Bloomberg News

Sinopec to Pay Lower Resource Tax Rate, Chairman Fu Says

October 14, 2011

(Closes shares.)

Oct. 14 (Bloomberg) -- China Petrochemical Corp., known as Sinopec Group, will pay a lower resources tax rate because of government tax breaks for production at old oilfields, Chairman Fu Chengyu said.

The company will be subjected to a tax rate of 3.7 percent, Fu told reporters in Hong Kong today.

China is introducing a nationwide oil and gas tax at a rate of 5 to 10 percent of sales starting next month, replacing a volume-based tax. China Petroleum & Chemical Corp., the group’s Hong Kong-listed unit known as Sinopec, produces oil at the 50- year-old Shengli field, also the company’s largest.

The tax rate “may impact Sinopec’s earnings by 5 to 6 percent, but it’s slightly less than the headline rate, which is a positive,” Neil Beveridge, a Hong Kong-based senior analyst at Sanford C. Bernstein & Co., said by telephone. “The important thing is how this change occurs in the context of potential changes to other taxes, the reform of product prices and natural gas prices.”

China, which controls fuel prices to curb inflation, should make its oil-product pricing system more transparent, Fu said.

The government introduced a mechanism in December 2008 allowing the National Development and Reform Commission to adjust fuel prices when benchmark crudes fluctuate more than 4 percent over 22 working days. Controls on fuel tariffs mean refiners cannot pass on higher global crude costs to consumers.

China may increase the frequency of fuel-price adjustments and change the global crude benchmarks that it monitors, the NDRC said on Oct. 8, without being more specific.

Sinopec’s Production Costs

Sinopec rose 1.1 percent to close at HK$7.22, compared with the 1.4 percent decline in the benchmark Hang Seng Index. PetroChina Co., the country’s biggest oil and gas producer, gained 0.5 percent, while Cnooc Ltd. slid 4.6 percent.

China rolled out a 5 percent tax on oil and gas sales in Xinjiang on a trial basis in June last year to help fund development of the western province.

“This 3.7 percent tax rate is lower than expected as Xinjiang is charging 5 percent,” said Gordon Kwan, the head of regional energy research at Mirae Asset Securities Ltd. in Hong Kong. “This is another example of China trying to balance between the strong -- Cnooc and PetroChina -- and the weak -- Sinopec. Sinopec’s upstream oil and gas segment has the highest production cost of the oil trio.”

Sinopec’s exploration and production segment posted first- half operating expenses of 274 billion yuan ($43 billion), up 46 percent from a year earlier, according to its earnings statement.

PetroChina reported a 24 percent increase to 78 billion yuan for the segment. Cnooc’s operating expenses for all its segments were 73.8 billion yuan.

--With assistance from Winnie Zhu in Shanghai. Editors: Ryan Woo, Baldave Singh.

To contact the reporter on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net

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


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