Algeria Windfall Tax Hits Anadarko Hard: [1]

Abstract

Anadarko's estimate of its $100 million liability is based on the assumption that the tax applies only to production value in excess of $30/bbl. But beginning in 2007 -- assuming an average oil price of $60/bbl and application of the exceptional profits tax to production value over $30/bbl -- Anadarko will face an annual expense for the exceptional profits tax of some $225 million, the company said.

US independent Anadarko said Monday it would record a large, special charge of around $100 million in earnings for the fourth quarter of last year, after Algeria imposed a new windfall tax on foreign oil companies.

The company could also face extra taxes of some $225 million this year -- and possibly double that amount -- depending on oil prices and interpretation of the new levy.

The "exceptional profits" tax, which took effect Aug. 1, 2006, applies when the monthly average price for North Sea benchmark Brent crude exceeds $30 per barrel.

Anadarko's chairman and chief executive, Jim Hackett, indicated that the company expected to be recompensed for the tax at a later date, either through an agreed settlement with Algerian state Sonatrach or via some form of arbitration, an option already raised by Anadarko last July (OD Jul.31,p1 ).

Legislation implementing the new tax was published in December 2006 (OD Dec.13,p6). Foreign oil and gas companies operating in Algeria must pay the tax by reducing their liftings of oil produced.

"Our Algerian assets are operated under a production sharing contract containing a stabilization clause that protects our existing investment and related asset value. Although we are recording the estimated impact of the tax with this charge in the fourth quarter, we expect to ultimately receive relief in a settlement agreement or in international arbitration," Hackett said. "Although we expect a favorable outcome to this matter, ultimate resolution may be more than a year away," he added.

Stabilization clauses are designed to protect upstream contracts against changes to the fiscal regime.

Anadarko's estimate of its $100 million liability is based on the assumption that the tax applies only to production value in excess of $30/bbl. But beginning in 2007 -- assuming an average oil price of $60/bbl and application of the exceptional profits tax to production value over $30/bbl -- Anadarko will face an annual expense for the exceptional profits tax of some $225 million, the company said.

If the exceptional profits tax is applied to the full value of production rather than to the value in excess of $30/bbl, the estimated annual expense would double under the $60/bbl price assumption, the company's statement continued.

As well as a lack of clarity over how the tax will be applied, there is uncertainty over how collection and relief will ultimately be resolved, Anadarko said, adding that Sonatrach has indicated it will begin collecting the current and past tax in March 2007.

The US company stressed that the exceptional profits tax would not entail a revision of reserves in Algeria, where Anadarko currently has some 110 million barrels of proved undeveloped reserves.

In 2005, Algeria accounted for 13% of Anadarko's proved reserves and 15% of its total production, second only to the company's core area of North America. Average production net to Anadarko in Algeria was approximately 64,000 barrels per day in 2006, a spokesman told Oil Daily Monday, adding: "We thoroughly believe we enjoy a contractual remedy to the situation."

Companies surveyed recently by Energy Intelligence indicated that they were seeking further clarification from Sonatrach as to how the new tax, which affects all contracts signed since the 1980s, would be applied. Some described it as "unquestionably negative," while others said that in some cases, if oil prices remain high, investment returns could remain attractive, even after a 50% tax.

Algerian Energy Minister Chakib Khelil said in November that the windfall tax on foreign company profits could net the North African state as much as $500 million-$600 million in revenues in 2006, and $1 billion in 2007 (OD Nov.27,p6).

Jill Junnola, London