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INFO RUCNMGH/MAGHREB COLLECTIVE

C O N F I D E N T I A L ALGIERS 000104 
 
SIPDIS 
 
DEPT FOR NEA/MAG - MNARDI AND JPATTERSON 
 
E.O. 12958: DECL: 02/04/2020 
TAGS: PGOV PREL ECON EPTE ENRG EINV AGAO US
SUBJECT: ANADARKO VS. SONATRACH -- UPDATE ON THEIR 
INTERNATIONAL ARBITRATION CASE 
 
Classified By: Ambassador David D. Pearce. Reasons 1.4(b), (d) 
 
Summary 
------- 
 
¶1. (C) The head of Algerian operations of the U.S. oil 
company Anadarko told the Ambassador this week that his 
company's dispute continues with the state oil company 
Sonatrach over the government's application of the windfall 
profit tax provision of the 2006 Hydrocarbons Law to 
Anadarko's operations, in violation of provisions in the 
company's production sharing agreement.  Anadarko took the 
case to international arbitration, after the GOA abruptly 
pulled out of negotiations late last year.  Anadarko doesn't 
expect a decision before 2012.  Its claims amount to over USD 
3 billion.  Company attorneys are confident they will win. 
At the same time, highly-placed GOA officials have strongly 
hinted the government will not pay if it loses.  If the GOA 
does not pay, Anadarko may move to seize Sonatrach assets 
abroad.  The case is symptomatic of the Algerian government's 
penchant to change the rules of the game for foreign business 
without warning or consultation, often in violation of 
internationally-accepted norms.  END SUMMARY. 
 
Anadarko/Sonatrach Dispute 
-------------------------- 
 
¶2. (C) Anadarko Algeria President Dick Holmes updated the 
Ambassador January 27 on the status of Anadarko's 
longstanding tax dispute with the Algerian government. 
Ambassador was accompanied by Pol-Econ Chief and Econoff. 
Holmes recalled that amendments to the Hydrocarbons Law 
adopted in 2006 included the Tax on Exceptional Profits (TPE 
-- a windfall profit tax), which imposed a steep levy on all 
production revenue when the price of oil exceeded USD 30 per 
barrel -- not just the revenue gained in the margin between 
current price and the USD 30 threshold.  Anadarko says it and 
several European companies were hit the hardest, because 
their concessions were granted before standard contract 
language incorporating the higher tax rates mandated by the 
2006 law.  The Ministry of Energy and Mines, Holmes 
continued, believes that the mere attractiveness of Algerian 
fields will draw companies to continue making bids even under 
these burdensome tax provisions. 
 
¶4. (C) During a meeting last year, Holmes explained that 
Anadarko faced a USD 450-million annual tax liability under 
this new provision.  At that meeting, he related that the 
company decided to invoke the arbitration clause in its 
contract.  Anadarko opened the arbitration case while 
simultaneously offering a compromise tax plan to Sonatrach 
and the Ministry of Energy and Mines.  Negotiations appeared 
to be going well, and Anadarko believed it was close to a 
deal.  Then, in the course of a meeting with Sonatrach 
officials last June, at which Holmes was present, the senior 
Sonatrach VP was called out of the room to receive a phone 
call.  When he returned, he told Anadarko that a negotiated 
solution was not possible and that Sonatrach was breaking off 
negotiations. 
 
¶5. (C) Holmes explained that a preliminary arbitration 
hearing ("conciliation") was held in Geneva last year.  On 
February 12, Anadarko will submit a "memorial" laying out its 
claim.  Sonatrach is then expected to submit its response by 
July.  The actual decision-making session is scheduled for 
June 24, 2011 in Paris and will last two weeks.  Anadarko 
expects a decision not before 2012.  Holmes told us that, 
over the course of the last year, Sonatrach had dismissed its 
lawyers and hired a New York-based attorney whose firm has 
defended the Venezuelan national oil company PDVSA against 
foreign producers.  Holmes said that the amount being claimed 
will be at least USD 3 billion. 
 
¶6. (C) Holmes affirmed that Anadarko's attorneys are 
confident they have a winnable case and are determined to 
pursue it to a decision.  He said that senior Sonatrach 
officials are aware they could lose the case, but they have 
hinted to Anadarko that "it could win the battle but lose the 
war," meaning that it is unlikely that the Government of 
Algeria will actually pay.  Even if does, it can extract 
equivalent costs from Anadarko by other means, up to and 
including nationalization.  Holmes says the attorneys are 
certain that the decision will be enforceable, if not in 
Algeria then through the seizure of Sonatrach assets abroad. 
According to Holmes, Minister of Energy and Mines Chekib 
Khelil told Anadarko's chairman that even if he wanted to 
resolve the dispute, he would not be able to do so and that 
this action was taken when he was out of the country. 
 
No USG Intervention Desired 
 
--------------------------- 
 
¶7. (C) Holmes said the Anadarko lawyers had explicitly 
instructed company officials not to request USG assistance. 
However, Holmes considered it in his company's interest to 
keep the Embassy appraised of the progress of the case. 
Anadarko's management has instructed him not to approach 
Sonatrach on this issue again and to re-engage only if 
Sonatrach approaches him.  Holmes told us that the Sonatrach 
corruption scandal has paralyzed most of that company's 
high-level decision-making and hit the very Sonatrach VP with 
whom Anadarko had been trying to reach a settlement outside 
of court. 
 
Comment 
------- 
 
¶8. (C) Anadarko lifts more oil than any foreign company 
operating in Algeria and worked here throughout the darkest 
years of Algeria's fight against terrorism.  Its production 
sharing agreement (PSA) predates the 2006 reform to the 
Hydrocarbons Law, which mandated majority Algerian 
participation in all new hydrocarbon investment and imposed 
steep taxes on oil profits whenever the price of oil exceeded 
USD 30/bbl.  Anadarko thinks international law and practice 
is on its side and that new legislation should not preempt 
its PSA.  The GOA, by contrast, firmly believes that national 
political sovereignty trumps international law.  This case is 
symptomatic of Algerian government willingness to change the 
rules of the game to the detriment of private business, 
particularly with foreign companies.  If Sonatrach loses the 
case, we believe it is highly unlikely it will pay.  Anadarko 
would then have to consider whether to move against Sonatrach 
assets abroad. 
PEARCE