New tax may spur refined oil price hike

By Zhang Jin and Jonathan Yang (China Daily)
Updated: 2006-04-05 07:03
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HONG KONG: CNOOC and PetroChina, China's top crude oil firms, will suffer from the newly adopted windfall tax, while refiner Sinopec may benefit, analysts said yesterday.

The tax, part of the Chinese mainland's efforts to overhaul its oil pricing regime, will also pave the way for another price hike of refined oil products, which will be good for refiners.

Public sectors and groups of vulnerable citizens may also get more subsidies.

A total of 20 billion yuan (US$2.5 billion) is estimated to be collected from the three companies in a year, said Grace Liu, an energy analyst with Guotai Jun'an Securities.

She predicted the profit margin separating the three firms would be tightened by 4 per cent to 5 per cent because of the taxation, which takes effect after a firm sells oil above US$40 per barrel.

The graduated tax, imposed since last Sunday by the central government, starts at 20 per cent and rises with the barrel price. A maximum 40 per cent tax is charged for barrels that are US$60 and higher.

"Apparently, the upstream players will be most severely hit," said Liu, although she noted CNOOC and PetroChina were strong enough to withstand the taxation.

Ding Jianchun, CNOOC's spokeswoman, said the taxation would affect the company, but declined to divulge how seriously.

By contrast, Sinopec, more a refiner than a crude oil producer, is expected to suffer less.

"The windfall tax is bad for CNOOC, mildly negative for PetroChina and neutral for Sinopec," said one analyst at a European investment bank.

Moreover, Asia's top refiner may benefit from subsidies from the government, just like a US$1.2 billion one-off payment given last year to offset its refining losses.

"One of the usages of the windfall tax will go to subsidize refiners," Liu said.

The mainland's refiners have long said their profits were shrinking because of a disparity between hovering crude oil prices - which are above US$65 a barrel - and a government-set cap on prices for finished products.

For example, the net profit of Sinopec Shanghai Petrochemical Co Ltd, a Hong Kong-listed refining arm of Sinopec, dropped by 53.4 per cent to 1.85 billion yuan in 2005 due to that disparity.

The windfall tax means Sinopec might be compensated by higher refined oil product prices.

"With the tax in place, another hike in finished oil products become feasible," said Liu.

Late last month, the mainland announced an increase in prices of processed oil products.

Ex-factory gasoline prices would be increased by 300 yuan (US$37.5) per ton, while the cost of diesel oil would rise by 200 yuan (US$24.9) per ton.

Retail prices for gasoline also rose by 250 yuan (US$30.8) per ton, while diesel prices rose by 150 yuan (US$18.5) a ton.

But Rong Guangdao, chairman of Sinopec Shanghai Petrochemical Co Ltd, said the company would not be able to break even until the ex-factory prices are increased to about 1,000 yuan (US$125) per ton.

Hong Kong-traded shares of China's three top oil firms were in line with analysts' projections yesterday.

(China Daily 04/05/2006 page11)