Identifier
Created
Classification
Origin
06ALGIERS1769
2006-10-04 13:11:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Algiers
Cable title:
FORMER SONATRACH COUNSEL CRITIQUES CHANGES TO
VZCZCXRO9524 RR RUEHDE DE RUEHAS #1769/01 2771311 ZNR UUUUU ZZH R 041311Z OCT 06 FM AMEMBASSY ALGIERS TO RUEHC/SECSTATE WASHDC 2079 INFO RUEHHH/OPEC COLLECTIVE RUEHLO/AMEMBASSY LONDON 1392 RUEHFR/AMEMBASSY PARIS 1950 RUEHRB/AMEMBASSY RABAT 1456 RUEHTRO/AMEMBASSY TRIPOLI RUEHTU/AMEMBASSY TUNIS 6311 RUEHCL/AMCONSUL CASABLANCA 2758 RUEAIIA/CIA WASHDC RHEBAAA/DEPT OF ENERGY WASHDC RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 04 ALGIERS 001769
SIPDIS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: EPET ENRG EINV ECON TRGY AG
SUBJECT: FORMER SONATRACH COUNSEL CRITIQUES CHANGES TO
ALGERIA'S HYDROCARBON LAW
REF: A. ALGIERS 01595
B. ALGIERS 01723
ALGIERS 00001769 001.2 OF 004
UNCLAS SECTION 01 OF 04 ALGIERS 001769
SIPDIS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: EPET ENRG EINV ECON TRGY AG
SUBJECT: FORMER SONATRACH COUNSEL CRITIQUES CHANGES TO
ALGERIA'S HYDROCARBON LAW
REF: A. ALGIERS 01595
B. ALGIERS 01723
ALGIERS 00001769 001.2 OF 004
1. (SBU) SUMMARY: A former Sonatrach counsel provided us
with a detailed briefing on the changes to Algeria's
hydrocarbon legislation over the last 20 years and his views
on the impact of the recent hydrocarbon amendments. He
clarified that while the new amendments obligate the Algerian
petroleum parastatal to take a majority stake in all upstream
projects, Sonatrach will not be required to assume any risk
in doing so. International oil companies will front all of
the funds for exploration -- for which they will be
reimbursed only if a discovery is made -- only to become a
minority partner in successful new projects. He noted that
foreign energy companies have always borne the risk of
exploration, but ever since Algeria switched to a transparent
bidding process in 2002 to attract more foreign investment,
Sonatrach's participation has typically been 25 percent.
Despite this disincentive, our contact stressed that foreign
energy firms are likely to continue to invest and benefit
from an enhanced regulatory environment and other positive
fiscal provisions under the new law. He also voiced his
concern about the impact on the evolution of Sonatrach, which
he feared would have no incentive to invest in training and
new technology. END SUMMARY
1986/1991 LEGISLATION GOVERNS ALL PROJECTS TO DATE
-------------- --------------
2. (SBU) A former Sonatrach legal counsel explained to us
September 28 how Algeria's 1986 hydrocarbon law was the first
to open the country's oil and gas sector to foreign
investment. Under the legislation, details regarding the
payment of taxes and royalties, Sonatrach's participation,
marketing agreements, and the other nuts and bolts of foreign
participation were left to be negotiated as part of each
individual contract, rather than mandated by law. Our
contact underlined that the 1986 legislation had governed all
of Algeria's foreign energy projects to date. (NOTE: The
law was amended in 1991 to include provisions for foreign tax
remuneration and recourse to international arbitration, among
other minor modifications. A 2005 revision of the
legislation, detailed below, was never implemented; hence
there are no contracts in place subject to its conditions.
