After a year-long review process, amendments to Algeria's Hydrocarbons Code were released in February 2013, offering new incentives to foreign investors. National authorities hope that the revisions will stimulate greater international involvement in oil and gas exploration, particularly for unconventional reserves, such as shale.
The country has seen declining investment in exploration since legislation was introduced in 2009 that requires foreign companies to enter into a joint venture with the state operator, Sonatrach, and limits their participation to 49%. The oil and gas sector still accounts for the majority of foreign direct investment (FDI) into the country, although overall FDI levels have fallen, dropping from $2bn to $1.7bn between 2011 and 2012, according to figures from Algeria's central bank.
In 2011, Sonatrach was responsible for 19 of the 20 hydrocarbon discoveries made nationwide and was the sole operator in 40 of the 53 active exploration permits. In the most recent bidding round, held in March 2011, only two of the 10 oil and gas permits on offer attracted bids, with Spain's Cespa and Algeria's Sonatrach winning licences for the Rhourde Rouni II and Rhourde Fares areas, respectively. This was the third consecutive bidding round to attract limited foreign interest.
The Hydrocarbons Code released in February makes some significant changes to the 2005 version, including revisions to the fiscal structure so that taxes are calculated on the basis of a project's profitability, rather than on its turnover. While foreign companies will now be subject to domestic corporate taxes, they will have the option to pay licencing fees in-kind. The new code also guarantees foreign operators' access to pipelines owned and operated by Sonatrach for a set tariff. Finally, a number of special incentives were introduced to encourage activity related to unconventional resources and deposits that are small in size or located in under-explored areas.
These revisions should help to give companies greater ownership over their exploration activities, although notably the 51:49 structure of joint ventures will not change. The special fiscal and operational incentives are designed to boost exploration for unconventional resources such as shale, where Algeria has a greater need for foreign involvement and expertise. However, for now it is unclear whether the recent revisions to the Hydrocarbons Code will be enough to generate new interest from international players.
The hydrocarbons sector has been buoyed by rising global oil prices but production levels are trending downward and the sector has had a negative contribution to real GDP growth in the last two years. Total exports of oil and gas amounted to $71.7bn in 2011 and $70.8bn in 2012, and they are projected to dip slightly to $70.3bn in 2013.
The need to stimulate new exploration is all the more important as existing fields are largely mature. Efforts to boost production in the medium term will likely depend heavily on tapping into unconventional and offshore resources. According to estimates from the US Energy Information Administration, Algeria may have as much as 6.54trn cu metres of technically recoverable shale gas resources. Crude oil production dipped from 1.29m barrels per day (bpd) in 2011 to 1.27m bpd in 2012, and this is expected to hold steady in 2013. Gas production, however, has remained unchanged at 1.34m bpd equivalent in 2011-12, and the same level is projected in 2013.
The volume of hydrocarbons exports fell by 1.3% in 2012, compounded by the economic downturn in Europe, after having grown by 27.6% in 2011. In the first quarter of 2013, the value of hydrocarbons exports dropped by 3% year-on-year to $19.68bn. Given the dominance of oil and gas, this dip contributed to a 2% decline in the overall value of Algerian exports for the quarter to $20.3bn.
While overall exports were down in the first three months of this year, the Medgaz pipeline, a submarine connection linking Algeria and Spain that became operational in April 2011, saw rising export levels in early 2013. Algerian Customs officials announced in the national press that Medgaz accounted for $600m worth of natural gas exports in the first quarter of 2013, nearly half of its total of $1.3bn for full-year 2012.
Furthermore, the Tiguentourine gas field in the southern Illizi province, which has been offline since it was the target of a terrorist attack in January 2013, is expected to return to operation by year-end. According to reports in the local press, the Tiguentourine complex has an annual capacity of 9bn cu metres and accounts for roughly 12% of national gas production. A group of representatives from government ministries, state agencies and law enforcement has been working to develop a plan to reinforce security at production sites, with a focus on the sparsely populated southern provinces, in an effort to reassure foreign investors.
While Algeria has taken concrete steps to encourage greater foreign involvement in its hydrocarbons sector, these efforts may continue to be hampered by a restrictive partnership structure and uncertainty over the security environment.
© Oxford Business Group 2013
