PETROCELTIC (PCI):CHART AND DISCUSSION THREAD (moderated)

I quote some interesting aspects of the 2005 algerian hydrocarbon law below: I quote these as they may have a bearing on interpretation of the amendments. There are all sorts of aspects where approval could be denied or the state could play hardball if it decided that it wanted to. Also it is interesting that the new law was silent re stabilisation in respect of future amendments to the law presumably reducing likelihood of any redress if a party was disadvantaged

feel free to discuss!

No advice intended,

RoL
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4.1.1. The state’s place in oil activities

The state’s place is the result of its ownership right, but that does not necessarily mean that it gets involved financially.

4.1.1.1. The state’s ownership right

Article 3, paragraph 1, Act 05-07 of April 28, 2005 pertaining to hydrocarbons,
stipulates that: “Hydrocarbon substances and resources, whether discovered or not, located in the soil or subsoil of the national territory or maritime spaces under Algeria’s sovereignty belong to the national collectivity, of which the state is the product.”

The meaning of this provision does not suffer from any ambiguity: it prohibits the investor from ever claiming ownership of the deposit he may have discovered.

It’s precisely because it is the owner of those natural resources that the state plays an active role in their management. Indeed it is the responsibility of the minister in charge of hydrocarbons to oversee their development, to put forth a policy and, following its adoption, to implement it.

This is also the reason why exploration and/or exploitation contracts must be
approved by decree of the executive council (Art. 11, paragraph 03, Act 05-07 of April 28, 2005 pertaining to hydrocarbons). As we will show later, these agreements are not likely to take effect without this approval.


b) The clause giving SONATRACH the option to take part in the exploitation

Each exploration and/or exploitation contract will necessarily have to contain a clause giving SONATRACH, when it is not a party to the contract, the option of taking a stake of up to thirty per cent (30%), but not less than twenty per cent (20%), in the exploitation of the deposit. (Article 48, paragraph 01, Act 05-07 of April 28, 2005 pertaining to hydrocarbons).

This right of option given to this public corporation may appear exorbitant, but its real justification can be found in the state’s ownership right over natural resources and its desire to control their exploitation.

This option will have to be exercised within thirty days following approval of the plan to develop the commercial discovery by ALNAFT.

In exchange for its stake, SONATRACH will have to reimburse the contracting
entity which made the discovery, proportionally to its stake, for all the costs associated with that discovery, as well as the costs involved in assessing the discovery (Art. 48, paragraph 4).

Within thirty days following the exercise of that option, SONATRACH will have to reach an operating agreement with the contracting entity which will have to be annexed to the contract. The contract will have to define the rights and obligations of the parties, specify the terms and conditions regarding the payment of future costs, as well as the reimbursement terms of exploration costs by the public enterprise (Art. 48, paragraph
05). Moreover, this agreement will have to contain “a joint marketing clause for any gas stemming from the discovery, in the event that the said gas should have to be marketed abroad.” (Art. 48, paragraph 8).

This agreement must be approved by the National Agency for the Development of Hydrocarbon Resources (ALNAFT).

It’s worth noting that SONATRACH will not be allowed to transfer all or part of its stake before a period of five years has elapsed from the exercise date of its option right. SONATRACH will have to assume, proportionally to its stake, all investment and exploitation costs relative to the development plan approved by ALNAFT (Art. 48, paragraph 3).


3. The coming into force of the exploration and/or exploitation contract

The validity of the exploration and/or exploitation of hydrocarbons contract and that of any possible amendment is subordinated to its conclusion by the parties involved, that is the National Agency for the Development of Hydrocarbon Resources (ALNAFT) and the contracting entity.

But this contract does not begin taking effect, in other words it does not come into force, before being approved by a decree of the executive council on the date of publication of this decree in the Official Gazette (Art. 30, Act 05-07 of April 28, 2005 pertaining to hydrocarbons).


B. The performance of the exploration and/or exploitation contract

The rules common to the performance of this contract essentially address two issues: the option recognized to the contracting entity to assign all or part of its contract and the right granted to the contracting entity to enjoy exorbitant privileges outside the scope of general law with regard to real estate.

