The energy aspect of the European Green Deal and its effects on Algeria

1. The European Green Deal, Goals, Trends and Challenges

The European Green Deal (EGD) sets high ambitions for the transformation of the EU's economy and way of life so as to become the first climate-neutral continent. Among the many changes that will take place before 2050 as a consequence of the implementation of the EGD, a relevant one will be the implications for fossil fuels exporters into the EU. The EU intends to replace "imported natural gas and petroleum products with locally produced renewable electricity, gases and liquids".[1] This serves a double purpose. Firstly, to transition from fossil fuels to renewable energy sources, and secondly, to reduce dependency on energy imports, with the geopolitical implications that this entails.[2] Furthermore, the Covid-19 pandemic has hit the global markets in an unprecedented way, consequently halting most of the environmental policies that countries were aiming to implement in the upcoming years. After an initial period of crisis where both the EU and its Member States turned their back on each other and fought over medical supplies, the EU committed itself to using the Covid-19 pandemic as a catalyzer to increase the EU's integration and implement the EGD. Thus, the EU has continued with its plans and, in fact, has allocated 35% of the Next Generation EU recovery budget, intended to fight Covid-19, towards green initiatives.[3]

In regard to natural gas, the EU will continue to rely on it until 2030, seeing as it is a lesser contaminating alternative than coal.[4] After 2030, however, the EU will start phasing out natural gas and virtually all other fossil fuels.[5] By 2050, natural gas is expected to make up only one tenth of the EU's energy mix.[6] In 2019, gas accounted for 23.8% of the EU's total energy consumed, but it is worth noting that gas remains the most feasible alternative to coal, which made up 13.6% of the energy mix that same year.[7] In 2019, the EU imported about 92% of the natural gas it consumed.[8] If the EU is to reduce natural gas consumption so drastically, this will have important economic and geopolitical implications for the countries supplying it. Estimates indicate that natural gas imports will shrink somewhere along 13% and 19% between 2015 and 2030, while after 2030, they will drop between 58% and 67% compared to 2015 levels.[9] This major shift will change the way in which the EU relates to its neighbors and partners, most notably those who are currently the main providers of energy and who have the potential to become new providers in the near future.[10]

Moreover, as the EU has already announced itself, it has the intention of fulfilling the role of initiator and leader of the global environmental transition.[11] Countries are already following suit with carbon-reduction commitments, many of them ahead of the COP26 that will take place in Glasgow in late 2021. Therefore, not only is the EU initiating a shift towards clean energies and the eventual phasing out of fossil fuels and natural gas, but it is also using its normative power to push other nations to do the same.[12] Examples of this include the 2018 Free Trade Agreement with Japan, which was the first one to make an explicit reference to the Paris Agreements. The EU has pursued its effort to encourage other countries to fulfill their environmental commitments, even those who may be less receptive, as it has been seen with the FTA attempt with the MERCOSUR block, which included a provision on the protection of the Amazon, thus proving that the EU is willing to use all its normative toolkit to endorse its climate objectives. This overall shift in consumption could lead oil and gas-producing economies to lose $7 trillion USD by 2040, according to the International Energy Agency.[13]

Having briefly emphasized the importance of the issue, it is surprising that after over a year has passed since the introduction of the EGD, the EU still has no strategy to deal with the external dimensions of the Deal. This is even more so considering the increased geo-politicization of energy dependence, especially in relation to energy security and Russia.

