Algeria fights to grow upstream sector
Almost one year after protests caused a massive shift in Algeria’s government, where is the country now, and what is it doing to repair its shrinking oil and gas sector?
Algeria was rocked by protests in April 2019, which made a clean sweep of the government and replaced senior officials. Abdelmoumen Ould Kaddour was replaced as the CEO of national oil company Sonatrach by Rachid Hachichi. Hachichi was replaced in November 2019 by Chikhi Kamal-Eddine, who was replaced by Toufic Hakkar in February 2020. This turbulence parallels the uncertainty of Algeria’s upstream sector and Hakkar, Sonatrach’s fourth chief executive in less than a year, will have challenges to face to stabilise the company’s production.
“Algeria’s hydrocarbon sector is grappling with reduced production from aging oilfields, rising domestic demand for natural gas and difficult investment climate that negatively impacts exploration and production activities,” wrote DWF’s Slava Kiryushin, partner and global head of energy and Soraya Corm-Bakhos, in a comment piece to Oil & Gas Middle East on the nation’s new hydrocarbon law.
The Hydrocarbon Law, passed in November 2019, provides incentives to foreign companies by reducing taxes and changing the legal content of contracts. In a November press conference, then-chief executive Chikhi Kamal-Eddine said that “efforts must be focused on research and development, exploration and revaluation of the company’s proven reserves to compensate for the volumes consumed so far, and increase these reserves in order to guarantee the long-term energy security of our country.”
“This new legal and fiscal framework will undoubtedly be an attractive asset for capital and technology and will consolidate Algeria’s attractiveness in terms of foreign direct investment and its competitive capacity in an environment marked by stiff competition,” he added.
The Algerian Prime Minister’s office said that the previous law, dated 28 April 2005 and amended in 2005, 2006, and 2013 had “proved its limits” and was responsible for lower production and reduced foreign investment. While national consumption doubled between 2002 and 2017, production has dropped as field have matured. The Ministry of Petroleum noted that without any changes to the industry, “an imbalance and structural gap between supply and demand in the national market is inevitable by 2030.”
Official data states that Algeria has conventional natural gas reserves of 159 trillion cubic feet (tcf) and recoverable shale gas reserves of 707 tcf. In the proposal for the new law, written in French, official sources noted a downward trend in reserves since 2005, with 60% of the nation’s initial hydrocarbon reserves exhausted. It also noted a “drastic drop in exploration partnerships, and a decrease in the contribution of foreign partners.”
It attributed the drop in international partnership to a complex tax system without incentives, an “unstable legislative and regulatory framework,” and an “inflexible” framework for contracts which is ill-suited to international standards, as well as a “rigid and slow” administrative and institutional framework.
The Arab Petroleum Investments Corporation (APICORP) noted in its Gas Investment Outlook that bureaucracy in project development and implementation was a major roadblock for Algeria, which it says is “exemplified by the recent unexpected cancellation of the Sonatrach-Agif $100 million tender for the gas de-bottlenecking project at the Rhourde Oulad Djemma field.” In addition to these and other factors, APICORP writes that “the uncertainties surrounding Algeria’s political transition are weighing down energy investments in the country.” However, it noted progress in southwest Algeria, where new supplies have come on stream from three groups of fields; Reggane Nord, Timimoun, and Touat, which have a combined peak production level of 9 bcma.
“Not withstanding an improvement in oil and gas prices, Algeria will have to address concerns over low upstream investments and access to much-needed technology for maturing fields – including the largest gas field Hassi R’Mel,” the report said. “The low appeal of the sector for foreign investments has hindered prospects for new discoveries and developments.” It noted that only $750 million is expected to be invested for projects now at the FEED/study level for the period 2019-2023.
Since 2010, the country has averaged two discoveries per year, with Sonatrach assuming sole risk of exploration. “The Hydrocarbon Law is aimed at stimulating foreign investment in Algeria’s oil and gas sector,” said DWF’s Kiryushin and Corm-Bakhos. “According to Minister of Energy Mohamed Arkab, the Hydrocarbon Law was drafted with input from the five biggest international oil companies operating in Algeria.” They added that hydrocarbons “represent 40% of government revenues and 95.6% of its exports,” making it heavily reliant upon the sector. With OPEC+ cuts, Algeria must limit production to 1.04mbpd, with which it has complied—while it does have oil reserves, gas is its primary hydrocarbon resource. Mohamed Arkab, Algeria’s Minister of Petroleum, is the OPEC president for 2020.
Maturing fields & limited investment into secondary and tertiary recovery technologies have led to low recovery rates, writes Mostefa Ouki, senior research fellow at the Oxford Institute for Energy Studies, in an October 2019 study, “Algerian gas in transition”. Ouki attributed dwindling supply to the “poor rate of new discoveries and proving up of new gas reserves due mainly to an unfavourable climate for international investments in upstream developments,” as well as bureaucratic issues delaying project development.
In its proposal for the law, the Ministry of Oil wrote: “An overhaul of the current legal, contractual and fiscal regime is no longer a choice, but a necessity to adapt to the new world energy order characterized by an abundant supply, a fall in prices and a gradual introduction of renewable energy into the energy mix.”
Fact box: 9 key changes in Algeria’s hydrocarbon law Information provided by DWF
1. Abolishes value-added tax (VAT) on professional activities within the oil and gas sector, likely to boost private companies’ involvement in Algeria.
2. Exempts imported goods, equipment, material, and products used in upstream activities from all customs duties, taxes, & other charges.
3. Taxes and other duties have been abolished where the entity is established for the benefit of the state and local authorities.
4. 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.
5. Foreign downstream workers will be exempt from social security tax if they continue to contribute to a social security fund in their country of origin.
6. Defines unconventional hydrocarbons as coming from rock geological formations and shale.
7. The duration of a hydrocarbon contract includes a 30-year exploration and exploitation period and may be extended for a up to 10 years.
8. Oil and gas supply chain must include provisions that give preference to Algerian companies for goods and services produced in Algeria, subject to their competitiveness.
9. Reintroduces production sharing agreements and reduces complexity of the petroleum framework by simplifying the fiscal terms’ structure. Royalty/tax participation contracts or risk service agreements will be available. Foreign countries’ interest will be limited to a 49% participation stake & foreign entities will pay surface tax, royalty, hydrocarbon revenue tax, and additional income tax.