1

THE EVOLUTION OF ALGERIAN HYDROCARBON LEGAL REGIME AND THE NEW PERSPECTIVES

2

SOME FIGURES

3

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 1990

Produce

d

56% rem

aini

ng

44%

End 2000

rem

ain

ing

50%Produ

ced

50%

end 1995

rem

ain

ing

50%prod

uced

50%

4

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 1990 à fin 2000à fin 1995

remaining

76%Produced

24%

Remaining84%

produced16%

remaining

70%produced30%

5

• During the last decade the renewal of the reserves has required an exploration investment of $3,2 billion:

$3,2 billion

en cours 27% Dry 16%

positifs 57%

0

0,2

0,4

0,6

0,8

millions de $

1989 1993 1997 2001

années

6

• The development of these new reserves has required an investment of $8,9 billion:

0

1000

2000

3000millions de $

1989 1993 1997 2001

années

SH associés

SH31%

partners69%

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

• 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.

Form of partnership

20

• 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.

Form of production sharing contract

21

• 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

Form of risk service contract

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

11/04/23

Production sharing contract: distribution of the production

COST OILCOST OIL

PROFIT PROFIT OILOIL

11/04/23

Production sharing contract : distribution of the production

Production destined to royalty, costs then profit sharing.

Distribution between the State, SONATRACH and the partner

royalty state

Transport costs partner + eventually SONATRACH

operating costs Partner + eventually SONATRACH

Investment reimbursementpartner + eventually SONATRACH

Partner’s net profit partner

SONATRACH’s part of profits SONATRACH + state

11/04/23

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),

reimbursementreimbursementOf the costsOf the costs

transport

Operating costs

Reimbursement of the investments

State revenues State revenues

11/04/23

Sharing the State revenues

• The state revenues are shared between:

– The partner as profit– The state as royalty and

tax– SONATRACH as net

profit

Partner

taxes

Royalty

State

SONATRACH

30

ROLE OF SONATRACH UNDER THE LAWS OF 1986 AND 1991

31

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

32

RELATIONSHIP BETWEEN THE ACTORSUNDER LAWS OF 1986 AND 1991

STATE

SONATRACH

FOREIGN COMPANY

33

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.

34

THE DRAFT OF NEW LAW:

MAIN PROVISIONS

35

SCOPE AND OBJECTIVES OF THE DRAFT

36

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

37

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

38

PRINCIPAL OBJECTIVES (2)

DECONTROL PRICES

PROVIDE RATIONAL EXPLOITATION SECURING OPTIMAL CONSERVATION

ENABLE SONATRACH TO FOCUS ON ITS COMMERCIAL ACTIVITIES

39

THE ACTORS

40

THE ACTORS

• Ministry in charge of hydrocarbons

• 2 Agencies

• Sonatrach

• Others investors

41

THE ADMINISTRATION: MINISTRY IN CHARGE OF HYDROCARBONS

ISSUES LAW ENFORCEMENT TEXTS AND

MODEL CONTRACTS

APPROVES E&P CONTRACTS

ISSUES PIPELINE CONCESSIONS

42

TWO INDEPENDANT AGENCIES

LEGALLY, ADMINISTRATIVELY AND FINANCIALLY INDEPENDANT

BUDGET APPROVED BY THE MINISTRY FUNDED FROM PART OF THE ROYALTIES PLUS FEES FOR SERVICES

43

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

44

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

45

… 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

46

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

47

THE INVESTORS

• ANY LEGAL ENTITY HAVING THE TECHNICAL AND FINANCIAL CAPACITIES

• INVESTORS CAN BE ALGERIAN OR FOREIGN, PRIVATE OR PUBLIC ENTITY

48

STATE

AGENCIESRegulation Contracts

COMPANY COMPANY COMPANY SONATRACH

Relations under the draft of the new lawRelations under the draft of the new law

49

MAIN PROVISIONS CONCERNING THE

UPSTREAM ACTIVITIES

50

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

51

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

52

TERM OF CONTRACT

MAX. DURATION 32 YEARS (EXPLO. PERIOD 7 YEARS & EXPLOIT. PERIOD 25 / 30 YEARS)

