The Oil and Gas Law Review: Algeria

Introduction

By area (2,381,741km2), Algeria is the largest country in Africa. The distance from the Mediterranean coast to the Hoggar massif is approximately 2,000km, and it is 1,800km 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 in 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 2019 the established resources2 were estimated at 12.2 billion barrels for oil and 4.3 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 geo-chemical modelling studies, the size of these fields falls within the 2,650 to 10,500 trillion cubic feet (Tcf) 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 tonnes of oil equivalent 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.

Legal and regulatory framework

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 to allow Sonatrach, which was at that time 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 (hereinafter Law 86-14), which added two new forms of partnership, namely the production sharing contract (the PSC) and the risk service contract (the RSC). Law 86-14 was amended in 1991 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 the Algerian jurisdiction); and (2) the foreign partner participating in the development of gas discoveries.

In 2005, 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 through Law No. 05-07 of 28 April 2005 relating to hydrocarbons, as amended by Law No. 13-01 of 20 February 2013 (hereinafter Law 05-07). For the upstream activities, the most significant changes were:

  1. the monopoly on oil activities was withdrawn from Sonatrach and entrusted to an institution named Alnaft;
  2. 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 partner or partners national or foreign for exploration or exploitation; Sonatrach's holding in the agreement must be at least 51 per cent; and
  3. Sonatrach lost 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 any 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 mining titles issued under Law 86-14 to Alnaft, a parallel agreement was entered into between Alnaft and Sonatrach to allow the latter to continue its activity in the context of the partnership agreement with its foreign partners.

Given the very disappointing outcome of Law 05-07, Law No. 19-13 dated 11 December 2019 dealing with hydrocarbon activities (hereinafter Law 19-13 or the New Law) was promulgated with the intention of improving the attractiveness of the national mining domain with a focus on exploration efforts. Law 05-07 is fully abrogated except the provisions relating to the two agencies and the windfall tax.

However, all upstream contracts concluded under Law 86-14 and Law 05-07 in force at the date of the promulgation of Law 19-13 remain in force in accordance with their terms and conditions until they expire, but they cannot be extended or renewed

i New domestic oil and gas legislation

Law 19-13 does not distinguish between conventional and non-conventional hydrocarbons contrary to the former Law 05-07.

Like under Law 05-07, according to the New Law the Algerian state grants Alnaft the right to exploit the mining domain; therefore, Alnaft remains the holder of the mining titles, with exploration and production activities being carried out:

  1. by Sonatrach alone according to a concession deed granted by Alnaft, which set out the rights and obligations of Sonatrach (concession deed); or
  2. by Sonatrach, with one or several international oil companies (IOCs), according to an administrative deed granted by Alnaft (attribution deed) which set out:
    • the perimeter of the concession;
    • the designation of the parties;
    • the research plan;
    • approvals of the development plan;
    • conditions of assignment rights and change of control; and
    • other relevant issues.

ii Regulation

The two regulation agencies set up by Law 05-07 remain in place:

  1. The minister in charge of hydrocarbons – in respect of the New Law, the minister is in charge of granting the mining titles, the approval procedure for hydrocarbons contracts and their amendments, the exploitation authorisations.
  2. Alnaft is in charge of the promotion and the management of the hydrocarbons mining area; its powers include:
    • evaluating the capacity of an entity to carry out exploration activities; and
    • granting prospecting authorisations or hydrocarbons exploration.
  3. 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; and
    • 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 that convention, the Democratic and Popular Republic of Algeria has declared that it will apply the Convention on a reciprocal basis of the recognition and enforcement of only arbitral awards made in the territory of another contracting state, only when such sentences have been pronounced on disputes arising out of legal relationships, whether contractual or not, that are considered to be commercial under Algerian law.

To date, Algeria has ratified 40 bilateral conventions on the promotion and the protection of investments and 34 bilateral conventions with a view to avoiding double taxation and to prevent tax evasion in the area of income and capital tax.

Licensing

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 or exploitation activities on the basis of a concession deed when Sonatrach is alone or an attribution deed in case the activities are carried out under an hydrocarbon contract entered into between Sonatrach and one or several IOCs.

In principle, the IOCs are selected as a party to a hydrocarbon contract following a competitive tender procedure.

However, under the New Law, Sonatrach can conclude a hydrocarbon contract by direct negotiation, after consultation with Alnaft, which issues an attribution deed for this purpose.

i Main contractual provisions

Law 19-13 provides for three types of hydrocarbon contracts to be concluded with Sonatrach. All these contracts existed under the former regulations, with the PSC being the most commonly used template so far.

Moreover, the New Law provides more room for negotiation of the terms and conditions of these contracts.

The production sharing contract (PSC)

Under a PSC, the IOC is given the right to prospect for and produce hydrocarbons within the contract area, assuming all exploration risks and costs in exchange for a share of up to 49 per cent of the total production, which cover the cost for recovery and its net remuneration The ownership title over hydrocarbons produced shall pass on to Sonatrach at the measuring point, and Sonatrach shall then transfer its share to the IOC at the delivery point contractually agreed, which is generally FOB for export.

