Key View: Spain will see slow growth in gas net imports over the forecast period after years of strong decline. We forecast a growing proportion of liquefied natural gas imports to Spain relative to pipeline gas, which will reach 25bcm by the end of our forecast period in 2031. The resurgence of strong tensions with Russia and European attempts to reduce dependence on Russian gas will further reinforce the likelihood of stronger imports of LNG into Spain, and notably of US LNG, in addition to reviving the stalled MidCat pipeline project between France and Spain over the coming quarters. Other pipeline projects could also see light given the country's large LNG regasification capacity, but limited by regional gas re-export capacity. A pipeline link to Italy and Portugal is already under discussion.
With virtually no domestic production, Spain remains heavily dependent on large imports of natural gas via well-developed gas import infrastructure. The domestic network is connected via pipelines to Morocco and Algeria and is linked to the European network through a pipeline connection with France. In total, the country has six international pipeline connections: two with Portugal, one with Morocco (no longer importing Algerian gas, but used as reverse flow to supply gas to Morocco as of 2022), one with Algeria (Medgaz pipeline) and two with France.
In addition to these connections, Spain has six active LNG regasification terminals along both the Atlantic coast and the Mediterranean Sea (Huelva, Barcelona, Cartagena, Bilbao, Sagunto and Galicia). In total, Spain's regasification capacity reaches 64.0bcm, far outstripping domestic consumption needs but offering possibilities to services in other countries in Europe. Most terminals are operated by Spain-based Enagás, with the exception being the Mugardos LNG terminal, which is operated by Reganosa. In 2021, Spain imported significant amounts of LNG from the US (26.4%), Nigeria (21.1%), Russia (16.3%), Algeria (10.3%), Qatar (11.6%) and Trinidad and Tobago (5.4%). The country's LNG imports (an estimated 20.0bcm) in 2021 are the largest of any of the Western European countries.
In 2021, we estimate gas imports through pipeline represented about 40% of gas imports that year. Algeria is by far the largest pipeline gas supplier to Spain with Algerian gas representing about 82% of gas imported by pipeline. The rest mostly comes from France (10.1%) and Norway (6.2%). Spain also re-exports limited quantities of gas to Portugal and through its pipeline system to France.
Traditionally, a large majority of gas imports into Spain come in the form of LNG imports. Nevertheless, Spain's LNG imports fell over the 2011-2015 period to the benefit of pipeline imports, in particular from gas-rich Algeria (mainly through Medgaz and the Maghreb pipelines). This trend was mostly explained by disruptions in supplies from traditional sources of LNG imports owing to the exogenous shock generated by a sudden increase in Japan's LNG consumption after the shutdown of its nuclear energy operations. In addition, Spanish imports from Egypt began falling significantly since 2009, driven by the country's growing resource nationalism and continued political instability. Since 2015, nearly no Egyptian LNG was imported into Spain.
Algeria/Morocco Transit Deal Expiry: More Volumes Through Medgaz and LNG
The political issues and breakdown of ties between Morocco and Algeria in 2021 has resulted in the non-renewal of the long-term gas transit agreement for Algerian gas through Morocco. Hence, Spanish imports of Algerian gas through Morocco by the GME pipeline came to an end in 2021. Traditionally, this was the main export route for Algerian gas into Spain, with about 12bcm/year of Algerian gas on average transiting through Morocco via the GME pipeline. This transit deal ended in November 2021.
While this creates some level of uncertainty for Spanish gas supplies given its reliance on Algerian pipeline gas imports, we do not expect a significant supply crisis given the alternative supply routes available. Indeed, Algeria has assured Spain it can meet Spanish gas demand using the Medgaz pipeline and LNG.
Firstly, in May 2021, the new pipeline was inaugurated, which links from El-Aricha on the border with Morocco, straight to Beni Saf on the Algerian coast, and is the starting point of the Medgaz pipeline. This, in theory, allow for gas to be moved from the GME pipeline on the Algerian side into the Medgaz pipeline, instead of the GME.
In addition, the Medgaz pipeline was just expanded to some 10.7bcm/year following expansion works over the past quarters, up from its previous capacity of 8bcm/year. However, the expanded pipeline capacity is unlikely to be sufficient to carry all gas required by Spain. According to Platts data, some 11.4bcm of gas already flowed through both pipeline into Spain over the first nine months of 2021, larger than the expanded capacity at Medgaz. This suggests that Medgaz alone will be insufficient and that an increase in LNG shipments from Algeria is therefore also likely. There is spare liquefaction capacity in Algeria and large amounts of regasification capacity in Spain.
