Algeria Hydrocarbon Laws
Algeria’s new hydrocarbon law may alter Algeria’s foreign investment environment in the oil and gas sector for international oil companies.
Algeria’s oil and gas sector garnered global interest following the adoption of a new Hydrocarbons Law in January 2020. The new law attempts to alter Algeria’s foreign investment environment in the oil and gas sector to attract international oil companies (IOCs). The reforms seek to re-energize the domestic oil and gas sector affected by decreasing production due to aging wells and a sharp, and potentially durable decreases in crude oil prices. The new Hydrocarbons Law addresses critical deficiencies of the former 2005 Hydrocarbons Law and related tax regimes.
The 2005 law featured high taxes and duties on exploration and production (E&P) activities, as well as unclear contract-sharing agreements with Sonatrach, the national oil company. Despite four amendments to the 2005 law (in 2006, 2013, 2014, and 2015), Algeria repeatedly failed to attract foreign investors. Since 2010, the number of new contracts signed dropped to an average of only two signed contracts per year. In response to this problematic situation, the Government of Algeria decided to reduce taxes significantly across a variety of E&P activities. The new law also removes customs duties and taxes on most imported E&P equipment. In addition, the reformed law provides VAT exemptions for professional activities in the sector.
Complementing the reduction of taxes, the new Hydrocarbons Law simplifies and improves contract agreement types for E&P as well as contracting procedures. Firstly, the reforms place Sonatrach, the national oil company, as the Algerian party to contracts, wholly eliminating ALNAFT, the former hydrocarbons contractual regulator. Secondly, IOCs can enter into one of three contract agreement types, up from one.
Participation Agreements (PA): Sonatrach now holds at least 51% stake and largely mirrors the same type as in 2005 laws,
Production Sharing Agreements (PSA): IOCs get a share of produced oil/gas, in consideration for its investment,
Risk Service Agreements (RSA): IOCs receive a fee per barrel produced above a minimum level of production.
The new Hydrocarbons Law will spur investment in Algeria’s oil and gas sector by IOCs. Therefore, U.S. oil and gas equipment providers, oilfield service companies, and technology providers should reconsider the Algerian market. While exploring the market, companies should keep in mind that the impact of reforms is likely to be gradual. For example, contract formalization under the former 2005 laws saw a lengthy process of nearly ten years. While contract time frames can decrease with the new reforms, the overall landscape will likely take up to a couple of years to change.