The risk service contract (RSC)

An RSC is a type of contract whereby the IOC performs exploration or production services for Sonatrach within a contract area for a fee. The IOC carries out the exploration work programmes stipulated, at its own risk and expense, in exchange for a fee representing up to 49 per cent of the value of the total production.

Sonatrach shall keep the ownership title over all hydrocarbons produced under a RSC. In both a PSC and an RSC, the terms and conditions of the financing of upstream costs is set out in the contract, where the general principle is that these costs are fully borne by the IOCs, with Sonatrach having an option to participate.

The partnership contract

A partnership contract is where the IOCs are granted the right to conduct exploration operations in a given area, as well as production operations in the event of commercial discoveries, under a joint venture type arrangement with Sonatrach, with the participating interests of the latter being at least 51 per cent. The ownership of hydrocarbons shall pass on the parties at the measuring point.

In this type of contract, the financing of upstream operations is proportionate to the participating interests of each party. However, Sonatrach's part of the exploration costs may be paid in advance by the IOCs.

The upstream concession and the hydrocarbon contracts are approved by decree of the Council of Ministers.

A joint operating agreement must be entered into between Sonatrach and the IOCs in which the missions of the upstream operator are set out.

The upstream operator, previously pre-qualified by Alnaft, must have the technical capabilities and it can be a third party.

Regarding gas, the PSC and the parternship contract must contain a marketing clause for any natural gas that may be discovered and intended to be exported. This may be joint or for Sonatrach only, on behalf of the partnership.

ii Expiry and termination of the hydrocarbon contracts

The term of the hydrocarbon contract is set at 30 years, and for a discovered field the term is 25 years from the concession or the contract coming into force, which means the date of the publication of the approval decree in the Algerian Official Gazette. In both cases, the term may be extended by a maximum of 10 years.

The term of the hydrocarbon contract includes an exploration period of up to seven years, which can be extended by two years, followed by the exploitation period starting from when Alnaft reports that the development plan has been approved.

At the end of the exploration period, Alnaft automatically withdraws the concession deed, or from the attribution deed in case of a hydrocarbon contract, in the event that Sonatrach or the IOCs have not declared the commerciality of the fields.

Production restrictions

i Restrictions on production entitlements

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

Alnaft is to allocate these limitations to all IOCs in an equitable manner, on a pro rata basis given their respective production and any technical constraints.

ii Restrictions on exports of oil and gas

The quantities of gas produced in the context of a hydrocarbon contract 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 market.

Law 19-13 grants priority to meeting the needs of the national market in hydrocarbons. Hence, Alnaft may request that each IOC supply the local market. The terms and conditions for such supply are set out in the attribution deed as well as in the hydrocarbon contract.

The quantities of hydrocarbons levied pursuant to the contribution of each IOC are sold to Sonatrach, who is then exclusively responsible for supplying gas to the national market.

iv Law applicable to price setting

The sale price of liquid hydrocarbons levied in the context of the supply of the national market is the free on board (FOB) price published by one of the specialised reviews indicated in the relevant agreement as applicable for calculating taxes.

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.

Tax

The tax system applicable to the upstream activity is almost the same as under Law 05-07; nevertheless, there are significant changes that make the new taxation of upstream activities more favourable for IOCs, compared to the former tax regime.

Indeed, the classification of the mining domain in four areas is repealed. The taxation is then calculated in a uniform manner regarding the location and the importance of the exploited area.

Law 19-13 provides for the following main taxes.

i Surface tax

This tax is paid annually on the basis of a fixed rate per square kilometre. The rates depend on the phase of the performance of the contract (i.e., exploration or production). It is non-deductible for the calculation of the tax on hydrocarbons revenues and income tax.

ii Hydrocarbons royalty

This tax is paid monthly at the rate of 10 per cent of the production value of all quantities of hydrocarbons extracted from each exploitation area. The production value is calculated by multiplying the quantities by the basic prices defined by the New Law, reduced by the transportation cost, gas liquefaction costs and fractionation costs for LPG. The royalty is paid by Sonatrach in case of a PSC and a RSC and by each party in case of a partnership contract.

In order to bring a fair profitability, a reduced rate up to of 5 per cent may be granted in the following cases :

  1. complex geology;
  2. technical difficulties in extracting hydrocarbons; or
  3. high development or operating costs compromising the economics of the project.

This royalty is deductible for the calculation of the tax on hydrocarbons revenues and for the income tax.

iii Tax on hydrocarbons revenues

This tax applies on the annual production value as calculated for the hydrocarbons royalty, reduced by the royalty, annual investment tranches, operating costs, abandonment provision, IOCs' remuneration and carry-forward from previous years.

