The Algerian Hydrocarbons Regulations

United Kingdom

Algeria was lauded in the past for the liberal terms it offered to international oil companies (IOCs) and the transparency of its bid rounds. After amendments were made to the Hydrocarbons Law in 2006, voices of dissent became louder.

In July 2008, Algeria launched its 7th licensing round but only 4 exploration licences (of 16 initially offered) were awarded. Algeria blamed the economic turmoil but most IOCs found that the current hydrocarbons regime was not attractive for foreign companies.

A year later in July 2009, l’Agence Nationale pour la Valorisation des Ressources en Hydrocarbures launched its 2nd licensing round. The public opening of the bids will take place on 20 December 2009 and will be highly anticipated.

1. A promising Hydrocarbons Law – a disappointing Presidential Order

In 2005, the Hydrocarbons Law No 05-07 dated 28 April 2005 came into force and replaced Law No 86-14 dated 19 August 1986. This new law made significant changes to the rules governing the petroleum industry in Algeria.

The 1986 Law established the monopoly of the Algerian State over hydrocarbons exploration, exploitation and transportation activities. The Algerian State, acting through its national oil company, Sonatrach, could only entrust these activities to Algerian companies. IOCs could not, therefore, carry out hydrocarbons exploration and exploitation activities except through a partnership with Sonatrach.

The 2005 Hydrocarbons Law was seen as a major liberalisation of the petroleum activities by setting up two new agencies, relieving Sonatrach from its public regulatory capacities and responsibilities and simplifying the hydrocarbons legal and tax regime. However, President A Bouteflika significantly amended the 2005 Hydrocarbons Law by Presidential Order No 06-10 dated 29 July 2006. The institutional framework and the new contractual regime set up by the 2005 Hydrocarbons Law have remained unchanged but the market liberalisation has been almost entirely abandoned.

1.1 New public entities replacing Sonatrach

Due to the liberalisation process and in order to avoid permanent conflicts of interest, the 2005 Hydrocarbons Law created two new public entities:

  • I’Agence Nationale de Contrôle et de Régulation des Activités dans le domaine des Hydrocarbures (ARH)

ARH is in charge of implementing and enforcing technical regulations related to the activities covered by the 2005 Hydrocarbons Law such as regulations on transportation tariffs and third party access to pipelines and storage facilities, on construction specifications and on health, safety and environmental matters.

  • l’Agence Nationale pour la Valorisation des Ressources en Hydrocarbures (“ANALFT”).

ALNAFT is responsible for the promotion of the petroleum industry and the creation of petroleum contracts. Its specific responsibilities include promoting upstream investments, managing the upstream data banks, issuing prospecting licences, calling for and evaluating bids for exploration and production contracts, granting exploration and production acreage, concluding exploration and production contracts, evaluating and approving development plans, optimising production while conserving resources, and assessing and collecting a number of taxes.

1.2 Simplified legal regime

The 2005 Hydrocarbons Law provides three main instruments:

            1.2.1 The prospecting licence

A prospecting licence gives the holder a non-exclusive right to conduct prospecting works within one or more areas. Prospecting works are preliminary works related to exploration and are conducted through geological and geophysical methods. Its term is up to two years.

            1.2.2 The exploration and/or exploitation contract

A contractor may only conduct exploration and production operations under a mining title issued by ALNAFT. Before conducting works, the contractor must enter into an exploration and/or exploitation contract with ALNAFT. This contract must be approved by governmental decree.

Neither type of contract grants the contractor any proprietary right in the land or in the subsoil resources, both of which remain the property of the Algerian State. These contracts are awarded to contractors through a competitive bid process.

Sonatrach must have a participating interest of at least 51% in each contract, which much be achieved by the parties entering into a JOA within 30 days from the approval by ANALFT. In addition, Sonatrach gets a pre-emption right over any assignment of a participating interest. Moreover, in the event of transfer of participating interest, Sonatrach has a pre-emptive right.

Important point: Disputes between ALNAFT and the contractor may be subject to international arbitration and Algerian law will be the governing law.

            1.2.3 The pipeline transportation concession

The Minister authorises a ‘concessionnaire’ to build and operate pipeline transportation facilities for a given period and in accordance with its terms. These will include storage of oil, gas or petroleum products but excludes gathering systems and gas networks supplying solely the national market. The duration of a concessionaire’s term can be up to 50 years.

Transportation activities may now only be undertaken by either Sonatrach or a local company, in which Sonatrach owns at least a 51% participation and in any event the transportation concession can only be awarded to Sonatrach.

