By area (2,381,741km²), Algeria is the largest country in Africa. The distance from the Mediterranean coast to the Hoggar massif is approximately 2000km, and 1800km from In Amenas in the East to Tindouf in the West.

The Algerian mining area is spread over an area of 1.6 million km² of sedimentary basins and is largely underexplored. This is especially true in the north and the Algerian offshore area, which both offer a significant opportunity to make new discoveries, given the significant potential. On the basis of current estimates, at the end of 2015 the established resources2 were estimated at 12.2 billion barrels for oil and 4.5 trillion m³ for gas. On the African continent, Algeria is classified third after Libya and Nigeria for oil resources, and second after Nigeria for gas. In addition, the Algerian mining area conceals significant resources known as non-conventional resources, relating to tight and shale reservoirs. According to the results of several geochemical modelling studies, the size of these fields falls within the 2,650 to 10,500 trillion cubic feet bracket.

Algeria's hydrocarbon basins hold two significant shale gas and shale oil formations, the Silurian Tannezuft Shale and the Devonian Frasnian Shale. Seven of these shale gas and shale oil basins, the Ghadames (Berkine) and Illizi basins in eastern Algeria; the Timimoun, Ahnet and Mouydir basins in central Algeria; and the Reggane and Tindouf basins in southwestern Algeria, contain approximately 3,419 tcf of risked shale gas in-place, with 707 tcf as the risked, technically recoverable shale gas resource. In addition, six of these basins hold 121 billion barrels of risked shale oil and condensate in-place, with 5.7 billion barrels as the risked, technically recoverable shale oil resource.

The first major hydrocarbon discoveries in Algeria date back to the 1950s during the colonial period. The year 1956 was marked by the discovery of the two largest deposits ever made in Algeria, in gas in Hassi R'mel and in oil in Hassi Messaoud.

As early as 1963, the year following independence, Algeria set up its favoured intervention instrument in all sectors of the hydrocarbon industry, namely the national hydrocarbon company, SONATRACH.

Algeria has a very sizeable hydrocarbon transport industry that, in 2015, allowed it to transport 145.3 million TOE of hydrocarbons, broken down as follows:

  1. crude oil: 47.6 million tonnes;
  2. natural gas: 81.7 billion m³;
  3. condensate: 9.8 million tonnes; and
  4. LPG.: 8.3 million tonnes.

There are also three transcontinental pipelines transporting gas to Europe: connecting Algeria to Italy via Tunisia, to Spain via Morocco and through a submarine pipeline named MEDGAZ.


The legal regime governing the oil activities of foreign companies in Algeria was initially subject to a concession regime implemented by the colonial authorities. Later, following hydrocarbon nationalisations by the Algerian authorities in 1971, the legal regime was amended in order to allow SONATRACH, which is the exclusive holder of mining rights, to carry out oil activities, but also setting out the framework under which the activities of foreign companies in the area of exploring for and exploiting liquid hydrocarbons is carried out. In particular:

  1. the creation of a partnership with SONATRACH;
  2. a majority holding by SONATRACH of at least 51 per cent;
  3. the role of operator is devolved to SONATRACH, who may entrust it to its foreign partner during the exploration phase, the risks of which are entirely taken on by the partner.

This legal framework was revised pursuant to Law No. 86-14 of 19 August 1986, which added two new forms of partnership, namely the production sharing contract (the PSC) and the risk service contract (the RSC). Law 86-14 will be amended in 1991 in order to allow foreign partners to benefit from advantages such as:

  1. having recourse to international arbitration to settle disputes with SONATRACH over the partnership agreement. Disputes between SONATRACH and the Algerian State remain subject to Algerian jurisdiction; and
  2. the foreign partner participating in the development of gas discoveries.

i Domestic oil and gas legislation

A new institutional framework regarding investments in all sectors of the hydrocarbons chain, and more specifically that of the exploration and exploitation of hydrocarbons, was implemented by Law No. 05-07 of 28 April 2005 relating to hydrocarbons, as amended by Law No. 13-01 of 20 February 2013. The most significant changes include:

  1. the monopoly on oil activities was withdrawn from SONATRACH and entrusted to an institution named ALNAFT, created by the law;
  2. the PSC and RSC forms of partnership were cancelled; and
  3. oil activities can only be carried out on the basis of an agreement entered into with ALNAFT, either by SONATRACH on its own, or by SONATRACH with one or more national or foreigner partner (the Contracting Party) for exploration and/or exploitation (the Agreement); SONATRACH's holding in the Agreement must be at least 51 per cent.

