New Energy Corridors in the Mediterranean
In 2018 the long planned and much delayed Gasdotto Algeria Sardegna Italia Pipeline, or GALSI pipeline, expects to go on stream, bringing natural gas from Algeria to Italy. The endeavor represents a significant economic, environmental, and political investment for both Italy and Algeria and has been the subject of a wide range of debates and scrutiny. At the core of this political, environmental, economic nexus, this new energy corridor shows the complicated nature of energy security in the Mediterranean. Not since the Cold War has a more dynamic spectrum of economic and physical security concerns existed throughout the region. Meanwhile, falling oil prices, rising temperatures, and shifting politics have ushered in a re-assessment of international relations. Because of these overlapping realities, a theme of interdependence is taking hold; appreciating this will be critical for the successful management of the GALSI pipeline. One thing appears certain — as this joint Italian-Algerian venture becomes a reality its impact will reverberate throughout the Mediterranean and beyond.
“Security of procurement is one of the principal objectives of Italy’s energy policy, together with diversification. All the projects to build new transport infrastructures, including the Galsi line, are essential to be able to meet the growth in energy demand that will surely manifest itself once we emerge from the current world crisis.” — Minister for Economic Development, Claudio Scajola, November 23, 2009
Energy security is a nebulous term; its meaning bent to the will of time, politics, and geography. Broadly speaking though, energy security is defined by three overlapping factors: reliability, affordability, and environmental friendliness. Closely linked with the notion of energy security is the field of geopolitics. This is true in Europe, where a resource-constrained European Union has been at the mercy of a Russian-Ukrainian row, a revolution in Libya, and a global economic meltdown within the past decade while trying to tackle climate change via the Paris Climate Agreement and the EUs Energy Initiative. It is within this international context that Italy’s energy policies for the next 20 to 25 years have developed. These same factors have concurrently delayed and bolstered construction of the GALSI pipeline.
At 850km, the GALSI pipeline will stretch from the gas fields of Hassi R’Mel in Northern Algeria to Italy via Sardinia, with 565km of the pipeline under the Mediterranean Sea. Laid at a depth of 2,885m, the undersea portion of the pipeline will be one of the deepest pipelines ever built. Once online it will bring about 8 billion cubic meters (bcm) of natural gas to Italy annually. This pipeline will go through Sardinia, providing increased access to natural gas for the manufacturing sector. Along with these manufacturing benefits, the increase in natural gas will assist Italy in achieving its 2020 aim of decreasing its greenhouse gas emissions. And it will further break Italy’s reliance on Russia natural gas. Despite these benefits, the pipeline has seen numerous delays since discussions surrounding the GALSI pipeline began in 2003. In the intervening years changing leadership, shifting priorities, fluctuating gas and oil prices, and environmental concerns have caused numerous delays. These delays underscore the complexity of the project, highlighting that the oft-touted “obvious benefits” of such a pipeline are not so simple or obvious.
Even though the pipeline is moving forward, criticism of the project continues. Now chief among these criticisms is that the project may be unnecessary. Italy already has four natural gas pipelines — TransMed from Algeria, Greenstream from Libya, TAG from Russia via Austria, and TENP/Transitgas from Northern Europe via Switzerland. The two North African pipelines — TransMed and Greenstream combined provide 41.2bcm. Along with these pipelines there are three LNG terminals, which provide 538 billion cubic feet (bcf) and there are five more LNG terminals planned that from 2018 to 2021 that would add a capacity of 950 bcf. Critics purport that these pipelines and LNG terminals, alongside the steady decline in gas usage from 2010 through 2014, make the additional pipeline questionable. Frida Kieninger summed up this criticism when she wrote, “Building a pipeline from Algeria, which relies on gas, to Italy, which doesn’t need Algerian gas, makes no sense.” These criticisms are not without merit, but they treat energy security as one-dimensional and make several assumptions. Principal among these assumptions is the faulty notion that current geopolitical climate, the supply security, and oil and gas prices will remain static. History shows such stasis in energy markets and geopolitics does not exist. The following pages will analyze the various dimensions of energy security intending to providing a holistic assessment of the risks and impacts of this new energy corridor.
Political dimensions of Energy Security
With few indigenous energy resources available, Italy’s energy security depends on imports. On average, Italy imports about 80% of its energy. Meanwhile, Algeria possesses the sixteenth largest oil reserves and eleventh-largest reserves of natural gas in the world. Fittingly, hydrocarbons provide Algeria’s economic backbone, accounting for approximately 30% of GDP and 95% of export earnings. These political economies explain why Italy and Algeria have a longstanding and mutually beneficial energy relationship. The confluence of politics and economics is especially salient in Algeria where the Société Nationale pour le Transport et la Commercialisation des Hydrocarbures (Sonatrach) — Algeria’s state owned oil-and-gas company — owns 80% of hydrocarbon production, wielding considerable influence in the political economy of Algeria.
