Algeria's new hydrocarbon law comes into force amid output slump

Algiers — Algeria's new hydrocarbon law -- designed to reverse declining foreign upstream investment through improved contract terms and tax rates -- came into force Monday after it was published in the country's Official Gazette.

The new law is considered essential for restoring the attractiveness of the sector against the background of low oil and gas prices, and increased competition among producing countries to attract new investors.

Under the new legislation, the tax burden on state-owned Sonatrach and its international partners will be cut from 85% to around 60%-65%, Toufik Hakkar, head of the working group responsible for the law, said.

In an interview with state news agency APS, Hakkar -- who is also vice president for development at Sonatrach -- said the "significant" fall in the tax burden was due to the reduction of three main taxes: the production levy; petroleum income tax (TRP); and complementary income tax (ICR).

Hakkar said the production levy will be set at a fixed rate of 10% compared with a range of 5%-20% previously.

The TRP is changed from a range of 20%-70% to a range of 10%-50% and the ICR moves from a range of 19%-80% to a fixed rate of 30%.

OUTPUT DECLINE

The change in hydrocarbon law comes as production from Algeria's oil and gas sector -- the mainstay of its economy -- continues to decline.

Oil production in the country has fallen over the past few years, averaging just 1.03 million b/d from January to November this year, its lowest average since 2002, according to S&P Global Platts data.

Algeria's pipeline gas exports to Spain and Italy fell by more than 11 Bcm year on year in 2019 to just 21.1 Bcm, according to S&P Global Platts Analytics data, only partly offset by higher LNG exports, which rose by almost 2 Bcm to 16.4 Bcm of gas equivalent.

Algeria has vowed to raise exploration activity together with international partners, and the reappointment last week of energy minister Mohamed Arkab in the new government appointed by President Abdelmadjid Tebboune will likely maintain stability in the oil and gas sector.

Sonatrach has said that the reform was urgently needed given the time it takes to implement new projects, pointing to the average time of 10 years between winning an exploration license and moving it to production.

"The new law is vital for Sonatrach to enable it to develop the discoveries made in recent years," it said in late 2019, adding that the development of many finds had been uneconomic due to the previous tax regime.

Government officials have said the legislation would mark a return to provisions in the 1986 hydrocarbons law, which led to significant discoveries in the 1990s, before changes to the regulations in the mid-2000s saw investment tail off.

ECONOMIC DIVERSIFICATION

Despite the reform, President Tebboune said on Sunday that he wanted to "free" the country's economy from dependence on hydrocarbons.

"It is imperative to apply a solid economic model based on diversification," Tebboune was quoted as saying in a statement from the presidential office.

"An economic model freed from bureaucratic obstacles, which generates wealth and absorbs unemployment, especially among young people," he said.

"This model must allow the national economy to free itself from dependence on hydrocarbons, essentially through the encouragement of alternative and renewable energies."

Hydrocarbon exports represent almost 95% of Algeria's foreign currency earnings, while the sector in Algeria accounts for 60% of the country's GDP.

By producing more electricity from renewable energy, Algeria hopes to free up more gas for export.

At the weekend, the Algerian government said its draft 2020 finance law provided for a 2% year on year increase in revenues from hydrocarbon exports from $34.5 billion to $35.2 billion.

The increase would be achieved through higher export volumes, it said, without giving details.

It added that it was basing its 2020 finance law on a reference oil price of $50/b and a market price of $60/b.

--Stuart Elliott, Illies Sahar, newsdesk@spglobal.com

--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com