With the amended Law 05-07, SONATRACH loses its prerogatives as regulator and only keeps its status as operator, with specific rights and obligations compared to other operators, owing to its status as a national state-owned company.

Even though Law 05-07 expressly repeals Law 86-14, it is important to underline that the partnership agreements entered into under Law 86-14 (mostly PSCs) remain subject to the latter. However, insofar as Law 05-07 obliged SONATRACH to transfer all licences issued under Law 86-14 to ALNAFT, a parallel agreement was entered into between ALNAFT and SONATRACH in order to allow the latter to continue its activity in the context of the partnership agreement with its foreign partners.

ii Regulation

Two regulation agencies have been set up:

  1. ALNAFT is in charge of the promotion and the management of the hydrocarbons mining area, whose powers include:
    • evaluating the capacity of an entity to carry out exploration activities; and
    • granting prospecting authorisations or hydrocarbons exploration and exploitation agreements, and ensuring their proper performance; and
  2. the Hydrocarbon Regulation Authority (ARH) is in charge of ensuring:
    • compliance with the technical regulations applicable to hydrocarbon exploration and mining activities;
    • the strict application of the principle of free access of third parties to transport infrastructures;
    • compliance with the regulations concerning hygiene, industrial and environmental security and the prevention and management of major risks – in particular the protection of groundwater and aquifers while carrying out the exploration and mining activities.

iii Treaties

Algeria is a member of the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards (New York 1958).

Referring to the possibility provided by Article 1, Paragraph 3 of the said convention, the Democratic and Popular Republic of Algeria has declared that it will apply the said Convention, on the basis of reciprocity, to the recognition and enforcement of only arbitral awards made in the territory of another Contracting State, only when the sentences have been pronounced on disputes arising out of legal relationships, whether contractual or not, which are considered as commercial under Algerian law.

To date, Algeria has ratified:

  1. 40 bilateral conventions on the promotion and the protection of investments;
  2. 34 bilateral conventions with a view to avoiding double taxation and to prevent tax evasion in the area of income and capital tax.


The carrying out of prospecting, exploration and exploitation of hydrocarbons activities is allocated by the State to ALNAFT, which delegates for a defined area the exercise of:

  1. prospecting activity to any oil company through issuing a prospecting authorisation for a term of two years, renewable once for up to two years; and
  2. exploration and/or exploitation activities on the basis of an Agreement. The choice of the party to the Agreement is, by principle, made following a competitive tender procedure. However, the Minister for Hydrocarbons may exceptionally authorise a direct agreement provided that the derogation to the tender procedure is duly motivated. The Agreement, as well as any amending agreements, must be approved by a decree issued by the council of ministers and will enter into force on the date of the publication of the decree of approval in the Official Journal of the People's Democratic Republic of Algeria.

i Main contractual provisions

The Agreement in particular confers upon SONATRACH and its partners the following rights:

  1. exclusivity for carrying out hydrocarbon exploration and exploitation works within the contractual area. In consideration thereof, the Contracting Party must undertake:
    • during each of the three phases, which constitute the research period, to carry out the minimum research program contractually set out; and
    • that the transition from one period to another is optional. The Agreement provides for the amount of a performance bank guarantee, at the request of ALNAFT, to cover the minimum amount of work to be performed by the Contracting Party during each research phase;
  2. to unilaterally declare the commercial exploitability of each discovery, and the right to keep the area covering the discovery for a period of three years for oil or humid gas deposits, and five years for dry gas deposits, in the event of the absence or limitation of transport capacities, or the recognised absence of any market for the production and sale of dry gas;
  3. exclusivity to exploit any discovery that has been declared commercially exploitable, provided that the development plan is approved by ALNAFT. Approval by ALNAFT, and any subsequent amendments, is equivalent to an undertaking by the Contracting Party to be bound by the development plan;
  4. to the ownership at the measuring point of all the production originating from the exploitation of the deposits that are the subject of the Agreement, and the ownership of all of the manufacturing facilities and assets for the contractual period. However, in the latter case, the Contracting Party is required to transfer to the state, at the end of the exploitation period, without cost or charge, the property of the said structures and facilities that must be operational and in good working condition.

