Main Upstream Provisions of the New Algerian Hydrocarbon Law

1
Main Upstream Provisions of theNew Algerian
Hydrocarbon Law
NOT AN OFFICIAL UNCTAD RECORD

• Presented By
• Hassan Yassine
  Andrew Derman
• Partners
• Thompson Knight LLP
• Hassan.yassine_at_tklaw.com
  dermana_at_tklaw.com

2
Reminder Disappearance of Monopolies

• For Hydrocarbon Upstream activities
• For Hydrocarbon transportation and downstream
  activities
• For Power Generation electricity
• For the industrial activities ,import and export
  goods and services .

3
Participation to the State companies

• State companies
• Controlled process
• success
• Partnership
• With experienced foreign investors bringing
  technology and investments

4
Main Investments Laws

• Law of 2001 related to the development of
  investments
• Law of 2001 related to the privatization of the
  State Companies
• Law of 2001 related to mining activities
• Law of 2002 related to the electricity and
  domestic gas distribution
• Law of 2005 related to Hydrocarbons

5
New representatives of the State Agencies

• Agency of regulation of the telecom activities
• Agency of Mining
• Agency for Electricity
• Agency of Hydrocarbon regulation
• Agency for hydrocarbon contracts
• Agency for development of investment

6
Hydrocarbon Sector

• The new Hydrocarbons Law of 2005, has been
  designed
• to take into consideration the evolution of the
  new International Market as well as the
  background provided by the Law 86-14 of 1986 with
  regard to negotiation terms, managing contracts,
  and controlling costs, and the rational
  exploitation of oil and gas reserves.
• to keep the competitivity of the investment
  Algerian regime in the oil upstream notably after
  the emergence of new oil zones that now compete
  with traditional producers.

7
New Rules in the Hydrocarbon Sector (contd)

• We will look at the main changes regarding
  research and hydrocarbon production, and compare
  them to the 1986 provisions and to the previous
  model of the Algerian production-sharing
  contract. For this purpose we will only focus
  the upstream matters presented below

8
Jurisdiction

• The 1986 law only covered activities such as
  mining, research, the transportation and
  production of hydrocarbons via pipelines, and the
  applicable fiscal regime related to these
  activities..
• The New law has put a complete legal system at
  investors disposal, which allows them to take
  part in projects comprising upstream, midstream
  and downstream activities.

9
Ownership

• The new law accords with the Algerian
  Constitution. It maintains that hydrocarbon
  resources located in Algerian soil or sub-soil
  and maritime areas under Algerian sovereignty
  before their extraction are the Algerian
  property.
• This clause has already existed in the 1986 law,
  which sought to ensure that non-produced reserves
  could neither be sold nor given as guarantees.
  The new law upholds the same principle concerning
  the reserves inalienability. Yet it allows the
  investor to use oilfield shares as a guarantee
  for a project financing or any other bank
  financing process.

10
Disappearance of Monopolies

• The 1986 law has expressly stated that
  hydrocarbon exploration, exploitation, and
  transport via pipeline were the monopoly of the
  Algerian State.
• The State could exclusively confer these rights
  exclusively to one State company (in practice,
  Sonatrach), giving also to Sonatrach the
  dominance on the mining activities and imposing
  to it the obligation to exercise certain
  controls which belong to the administration.

11
Disappearance of Monopolies (contd)

• In fact, Sonatrach has often resorted to
  partnerships for research and production since
  1986. More than 50 research contracts have been
  signed, and several new hydrocarbon reserves have
  been found by oil companies that assumed research
  risks on their own.

12
Disappearance of Monopolies (contd)

• Considering that the monopoly principle on the
  hydrocarbon activities had been rendered obsolete
  by the evolution of the international economy,
  and that the advantages of state control had
  become uncertain, the Parliament has suppressed
  the monopoly that has been instituted by the law
  of 1986.

13
Maintaining Mining Permits

• Old mining permits are maintained even if the
  article 23 of the new law leaves this issue to
  the implementation regulation.
• The new law mentions the seismic authorization
  that will last a maximum of two years, and does
  not confer exclusive rights. It also mentions
  anticipated production authorization, which
  confers the beneficiary the right to produce
  hydrocarbons for a maximum of one year.
• This authorization, like the provisional
  exploitation authorization existent in the 1986
  law, aims to permit testing wells for the
  expansion of oilfield development projects.

14
Participants

• The Minister in charge of Hydrocarbons is
  responsible for evaluating hydrocarbons, and the
  drafting proposals and executing of the
  hydrocarbon national strategy.
• The minister presents the concluded contracts to
  be approved by the government. These duties,
  enumerated in Article 11 of the new law, give the
  Ministery the crucial power on hydrocarbons
  activities whether it acts alone or thru
  agencies.

15
Agencies

• The new law creates two legal entities to replace
  Sonatrach in the practice of certain public
  authority missions, each directed by a committee
  nominated by the president of the republic.
  This way of appointment shows the importance that
  the state gives to agencies and their
  responsibility for the development of the country
  Hydrocarbons sources.

