Oil stocks shrug off plan to impose 10pc tax on revenues

PUBLISHED : Thursday, 20 December, 2007, 12:00am
UPDATED : Thursday, 20 December, 2007, 12:00am

Investors shrugged off news yesterday of a proposal by the Ministry of Finance to slap a 10 per cent resource tax on oil firm revenues, with the three major mainland oil companies recording share price gains.

The proposed tax appeared in an obscure section of the ministry's website. It outlined a controversial plan to roll out the tax, replacing an existing resource tax charged on per tonne of output, which would substantially dent oil firm profits. But the statement about the tax was removed from the website yesterday.

Analysts said it was unlikely the tax would be implemented unless the government relieved oil firms from other levies, given the sheer magnitude of the mooted tax.

Other observers said the higher resource tax had already been reflected in the share values. '[The likely implementation] of higher resource taxes has already been priced into the stock,' CLSA head of China energy research Gordon Kwan wrote in a research report.

The removal of the statement appeared to have reduced the likelihood of its implementation any time soon. The ministry's spokesman was unavailable for comment.

PetroChina's share price climbed 1.78 per cent to HK$13.74, while that of China Petroleum & Chemical Corp (Sinopec) edged up 0.91 per cent to HK$11.14 and CNOOC gained 3.51 per cent to HK$12.38. The Hang Seng index rose 1.11 per cent.

According to the original statement, still carried on various websites, Vice-Minister Zhu Zhigang said the ministry had suggested an initial tax rate of 5 per cent, which would then rise to 10 per cent. No timetable was indicated.

A resource tax reform has been discussed for several years, as sky-rocketing crude oil prices prompted calls for a change in the levy basis to link it with oil prices.

Earlier reports also suggested that Beijing was mulling whether to double the resource tax on mineral resources by changing the volume-based tax to a price-based one.

If a 10 per cent resource tax on oil is implemented, it would represent a more than 10-fold rise from the current level of 1.90 yuan to 4.10 yuan per barrel, given this year's average oil price.

The central government last raised the crude oil resource tax in July 2005 from 1.10 yuan to 4.10 yuan per barrel.

DBS Vickers Securities analyst Gideon Lo Wai-yip estimated that the average Brent oil benchmark price was US$71.50 this year. Assuming PetroChina's realised oil price discount to the benchmark this year is US$5.34, the same as last year, its realised oil price could be around US$66. A 10 per cent resource tax levy would imply a per barrel charge of 48.80 yuan.

Based on PetroChina's target output of 838.5 million barrels this year, a full 10 per cent levy could amount to 40.9 billion yuan, or 26 per cent of the average analyst net profit estimate of 154.75 billion yuan, as polled by Thomson Financial.

Mr Lo said if the proposed resource tax was implemented, Beijing would be under pressure to cut the windfall tax rolled out in March last year. That levy is equivalent to 20 per cent to 40 per cent in a progressive manner of the portion of the oil selling price that exceeds US$40 a barrel.

'Such a resource tax will overlap with the windfall levy because both are taxes on revenues,' he said. 'If the government hits oil producers with both taxes in full force, it will raise the question as to why producers of other increasingly valuable commodities such as coal and copper are not subject to a windfall tax.'