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China launches energy tax in Xinjiang
Published on: 2010-06-03
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BEIJING—China is introducing a 5% tax that the country's energy companies must pay on oil and natural gas produced in Xinjiang, part of Beijing's efforts to improve the economic prospects in the poor western region, where local ethnic Muslims have rioted against Han Chinese and where the windfall from the development of rich resources has been scant.

The new natural resource tax, which will eventually be rolled out nationwide, will increase the local government's coffers, but it will hurt the profits of China's two biggest oil and natural-gas companies—PetroChina Co. and China Petroleum & Chemical Corp., also known as Sinopec.

Xinjiang is important for China's energy needs: It is the source of 13% of its crude-oil production and 29% of its natural-gas output. Oil and natural-gas production accounted for nearly 30% of the economic output of Xinjiang last year, a vast area ringed by high mountains and deserts that has seen increasing migration of China's majority ethnic group, the Han, since the 1950s as part of Beijing's push to solidify control of the region.

But despite the region's vast mineral wealth and huge food and cotton farms, Xinjiang's development has lagged behind the rest of China, and much of its wealth has flowed disproportionately to the Han. While oil and gas companies pay income tax to Beijing, local governments have collected only a modest resource tax based on volume instead of value.

This meant that as the global commodity boom powered by China's own rise pushed oil and natural-gas prices higher, resource-tax revenue for local governments saw little benefit. In 2007, oil and gas accounted for 1.6% of Xinjiang's tax revenue, said economist An Tifu with Renmin University in Beijing.

The new tax will be based on value and is estimated to increase Xinjiang's revenue from natural resources to five times its current level. Once the Xinjiang pilot program is rolled out nationally, local governments' resource revenue could increase to $5.2 billion a year from around $800 million annually now, according to an estimate by consultancy Eurasia Group.

Such revenue is especially needed in Xinjiang, home to China's Muslim Uighur minority. In July 2009, friction between Han migrating into Xinjiang and Uighurs boiled over into riots that left 197 dead. Widening income gaps between Uighurs and Han exacerbated long-simmering resentment over cultural and religious issues. In the wake of the riots, the provincial government increased the security budget by nearly 90% to 2.89 billion yuan ($423 million) in 2010.

China's leaders last month held a special meeting where they announced new measures to boost Xinjiang's economy, including the natural-resource tax. "Resource development should be directly linked to the welfare of the local people," President Hu Jintao said at the time.

Critics have called Beijing's treatment of Xinjiang's resources exploitative. Dru Gladney, an anthropologist at Pomona College who studies Xinjiang, called the new tax "a step in the right direction, but it's not a big enough step."

The boost for local governments likely comes at the expense of the oil companies. Unless Beijing offsets the new tax by reducing other taxes they pay, some analysts estimate that PetroChina could see its per share earnings cut by 4.2%, while Sinopec will lose 1.3%. About one-fifth of PetroChina's oil and natural-gas output is from Xinjiang. Sinopec gets around 14% of its oil and natural gas from there.

If the change is rolled out nationwide the impact would be greater. One estimate says such a move could lower PetroChina's per share earnings by 17%.

China's biggest offshore oil producer, Cnooc Ltd., which doesn't have any onshore operations and already pays a 5% tax on its offshore production, won't be affected by the new policy.

PetroChina's chief executive, Jiang Jiemin, said he welcomed the new tax but told reporters last month that it should be linked to a reduction in the windfall profit tax that is levied on energy companies' income as oil prices go above a certain level.

Sinopec didn't offer comment on the new measure Wednesday.

Beijing has already taken one step to soften the blow of the new resource tax by raising the price of natural gas 25% this week, even as it cut retail gasoline prices. The increase reflects China's desire to boost natural-gas production as a cleaner alternative to coal. Xinjiang is especially important for natural gas, accounting for 35% of PetroChina's total natural-gas production.

PetroChina has big ambitions to nearly double its yearly natural-gas output from Xinjiang to 30 billion cubic meters by 2015, while Sinopec wants to increase its output nearly fivefold to five billion cubic meters a year by 2015. PetroChina is also adding more capacity to a gas pipeline from Xinjiang down to the coastal export powerhouse of Guangdong province.

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