Algeria Revises Hydrocarbon Law But Real Sector Changes Remain Unclear

After months of speculation, Algeria’s Council of Ministers finally announced that they had passed a revised hydrocarbon law, erasing the outdated 2005 legislation in hopes of reversing the country’s waning production levels. However, lacking precise details and missing expected reforms for existing projects, the new law ‘s impact on the country’s weakened production efforts may not have the impact they hoped for.

Passed earlier this month, the legislation was accompanied by an announcement from the national government outlining a plan that focuses on creating a more inviting investment environment for potential development partners who can help Algeria make the most of their potential shale reserves. However, the revisions appear to have little effect on existing or more traditional efforts, which have seen a steady decline in recent years.

According to a Bloomberg report, Algeria is sitting on an expected 2 trillion cubic meters of shale gas which they base on tests carried out in three provinces over 180,000 sq. km. However, reaching the country’s reserves remains a challenge for the government and its state-backed firm Sonatrach because of high initial production costs and a lack of domestic experience and equipment.  The shale push figures into the country’s wider $80 billion energy sector investment plan over the next five years, with 60 percent of funds dedicated to excavation and production efforts, including “150 exploratory wells and expand crude-processing capacity at three oil refineries.”

To meet the requirements of launching a local shale effort, Algeria has turned to foreign partners to help guide the process and provide needed technical experience, including Italy’s Eni, Royal Dutch Shell and Exxon Mobil. The new legislation was meant to appeal to these firms, opening up significant new streams of revenue to a country heavily dependent on hydrocarbon exports to meet government spending needs.

An Uncertain Energy Landscape

Almost exclusively dependent on oil and natural gas revenue to fund government spending and operations, Algeria has long realized known that the secret to keeping the country politically and socially calm is a strong energy sector. However, in recent years, sector uncertainty and misuse helped create a working environment seen as hostile to a number of necessary foreign firms, leading to both cancellation of existing projects and dwindling interest in new ones. The most glaring example of the country’s waning attractiveness to outside investors came with a round of ten possible licenses which attracted only two bids, one of which came from the country’s state-backed energy firm, Sonatrach.

The decline began with the adoption of new revenue sharing laws and taxes in 2005, including a new policy in 2006 that would impose heavy costs on revenue when oil climbed over $30 a barrel. Interest continued to waver, spurring a decline in the country’s output, which dropped more 5 percent in 2009 alone. Algeria’s production environment grew more and more unattractive to foreign investors, spurring threats from international firms that they would leave if conditions did not improve.

This process began with a wide-reaching corruption investigation at Sonatrach, resulting in an overhaul of the company’s leadership. Accused of selling exploration rights and claims to family members and friends, the Sonatrach leadership was shown the door in a way Algiers hoped would rebuild some level of confidence among international investors.

The energy sector leadership in Algiers continued this process with new support for novel avenues of local exploration, including new natural gas efforts and adopting unconventional strategies, including seeking out the kind of deep-set shale reserves that have transformed energy markets in North America, China and potentially Argentina. However, Algeria realized that to diversify, they must seek out ways to appeal to wary funding partners abroad.

In order to appeal to necessary foreign production partners, Algerian officials announced a revision earlier this summer, noting that an overhaul was necessary because the 2005 law was passed when pricing and technology required a very different approach to excavation and production strategies.

Now passed and announced by the government, the legislation has fallen short of analyst expectations, including keeping a 51-49 percent ownership requirement for Sonatrach in place. Additionally, the new laws will not apply on existing excavation projects, giving little relief to those companies already operating in country. Instead, government officials announced only that undefined tax incentives would be offered to foreign partners to encourage unconventional efforts, which require significant investments in technology and personnel.

An Wider Expansion Effort

Algeria’s move into unconventional exploration efforts comes as the country tries to broaden their energy base, for the benefit of both growing domestic demand and vital revenue streams. In addition to supporting the development of shale projects, Algeria has also begun appealing to development partners for renewable projects to the tune of $60 billion, according to a Bloomberg report. The push is intended to move the country towards a 40 percent adoption of renewable power by 2030, easing domestic demand and increasing the amount of domestic hydrocarbon reserves available for export.

Image: Sweet Crude Report

Originally Posted: Newsbase’s Afroil Monitor

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