END NOTE)
3. (SBU) The 1986 legislation gave international oil
companies (IOCs) a menu of options for partnering with
Sonatrach. Production sharing contracts (PSCs) were the most
popular mechanism, accounting for some 90 percent of the
agreements signed under the 1986 law, according to our
contact. (NOTE: PSCs, which were first developed in
Indonesia, seek to encourage investment by IOCs while
allowing them to avoid the pitfalls of dealing with a host
country's bureaucracy, such as its tax authorities and
environmental regulators. Under a PSC, the foreign
contractor typically bears all risk and costs for
exploration, development and production. In return, if
exploration is successful, the contractor receives a
stipulated share of production; the IOC simply brings in a
ship and takes its predesignated share of oil. These
agreements work similarly for gas projects, with the notable
exception that the contractor usually takes part in a joint
marketing venture with the state. All ownership of
energy-related infrastructure is retained by the host
government. END NOTE) Under its PSCs, Sonatrach typically
paid all royalties (calculated as a set percentage of a
project's production value),taxes (calculated as a set
percentage of a project's profits),and transportation fees.
A close cousin of the PSC was the risk service contract
(RSC),of which the former Sonatrach counsel explained there
had been three. (NOTE: Risk service contracts are very
similar to PSCs, with the exception that the foreign partner
is contractually guaranteed a defined share of revenue rather
than a share of production. END NOTE)
4. (SBU) Under the 1986 law, foreign firms could
alternatively create joint ventures with Sonatrach, although
our contact was not sure this had ever occurred. Finally,
IOCs could form "participation in association" contracts, of
which he estimated there had been no more than five. In
ALGIERS 00001769 002.2 OF 004
these arrangements, IOCs would front all of the funds for
exploration. In the case where exploration was successful,
Sonatrach would reimburse them 51 percent. In turn,
Sonatrach would receive 51 percent of the project's output
and pay 51 percent of its royalties, taxes, and
transportation fees. The former counsel stressed that of the
four types of partnership allowable, only the "participation
in association" and joint venture contracts obligated
Sonatrach to hold a majority share.
5. (SBU) In 2002, Algeria held its first of six international
oil and gas licensing rounds for unexplored blocks.
Sonatrach had previously awarded foreign contracts for
unexplored blocks by fiat, whereas a bidding system for
already-developed blocks has existed since 1992. Energy
Minister Khelil, when he was CEO of Sonatrach, established
the international licensing round in an effort to attract
foreign investment. The former counsel reiterated that in
all of the projects signed as part of its licensing rounds,
Sonatrach's participation was optional and based on the
conditions of the particular contract. In practice, however,
Sonatrach chose to participate in every contract by around 25
percent.
6. (SBU) Finally, our contact explained that contracts under
the 1986 limitation have long been subject to profit-limiting
price ceiling (or "ecremage") clauses, which raise an IOC's
taxes as the world oil price goes up. He confirmed that
three major contracts signed in the late 1980s (ref A) are
the exception. Following the conclusion of these deals,
Sonatrach systematically included profit-limiters in its
contracts. It did so up until 2000 with fixed ceilings and
thereafter with a theoretically-similar but mathematically
more complicated system known as "k factors."
2005 LEGISLATION: TOO GOOD TO BE TRUE
--------------
7. (SBU) The former Sonatrach counsel explained how the
never-implemented 2005 hydrocarbon law would have obligated
IOCs to have "concessionary" contracts. (NOTE: He remarked
that while this was the industry term, Algerian officials
shied from referring to these contracts as such to avoid the
inevitable comparison with the historic western concessions
in Iran and Saudi Arabia. END NOTE) Most importantly, the
law codified the system of competitive bidding for awarding
energy blocks and projects. Under the terms of the 2005 law,
if Sonatrach bid for the project by itself and won, it could
maintain 100-percent control. If an IOC won the bid,
Sonatrach would have then had the choice to "back in" between
20 and 30 percent. Thus the winning IOC would have fronted
the full costs of exploration. Had it proven successful,
Sonatrach would have had 30 days from when the discovery was
made to decide to reimburse the IOC between 20 and 30 percent
of its investment. If, for example, Sonatrach had decided to
"back in" 25 percent, it would have then received 25 percent
of the project's output and have been required to pay 25
percent of the project's royalties, taxes, and transportation
fees.
