Algeria mulls level competition between Sonatrach, foreign investors

Dec. 12, 2002
Algerian officials are debating a proposal to strip Sonatrach, the state oil firm, of its monopoly market powers and put it on a nearly equal competitive footing with foreign energy companies in that country, said a former Sonatrach director.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 12 -- Algerian officials are debating a proposal to strip Sonatrach, the state oil firm, of its monopoly market powers and put it on a nearly equal competitive footing with foreign energy companies in that country, said a former Sonatrach director.

Proposed legislation not yet presented to Algeria's parliament would establish a new agency, ALNAFT, to award upstream contracts, approve development plans, and collect state royalties, said Hassan Yassine, former director of negotiations and legal affairs for Sonatrach. Yassine, who helped draft Algeria's current hydrocarbon laws, is a new partner with Dallas-based Thompson & Knight LLP and will head the law firm's new office in Algeria. He outlined the proposed legislation in a meeting Tuesday with industry representatives at Thompson & Knight's Houston office.

The proposed legislation represents a major move to open to foreign participation the upstream, midstream, and downstream segments of Algeria's oil and natural gas industry. In its attempt to strip away the monopoly of its national oil company and open its oil and gas industry to foreign investment, Algeria "is exactly like Brazil," said Andrew B. Derman, a partner in the law firm.

Under the proposed program, Yassine said, "Sonatrach will be treated like any other investor." Although some Algerian officials question the wisdom of stripping Sonatrach of its current competitive advantages, Yassine and other proponents maintain that it's imperative to attract the outside investment necessary to explore and develop Algeria's oil and gas reserves.

Algeria is almost entirely dependent upon exports of oil and natural gas to generate hard currency. Therefore, said Yassine, "Hydrocarbons are more important than Sonatrach, which is only one means of developing and producing Algeria's hydrocarbons." Yassine claimed Sonatrach "technically has the ability" to compete with other oil and gas companies on an even field. "But if it's not ready for that change now, it won't be ready 20 years from now," he said.

ALNAFT would award exploration and production contracts "only by tender" and on the basis of any one of three criteria: a work program, signature bonus, or a royalty rate above the minimum fixed by law. Whoever wins such a contract would own the resulting production "at the measured point" for the life of that contract. The successful contractor also would be free to market that production both within and outside of Algeria, a right currently reserved for Sonatrach. However, natural gas production that is sold into the Algerian market would be marketed jointly by Sonatrach and the contractor, since "Sonatrach owns this market," Yassine said.

Proposed new system
The proposed new contract would provide a 7-year exploration period, followed by an exploitation period of 25-30 years. It also would allow the contractor to decide whether an explored prospect is commercially viable, providing a "retention period" for such assessment amounting to 5 years for an oil project and 10 years for gas.

Under the new system, Sonatrach would have an option to acquire 20-30% interest in a project as nonoperator, but that option must be exercised within 30 days after ALNAFT approves a development plan for the new discovery.

In a total reversal of Algeria's current monetary policy, participating exploration, production, and service companies would be allowed to bring in foreign currency to cover local costs. They also would be able to take out of the country "any local currency surplus" from their operations.

Under a new tax regime, participating foreign producers would be subject to a petroleum revenue tax that would escalate with a firm's cumulative production. They also would be subject to royalties, income tax and surface taxes, but exempt from value-added taxes (VAT) and customs duties. As proposed, however, the tax burden on producers would be adjusted when necessary to provide incentives to explore frontier areas and to develop "modest size" discoveries, officials said.

Downstream operations would be opened to permit the import and sale of hydrocarbons and petroleum products. Domestic prices for petroleum products also are to be decontrolled, Yassine said. Pipeline concessions also would be available to foreign participation for periods of 50 years, subject to open access and nondiscriminatory tariffs.

Under the new plan, the existing associate contracts between Sonatrach and foreign production companies would remain in force, and Sonatrach would continue to market the state's share of that production. But each associate contract would require "a parallel contract to be done by ALNAFT and Sonatrach to fix the taxes to be reverted to the state, said Yassine.

Under all existing oil and gas contracts in Algeria—including partnerships, production sharing contracts, risk service contracts, and joint ventures—Yassine said, "If someone wants to keep a block, it has to work the block." That means Sonatrach would have to submit work programs for every block it now holds, within 3 months of passage of the proposed legislation, he said.

With Algeria's parliament not in session now, Yassine declined to guess what chance the proposed legislation might have for passage. However, he said it "probably" will be approved "with minor modifications," possibly in the early months of 2003.

Contact Sam Fletcher at [email protected].