News & Insights

Energy Law Exchange

March 13, 2020

Overview of the New Algerian Hydrocarbons Law

After 15 years of foreign upstream oil and gas investment in Algeria being regulated by law No. 05-07 of 28 April 2005, as amended (“Law 05-07”), a new hydrocarbons law was published at the eve of 2020, law No. 19-13 dated 11 December 2019 relating to hydrocarbons activities (the “New Law”).


1.1 Historical context – From Law 86-14 to Law 05-07

Following the nationalisations of 1971, structured involvement of international oil companies in Algeria began under law No. 86-14 of 19 August 1986, as further amended (“Law 86-14”). This system offered three different investment vehicles: the association (incorporated joint venture with the Algerian national oil company, Sonatrach), the production sharing contract and the risk services contract (both types of contract also entered into with Sonatrach). In practice though, most investments were made on the basis of production sharing contracts, which appeared to be the preferred option. The old system produced 20 years of growth in upstream oil and gas investment, a growing number of foreign companies operating in Algeria, and an increase in discoveries and production.

Towards the end of the 1990s, given the growing competition among other countries around the world to attract foreign oil companies, the decade-long civil unrest in Algeria, the volatility of oil prices, growing internal demand and existing long-term gas export commitments, coupled with the alarming declining discovery rate, the government decided to issue a new law which was intended to boost the attractiveness of the Algerian oil and gas regime. Despite significant opposition, the new Law 05-07 was adopted and completely changed the hydrocarbon regime in Algeria. Sonatrach lost its regulatory prerogatives—which were mainly transferred to two independent agencies, ALNAFT and ARH—and was supposed to become a purely commercial oil company, competing for blocks like any other international oil company (“IOC”). The old production sharing system (as well as the association or the risk services contract) was abandoned in favour of a unique type of contract, the exploration and/or exploitation agreement (“EEA”), which was in fact more akin to a concession, and whose fiscal terms were also completely overhauled to more closely resemble a concessionary tax system. Moreover, Law 05-07 was initially designed to put Sonatrach in a similar position to other IOCs, but in 2006, its fundamental principles were altered, with the introduction of a compulsory minimum 51% participating interest for the benefit of Sonatrach.

2.2 Law 05-07, a law that has not lived up to expectations

During the 15 years that Algeria was under the regime of Law 05-07, the country held four exploration rounds, with limited success. In the 2008 round, only four blocks were awarded (out of the 45 offered); in 2009, only three (out of 10 blocks offered); in 2011, only two (out of 10 offered); and in 2014, only four (out of 31 offered). Moreover, no substantial new discoveries were made, and a decreasing interest of midsize and major oil companies has been remarked over the past few years.

Even the amendment of Law 05-07 in 2013, which introduced new incentives improving the attractiveness of the national mining domain with the aim of intensifying the exploration effort and, as a result, of discovering new conventional and unconventional reserves, did not make a difference.

This would not have been alarming had Algeria’s economy not been largely reliant on hydrocarbons and had it effectively encouraged investments in other sectors. But, for decades, hydrocarbons have accounted for more than 90% of the country’s exports (approximately 93.6% in the first quarter of 2018). The economic contribution of the hydrocarbons sector has substantially decreased with the fall in oil prices that began mid-2014. As an illustration, hydrocarbons constituted around 60% of the country’s revenues in 2014, but this figure fell to 47% in 2016 and to around 40% in 2018 and 2019. This decrease has had significant consequences for the economy, exacerbated by constraints linked to the sector (maturing fields) and the unattractiveness of the latest oil and gas upstream bidding rounds.

The New Law was announced at a time when the country, in a critical economic situation, was also facing political turmoil: since February 2019, civil uprisings against the regime have forced the president Bouteflika to resign and have instigated new elections. The draft law was kept confidential, and in the absence of a proper consultation process, the public was left guessing as to the content of the amendments. Since the publication of the New Law at the end of December, the mystery has been lifted at least on the main principles of this new legal framework (see para. 2 below), although several topics deserve clarification. These remaining issues should be addressed in the implementing regulations which are yet to come (see para. 3 below).


The New Law is generally more precise, simpler and more flexible, in particular by providing different contractual options and more room to contractually negotiate certain terms such as the sequencing of the different exploration phases, the financing and the sharing formula.

