Key changes in Algeria's hydrocarbon law: DWF
Slava Kiryushin, partner and global head of energy, and Soraya Corm-Bakhos, director at DWF, detail the key facts surrounding Algeria's new hydrocarbon law, and the changes it includes
Algeria's new hydrocarbon law was approved during a government meeting chaired by Prime Minister Noureddine Bedoui, on 2 October 2019 (the "Hydrocarbon Law") with a vote by the National Assembly on 14 November 2019. The Hydrocarbon Law is aimed at stimulating foreign investment in Algeria's oil and gas sector. According to Minister of Energy Mohamed Arkab, the Hydrocarbon Law was drafted with input from the five biggest international oil companies operating in Algeria.
Algeria's state-owned Sonatrach is advocating the country's new Hydrocarbon Law, saying the need for reform is "urgent", given the state of the country's reserves and exploration activity. Algeria is still overly dependent on hydrocarbons, which represent 40% of government revenues and 95.6% of its exports.
Algeria's hydrocarbon sector is grappling with reduced production from ageing oilfields, rising domestic demand for natural gas and difficult investment climate that negatively impacts exploration and production activities.
Algeria's cabinet approved the draft law on 13 October 2019 to reverse declining foreign investment by revising upstream contract terms and tax rates.
The Algerian Prime Minister's office has said the current law dated 28 April 2005, as amended in 2005, 2006 and 2013, "has proved its limits" and is responsible for negatively impacting production and reducing foreign investment in the sector.
A new development plan for the state oil giant, Sonatrach, and the new law were approved by an Inter-ministerial Council on 23 September 2019 and the Prime Minister on 2 October 2019. However, Algeria intends to maintain its foreign ownership formula for oil and gas projects where Sonatrach must continue to hold a 51% stake.
Key Changes in the Hydrocarbon Law
- The Hydrocarbon Law has abolished value-added tax ("VAT") on professional activities within the oil and gas sector. This provision is likely to boost private companies' involvement in Algeria, who will not be subject to VAT.
- The Hydrocarbon Law exempts imported goods, equipment, material and products used in exploration activities and/or the exploitation of hydrocarbon fields from all customs duties, taxes and other charges.
- Taxes and other duties have been abolished where the entity is established for the benefit of the state and local authorities.
- Tariffs for pipeline transportation will be exempt from VAT. This includes connected goods and services with hydrocarbons and customs duties, duties and royalties on the importation of material and products.
- Foreign workers in the refining and petrochemical fields will be exempted from social security tax, provided they continue to contribute to a social security fund in their country of origin.
- The Hydrocarbon Law has defined unconventional hydrocarbons as coming from rock geological formations and shale.
- The duration of a hydrocarbon contract includes a 30-year exploration and exploitation period and may be extended for a maximum period of 10 years.
- The oil and gas supply chain must include provisions that give preference to Algerian companies for the supply of goods and services produced in Algeria, subject to their competitiveness.
- The Hydrocarbon Law reintroduces production sharing agreements and reduces the complexity of the previous petroleum framework by simplifying the structure of the fiscal terms. Also, royalty/tax participation contracts or risk service agreements will be available. Foreign countries' interest will continue to be limited to a 49% participation stake and foreign entities will need to pay surface tax, royalty, hydrocarbon revenue tax, and additional income tax.