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Sid Ali Betata – Chairman, Executive Committee, ALNAFT – Algeria

30.07.2015 / Energyboardroom

The president of ALNAFT comes back on the 10 years of existence of the agency and its role, and explains the Algerian hydrocarbon environment and partnership opportunities

ALNAFT recently turned ten years old. At the time, the idea to set up an independent agency existed only on paper, and Sonatrach would provide the bulk of what has become ALNAFT’s current mission of mediation. How did the concept materialize and how was it adjusted to daily reality?

To begin I would like to thank you for the interest you have in Alnaft, by choosing to get in touch us to view to get information on topics you are interested in.

ALNAFT was created by effect of the 05-07 Law. The executive committee was inaugurated on November 14th 2005, and since then we have developed the organization so as to meet and support the mission entrusted to us by law.

Naturally, we started with the paperwork needed in order to comply with the law, and after this launched calls for applications, in order to provide the new agency with the necessary workforce. We also participated with the Ministry of Energy in the development of secondary regulation, as required by the 05-07 Law. We have started with the paperwork to ensure compliance with the law, we than have sent out calls for applicants in order to meet the needs for adequate staffing, we have also participated along with the ministry of energy relevant structures in the elaboration of the regulation provided for by the law 05-07. Once the legal framework was established Alnaft was actually born in 2008 through the launch of the first bid round. The first mission of the agency is to promote investment in hydrocarbon exploration and production, through the authorization to prospect that we give to any investor who requests one, provided they are prequalified by ALNAFT in accordance with regulation, or through an exploration and production contract, which is attributed after competitive bidding. These are ALNAFT’s essential missions, plus other major tasks such as the collection of oil royalties, with repayment to the Treasury after deduction of 0.5 percent on every transaction made by every operator, in order to fund budgets for both hydrocarbon agencies – namely ALNAFT and the Hydrocarbon Regulatory Authority, which are thus provided with financial autonomy – and approval of the development plans for each new discovery. This approval signifies ALNAFT’s authorization to start production.

Finally, we also have a mission to manage and keep up to date a national database which includes all available upstream petro-technical information, an absolutely vital tool.

Once the legal and regulatory framework was established, ALNAFT launched its first licensing round in July 2008. We eventually awarded four contracts at that time, in the midst of the global financial crisis: the price of oil had reached USD 147 when we launched the round, and was selling around USD 40 when the bidding opening ceremony took place.

In my opinion, the difficulty was not in the technical implementation of the 05-07 Law provisions, as this type of difficulty is quite surmountable; however the main difficulty was the adaptation of mentalities to the new sector organization: the hydrocarbon sector was organized in such a way that it was the national company Sonatrach that had a dual role as an investor and as the owner of field titles. With the new organization, ALNAFT started providing this second part. The resistance to change is quite a natural behavior whatever the situation and whatever places you are.

Can you tell us more about your seismic database? Historically, it was maintained by Sonatrach. How does it work today, how do you collect geological data?

This project was begun in 2009 and was set to take five years: and will be completed very soon. Currently, all the information is already available, and we are continuing the transfer process from Sonatrach to ALNAFT. We asked Sonatrach to continue to receive the new seismic data on our behalf, so we can insert them later into the ALNAFT database.

This task is going on, and we hope that the seismic database will be fully operational by the end of 2015 or in the first quarter of 2016, though the business applications are already functional. We have the data, we have categorized identification data, and a large amount of information is already in the system. We will simply continue with data transfer from Sonatrach. For this, there is scanning, control, and authorization work that needs to be done to turn this seismic data into a digital format that matches our databank.

In terms of activity, we estimate that the potential oil and gas reserves have now been half covered, either by research. These areas are covered either by prospecting activities or G&G studies, stratigraphic drilling, or by exploration (seismic activity and development drilling) as part of exploration and production contracts. It is no secret that Algeria has a vast hydrocarbon potential, much of which has yet to be revealed. Hydrocarbon resources are not all concentrated in mature areas, the potential of which is well documented. Some of them lie in under-explored areas, removed from existing infrastructure, with complex geology or even offshore. There is still much to do.

How would you describe the standard Algerian field, in terms of geology, etc.?

In the extension of your previous question I will say that the Algerian mining estate has not revealed all what it has since only half of it is covered by works, there is still a lot to do.

Geology in the Sahara is relatively mastered, especially in the case of mature reserves located in the Berkin Basin, Illizi, etc. In addition to this, geology in the north of Algeria is very complex in nature, there has been a lot of tectonic activity and geological events.

