THE EVOLUTION OF ALGERIAN HYDROCARBON LEGAL REGIME AND THE NEW PERSPECTIVES

1. THE EVOLUTION OF ALGERIAN HYDROCARBON LEGAL REGIME AND THE NEW PERSPECTIVES

2. SOME FIGURES

3. Produced produced remaining remaining 50% remaining 50% Produced 50% 50% 56% 44% Shape of hydrocarbon reserves • The volume of recoverable reserves of crude oil have increased by: • 25% between 1990 and 1995 • 13% between 1995 and 2000 • The production has increased by: • 10 % between 1990 and 1995 • 13% between 1995 and 2000 end 1995 end 1990 End 2000

4. remaining Remaining remaining 84% 76% 70% produced Produced produced 30% 24% 16% Shape of Hydrocarbon reserves • The volume of recoverable reserves of natural gas have increased by: • 14% between 1990 and 1995 • 15% between 1995 and 2000 • The production has increased by: • 69 % between 1990 and 1995 • 40% between 1995 and 2000 à fin 1995 à fin 1990 à fin 2000

5. Dry 16% en cours 27% positifs 57% • During the last decade the renewal of the reserves has required an exploration investment of $3,2 billion: $3,2 billion

6. SH 31% partners 69% • The development of these new reserves has required an investment of $8,9 billion:

7. MAIN STEPS IN THE EVOLUTION OF LEGAL FRAMEWORK 1- PERIOD BETWEEN 1986 AND 1991:THE FIRST VERSION OF THE LAW 2-PERIOD BETWEEN 1991 UNTIL TODAY: THE AMENDMENTS TO THE LAW OF 1986 3-THE PERSPECTIVE OF A NEW LEGAL FRAMEWORK

8. 1- PERIOD 1986 / 1991: FIRST VERSION OF LAW OF 1986

9. Some principles of law of 1986 • Property of hydrocarbon Reserves ==> Nation • Exploration /exploitation Activities ==> State ’s monopoly • Performance of these activities by state companies which may choose to be associated with a foreign oil company

10. Some principles of law of 1986 • Performance of activities submitted to the mining licences granted only to a state company. • Possibility of entering into partnerships only with foreign companies • 4 forms of association contracts autorised by the law • specific tax system

11. Some principles of law of 1986 • Obligation for any foreign investors to enter into Exploration contracts with Sonatrach • Partnership on the already discovered fields not autorised • Maximum limit of the partners’ share : 49 %

12. Some principles of law of 1986 • Monopoly on transportation by pipeline • Entitlement only to liquid hydrocarbons (equity) • no equity on gas • no recourse to the arbitration

13. Some tax aspects of law of 1986 • Royalty from 12.5 to 20% • Income tax from 65 to 85%

14. PERIOD 1991 UP TODAY

15. PERIOD 1991/TODAY: Amendments to law 1986 to allows: • Recourse to the Arbitration • Extension of partnerships to the appraisal and/or the development of the existing fields • Possibility to have equity on gas

16. PERIOD 1991/TODAY: Amendments to law 1986 to allows: • Possibility for foreign companies to build and to exploit transportation pipe lines • Reduction of the royalty ’s right to 10% and to 42% for the income tax • Possibility of Tax Credit in the countries of the investors

17. MAIN ASPECTS OF THE LEGAL FORMS OF CONTRACTS

18. LEGAL FORMS OF CONTRACTS • PARTNERSHIP • Production sharing contract (PSC) • Risk service contract (RSC) • Joint venture company (JVC)

19. Form of partnership • PRINCIPLES • Sharing the rights and obligations up to their rate of participation. • SONATRACH’s participation must be at least 51%. • CHARACTERISTICS • Exploration risk supported entirely by the partner • Sharing the production at the field • Each partiy pays a royalty and the oil tax on its share. • The investor finances the whole exploration investment • In case of a conmmercial discovery . SONATRACH reimburses 51% of such investment.

