China’s Ministry of Finance today announced that it will be raising the threshold for windfall taxes on oil and gas output starting January 1. The new threshold will be set at $65 a barrel, up $10 from $55 a barrel, the price set back in November 2011, according to Reuters.
A 20% tax is charged to oil being sold at $65 a barrel, rising to 25% between $70 and $75 and increasing 5% with every $5 increase in oil prices, with the highest tax burden of 40% being applied when crude prices are at or above $85 a barrel.
“It’s an encouraging policy move by the government because the oil price slump is putting a lot of pressure on cash flow,” Gordon Kwan, Nomura’s Hong Kong-based head of regional oil and gas research, told Bloomberg. “China needs to reduce the windfall profit tax to accommodate struggling producers. Otherwise there’s a lack of incentive to invest.”
Raising the threshold would increase profits of China’s biggest oil companies by at least 10% next year, if other factors are unchanged, according to UOB Kay Hian Ltd. PetroChina (ticker: PTR) shares were up more than 5% today on the news, while CNOOC Ltd. rose as much as 2.5%.
Sinopec plans to move forward with shale development
Sinopec (ticker: SNP) stocks rose as much as 3% after the news of the windfall tax cuts. The company also announced that it is committed to continuing its shale gas program in 2015, despite falling gas prices.
The sinking oil market, which is linked to Chinese gas prices, will have no major impact on the company’s plans for natural gas development, Jiao Fangzheng, senior vice president of Sinopec, said, according to the Economic Times.
Sinopec, the country’s second-largest state energy firm, has taken the lead in developing China’s shale gas resources, having discovered the first large deposits at Fuling in the southwest. The company has said the Fuling Field, which has produced 1.1 billion cubic meters or bcm (38.9 billion cubic feet or bcf) of gas to date, is on track to reach a capacity of 5.0 bcm (176.6 bcf) by 2015 and 10.0 bcm (353.2 bcf) in 2017.
Fuling gas currently sells at 2.48 yuan (40 cents) per cubic meter, which, along with an additional 0.40 yuan per cubic meter subsidy from the government for shale gas, gives Sinopec an internal rate of return of 11% to 13%. It is hoped that the subsidy and the new, higher threshold for windfall taxes will help Sinopec continue developing expensive shale assets, and help other companies survive the lower oil price environment.
China is hopeful that rising domestic production will reduce its need for imported goods. The Energy Information Administration projects the world’s most populous country will become the global oil import leader in 2014. China was a net gas exporter until 2007 but its energy needs have risen quickly. Gas imports accounted for 29% of all demand in 2012.
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