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News Oct 19, 2016

Shearman & Sterling Secures Major Arbitration Victory for Sonatrach Over Windfall Profits Tax

Shearman & Sterling has secured a major victory for Sonatrach after an ICC Tribunal rejected the claims by three oil companies – Repsol Exploración Argelia S.A, Samsung C&T Corporation and SK Innovation Co Ltd – regarding the performance of a production-sharing agreement and the implementation of a windfall profits tax.

The production-sharing agreement was signed in 1990 between Sonatrach and Repsol for the exploration, development and production of an oil field in the Issaouane area of Algeria.

Repsol, Samsung and SK Innovation launched the arbitration against Sonatrach in September 2013. They claimed the equivalent of US$240 million in compensation for alleged violations of the contractual provisions regarding production sharing, reimbursement of various amounts spent as part of a work-over campaign, as well as restitution of the amounts deducted from their share of the profits as a result of a windfall profits tax (TPE) implemented in 2006.

The Tribunal accepted all of the arguments presented by Sonatrach in this case and rejected Repsol’s claims in their entirety, granting Repsol only the small portion of the work-over costs Sonatrach had conceded from the outset.

Regarding the implementation of the TPE, the Tribunal rejected Repsol’s claim that the contract included provisions stabilizing the legal regime applicable to the contract and that Sonatrach should have paid, on behalf of the foreign companies, the amounts due to the State as a result of the TPE.  The Tribunal agreed with Sonatrach’s position that Sonatrach was required by Algerian law to collect the TPE and that it did not violate the PSA in this regard.

In light of Sonatrach’s success, the Tribunal awarded Sonatrach 90% of its costs and fees.

Sonatrach’s lead counsel, Shearman & Sterling head of International Arbitration Group Emmanuel Gaillard, told GAR that he is delighted by this result: “This is the first time that an arbitral tribunal has rendered a decision on the windfall profits tax in Algeria and it validated Sonatrach’s position on the matter in every respect. The decision is a very strong precedent in favor of Sonatrach”.

Sonatrach was represented in this case by an international arbitration team from Shearman & Sterling led by partner Emmanuel Gaillard in Paris and including counsel Emmanuel Jacomy in Beijing / Singapore; associates Marina Matousekova in Milan and Benjamin Siino and Paul Lefeuvre in Paris.