ALGIERS, Algeria (Dow Jones)--A top energy official here said a cooperation pact between state-owned natural-gas companies in Algeria and Russia has lapsed, a development that may help assuage fears in Europe that two of its biggest suppliers could join forces to drive up prices.
In an interview, Mohamed Meziane, who heads Algeria's state-owned energy company, said the memorandum of understanding that Algeria's Sonatrach signed with OAO Gazprom (GAZP.RS), the Kremlin-controlled gas giant, in August 2006 had yielded "nothing concrete" and ended a few months ago.
The deal raised concerns at the time that Moscow was trying to sew up the European market. Some officials at the European Union fretted that Russia and Algeria could try to form a cartel of natural-gas producers modeled on the Organization of Petroleum Exporting Countries.
Mr. Meziane denied that the agreement was about "manipulating prices." He had hoped it would lead to cooperation on projects to produce liquefied natural gas, or LNG, a technology the Algerian company excels in but in which Gazprom had shown less interest, he said. Gazprom declined to comment.
With its own production in decline, the European Union is under pressure to find new sources of natural gas. Official forecasts show the bloc's dependence on energy imports could grow to 70% of general consumption by 2030. Russian natural gas will account for a large portion of that.
Fears that the EU is overreliant on Moscow have grown, especially since Russian natural-gas supplies to Europe were briefly halted during a pricing dispute with Ukraine in January last year. Any suggestion that Russia might team up with other gas producers to boost their market power has sown anxiety in Brussels.
But analysts weren't surprised that the Gazprom-Sonatrach deal fizzled. "There's a lot of paranoia in Europe that suppliers will get together and fix prices or markets, but these conspiracy theories rarely have any traction," said Jonathan Stern, director of natural-gas research at the Oxford Institute for Energy Studies. "Everything is driven by immediate commercial advantage."
Algeria is Europe's third-largest supplier of natural gas after Russia and Norway, with 18% of the market. But it has ambitious plans to increase exports. The country is building two natural-gas pipelines under the Mediterranean Sea - one to Spain, the other to Italy - that will increase export capacity to the continent by nearly 50% over the next three to five years, according to Algerian Energy Minister Chakib Khelil. It is also constructing LNG plants to help it tap new markets.
Algeria's piped natural gas goes to its traditional markets in France, Spain, Italy and Portugal. But LNG, which can be transported in tankers, can reach countries farther afield, such as the United Kingdom, Turkey, Greece and the U.S. Mr. Meziane said Algeria hopes to raise total natural-gas exports to 85 billion cubic meters a year by 2010 from the current 62 billion cubic meters a year.
Europe welcomes those ambitions. Only last week, Gaz de France SA (1020848.FR), the French natural-gas company, clinched a multibillion-dollar deal with Sonatrach to extend its supply contracts for Algerian LNG by five years to 2019. That built on a 20-year deal signed last year under which Gaz de France will import one billion cubic meters of Algerian natural gas a year through the Medgaz pipeline to Spain, which comes onstream in 2009.
But as Sonatrach seeks new markets in Europe and secures its foothold in existing ones, it could come into direct competition with Gazprom. In June, Russia and Italy signed a deal to build a pipeline that would carry Russian natural gas into Europe through the Black Sea. The project, which would be owned and financed via a 50-50 joint venture between Gazprom and Eni SpA (E), the Italian energy giant, shows Gazprom moving ever deeper into Italy, a country Sonatrach sees as its natural market.
Mr. Meziane said he doesn't see Sonatrach bumping up against Gazprom in Europe. "There is enough room for everyone, for Russia, Algeria and the others," he said.
But some doubt whether Algeria will have enough natural gas to fill the pipelines when they are completed. The country has 4.5 trillion cubic meters of natural gas reserves, according to BP PLC, the eighth-largest in the world after Russia, Iran, Qatar, Saudi Arabia, the United Arab Emirates, the U.S. and Nigeria. But as its own economy grows, domestic demand for natural gas used in power generation and petrochemicals is rising.
Meanwhile, tough new conditions on foreign investment could deter Western energy companies from developing Algeria's enormous untapped gas fields.
"There's no question that Algeria has gas reserves adequate to cover domestic needs and exports, but how quickly can they move them into production?" asks Mr. Stern.