The rate varies from 10 to 50 per cent depending on the R factor. R is the ratio between the cumulated net incomes since the beginning of the production and the cumulated costs since the hydrocarbon contract first came into force.

As for the hydrocarbons royalty, the maximum 50 per cent rate may be reduced up to 20 per cent in the case of complex geology, technical extractions constraints and high development costs adversely affecting the project.

This tax has replaced the former tax on oil revenues. The main difference is that the deductible investment tranches are no longer uplifted and the operating costs are deducted.

Investment research incurred for an area covered by a concession deed or a hydrocarbon contract, if restored at the end of the exploration period or before its expiry, is taken into account when calculating the rate and the tax basis, as well as in case of granting a new concession deed or concluding a new hydrocarbon contract.

The reduced rates of hydrocarbons royalty and of the tax on hydrocarbons revenues may be requested by Sonatrach and IOCs, at any time during the term of the hydrocarbon contract.

The reduced rates are set by a joint order from the Ministers of Finance and Energy.

For the record, according to Algerian law, any regulatory provision relating to tax, tax rate, tax basis or a tax exemption is under the exclusive competence of the law.

In order to bring more attractiveness and flexibility, the Algerian law has been amended to enable the Ministers, in accordance with the New Law, to set reduced tax rates regarding hydrocarbons royalty and tax on hydrocarbons revenues.

iv Income tax

Income tax at the rate of 30 per cent is due by Sonatrach on an annual basis and is calculated on the revenues generated from the performance of all concession deeds, PSCs and RSCs in force. In the partnership contract it is set out that Sonatrach's partner has to pay income tax due on its share.

v Tax on the foreign partner's remuneration

This tax was established under the former law 86-14 on the PSC and RSC, but is still maintained under the New Law for these two types of hydrocarbons contracts. This tax, paid on an annual basis, is calculated at the rate of 30 per cent of the gross remuneration of the IOC. If this tax is paid by Sonatrach on behalf of the IOC, the latter is not exempt from fulfilling its tax obligations toward the tax authorities.

Receipts for the payment of taxes are issued by the Algerian tax authorities in the name of the IOC. It can therefore benefit from a tax credit in its tax residence country.

Foreign investment considerations

In order to be able to invest in hydrocarbons activities in Algeria, all investors have to provide evidence of their technical or financial capacities, allowing them to be pre-qualified by Alnaft. Indeed, participation in a tender for a hydrocarbons exploration and exploitation contract is subject to Alnaft's pre-qualification.

i Establishment

Just like former Law 05-07, Law 19-13 also provides that hydrocarbon activities may be carried out by any legal entity, Algerian or foreigner established in Algeria, or having a branch there, or organised under any other form allowing it to be a taxable liable person in Algeria.

ii Capital, labour and content restriction

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

Indeed, according to the New Law, the Algerian branch of a foreign company is considered to be non-resident with regard to foreign exchange controls, which allows it to keep the proceeds of its hydrocarbon exports overseas during the exploitation period, whereas a party to a hydrocarbon contract who is resident in Algeria is obliged to repatriate these amounts to Algeria.

Even though it is 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 for it to function locally.

However, regarding payments of services provided by a non-resident supplier of services, the New Law expressly allows a non-resident IOC to pay for those services from its foreign bank accounts, whereas under the former regulation such payment had to be made from Algeria.

Under the former regulation, there were no specific local content obligations. However, according to the New Law, hydrocarbon contracts provide for some provisions setting out the national preference regarding the supply of goods and services, provided that quality and prices conditions are competitive.

Parties to a hydrocarbon contract, and their subcontractors, have to hire, as a priority, Algerian employees for upstream operations; therefore, employers must ensure there is training available.

Subject to this priority regarding Algerian employees, there are no specific restrictions on the upstream sector as regards the recruitment of foreign employees, it being specified that any foreigner working in Algeria must, in principle, hold a work permit.

iii Anti-corruption

There are legal and regulatory provisions for the fight against corruption that apply also to the investors in the contracts.

Current developments

The New Law has led to great hope, but before it becomes fully operational, it is necessary to enact the implementing regulations and the templates of the hydrocarbon contracts. In the meantime, the existing implementing texts taken under Law 05-07 still apply to the extent that they are not incompatible with the New Law. Nevertheless this transitional situation is not satisfactory in view of creating a new strong dynamic.

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 respectively recovered the Algerian upstream assets of Maersk Oil & Gas and Talisman in the context of global transactions. The companies Total and Repsol, 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 concluding an upstream 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 have taken over companies holding partnership agreements (subject to Law 86-14) in Algeria, such as Neptune Energy, which has 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.

Since the promulgation of the New Law, several memoranda of understanding have been signed by Sonatrach and IOCs including OMV, Lukoil, Cepsa and ExxonMobil.

Footnotes

Footnotes

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

2 BP Statistical Review of World Energy, 2020.

Get unlimited access to all The Law Reviews content