2.1 Main stakeholders

The main stakeholders involved in oil and gas activities remain the same as under the previous regime, with some adjustments however to the allocation of powers between the minister in charge of hydrocarbons and the existing hydrocarbons’ regulatory agencies:

  • Minister in charge of hydrocarbons – The minister is entrusted with the general role of defining and overseeing the implementation of the Algerian hydrocarbons and energy policy. The minister is mainly involved in the mining titles granting process, the approval procedure for hydrocarbons contracts and their amendments, the exploitation authorisations, and pipeline transportation concessions.
  • ALNAFT [the National Agency for the Development of Hydrocarbon Resources] ALNAFT is the holder of the mining titles and maintains its role of regulator as under Law 05-07. ALNAFT is responsible for managing the upstream mining domain, which includes issuing licensing rounds and evaluating bids for the selected perimeters, granting exploration and production rights (through specific administrative deeds), approving development plans, approving transfers of interests, etc. ALNAFT is no longer a party to the upstream oil and gas contracts, which are now entered into only between Sonatrach and one or several contractors (see para. 2.2).
  • ARH [Hydrocarbons Regulatory Authority] – As under Law 05-07, ARH assumes a regulatory role, mainly with respect to technical issues and the control of the due compliance with the provisions of the law. The New Law has strengthened ARH’s functions concerning transportation tariffs, third-party access, and health, safety and environmental regulations.
  • Sonatrach – Sonatrach is the national oil company, which may develop oil and gas blocks either alone or with IOCs. Although it has, as under Law 05-07, the role of a purely commercial company which competes with other IOCs both in Algeria and elsewhere for acreage, Sonatrach continues to benefit from certain preferential rights and treatment.

2.2 Award of hydrocarbons interests

2.2.1 Ownership of hydrocarbons

All hydrocarbon resources remain the property of the State until they are extracted in accordance with the provisions of Algerian law and the specific requirements detailed in the relevant Upstream Concessions and Hydrocarbons Contracts (detailed in para. 2.2.4 below).

2.2.2 Contractual framework – Upstream Concession / Hydrocarbons Contract and “Acte d’Attribution

The State grants the right to explore and develop reserves to ALNAFT, through the award of mining titles. Upstream oil and gas activities under the New Law can either be carried out:

  • by Sonatrach alone, under an “Upstream Concession [Concession Amont] granted by ALNAFT, as the holder of the mining title (where Sonatrach can however entrust the operatorship to a third-party operator); or
  • by Sonatrach and one or several IOCs, under a “Hydrocarbons Contract [Contrat d’Hydrocarbures]. The New Law reinstates three types of Hydrocarbons Contracts, as under Law 86-14, whereas Law 05-07 only provided for EEAs. The Hydrocarbons Contract will operate under the umbrella of an administrative deed named “Acte d’Attribution”, granted by ALNAFT to Sonatrach and the IOCs. The co­contracting entity(ies) to a Hydrocarbons Contract shall be selected through a public tender process organised by ALNAFT, or through direct negotiations with Sonatrach (the Upstream Concession is then terminated and replaced by a Hydrocarbons Contract). As under Law 05-07, tenderers will still have to be pre-qualified.

The Upstream Concessions and the Hydrocarbons Contracts themselves and any amendments thereto (except for changes of names, transfers between affiliates and correction of material errors) must be approved by decree taken by the Council of Ministers and published in the Algerian Official Gazette.

Sonatrach and the IOC(s) are also required to agree in advance the terms of a joint operating agreement, which will govern the respective rights and obligations of the parties.

Whilst this overview of the new Algerian hydrocarbons law focuses on the rights awarded under Concession Agreements and Hydrocarbons Contracts, it should be noted that the New Law also provides for a grant of more limited rights in the form of a prospecting licence.

2.2.3. Term of the rights awarded

The New Law no longer distinguishes between conventionals and unconventionals: the term of the Upstream Concessions and the Hydrocarbons Contracts, for both conventional and unconventional hydrocarbons, is set at 30 years, including an exploration period of up to seven years (which could be extended to nine years) and an exploitation period. The term can be extended for a maximum period of 10 years.

The New Law does not provide any details of the various phases, with the conditions for moving from one phase to another being left to the contracts and to negotiations.

