Proposed Principles of New Hydrocarbons Law

1. Proposed Principles of New Hydrocarbons Law Robert W. Pleasant Pleasant & Associates New York

2. SCOPE OF LAW • Covers all upstream and downstream activities except gas distribution • Gas distribution governed by the Electricity Law

3. PRINCIPAL OBJECTIVES • Open all activities in sector to all investors, national and international • Decontrol prices • Separate Government and Commercial roles • Create a legal and institutional framework that will • allow market forces to predominate • streamline and assure transparency in contracting and regulatory practices

4. Maximize the use and training of national human resources • Improve environmental standards • Provide contractual and fiscal conditions that are internationally competitive • Enable SONATRACH to focus on its commercial activities • Optimize Government revenues

5. Organization of the Sector

6. Minister • Proposes and oversees implementation of sector policies • Issues Regulations and Model Contracts • Approves E and P Contracts • Issues Pipeline Concessions

7. The Two Autonomous Entities • Regulatory Authority • ALNAFT - the entity that will sign and administer E and P contracts • Characteristics: - legally, administratively and financially autonomous - funded from small share of the royalties plus fees for services

8. Regulatory Authority • apply technical, safety and environmental regulations for upstream and downstream • apply regulations governing tariffs and free access for pipelines and storage facilities • make recommendations for award of pipeline concessions • apply norms and standards • issue construction and operating permits for downstream activities

9. Alnaft • Promote E and P investment • Maintain and update technical data bank • Conduct tenders for E and P blocks • Sign E and P Contracts • Administer E and P contracts • Approve Development Plans and annual exploitation work programs and budgets • Collect Royalty and assure payment of PRT

10. Sonatrach • to be treated same as any other investor • to focus on commercial activities in Algeria and abroad • to finance without Government guarantees • to have contracts under the new Hydrocarbons Law covering its existing and future E and P areas

11. to have concessions covering its pipelines • to continue to administer the existing PSA and joint venture contracts

12. Activities in the Sector • Upstream • Prospection - requires permit issued by Alnaft • E and P - requires contract awarded by tender • Downstream • Pipelines - concession issued by the Minister • Refining; Transformation; Storage, and Product Distribution • construction authorizations and operating permits

13. Exploration and /or Exploitation • Requires contract awarded by tender • award on basis of single bid parameter • guaranteed work commitment • signature bonus or • royalty rates above minimums in Law • contract non negotiable and to be signed within days after opening of bids • contracting parties: Alnaft and the Contractor • contract effective on signature of arrete by Minister approving same

14. Modern “License” type Contract • Contract grants exclusive right to explore and exploit: no need for issuance of mining titles • Reserves in place belong to the State • Contractor receives 100% of extracted production at Measurement Point in Contract Area and markets its production • Contractor pays cash Royalty and taxes

15. Zones • Country divided into zones A, B, C and D, based on proximity to existing production and infrastructure • Zone will govern • maximum size of Contract Area • minimum work program and • certain fiscal rates

16. Contract Area • Comprised of contiguous 5” x 5” parcels • Relinquishment required at end of each phase of exploration period • Contractor may voluntarily surrender if accrued obligations satisfied

17. Duration of Contract Exploration and Exploitation • maximum duration of 40 years from effective date, plus any retention period utilized • exploration: up to 7 years ( 3, 2 and 2) • Contractor determines commerciality • Contract terminates at end of exploration period if no commercial discovery or retention period

18. Retention Period • Contractor right to retain discovery if cannot be declared commercial because of • lack of transport infrastructure • lack of market for the production • 10 years for dry gas • up to 10 years for dry gas • up to 5 years for oil or wet gas

19. Exploitation only • duration: oil or wet gas - 30 years dry gas - 35 years • no retention period • may explore in exploitation area

20. Participation Option • Sonatrach option to assume up to 25% equity interest as non operator • Exerciseable within 30 days after Alnaft’s approval of development plan for discovery • Sonatrach • reimburses with interest its share of discovery well and appraisal costs • pays as incurred its share of development and operating costs