12. Total or partial transfer of the contract

After establishing the principle that a contract can be freely transferred, the new law moderated its impact by granting the power to waive these provisions to the minister in charge of hydrocarbons.

a) The free transfer, total or partial, of the contract

According to the terms of article 31 of act 05-07 of April 28, 2005 pertaining to hydrocarbons, “the person constituting the contracting entity or the persons coming together as the “contracting entity” may, individually or jointly, transfer all or part of their rights and obligations in the contract between themselves or to any other person.”
What emerges from this provision is that when the contracting entity consists of a single person, that person can only, by definition, transfer his contract to a third party. On the other hand, when several investors are involved, they are allowed to mutually transfer their rights and obligations to one or another or transfer them, totally or partially, to an external party.


The validity of this type of transfer is subordinated to three conditions: it must be approved by the National Agency for the Development of Hydrocarbon Resources (ALNAFT) beforehand; it must be the subject of an amendment whose implementation is subordinated to its approval by a decree of the executive council published in the Official Gazette; finally, this transfer is subject to the payment of a non-deductible right, whose amount equals one per cent (1%) of the value of the transaction, to the Treasury.

The exercise of this freedom of transfer is subject to another limitation stemming from the fact that SONATRACH has the right of first refusal (Art. 31, paragraph 2, Act 05-07 of April 28, 2005 pertaining to hydrocarbons). This means that SONATRACH is first in line when it comes to acquiring the rights and obligations being transferred. To exercise this right however, SONATRACH has only 90 days from the moment that the transfer notification is made by ALNAFT.

b) Dispensation from the free transfer of contracts

After establishing the principle of free contract transfer, the legislative body authorized the minister in charge of hydrocarbons to possibly waive it in the name of public interest (Art. 31, paragraph 4, Act 05-07 of April 28, 2005 pertaining to hydrocarbons). In spite of its optional nature, this dispensation is even more devoid of usefulness in our opinion, not only because the contract transfer is only validated if it is approved by the National Agency for the Development of Hydrocarbon Resources (ALNAFT), but also because a right of first refusal is awarded to SONATRACH.

These two safeguards are amply sufficient to discard any undesirable transferee, if need be.


C. Cancellation of the exploration and/or exploitation contract

Article 57 of Act 05-07 of April 28, 2005 pertaining to hydrocarbons stipulates that when the contracting entity does not fulfill the commitments that it has agreed to, or when, generally speaking, it violates the conditions and obligations for which it was responsible according to the law in force, the contract may be cancelled. This solution can be implemented, for example, if the contracting entity does not satisfy the requirements of the minimal work program, if he does not pay his royalties or does not fulfill his fiscal obligations.

Even if the aforementioned provision does not specifically say who might effect that cancellation, it is clear that it can only be the National Agency for the Development of Hydrocarbon Resources (ALNAFT), since it is that agency which acts as the counterpart in the exploration and/or exploitation contract.

This power of cancellation, recognized to this agency, merely constitutes a special application of a principle of general law according to which a party may end a contractual relationship if his contra-party does not fulfill his obligations. Still, cancellation remains a drastic measure whose consequences may prove just as serious for the public authorities as for the investor. This is why it should only be used as a last resort.

For this reason, the legislative body wisely took the precaution of recalling a general law principle – which constitutes an expression of the loyalty that must exist in all contractual relationships - according to which, the power to cancel is subordinated to a summons to fulfill the contractual obligations. It is only if, thirty days after the date of this formal notification, the contracting entity persists in not fulfilling his duties that this cancellation can become effective; and that the Agency may resort to arbitration to seek
repair for the damages it suffered.



4.3.3.3. The stabilization of applicable law
In long-term international contracts, clauses stabilizing or freezing applicable law are often considered a guarantee by foreign contracting entities. That is because they fear that the contract’s balance could be upset as a result of modifications to applicable law.
This is why article 15 of ordinance no 01-03 of August 20, 2001, pertaining to the development of investments, confirms this stabilization of applicable law by making provisions to the effect that “revisions or abrogations liable to be made in the future do not apply to investments made within the framework of the current ordinance unless the investor specifically requests it” (j.o.r.a. of August 22, 2001, p. 5).
We cannot help noticing that the new law is completely silent with regard to this issue even though exploration and/or exploitation contracts are perfect examples of international long-term contracts. In spite of the law’s silence, it is possible that a clause freezing applicable law may be inserted in those contracts nonetheless. It is true that the strict application of the principle of non-retroactivity can have the same effect.