Korean oil refiners face windfall profit tax call from opposition

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Korean oil refiners face windfall profit tax call from opposition

 
Park Hong-keun, fourth from the left, floor leader of the Democratic Party (DP), poses for a photo with representatives from the oil refiners — S-Oil, GS Caltex, SK energy, and Hyundai Oilbank — and DP lawmakers during a meeting on profit-sharing held Monday at National Assembly. [NEWS1]

Park Hong-keun, fourth from the left, floor leader of the Democratic Party (DP), poses for a photo with representatives from the oil refiners — S-Oil, GS Caltex, SK energy, and Hyundai Oilbank — and DP lawmakers during a meeting on profit-sharing held Monday at National Assembly. [NEWS1]

 
After a strong second quarter, oil refiners are facing pressure from opposition lawmakers to share their profits. And they are not happy about it.
 
Yong Hye-in, a lawmaker from the Basic Income Party, on Tuesday proposed a bill to impose taxes on “extra profits” of oil refiners, saying that the purpose is “not to take away profits rightfully earned by companies, but to return a proportion of the massive windfall earnings to the society, which are gained due to external changes instead of the company efforts.”
 
On Monday, the inflation task force under the opposition Democratic Party (DP), held a meeting at the National Assembly with representatives from the four oil refiners in Korea — SK energy, GS Caltex, S-Oil and Hyundai Oilbank — and Korea Petroleum Association to discuss profit-sharing measures.
 
Park Hong-keun, floor leader of DP, urged the oil refiners to voluntarily share the earnings by establishing charity funds.
 
“As the economy is in an emergency situation, I would like to ask the oil refining industry to take the social responsibility by sharing the burden,” said Park during the meeting.
 
The oil refiners reported strong earnings in the April-June period, due to rising demand and a supply shortage caused by the war in Ukraine.
 
SK Innovation, which owns 100 percent of oil refiner SK energy, reported a 589.8 percent jump on year in net profit to 1.34 trillion won ($1.03 billion) in the second quarter. S-oil reported a 147 percent increase in net profit to 1.01 trillion won, and Hyundai Oilbank reported a net of 818 billion won, up 390 percent on year. GS Holdings, which owns 100 percent of GS Energy, is yet to report its quarterly earnings, but its net profit is estimated at 386 billion won, up 87.6 percent on year, according to FnGuide.

 
“The combined operating profit of the oil refiners in the first half of this year was over 10 trillion won,” said lawmaker Kim Sung-whan, who chairs the DP’s policy planning committee, during the Monday meeting.
 
Kim emphasized that countries like the United States, Italy and Britain are already pushing to impose windfall taxes on the oil companies, and added that "there is a precedent of the oil companies creating a special fund to share back in 2008 when they reported revenue near 3.5 trillion won due to high oil prices."
 
The oil refiners are arguing that it is unfair, and also may hurt their performances in the remaining quarters, with refining margins falling near the break-even point.
 
“It seems to be against the market logic,” said an industry insider from one of the four oil refiners, emphasizing that the company “is already paying corporate taxes for earnings.”
 
He said that imposing additional taxes on a regular business operations as if they are making excessive profits is unfair, and that the oil refiners had to suffer losses when the market situation was bad.
 
Whether the strong earnings would continue into the third and fourth quarters remain uncertain as well.
 
The increase in the operating profit in the April-June period came from the high refining margin and additional profits made through crude inventories. In the upcoming quarters that might no longer be the case.
 
The refining margin is the difference between the selling price of a finished product and the costs to produce it except for the refining cost. A margin of $4 to $5 per barrel is considered the break-even point in the industry.
 
The refining margin, which has been pushed up to a record of $29.50 per barrel in June due to the Ukraine-Russia war, dropped to $4.30 per barrel in the fourth week of July, according to data compiled by SK Innovation.
 
Crude prices also began to fall as well. Dubai crude traded at $101.54 per barrel Monday, bouncing between the $90 and $100 level through July after hitting $118.9 on June 10.
 
With crude prices soaring throughout this year, the crude inventories bought before the price increases generated extra profits for the oil refiners. When the crude prices go further down in the future, the inventories may translate into losses.
 
“Out of S-Oil’s 3 trillion operating profit in the first half of this year, profits made from crude inventories were 1 trillion won,” said Jeon Yu-jin, analyst at Hi Investment & Securities. “In the latter half of this year, the estimated level of profit should be adjusted downward considering a decline in refining margin.”
 
The oil refiners are likely to discuss whether to raise the fund with Korea Petroleum Association.
 
The government is against imposing windfall taxes on oil refiners.
 
Finance Minister Choo Kyung-ho said during a July 26 hearing at National Assembly that he is against windfall taxes, adding that “the companies should pay corporate taxes properly” instead.
 

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]
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