Why Libya and Algeria Could Be Europe's Solution For Oil

By Martin Hutchinson

Europe has an energy problem. Its name is Vladimir Vladimirovich Putin.

Not only does Europe get much of its oil from Russia, but a lot of its gas supply comes through pipelines controlled by Russia, whether from Russian fields or from fields in former Russian satellites, such as Kazakhstan and Turkmenistan.

However, the Baku-Ceyhan gas pipeline, opened in 2004, provided one non-Russian outlet to the Mediterranean, through Azerbaijan, Georgia, and Turkey. Unfortunately, a deal signed this past May between Russia, Turkmenistan, and Kazakhstan set in motion a plan to build a pipeline around the Caspian Sea and through Russia. This makes it unlikely that any further non-Russian pipelines will be built. At the other end of Europe, North Sea gas production is declining, and even Britain is becoming dependent on Russian gas supplies.

Vladimir Putin (and his successor in Moscow after next March) has Europe in his grip. What's more, every January, when the weather gets cold, he demonstrates this. In 2006, Gazprom cut off Ukraine, and in 2007 it cut off Georgia and Estonia, the latter an EU member.

Economically, it makes no sense for Gazprom or Russia to be an unreliable supplier to its best customers. However, it has become quite clear that Putin doesn't regard economic considerations as paramount. For a former KGB officer like Putin, making people freeze allows him to demonstrate Russian strength and potentially extract concessions on other issues such as missile defense and the future of NATO. Thus, Europe desperately needs an alternative source of gas supplies.

Fortunately, two such sources exist; the two countries concerned are Libya and Algeria. Both are close to Europe, so transportation is easy – and in Algeria's case, a trans-Mediterranean pipeline already exists. Their reserves are much smaller than Russia's – 162 trillion cubic feet for Algeria and 50 trillion for Libya against Russia's 1,680 trillion, according to the US Energy Information Administration. However, total EU gas demand is only around 20 trillion cubic feet per year, so between them the two countries have a 10 years' supply.

What's more, both countries nationalized their oil and gas operations in the 1970s and have left them to dozy state-owned companies since then. So, there's little doubt that if larger more experienced companies went in, better funded and better equipped, they could double or triple the reserves we know about.

Both Libya's Muammar Gaddafi and Algeria's President Abdelaziz Bouteflika are trying to open their economies and make nice. Libya is seeking to join the World Trade Organization and recently allowed BP in to explore for gas, while Algeria has a number of joint venture projects in progress with Western energy companies. Both countries are members of OPEC, but both pursue a determinedly independent, not to say eccentric, foreign policy and are strong opponents of al-Qaeda – so even if anti-Western governments gained influence over OPEC, Libya and Algeria wouldn't necessarily follow.

In the 1990s, Libya and Algeria seemed pretty unattractive places to do business when compared with the democratizing and liberalizing countries of Eastern Europe, the former Soviet Union, and Latin America. Today, they really don't look so bad. From the side of Libya and Algeria, their populations are not desperately poor but would certainly like to be richer. And today's high oil and gas prices make it well worthwhile to develop their natural resources, even if their leaders have to dilute the purity of their socialism to do so. So it looks like a win-win operation.

With Libyan and Algerian gas available, the citizens of the EU can be sure of not freezing in January, however badly Putin and his successors behave. For US investors, there are no Libyan or Algerian companies you can invest in (that have issued American Depositary Receipts). You might, however, try some of the energy majors or European energy services companies to find Algeria/Libya exposure.

There is also surely satisfaction in knowing that Vladimir Putin's bad behavior will not always be rewarded.

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