There are several in earnest political realities that imbue the pipeline with a particular importance. In Italy’s case, the need to diversify their energy imports and break away from what many see as an unhealthy dependence on Russia natural gas is paramount. With the 2009 economic crisis fresh in their minds, Italy’s politicians are looking for stability in their energy market. Meanwhile, Algeria is recovering from collapsing oil prices, dealing with an ailing president, and keeping Islamic terrorism at bay.
The energy relationship between North Africa and Europe began in the 1970s when the volatility of the world energy market spurned diversification. Attempts to establish natural gas shipments between North Africa and Southern Europe began with the 1983 construction of a sub-sea pipeline under the Mediterranean Sea known as the Trans-Mediterranean Natural Gas Pipeline. Since then over 7000km of additional gas pipelines have crisscrossed the Mediterranean, establishing North Africa as a major supplier for Southern Europe’s energy market. Taken together these pipelines provide 64bcm annually — approximately 14% of the EUs natural gas demand; by contrast, Russian supplies in 2017 rose to 193.9 bcm or 40% of the EUs natural gas. Considered in this context, on the one hand, the pipeline represents the next step in Italy’s evolving energy security architecture. On the other, it represents the proverbial rock and a hard place scenario whereby Italy replaces the geopolitical volatility associated with Russian gas with the geopolitical volatility surrounding Algerian gas.
In the past few decades, several notable events have endangered Italian energy security. Foremost among these events are the episodic disputes between Russia and Ukraine over natural gas imports. Since 2005 a series of gas disputes between Russia and Ukraine have spiraled into transnational political issues that severely affected gas imports for several European countries. In the January 2009 dispute, Russia completely shut off gas flowing through Ukraine affecting 18 European countries, including Italy. At the time Italy received about 28% of its gas imports from GAZPROM and the shut-off reduced gas flows to Italy by 90%. The episode highlighted how cross-border pipelines have an increased susceptibility to external politics. Though these disputes typically resolve quickly, the political fallout remains, contributing to Italy’s increased interest in Mediterranean energy.
When the Arab Spring reached Libya, the world saw just how quickly politics could give way to violence. The political and social turmoil unleashed in Libya during the Arab Spring and the subsequent military intervention that followed was a watershed moment for Italy’s energy security. The situation again illustrated how political turmoil could affect energy supplies. However, unlike the gas interruptions from Russia, the chaos in Libya did not end fast. Italy at the time received 11% of its natural gas from Libya, which fell to zero almost immediately and remained there for 8 months. Although Italy mitigated the impact through its natural gas reserves and increased imports from Russia, the episode provides a glimpse into what would happen if similar political turmoil took hold in Algeria. Aside from the economic concerns, relying on extra-national energy sources increases a nation’s susceptibility to the internal struggles.
While Algeria avoided much of the turmoil that swept across North Africa in 2011 as part of the Arab Spring, the country has suffered with a long-standing terrorism problem. Terrorist attacks on energy infrastructure are not unheard of in the region and such attacks hold the potential for broad consequences. Such was the case with the January 2013 In Amenas hostage crisis where an Al Qaeda linked terrorist group took over 800 hostages –132 of which were foreigners — at the Sonatrach-owned Tigantourine gas facility near the Libyan border. The multi-day standoff ended with 40 hostages dead and illustrated that Algeria’s relative stability notwithstanding, the country was still susceptible to terrorism. This high-profile attack was not the first. In 1997, terrorists attacked the Trans-Mediterranean pipeline, stopping gas supplies for five days and in 2011 there was a failed attack on the Trans Mediterranean pipeline. These attacks illustrate the continued susceptibility of energy infrastructure to attacks.
Regional geopolitics, coupled with Algeria’s rigid internal control, keep Algeria’s trajectory unpredictable; such unpredictability presents a concern for Italy’s energy market. While Algeria avoided much of the chaos unleashed during 2011’s Arab Spring, the country has struggled with Islamic terrorism and economic downturns. With weak institutions and a heavy influence from the military, Algeria has struggled to find a clear path towards assuaging long-standing political grievances. On more than one occasion these political grievances have boiled over into riots and demonstrations and, in the most egregious case, decades-long civil war.
