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:
No comments:
Post a Comment