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ANALYSIS: Algeria's draft amended oil, gas law offers new tax breaks

Highlights

New oil and gas exploration in Algeria has all but dried up in recentyears because of international company disappointment with the terms on offerfor exploring the country's vast conventional resources.

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Given the poor state of its new upstream activity, Algeria startedrevising its hydrocarbon law at the start of 2012 in an attempt to encouragemore international investment in exploration.

The law's amendments, which will apply to all new developments in thecountry, were approved in September last year by the government and are nowbefore Algeria's national assembly for the final go-ahead.

Since Algeria's oil law was last amended in 2006, the OPEC oil-producingstate has held three exploration rounds, with only limited success.

In the 2008 round just four blocks were awarded, in 2009 only threeblocks were picked up, and in 2011 just two were awarded.

A fourth round is now being prepared, the first to take place since thelaw was amended.

According to the text of the law before the assembly, there are 12 keynew elements to the country's hydrocarbon law.

These are:

-- The introduction of tax incentives to encourage activities related tounconventional oil and gas, small fields, deposits in under-explored areas,including offshore fields, and fields with complex geology and/or thoselacking infrastructure

-- A revision to the methodology for determining the tax rate on oilrevenues so that it is based on a project's profitability instead of itssales

-- The relaxation of certain conditions for exploration, research and/orproduction of oil and gas

-- The introduction of new specific provisions to support research intoand production of unconventional oil and gas

-- Strengthening the involvement of state-owned Sonatrach in researchactivities

-- Sonatrach to also have exclusive control of all oil and productpipeline transportation

-- Priority to be given to the domestic market's oil and gas demand, inparticular through a system requiring contractors to sell part of theirproduction at international prices

-- The possibility of paying taxes in kind

-- A clarification of certain tasks to be carried out by Algeria's stateoil and gas agencies

-- The introduction of a provision requiring any entity wanting to beinvolved in oil processing or refining to partner with Sonatrach

-- The introduction of a provision requiring anyone wishing to pursuerefining activity to have their own storage facilities

-- The introduction of a system of excess profit removal for companiesthat benefit from a reduced rate of tax on additional income.

MORE DETAILS

A further examination of the amended law's articles give some additionaldetails on how the legislation will be changed.

-- For unconventional oil and gas, research permits will have a term of11 years, the amended law shows

-- Licenses for developing unconventional oil are set for 30 years andat 40 years for unconventional gas

-- Refining operations are to be carried out by Sonatrach alone or inpartnership with Sonatrach and its subsidiaries to hold at least 51%

-- The tax rate on oil revenues will vary from 20% to 70% for productionat fields where the daily maximum output is less than 50,000 b/d, while itwill vary from 30% to 70% for fields where output is greater than or equal to50,000 b/d

-- For unconventionals, the tax rate on oil revenues will be set at10-40% depending on the level of profitability

-- The rate of additional tax on income is 19%. However, it can reach80% depending on the size of the deposit and the profit made.

It is unclear when the amended law will be approved, but Algiers will behoping that by the time its fourth exploration round is launched, companieswill have a much clearer idea of the benefits of exploring in Algeria.

--Lies Sahar, newsdesk@platts.com

--Stuart Elliott, stuart_elliott@platts.com

--Edited by Maurice Geller, maurice_geller@platts.com