Feb. 5, 2007 (Dow Jones Newswires)
U.S. oil major ConocoPhillips (COP) has asked for arbitration in a dispute with China National Offshore Oil Corp. over costs incurred due to Beijing's windfall tax on oil sales, according to people familiar with the situation.
The move and its outcome will be closely watched by other foreign energy companies whose production contracts with China's largest offshore oil producer state that any new government-imposed rule which causes a material change in their returns can be challenged outside China.
The windfall tax has cost the energy industry billions of dollars since it was introduced in March last year, and has prompted U.S. firms to cite it as an example of the difficulties of doing business in China.
Companies that produce oil onshore and offshore China to be sold in the country are subject to the "Special Upstream Tax Levy" of 20% to 40% on the portion of the price that is above $40 a barrel.
China's state-run oil majors are not exempt either, with China National Petroleum Corp. (CNPC.YY) paying windfall taxes totaling CNY28.98 billion ($3.7 billion) last year.
CNOOC has so far not said how much the windfall tax cost it last year, but earlier figures show that it paid levies totaling CNY1.99 billion at the half-year stage. ConocoPhillips also has declined to say how much windfall tax it has paid.
The sources were unable to provide details of the arguments put forward by ConocoPhillips in asking for arbitration.
A production contract seen by Dow Jones Newswires states that CNOOC and its foreign partners must agree to amend the contract terms in order to maintain the latter's "normal economic benefits" if they are affected by the introduction of a new law.
Either party can ask for arbitration in a neutral jurisdiction if they fail to reach an agreement, the contract stated.
Speaking on condition of anonymity, people said ConocoPhillips has activated a clause in its contract with CNOOC that allows its dispute to be heard at the Arbitration Institute of the Stockholm Chamber of Commerce in Sweden.
William Tanner, Houston-based spokesman for ConocoPhillips, when asked whether his company had asked for arbitration with CNOOC, said: "Generally, ConocoPhillips does not (comment) on arbitration issues, nor will we speculate as to future actions."
CNOOC also declined to comment, as did the Arbitration Institute at the Stockholm Chamber of Commerce.
Foreign energy companies are known to be unhappy with the way the windfall tax was imposed with little warning by the Chinese last year.
Jeffrey Jarrett, assistant secretary for fossil energy at the U.S. Department of Energy, told reporters on the sidelines of an energy forum in September that U.S. firms had complained in private that the tax issue "snuck up on them".
"The single biggest message that I have heard from U.S. industry here is the need for better transparency when doing business in China," Jarrett said.
Brent Emmett, chief executive of Australian explorer Horizon Oil (HZN.AU), said in an interview with Dow Jones Newswires last year that the tax was particularly painful when the oil price was above $60 a barrel, as it was for much of last year.
"I don't think any of the companies are going to accept the imposition of this new tax or accede to it lightly," Emmett said then. "I think it will be contested."
Horizon says it is not involved in any arbitration with CNOOC.
Foreign oil companies rarely risk clashing with Chinese competitors, whose biggest shareholder are the state, out of concern they might get locked out of future projects.
ConcocoPhillips' readiness to seek arbitration may be down to its rapid development in China, where it has major projects that are due to come on stream from 2009, including the giant Peng Lai field in northern China's Bohai Bay.
Figures from ConocoPhillips' annual report for 2005 - the most recent available - show that the company's average net output of crude oil from Chinese fields where it has an interest totaled 38,000 barrels per day.
With ConocoPhillips holding a 49% stake at the 1.6 million-acre oil block that covers the Peng Lai 19-3 field, analysts expect this output to increase sharply.
Jim Mulva, chairman and chief executive of ConocoPhillips, told analysts at the time of the company's fourth-quarter earnings in January that offshore China was among the key regional focus areas for his company where it expects to book reserves.
CNOOC Ltd., the New York and Hong Kong-listed unit of China National Offshore Oil Corp., holds the 51% stake in the 11/05 block covering Peng Lai and analysts say that it is central to the medium-term production growth prospects of the Chinese company.
Citigroup analyst Graham Cunningham said last month that the Peng Lai 19-3 project, along with the OML-130 field in Nigeria, is key to estimates of 16% output growth in 2008 and 2009 for CNOOC Ltd.
China has used the windfall tax as a means to compensate low-income groups which are disproportionately hit by rising retail prices of gasoline and diesel.
Other foreign companies that have been affected by the windfall tax include Ultra Petroleum Corp. (UPL) and Anadarko Petroleum Corp. (APC) of the U.S., and Australia's Roc Oil (ROC.AU).
Copyright (c) 2007 Dow Jones & Company, Inc.
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