Algeria’s cabinet has approved a controversial Hydrocarbons Law on 13 October whose goal is to increase foreign investment in its oil and gas sector.
New agencies Bloomberg and Reuters reported that hundreds of protesters had gathered outside of parliament to oppose changes to the energy law which they argue Algeria’s interim president Abdelkader Bensalah has no authority to pass.
For the bill to become law it will need to be passed by parliament.
The new bill reintroduces Production Sharing Agreements (PSAs) and reduces the complexity of the previous framework by simplifying the structure of fiscal terms.
According to the new bill, prospective licensees can now sign a royalty/tax (R/T) participation contract, a PSA, or a Risk Service agreements (RSAs).
Under the R/T participation contract, investors remain limited to 49% participation alongside Sonatrach and will pay surface tax, royalty, hydrocarbons revenue tax, and additional income tax. The framework for PSAs and RSAs is effectively the same as it was before 2005: Investors’ shareholding in a contract is not limited, with only their share of production (PSA) or revenue (RSA) instead limited to 49%, while Sonatrach pays all the taxes on behalf of the licensees.
As the graph below shows, the proposed terms for the R/T participation contract would allow licensees a significantly higher Internal Rate of Return (IRR) compared to previous regimes’ IRRs and would significantly improve Algeria’s regional competitiveness. Moreover, reduced royalty and tax rates may further improve potential returns.
The draft bill is a step in the right direction, but investors will still face the difficulties of investing in a country under political unrest. Moreover, improving the petroleum fiscal framework may not suffice as there are other hurdles at the administrative, political and technical level, which might prevent licensees from investing in Algeria’s upstream sector.
At the administrative level, it is not certain that a caretaker government, which has limited powers, is legally able to approve the new Hydrocarbons Law, which is beyond of the scope of daily tasks or emergency measures.
At the political level, after the departure of President Abdelaziz Bouteflika in April 2019, political unrest remains, and the draft law immediately drew significant protests. It is unclear whether the presidential elections, initially planned for July, and now scheduled for December 2019, will get Algeria out of the impasse.