Structural Constraints Will Limit Algeria's Ability To Capitalize on Tighter Energy Markets

(CLEMENT MAHOUDEAU/AFP via Getty Images)

A worker stands on the uploading dock of Cavaou LNG terminal in Fos-sur-Mer, France, on June 22, 2023, while the tanker boat "Lalla Fatma N'Soumer" arrives full of LNG ready to be delivered.

Algeria's limited spare capacity will constrain its ability to boost gas exports to Italy and Spain, and although higher global oil prices will increase Algeria's state revenues, persistent structural obstacles will likely impede foreign investment in its hydrocarbon projects. In recent weeks, Spain and Italy have sought additional Algerian gas to compensate for supply shortfalls from the Middle East caused by the Iran war. For instance, in late March, Spanish Foreign Minister Jose Manuel Albares visited Algiers, where he and Algerian officials agreed to try to boost Algerian gas exports by operating the Medgaz pipeline at full capacity, thereby increasing Algerian exports to Spain by up to 10%, and/or increasing liquefied natural gas (LNG) cargoes. According to the Spanish gas grid operator Enagas, Algerian gas accounted for over 29% of Spain's total gas imports in January and February, much of which arrived via the Medgaz pipeline. Around the same time, Italian Prime Minister Giorgia Meloni also visited Algeria to boost energy cooperation, aiming to build on Algeria's already significant provision of around 30% of Italy's total gas consumption in 2025. However, thus far, there have been few indications that the visits by Albares and Meloni have led Algeria to deliver significantly more gas to Spain and Italy.

Europe receives the majority of Algeria's energy exports. According to the Energy Institute's Statistical Review of World Energy 2025, Algeria exported 15.6 billion cubic meters of LNG to European countries and Turkey in 2024. According to the same report, Algeria and Libya exported 57.8 million tons of crude to Europe, which, combined, accounted for around 12.4% of Europe's total crude imports.
In 2025, the European Union imported around 10% of its LNG from Qatar. However, QatarEnergy declared force majeure on some long-term LNG contracts after a March 18 Iranian attack on Qatar's Ras Laffan production complex, which took 17% of Qatar's current export capacity offline for up to five years. LNG expansion projects to increase Qatar's export capacity were originally set to come online in 2026, but they are likely to be delayed due to the Iran war. Meanwhile, the European Union imported just over 10% of petroleum products from Saudi Arabia and Iraq combined. Though exports via Saudi Arabia's Yanbu port on the Red Sea have provided an alternative route for Saudi oil exports, the closure of the Strait of Hormuz has significantly decreased Iraqi exports.
In April, in accordance with OPEC+, Algeria's oil production quota increased by an additional 6,000 barrels per day to around 977,000 barrels per day. Algeria is expected to maintain higher oil production quotas amid disruptions to Middle Eastern production and exports.

Algeria's existing infrastructure and distance from regional conflicts make it a critical supplier of gas to Italy and Spain, but its export capacity is constrained by long-term contracts and rising domestic demand. Algeria is a key gas supplier to Italy and Spain due to its existing infrastructure, including the Medgaz pipeline, which links Algeria to Spain, and the Trans-Mediterranean pipeline, which facilitates Algerian gas exports to Italy. Additionally, Algeria's importance as an alternative energy supplier to both countries has grown, as its distance from the Iran war has insulated it from the production and export challenges faced by Gulf countries. Furthermore, Algeria has LNG production facilities that, theoretically, have the capacity to export tens of millions of tons annually. However, Algiers will have little flexibility to meet Italy's and Spain's increased energy appetite. This is largely due to Algeria's state-owned oil and gas company, Sonatrach, having signed several long-term gas contracts, leaving very little spare capacity to ramp up flows. Additionally, Algeria's domestic energy demand has increased by around 3%-4% annually, primarily driven by population growth, rising average temperatures and industrial needs, which further reduces the amount of gas available for export. Lastly, limited liquefaction capacity due to ongoing infrastructure upgrades and modernization efforts, combined with a natural decline in production at some of Algeria's older gas fields, will further limit Algeria's spare capacity.