2.2.4. Contractual structure of the Hydrocarbons Contracts

There are three types of Hydrocarbons Contracts to be entered into between Sonatrach and the IOC(s):

  1. Partnership Agreement [Contrat de Participation]
    • The split of the participating interest shall be at least 51% for Sonatrach and a maximum of 49% for the IOC(s).
    • The ownership of hydrocarbons shall pass on to the parties at the measuring point.
    • It is not clear whether any specific requirements regarding the form of the partnership will be imposed (i.e. incorporated or unincorporated partnership, requirement for the IOC to set up a branch in Algeria, etc.).

ii. Production Sharing Contract (PSC) [Contrat de partage de production]

    • The contract shall set the terms relating to the sharing of production and cost oil, including the priority order for the recovery of petroleum costs. The IOC(s)’ share of production for cost recovery and net remuneration shall not exceed 49% of the total production.
    • The ownership title over hydrocarbons produced shall pass on to Sonatrach at the measuring point, and Sonatrach shall then transfer their share to the IOCs at a delivery point to be agreed upon, which would most likely be FOB for export. The IOC is free to dispose of its share of production in reimbursement of oil costs (including provisions for abandonment costs) and its remuneration.

iii. Risk Services Contract (RSC) [Contrat de services à risque]

    • The IOC(s) shall act as a mere service provider to Sonatrach. The contract shall define the calculation mechanisms for the recovery of petroleum cost and the remuneration of the IOC.
    • The IOC(s) shall be paid in cash. In any event, the IOC(s)’ net remuneration, after cost recovery, shall not exceed 49% of the total value of the production.
    • Sonatrach shall have ownership title over all hydrocarbons produced under an RSC.

Concerning the financing obligations:

  • in the Partnership Agreement, the financing obligations shall be proportional to the participating interests, with a possibility for the IOC(s) to carry Sonatrach’s share during the exploration period; and
  • in both the PSC and RSC, the terms relating to the financing of upstream operations shall be set out in the contract (the principle being that the IOC(s) shall bear the financing costs, with an option for Sonatrach to participate).

As to the ownership of the facilities at the expiry of a Hydrocarbons Contract:

  • in the Partnership Agreement, the parties shall keep the ownership over the facilities for which ALNAFT has not requested the transfer of ownership and all the facilities and equipment which are not ancillary to the perimeter; and
  • under both the PSC and RSC, the facilities built up for the performance of the contract shall belong to Sonatrach (and possibly be transferred to ALNAFT at the end of the contract, upon request).

2.3 Transfers

Transfers are defined as covering both assignment of interest and changes of control. Any transfer would trigger (i) ALNAFT’s prior approval within 90 days (however, the law is silent on whether a lack of response from ALNAFT within the 90-day time frame would be deemed an approval), and (ii) Sonatrach’s pre-emption right within 60 days (no deemed waiver appears in the law, however). In the case of a change of control, the minister in charge of hydrocarbons shall have three months to decide whether this transaction is “incompatible” or not with maintaining the participation of the relevant IOC in the Hydrocarbons Contract. If the minister decides that it is incompatible, then the participating interests shall be transferred to Sonatrach or the other contracting parties, subject to a “fair compensation”.

The transfer process under the New Law appears to be complex and to contain an unnecessary catch-all approval structure which limits exit rights for foreign investors.

Any transfer is subject to a 1% non-deductible tax on the transaction’s value (except for “non-commercial” transfers between affiliates).

2.4 Tax regime

The tax regime under the New Law is in essence the same as under Law 05-07 (albeit with lower rates), with the exception of one new tax: the tax on the foreign co-contractor’s remuneration.

Both the international investors and Sonatrach are subject to the same tax treatment. Under the New Law, upstream oil and gas activities are subject to the following taxes:

