Main Upstream Provisions of the New Algerian Hydrocarbon Law

NOT AN OFFICIAL UNCTAD RECORD Main Upstream Provisions of theNew Algerian Hydrocarbon Law Presented By Hassan Yassine Andrew Derman Partners Thompson & Knight LLP Hassan.yassine@tklaw.comdermana@tklaw.com

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 .

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

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

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

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.

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:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 ALNAFT’s 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.

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.

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.

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.

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.

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.

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 decree’s and confirms lawmakers’ concerns of avoiding the risk of competition between Algerian gas sellers.

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.

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.

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.

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 ALNAFT’s request.

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

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.

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

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

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.

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.

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 .

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

SOME OTHER RIGHTS OF THE INVESTORS • INTERNATIONAL ARBITRATION • CONTRACTOROWNS FIXED ASSETS FOR LIFE CONTRACT • RECEIVING AND MAINTAINING EXPORT REVENUES ABROAD IS GARANTED

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

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 d’exploitation

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.

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

Garnishment-Payment of the Debt of Another Banks Lenders $$$$$ Debt Sovereign Borrower Discount Collection Efforts Royalty (In-Kind) [Taxes] [National Oil Company Share] Vulture Funds Oil & Gas Company

Main Upstream Provisions of the New Algerian Hydrocarbon Law