21. Natural Gas • Contractor free to market its natural gas - both in Algeria and for export • For fiscal purposes exported gas valued at higher of • the contract price or • a reference price equal to the weighted average price of Algerian gas exported during past quarter, subject to a floor tied to a percentage of the published FOB price of Sahara Blend

22. If shortfall in gas for national market, each gas producer may be requested to supply pro rata share to satisfy the demand • Take or pay contracts for such sales • Price equals weighted average received by Sonatrach from national gas sales in period • Producers may arrange swaps • Flaring of gas prohibited

23. Legal Aspects • International arbitration • Contractor owns assets for life of Contract • Facilities may be pledged for financing • At end of Contract, assets pass to State free of charge

24. Financial Aspects • Receive and retain export proceeds abroad • Right to convert local currency proceeds • Right to bank accounts in Algeria and abroad • Preservation of foreign exchange value for amortization

25. Upstream Fiscal Package • Area Rental : based on zone and year • Royalty - payable in cash • sliding scale based on Zone and increments of daily production (rates from 5.5% to 23%) • applied on average daily production from Contract Area measured in Contract Area • assessed on value at Measurement Point in Contract Area

26. Income Tax • generally applicable corporate income tax • rate currently 30% • consolidation of all activities of same taxpayer in energy sector (i.e.., activities governed by Hydrocarbons Law or Electricity Law)

27. Petroleum Revenue Tax (PRT) • ring fenced by Contract Area • profit based, but uses uplifts in lieu of op costs • rate of 20% until achieve one billion dollars of cumulative production • rate escalates with value of cumulative production (maximum rate of 70%) • PRT deductible in calculating income tax

28. PRT includes incentives for enhanced recovery • higher uplift • quicker amortization • cost of gas purchased for injection treated as deductible capital cost

29. Exemption from all other taxes or impositions including import duties • fiscal system • transparent • easily administered • progressive • allows development of smaller discoveries • provides incentives to explore in frontier areas

30. DOWNSTREAM • Importation and sale of hydrocarbons and petroleum products in Algeria are free • Prices for national market are decontrolled, subject to transition period • max price for petroleum products to be fixed by Minister for up to 5 years • max price for gas to be fixed for up to 10 years • Any subsidies to come from public treasury

31. Pipelines • Concessions for 50 years • Open access • Non discriminatory tariffs approved by Regulatory Authority • lowest cost to user assuring continuity of service • permit concessionaire to cover its reasonable operating costs, amortization, taxes, financing charges and reasonable ROR on equity

32. Other Downstream Activities • Open to anyone • Subject to technical, safety and environmental norms and standards • Investor will need construction and operating authorizations attesting that the installations satisfy such norms and standards • Petroleum and product storage subject to open access and regulated tariff

33. Downstream Taxation • Investors subject to generally applicable taxes • Pipelines and facilities for liquefaction of gas and separation of LPG exempt from • value added tax • tax on professional activities • import duties etc... on equipment

34. Technical, Safety and Environmental Norms • Sector and activity specific • Enforced by the Regulatory Authority • 3 year period to adequate existing activities and facilities to the norms and standards • Assure maximum recuperation of reserves, optimal conservation of reservoirs, and protection of the environment

35. Existing Association Contracts • Existing PSC and joint venture Contracts remain in vigor according to their terms • Rights and obligations of the foreign associates under the contracts unchanged • Sonatrach continues to administer • “Parallel” contract under new law between Alnaft and Sonatrach allocating proceeds from State’s share of production

36. Sonatrach’s Existing Operations • Sonatrach or an affiliate to enter into Contract under the new Law for each of its existing production areas and exploration areas that it elects to retain • In future Sonatrach will compete in tender for award of E and P areas • Fiscal system under the new Law will apply to the Contracts

37. Sonatrach to receive a concession for each of its existing pipeline systems