Much of what has kept Algeria from imploding is President Abdelaziz Bouteflika’s iron-fisted rule and economic placation that results from energy revenues. So, it is unsurprising then, that an intertwined list of social, economic, and political grievances exist throughout society. At 80 years old, Bouteflicka’s 19-yr rule is winding down, leaving many to wonder what a post-Bouteflicka Algeria will look like. It is likely that these simmering resentments will come rushing forward once Bouteflicka’s time in office passes. How the Algerian government handles this transition will heavily impact its economy and its relationship with Italy and the Mediterranean region.
Economic Dimensions of Energy Security
The political economy of Algeria is inextricably tied to its hydrocarbon reserves. Despite decades of prosperity from hydrocarbon exports Algeria remains a command economy, not too dissimilar from the post-independence socialist model introduced by Ahmed Ben Bella in the 1960s. Heavy regulations continue to stifle non-hydrocarbon industries in favor of state-driven growth and declining oil prices have exacerbated socioeconomic imbalances. As such, Algeria has been increasing gas output to compensate for falling oil prices. On the other hand, Italy’s economy — the third largest in Europe — developed to be reliant on labor due to the scarcity of natural resources, though the auto manufacturing deviates from this norm. Therefore, diversifying the economy to overcome the economic stagnation that plagued the economy after 2009 will require continued access to imported energy. In effect, by strengthening their energy relationship each country is gambling that the other country will maintain a stable and positive economic trajectory. Where the economic dimensions of energy security are concerned, the GALSI pipeline, while offering economic benefits, also subjects both Italy and Algeria to potential economic problems.
Though no country’s economic trajectory is written in stone, there are historical antecedents that show Algeria’s heavy reliance on hydrocarbon exports warrants concern. One salient example is the Dutch economic relationship with natural gas — coined the “Dutch Disease” because of the negative impact that energy exports had on the remaining economy. Algeria is following a similar pattern though without the benefit of an economic union such as the EU. Another cause for concern is the economic impact of terrorism. Natural gas and oil exports account for 30% of Algeria’s GDP and 95% of export earnings — meaning that much of the economy is susceptible to terrorist attacks. As a reference point, it took almost three years for In Amenas to come back online after the 2013 terrorist attacks. Though past incidents are not reliable predictors of future events, terrorism across the Sahel and North Africa continues unabated — this is foreboding for the economies of Algeria and Italy. Specifically concerning is the post-Bouteflicka era and the political and economic uncertainty that will accompany it.
Italy’s reliance on energy imports means the economy is highly susceptible to shocks from the energy market. This vulnerability was clear when Rome declared a state of emergency shortly after the explosion on the TAG pipeline that stopped Russian gas flow through Austria in late 2017. The Financial Times reported that gas prices almost doubled after the state of emergency — a worrisome sign for a country that meets 38% of its energy needs from natural gas. A terrorist attack on the GALSI pipeline holds significant potential for impacting the economy — especially the local economy of Sardinia, which has limited access to natural gas and relies on coal and oil to power its economy.
Another area of concern is Algeria’s ability to balance exports demands with domestic demands, which have risen steadily since 2003. In a July 2017 visit to Hassi R’Mel gas fields, Sonatrach CEO Abdelmoumen Ould Kaddour acknowledged as much, telling reporters that meeting the growing domestic demand and European exports demands will be “very hard.” Algeria after failing to diversify its economy away from an over-reliance on hydrocarbon exports, needs to compensate for falling oil prices. Algeria’s economic dependence on hydrocarbon exports is unlikely to change soon. Particularly with the Netherlands main gas fields in the North Sea nearing their end and Norway’s pipeline at maximum capacity, Algerian gas stands to benefit. In December 2017, Sonatrach reportedly agreed with BP and Statoil to “produce an additional 11 billion cubic meters (bcm) of natural gas from Tiguentourine.” Coupled with the global push to decrease greenhouse gases and it is hard to imagine Algeria moving away from its current hydrocarbon-based economy. Though this economic model provides stability, it also opens the Algerian economy up to European political instability. As Rafael Jiménez-Aybar noted in Energy and Global Warming: 2015 Paris Climate Change Conference, Europe has historically overestimated gas demands, which has led the “EU’s energy security strategy to focus on accessing new sources of gas, rather than on alternative approaches such as a demand reduction or strengthening internal connections.” This penchant for overestimation could deal an economic blow to Algeria if Italy’s economy re-calibrates dues to another economic crisis or new energy legislation from the EU. Furthermore, inflated gas consumption projections can skew the economic evaluation of new projects.
