Domestic oil giants benefit from higher energy price reforms

According to Hong Kong media reports, the Chinese government listed energy price reform as a priority for 2012, demonstrating the government’s determination to reform the market. The market expects that this year's energy price reform will inject a new impetus into the industry.

As inflation continues to slow in the Mainland and global oil prices remain relatively stable, the Chinese government’s energy focus this year is to reform and improve the refined oil pricing mechanism, special oil proceeds, natural gas prices and other taxes, and gradually move toward marketization.

The special oil proceeds (ie, windfall profits tax) refers to the special income collected by the country from a certain percentage of the excess revenue obtained from the sales of domestically produced crude oil by oil extraction companies when the sales price of crude oil in the mainland exceeds a certain level. China has imposed windfall profits since 2006, and crude oil prices are denominated in US dollars.

Earlier this year, with the approval of the State Council, the Ministry of Finance decided to increase the windfall tax threshold from US$40 to US$55 from November 1 last year. After the increase of the threshold, the windfall tax levy is still subject to a five-level excess progressive ad valorem fixed rate, which is calculated on a monthly basis and paid quarterly. The new policy has a stimulating effect on the profitability of the three major oil companies in the Mainland, including PetroChina, Sinopec and CNOOC, but its benefit level is different.

Benefits from the increase of windfall tax thresholds According to the data, the adjustment of windfall tax thresholds, with CNPC’s 2011 crude oil output of 710 million barrels, and the current international oil price of US$100 per barrel, the new policy has decreased by US$4.26 billion (about 26.638 billion US dollars). RMB ***) of windfall profits tax; Sinopec can reduce 12.439 billion yuan. It is worth mentioning that the increase in the threshold is designed to hedge the effect of the resource tax reform on November 1 last year.

The National Development and Reform Commission announced that since December 26, Guangdong Province and Guangxi Province have initiated pilot reforms of natural gas price formation mechanisms. If natural gas price reforms are pushed to the country, regions with lower natural gas prices will move closer to market prices, and natural gas suppliers such as PetroChina and Sinopec will be the biggest beneficiaries. Another country this year may implement pricing reforms for petroleum products, tariff reforms, and VAT adjustments.