5% energy tax in Xinjiang will hurt oil companies

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 gest 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. 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. In 2007, oil and gas accounted for 1.6% of Xinjiang’s tax revenue. 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.

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.

The boost for local governments likely comes at the expense of the oil companies. Some analysts estimate that PetroChina could see its per share earnings cut by 4.2%, while Sinopec will lose 1.3%. If the change is rolled out nationwide PetroChina’s per share earnings may drop by 17%. Petro China’s chief executive has said he welcomed the new tax but felt 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.