EXPLOITATION CONTRACT : RIGHT TO EXPLORE IN EXPLOITATION AREA

CONTRACTOR DECIDES OF THE COMMERCIAL EXPLOITABILITY

RETENTION PERIOD

53

RIGHTS OF SONATRACH

RIGHT TO PARTICIPATE TO BID ROUNDS IN THE SAME CONDITIONS THAN OTHER

INVESTORS

SONATRACH’S OPTION TO ACQUIRE INTEREST IN ANY PROJECT (20 % - 30 %)

OPTION VALID WITHIN 30 DAYS AFTER DEVELOPMENT PLAN APPROVAL FOR DISCOVERY

MARKET JOINTLY WITH CONTRACTOR IF GAS DICOVERY

54

SOME RIGHTS OF THE INVESTORS

INTERNATIONAL ARBITRATION

CONTRACTOR OWNS FIXED ASSETS FOR LIFE CONTRACT

RECEIVING AND MAINTAINING EXPORT REVENUES ABROAD IS GARANTED

55

SOME RIGHTS OF THE INVESTORS

DEPRECIATION AT THE VALUE OF US $ THE LAST DAY OF FISCAL YEAR

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

EXEMPTION FROM VAT AND TAX DUTIES

56

UPSTREAM TAX ASPECTS

SURFACE RENT : (PER KM2, ZONE & PERIOD)

ROYALTY : (ZONE & AVERAGE B.E.P/DAY) PAID MONTHLY IN CASH

PETROLEUM REVENUE TAX (PRT) :

RATE ESCALATES WITH VALUE OF CUMUL. PROD. RIGHT TO USE UPLIFTS

PRT IS DEDUCTIBLE

INCOME TAX (CIT) : CONFORM TO GENERAL CORPORATE INCOM TAX

57

…..UPSTREAM FISCAL PACKAGE

EXEMPTION FROM ALL OTHER TAXES OR IMPOSITIONS

CONSOLIDATION OF ALL ACTIVITIES IN ENERGY SECTOR IN CALCULATING CIT

ALLOW DEVELOPMENT OF MODEST SIZE DISCOVERIES

PROVIDE INCENTIVES TO EXPLORE IN FRONTIER AREAS

58

DOWNSTREAM

IMPORTATION AND SALE OF HYDROCARBONS AND PETROLEUM PRODUCTS IN ALGERIA ARE FREE

DOMESTIC PRICES ARE DECONTROLLED AFTER TRANSITION PERIOD

59

Main provisions concerning midstream and downstream

activities

60

MIDSTREAM: TRANSPORTATION BY PIPELINE

CONCESSION FOR 50 YEARS

OPEN ACCESS

NON DISCRIMINATORY TARIFFS

61

..DOWNSTREAM TAX ASPECTS

POSSIBILITY TO INVEST IN ANY DOWNSTREAM ACTIVITY

INVESTOR SUBJECT TO GENERAL TAX SYSTEM

THE ACTIVITIES OF TRANSPORTATION , LIQUEFACTION, LPG SEPARATION ARE EXEMPTED FROM :

VAT PAYMENT CUSTOM TAX AND DUTY

62

LEGAL PROTECTIONOF INVESTORS’ RIGHTS IN

SIGNED CONTRACTS

63

EXISTING CONTRACTS

EXISTING CONTRACTS REMAINS VALID

RIGHTS AND OBLIGATIONS OF PARTNER ARE MAINTAINED

SONATRACH WILL CONTINUE TO MARKET STATE’S SHARE OF THE HYDROCARBONS

FOR EACH ASSOCIATION CONTRACTS, A PARALLEL CONTRACT’ WILL BE CONCLUDED BY ALNAFT AND SONATARCH TO FIX TAXES TO BE REVERTED BY SONATRACH TO THE STATE

64

THANK YOU FOR

YOUR ATTENTION