We must also account for offshore. Two prospecting licenses have been awarded to Sonatrach, one in the east and the other in the west of Algeria, where the company is currently finalizing seismic acquisition. Much work remains to be done to clearly identify the different geological events and thus define with the least possible uncertainties the history and genesis of oil in our subsoil.

As part of the Algerian policy on hydrocarbons, the legislation governing oil and gas has been adjusted to introduce incentives, in order to make it possible to continue explorative efforts on our hydrocarbon reserves, in the best profitable conditions for operators, investors, and the state.

It was with this in mind that the recent amendments to the hydrocarbons law take into consideration amongst other things, the hydrocarbons research and exploitation activities in areas I have just mentioned.

That being said, we continue to mobilize our efforts to significantly improve the coverage of our vast oil and gas domain through the intensification of the exploration effort. Thus, we are considering the exploration of the huge potential in unconventional resources that our subsoil currently holds, for production purposes and in order to secure hydrocarbon supply for the country.

What value will technological innovation capacity represent in ALNAFT’s future choice regarding partnerships?

The promotion action is broad. First, we need to know what we have, starting with basin-scale studies, in order to collect data, which in turn will enable us to promote the area in question, and with it, attract companies to conduct hydrocarbon research. We have already started a few studies, and we will continue in 2015, especially for unconventional resources, where we have already progressed much in terms of identification and evaluation, in line with the national energy policy on hydrocarbons: leaving no power source aside in order to establish energy independence for the country in the very long term.

Our exploration efforts today simultaneously, in the mature or immature basins, or the new domains such as the unconventional, fall fully within the aim of having a reserve basis to ensure the energy independence for a long and very long run. What we are doing today in the energy field address the short, medium and long term needs of the country, with work being carried out on each level. All the work we are conducting, to identify and assess oil and gas resources, precisely serves to collect the necessary data, in order to attract the companies that own the necessary technologies, especially regarding unconventionals.

In terms of foreign investment and technology transfer, one of our main ambitions is to implement strategy and procedures that, among other things, can attract foreign investors, to strengthen the development of hydrocarbon exploration and production, and also open new partnership horizons by diversifying the volume of shared experience and, consequently, increase the chances of technology transfer via, in particular, associations with Sonatrach.

One of the innovations sought by the developments made to the hydrocarbons law is to find a point of intersection between the technical and economic interests of our partners and of the state: the latest improvements made to the regulation on hydrocarbons provide a favorable environment and help to consolidate a win-win mindset with our partners.

Partnership policy is nothing new in Algeria, since several foreign companies operate in association with the national company Sonatrach.

However, given the technological discoveries that have been made in the hydrocarbon industry, and our concern to updated knowledge and technical precision in our capacity as key players in the international scene, and in the other hand, the attractiveness of our national mining domain through a number of incentive measures is for us a fundamental focus in continuing hydrocarbon development of Algeria’s mining domain in the hydrocarbons sector.

What are your comments on the results of last October’s licensing round?

I believe this very question is actually a continuity of the preceding one. Let me first make a short reminder of some provisions in this regard. As far as the award of contracts is concerned, provisions brought by the new regulation reflect the need for Algeria to take into account the economic situation of the global oil and gas industry. In order to maintain and improve attractiveness of the Algerian sector and regain the motivation of investors, the recent amendments to the 05-07 Law introduce a profitability criterion, to replace that of turnover, in determining tax rate on oil income. This is an important element in the tax treatment planned by the government regarding hydrocarbon activities.

In this context it may be noted that a ll countries in the world use tax incentives (similar to those provided by the 05-07 amended law), the principle being to compensate the risk taken by the various companies with fiscal or parafiscal benefits likely to encourage them to engage in the available opportunities. Another opportunity is that they can now target joint objectives (both conventional and unconventional).

In the immediate aftermath of the contract attribution in the October round, the results were acceptable, insofar as they were consistent with our objectives to intensify exploration efforts through the own efforts of Sonatrach, but also through partnerships, which represent for us an important leverage of hydrocarbon resource development in Algeria. I accept the results of the fourth tender because they contribute to this effort.

The attribution of the Boughezoul perimeter contract, north of Algeria, was a very positive outcome, a new frontier crossed. In addition to this, we also have a new entrant on the Algerian oil and gas market, namely Dragon Oil, which is another positive aspect.