20. Form of production sharing contract • PRINCIPLES • As reimbursment of its expensesand remuneration, the partner receives a share of the production at the loading port free of all taxes. • CHARACTERISTICS • The share of the partner cannot exceed 49% of the global production of the relevant field. • Exploration risk supported by the partner. • All or part of the geological and industrial risk supported by the partner. • The partner’s share of profits is free of tax. SONATRACH pays on behalf of the partner a tax on profit which rate equals the general income tax.

21. Form of risk service contract • PRINCIPLES • As reimbursment of its expenses and remuneration, the partner receives a payment in kind or in cash free of tax. • CHARACTERISTICS • RSC Allows to chose the risk to be supported by the partner. • The payment depends on the risk taken up by the partner. • The partner do not have any equity on the field or the production

22. Depending the form of the contract, the share of the production of the investor is delivered: • At the field, as part of the production.In such a case the association will have the form of a “partnership”. • At the port of loading, as part of the production free of tax. In such a case the association will have the form of a “production sharing contract” (PSC). • As a payment in cash or in kind free of tax. In such a case, the association will have the form of a “risk service contract”(RSC).

23. TAX LIABILITY • The royalty over the whole production and the b oil tax on the result have to be paid: • .by SONATRACH when it operates alone or in association in the form of a “production sharing contract” or a “risk service service contract” • By SONATRACH and the investor in prorata of their participation when the association is a “partnership” • For the purpose of tax credit, The investor is liable for the paiement of the tax on its profit in case of a PSC or RSC . SONATRACH have to pay such tax on behalf it.

24. PRODUCTION ALLOCATION METHODOLOGY: PSC EXAMPLE

25. PROFIT OIL COST OIL Production sharing contract: distribution of the production

26. SONATRACH’s part of profits SONATRACH + state Partner’s net profit partner Investment reimbursement partner + eventually SONATRACH operating costs Partner + eventually SONATRACH Transport costs partner + eventually SONATRACH royalty state Production sharing contract : distribution of the production Production destined to royalty, costs then profit sharing. Distribution between the State, SONATRACH and the partner

27. transport Operating costs Reimbursement of the investments Definition of the state revenues • The State revenues are the value of the production after deducing: • The transport costs • The exploitation costs (operating costs and reimbursements of investments), reimbursement Of the costs State revenues

28. SONATRACH Royalty taxes State Partner Sharing the Staterevenues • The state revenues are shared between: • The partner as profit • The state as royalty and tax • SONATRACH as net profit

29. ROLE OF SONATRACH UNDER THE LAWS OF 1986 AND 1991

30. SONATRACH ’s DOUBLE ROLE IN THE CURRENT REGIME • REPRESENT THE STATE VIS AVIS THE OIL COMPANIES • ROLE OF ANY COMMERCIAL COMPANY • CONSEQUENCES: JUDGE AND PARTY

31. RELATIONSHIP BETWEEN THE ACTORS UNDER LAWS OF 1986 AND 1991 STATE SONATRACH FOREIGN COMPANY

32. PERSPECTIVES OF THE DRAFT OF THE NEW LAW TO IMPROVE THE CURRENT LEGAL FRAMEWORK TO: • Elaborate a more simple and attractive contractual system. • Give Sonatrach the possibility to be only a commercial entity.

33. THEDRAFT OF NEW LAW: MAIN PROVISIONS

34. SCOPE AND OBJECTIVES OF THE DRAFT

35. SCOPE OF THE DRAFT • COVERS ALL UPSTREAM AND DOWNSTREAM ACTIVITIES EXCEPT NATURAL GAS DISTRIBUTION (GOVERNED BY ELECTRICITY LAW) • OPEN ALL ACTIVITIES TO ALL INVESTORS : - PRIVATE OR PUBLIC - NATIONAL OR INTERNATIONAL