8. (SBU) The former counsel characterized the 2005 law as
"excellent for Sonatrach and excellent for Algeria." He
stressed that it would have liberalized Algeria's energy
sector, forced Sonatrach to evolve into a commercially viable
competitor to IOCs, and continued to offer the right
incentives to foreign investors. He added that Khelil wanted
IOCs to be able to hold 100-percent concessions, but
political pressure had forced him to relent on the clause
allowing Sonatrach to "back in" 20 to 30 percent. However,
Khelil had scored a brief victory with pipeline projects, for
which 100-percent foreign ownership over a 50-year concession
would have been theoretically possible.
NEW AMENDMENTS MAINTAIN MANY POSITIVE ELEMENTS OF 2005 LAW
-------------- --------------
9. (SBU) The former Sonatrach counsel recounted what he
viewed as a series of other positive changes in the 2005 law,
all of which ultimately remained untouched with the 2006
amendments. He praised the establishment of Algeria's two
new independent regulatory agencies, which he said would
ALGIERS 00001769 003.2 OF 004
separate Sonatrach's conflicting roles as "judge and party."
He highlighted the addition of retention clauses, which
lengthen the period of IOCs' concessions between three and
five years in order to give them to time to build
infrastructure and find markets for their oil and gas
discoveries. Foreign participation in most downstream
projects, he added, would be left alone. Finally, the law
still included a series of financial measures that he
assessed would benefit IOCs and promote greater investment.
These included lowering royalty and taxation rates based on
geographic area in order to promote the development of
marginal fields; changes to an accounting measure known as
"uplift" that offers IOCs advantages for amortization;
additional tax exemptions; and the end of a requirement that
IOCs pay Algerian social security for their non-Algerian
workers.
10. (SBU) Our contact echoed Khelil in saying that much of
the 2005 law and its amendments did not mark a change of
policy so much as a codification into law of existing
contractual practices (ref B). However, he critiqued both
documents for being very poorly written. He highlighted
various loose ends in the law, including rules pertaining to
the domiciliation of IOCs in Algeria and the term of
Sonatrach's participation in energy projects. He was
skeptical that the coming implementing regulations would
answer many of these questions. Yet there was a silver
lining, he confessed: lawyers such as himself would have
plenty to keep them busy.
11. (SBU) Our contact dismissed econoff's concern about a
vaguely worded provision in the amendments that would enable
the Minister of Energy to abrogate the normal bidding process
"for reasons of general interest in the context of
hydrocarbon policies" with approval by the Council of
Ministers (which is chaired by President Bouteflika). The
former counsel assessed this less as a potential encroachment
of the transparent bidding process by the presidency than a
curb on the powers of the Minister of Energy. He viewed the
clause as trying to rein in Khelil for seeking too much
liberalization under the 2005 law. He noted that
presidential approval is hardly uncommon in the Algerian
energy sector. Each contract signed with an IOC, he said,
has always required approval by the Council of Ministers.
WITH 2006 AMENDMENTS, "SONATRACH WILL SLEEP AGAIN"
-------------- --------------
12. (SBU) Under the 2006 legislation, our contact explained,
all contracts would be structured exactly like the
"participation in association" contracts practiced under the
1986 law. As a result, whereas Sonatrach would have had a
choice to participate in upstream projects under the 2005
legislation, it will now be obligated to participate by a
minimum of 51 percent. The same rule applies for pipeline
and refinery projects; other downstream projects continue to
be excluded. The former counsel warned that the new rules
regarding upstream and pipeline contracts would give
Sonatrach not only the majority of revenues, but also the
majority vote for decisions regarding the projects. He
viewed this as a disincentive to investment since foreign
companies would bear the full risk of exploration only to be
made a junior partner in successful projects. He emphasized
that Sonatrach, with no incentive to invest in technology or
training, will now "sleep again" as it goes forth and
collects its 51 percent with no effort.
