ALGIERS – A new hydrocarbons law in Algeria, which commits to the oil and gas market against a global trend favoring renewable energy, has sparked controversy in the country which has seen a sustained protest movement demanding economic and social changes.
Algeria has been mired in an acute economic and financial crisis since the price of oil and gas collapsed in 2014, materials that account for 95% of its exports.
A sharp decline cut its revenues and shook the obsolete socialist system of subsidies for essential products – fuel, flour, water, housing, transport, basic food – with which the military regime, in power since independence from France in 1962, had bought social peace, particularly in times of economic anxiety and social disenchantment like the current one.
Believing it was a temporary situation, the regime then led by President Abdelaziz Bouteflika resorted to the abundant reserves of foreign currency, then calculated at about 178 billion euros, to maintain subsidies and maintain the peace he had brought in 2011 to after the Arab Springs uprising.
In 2018, a year before the outbreak of the popular revolt that facilitated Bouteflika’s expulsion, reserves had been reduced to less than half with no prospect of the oil market recovering, as had been predicted by Algerian experts.
The cuts, which impoverished an already poor population, were imposed and discontent grew.
The option of resorting to international debt – a red line in the Algerian military regime – was ruled out, the new government has prioritized investment in fossil fuels and passed a law that encourages prospects such as shale gas extraction, which are expensive and have a great impact on the environment.
In theory it also opens up the watertight national hydrocarbons market with the intention of alleviating continued decline in production of deposits, the decline in reserves and the increase in national consumption.
Algeria has already depleted 60% of its oil reserves and increased its internal consumption at a rate of 7% per year, a dangerous combination that could lead to more difficulties meeting its exploitation commitments, according to official figures.
The new law, which is awaiting final approval this week in the senate, includes significant tax and customs exemptions for foreign companies willing to invest in the Algerian sector and facilitates the transfer of shares of foreign companies if they were acquired by other companies.
It also allows the exchange of old concession contracts for others with fewer conditions, although it does not repeal, as was initially reported, a rule requiring an Algerian partner to be in place and to own at least 51% of the shared company.
The law also preserves article 51/49 which grants state company Sonatrach the right of first refusal and the ability to invalidate the sale or transfer of assets and shares of foreign companies.
It includes tax exemptions such as VAT for companies that invest in upstream activities (research, exploration and drilling phase), professional activity and customs fees and duties on imports of materials and equipment.
Economist Mahfoud Kaoubi told EFE: “It is intelligent, the law also simplifies tax procedures and the involvement of different administrations, in addition to favoring flexibility between Sonatrach and foreign partners.
“The objective is more flexibility, more visibility and capacity to attract in a global environment marked by an increase of concurrence and fall in oil prices.”
Mohamed Said Beghoul, a former director of exploration at Sonatrach and industry veteran of 30 years, said the new legal framework only offers opportunities to small oil groups, since it focuses on taxation and not on the search for new deposits.
“To say that this law will attract investors like a magic wand is not true,” he told EFE.
“This law will fascinate Asian companies of less weight than Sonatrach and not larger groups such as Exxon or BP that will prefer other subsoils.
“Taxation is the second stage, the investor is only interested in the volume he will find.”
He added: “A partner, when he arrives, does so as a geologist.
“The new deposits are modest, with small accumulations that do not whet your appetite.”
A criticism that is also on the street, where the new regime has taken advantage of a period of political transition and social upheaval to approve a legal framework that will allow it to “shear the oil riches,” without thinking about the fate of future generations.