THE EVOLUTION OF ALGERIAN HYDROCARBON LEGAL REGIME AND THE NEW PERSPECTIVES

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 1995
end 1990
End 2000
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 1995
à fin 1990
à fin 2000
5

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

3,2 billion
6

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

7
MAIN STEPS IN THE EVOLUTION OF LEGAL FRAMEWORK

• 1- PERIOD BETWEEN 1986 AND 1991THE 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 gt Nation
• Exploration /exploitation Activities gt
  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
Form of partnership

• PRINCIPLES
• Sharing the rights and obligations up to their
  rate of participation.
• SONATRACHs 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.

20
Form of production sharing contract

• 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 partners 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.

21
Form of risk service contract

• 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

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
25
Production sharing contract distribution of the
production
26
Production sharing contract distribution of the
production
Production destined to royalty, costs then
profit sharing.
Distribution between the State, SONATRACH and the
partner
27
Production sharing contractsharing profit oil
28
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),

reimbursement Of the costs
State revenues
29
Sharing the State revenues

• The state revenues are shared between
• The partner as profit
• The state as royalty and tax
• SONATRACH as net profit

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 ACTORS
• UNDER 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 EP 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 EP INVESTMENT
• MAINTAINS AND UPDATES NDB
• CONDUCTS TENDERS FOR EP BLOCS, IN VIEW OF
  CONTRACTS AWARD
• SIGNS EP 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

Relations under the draft of the new law

• STATE
• AGENCIES
• Regulation
  Contracts
• COMPANY COMPANY COMPANY SONATRACH

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 EP
  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
• SONATRACHS 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 STATES 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