The National Development and Reform Commission, China's top planning body, is drawing up a plan to bail out troubled domestic oil producers by raising the threshold of the windfall tax from the current $40 per barrel to $60 per barrel, a move expected to cushion the huge losses of oil producers.

According to an expert who helped draft the proposal, structural adjustment and modernization of the industry is part and parcel of the plan.

Domestic oil giants such as PetroChina, China's largest oil producer, and China Petroleum and Chemical Corporation, the largest refiner in Asia, said net profits were squeezed by 36.3 percent and 73.4 percent respectively in 2008 compared to the previous year.

Losses were concentrated in their refining operations. In the first half of 2008, China Petroleum and Refining Corporation, lost 73.879 billion (US$10.7 billion) yuan in refining; China National Petroleum Corporation lost 59.02 billion yuan (US$8.6 billion) in refining and sales.

Oil producers reeling from the roller coaster ride of oil prices, will take some time to recover. Imposing a high windfall profit tax would be a crushing blow, so the plan sees $60 per barrel as a reasonable threshold, allowing the oil sector to benefit from a tax break.

According to current practice, when the international oil price is between $40 and 60 per barrel, the tax will range from 20 percent to 35 percent; when the price tops $60 per barrel, the tax will be 40 percent.

How widely the tax break will be put into practice relies to a large extent on the financial muscle of the government, which began to see its revenues decline in the fourth quarter of 2008.

The implementation of the move will require the concerted efforts of the National Development and Reform Commission and the Finance Ministry.

In the draft plan, subsidies are proposed for the two giants, but such an offering would be a temporary move, said the expert, who added that how much they will receive depends on market conditions, and details are still subject to review.

The plan also involves an adjustment in consumption tax, tax rebates on chemical product exports, and an increase in oil reserves.

"Since the bail-out plan will cover a wide range of subjects, it will be published later than expected," said the expert. "But at the latest it will be published during the first half of 2009, after being approved by the State Council."

(China.org.cn by He Shan February 11, 2009)