36. PRINCIPAL OBJECTIVES (1) • ESTABLISH COMPETITION IN A FREE MARKET • IMPROVE ENVIRONMENTAL STANDARDS • PROVIDE CLEAR, SIMPLE, & COMPETITIVE FISCAL REGIME & CONTRACTUAL CONDITIONS • SEPARATE GOVERNMENT AND COMMERCIAL ROLES

37. PRINCIPAL OBJECTIVES (2) • DECONTROL PRICES • PROVIDE RATIONAL EXPLOITATION SECURING OPTIMAL CONSERVATION • ENABLE SONATRACH TO FOCUS ON ITS COMMERCIAL ACTIVITIES

38. THE ACTORS

39. THE ACTORS • Ministry in charge of hydrocarbons • 2 Agencies • Sonatrach • Others investors

40. THE ADMINISTRATION: MINISTRY IN CHARGE OF HYDROCARBONS • ISSUES LAW ENFORCEMENT TEXTS AND MODEL CONTRACTS • APPROVES E&P CONTRACTS • ISSUES PIPELINE CONCESSIONS

41. TWO INDEPENDANT AGENCIES • LEGALLY, ADMINISTRATIVELY AND FINANCIALLY INDEPENDANT • BUDGET APPROVED BY THE MINISTRY FUNDED FROM PART OF THE ROYALTIES PLUS FEES FOR SERVICES

42. FIRST AGENCY: REGULATION AUTHORITY.. • CONTROL THE APPLICATION OF THE REGULATION FOR UPSTREAM AND DOWNSTREAM (TECHNICAL ISSUES, HSE, NORMS AND STANDARDS) • MAKES RECOMMENDATIONS FOR THE AWARD OF PIPELINE CONCESSIONS • SEES TO THE APPLICATION OF THE REGULATIONS GOVERNING TPA FOR PIPELINES AND STORAGE FACILITIES • ISSUES CONSTRUCTION & OPERATING PERMITS FOR DOWNSTREAM ACTIVITIES

43. SECOND AGENCY : ALNAFT.. • PROMOTES E&P INVESTMENT • MAINTAINS AND UPDATES NDB • CONDUCTS TENDERS FOR E&P BLOCS, IN VIEW OF CONTRACTS AWARD • SIGNS E&P CONTRACTS AND OBTAINS MINISTRY APPROVAL

44. … ALNAFT • APPROVES DEVELOPMENT PLANS AND ANNUAL I & E PROGRAMS • COLLECTS ROYALTY AND SEES TO PAYMENT OF OTHER TAXES • SECURES EASY ACCESS TO INFORMATION REGARDING GAS MARKETS

45. THE STATE COMPANY: SONATRACH • TO BE TREATED LIKE ANY OTHER INVESTOR • TO FOCUS ON ITS COMMERCIAL VOCATION • TO FINANCE ITS PROJECTS WITHOUT STATE GUARANTEE • TO CONTINUE TO ADMINISTER THE CONTRACT ALREADY CONCLUDED

46. THE INVESTORS • ANY LEGAL ENTITY HAVING THE TECHNICAL AND FINANCIAL CAPACITIES • INVESTORS CAN BE ALGERIAN OR FOREIGN, PRIVATE OR PUBLIC ENTITY

47. Relations under the draft of the new law STATE AGENCIES Regulation Contracts COMPANY COMPANY COMPANY SONATRACH

48. MAIN PROVISIONS CONCERNING THE UPSTREAM ACTIVITIES

49. UPSTREAM • CONTRACT AWARDED BY TENDER ON THE BASIS OF A SINGLE CRITERIA : • WORK PROGRAMME OR • SIGNATURE BONUS OR • ROYALTY RATE ABOVE MINIMUM FIXED BY THE LAW

50. UPSTREAM • CONTRACT GRANTS EXCLUSIVE RIGHT TO E&P HYDROCARBONS • ALL PRODUCTION OWNED BY CONTRACTOR AT THE MEASUREMENT POINT • CONTRACTOR MARKETS ITS PRODUCTION • CONTRACTOR PAYS ROYALTY AND TAXES