13. (SBU) Regarding the windfall profits tax, our contact
said he understood the 5- to 50-percent production tax would
apply to all previous contracts, not just those lacking
"ecremage" clauses. (NOTE: Khelil hinted to Ambassador on
September 23 that only contracts lacking profit-limiter
clauses would be impacted by the windfall profits tax, but he
did not address the issue definitively. END NOTE) He said
he expected this tax to be assessed on a graduated basis.
For example, the tax would be 5 percent when oil cost USD
30-35 per barrel, 10 percent when oil cost USD 35-40 per
barrel, etc. He interpreted the law as indicating that the
windfall profit tax would apply only to existing contracts,
since Sonatrach was already likely to demand similar
provisions in future deals. He added that a major problem
ALGIERS 00001769 004.2 OF 004
presented by the windfall tax was that the law was based upon
the fixed amount of USD 30 per barrel, rather than an indexed
figure. Thus over time, inflation alone would contribute to
the amount of revenue subject to taxation.
COMMENT
--------------
14. (SBU) The former Sonatrach counsel's analysis of the
evolution of Algeria's hydrocarbon regime suggests that the
2006 amendments may prove more detrimental to the evolution
of Sonatrach than to foreign investment in Algeria. The
windfall profits tax, he confirmed, should significantly
impact only a handful of early projects, since all subsequent
deals contained profit-limitation clauses. (He seemed to
gloss over the fact that the affected contracts, such as
Anadarko's, not only account for some of the largest
investment in Algeria's hydrocarbon sector, but also came at
a time when few other investors were willing to brave doing
business in Algeria.) That being said, while there is no
doubt that the 2005 law in its original form would have
offered IOCs a better deal than the current amendments allow,
our contact seemed to view the sectoral reorganization and
enhanced regulatory environment as outweighing the
amendments' negative fiscal provisions. In this sense, he
echoed Minister Khelil's rationalization that since oil
companies are making enormous profits in Algeria, they are
unlikely to stop investing here any time soon. Once the
implementing regulations are available, IOCs need only plug
the new numbers into their algorithms to determine whether or
not prospective projects will be profitable. What is not as
easy to quantify is how this clumsily written legislation
will hinder foreign investment by contributing to Algeria's
already formidable red tape.
15. (SBU) In addition to the Ambassador's meeting with
Minister of Energy Khelil, on September 17 we raised our
concerns about the sanctity of existing contracts with former
finance minister and current MP Abdelkrim Harchaoui.
Harchaoui suggested that the tax implications of the
forthcoming implementing regulations (which Bouteflika has
already signed, closing the window on any negotiation for the
time being) will not be as severe as the international
business press has warned. The former Sonatrach counsel
agreed to brief us on the ramifications of these regulations
once they are published.
FORD
SIPDIS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: EPET ENRG EINV ECON TRGY AG
SUBJECT: FORMER SONATRACH COUNSEL CRITIQUES CHANGES TO
ALGERIA'S HYDROCARBON LAW
REF: A. ALGIERS 01595
B. ALGIERS 01723
ALGIERS 00001769 001.2 OF 004
1. (SBU) SUMMARY: A former Sonatrach counsel provided us
with a detailed briefing on the changes to Algeria's
hydrocarbon legislation over the last 20 years and his views
on the impact of the recent hydrocarbon amendments. He
clarified that while the new amendments obligate the Algerian
petroleum parastatal to take a majority stake in all upstream
projects, Sonatrach will not be required to assume any risk
in doing so. International oil companies will front all of
the funds for exploration -- for which they will be
reimbursed only if a discovery is made -- only to become a
minority partner in successful new projects. He noted that
foreign energy companies have always borne the risk of
exploration, but ever since Algeria switched to a transparent
bidding process in 2002 to attract more foreign investment,
Sonatrach's participation has typically been 25 percent.
