Written by Chloe Marie – Research Fellow
The Global Shale Law Compendium series addresses legal developments and other issues related to the governance of shale oil and gas activities in various countries and regions of the world. In this article, we will highlight governance actions taken by Algeria to develop policies specific to shale gas development.
The hydrocarbon sector represents a major part of the Algerian economy and accounts for 25% of its gross domestic product, up to 95% of its export earnings, and 60% of its budget revenues according to EIA data. Algeria is the largest producer of natural gas and a top three producer of crude oil in Africa as well as being one of the major suppliers of natural gas to the European market. The economic situation of the country, however, has progressively declined in recent decades. This decline has been precipitated by the collapse of world oil prices in 1986, the decline of conventional supplies, and an increase in domestic demand. These factors have led to low level of foreign investments in the field of hydrocarbon development and to a decline in export levels. Consequently, for these reasons, the Algerian government began to evaluate the country’s shale gas potential in 2009 with the objective of increasing its hydrocarbon supplies and maintaining its position as leader in the natural gas sector.
According to EIA estimates released in 2013, Algeria possesses around 707 Tcf of technically recoverable shale gas, which generally are located in southern Algeria. Despite having considerable shale gas potential, such development in Algeria has faced significant legal, political and technical difficulties that may jeopardize the level of foreign direct investment necessary to realize this potential.
The legal and regulatory framework for the hydrocarbon resources has long been considered unstable and unattractive to foreign companies due to protectionist policies and economic nationalism in relation to exploitation and production activities. Indeed, since the end of the French colonial era in 1962, Algeria has been committed to regain control over its land’s hydrocarbons and mineral resources. To that effect, the country has enacted restrictive foreign investment rules and created Sonatrach, a government-owned company which must hold a 51% stake in each oil and gas exploration and exploitation project. In the shadow of its economic crisis, the Algerian government has become progressively concerned about the possible effects such legal protectionism could have on the hydrocarbon sector and therefore has gone through several reforms in an attempt to liberalize the market. These reforms, however, have not been particularly successful as they offer limited contractual mechanisms and financial incentives to encourage foreign direct investments.
To date, the relevant legal framework is comprised of the Hydrocarbon Law 05-07 of April 28, 2005, which was amended by Ordinance 06-10 of July 29, 2006, and supplemented by Law 13-01 of February 20, 2013, towards a goal of promoting foreign investments in shale gas extraction in Algeria. The Hydrocarbon Law provides for the granting of a single contract for both exploration and production of hydrocarbons issued by the National Agency for the Promotion of the Hydrocarbon Resources of Algeria (ALNAFT). Applicants must go through a tender process with a selection including both technical and commercial criteria. Subsequently, the winner of the tender must enter into a compulsory joint operating agreement with Sonatrach and this agreement must contain a participation clause for Sonatrach, which must hold a 51% minimum share in each exploration and production contract. Interestingly, the exploration and production activities are performed either by Sonatrach as sole operator or by Sonatrach and the foreign company as joint operators. The operator bears all costs related to the performance of the contract. If hydrocarbon resources are discovered, any production activity must be approved by ALNAFT. The Hydrocarbon Law also provides for tax incentives for foreign companies with taxes based on profit rather than revenue to encourage unconventional oil and gas production.
In recent years, ALNAFT has granted several prospection permits and exploration and/or production contracts for shale development to many foreign companies, including, among others, Eni, an Italian-based energy company, Statoil ASA, and Royal Dutch Shell. Despite these actions, shale gas production has not yet been carried out in Algeria.
From a political point of view, Algeria faces a problem of confidence among foreign investors, mainly for two reasons: the growing terrorist threat and government corruption. In January 2013, Algeria faced terrorism at the Tiguentourine gas facility near In Amenas, in southeast Algeria, involving hostage taking and the deaths of dozens of civilians working at the gas facility. This attack had strong repercussions on the export of energy resources and on the presence of foreign companies in Algeria. This matter was not an isolated incident and thus questions remain among foreign investors about the security of their investments and the safety of their employees and contractors. Furthermore, in January 2010, Sonatrach was involved in a major corruption scandal in the award of contracts and was placed under judicial supervision, which seriously challenged the government’s credibility. Again, in late 2012, the Algerian government came under increasing scrutiny as a result of the Italian government’s investigation over suspicions of corruption in the handling of a natural gas pipeline project in Algeria. These legal disputes have considerably undermined the business conditions within the Algerian oil and gas sector and discouraged foreign investors to partner with Sonatrach and the government in any kind of energy project.
Finally, from a technical standpoint, the Algerian government has been the subject of broad criticism internally for not being able to address the potential impacts of hydraulic fracturing on the environment, and more precisely on water resources. In December 2014, Sonatrach drilled two exploratory shale gas wells near the Saharan town Ain Salah to evaluate the operational and economic feasibility of producing shale gas from the Ahnet basin. The results were considered promising and, soon after, Sonatrach announced its intention to invest around $70 billion for the exploitation of shale gas in the Saharan region. In early 2015, the inhabitants of Ain Salah along with populations of neighboring towns demonstrated against such exploitation projects alleging serious concerns over water scarcity and contamination. Indeed, the Saharan desert covers most of Algeria, and water resources are very limited in southern areas of the country where agricultural irrigation is the primary water consuming sector. Add to this the lack of infrastructure and experience working with the technique of hydraulic fracturing, and foreign companies have expressed important doubts about the real prospects and viability of shale gas production in Algeria.
The future of shale gas developments in Algeria remains fragile and uncertain. Shale development could provide benefits to Algeria’s economy, but the country must deal appropriately with the legitimate concerns of foreign investors. If the country fails to do so, the energy sector in general may fall into a dangerous situation with little chance for shale gas development.
Prior articles in the Global Shale Law Compendium series:
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