Algerias plan to tax the windfall profits of international oil companies (IOCs) operating in its oil and gas sector, details of which have recently been published in the Algerian official gazette, will still leave companies with a substantial rate of return on their investment, Algerian Energy and Mines Minister Chakib Khelil said on 14 December (MEES , 24 July and 27 November).
Speaking on the sidelines of the OPEC conference in Abuja, Dr Khelil said that the windfall tax introduced into the Hydrocarbon Law had not deterred existing operators from continuing and expanding their operations in Algeria so far. The operators said they are going to stay and they are going to invest more, he said, pointing out that the new tax only affected contracts that were signed in the 1980s and early 1990s a period when oil prices did not move much above $15/B. But in the present oil price environment, the profit share is not favorable for the state, he said. Its still going to leave them (IOCs) with a huge rate of return after taking away these taxes. They were probably getting rates of return in the order of 40-45% which is unusually high for the oil industry. So with that tax theyre going to come down to a reasonable rate of return, taking into account the risk theyve taken in exploration, the risk in the country, and also the advantages of producing oil in a country like Algeria which is very close to the market and has an excellent type of crude, he said. Dr Khelil clarified that the windfall tax would not apply to contracts signed under the 2005 Hydrocarbon Law, which has its own fiscal system of incentives for IOCs.
The 2005 Hydrocarbon Law was introduced after several years of delay in order to liberalize Algerias oil and gas sectors and allow greater foreign participation. However rising oil prices and exceptional earnings caused a reassessment within government, prompting a re-examination of contracts and a slightly more conservative approach to new IOC investment (MEES , 10 July). Algeria expects the new tax will bring in up to $600mn for the last five months of 2006 and perhaps as much as $1bn in tax revenue during 2007. The high price of oil has led the country to project hydrocarbon sales earnings at nearly $50bn for 2006 and allowed it to repay some $12bn in foreign debt ahead of schedule (MEES , 27 November).
Retroactive Tax
While the amendments to the hydrocarbon legislation will affect only future upstream investment, the windfall tax is retroactive to 1 August 2006 and stipulates that a tax on exceptional profits (Taxe sur les Profits Exceptionnels TPE) will apply to the production share of foreign companies according to a sliding scale of 5-50%, when the monthly average of Dated Brent crude, as published by Platts Crude Marketwire , exceeds $30/B. The government decree, Number 06-440, has been published on the Algerian government gazette website: http://www.joradp.dz. The rate of taxation will depend on the daily production of hydrocarbons by companies partnered with Sonatrach, and should Sonatrach have more than one partner in a production-sharing agreement (PSA), then the TPE will be calculated on the sum of the production shares of all foreign partners.
IOCs operating in Algeria contacted by MEES declined to comment on the potential implications of the windfall tax, with most still assessing the impact of the measure on their businesses. Anadarko CEO Jim Hackett, speaking in a company webcast on 12 December, said Anadarkos Algerian assets could fall into two potential categories and the company would need to consult with Sonatrach. If we dont get the right answer there, we have a lot of protection, Mr Hackett said. We have a stabilization clause, we have an international arbitration clause, we think weve got legal protection. Dr Khelil meanwhile said that the windfall tax and separate recent changes that had been made to the April 2005 Hydrocarbon Law had not decreased IOC interest in new acreage. There is definitely interest. If I open acreage, you are going to see the results. Just like the IOCs are interested in Libya, he said. Algeria is expected to launch a new upstream licensing round in early 2007.
Rising Project Costs
Asked to comment on concerns that Algeria could miss its oil output target of 2mn b/d by 2010, following its failure to reach 1.5mn b/d by the 2005 target, Dr Khelil said rising project costs could lead to the postponement or even cancellation of new projects in the LNG and GTL sector, as well as in terms of oil capacity expansion. Most countries including OPEC countries and Algeria are going to have to postpone or even cancel projects because they are not any longer feasible due to cost, he said. He pointed to the more than tripling in the cost of an LNG project over three years and said that even amid $60/B oil, postponement of projects was inevitable especially in the nascent GTL sector where rates of return were so much leaner until the outlook on cost became clearer. Lots of the projects in OPEC and non-OPEC countries could be postponed and it could have an impact on oil production in the next two-to-three years, Dr Khelil said, adding that drilling rig availability and the backlog of orders from component suppliers and even LNG contractors were compounding the rising cost of materials and services: It is not a question of being able to achieve 2mn b/d or 3mn b/d, it is a question of whether the materials and services are there to allow you to do what you want to do.
Algerias Hydrocarbon Law
The following is a basic summary of the sliding taxation rates in relation to daily production volumes (MEES translation):
Article 8.1 : For contracts that stipulate a sharing of liquid hydrocarbons and gas without distinguishing between the amount for reimbursement and the amount for remuneration of the foreign partner and without a price cap mechanism as defined in the association contracts, the tax rate is applied as follows:
Average Monthly Production of the Foreign Partner (B/D) | Tax Rate |
Less or equal to 5,000 b/d | 5% |
5,001 10,000 b/d | 15% |
10,001 25,000 b/d | 25% |
25,001 40,000 b/d | 35% |
Exceeding 40,000 b/d | 50% |
Article 8.2 : For contracts that stipulate a clause containing a specific formula relating to the calculation of the foreign partners remuneration, without a price cap mechanism as defined in the association contracts:
Average Monthly Production of the Foreign Partner (B/D) | Tax Rate |
Less or equal to 1,000 b/d | 15% |
1,001 3,000 b/d | 25% |
3,001 5,000 b/d | 35% |
5,001 7,000 b/d | 45% |
Exceeding 7,000 b/d | 50% |
Article 8.3 : For contracts that stipulate a clause containing a specific formula relating to the calculation of the remuneration of the foreign partner with a price cap mechanism, the tax rate is determined according to a coefficient ? (and following the formula below):
?=(Pb-Pc) / Pc If Pb X Pn exceed $30/B
Pb= price of barrel of oil
Pc= value of the price cap indexed to the month (as defined in the contract).
Pn= coefficient of the price cap
Tax Rate | |
Less or equal to 0.2 | 5% |
Superior to 0.2 and inferior or equal to 0.5 | 10% |
Superior to 0.5 and inferior or equal to 1.0 | 15% |
Superior to 1.0 and inferior or equal to 1.5 | 20% |
Superior to 1.5 and inferior or equal to 2.0 | 30% |
Superior to 2.0 and inferior or equal to 2.5 | 40% |
Superior to 2.5 | 50% |
Article 8.4 : For contracts containing a production-sharing formula of the type: Pi = (a-b) or Pi = (k*a-b) as defined in the association contracts:
Average Monthly Production of the Foreign Partner (B/D) | Tax Rate |
Less or equal to 20,000 b/d | 5% |
20,001 40,000 b/d | 15% |
40,001 60,000 b/d | 25% |
60,001 80,000 b/d | 35% |
80,001 100,000 b/d | 45% |
Exceeding 100,000 b/d | 50% |
Article 8.5 : For contracts of association in participation:
Average Monthly Production of the Foreign Partner (B/D) | Tax Rate |
Less or equal to 20,000 b/d | 5% |
20,001 40,000 b/d | 15% |
40,001 60,000 b/d | 25% |
60,001 80,000 b/d | 35% |
80,001 100,000 b/d | 45% |
Exceeding 100,000 b/d | 50% |