16
Agencies

• The contracting agency (ALNAFT) is essentially in
  charge of
• technical, juridical and fiscal missions,
  investment promotion for exploring and exploiting
  hydrocarbons,
• centralization and management of data banks,
  attribution of perimeters research and
  exploitation as well as the conclusion of the
  corresponding contracts,
• approval of development plans for hydrocarbon
  deposits, optimal conservation of reserves,
• counting and collecting royalties for the
  Algerian Treasury.

17
Agencies (contd)

• The Hydrocarbon Regulation Authority (ARH) is in
  charge of
• regulatory questions concerning technical norms
  dictated by the new law including
• Upstream, midstream and downstream activities,
• health, safety and environment regulations
• pipeline transport, instruction of concession
  requests for pipeline transport,
• elaboration of call of tenders specifications for
  transportation concessions
• management of adjustment funds for transport and
  oil product tariffs.

18
Sonatrach

• Conceived at first as a state tool to valorize
  hydrocarbons resources, Sonatrach has been an
  efficient vehicle for Algeria to recover control
  of its resources.
• Its commercial activities are often confused with
  the exercising of administrative privileges. It
  was Judge and Party
• The new law relieve Sonatrach of its
  administrative functions by creating an
  institutional framework, which limits its role to
  that of a commercial entity, which the main
  target is to make profits.

19
Sonatrach Keeping privileges

• The new law gives Sonatrach two privileges
• Based on a practice implemented in PSCs
  (production sharing contracts), the new law
  allots Sonatrach a back-in right, permitting it
  to participate in any oilfield exploitation
  project in which it had not been participating.
• This participation option is established at 20
  minimum and 30 maximum and must be exerted
  within 30 days of ALNAFTs approval of field
  development plans.
• Sonatrach also has the possibility of
  participating in any transport concession in
  which it is not yet participating. This second
  privilege is distinguishable from the first, as
  it can only be executed under the recommendation
  of ARH and the authorization of the Minister.

20
Investors

• Under the old law, only foreign oil companies
  could close a contract for the research and/or
  production of hydrocarbons, excluding the
  Algerian financing capacities.
• With the opening of the Algerian market, the
  parliament deemed this exclusion negative. Under
  the new law, an oil company or oil investor can
  be, by definition, any foreign or Algerian
  company , state or private one having the
  required capacities.

21
Bidding Process

• The 1986 law did not enforce any method of
  attribution for research parcels or new fields.
  It was up to Sonatrach to set up the procedure.
• From 2000 onwards, the majority of parcels or
  discoveries were awarded via invitations to bid.
• Putting up competing upstream projects was in
  anticipation of the new law which legally imposes
  the recourse to the call of tenders unless a
  derogation granted by the Minister.

22
Types of Contracts

• The 1986 law made provisions for four types of
  hydrocarbon research and/or exploitation
  contracts. The most common are the PSC and the
  Risk Service Contract (RSC).
• This classification has been replaced by
  contracts based on the type of the Hydrocarbon
  activity (research and exploitation contract or
  exploitation contract), which is similar to the
  Concession contracts used in some other oil
  countries.

23
Types of Contracts (contd)

• The duration of these contracts is fixed at 32
  years, distributed in two phases. The research
  phase is divided into three periods (3-2-2). The
  exploitation phase lasts about 25 years (32
  years, minus the research phase). Dry gas
  development projects are allotted an extra five
  years.
• This is to account for necessary delays for the
  development of oil wells and finding a market.
• Durations of Exploitation contracts are 25 years
  for liquids and 30 years for gas.

24
Specific Gas Provisions

• The December 1991 law amended the 1986 law has
  cancelled the Article 23, which denied the
  investor any right to a share of gas production.
  The investor was thus accorded the same rights
  for gas as for liquid hydrocarbons.
• It was Sonatrach who had contractually forbidden
  sharing gas production and obliged parties to
  jointly market the entire gas product and share
  the revenues.
• This process was confirmed by a 1996 decree
  stating that gas should be marketed for export,
  either jointly by the concerned parties or by
  Sonatrach alone.

25
Specific Gas Provisions (contd)

• The new law emphasizes the organization of gas
  marketing in the national market and attributes
  important privileges to ALNAFT in this matter.
• Gas producers are obliged to supply the local
  market prorata their production and, for take or
  pay contracts, 85 of the expected quantity.
• Furthermore, it states that if Sonatrach exerts
  its back-in right on a gas well, exportation of
  gas production will be done jointly.
• This means that no investor could freely dispose
  its share of gas production in kind. This
  obligation follows the 1996 decrees and confirms
  lawmakers concerns of avoiding the risk of
  competition between Algerian gas sellers.

26
Production Sharing

• The 1986 law enforced the sharing of hydrocarbon
  production, with at least 51 to be reverted to
  Sonatrach.
• The new law allows any investor to retain and
  market its entire production, assuming taxes and
  fees.

27
Retention Rights

• The new law makes it possible for investors to
  retain a well without having to develop it for
  three years for liquid hydrocarbons, or five
  years for dry gas in case of insufficient
  transport or a lack of gas market.
• This provision will be well received, as it was
  often requested by investors, yet systematically
  refused by Sonatrach during PSC negotiation.

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Assignments

• The investor has the right to assign all or part
  of his interests to either a subsidiary, a third
  party, or one or more of his partners in the same
  contract.
• The conditions laid out by the 1986 law have also
  been maintained
• Conclusion of an addendum to the contract
• Approval by the Agency (previously Sonatrach) and
  the Minister
• The Agency gives to Sonatrach a pre-emptive
  rights.
• The new law provide that the investor pays a 1
  fee for the value of the cession transaction.

29
Bank Guarantee

• Extending a practice established by Sonatrach in
  2000, the new law requires investors to offer a
  guarantee which corresponds to the minimum amount
  of research work that will take place. This is
  payable if the work does not take place and upon
  ALNAFTs request.

30
Abandonment

• Provisions destined to cover abandonment costs
  have also been planned.
• It will be considered cost deductible.

31
Fiscal Provisions

• The 1986 law established three royalty rates
  (12.5, 16.25 and 20) and three oil tax rates
  (65, 75 and 85).
• These vary according to geographic zones (N, A or
  B) and technical process (secondary or tertiary
  recuperation process).
• Special reductions can also be given up to 10
  for fees and up to 42 for taxes.
• A 30 remuneration tax has been created in 1991
  to allow investors that did not pay the oil tax
  in Algeria to obtain tax credit in their home
  country. This tax has to be paid on their behalf
  by Sonatrach.

32
Fiscal Provisions (contd)

• The new law establishes a more elaborate fiscal
  regime based on 4 fiscal zones (A, B, C and D)
  with the following tax
• The surface tax Min 4000 Max 800,000
  dinars
• Royalty From 5.5 to 23 depending on the Zone
• Petroleum revenues Tax (PRT) From 30 to 70
  depending on the level of revenues
• Corporate income tax 30
• Tax on assignment 1 on the value of the
  transaction
• Tax on transfer of gas emission rights to be
  defined by regulation
• Tax on burning gas 8000 dinars per cubic metre
• Tax on utilization of potable water or to be
  dedicated to agriculture 80 dinars per M3
• Tax on land as provided by the General tax regime

33
Exemptions

• As the previous law , The new law maintains the
  tax exemptions granted by 1986 law, i.e., VAT,
  Professional Tax, Custom duties.

34
Uplift

• An up-lift of amortization is allowed by the new
  law in accordance with the tax zones and the
  technical process used on the field.

35
Disputes

• The new law confirms the December 1991 law, which
  authorized the recourse to international
  arbitration to handle disputes.
• The new law allows parties to choose the type of
  arbitration procedure and where it will take
  place,
• Algerian law must be applied to the dispute.

36
Preservation of Existent Contracts

• Although Article 101 of the new law could be
  clearer, it guarantees the preservation of
  contracts and additional clauses concluded prior
  to its existence.
• It also states that Sonatrach sign a new contract
  with ALNAFT for every previous contract so as to
  apply the new laws to Sonatrach without modifying
  partners rights.
• This especially concerns possession of mining
  permit and the new fiscal regime .

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SOME OTHER RIGHTS OF THE INVESTORS

• PRECIATION AT THE VALUE OF US THE LAST DAY OF
  FISCAL YEADER
• IMPORT FOREIGN EXCHANGE TO COVER LOCAL COSTS
  ALLOWED
• RIGHT TO USE LOCAL CURRENCY REVENUES TO COVER
  LOCAL COSTS
• RIGHT TO REMIT IN FOREIGN EXCHANGE ANY LOCAL
  CURRENCY SURPLUS

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SOME OTHER RIGHTS OF THE INVESTORS

• INTERNATIONAL ARBITRATION
• CONTRACTOR OWNS FIXED ASSETS FOR LIFE CONTRACT
• RECEIVING AND MAINTAINING EXPORT REVENUES ABROAD
  IS GARANTED

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SOME OTHER RIGHTS OF THE INVESTORS

• CONSOLIDATION OF ALL ACTIVITIES IN ENERGY SECTOR
  IN CALCULATING INCOME TAX
• ALLOW DEVELOPMENT OF MODEST SIZE DISCOVERIES
• PROVIDE INCENTIVES TO EXPLORE IN FRONTIER AREAS

40
Implementation texts expected

• To clarify law provisions notably
• The obligation for investors to create a local
  company
• The consolidation
• Les limites des perimetres de recherché et
  dexploitation

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Conclusion

• No matter how good a regulation or legislative
  text, its success or failure depends on those who
  will enforce it. No doubt that the managers of
  the Agencies who have been recently appointed
  knows the importance of this challenge.
• The first experience will happen soon, thru the
  integrated Tinhert gas development project.

42
Foreign Investment

• 77 countries have defaulted on some portion of
  their foreign debt
• Vulture funds acquiring this debt
• At a very substantial discount
• Chasing sovereign states
• and
• Oil and gas companies in the US

43
Garnishment-Payment of the Debt of Another

Banks Lenders
Debt
Sovereign Borrower
Collection Efforts
Discount
Royalty (In-Kind) Taxes National Oil Company
Share
Vulture Funds
Oil Gas Company