2. The Energy Transition and Algeria

Concerning the consequences for fossil fuel exporters, currently most of them are part of the EU's neighborhood, an area that due to proximity to the EU's borders holds special strategic and geopolitical importance. In its Southern Neighborhood, the EU has preferred to reluctantly accept semi-autocratic moderate regimes rather than Islamic governments, particularly following the instability caused by the Arab Spring and the events that followed it.[14] This is because this region is especially relevant when it comes to the regulation of migratory flows and terrorism. Within this context, Algeria is one of the only countries in the region that remained stable during the Arab Spring by implementing heavy subsidies on basic goods and services as well as fossil fuels and electricity. This set of social programs heavily strained the Algerian economy. Moreover, being the second largest military power in Africa, the country is especially important to the EU.[15] These are only some of the reasons why Algeria is a key partner for the EU, not only in matters of energy, but also in matters of security and migration. Hence, any signs of instability in Algeria can have direct consequences in key EU policy areas. The implementation of the EGD has the potential to destabilize Algeria due to the country's high level of dependence on hydrocarbon exports to the EU, which remains its main export destination.[16]

As mentioned above, the global natural gas markets are starting to become strained as a result of the Covid-19 pandemic. Ultimately, however, the market changes are going to be structural due to the energy transition and the long-lasting effects of the Shale Revolution. In the last years, the markets have been characterized by an increase in supply.[17] Liquified Natural Gas (LNG) has been the source with the biggest trade growth, amounting to 13% in 2019.[18] In this regard, the European market has led the growth in LNG imports, reaching 117 bcm in 2019, 78% more than the previous year.[19] On the other hand, European gas imports through pipelines decreased by 6.5% in 2019, with Spain, as the main destination for Algerian gas, leading the drop with a 15% decline.[20] The first tendency is a decline of trade through pipelines and an increase of LNG, which is detrimental to Algeria, since it reduces the country's comparative advantage in infrastructure. Moreover, barriers to market entry are shifting away from pipelines and towards ports and vessels equipped for the processing and manufacturing of LNG.

Although Algeria trades small portions of LNG, its infrastructures are constituted mainly by pipelines connecting to Spain and Italy. Algerian pipeline exports fell by 30% in 2019 compared to the previous year.[21] Pressure was exercised both by the fact that cheaper LNG came primarily from the US and by the increased importance of Russian gas resulting from both the TurkStream and from a potential Nord Stream 2.[22] The steady increase in the production and consumption of renewable energies also had an impact. Renewable energy made up 19.7% of the EU's energy consumption in 2019, in line with the 20% objective by 2020.[23] This market behavior illustrates the beginning of a decline that will continue into the future as part of the energy transition and the Shale Revolution, which consists in the development of new extractive methods of fossil fuels that allow access to previously thought inaccessible resources, thus increasing the offer. The short-term effects will be exacerbated by the Covid-19 crisis.

Two additional factors that have been damaging Algerian natural gas exports are the decline in production and the increase in domestic consumption within Algeria.[24] To fight against these issues, the Algerian government has implemented the New Hydrocarbon Law, approved in late 2019.[25] The main purpose of this law is to improve the attractiveness of Algerian hydrocarbon and to incentivize foreign investment in the development of said sector. However, the government wants to maintain control over it, preserving the prior 51/49 ownership requirement.[26] This means that Sonatrach must hold at least 51% ownership of projects initiated by foreign companies in Algeria. Overall, the approval of this law demonstrates Algeria's willingness to continue developing its hydrocarbon sector through foreign investment, while still maintaining control over this critical sector, in an effort to increase Algerian exports.

However, a really important issue concerning the imbalance between production, sale and consumption of natural gas is the low level of energy efficiency Algeria has. Energy consumption efficiency is an endemic issue in countries with an abundance of fossil fuels and state-owned extractive companies.[27] This is a direct consequence of the low prices that these goods tend to have as well as the lack of environmental awareness of the population.[28] Energy products are typically highly subsidized, making prices very accessible for the bulk of the population. This, in turn, has additional negative repercussions for CO2 emissions, for which Algeria ranks third in Africa, very much against the country's modest commitments to the Paris Agreements.[29] Since countries tend to prioritize energy autonomy, they will always make sure to meet internal energy demand before exporting any leftover hydrocarbons. In the case of Algeria, this has resulted in a reduction of exports and consequently a reduction of revenues, since the sale price of hydrocarbons is very different at home than it is abroad. This has caused Sonatrach to become virtually economically sustained by the state both as a consequence of the lax subsidy policy in Algeria and of the drop in exports.[30]

