The first circulated draft of the much-anticipated hydrocarbon law in Algeria shows that the government is willing to loosen up the law in a move that aims to attract more foreign investors to its energy sector.
The new law, which was prepared by U.S.-based consultancy “Curtis, Hartree, Parner et McKinsey,” is considered by local experts as a revised version of the previous law 86/14, which was in place prior to the current law. The current lasw is widely seen as a barrier to foreign investment in the country.
A key amendment of the hydrocarbon law is the reintroduction of three types of contracts. The move targets foreign partners to invest in the critical energy sector of the country.
Chapter 10 of the new draft law defines the different types of the upstream contracts, including participation, production-sharing and risk services. All the contracts should be signed with the national oil company, Sonatrach.
In the current law, number 05-07, foreign oil partners can operate in the country only under petroleum concessions contracts, which are seen by international companies as repulsive for foreign investments. The return on investment is not attractive, especially in a country with a very tough and complicated tax regime.
It is one of the reasons why Algeria managed to offer only four concessions out of the 31 concessions during the 2014’s bid rounds, and only two oil and gas concessions in the 2011 bid round out of 10 oil and gas exploration contracts offered.
The new law also relaxes the control the government’s regulatory body, the Agence Nationale pour la Valorisation des Ressources en Hydrocarbures (ALNAFT), on the energy sector. According to the new law, another energy regulatory body called ARH will be also in charge of the technical aspect of the energy sector in Algeria, in addition to Alnaft.
ALNAFT and ARH will each have a supervisory board that will include seven members appointed by a presidential decree with five members representing various ministries ministries, and two independent members appointed based to their experience in the domain, according to Chapter 6 clause 29 of the draft of the new law.
The role of ALNAFT will be limited to signing exploration contracts, collecting and evaluating upstream data, and concessions among others. In case of the signature of an exploration contract, the exploration contract is valid for two years and renewed for same period only one time, where the foreign oil company can rescind the contract any time in case the concession area showed no promising indications for oil and gas.
ALNAFT’s role will also include the management of the mining sector in the country and announcing major international bids. Under the new law, ALNAFT’s role will be mainly regulatory while the ARH will be in charge of all technical aspects of the energy sector in the country.
The new law also gives more freedom and authority to Sonatrach in term of negotiating and signing exploration and production contacts with foreign partners compared to the existing law.
The new law reviewed the taxation system imposed on foreign investment in the country, such as the taxes imposed on the explored area, and the tax on the oil income. The new law also reviewed the way of calculating taxes, and simplified it.
The new amendments of the hydrocarbon law have also reviewed the pricing of gas destined to local market, in a move that is in line with the government’s intention to abandon the subsidies policy. ALNAFT will be in charge of selling gas to national electricity company, where the price should cover the costs of gas extraction and production including taxes.
Furthermore, Clause 158 of the new law considers prices of petroleum products sold in local market as “free priced” products, with the exception of gasoline, LPG, and fuel, where prices of these products remain subsidies by the government.
In regard to the cost of crude oil and condensate sold to local refineries, Clause 159 states that Alnaft is in charge of setting the methodology of calculating the price on a yearly basis, which is a way to slash the deficit of companies operating in the upstream sector, as setting prices on yearly basis could help adjust their deficits.
The draft of the new law indicates in Clause 160, that every activity of the energy industry should enjoy acceptable profit margin for its activity.
While the team who drafted the new law worked hard to make it attractive to foreign investors, approving the law seems to be extremely difficult given the contentious political transition in Algeria, which is creating uncertainty around the energy sector in the country. Local newspaper Elkhabar reported that the ousted prime minister Ahmed Ouyahya approved the law during a cabinet meeting, before presenting it to the parliament for final ratification and approval; but given the current situation, the chances of passing the law seems to be extremely slim, especially amid talks that Sontrach CEO Abdelmoumen Ould Kaddour, who is considered as pro-Bouteflika, will be replaced soon, in addition to Algerian Energy Minister Mustapha Guitouni who won’t be part of the next government, which means all the people who advocated for the new law won’t be part of the next phase, as protesters are calling for a deep changes, where the controversial law most probably won’t be passed and will be reviewed, again.
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