the US has been the biggest provider of natural gas to Spain. In the mother of all ironies, Spain has also increased its purchases of gas from Russia by around 50% since April.

Of course, the LNG that is arriving from the US is far more expensive than the gas Spain buys from Algeria, at least based on current terms and conditions. There are also serious doubts as to how reliable an LNG supplier the US will prove to be. Will US energy producers be able to continue supplying Washington’s geopolitical partners with LNG while also meeting the needs of the domestic market?

Natural gas prices in the US have already surged as soaring spot prices for LNG at European trading hubs have galvanized US exporters to ship more and more of their LNG to Europe and the UK. As a result, US natural gas prices are increasingly arbitraged against global prices. To make matters worse, Freeport LNG, the operator of one of the US’ biggest LNG plants, will shut for at least three weeks after an explosion at its Texas Gulf coast facility, putting even further pressure on gas supplies to Europe.

 

 

 

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