Algeria recently challenged the reform of the hydrocarbons sector that took place in 2005 when Minister of Energy Chakib Khelil brought in laws withdrawing the monopoly held by the state-owned company Sonatrach under the Hydrocarbons Law 1986.

Indeed, Algeria's President Abdelaziz Bouteflika passed an order on 29 July of this year that reversed the withdrawal of that monopoly. The 2006 Hydrocarbons Order leaves the institutional framework and the contractual regime set up by the 2005 Hydrocarbons Law unchanged, but the market liberalisation that the 2005 law aimed to achieve is almost entirely given up. In addition, the latest order creates a new windfall profit tax for all contracts entered into under the 1986 law.

The 1986 law confirmed the monopoly of Sonatrach over exploration, exploitation and transportation of hydrocarbons in Algeria. International oil and gas companies (IOCs) could only carry out hydrocarbons exploration and exploitation with Sonatrach, the sole holder of the mining titles, through a partnership consisting mostly of production-sharing contracts.

The 2005 law initially aimed to terminate Sonatrach's monopoly over hydrocarbons activities, leaving the state-owned company as a common player in the hydrocarbons sector, competing with other IOCs investing in the liberalised upstream, midstream and downstream activities in Algeria.

To achieve such liberalisation, a new institutional framework was established that included two new regulation agencies – one for hydrocarbons development, Agence Nationale pour la Valorisation des Ressources en Hydro-carbures (ANALFT), which became the sole holder of the mining titles, and one for hydrocarbons regulation, Agence Nationale de Controle et de Regulation des Activites dans le domaine des Hydrocarbures (ARH).

The contractual regime set up by the 2005 law established an exploration and/or production contract known as contrat de recherche et/ou d'exploitation (CRE) – entered into between the IOC and ANALFT – that aimed to further a competitive, fair and transparent bid process. The CRE entitles the IOC to undertake exploration activities in Algeria, as well as exploitation activities in case of commercial discovery, on an exclusive basis.

The initial 2005 law no longer includes any reference to a production-sharing mechanism and, as such, the CRE shall be analysed as a tax royalty agreement. The contracts entered into before the publication of the 2005 law remain valid and in full force until their initial term and, therefore, Sonatrach remains a party to those contracts in its initial capacity of mining title holder.

As for the tax regime, whereas Sonatrach is to pay the royalty pertaining to the whole production and income tax on behalf of the IOC for the contracts entered into under the 1986 law, the 2005 law provides that the operator under the CRE shall pay taxes directly.

The 2006 order, passed while the Parliament was in recess, reallocates to Sonatrach a majority stake, which can not be lower than 51%, for almost all upstream, midstream and downstream activities in Algeria.

The 2005 law was relatively consistent as it allocated the entire production to the IOCs and Sonatrach was only allocated an option to acquire a 20%-30% participation, which was in line with the practice in force in the international petroleum industry. In this regard, the mandatory 51% participation is no longer consistent and may reduce the IOC's stake significantly, not to mention that the 2005 law also gives a pre-emption right to Sonatrach for any assignment of a participating interest.

In addition, with a mandatory participation of a minimum 51%, Sonatrach has a majority control under both the CRE and the joint operating agreement (JOA) to be entered into with the IOC and, as such, may reasonably require to be involved in the most important decisions, such as the approval of the decision of commerciality and the approval of a development plan.

However, the 2006 order does not provide any information pertaining to the decision of commerciality and, in any event, Sonatrach shall only enter into the JOA within 30 days after the approval of the said development plan by ANALFT. To that extent, Sonatrach's majority participation does not only reduce the IOC's stake but is also very likely to entail issues with ANALFT. It is rumoured that Sonatrach would be preparing the next licensing round, which if confirmed would seriously challenge the institutional framework established in 2005.

Transportation and refining activities may now be only undertaken by Sonatrach, or a local company in which Sonatrach owns at least a 51% stake, leaving hydrocarbons transformation as the only activity that remain liberalised.

The 2006 order introduces a windfall profit tax (WPT). All IOCs operating in Algeria in accordance with a contract governed by the 1986 law are now subject to a non-deductible WPT as from 1 August, 2006. The WPT is based on the share of production allocated to the IOC when the Brent price exceeds $30 (£16) per barrel. It is calculated at a rate, which ranges from a minimum of 5% to a maximum of 50%. However, the 2006 order does not provide any information pertaining to the method of calculation and assessment of the said WPT, which shall be provided later.

It is difficult to assess the full impact of the 2005 law as amended by the 2006 order since implementing regulations have yet to be passed. Some are already challenging the validity of the 2005 law as it would seem that the latter was not adopted in accordance with the required constitutional procedure. If that is confirmed, the 2006 order may be challenged as well. To that extent (and in any event), the 2006 order may not be ratified by parliament and therefore may be null and void. And Algeria would be back to square one – the 1986 Hydrocarbons Law, which in the end may not be such a negative outcome.

Francois Krotoff is a lawyer at Gide Loyrette Nouel in Paris and Nicolas Bonnefoy is a lawyer at the firm's London office.