Oil firms hit with windfall tax

Mainland refiners face levy of 20pc to 40pc when price of crude surges past US$40

Mainland oil companies have been hit with a windfall tax of between 20 per cent and 40 per cent every time the price of a barrel of crude oil goes above US$40.

However, those with downstream refining operations can hope to get some relief if the government delivers on its promise of pricing reform.

China Petroleum & Chemical Corp (Sinopec) chairman Chen Tonghai said yesterday the company had only just been notified by the central government that it would have to pay a tax on the excess of its average realised oil price from a base of US$40 a barrel.

When the price is between US$40 and US$45, the levy is 20 per cent, but it will rise progressively by five percentage points for every US$5 increase to a limit of 40 per cent when the price passes US$60 a barrel.

For example, if Sinopec's oil price rises to US$50 a barrel this year from US$45.88 last year, it will have to pay US$2.25 for every barrel it produces.

Based on this year's planned oil output of 282.58 million barrels, it may have to pay US$635.8 million. Last year, Sinopec made a net profit of 40.92 billion yuan.

The government has also introduced a formula for calculating refined oil prices by adding a refiner's average crude oil cost to its insurance and freight costs, in addition to an undisclosed profit margin.

Mr Chen said Beijing had not indicated a timetable for implementing the formula but it would be introduced 'step by step' to avoid excessive inflation pressure.

Domestic refined oil prices are tied to Rotterdam, Singapore and New York prices with a one-month time lag. By linking domestic prices with international crude prices instead of refined oil prices, the government wanted to prevent price speculation, Mr Chen said.

He added that the 'speculation premium' of domestic refined oil prices reached a high of US$25 a barrel last year, far exceeding the usual US$4 to US$8.

On March 26, the government raised petrol and diesel prices by 5 to 7 per cent in a move to close the gap between domestic and international prices.

Mr Chen said the impact of the price rise on its bottom-line this year would outstrip that of the crude oil special levy.

BOC International analyst Lawrence Lau estimated the company would gain 10 billion yuan from the fuel price rise this year.

Meanwhile, Mr Chen said Sinopec would spend about 25 billion yuan over five years to develop its Puguang gasfield in Sichuan province, and 12 billion yuan to build a 1,600km pipeline to send gas to Hunan and Shandong provinces.

He expected technical recoverable reserves to rise from 188.3 billion cubic metres (bcm) now - as confirmed by the Ministry of Land and Resources - to at least 400 bcm by the end of next year.

If all 400 bcm of gas - equivalent to 2.35 billion barrels of oil (boe) - is proved and booked, it could raise the company's oil and gas reserve by 62 per cent from 3.78 billion boe at the end of last year.

The project had an internal rate of return of just over 14 per cent based on existing gas prices, Mr Chen said. If the government raises gas prices to better reflect its market value, the return rate is expected to improve.

Production will start in 2008 with an annual capacity of four bcm of gas, rising to eight bcm by 2010. Sinopec produced 6.28 bcm of gas last year.