After awarding the contracts in the last round, we invited several companies to share their remarks, particularly if they had actively participated in data room sessions but did not present any offer. The process is still ongoing, and is intended to complete our own analysis. ALNAFT will spare no effort to flatten any difficulties that persist, and to facilitate understanding of the new regulation and procedures attached to it, in anticipation of the forthcoming bidding round which is part of ALNAFT’s 2015 action plan.

What is the typical pattern of a project? Companies receive the data, and bid? What is the time length they have to present their offer ?

The process is fairly standard compared to what happens elsewhere: the companies pay one million dinars (USD 10,125) to access the data; then, during further clarification meetings, their representatives can discuss with the concerned officials of ALNAFT to get all the complementary information they need.

Generally, in the case of hydrocarbon exploration and production contracts, there are three exploration phases. The first phase lasts three years, and the other two last two years each. In the case of unconventional hydrocarbons, a four-year pilot phase comes in addition to this.

When we award/attribute a contract, the company commits to a minimum time period that corresponds to the duration of the first phase. Works programs contain a minimum amount of seismic acquisitions and wells to drill, which the companies usually exceed in most cases. As an example, at Boughezoul, the expectation is to achieve 1,400km of 2D seismic data and drill four exploration wells. At North Tinhert, the operator has planned to achieve 1,000 km2 of 3D seismic and seven exploration wells. At Timissit, 1,100km of 2D seismic and four exploration wells, and at M’sari Akabli, 400 km in 2D, 350 km2 in 3D seismic and seven exploration wells (here, the minimum amount of wells had been set to four). The total of these investments amounts to USD 266 million.

If they honor their commitments, these companies can move to the next phase of research and make a new commitment to a seismic and drilling program; the same goes for the 3rd phase/following phase. In case companies find evidence of hydrocarbons, they propose a delineation program. As a result of this program, and if the discovery is granted commercial deposit status, the companies are required to submit the draft of a development plan for approval by ALNAFT.

They remain the same initial territories in the three phases, or are the boundaries likely to change?

Contractual perimeters can be reduced after each phase of research, as specified in the contract. On this issue, in the amendments brought to the law in February 2013, several tax incentives have been introduced and flexibility for activity fulfillment has been increased.

These incentives and improvements include:

In exploration:

  • Increased time for exploration: possibility of a renewal for a maximum of two years
  • Introduction of a right of preference: preferential right is granted to the company that is carrying out exploration works on a perimeter set for competitive bidding, provided it lines up forthwith with the best offering, and provided that the bidding runs for the area concerned.
  • Possibility to recover exploration expenditure: exploration expenditures previously approved by ALNAFT and incurred by a person on a given perimeter will be considered research investment in case the company concludes a hydrocarbon exploration and production contract over the said perimeter.

In exploration and production:

  • In exploration: A two-year extension of the exploration period can be granted by ALNAFT to allow completion of the delineation program on a discovery made before the end of the exploration period.
  • In production: an additional five-year period is added to the production period of natural gas fields. This production period can be increased by the length of any unused exploration period.

In unconventional hydrocarbons:

  • In exploration: a pilot phase of maximum four years will be granted to the contractor by ALNAFT, adding to one of the exploration phases, therefore bringing total exploration period to 11 years.
  • In production: two successive extensions are now possible beyond initial term (30 years for liquids and 40 years for gas).

Surface rendering

Rendering rates to be performed at the end of each phase within the exploration period are specified in the contract. This means that the rate may vary from one contract to the next, according to the characteristics of each perimeter. Regarding unconventional hydrocarbons, conditions and modalities for surface rendering shall be determined in the contract. A right of preference may be granted to the contractor who returned geological surfaces and horizons if put to competitive bidding.

Fortuitous discovery

The contractor can claim a right over a fortuitous discovery made during the implementation of the development plan in the geological levels objects of the said development plan.

Tax aspects

  • Tax on acreage: the rates of the tax on acreage used in the case of unconventional hydrocarbon exploration and production sites are the ones used in zone A.
  • Royalty : for unconventional hydrocarbons and hydrocarbons produced in operating areas located in very little explored regions, or with complex geology, and/or lack of infrastructure, the amount is 5 percent of total amounts.
  • Tax on oil revenue: the TRP (tax on oil revenue) rate is calculated based on project profitability and no longer on turnover. For unconventionals, minimum rate stands at 10 percent and maximum rate at 40 percent according to project profitability.