Despite this disincentive, our contact stressed that foreign
energy firms are likely to continue to invest and benefit
from an enhanced regulatory environment and other positive
fiscal provisions under the new law. He also voiced his
concern about the impact on the evolution of Sonatrach, which
he feared would have no incentive to invest in training and
new technology. END SUMMARY
1986/1991 LEGISLATION GOVERNS ALL PROJECTS TO DATE
-------------- --------------
2. (SBU) A former Sonatrach legal counsel explained to us
September 28 how Algeria's 1986 hydrocarbon law was the first
to open the country's oil and gas sector to foreign
investment. Under the legislation, details regarding the
payment of taxes and royalties, Sonatrach's participation,
marketing agreements, and the other nuts and bolts of foreign
participation were left to be negotiated as part of each
individual contract, rather than mandated by law. Our
contact underlined that the 1986 legislation had governed all
of Algeria's foreign energy projects to date. (NOTE: The
law was amended in 1991 to include provisions for foreign tax
remuneration and recourse to international arbitration, among
other minor modifications. A 2005 revision of the
legislation, detailed below, was never implemented; hence
there are no contracts in place subject to its conditions.
END NOTE)
3. (SBU) The 1986 legislation gave international oil
companies (IOCs) a menu of options for partnering with
Sonatrach. Production sharing contracts (PSCs) were the most
popular mechanism, accounting for some 90 percent of the
agreements signed under the 1986 law, according to our
contact. (NOTE: PSCs, which were first developed in
Indonesia, seek to encourage investment by IOCs while
allowing them to avoid the pitfalls of dealing with a host
country's bureaucracy, such as its tax authorities and
environmental regulators. Under a PSC, the foreign
contractor typically bears all risk and costs for
exploration, development and production. In return, if
exploration is successful, the contractor receives a
stipulated share of production; the IOC simply brings in a
ship and takes its predesignated share of oil. These
agreements work similarly for gas projects, with the notable
exception that the contractor usually takes part in a joint
marketing venture with the state. All ownership of
energy-related infrastructure is retained by the host
government. END NOTE) Under its PSCs, Sonatrach typically
paid all royalties (calculated as a set percentage of a
project's production value),taxes (calculated as a set
percentage of a project's profits),and transportation fees.
A close cousin of the PSC was the risk service contract
(RSC),of which the former Sonatrach counsel explained there
had been three. (NOTE: Risk service contracts are very
similar to PSCs, with the exception that the foreign partner
is contractually guaranteed a defined share of revenue rather
than a share of production. END NOTE)
4. (SBU) Under the 1986 law, foreign firms could
alternatively create joint ventures with Sonatrach, although
our contact was not sure this had ever occurred. Finally,
IOCs could form "participation in association" contracts, of
which he estimated there had been no more than five. In
ALGIERS 00001769 002.2 OF 004
these arrangements, IOCs would front all of the funds for
exploration. In the case where exploration was successful,
Sonatrach would reimburse them 51 percent. In turn,
Sonatrach would receive 51 percent of the project's output
and pay 51 percent of its royalties, taxes, and
transportation fees. The former counsel stressed that of the
four types of partnership allowable, only the "participation
in association" and joint venture contracts obligated
Sonatrach to hold a majority share.
5. (SBU) In 2002, Algeria held its first of six international
oil and gas licensing rounds for unexplored blocks.
Sonatrach had previously awarded foreign contracts for
unexplored blocks by fiat, whereas a bidding system for
already-developed blocks has existed since 1992. Energy
Minister Khelil, when he was CEO of Sonatrach, established
the international licensing round in an effort to attract
foreign investment. The former counsel reiterated that in
all of the projects signed as part of its licensing rounds,
Sonatrach's participation was optional and based on the
conditions of the particular contract. In practice, however,
Sonatrach chose to participate in every contract by around 25
percent.
6. (SBU) Finally, our contact explained that contracts under
the 1986 limitation have long been subject to profit-limiting
price ceiling (or "ecremage") clauses, which raise an IOC's
taxes as the world oil price goes up. He confirmed that
three major contracts signed in the late 1980s (ref A) are
the exception. Following the conclusion of these deals,
Sonatrach systematically included profit-limiters in its
contracts. It did so up until 2000 with fixed ceilings and
thereafter with a theoretically-similar but mathematically
more complicated system known as "k factors."