Last, there is the domestic economic of Algeria. A stifling bureaucracy, the lack of a clear economic vision, and nebulous laws and regulations have combined to create an investment climate led the US State department characterized as “the epitome of a high risk, high reward economy.” This environment led the Index of Economic Freedom to label Algeria as the least free country in the Middle East North Africa region. GALSI, as a joint venture, ties Italy to this political economy. The government in Algiers will need to balance the increasing export demands with increasing domestic demands. Prioritizing one over the other will risk destabilizing the socioeconomic balance that has enabled Algeria to be a consistent and relatively stable actor in Mediterranean affairs.
Looked at from the Italian perspective, rising domestic demand for energy in Algeria and an uncertain investment climate due to political instability could prevent a future development of Algerian gas exports. Considering that natural gas accounts for 50% of Italy’s imports and that manufacturing plants rely on natural gas for electricity generation, such limitations would pose a serious threat to Italy’s economic growth. Concerns over such a scenario keep Italy close with Russia — the main supplier of natural gas to Europe. This economic attachment was on display in December 2015 when Italian Prime Minister Renzi persuaded fellow EU members not to renew sanctions against Russia. Through such efforts have wider political motivations; the economic motivations are clear and understandable. Italy’s economic health relies on stability and accessibility and Algeria poses a risk in both aspects.
Environmental Dimensions of Energy Security
From an environmental standpoint, the GALSI pipeline enters the geopolitical stage at an interesting time. Until recently, few would have considered the environment a geopolitical concern, but the rising temperatures, a better understanding of the detrimental impact of greenhouse gases, and the Paris Climate Agreement has changed that mindset. In keeping with the challenges put forth in Paris, in October 2017 Italy announced its intent to phase out all coal usage by 2025. An ambitious goal for a country that relies on coal to meet 38% of its energy needs and has rejected Nuclear energy. Considering this ambitious agenda the GALSI pipeline represents additional benefits aside from Italian energy diversification and the economic benefits for Algeria. Increasing natural gas imports will move Italy towards its goal of reducing greenhouse gas emissions. Algeria, an early proponent of the Paris Climate Agreement, acknowledged the political winds. Emphasizing natural gas via additional pipelines like GALSI falls in line with the spirit of the climate change accords by moving towards reduction in oil and coal.
Setting aside these laudable benefits, natural gas presents environmental concerns. Though natural gas is clean and easy to use relative to other fossil fuels, it still represents environmental concerns. As noted, undersea pipelines have existed across the Mediterranean for decades with no noted environmental disasters. Despite this clean record, there are issues that raise concern for the surrounding environment as they could become catastrophic. As the Eurasian Research Institute noted, “In case of an accident compressed gas transported via pipelines would break through and cause a big scale explosion.” In such an event gas emissions would pollute the surrounding water and air thereby degrading the quality of the affected ecosystem. Besides concerns of pipeline corrosion and explosions, there are concerns about security of methane gas emissions. A 2007 maritime route survey on behalf of the GALSI pipeline detailed these environmental concerns and more, but concluded that the pipeline was a safe environmental investment.
Getting environmental approval for the undersea portions of the pipeline was just one step. Environmental groups in Sardinia lobbied the European Commission for greater restrictions and environmental concessions if the pipeline was to qualify for financing under the EUs European Energy Plan for Recovery. The GALSI pipeline complied with these new restrictions and secured 120 million euros to finance the Italian side of the construction. Complicating these environmental issues is the large percentage of the pipeline that lies outside the national jurisdiction of Algeria and Italy. While United Nations Convention on the Law of the Sea (UNCLOS) provides regulatory oversight that compliments the national activities, standardization is a long way off. This lack of standardization causes concerns for environmental groups, which feel that such ad hoc approaches invite exploitation and potential disasters. Ultimately, the investors and regulators deemed the environmental risks associated with the GALSI pipeline acceptable relative to the economic benefits, again illustrating the overlapping dimensions of energy security.
On the one hand, the GALSI pipeline represents the next step in Italy’s evolving energy security architecture. On the other, it represents the proverbial rock and a hard place scenario whereby Italy replaces the geopolitical volatility associated with Russian gas with the geopolitical volatility surrounding Algeria. Energy security sits at a complex geopolitical crossroad, where economics, politics, and the environment impact one another. Failing to understand and address these intermingling factors will put Italy and Algeria in a precarious position. While the current geopolitical climate of the Mediterranean may create a relationship between Italy and Algeria defined by interdependence, that relationship may look different in the future. In fact, the more factors involved the more volatile the relationship becomes. One has to look no further than the Russian-orchestrated gas crises to see how susceptible energy security is to the vicissitudes of geopolitics.