UPDATE 1-Algeria's Sonatrach says it has terminated Ain Tsila contract

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ALGIERS, April 15 (Reuters) - Algerian state oil company Sonatrach said on Thursday it had terminated a 2004 contract with Petroceltic PLC, which was later bought by Sunny Hill Energy, for exploration and production in the Ain Tsila gas field.

Sonatrach, which has faced years of declining energy output, said in an emailed statement that the termination was in accordance with the contract, and that it had taken the step after Petroceltic failed to comply with contractual obligations.

Algeria is trying to encourage investment in its energy sector by international oil companies to reverse its falling production levels, which have hit state finances.

Sunny Hill said in a statement that it intends to pursue legal action to compensate it for the loss, which it values at over $1 billion, after having invested hundreds of millions of dollars in the project.

Sunny Hill holds a 38.25% stake in Ain Tsila after buying Petroceltic, which was formerly listed in London and Ireland.

Sonatrach said in its statement that Petroceltic had twice reduced its participation in the project, which was 75% when the contract was signed.

It said a development plan for the project had been approved in 2012 with a forecast commissioning date of 2017 to produce at least 10 million cubic metres of natural gas, 17,000 barrels of liquefied petroleum gas and 11,500 barrels of condensate a day.

It said it would continue development efforts to bring it into production in November 2022.

Algeria is Sunny Hill’s only operation.

“We have fully met our contractual obligations including providing our full share of resources required for the operation of the joint venture with Sonatrach. We will robustly pursue our claims taking all actions to protect our interests,” Angelo Moskov, chairman of Sunny Hill, said.

Sonatrach holds the remaining interest in the field.

Reporting by Lamine Chikhi, Julia Payne and Shadia Nasralla; Writing by Angus McDowall; Editing by Jan Harvey and David Evans