"A sovereign decision": Algeria, IOCs debate oil law

Algeria's Energy and Mines Minister, Chakib Khelil held a rare open meeting with foreign oil firms and journalists on Wednesday in which he debated the details of a new windfall tax on foreign oil company profits.

The following is the partial text of an exchange between Khelil and Anadarko (APC.N: Quote, Profile, Research) Vice President for International Operations Dick Holmes.

Holmes - "The industry and the contract and the law 86/14 were contracts of association production sharing agreements which were all very useful for working with. The new law 05/ 07 creates a licensing sytem which we are used to working with in other parts of the world where the government sets the tax and we understand that. The amendment and the creation of the exceptional profits tax seems to cross a divide between the two systems and to affect the sanctity of the contracts we've all signed in the past before 2005. Have you considered an alternative way of discussing with the various companies about modification of the contracts?"

Khelil - "Thank you for the question on the tax on windfall profits or exceptional profits. It is a tax which has been imposed given the exceptional profits made by the companies which led to the disequilibrium between the interests of the companies and the state. When the companies signed the contracts the price of oil was $15.

POLITICAL PROBLEM

"And it was just normal that negotiations that were made, it was not really bidding that was used. At the time it was negotiations. It was fair negotiations. But it was based on $15 and most of the contracts did not include any ways for the state or for Sonatrach to recover its fair share of the excess profits.

"So international experience shows that when you have situations of that sort, and we had recent experience in Bolivia where the state and the people considered that the deal is not fair anymore, which means the contract is not stable, then we could have a situation where the companies could be losing more than just a tax on excess profits.

"So it's just natural, to maintain stability due to political considerations, for the contract to reestablish the equilibrium which was determined at the time of the signing of the contract.

"So if you look at the signing of the contracts you could imagine that under the situation prevailing at that time in terms of prices, in terms of expectations, in terms of reserves then the company was expecting a certain rate of return at the time in the 1990s. And that rate of return is now excessively much larger than it was expected to be.

"It creates a political problem which has to be solved and it had to be solved through a reasonable share of the profits, to put back the re-equilibrium of the two parties in the contract.

SOVEREIGN DECISION

"The decree or the law did not decide that the tax on exceptional profits would be put in place after the prices exceed $15. It was decided it was going to be $30. So if at the time it was $15, at the time of negotiations, then the law gives a margin of $15. Now you could tell me 'what happens if the price goes to zero. Would the state give you (that back)?'

"What we are saying is that we are giving you $15 higher than was expected at the time. That is a sovereign decision by the state which has been made and it has been applied through this amendment in the law. I think it's fair.

"Some companies are not going to pay much because they already, in their contractual arrangements, have a formula by which a fair equilibrium between the two paries was ensured. Certain companies did not have that, which means that all the super profits were kept by the companies. This of course creates a political situation where people will say 'Well, look what is the state getting out of $60/ a barrel. It was getting very good at $15 but at $60 it's getting the same thing. So what is going on?

EXCELLENT RELATIONSHIP

"And that is what created situations in many countries where there were tremendous changes in the law whether it was in Venezuela, in Bolivia, whether it was in other countries. So I think by introducing this tax I think we just maintain equilibrium between the two parties and ensure the continuation of the excellent relationship that we have."

Holmes - "You refer to a exceptional profits tax - the cost associated with development and construction has risen enormously. From what we've read in the press it's not clear to us that it actually is profits and that the exceptional costs of doing business in the future are taken into the account in the calculation. Can you confirm that it is profits and not just revenue?"

COSTS

Khelil - "We are talking about contracts that are ongoing, which means that all investments have been already done. If you are producing right now, for the last 5 years your investments are already done. You are amortising, you are depreciating your investment. For sure, for the new investments in the future, under the law 05/07 we have a new situation. But the law takes care of it under the fiscal system. The fiscal system here takes care of the increased cost of investment. It takes care of some of the increased revenues through the PRB -- the tax on petroleum revenues -- which modulates the take that the state pays in function of investments and revenues.

"Now if we are talking about the existing contracts, you have invested. You are not investing now at the rate you have invested. So the costs that we are seeing in the steel market and so forth have not affected your investments. We have been affected more than you have. When I say we I mean Sonatrach that has been affected. So we don't think that that's really applicable to most of the contracts which are under production right now. Thank you."