Global Insight Perspective | |
Significance | A number of existing investors are still trying to gauge the impact of the two recent amendments on their business in Algeria, although new investors are unlikely to be unduly put out by the changes. |
Implications | Algeria seems to have lost its usual flair with its energy investors, likely reflecting some confusion within the government over the exact mechanism for the proposed windfall tax and some remaining flexibility on that score. |
Outlook | The confusion is likely to be temporary as the Algerians meet with company representatives to finalise the code and publicly announce the new tax formula. As yet the amendments are only in draft form, and a significant investor backlash could see their application diluted, at least on the fiscal front. |
Amend Away
Algerian oil investors have been left scrabbling to nail down details of the surprise amendments to the country's energy legislation announced in July under a presidential executive order, which is expected to pass into law as early as next month (see Algeria: 21 July 2006: Algeria Prepares to Go Into Reverse on Hydrocarbon Law as Political Factors Rule the Day).
The changes consist of two amendments, the first aimed at restoring the control and upstream and midstream dominance of state-owned Sonatrach, which was watered down in the landmark 2005 hydrocarbons legislation. The second sets out to modify the fiscal terms of some contracts signed under the previous 1986 legislation, imposing a windfall tax when dated Brent exceeds US$30/b, where existing terms do not include any provisions of this nature (see sidebar for details). Oil Minister Chakib Khelil has said that the tax will vary according to production levels and that the changes are not set to apply retroactively
As yet it is unclear how many contracts will be affected by the fiscal change, with some 1986 contracts already including a price cap or 'b' factor that limits corporate profits above a certain level, according to the Middle East Economic Digest (MEED). The uncertainty has seen existing investors make a beeline to the Oil Ministry in an attempt to clarify the exact terms and mechanism for the tax, with consultations expected to take another week or two at least.
Given that the proposed law remains in draft form, until President Abdelaziz Bouteflika confirms it and publishes it in the Journal Officiel there does seem to be some scope for modifications if the investor backlash is too strong. The largest oil producer, Anadarko, has already said that it is prepared to seek arbitration if the changes go against its understanding of its 1986 terms (see Algeria: 31 July 2006: Anadarko Raises Prospect of Arbitration if Algeria Hydrocarbon Law Changes Agreed).
2006 Amendments to Law 05/07 |
a). Sonatrach should automatically hold a 51% stake in new developments, compared to an optional right of 20-30% encompassed in the 2005 law. This applies to pipelines and transportation as well. b). Windfall taxes would be imposed on contracts not including this clause, when oil prices reach US$30/b or more. |
Stronger Hand
The amendments reflect Algeria's increasing leverage vis-à-vis investors as a result of rising energy prices, which have boosted foreign current reserves to a record US$66 billion and annual earnings to over US$40 billion last year alone. That has led to calls for the conservation rather than the accelerated exploitation of the country's hydrocarbon wealth, with an eye to future generations, echoing a wider trend towards resource nationalism amongst oil- and gas-producing states.
President Bouteflika's hopes to rally union support to push for constitutional amendments that will allow him to stand in 2009 elections represent another factor in the timing of the changes, with the unions keen to preserve the dominant role of Sonatrach in the interests of job security, employment and national economic growth.
However, the amendments do still pave the way for some reforms at the state body in line with the remaining terms of the 2005 code, including the removal of its regulatory and promotion functions and the opening up of downstream projects to majority outside ownership. Fiscal requirements on new corporate partners will also remain unchanged from the 2005 terms.
Outlook and Implications
Algeria seems, at least temporarily, to have mislaid its touch with investors through this rather hasty introduction of regulatory changes, which appear to have resulted from political forces outside the industry, rather than from within the Oil Ministry itself. This has clearly led to some initial internal confusion and lack of consensus, which has then been passed onto investors, igniting the current scrabble for information and clarification.
On the flip side, however, the lack of clarity thus far suggests that there is some scope for investors to negotiate on the fiscal changes before they are published and come into law. Whether they can negotiate themselves out of any windfall provision entirely is less likely, although Algeria has previously been keen to carry out changes in a consensual manner, which suggests some grounds for hope. Nevertheless, the key clause affecting new investors, namely the return of Sonatrach's dominance in the upstream, is unlikely to be a target for negotiation given its popularity with politicians and unions alike. This means that hopes for a greater stake in upstream exploration in the seventh licensing round and beyond are now well and truly dashed, although given the shortfall in upstream projects globally, investors are unlikely to be unduly concerned on this score.