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.