'What a difference a year makes...' Recent regulatory changes in Algeria
20 September 2006
In July 2005, the Algerian Government promulgated a new legislative regime for the petroleum sector, Law No. 04-05 of 28 April 2005 (the Hydrocarbons Law), and the resulting deregulation/liberalisation and international investors welcomed improved fiscal and operational terms. Now, barely a year later – a year which does not witness increases in petroleum prices on the same scales as the period from 2001, when the Hydrocarbons Law was first proposed, to 2005, when it was promulgated - the Algerian Government has done an about-face on one crucial aspect of the Hydrocarbons Law and re-vested Sonatrach with a majority (at least 51 per cent) participation right in all petroleum contracts and petroleum transportation projects. This step back will be accomplished through new measures that were approved by the Algerian Cabinet on 10 July 2006. They will be incorporated in a document designed to amend the Hydrocarbons Law (the Amendment) but the actual legal instrument that will be used to implement the changes is not yet clear. The instrument might be a Presidential Ordinance (ordonnance présidentielle) instead of a formal amendment. A Presidential Ordinance would not have to be discussed by Parliament, but it would require approval from Parliament.
This Article focuses on Sonatrach's participation right. The Amendment contains other important changes that have not been addressed in this Article, including the creation of a new tax on windfall profits from petroleum contracts.
Before the Hydrocarbons Law came into force, Law No. 86-14 of 19 August 1986 Concerning Activities of Prospection, Exploration, Exploitation and Pipeline Transportation of Hydrocarbons (the Old Law) governed petroleum operations in Algeria. Under the Old Law, Sonatrach was a mandatory majority (at least 51 per cent) participant in each petroleum contract and each petroleum transportation project from the date the contract was entered into. It is important to note that Sonatrach's role in the Algerian petroleum industry was different during this era – it functioned both as the state participant in commercial activities in the oil and gas sector and as the regulatory authority. During this era it was easier to reconcile the mandatory 51 per cent participation with Algeria's desire to attract foreign investment – as the regulator, Sonatrach could use its majority participating interest to control operations and thereby regulate oil companies active in Algeria.
In July 2005 the Hydrocarbons Law came into force. The Hydrocarbons Law recognised the evolving character of Sonatrach's role in the Algerian and international petroleum industry. It made Sonatrach a commercial entity and relieved Sonatrach of the public sector (regulatory) responsibilities that were "provisionally" entrusted to Sonatrach under the Old Law. At this time, the Algerian Government also began encouraging Sonatrach to compete domestically and internationally for petroleum projects. This new domestic and international commercial focus was reflected in the Hydrocarbons Law. In conjunction with Sonatrach's change of roles, the Hydrocarbons Law also reduced the scope of Sonatrach participation in upstream ventures from a mandatory 51 per cent to an optional 20 per cent to 30 per cent. Sonatrach can exercise this option to participate for a limited period after ALNAFT approves the development plan for the discovery made under the relevant petroleum contract. Previously, Sonatrach's participation was from the signing of the petroleum contract and, as a result, Sonatrach had greater involvement and could participate in exploration operations. The Hydrocarbons Law clearly reduced Sonatrach's influence, involvement and privileged position.
Sonatrach's public sector responsibilities were assumed by l'Agence Nationale de Contrôle et de Régulation des Activités dans le domaine des Hydrocarbures (ARH) and l'Agence Nationale pour la Valorisation des Ressources en Hydrocarbures (ALNAFT). Both ALNAFT and ARH have been established and are now functioning. ALNAFT is responsible for promoting investment in the petroleum industry and ARH is responsible for regulating the more technical aspects of the industry.