Nevertheless, Algeria is also on the way to develop its own renewable energy capacity. The Algerian government acknowledges the benefits of renewable energy and sees the overall need to diversify its economy by advancing its national renewable sector.[31] The most pressing matter, apart from the global energy transition, is that fossil fuel reserves are estimated to run out in 20 years, in the case of oil, and in 50 years, in the case of natural gas.[32] Therefore, even if Algeria wants to hold on to hydrocarbons for as long as possible, it is obvious that this cannot last forever.

The Algerian government is aware of the enormous renewable energy potential the country has. The Sahara desert makes up 86% of Algerian territory, meaning certain areas provide between 2,500 and 3,600 hours of sun per year.[33] This corresponds to approximately double the radiation that can be generated in the EU in a single year.[34] In this regard, one of the targets that Algeria has set for itself is the development of its solar and wind capacity to 15,000 MW by 2035.[35] This means that Algeria should develop 4,000 MW by 2024.[36] In 2019, the government presented a tender scheme to gather investments in which only Algerian companies or partnerships that respected the 51/49 requirement were allowed to participate.[37] The tender was not as successful as expected due to the formal requirements. Following this failure, the Algerian government launched a new corporation within the framework of state-owned Sonatrach that would be dedicated to the development of renewable energy.[38]

To this day, the Algerian renewable sector is heavily underdeveloped, which is particularly shocking considering the great potential that the country has, not only in terms of annual hours of sunlight, but also of geographic proximity to the EU. The EU itself has foreseen in the EGD that it will not be able to produce all the necessary clean energy to supply the European region within its own territory.[39] Imports of green energy will be necessary to meet the demand. Algeria possesses the climatic characteristics and geographical and infrastructural features necessary to become a main supplier of green energy to the EU via already existing pipelines.

Investment in the renewable energy sector would not only help with Algeria's energy transition, but also with the diversification of its economy, which has been declared as a top priority for the upcoming years.[40] The Algerian government's main goal is to be able to provide for its people, especially by becoming self-sufficient when it comes to securing critical products such as food and agricultural yields.[41] After Algeria manages to provide for its ever-growing population, the government intends to limit its exports to a small number of specialized products.[42] In terms of figures, Algeria has set itself the short-term goal of making $5 billion USD worth in exports unrelated to hydrocarbons during 2021.[43] This effort to diversify is not new, Algeria has experienced multiple attempts in the last decades. However, all were unsuccessful because they went against the established power structures.[44] The strategy that Algeria is currently pursuing involves capitalizing on natural gas for the next 8 to 10 years until it is phased out by the Green Deal.[45] Moreover, the Algerian government is counting on an increase in the demand of gas.[46] While this increase may take place as the EU transitions from coal to gas as a less pollutant alternative, it is also clear that the gas market is diversifying and that competition is rising. Therefore, Algeria will have to compete against energy super-powers like the US and Russia to provide the EU with a cheap and secure source of natural gas.

Multiple scholars and analysts have argued that Algeria has been postponing an unavoidable reform of its economy and institutions.[47] The Green Deal poses both a threat to Algeria's status quo, given the structure of 'pouvoir' currently in place, and an opportunity for the country to embrace the shift to green energy, given its untapped potential in this sector. Nonetheless, this may mean that the 'pouvoir' will have to be the driver of change and lose part of its influence along the way. Certainly, the rentier character of Algeria is the key determinant for resistance, but it is also true that if the Algerian government does not hop on this train, there may not be many more opportunities like this. Momentum has been built internationally, with the EU announcing its ambitions and many countries following suit, but also domestically, with the Hirak taking the streets again after having to stop due to the pandemic. As difficult as it may be, Algeria finds itself in a privileged position to initiate a double transition: the transition towards renewable energies and the transition towards a non-rentier system.