2005 LEGISLATION: TOO GOOD TO BE TRUE
--------------
7. (SBU) The former Sonatrach counsel explained how the
never-implemented 2005 hydrocarbon law would have obligated
IOCs to have "concessionary" contracts. (NOTE: He remarked
that while this was the industry term, Algerian officials
shied from referring to these contracts as such to avoid the
inevitable comparison with the historic western concessions
in Iran and Saudi Arabia. END NOTE) Most importantly, the
law codified the system of competitive bidding for awarding
energy blocks and projects. Under the terms of the 2005 law,
if Sonatrach bid for the project by itself and won, it could
maintain 100-percent control. If an IOC won the bid,
Sonatrach would have then had the choice to "back in" between
20 and 30 percent. Thus the winning IOC would have fronted
the full costs of exploration. Had it proven successful,
Sonatrach would have had 30 days from when the discovery was
made to decide to reimburse the IOC between 20 and 30 percent
of its investment. If, for example, Sonatrach had decided to
"back in" 25 percent, it would have then received 25 percent
of the project's output and have been required to pay 25
percent of the project's royalties, taxes, and transportation
fees.
8. (SBU) The former counsel characterized the 2005 law as
"excellent for Sonatrach and excellent for Algeria." He
stressed that it would have liberalized Algeria's energy
sector, forced Sonatrach to evolve into a commercially viable
competitor to IOCs, and continued to offer the right
incentives to foreign investors. He added that Khelil wanted
IOCs to be able to hold 100-percent concessions, but
political pressure had forced him to relent on the clause
allowing Sonatrach to "back in" 20 to 30 percent. However,
Khelil had scored a brief victory with pipeline projects, for
which 100-percent foreign ownership over a 50-year concession
would have been theoretically possible.
NEW AMENDMENTS MAINTAIN MANY POSITIVE ELEMENTS OF 2005 LAW
-------------- --------------
9. (SBU) The former Sonatrach counsel recounted what he
viewed as a series of other positive changes in the 2005 law,
all of which ultimately remained untouched with the 2006
amendments. He praised the establishment of Algeria's two
new independent regulatory agencies, which he said would
ALGIERS 00001769 003.2 OF 004
separate Sonatrach's conflicting roles as "judge and party."
He highlighted the addition of retention clauses, which
lengthen the period of IOCs' concessions between three and
five years in order to give them to time to build
infrastructure and find markets for their oil and gas
discoveries. Foreign participation in most downstream
projects, he added, would be left alone. Finally, the law
still included a series of financial measures that he
assessed would benefit IOCs and promote greater investment.
These included lowering royalty and taxation rates based on
geographic area in order to promote the development of
marginal fields; changes to an accounting measure known as
"uplift" that offers IOCs advantages for amortization;
additional tax exemptions; and the end of a requirement that
IOCs pay Algerian social security for their non-Algerian
workers.
10. (SBU) Our contact echoed Khelil in saying that much of
the 2005 law and its amendments did not mark a change of
policy so much as a codification into law of existing
contractual practices (ref B). However, he critiqued both
documents for being very poorly written. He highlighted
various loose ends in the law, including rules pertaining to
the domiciliation of IOCs in Algeria and the term of
Sonatrach's participation in energy projects. He was
skeptical that the coming implementing regulations would
answer many of these questions. Yet there was a silver
lining, he confessed: lawyers such as himself would have
plenty to keep them busy.
11. (SBU) Our contact dismissed econoff's concern about a
vaguely worded provision in the amendments that would enable
the Minister of Energy to abrogate the normal bidding process
"for reasons of general interest in the context of
hydrocarbon policies" with approval by the Council of
Ministers (which is chaired by President Bouteflika). The
former counsel assessed this less as a potential encroachment
of the transparent bidding process by the presidency than a
curb on the powers of the Minister of Energy. He viewed the
clause as trying to rein in Khelil for seeking too much
liberalization under the 2005 law. He noted that
presidential approval is hardly uncommon in the Algerian
energy sector. Each contract signed with an IOC, he said,
has always required approval by the Council of Ministers.
