TALKS in Algiers last month between Gazprom and Sonatrach, the Russian and Algerian gas giants, were overshadowed by a $7 billion (£4 billion) arms deal between the two nations.

Despite being held in the shadow of a visit by President Putin, the significance of the talks over gas was not lost on the Algerian media, which described it as the first step to the creation of a “powerful energy lobby that would force Europe to bend”. The Quotidien d’Oran, a newspaper, said that Gazprom and Sonatrach would be the “locomotives of a new Opec of gas”.

No document was signed and the companies agreed only to prepare a memorandum of understanding to be signed this month.

However, the potential power of the two companies in the emerging market for liquefied natural gas (LNG) is only now beginning to be recognised. Algeria is the second-largest natural gas exporter to Europe after Russia. In terms of gas reserves, it ranks eighth in the world, with 4.5 trillion cubic metres, a reservoir that could rise to eight trillion cubic metres with further exploration beneath the sands of the Sahara.

In production, Algeria is more important still, ranking fourth in the world in output. It occupies a strategic position, flanking Southern Europe with one pipeline, Transmed, linking Algeria to Italy’s boot, and another, Maghreb, traversing the strait of Gibraltar to penetrate the Iberian peninsula. A third pipeline is planned to link Algeria directly with the Spanish coast and it has plans to expand its capacity in the growing market for LNG.

Accepted wisdom has, in the past, viewed a gas cartel as unlikely because natural gas is a local market, fragmented by pipelines and boxed-in by long-term contracts between suppliers and consumers. However, an emerging trade in LNG cargoes in the Atlantic is beginning to change the economics of gas, creating price competition between North America and Europe. The North African state is within striking distance of the huge American gas market, which has been a recipient of regular cargoes from Sonatrach’s fleet of LNG tankers since the Seventies. The country was a pioneer in the technology of chilling gas to -160C, having shipped one of the first cargoes to Canvey Island in Britain in the Sixties.

According to Patrick Heren, publisher of the Heren Report, a gas industry journal, Sonatrach’s eastward expansion has been limited. After a conflict with Gazprom in the Balkans, Sonatrach has focused on southwestern Europe and the United States.

Gazprom is anxious to build quickly a big position selling LNG to America and Algeria’s established presence in the US market makes it a competitor or a useful ally. Pending the development of Siberian LNG exports, Gazprom is believed to be discussing LNG swap agreements with Sonatrach, under which Gazprom would deliver Algerian cargoes of LNG to US ports, helping to establish a Russian transatlantic trade. In return, Gazprom would supply fuel to Sonatrach’s European customers via pipeline.

Such deals are already in place with the delivery by Gazprom in December to Cove Point, Maryland, of a cargo of Algerian gas, originally sold to Gaz de France but flipped on to the Russian company.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts