Algeria’s new Hydrocarbon Law: Incentive advantages for foreign investment

19.12.2019

The Algerian cabinet, headed by Prime Minister Noureddine Badawi, approved, October 2nd, a new hydrocarbons bill to boost investment in the vital energy sector and improve investment conditions, both legally and fiscally, with a view to bolster the partnership aimed at intensifying exploration efforts and increasing the country’s reserves in order to ensure long-term energy security and the resources necessary for national socio-economic growth. 

The Algerian Prime Minister's office stressed that the current law dated 28 April 2005, as amended in 2005, 2006 and 2013, "has proved its limits" and is responsible for negatively impacting production and reducing foreign investment in the sector.

This law raised controversy with some economists considered it risky, pleading for its imperative postponement to take the necessary time to examine and enrich it within the framework of an inclusive dialogue involving all the stakeholders in the sector given the importance of this project, especially in terms of energy security since it requires a lot of clairvoyance, precision and reflection.

Other observers delivered mixed opinions between partisans deeming imperative the revival of exploration activities to avoid the country an acute energy crisis, with the decline in oil exploration activity in the country in light of Algeria’s national hydrocarbons giant Sonatrach’s inability to bear the major costs of this activity and amid a situation marked by a large increase in domestic energy demand which pushed the current law to show its limit. According to Energy Minister Mohamed Arkab,  nearly 60% of the initial hydrocarbon reserves were exhausted, due to the increase in local consumption and exports, considering that the new law would be “an imperative and not a choice”, ailing at exploring new reserves since Algeria possesses a mining sector of 1.5 million of Km2, where only 38% is exploited and developed.  

“There are several factors that compel us to adapt the Hydrocarbons Act to international standards,” said the Minister, while presenting the draft law governing hydrocarbon activities to the Commission on Economic Affairs, Development, Industry, Trade and Planning at the National People’s Assembly (APN).

 “The bill on hydrocarbons will strengthen Sonatrach so that it could develop its activities with good partnership possessing technological and financial plus as well as added value so that this company, which will keep its sovereignty (51/49 and pre-emptive rights), could execute its exploration and exploitation projects in the national mining sector,” he added.   

The Minister backed the partisans’ positions, referring to a dramatic fall in Algeria’s reserves due to a considerable increase in domestic demand for gas and petroleum products, with a hike exceeding 7% annually, a high rate compared to those recorded at the global level, stressing the need to adapt Sonatrach’s activity to the data of the global oil market and to the strong competition imposed by the major oil producers.

The refusal of its adoption, he added, will result in a structural deficit by 2025-2030 between supply and demand on the domestic market, stressing that this situation will, certainly, impact Algeria commitments to foreign customers with regard to gas export contracts, especially those renewed in 2019 and 2020.

On the other hand, opponents who judged the economic situation inappropriate, stressing that this bill should be debated with a certain patriotic spirit and a prospective vision, maintaining that the 49-51% rule and the right of pre-emption are pledges for national sovereignty and preserve its riches.

They regretted that there are 12 articles in the bill that undermine national sovereignty and make the interests of foreign companies prevail over the national interest especially as they pave the way for the withdrawal of State of ownership of underground wealth.

They argued that this bill is designed to suit only the interests of international companies working to expand business activities in Algeria after decades of legal obstacles hampering them from invading the oil and gas sectors in Algeria.

Sonatrach, for its part, has called the public authorities to accelerate the adoption of the bill in light of the limited old text adopted in 2006 by the regime of the ousted President Abdelaziz Bouteflika as this sector witnessed a downturn that has not abated starting from 2007.

According to the state-run group, which remains vital to Algeria's future, it is more than ever necessary and urgent to enact a new hydrocarbons law adapted to international context, aiming at boosting its output and revitalizing the fortunes of the hydrocarbons sector through striking more partnerships with foreign companies with a view to enhancing Algeria's competitiveness advantage especially that hydrocarbons output in partnership represents a quart some 15 percent of the national production compared to about 33 percent in 2007. This decline would likely be prolonged within the current hydrocarbons law, enacted in 2005 and amended in 2013,due to the lack of attractive conditions.

Resorting to partnership is a strategic choice for Algeria which aims through this action to share risks relating to the exploration activity and the benefit of financial and technological contribution necessary to the revival of the hydrocarbon activity.

Besides, striking new partnership would generated direct and indirect jobs as the company, one of the largest in the world, directly employs around 120.000 people and provides livelihoods for many others. 

The Algerian lawmakers are to decide between maintaining high taxes and cutting them to lure investors because deeper pockets are needed more than before especially that Algeria relies on oil and gas for the lion’s share of its foreign revenue.

The new law has easened the previous conditions on foreign investment, seeking to increase exploration and exploitation of the country’s hydrocarbon resources to increase revenues and meet growing popular demands.  In view of the amount of national production of hydrocarbons in terms of quantity (tons of oil equivalent), the relevant sector has witnessed a decline since 2007, and continued to shrink until 2019, while Algeria needs to sell its crude oil at $115 per barrel to achieve its financial balance.

In this aspect, the draft, according to Echourouk  ,  focused on the main axes, such as; the tax and customs’ exemptions for many activities and the measures to transfer the shares of foreign companies in the case of acquisition by other companies, the activity of handling, employment and production sharing and entailed risk .

The document provided for incentives in the tax and fiscal field; the exemption of  the upstream activity (research, exploration and production) from value-added taxes (VAT) in relation to the import of goods and services directly pertaining to this activity.

The exemption from VAT of duties, taxes and customs rights on imports of goods and equipment, materials and products used in exploration and / or exploitation of hydrocarbons.

The bill also abolished fees on bank localization related to the import of services destined for Upstream (Exploration and Production).

The new project also comprised the scrapping of taxes, duties or other charges not referred to in this heading (upstream activity), created for the benefit of the state, local communities and any legal entity in public law.

Pipeline transportation (oil and gas) has also been exempted from value added fees related to goods and services pertaining to these energy-related activities.

The new text dealt with what is known as the right of preemption exercised by the National Hydrocarbon Group “Sonatrach”, to head off the transfer of the shares of foreign companies in oil and gas fields to other companies, as it grants the right of preemption to Sonatrach, which can be exercised within a period not exceeding 60 days from the date of notification by the valuation agency Fuel Resources “ALNAFT” in request for transfer of assets.

The project included the retention of investment rule 51/49 on partnership with foreigners in point and gas projects, the same approach like the Finance Act 2019, which scrapped this rule but kept it in the strategic sectors with on focus the hydrocarbons one, with the possibility of granting deals through forward agreement contracts.

The exploration and production licenses have been extended from 2 to 7 years, which can be extended for an additional two years. The maximum duration of exploitation of oil and gas fields will be set at 32 years.

The new hydrocarbons law extended the terms of gas and oil exploration licenses from (02) in the current law to seven years, extendable for an additional two years, due to possible operations to develop shale gas fields, while the maximum period of exploitation of the fields, including the exploration phase will be 35 years.

The projected law plans to resolve disputes with foreign partners within friendly options before resorting to international arbitration.

With regard to fuel, the draft law in our possession is set to reduce fuel subsidies of all kinds in addition to electricity and gas.The government plans to lift subsidies on energy and electricity prices and subject them to international pricing. Lifting the subsidies could lead to a nearly 300% increase in petrol, diesel and electricity retail prices, experts said, and most Algerians’ family budgets would not be able to handle the increases.

The project gave preference to national (local) companies in terms of handling activities related to oil and gas projects being implemented in partnership between Sonatrach and foreigners, in addition to prioritizing the recruitment of skilled Algerian personnel in relation to their specific needs for upstream activities (exploration, research, exploration and production).

With respect to the exploitation of shale gas and renewable energy, Algeria has 150 fields to explore, a thing that Sonatrach will do with difficulty under the current law because, notably, of the weight of taxes. The new bill provides for the creation of a national commission for renewable energy. This authority will ensure a well elaborated and studied energy transition to give renewable energy a useful position.

Algeria is ranked 10th among countries with proven reserves of natural gas. It stands sixth in global gas exports and possesses the third largest proven reserves of shale gas.