Francisco A. Laguna & Younes Saci
Algeria is an important oil and gas producer and a member of OPEC. In 2010, Algeria was the fourth largest crude oil producer in Africa and the 8th largest global producer of natural gas. For the past two years, the United States has been the largest importer of Algerian crude oil. In terms of natural gas, it is the 3rd largest supplier to Europe.
The national energy company, Sonatrach, plays a (mandated) major role in exploration, production, commercialization, and transportation activities in Algeria, and boasts overseas operations in ten countries, including the US. Therefore, Algeria plays a significant and strategic role geopolitically and within OPEC. Internally, the Algerian energy sector represents ~ 36% GDP and nearly 100% of export revenue.
The petroleum sector is regulated the Hydrocarbons Law of 2005 (Law No. 07/05), as amended, which replaced the original 1986 Petroleum Law. The 2005 Law intended to streamline oil and gas activities by divesting Sonatrach of its regulatory and administrative role in the management of hydrocarbon resources and simplifying the legal and tax regimes applicable to the sector.
The 2005 Law creates two new agencies : l’Agence Nationale pour la Valorisation des Ressources en Hydrocarbures (the National Agency of Promotion of Hydrocarbon Resources –ALNAFT), which controls, regulates, and delivers all petroleum permits required to launch any petroleum activities in Algeria; and the Autorité de Régulation des Hydrocarbures (the Hydrocarbon Regulatory Authority – ARH), which monitors legal and operational compliance in the sector, including tariffs and construction standards.
The Law establishes three types of licenses / authorizations: a prospecting license; an exploration / exploitation contract (requires 51% Sonatrach participation); and a pipeline transportation concession (transportation operators require 51% Sonatrach participation).
Law 05/07 also specifies the taxes to be paid by international oil companies operating in Algeria, such as a surface area tax based on the land area specified in licenses issued by ALNAFT, a somewhat negotiable monthly royalty on the volume of hydrocarbons extracted, monthly oil revenue taxes, annual earnings tax, personal property taxes and certain environmental taxes (water use / carbon emissions).
Importantly, the Law provides the possibility of international arbitration – an important right for foreign investors; however, applicable law will be Algerian. Sonatrach has previously agreed to the use of UNCITRAL Arbitration Rules.
Presidential Ordinance No. 2006-10, amending the 2005 Law, maintains Sonatrach’s monopoly, requiring foreign companies to joint venture with Sonatrach on exploration, exploitation and processing contracts. Similarly, only Sonatrach may be awarded pipeline transportation concessions. This majority participation requirement has affected foreign interest in investing in Algeria, as evidenced in the last 3 rounds of international bidding – only 2 blocks were awarded in 2011.
To attract foreign investment and create incentives for oil companies after recent militant attacks on oil workers, the Algerian Government modified Petroleum Law 05/07 by reducing taxes on international oil companies and providing increased incentives for them to participate in unconventional hydrocarbon resource exploration and exploitation. Time will tell whether these reforms are sufficient, given Sonatrach’s continued participation requirement and allegations of bribery / corruption.
TransLegal assists clients in the oil and gas sector, including the negotiation of contracts, identification of local partners, and use of genetically modified organisms in petroleum and biofuels production. Call us with your questions concerning Algeria and other oil-rich countries.