1.3 Fiscal regime

Section 8 of the Hydrocarbons law sets out the fiscal regime applicable to exploration and/or exploitation activities. Under the terms of this section, IOCs will be exempt from tax and duties generally applied under the common regime with regards to goods and materials acquired in the performance of the exploration and/or exploitation activity. Indeed, pursuant to article 89 of the Hydrocarbons law:

“the exploration and/or exploitation activities governed by this law are exempt from:

- VAT on goods and services related to exploration and/or exploitation activities

- TAP

- customs duties on the imports of equipments, materials and products destined to be exclusively allocated and used in the exploration and/or exploitation activities of hydrocarbon deposits

- any other fees or taxes not mentioned in Articles 31 (farming-out tax), 52 (flaring tax), 53 (royalty on the use of water) and 67 (tax on the transfer of greenhouse gas emission credits) impacting the operating results and established for the benefit of the state, territorial collectivities and any public corporation.”

However, IOCs are liable to hydrocarbons taxes, namely:

  • an annual surface area tax (taxe superficiaire) to be paid to the Algerian Treasury, which is assessed on the area covered by licences/contracts held by the IOCs. The amount to be paid is determined by the location of the block (A, B, C or D) held by the IOCs and the phase period (exploration period, retention period or exploitation period). The surface area tax is a non deductible charge and the amount is updated every year taking into account exchange rate variations (article 84).

  • a monthly oil royalty which is assessed upon the amount of hydrocarbons extracted. The royalty rate mentioned in the contract cannot be lower than those mentioned in article 85 of the Hydrocarbons law.

  • a monthly tax on oil revenues (Taxe sur le Revenu Pétrolier, TRP) to be paid to the Algerian Treasury is assessed upon the value of the annual production. The following are deductible from the value of the annual production: royalties, annual instalments in development and research investments, reserves for abandonment and/or restoration costs, costs of training national human resources for the carrying out of the exploration and exploitation activities, costs for purchasing gas for assisted recovery. The TRP is a deductible charge from the assessment base of the annual additional tax on earnings.

  • an annual additional tax on earnings (Impôt sur le Résultat Complémentaire, ICR) at the rate of 30%. It is assessed on the annual revenues generated by the IOCs within the performance of the exploration and/or exploitation contract (article 88).

  • property taxes on property other than operating property under the conditions set forth in the Algerian direct tax code (article 248 and onwards).

  • miscellaneous taxes: farming-out tax (article 31); flaring tax (article 52); royalty on the use of water (article 53) and tax on the transfer of greenhouse gas emission credits (article 67).

Furthermore, in the transitional provisions section, there will be a retroactive windfall profit tax on earnings (taxe sur les profits exceptionnels, TPE) when oil prices exceed $30/b. The windfall profit tax is applied to foreign companies. The rate of at least 5% is capped at 50% of the production attributed to a foreign company. The retroactive windfall profit tax is a non deductible charge when assessing the tax on oil revenues’ base. This tax is paid to the Algerian Treasury by Sonatrach which will withhold the amount due from the revenue accruing to the foreign investors.

2. The new Licensing Round

In 14 July 2008, Algeria launched the highly anticipated 7th international exploration and production licensing round. Pre-qualified candidates were invited to bid for acreage across 16 zones. This round was long awaited by the industry as the first under the 2005 Law. It was also the first to take place where Sonatrach will have a minimum interest of 51% in every contract awarded to a foreign company and the first run by ALNAFT.

However, only 9 bids were submitted and 4 exploration licences (of 16 initially offered) were awarded to Gazprom, Eni, BG and E.ON Ruhrgas. The relatively poor response appears to reflect the lingering uncertainty of IOCs surrounding Algeria’s regulatory system. It should be noted that when ALNAFT launched the latest bid in July 2008 and the oil price had just exceeded $140/b for the first time. Under these circumstances, IOCs would have been inclined to accept relatively stiff commercial terms and Algeria had little incentive to sweeten the terms of access to their oil and gas reserves. The subsequent drop in the oil price below $50/b changed the equation. The IOCs have required better terms to induce them to invest and it is likely that some companies which were considering submitting bids have concluded that the Algerian authorities might now be persuaded to improve those terms.

A year later, in July 2009, ALNAFT launched its 2nd exploration and production round (8th licensing round to take place in Algeria), hoping for better results. ALNAFT’s chairman Sid Ali Betata remains confident and has said that despite the disappointing results of the 7th licensing round, Algeria remains a country attractive to the international oil industry and one of the most important elements of Algeria’s appeal to foreign companies is the high number of discoveries in recent years.

Mohamed Meziane, CEO of Sonatrach has said that Algeria has taken into consideration the remarks and suggestions made by foreign companies and has sweetened the terms under this round. However, according to foreign firms no substantial changes in the terms on offer have been noted. It is likely that Algeria would need to reform its commercial, legal and fiscal terms radically to avoid a repeat of the disappointment of the 7th licensing round.

The selected blocks are located in different Algerian hydrocarbon sedimentary basins, including the major Ahnet basin, which was removed from the previous licensing round. The deadline for bids for 10 areas containing 25 blocks is 20 December 2009 and contracts for winning bids would be signed on 16 January 2010.