Seventh E&P Licensing Round Launched in Algeria

A Favourite Play for IOCs?

Algeria has for almost two decades been one of the Middle East and North African (MENA) region's absolute favourite hydrocarbon plays for IOCs, offering expansive and highly prospective territory that to this day remains vastly underexplored. This has led to large investments in oil and gas exploration and production (E&P) both from a number of majors, particularly the United Kingdom's BP and France's Total, and a large number of medium-sized companies, led by U.S. independents Anadarko and Hess, Norway's StatoilHydro, and Spain's Repsol-YPF, as well as a number of juniors and minnows such as Gulf Keystone and First Calgary. Algeria has been able to offer acreage for the different sizes of companies at the same time, instead of the more common approach of its neighbours to pursue the largest projects only and wait for the development of junior fields once all larger opportunities have been depleted.

However, the new 2006 oil law upset the attractiveness of Algerian investment from the outset, by establishing the right of state company Sonatrach to take a 51% stake in all upstream hydrocarbon projects and raising the government's take, mainly through the introduction of a windfall tax. IOCs initially protested, as the 2006 change entitled the levying of this windfall tax on already-signed production-sharing agreements (PSAs), but as oil global prices have continued to rocket and resource-nationalistic policies have spread throughout producing nations, the Algerian E&P terms are still viewed as generally very competitive by international standards.

Calming the Fears

The main fears of IOCs have instead come to rest on the credibility of the current oil law in a "political stability" sense, with concern that popular or parliamentary pressure could move the goalposts again and force companies to change terms in the middle of agreed contracts (see Algeria: 21 July 2006: Algeria Prepares to Go Into Reverse on Hydrocarbon Law as Political Factors Rule the Day). The process surrounding the current oil law was seen as signalling such possibilities, as what began as quite a far-reaching liberalisation of the upstream oil-sector law draft in 2005—especially judged in the regional context—was within a year reversed to become a more protectionist legal framework.

While this could be—and at least initially in many cases was—interpreted by companies as a growing preponderance for politically driven retroactive changes to agreed contracts, the Algerian government has been keen to demonstrate that this measure was a one-off, driven by radical changes in long-term conditions. The great delay of the seventh licensing round—it was initially scheduled to be launched just after the 2005 oil law in the third quarter of 2005—can in part be attributed to this, as the government seems to have been willing to soothe feelings, and to restore a sense of normality and stability in the industry after the 2006 liberalisation reversals in the current oil law (see Algeria: 8 September 2005: Hydrocarbon Reform Process Moves Slowly Forward in Algeria and Algeria: 16 October 2006: Parliament Approves Hydrocarbon Law Changes in Algeria).

The Terms

ALNAFT has not published results of the prequalification process running over the first half of this year; the prequalified companies have only been contacted directly (see Algeria: 14 January 2008: Exploration Licensing Round Prequalification Launched in Algeria). Companies have been classified as being qualified to bid for projects as operators, or just as investors taking a partnering stake, and will have access to ALNAFT's data rooms during two periods: the first half of August, and during September to mid-October (see table).

Energy Minister Chakib Khelil has, in the run-up to the licensing round, stressed that companies' ability to offer international asset swaps to Sonatrach, enhancing its international portfolio, would be highly influential in the tender evaluations process, although initial calls for stakes in downstream oil, petrochemical gas liquefaction, or regasification projects seem to have been dropped—or at least modified—given the difficulty in comparing the value of projects in different sectors, industries, and countries to each other in a transparent and fair way. Less prospective acreage in frontier territories is also likely to continue attracting small E&P players, which will have little if anything to offer Sonatrach except their low risk aversion, further complicating the selection process.

What remains clear, however, is that ALNAFT will look favourably on those offers involving good opportunities for technology transfers and strategic co-operation extending internationally, with the possibility that some of the large companies will be successful in offering overseas upstream acreage to Sonatrach directly as part of the bidding.

Outlook and Implications

So, Algeria is launching its seventh upstream licensing round, ready to pull in a good-sized crowd and dispel the controversies from 2006 and early 2007 over its enacting of a windfall tax for already-signed and future contracts. The windfall tax will, in the new PSAs awarded through the imminent process, be exchanged for an integrated windfall government-take mechanism, adjusting with the fluctuation of the world market per-barrel price (see Algeria: 9 April 2008: Windfall Tax to Be Integral to New PSAs in Algeria's Coming Licensing Round). The exact terms remain to be negotiated, but the government's blueprint is thought to be relatively standardised and straightforward, with ALNAFT hoping to finalise negotiations with all winners between 3 and 17 December.

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