The Amendment will undo some of the changes the Hydrocarbons Law made to Sonatrach's participation rights and almost return Sonatrach to the position, in respect of participation rights, it occupied under the Old Law. This time Sonatrach will have the option to participate, at a minimum level of 51 per cent, in every petroleum contract and petroleum transportation project. It will not be a mandatory participation as under the Old Law but Sonatrach will once again have the ability to get a majority control over petroleum operations. This would be a condition from the outset that would be included in each new petroleum contract that is offered for bid. The Amendment does not set out clearly the timing of Sonatrach's election to participate. Sonatrach may be entitled to exercise its option effective from the beginning of the exploration phase or from the beginning of the development phase and, further, may be entitled to decide on the manner in which it will participate. This unknown factor may create additional uncertainty for investors and make it necessary for them to assess Sonatrach's technical expertise and financial capability to participate fully (i.e. from the start of exploration operations) in all petroleum contracts and petroleum transportation projects.
The Amendment does not re-vest Sonatrach with the public sector responsibilities that were assumed by ALNAFT and ARH. Sonatrach's role remains limited to participation as the state-owned commercial partner in the petroleum industry. In this context, Sonatrach's "sovereign participation right" to a minimum 51 per cent interest cannot be justified on the basis of the regulatory role it formerly held. The Algerian Government has indicated that its motivations and justification for its about-face are twofold: (i) the overwhelming success that the state has had in attracting foreign investment and (ii) the preservation of Algeria's mineral wealth for future generations.
While this reinstatement of Sonatrach's 51 per cent participation right may not be surprising given the recent climate of resource nationalism (witnessed, for example, in Venezuela, Bolivia and Chad), there is a risk that the Amendment will have a chilling effect on Algeria's status as one of the hottest areas for upstream investment. However, Dr. Chakib Khelil, the Algerian Energy Minister, and others have recognised this consequence and seem to be comfortable with it. In fact, retarding resource development and foreign investment is an obvious corollary of the preservation of mineral wealth for future generations. The Algerian Government appears confident that slowing foreign investment will not harm the economy, as Algeria has accumulated foreign exchange surpluses and paid down international debt at an accelerated rate during the recent periods of high petroleum prices. Nor does the government seem concerned that the Amendment will make the investment terms for Algeria's high quality upstream opportunities unpalatable to international investors, given that Algeria is viewed as being the OPEC country with the most open access and that it was even able to attract foreign investment under the Old Law and lower petroleum prices. However, this political and regulatory flip-flop creates uncertainty and may give investors pause before investing further in Algeria or may raise their investment hurdle rates which, in turn, could slow down or even jeopardise Algeria's plans to develop some of its marginal fields.
Reports suggest that the Amendment was the result of internal political pressure from labour unions (Union Générale des Travailleurs Algériens, Parti des Travailleurs), many of whom opposed the Hydrocarbons Law from the outset. When the Hydrocarbons Law was promulgated, after a number of false starts and significant opposition, it was a major victory for President Bouteflika, Dr. Khelil and their reformist supporters. Now it appears that the political battle is either not yet over or that the players have changed sides. Opponents and proponents of the Hydrocarbons Law now find themselves in agreement. Louisa Hanoune, the Secretary General of Parti des Travailleurs, said that the Amendment was "an enormous victory for the Algerian people" and Dr. Khelil indicated that the Amendment "will achieve our objective of safeguarding natural resources for future generations". The Amendment may have come less than a year after the Hydrocarbons Law came into force, but a year's worth of sustained high oil prices seems to have been enough to call into question the motivation and logic behind some of the changes wrought by this new statute and redrawn the political boundaries on this issue – what a difference a year makes!
The Amendment already has the support of the cabinet and is expected to be promulgated into law in September. It clearly reduces the attractiveness, to investors, of Algeria's fiscal and operational investment terms when compared with the position under the Hydrocarbons Law before the Amendment. However, Algeria is still viewed as having an attractive investment regime. We understand that the Amendment will apply to the contracts awarded by ALNAFT under Algeria's seventh international licensing round which was originally scheduled for late 2005 under the unamended Hydrocarbons Law and which is now expected to take place in December.
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