However, the legislature has made it clear that the Agreement does not confer to the Contracting Party the right to the ownership of the land and to the ownership of the deposits and wells which are non-mortgage immovable properties. This provision, therefore, reaffirms the state's right of ownership over discovered or undiscovered natural resources located on the soil or subsoil of the national territory.

The Agreement specifies:

  1. SONATRACH'S participation rate, which shall not be less than 51 per cent, the conditions of execution of the Agreement and the method and conditions for financing and exploitation investments; and
  2. the level of funding at the expense of SONATRACH, if the latter decides to participate in the financing of research investments.

A joint operating agreement signed by SONATRACH and its partners is attached to the Agreement. It mandatorily contains a marketing clause for any natural gas that may be discovered. This may be joint or for SONATRACH only, on behalf of the partnership.

ii Termination and expiry of the agreement

The law sets out the term of the Agreement based on the execution phase and the type hydrocarbons, though early termination may be possible.

Regarding the expiry of the Agreement, the term of the Agreement varies based on the phase, which is:

  1. three years if no discovery has been made at the end of the first period of exploration, and if the parties decide not to continue as allowed by the Agreement;
  2. 37 years for conventional hydrocarbons; and
  3. 60 years for non-conventional hydrocarbons.

Under Law 05-07, it is possible for ALNAFT to terminate an Agreement if the Contracting Party fails to perform its obligations set out in the Agreement. Thus, the Agreement may be terminated after formal notice remains unsuccessful for 30 days from the date of its receipt by the Contracting Party upon simple notification for one of the following reasons:

  1. the bank guarantee provided is invalid;
  2. the minimum research work requirement during the research phase concerned has not been respected;
  3. failure to implement the development plan on time;
  4. the obligation to supply the domestic market has not been satisfied; and
  5. any taxes prescribed by law on hydrocarbons have not been paid within 30 days of the date fixed for the payment.


i Restrictions on production entitlements

For reasons relating to objectives of the national energy policy, production limitations on liquid hydrocarbon deposits may be applied. These limitations are the subject of a decision of the Minister for Hydrocarbons, who sets out the quantities, the date of intervention of the limitations and their term.

ALNAFT is to allocate these limitations to all of the Contracting Parties in an equitable manner, on a pro rata basis based on their respective production.

ii Restrictions on exports of oil and gas

The quantities of gas produced in the context of an Agreement are exported on the basis of joint commercialisation with SONATRACH, or by SONATRACH on behalf of each of the parties making up the Contracting Party.

There are no export restrictions as regards liquid hydrocarbons.

iii Requirements for sales of production to local markets

Law 05-07 grants priority to meeting the needs of the national market both in liquid hydrocarbons and in gas.

As regards liquid hydrocarbons, the volumes making up these needs are distributed in an equitable manner by ALNAFT to all its contracting parties, based on their respective production levels.

The terms and conditions for the supply of the local market in liquid hydrocarbons are set out in the Agreement. The price is the FOB price published by one of the specialist reviews indicated in the Agreement.

As regards gas, ALNAFT may request each Contracting Party producing gas to contribute to meeting the national needs; the maximum rate of contribution, and the terms and conditions of supply of the local market in gas are defined in the Agreement.

The quantities of gas levied pursuant to the contribution of each Contracting Party are assigned to SONATRACH, who will then be exclusively responsible for supplying gas to the national market. SONATRACH will purchase this gas from the various producers at the average, weighted by volumes, of the prices of the various Algerian gas export sale agreements performed by the Contracting Party.

iv Law applicable to price setting

For the calculation of the taxation, the sale price of the liquid hydrocarbons levied in the context of the supply of the national market is the FOB price published by one of the specialised reviews indicated in the Agreement.

As regards gas intended for an export sale agreement, the basic price is the higher of the following two prices:

  1. the price resulting from the agreement for the previous month; and
  2. the average, weighted by volumes, of the prices of the various Algerian gas export sale agreements.