WITH 2006 AMENDMENTS, "SONATRACH WILL SLEEP AGAIN"
-------------- --------------
12. (SBU) Under the 2006 legislation, our contact explained,
all contracts would be structured exactly like the
"participation in association" contracts practiced under the
1986 law. As a result, whereas Sonatrach would have had a
choice to participate in upstream projects under the 2005
legislation, it will now be obligated to participate by a
minimum of 51 percent. The same rule applies for pipeline
and refinery projects; other downstream projects continue to
be excluded. The former counsel warned that the new rules
regarding upstream and pipeline contracts would give
Sonatrach not only the majority of revenues, but also the
majority vote for decisions regarding the projects. He
viewed this as a disincentive to investment since foreign
companies would bear the full risk of exploration only to be
made a junior partner in successful projects. He emphasized
that Sonatrach, with no incentive to invest in technology or
training, will now "sleep again" as it goes forth and
collects its 51 percent with no effort.
13. (SBU) Regarding the windfall profits tax, our contact
said he understood the 5- to 50-percent production tax would
apply to all previous contracts, not just those lacking
"ecremage" clauses. (NOTE: Khelil hinted to Ambassador on
September 23 that only contracts lacking profit-limiter
clauses would be impacted by the windfall profits tax, but he
did not address the issue definitively. END NOTE) He said
he expected this tax to be assessed on a graduated basis.
For example, the tax would be 5 percent when oil cost USD
30-35 per barrel, 10 percent when oil cost USD 35-40 per
barrel, etc. He interpreted the law as indicating that the
windfall profit tax would apply only to existing contracts,
since Sonatrach was already likely to demand similar
provisions in future deals. He added that a major problem
ALGIERS 00001769 004.2 OF 004
presented by the windfall tax was that the law was based upon
the fixed amount of USD 30 per barrel, rather than an indexed
figure. Thus over time, inflation alone would contribute to
the amount of revenue subject to taxation.
COMMENT
--------------
14. (SBU) The former Sonatrach counsel's analysis of the
evolution of Algeria's hydrocarbon regime suggests that the
2006 amendments may prove more detrimental to the evolution
of Sonatrach than to foreign investment in Algeria. The
windfall profits tax, he confirmed, should significantly
impact only a handful of early projects, since all subsequent
deals contained profit-limitation clauses. (He seemed to
gloss over the fact that the affected contracts, such as
Anadarko's, not only account for some of the largest
investment in Algeria's hydrocarbon sector, but also came at
a time when few other investors were willing to brave doing
business in Algeria.) That being said, while there is no
doubt that the 2005 law in its original form would have
offered IOCs a better deal than the current amendments allow,
our contact seemed to view the sectoral reorganization and
enhanced regulatory environment as outweighing the
amendments' negative fiscal provisions. In this sense, he
echoed Minister Khelil's rationalization that since oil
companies are making enormous profits in Algeria, they are
unlikely to stop investing here any time soon. Once the
implementing regulations are available, IOCs need only plug
the new numbers into their algorithms to determine whether or
not prospective projects will be profitable. What is not as
easy to quantify is how this clumsily written legislation
will hinder foreign investment by contributing to Algeria's
already formidable red tape.
15. (SBU) In addition to the Ambassador's meeting with
Minister of Energy Khelil, on September 17 we raised our
concerns about the sanctity of existing contracts with former
finance minister and current MP Abdelkrim Harchaoui.
Harchaoui suggested that the tax implications of the
forthcoming implementing regulations (which Bouteflika has
already signed, closing the window on any negotiation for the
time being) will not be as severe as the international
business press has warned. The former Sonatrach counsel
agreed to brief us on the ramifications of these regulations
once they are published.
FORD