Rising Algeria - Spain Tensions
As of 2022 however, we note increasing risks of supply disruptions of Algerian gas linked to geopolitical issues, and in the context of the Russian invasion of Ukraine and soaring European gas prices. New tensions emerged between Spain and Algeria after Spain altered its position regarding the autonomy of the disputed Western Sahara region. The region is a hotly disputed topic between Morocco and Algeria. In March 2022, Spain reversed its tradition 'neutral stance' with regard to the disputed territory, now supporting a proposal by Morocco to allow Western Sahara to have limited regional autonomy. This is strongly condemned by Algeria. While Algeria reported it would continue supplies to Spain, Algerian state-owned company Sonatrach reported it was not ruling out a price recalculation and increase of gas paid by Spain's Naturgy, officially as a response to the soaring gas prices. The timing however could indicate a geopolitical move, given contracts with other countries and importers are not facing gas price increases.
In a further escalation in April 2022, Algeria threatened to terminate gas supply contracts to Spain entirely, if Algerian gas is delivered to destinations other than those specified in the contracts. This was in reaction to Spanish plans to reverse flow gas on the currently idled GME pipeline to supply gas from Spain to Morocco. As highlighted above, the gas transit deal between Algeria and Morocco was ended in 2021 following increased tensions between the two countries. With the end of the contract, Morocco also lost access to Algerian gas, as Algeria previously supplied gas to Morocco via the GME pipeline as payment for transit (about 1bcm per year to Morocco as payment). Given Morocco has limited domestic gas production and no LNG import capacity to date, the reverse flow plan with Spain would allow Morocco to buy LNG, import it through one of Spain's LNG terminal and flow it to Morocco by reverse flow on the GME pipeline.
In June 2022, Spain's Naturgy said the contract for Sonatrach gas was 'working normally', with deliveries of about 23mcm of gas. Since the start of 2022, Medgaz flows have been flowing an an average of 26mcm of gas (9.5bcm per year), higher than the 22mcm registered in 2021 to make up partly for the lost GME pipeline exports.
In July 2022, Spain begun to re-export gas to Morocco via reverse flows on the idled GME pipeline, despite initial threats from Algeria. Algeria had threatened to terminate its gas supply contract with Spain entirely should the country re-export Algerian gas to Morocco. Spain developed a new system of gas origination certification to prove the gas re-exported was not Algerian.
Russian Invasion Of Ukraine To Further Boost US LNG Imports and Revives Interconnector Projects
Renewed and heightened tensions with Russia following the Russian invasion of Ukraine early 2022 are pushing policymakers to diversify their supplies and increase the links between European consumer markets. Hence, there is potential for increasing gas interconnection links between France and Spain from the south to the north, which to date remain very limited. At the time of writing, the countries are linked by two pipelines, Larrau and Biriatou, with a combined capacity of about 7bcm. The crisis could notably revive the stalled Midcat pipeline project between Spain and France to allow more regasified Spanish LNG to be sent out to the rest of Europe. In addition, a new pipeline link to Italy by subsea pipeline, and a link to Portugal are also under study.
The MidCat project has been stalled since 2016 when the CRE came out against the pipeline, highlighting that it would not boost the security of French or European gas supply and could raise gas prices for consumers. The CRE estimated that the project would cost USD3.36bn and boost the gas import-export capacity to about 15% of gas consumption in France and Spain. They maintained that in light of stable demand and import overcapacity, the project was not needed. In 2019, the CRE and its Spanish counterpart the CNMC again both rejected the STEP interconnector project by France and Spain's grid operators, which would have been the first part of the EU-backed MidCat pipeline project. According to the CRE, the project does not respond to market needs and was not sufficiently mature to get the go-ahead.
However, given renewed tensions and attempts to reduce European dependence on Russian gas, we expect the project will be renewed. It would allow for more regasified Spanish LNG to reach the rest of Europe, reducing dependence on Russian gas: the project would allow an increase in trans-border gas transit of 15bcm/year, from current levels of about 7bcm. In addition, it would also open a share of Western European markets to exports from North Africa – notably Algeria (although Algerian gas can now reach Europe through Italy and the Transmed pipeline - in April 2022, Eni and Sonatrach agreed to a new gas supply deal that will rise to 9bcm/year by 2023-2024 through the pipeline).
New interconnector projects were also revealed in May 2022 as part of the European Commission's new EUR210bn plan to reduce dependence on Russian fossil fuels. This includes an underwater gas pipeline project between Spain and Italy, and a gas link between Spain and Portugal. Italian company Snam signed a deal with Spain's Enagas to study to pipeline project to Italy, with capacity of the project pipeline estimated at 30bcm/year.
We also expect a continued increase of Spanish imports of US LNG over the coming quarters. Spain has already increased its imports of US LNG over the past months to replace the reduced Algerian volumes after the closure of the GME pipeline through Morocco at the end of 2020. USD LNG imported into Spain in May 2022 totalled 13.1TWh, which means that the US is Spain's largest supplier, representing 35% of all volume supplied to Spain in the year to date. We expect more LNG generally to arrive into Spain over the coming quarters, relative to the past years. Spain also increased imports from Nigeria (representing 15% of gas supplied to date in 2022), and Russian LNG (7% of supplies in 2022 as of May 2022).