  • Surface Tax – which is due annually and calculated on the basis of a fixed rate per square kilometre, for each phase of the project. The rate of the surface tax is subject to an annual indexation set by ALNAFT based on the Algerian consumer price index (CPI). It is non-deductible for the calculation of the Hydrocarbon Tax and the Income Tax.
  • Hydrocarbons Royalty which is due on a monthly basis and calculated at a rate of 10% of the production value (whereas under Law 05-07, the rate varied from 12% to 20% for production above 100,000 boe/d and there were multiple rates depending on the geographical zone and the production level). The production value is calculated by multiplying the quantities by the “Reference Price”, minus transportation cost, natural gas liquefaction costs and fractionation costs for LPGs. It is deductible, for the calculation of the Hydrocarbon Tax and the Income Tax.
  • Tax on Hydrocarbons Revenues (THR) – which is the equivalent of the former taxe sur les revenus pétroliers under Law 05-07. It applies on the value of the annual production (as calculated for the Hydrocarbons Royalty) minus certain deductions, including the Hydrocarbons Royalty, annual investment tranches (with a 25% annual amortisation), operating costs, abandonment provision, IOCs’ remuneration and carry forward. The rate of the THR varies from 10% to 50% depending on an R factor adjustment (which is in effect an internal rate of return). It is deductible for the calculation of the Income Tax (IR).
  • Income Tax (“impôt sur le résultat”) – which is largely similar to the former ICR, under Law 05-07. It is a 30% annual tax, applied to the taxable income, which is calculated after deducting depreciation rates set forth under Algerian law and the exploration costs. Both Sonatrach and the IOC(s) shall pay their respective Income Tax.
  • Tax on Foreign Partner’s Remuneration – this tax did not exist under Law 05-07 (which was akin to a concessionary regime), but did exist under the old Law 86-14. This tax is payable by the IOC that is a party to a PSC or an RSC. It applies at a 30% rate on the gross remuneration of the IOC, but allows the IOC to obtain a tax credit.
  • Flat Rate Royalty on Early Production – it is a monthly payable tax at a rate of 50%, which applies on the value of an early production.
  • Flaring Tax – there is a prohibition on flaring, as under Law 05-07. However, where a specific derogation is granted, a non-deductible flaring tax applies at a rate of DZD 12,000 per thousand cubic metres, which is revised annually based on the Algerian CPI.
  • Water Tax – a non-deductible water tax applies, which is currently set at DZD130 per m3 of water extracted, and revised annually.
  • Transfer Tax – a 1% transfer tax on the value of the transaction shall apply to any transfer of interests or change of control.

The Surface Tax, the Hydrocarbons Royalty, the THR and the Flat Rate Royalty on Early Production are paid by Sonatrach in the case of an Upstream Concession, a PSC or an RSC. In the case of a Partnership Agreement, these three taxes are paid by Sonatrach and the IOC(s).

The New Law also provides for reduced tax rates for the Hydrocarbons Royalty and THR in the case of complex geology, technical extraction issues and high development/production costs.

2.5 Other considerations

The New Law governs several operational aspects, including the possibility to grant another upstream concession or another hydrocarbons contract in other geological layers or the grant of an authorisation for the exploration and production of other mineral or fossil substances other than hydrocarbons, local content considerations, State ownership over data generated, domestic supply obligation, unitisation, development plan, fortuitous discoveries, early production, abandonment, flaring, environmental issues, transfer of immovable assets and immovable assets by destination, foreign exchange, etc.

2.6 Downstream activities

Transportation by pipeline – the New Law maintains that hydrocarbon transportation activities are exclusively carried out by Sonatrach, under a 30-year concession (which could be extended), with a third-party access right.

Refinery and processing activitiescan only be carried out either by Sonatrach alone, or by Sonatrach in partnership with any Algerian or foreign entity (the concept of partnership is unclear), subject to the approval of the minister in charge of hydrocarbons and upon the recommendation of ARH.

2.7 Dispute resolution

International arbitration is allowed between Sonatrach and the IOCs for disputes arising out of the Hydrocarbons Contracts. However, any disputes with ALNAFT can only be heard before the competent Algerian courts, unless a treaty arbitration could be put in place.

2.8 Transitory provisions – existing contracts

Law 05-07 is repealed, with the exception of the provisions relating to the windfall profit tax and provisions applicable to PSCs governed by Law 86-14.

The existing EEAs under Law 05-07 and PSCs under Law 86-14 shall remain in force and grandfathered by these laws until their initially agreed term, and may not be extended or renewed beyond that term, with the exception of the provisions of the New Law relating to the environment, health and safety, and abandonment, which shall immediately apply.

EEAs governed by Law 05-07 can opt to move to the New Law if no production has started prior to 24 February 2013 and if the request for migration is made prior to 23 December 2020.


The new hydrocarbons legal framework will no doubt give the oil and gas sector in Algeria new impetus.

The New Law has set the general framework, but several elements either remain unclear or are yet to be dealt with under implementing regulations. Until then, the implementing decrees of Law 05-07 remain applicable to the extent not incompatible with the New Law. In all likelihood, at least 25 new regulations will be published in the following months. Although several practical aspects of petroleum operations are not dealt with in this law, such as customs and employment issues, the New Law, even if not perfect, marks real progress compared to the previous regime of Law 05-07.

A more detailed legal analysis on the above can be provided upon request.