ALGERIA - The E&P Regime.

Due to tough E&P terms, exploration fell considerably in the second half of the 1970s. As a result, the government in 1980 improved its terms somewhat by offering new production-sharing agreements (PSAs), JV concessions and service contracts. But no foreign company could hold more than 49%. As the foreign companies' response in the subsequent years was below Algiers' expectations, with fields poorly maintained by Sonatrach, Algeria's oil production capacity fell.

After a long debate, a new upstream law was issued in August 1986 to attract foreign companies and for oil exploration to be resumed. All three types of E&P contracts were improved and foreign companies were allowed to act as operators. But the law preserved Sonatrach's right to hold at least 51% in any venture, with Sonatrach also acting E&P regulator. Because the response was poor, further improvements were made in 1986-87, while other states in North Africa and the Middle East were offering better terms and foreign firms still were apprehensive of Algeria's tough socialist approach.

The law was amended in late 1991. Foreign companies then could take up to 49% equity in producing oilfields and in E&P for gas, whereas before only Sonatrach could develop and operate gas fields. Pipelines and related facilities were no longer a Sonatrach monopoly. Disputes were to be resolved by international arbitration and not by Algerian courts. Further improvements of the regime were made in the subsequent years.

In 2000 the Ministry of Energy and Mines, under Shakib Khelil, proposed a new law which he had to revise in 2001 because of opposition from within Sonatrach and powerful trade unions. The law was issued in late 2002 to end Sonatrach's monopoly and E&P regulatory role and allow foreign companies to hold the majority in new E&P ventures. But the law was shelved in early 2003 in view of opposition from the labour unions.

After President Abdel Aziz Bouteflika won a second term in April 8, 2004, elections, Khelil was retained as minister and encouraged to revive the law. But this time he was careful and moved cautiously (see background and outcome of six international oil and gas rounds since 2000 in gmt5AlgGeoJan31-05).

On Oct. 14, 2006, the National People's Assembly approved amendments to the 2005 hydrocarbons law which reinstated Sonatrach's automatic position as 51% majority partner in all E&P ventures. The amendments also imposed a windfall tax on international oil companies (IOCs) of 5-50% when the price of dated BFO was above $30/b. The latter measure was to earn Algeria over $1 bn of income per year.

Details of the tax published in December 2006 showed that it will have a disproportionate impact on key foreign producers. Companies that are producing over 40,000 b/d will be paying up to 50% of their additional profits to the state. The lowest rate applies to those producing 5,000 b/d or less. The tax will hit Algeria's leading foreign operator, the US independent Anadarko, the hardest on its gross oil production of 470,000 b/d (see Part 2 in No. 6).

The next international oil and gas round - the seventh since 2000 - was scheduled for the first months of 2007, with ten new blocks to be offered expected to include offshore tracts. Speaking at the third international energy conference in Oran in late November 2006, Sonatrach CEO Mohamed Meziane said new exploration will help to address the country's low oil well ratio of 11 wells per 10 million sq km, compared with a world average of 105. He said: "We are well below international standards. Most of our conventional resources are exploited by Sonatrach alone, but now we will look for the best formula to work with both [IOC] operators and service companies to explore new oil and gas frontiers".

Meziane told the conference Algeria must develop unconventional sources of energy, such as tight gas and shale gas, in order to meet rising demand. He said: "The era of conventional resources in Algeria is now ending - ahead is that of non-conventional resources, whether it be tight, shale or deep gas, or coal, methane or offshore gas. Most of Algeria's potential is in cutting-edge technology, with a focus on tight gas, shale gas and deep gas".

Algiers hosted a workshop in December on tight gas, with the south-west of the country seen as a key target for development.

Sonatrach has a programme to examine 41 oil and gas prospects: 33 in the east, five in the west and three in the north of the country. Meziane detailed Sonatrach's investment plans, which will see the state-owned company investing about $32,000m over the next four years in order to raise the country's gas exports to 85,000 MCM/year by 2010 and oil production to 2m b/d from 1.45m b/d. In 2005, Algeria exported about 60,000 MCM/year of gas. For Sonatrach export 85,000 MCM/year, it will have to raise gas production by as much as 25,000 MCM to 175,000 MCM/year.

Speaking to MEED on the sidelines of the November conference, Sonatrach Vice-President Chawki Rahal said the company would beat its gas export targets. MEED on Dec. 8 quoted Rahal as saying: "Our official target for gas exports in 2010 is 85,000 million CM/y, although it is likely to be more. We are likely to reach 100,000 million CM/y by 2012-13".

MEED on Dec. 8 said: "Offshore acreage may become available to international oil and gas companies for the first time when Algiers launches its seventh international oil and gas licensing round, expected in the early months of 2007. MEED quoted Sonatrach Exploration Director Reda Rahal as saying: "There are no offshore research permits in Algeria to date. But it may be possible in the coming bid round".