PetroChina, Sinopec Say Threshold on Windfall Tax Increased

China raised the threshold on a windfall tax paid by crude oil producers including PetroChina Co. (857) and China Petroleum & Chemical Corp. (600028) in a move that analysts say may spur exploration of the nation’s energy resources.

The threshold was raised to $55 a barrel from $40 effective Nov. 1, PetroChina and China Petroleum, known as Sinopec, said in statements filed to the Hong Kong stock exchange yesterday. The tax was introduced in March 2006. Shares rose.

“This will encourage more offshore China exploration as well as onshore,” said Gordon Kwan, the Hong Kong-based head of regional energy research at Mirae Asset Securities HK Ltd. “This is good for the three major oil companies and the major oil players” from overseas, he said. “Anyone operating in China has to pay the windfall tax.”

The increase in the threshold of the so-called special oil income levy coincides with a nationwide implementation of a value-based tax on oil and gas sales from the same day. The change in the windfall tax will offset the 5 to 10 percent resources tax, Kwan said.

Many analysts lowered their earnings estimates for oil companies in November when the resources tax, previously based on volume of sales, was implemented, according to Kwan. These forecasts may now be increased to earlier levels, and the shares of Chinese oil companies may outperform today, he said.

PetroChina rose 2.5 percent to HK$10.64 in Hong Kong trading at the midday break, compared with the 1.4 percent drop in the benchmark Hang Seng Index. Sinopec advanced 1.9 percent, while Cnooc Ltd. (883) climbed 3.1 percent.

Rising Crude Prices

Crude has tripled to about $101 a barrel in New York since sliding to a four-year settlement low of $33.87 in December 2008 amid a global recession. Higher prices meant oil producers in China had to pay more windfall taxes, which are calculated every month and collected quarterly.

China was due to raise the threshold in 2011 when the government implements a nationwide resources tax, PetroChina Chairman Jiang Jiemin said on March 14, citing a government plan.

The trigger point of the windfall tax ought to be raised to at least $60 a barrel, with $80 being the “most reasonable” level, Yu Baocai, a vice president at China National Petroleum Corp., PetroChina’s parent, said in March last year.

‘Too Low’

Sinopec Chairman Fu Chengyu told the government in September that $50 a barrel would be “too low.”

“Most of Sinopec’s onshore oilfields will lose money at a $50 threshold,” Fu said at a meeting of the State Council, or Cabinet, according to a memo posted Nov. 9 on an employee training website operated by unit Sinopec Shengli Oilfield Co. “Sinopec’s average cost per barrel of oil in China was $52, with oil from several fields costing about $70 to $75 a barrel.”

The finance ministry doesn’t consider foreign exchange movements when setting the threshold, which means tax payments would be higher in yuan terms following the Chinese currency’s appreciation, Fu said. The windfall tax is assessed in dollars.

The yuan has risen 23 percent against the dollar since March 2006 when the levy was introduced, and the government has increased the threshold by 37.5 percent.

The net effect of the higher threshold is smaller than it appears because the yuan has appreciated, said Neil Beveridge, a Hong Kong-based energy analyst at Sanford C. Bernstein & Co.

“In terms of value in Chinese currency, the increase is positive, but not as impressive,” Beveridge said.

While all three Chinese oil majors will gain from the change, “taking the adjustment to the windfall tax and resource tax together, Cnooc benefits most with an earnings-per-share impact of 9.4 percent,” he said. Cnooc is China’s biggest offshore energy explorer.

The levy will be charged at 20 percent starting at $55 a barrel and rise in $5 increments to a maximum of 40 percent at $75 a barrel, according to PetroChina and Sinopec. Previously, the levy started at $40 and reached the maximum at $60.

To contact the reporters on this story: Eleni Himaras in Hong Kong at ehimaras@bloomberg.net; Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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