Fitch: Algeria's Skikda LNG plant explosion increases industry risk perception

Published January 29th, 2004 - 02:00 GMT

The explosion at Algeria's Skikda Liquefied Natural Gas (LNG) complex on January 20 is likely to change perceptions of risk for the industry during a critical period of dramatic expansion, particularly for Algeria, which is the most significant provider of LNG to Europe, according to Fitch Ratings


The explosion, currently thought to have been due to a mechanical fault, destroyed half of the capacity at the coastal complex and was the greatest single disaster in the LNG industry's 40-year lifetime with an excellent safety record.  


Algerian national oil company Sonatrach, owner of the Skikda complex, delivers 67 percent of Europe's LNG to six countries - France, Spain, Belgium, Italy, Greece and Turkey. Sonatrach delivers most of France, Belgium, and Spain's LNG imports, satisfying approximately 25 percent of annual national consumption.  


The Skikda plant, Algeria's largest LNG complex, produces 25 percent of the Algeria's LNG and exports to the core short-haul European markets, mainly France, using an ageing fleet of shallow draft, low capacity LNG carriers, necessitated by the shallow port facilities.  


Current indications are that deliveries and the estimated three to four billion cubic meters per year (bcm/y) shortfall in production can be bridged at minimal incremental cost by Sonatrach, largely as a result of the imminent completion of a two-year project to increase expansion of the Mahgreb pipeline to Spain.  


Sonatrach may be able to satisfy delivery requirements for France and Italy if Algeria's other LNG capacity marginally increase output, Sonatrach diverts spot cargoes bound for the buoyant US markets and third party spot cargoes provide assistance, but this, together with the low capacity of available shipping, will mean higher costs for Sonatrach. 


The incident highlights the importance of diversity of supply, to the extent risks are not mitigated by the buyers' own storage capacity, which in some cases is substantial, and further may focus market attention on age and technological factors in assessing delivery risks.  


Fitch notes several buyers' success in diversifying future sources of LNG with contractual offtake from near term developments, for example, in Egypt and Norway.  


Insurance premiums are anticipated to rise materially, after replacement costs, which may reach one billion dollars, in particular in relation to business interruption, until more specific risks can be identified. This comes at a time when the industry is looking to project financing, for which business interruption insurance is generally a requirement, to fund capacity expansion.  


The recent explosion at an Australian key gas processing plant causing delivery shortages in South Australia adds further pressure on premiums to rise. The Australian example also demonstrates the susceptibility of traditional pipeline-to-customer architecture to critical failures and the benefits of an integrated LNG and piped-gas delivery which the relatively limited negative effect of the Algerian event reinforces.  


Effects on the permitting process within the sector may also be material. Permitting for unsightly LNG facilities has been slow in the main growth markets of the US and Europe and often caused by the local lobbying associated with the process. Until recently the argument against onshore permitting was primarily linked to aesthetics, with safety concerns being mitigated by the industry track record, while future objections are expected to extend to safety aspects. This may delay existing timelines within a capacity constrained market place or add to capital costs as permissions prefer offshore development, taking advantage of the current competitive market for permit application.  


Aside from the obvious negative cost effects to Sonatrach of fulfilling customer deliveries, some longer term benefits may arise from the market perception of Algerian LNG delivery risk, arising from the apparent resilience of delivery after large-scale plant failures.  


In the medium term, the prospect of newer replacement plants and works arising from a likely reassessment of Algeria's existing older generation plant will also act to counter any negative market sentiment. — ( 



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