Interview: “States are free to tax windfall profits or to share them with the investor, provided that the legitimate expectations of the investor are followed.” - Mehdi Haroun, Herbert Smith

摘要

Following a recent statement by Italy’s Eni that it is renegotiating the tax burden in some Algerian blocks it shares with Sonatrach, Gas Matters Today examines the legal and fiscal environment in upstream projects in the North African country which holds the 8th biggest gas reserves in the world. Mehdi Haroun, a Partner at Herbert Smith and qualified Algerian lawyer, explains some inadequacies of the much-publicised 2005 hydrocarbon law which has created unexpected challenges for international oil companies doing business in Algeria. GMT: How were upstream contracts in Algeria structured before the 2005 hydrocarbon law was introduced?MH: To really understand the current situation, one has to look back at the previous law dating back to 1986. This law had mainly put in place a system of production sharing agreements (PSAs). The foreign partner would take a share of the production, which is generally exempt of taxes. The foreign company becomes the full owner when the volume is loaded onto the tanker. The maximum share the IOC could take was 49% of the production.For PSAs containing an exploration phase, foreign partners invest and bear the exploration risk alone. In assessing IOC's bids, one of the most important parameters is based on the amount of the investment commitment for the exploration phase.The next phase is the development phase which depends on whether the discovery is considered as being a commercial discovery. The assessment of commerciality will depend on various parameters such as the available quantity and the investment needed to develop the block. In particular, the quality of the gas discovery will dictate the treatment requirements and the related capex. The partners need to see if the quantity is sufficient to cover the cost of treatment, exploration and exploitation but also if all these costs will allow the investor to get an acceptable return.Then the development plan is to be agreed upon. Sonatrach wouldn’t pay anything during the exploration phase but would be required to finance the development plan and pay operational costs during the production phase. Generally it is on a 75(Sonatrach):25 (IOC) basis. Exploration investments are nevertheless recoverable by the IOC at the same rate.The production is generally shared in accordance with the agreed production share ratio. However the foreign partner will first be entitled to recover its costs through additional oil (called the "cost oil") before the agreed production share ratio is applied. If you have spent $X dollars over the lifespan of the contract, you will have the right to get your money back over the lifespan of the contract. But contractually the total production share is limited to 49% of output, even if the recoverable costs ($X) exceed the value of the 49% production.Once the foreign partner has recuperated all exploration, development and exploitation costs, it can make a profit out of the remaining available production which is shared with the NOC (Sonatrach) at an agreed rate (called the "profit oil"). Such rate does not, on average, generally exceed 20% of the production. Foreign companies can get a lot more, up to 49%, but there’s a big chunk of this which in reality is “cost oil” and not “profit oil”.20% can be a significant part, for example on the Libyan contracts, the last round, some bids were made at around 8%, which can be fair, because, it depends on a lot of parameters: for example, on the block and the oil price, which at the time was very expensive (and also on the perceived competition for the blocks).These contracts were improved over time. There were roughly four generations of PSA contracts since 1986. The first contracts were very basic, while the others were a bit more elaborate. Some terms were improved and notably, in the production sharing formula, a price variation was included, as well as the variation of different factors. There is a corrective factor, commonly known as the "K" factor, to specifically take into