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IOCs retain Algerian caution

Sceptical Western investors adopt wait-and-see attitude even after Algeria’s interim government agreed a draft hydrocarbons law

Algeria is set to move away from an onerous tax regime that has seen international oil companies (IOCs) stay away in recent years, under a draft law announced in October by interim president Abdelkader Bensalah, who replaced the ousted Abdelaziz Bouteflika in May after weeks of riots. But it remains to seen whether it will be enough to fire potential investors’ enthusiasm. 

Officials say the law is a return to the IOC-friendly regulatory framework of the 1980s and 1990s, which resulted in rapid growth in oil and gas output. That framework was ditched in 2005, but tighter rules deterred IOCs and saw exploration stagnate. Auctions for exploration licenses flopped in 2010 and 2014, with only six of 42 concessions taken up. 

The new law keeps the requirement that foreign investors must set up joint ventures with Algerian partners and cannot own more than 49pc. This has been a major disincentive for IOCs, which are reluctant to invest plant, finance and expertise in enterprises they do not control. 

Whoever takes charge of the country after December's vote will face a looming cash crunch

But officials say the new law eases the so-called windfall tax, which mandates that, if oil or gas prices rise above a certain point, IOCs pay higher taxes. And it offers more streamlined and flexible terms for production-sharing contracts (PSCs). 

The draft law will need parliamentary approval, and that is not guaranteed. There is a powerful narrative in Algeria suspicious of outside actors gaining control of oil and gas. Several hundred people protested in Algiers hours after the draft law was announced, accusing the government of selling out to foreign firms. 

Even if passed, the new law on its own will not solve the woes of a hydrocarbons industry that has become a byword for corruption, delays and inefficiency. IOCs have long complained about state oil firm Sonatrach’s poor management. “Enactment of a more attractive hydrocarbons law is a necessary, but not sufficient, condition to relaunch Algeria’s hydrocarbon upstream,” says Mostefa Ouki, author of an October study for the Oxford Institute for Energy Studies. “International investors face…a daunting bureaucratic administration system.” 

Sonatrach’s upper echelons are also engulfed in corruption investigations mandated by the new government. On the plus side, Algeria can point to four new gas developments in the south west which should add 13bn m³/yr to production. Sonatrach officials have met with IOCs including Chevron and ExxonMobil to discuss new exploration. 

Elections ahead

Algeria faces presidential elections in December, but whoever takes charge of the country will face a looming cash crunch, which only a rapid jump in hydrocarbons output can fix. Most of the 42mn population rely on subsidies for housing, fuel and food—or on pay packets in a grossly inflated public sector, and those payments depend on oil and gas, responsible for 95pc of export earnings.

But hydrocarbon production is falling. Exhausted fields and inefficiencies have seen gas output fall from 89bn m³ in 2013 to 80bn m³ now, and oil is down from 1.77mn bl/d a decade ago to around 1mn bl/d in September. Algeria announced in October that hydrocarbons exports were down by 9pc in the first nine months of 2019.  

The former government kept the subsidy system mostly intact by raiding foreign reserves, which fell from $194bn in 2014 to $88bn in July. This is unsustainable without a substantial production jump. But IOCs will need to see not just a change in the law but political stability before committing to new ventures.

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