In total, Algeria has a liquefaction capacity of around 25.3 million tons per year. However, in recent years, Algeria's production has been well below full capacity, declining after reaching a record high in 2023 of 13.5 million tons, in part due to maintenance and long-term modernization projects at liquefaction facilities.
Algeria has several energy projects and upgrades set to come online in 2026 and 2027. First, Algeria is constructing three compression stations at the Hassi R'Mel gas field, Algeria's largest. The stations are scheduled to begin operating in late 2026 to mid-2027 and will better facilitate the movement of gas. Additionally, the Alrar Phase 3 expansion project is expected to come online in 2027. The project aims to compensate for naturally declining gas field pressure and to keep field production at 10 million cubic meters per day.

Although Algeria will struggle to significantly increase gas exports to Italy and Spain, elevated global oil prices will provide some fiscal relief. Algeria will likely benefit somewhat from elevated global oil prices, which at times have exceeded $126 per barrel and are likely to rise the longer the Iran war lasts, especially if the United States resumes military operations. Though most of the fiscal benefits from elevated prices will likely come from Algeria's crude exports, Algeria's long-term gas contracts will also provide some fiscal relief, albeit more gradually, since they are oil-indexed, often at six-month intervals. This will support Algeria's ongoing efforts to cut its budget deficit by 35% to 12.4% of gross domestic product in 2026. However, some of these increased state revenues will be needed to offset Algeria's rising import bill, driven by higher freight and food prices resulting from the Iran war. Furthermore, Algeria's breakeven oil price is believed to be above $120 per barrel, meaning that, even at elevated prices, Algeria will benefit less than many other oil producers with lower breakeven prices.

In late February, before the Iran war began, oil prices were around $70-$75 per barrel, but regional uncertainty and shipping and production disruptions have pushed global oil prices higher throughout the conflict. Even after U.S. President Donald Trump announced an extended ceasefire with Iran on April 21, global oil prices have increased, especially after Trump indicated willingness to prolong the blockade on Iran and, by extension, continue to disrupt oil and gas exports via the Strait of Hormuz.

Structural obstacles will continue to impede greater foreign investment in Algeria's energy exploration and development, while prolonged elevated oil prices risk deepening Algeria's reliance on hydrocarbon exports for state revenues. Despite recent interest by the Spanish and Italian governments in boosting gas imports from Algeria, structural obstacles in Algeria's oil and gas industry will continue to pose long-term challenges to international oil and gas companies considering investment decisions. For instance, Algeria has maintained the so-called 51/49 rule, which requires Algerian local majority ownership in the oil and gas sector, even though Algeria has relaxed this rule for other, non-strategic sectors. Furthermore, even though Algeria has taken some steps to ease bureaucratic obstacles and reduce corruption, foreign investment in Algeria still faces hurdles like bureaucratic red tape, mismanagement and weak institutions that introduce various political and compliance risks for foreign energy companies. As such, Algeria's operating environment will remain less appealing than those of other countries with fewer ownership restrictions and compliance pitfalls. Meanwhile, if oil and gas prices remain elevated for a prolonged period — most likely in the case of a protracted Iran conflict and medium-term disruptions to maritime shipping — Algeria's reliance on hydrocarbon exports for state revenues may deepen, even though Algeria has tried to reduce its vulnerability to price volatility. In such a case, combined with high oil prices, Algeria would be less inclined to implement domestically unpopular economic reforms that could improve its investment environment, especially in non-hydrocarbon sectors.

Algeria's hydrocarbon exports accounted for just under half of state revenues between 2020 and 2024, according to the International Monetary Fund.
In April, Algeria launched its second bid for seven hydrocarbon development blocks to boost upstream investment, though contracts from this round are not expected to be signed until early 2027. In addition, Algeria is expected to begin construction of the Trans-Saharan Gas Pipeline in 2026 to deliver tens of billions of cubic meters of Nigerian gas to European markets, though severe security risks and potential diplomatic disputes between Algeria and Niger may undermine the project.