China plans to extend 5-10% resource tax on oil & gas nationwide

25 July 2011 07:51  [Source: ICIS news]

By Fanny Zhang

China is proposing to extend nationwide, a price-based resource tax on oil and gas GUANGZHOU (ICIS)--China’s plans to impose a nationwide 5-10% resource tax on the value of oil and gas at the production level will result in an increase in the cost of petrochemicals, industry sources and analysts said on Monday.

The government has already imposed the price-based resource tax in 12 provinces, but now has plans to extend it to the entire country, they said.

A draft of the proposed expansion was given clearance last week by Chinese premier Wen Jiabao for submission to the State Council, the country’s top decision-making authority. The extended resource tax is pending the council’s approval and may get passed soon, they added.

The price-based resource tax on crude oil and natural gas was first introduced in Xinjiang, which has been levying the tax at a starting rate of 5% since 1 June 2010.

The remaining 11 provinces that include Shaanxi, Inner Mongolia, Qinghai and Sichuan followed suit on 1 December 2010.

Elsewhere in the country, the resource tax on crude oil and natural gas is currently calculated and paid on volume. Energy firms pay yuan (CNY) 14-30/tonne ($2-5/tonne) resource tax on crude and CNY7-15/cbm (cubic metre) on natural gas depending on the volume of output.

Industry sources said that a nationwide resource tax reform would “absolutely” increase the costs of crude and natural gas in China and thus affect the costs and earnings of the downstream petrochemical industry.

PetroChina will suffer the biggest rise in its costs as it is the largest oil and gas producer in the country, while Sinopec may sustain a far lesser impact as most of its crude comes from imports, a source from Sinopec said.

“Independent refineries are going to benefit from the [tax] reform because they’re taking imported fuel oil as feedstock instead of domestic crude oil,” said the source.

A PetroChina source said that the reform may increase the amount the company pays for resource tax by six times to over CNY30bn a year.

“Petrochemical producers will raise their prices in view of more expensive raw material and consumers eventually will have to pay for the rise in costs,” said a source from China Petroleum and Chemical Industry Federation (CPCIF).

“Choosing a time for [proceeding with the nationwide tax] is critical. [However,] we believe it won’t [be realised] for the next three months at least because of inflation,” said a CPCIF source.

The country’s consumer price index, a gauge of inflation, hit a three-year high of 6.4% in June this year.

The country may adjust other taxes, such as special proceeds on crude oil, to offset the hefty increase of the resource tax in order to ensure healthy development of domestic petrochemical and energy industries, he added.

The PetroChina source said that the rates of special proceeds for crude oil are too high currently and should be reduced or removed when the resource tax reform is introduced.

China currently levies 20-40% of special proceeds on crude oil produced in the country with a $40/bbl crude price as the starting point.

($1 = CNY6.45)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: Fanny Zhang
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