FocusChina expands new resource tax base; PetroChina takes big hit

11 October 2011 09:15  [Source: ICIS news]

China expands new resource tax base; PetroChina takes big hitBy Fanny Zhang

GUANGZHOU (ICIS)--China will start a nationwide implementation in November of a 5-10% resource tax, which will dent the operating profits of PetroChina – the country’s biggest oil and gas exploration firm – industry sources and analysts said on Tuesday.

The tax liability of PetroChina on resources will likely jump sixfold to more than yuan (CNY) 30bn ($4.72bn) each year, said a company source. The figure is roughly a fifth of the company’s net profit in 2010 at CNY140bn.

China’s price-based resource tax is on test implementation at 12 resource-rich provinces – Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, Inner Mongolia and Guangxi – in the northern and western parts of the country.

Other provinces still apply a volume-based resource tax of yuan (CNY) 14-30/tonne on crude and CNY7-15/cubic metre on natural gas. The change in the tax policy was implemented to better reflect values of those resources, according to the government.

It will be a direct hit to PetroChina’s earnings as the company will not be able to adjust prices of fuel products to ease its tax burden, said Wang Qiang, an energy analyst at Shanghai-based brokerage China Merchants Securities (CMS).

As fuel prices are regulated by the Chinese government and linked to international crude prices, domestic refiners that also do oil exploration in the country “have no way to pass their cost increase to fuel consumers”, Wang said.

But the CMS analyst said that the tax increase can be digested by PetroChina, considering its profitability.

For China’s petrochemical giant, Sinopec, the earnings impact is less significant since the company imports most of its crude requirements, analysts said.

China should consider reducing or removing the 20-40% tax on the windfall profits of oil companies that use $40/bbl as the crude price threshold, industry sources said.

“The $40/bbl point is set too low and even hard to cover today’s exploration cost,” said Wang of CMS.

PetroChina paid CNY51bn in windfall profit tax last year, market sources said.

($1 = CNY6.35)

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

By: Fanny Zhang
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