All of this is transcribed in the contract attributed after the licensing round, or under the provisions of the 05-07 Law which provide an option, in exceptional circumstances and in general interest cases, within the boundaries of the national policy on hydrocarbons, to attribute a contract outside the process of bidding round.

Can the companies that acquire the rights on fields sell these rights?

The law does allow a “farm in/farm out” process, a practice on the whole usual and standard in the hydrocarbon industry, under certain regulatory provisions. For the sale to happen, the recipient partner must prequalify. Moreover, the company wishing to sell part of its rights and obligations must first seek agreement of ALNAFT to disclose contractual information, in order for the interested companies to make their assessment and formulate their offer.

Once this happens, the company wishing to sell seeks approval for the selection of the successful bidder, knowing that Sonatrach has a right of preemption on any proposed assignment. If Sonatrach does not exercise this right and if the purchaser meets the criteria set by the law, then ALNAFT authorizes the transfer to the new company, subject to the payment to the treasury of a one percent fee on the total amount of the transaction.

During the third phase, which operating modalities does ALNAFT favor? What are those you would prevent to happen in Algeria?

There is clear regulation on this: people can produce hydrocarbons in compliance with the clear criteria set by the legislator, included those relating to the conservation of the fields. Once the company reveals an exploitable hydrocarbon field and declares its commerciality, they submit a development plan for ALNAFT’s approval. Once approved, the company can begin operations.

As for your question relating to Alnaft refusal to authorize exploitation, we have no reason to refuse an development plan if it complies with the relevant regulation.

The fourth wave of partnerships has just ended. What are your concerns going to be for the future, in 2015 and the following years, what areas are you going to work on and what would you like to implement in Algeria?

In ALNAFT’s action plan for 2015, we have included the launch of the fifth licensing round, for which we have already started preparatory works. The exact date is yet to be determined. We must now wait the preparatory works to achieve to know the specific launch date.

The second action in 2015 will be to continue to initiate evaluation studies of Algeria’s oil and gas potential. We are going to launch a number of studies, with the help of our geologist engineers and the specialized consulting offices that we will select. For this, we will open tenders for the recruitment of specialized consulting firms, the first of which shall be launched very soon.

The third action will be to improve our internal organization, and continue to strengthen our workforce, including the areas of monitoring, audit and cost control. We will proceed with a reflection on our internal organization, to make sure that all our future plans will be supported by the required human resources.

Competition for these human resources must be fierce; there was one single person before whereas now that you are competing with the ministry, Sonatrach and the other oil companies.

That is correct, and it is a challenge that will need to meet, especially as human resources are fundamental to ALNAFT. We must strengthen Alnaft staffing to carry out the mission entrusted to us pursuant to law 05-07. Here we approach a sensitive issue, which in fact is a major challenge, because these human resources are not available. The competition is very tough, and sometimes, we may not always have the means to attract the best profiles.

To solve this problem, we have opted to hire young professionals and train them. For example, we have taken action with the Houari Boumediene University of Bab-Ezzouar and thanks to the close collaboration of the leaders and teachers in this important university, a Master’s in reservoir engineering, was created for the first time in Algeria, with the first graduates enrolling this year. In addition, we launched a training program in legal, economic, financial and fiscal expertise, which is vital in achieving our cost targets. Now as for the next stages, which are most important, once we achieve the basin analysis actions, we finalize our organization and the one related to recruitment and training to achieve the necessary staffing, than it will be a significant achievement given the challenge it represents.

Regarding your question relating to my message to the investors, I should say Algeria mining estate is very rich, very varied and widespread. The potential is there and we have an attractive regulation, especially with the recent amendments of the law. I believe this is a particularly incentive element for companies that will invest in Algeria. My message is that we also have the human capacity and Algeria is a stable country. Companies can work without being disturbed and the conditions are right to do a win-win business.

Partnership is an important lever, within the frame of the national energy policy, for the development of hydrocarbons resources, and I say to companies they are most welcome to come to Algeria should they wish to contribute in this effort of the exploration intensification, Alnaft and the energy sector shall always listen to their needs to move forward.

Algeria is the best place to invest in hydrocarbons, it has to be said. In my view, we will soon witness a new boost of the oil and gas sector, thanks to the new legal framework in particular.

Companies, however, should accept to invest and countries have to set up a motivating environment for the said investment. All in all, there a certain balance to guarantee, from both the international oil companies and the producing countries.

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