Source: The Wall Street Journal Asia              June 04, 2010

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.

The new tax will be based on value and is estimated to increase Xinjiang's revenue from natural resources to USD5.2 billion a year from around USD800 million annually now. 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%.

PetroChina chief executive Jiang Jiemin 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.