The transfer of all or part of the rights and obligations of a Contracting Party to an Agreement is possible, provided that it is approved by ALNAFT and implemented by an addendum to the Agreement.

SONATRACH has a pre-emption right that it can exercise within a period not exceeding 90 days from the date of notification of the transfer.

The transfer is subject to the transferor paying to the Public Treasury a non-deductible duty equal to one per cent of the value of the transaction. The method of calculating and paying this duty are specified through regulations.

Transfers between an entity and its wholly-owned subsidiaries, without involving any commercial transaction, are not subject to this provision.


From a taxation point of view, the national mining area relating to hydrocarbons for which the extraction does not necessitate a non-conventional technology is shared between four zones: A, B, C and D, to which specific taxation conditions are applied.

Taxation advantages are granted for cases such as tight or marginal fields, regardless of which zone they are in, shale oil or gas or depleted deposits requiring the use of tertiary recovery techniques.

The taxation system is composed of four levies, three of which are specific to oil activity (surface area tax, the fee and a tax on oil income), the fourth (ICR (additional income tax)) is a general law tax. Specific provisions set out the terms and conditions for the determination of the prices of the various hydrocarbons for the application of these taxes:

  1. the surface area tax, equal to the product of the contractual area and a price per km², which depends on the tax zone in which the area is situated and the nature of the activity being carried out (exploration) or (exploitation). The exploitation of non-conventional hydrocarbons such as shales, requiring the use of non-conventional technologies, benefits from the lowest rates;
  2. the royalty, the amount of which is determined on a deposit by deposit basis. Its amount is a percentage of the value of the production from which is deducted the transport rate, which is regulated. The royalty rate, from a minimum of 5.5 per cent to a maximum of 20 per cent, depends on the level of the production and the tax area where the deposit is located. Non-conventional hydrocarbons benefit from a rate of 5 per cent whatever the level of production;
  3. tax on oil income, the amount of which is also determined on a deposit-by-deposit basis. The oil revenue is defined by the law on hydrocarbons. The rate is based on the profitability of the investments granted for exploiting the deposit. Its minimum varies from 10 per cent to 30 per cent and its maximum from 40 per cent to 70 per cent depending on whether the deposit is conventional, non-conventional or complex geology. It is equal to the value of the production, from which is deducted:
    • the transport rate;
    • the amount of royalty;
    • one-fifth or one-eighth of the amount of the investments realised and relating to the said deposit uplifted of 15 per cent or 20 per cent respectively, depending on the fiscal area where the deposit is located or the non-conventional character of the hydrocarbons;
    • trainings costs, provisions to cover abandonment and restoration costs; and
    • the gas costs injected into the deposit in the context of the use of a specific recovery process; and
    • additional income tax, applied to the consolidated profit of all of the oil activities carried out by the investor in Algeria.


Prior to carrying out any operation on the national mining area, it is mandatory to prepare an environmental impact study and a risk management plan, and to submit them to ALNAFT for approval.

At the end of the term of the Agreement, the ownership of all assets allowing the continuation of the activities is transferred to the state. ALNAFT will notify the Contracting Party of the list of facilities and assets for which the state does not require the transfer of ownership, at least three years prior to the end of the term of the Agreement.

At the time of the transfer, the assets and facilities to be transferred by the Contracting Party must be operational and in working order.

For any facility or asset for which the state does not require the transfer of ownership, the Contracting Party takes responsibility for all site abandonment or restoration costs, or both. The Contracting Party must set up provisions during the term of the Agreement in order to meet these site abandonment or restoration costs, or both. This provision, considered as a deductible operating expense, is paid annually by the Contracting Party into an escrow account.


Participation in a tender for a hydrocarbons exploration and exploitation Agreement, or for a hydrocarbons mining Agreement, is subject to obtaining a pre-qualification certificate issued by ALNAFT. A regulatory text sets out the pre-qualification rules and criteria.

It establishes two statuses necessary before an offer can be submitted:

  1. the status of operator-investor, requiring the technical qualifications and experience in order to act as operator and having the financial capacities required in order to meet any contractual obligations; or
  2. the status of non-operating investor, only requiring the financial capacities requested in order to meet any contractual obligations, but not necessarily the technical qualifications or experience required to carry out of the oil operations. In this case, the company may only participate in the tender as a party to a consortium managed by a company pre-qualified as an operator-investor.

