Algeria Shocks Oil Firms With Windfall Tax

by Jason Gorringe, Tax-News.com, London

24 November 2006

Foreign investors operating in Algeria's oil fields are facing a new windfall tax on their profits that the Algerian government expects to yield $1 billion in revenues next year.

Energy Minister Chakib Khelil told an international conference of reporters and executives on Wednesday that foreign oil companies have been making "excessive" profits as a result of high oil prices, and that a windfall tax would be entirely justified, especially in the light of similar moves made by governments elsewhere, notably Venezuela and Bolivia.

"The tax on exceptional profits is not an injustice but the re-establishment of justice in view of the quadrupling of the price of the barrel," Khelil stated.

Algeria currently produces about 1.4 million barrels of oil per day, and sits on reserves that have been estimated at 11.8 billion barrels.

The Algerian government has not yet released details of the new tax, but the Minister said that it expects to collect revenues in the region of $500 to $600 million this year and $1 billion in 2007. The government will elaborate on its plans in the next few days, and will have released full details by the beginning of next year.

In a similar vein to the Venezuelan government, Algeria is seeking to reverse laws which gave oil companies more freedom to invest by restricting the stake that foreign firms can take in joint ventures with state-owned oil business Sonatrach, which must now have a 51% share in all oil operations.

This has raised the question of whether the new laws will invalidate existing contracts that the government has signed with foreign companies, and has led analysts to predict that many investors will lose interest in Algeria and pull investment out of the country.

However, despite these concerns, Khelil remained undaunted, noting that crude oil was about $15 per barrel when many of these contracts were concluded.

"(The) rate of return is now excessively much larger than it was expected to be," he observed.

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