Spanish oil producer Repsol is the latest multinational company to take the Ecuador government to international arbitration over windfall taxes. The company is responding to a move by the government to charge a 99% tax on all profits above a set contractual price per barrel.
Ecuador's president Rafael Correa (in Spanish) announced plans in 2007 to charge a windfall tax on all profits above this benchmark. The tax rate was originally set at a rate of 50% but at the end of the year he increased the charge to 99%. This means that nearly all profits above the benchmark go to the state.
"We have to protect the interest of our partners and shareholders," said Federico Cruz, Repsol's spokesman in Quito, to the Reuters news agency. "We hope to reach an agreement and to remove the charges immediately." Repsol has already paid $529.4 million in windfall taxes.
Earlier, several companies operating in Ecuador – including the US producers City Oriente, Murphy Oil Corporation and Burlington Resources, refused to pay the extra charge and referred the dispute to international arbitration. A clause in their contracts said that for independent resolution the oil companies could go to the World Bank's International Centre for Settlement of Investment Disputes. Repsol has now joined them.
Correa said recently that he would reject any findings by the World Bank. The companies said they would have to withdraw from the market in Ecuador – the fifth largest oil producer in South America - if their investment would become unprofitable.
At the weekend, Correa said that his government has struck a new deal with foreign oil companies which would reduce the windfall tax for one year if companies dropped their legal actions. They would pay 70% tax on all profits above the agreed benchmark price for the first year if they dropped their legal challenges.
Repsol confirmed to International Tax Review Week that its case was still going ahead. Venezuela, Bolivia and Ecuador have all redrawn contracts with oil companies to benefit from prices nearing $100 a barrel.
The government in Quito is renegotiating contracts with foreign companies to reduce their stake and to downgrade their status from joint venture partners to suppliers. Other companies renegotiating their deals with Ecuador are Petrobras (Brazil), Andes Petroleum consortium (China) and Perenco (France).