The certificate of pre-qualification will expressly set out the capacity under which the pre-qualified company can tender, namely:

  1. either in the capacity of an onshore operator-investor or as an onshore and offshore operator-investor; or
  2. in the capacity of non-operator-investor.

Once the Agreement has been allocated, the Contracting Party is obliged to provide a bank guarantee for the proper performance of the programme of exploration works, which it has undertaken to carry out.

i Establishment

Law 05-07 provides that exploration and exploitation activities may be carried out by any entity established in Algeria, or having a branch there, or organised under any other form allowing it to be a tax liable entity.

If a company is created, it has to be at least 51 per cent held by one or more Algerian resident partners, pursuant to the application of Article 66 of the Financial Law for 2016.

In practice, all foreign Contracting Party to an Agreement create an Algerian branch. The creation of such a branch does not take more than one month.

ii Capital, labour and content restrictions

In order to be able to invest in hydrocarbons exploration and exploitation, all companies have to provide evidence of their technical and financial capacities, allowing them to carry out hydrocarbons exploration and exploitation activities, and for this reason they are subject to pre-qualification according to the terms and conditions set out above.

Companies are obliged to provide a bank guarantee for the proper performance of the obligation to carry out the exploration works programme.

Strict foreign exchange controls exist in Algeria, though in order to facilitate the operations of foreign companies operating in the upstream oil sector, Law 05-07 has provided for much more flexible provisions compared to standard law rules.

According to Law 05-07, a branch is considered to be non-resident with regard to foreign exchange controls, which allows it to keep the proceeds of its hydrocarbon exports overseas, whereas a Contracting Party to an Agreement who is resident in Algeria is obliged to repatriate these amounts to Algeria.

Even though considered as non-resident, a branch is still required to import into Algeria and to transfer to the Bank of Algeria the necessary convertible currency in order to meet its exploration and development expenses and mining, pipeline transportation and operating expenses as the case may be, as well as the necessary amounts to pay the fees, taxes and duties owed.

There is no specific restriction to the upstream sector as regards the recruitment of overseas staff, it being specified that any foreigner working in Algeria must, in principle, hold a work permit. Likewise, there are no local content rules or obligations in terms of recruitment of a local workforce.

iii Anti-corruption

There are legal and regulatory provisions for the fight against corruption, undertakings are also made by the investors in the Agreements. The Agreement allocations take place in the context of an invitation to tender, which is the case for all the Agreements that have been allocated to date. Over the counter allocation is exceptional and must be justified.


At a regulatory level, four invitations to tender have been organised since Law 05-07 entered into force. The Algerian authorities have now admitted that the expected success of these consultations has failed to come about.

Accordingly, there are plans to enact a new hydrocarbons law replacing Law 05-07, with the main objectives of making the investment framework more attractive and others of softening the environment in which the oil operations are carried out.

On the basis of leaks of information about the draft of the new Law, it seems that the production sharing system would be adopted again after having been abrogated by Law 05-07.

We have witnessed a concentration in the upstream oil sector over the past few years between the long-standing operators in Algeria, such as ENI, Total and Repsol, who have just recently respectively recovered the Algerian upstream assets of Maersk Oil & Gas and Talisman in the context of global transactions. Total and Repsol companies, as Sonatrach partners in the exploitation of the Tin Fouyé Tabenkourt deposit under a PSC concluded in 1996, renewed their interest in this deposit by conclusion of a new contract governed by Law 05-07. Cepsa has also renewed its interest in extending the exploitation period of the R'hourde El Khourf field.

We have also witnessed the entry of new players such as investment funds, which repurchase companies holding partnership agreements (subject to Law 86-14) in Algeria, such as Carlyle and CVC, which have repurchased Engie's Exploration-Production activity, and the Worldview capital fund, which has taken control of Petroceltic, which held a partnership agreement on the Isarène area.


1 Samy Laghouati is a partner and Djamila Annad is of counsel at Gide Loyrette Nouel.

2 BP Statistical Review of World Energy review.