With energy supplies unstable following the Middle East crisis, the refining industry is expressing reluctance over profit-limiting measures such as a windfall tax and export volume caps. A windfall tax means levying an additional tax when corporations reap massive profits due to external factors such as war or disasters, regardless of their own efforts. Typically, when oil prices surge, the value of crude oil already on hand jumps, expanding inventory valuation gains.
Refiners counter that when oil prices fall, the value of stored crude drops and their financial structure deteriorates, yet there is no compensation for that. In this situation, with export volume restrictions layered on, refiners say the likelihood of deteriorating results is also high.
◇ Refiners, "besieged on all sides" by talks of introducing a windfall tax
According to the industry on the 20th, lawmaker Jang Cheol-min of the Democratic Party of Korea on the 11th sponsored a bill to partially amend the Corporate Tax Act aimed at refiners. If a petroleum refiner or a liquefied petroleum gas (LPG) group supplier earns at least 500 million won more in one year than the average profit of the previous three years, the gist is to levy an additional 20% corporate tax on the excess income. The plan is to introduce an excess profits tax, the so-called "windfall tax," which would collect additional taxes from corporations that have earned excess profits.
Ordinarily, refiners' operating profits swell during periods of high oil prices. That is because inventory valuation gains on stockpiled crude increase. As oil prices rise, refined product prices also go up, and refining margins often improve. The refining margin is the value obtained by subtracting crude prices, transportation costs and other expenses from refined product prices, and it is an indicator of a refiner's profitability.
The refining industry is agonizing over recurring discussions of a windfall tax. When international oil prices surged due to the fallout from the 2022 Russia-Ukraine war, politicians argued that a windfall tax should be imposed on refiners. In 2022, the combined operating profit of the four major refiners (SK Innovation, GS Caltex, S-OIL, HD Hyundai Oilbank) reached a record 14.689 trillion won. That was double the previous year's combined operating profit of the four (about 7.2 trillion won).
The refining industry argues that the gains are only book profits from the increased value of crude stored in tanks as oil prices rise, and are different from actual operating profits earned. When international oil prices fall, they incur valuation losses, and they complain that taxing only book gains is unfair. During the COVID-19 pandemic in 2020, when demand collapsed and international oil prices plummeted, the four major refiners posted a record operating loss of about 5.1 trillion won.
A refining industry official said, "We already face heavy expense burdens, including investing hundreds of billions of won in facilities every year," and added, "We view this as a national crisis and are following government policy, but imposing additional taxes is burdensome."
◇ Government pressure: "We could cut exports further"… refiners bound by export caps
The government's tighter regulation of petroleum product exports is also increasing management uncertainty for refiners. Starting on the 13th, the government implemented a petroleum price ceiling system and limited refiners' export volumes to the level of the same period a year earlier. Last year, the total exports of the four domestic refiners were $40.7 billion (about 61 trillion won), down 9.9% from the previous year.
In addition, President Lee Jae-myung on the 17th at a Cabinet meeting said, "If necessary, we should consider (energy) export controls," signaling further cuts. After the price ceiling took effect, if overseas selling prices rise higher, refiners are more likely to reduce domestic supply and increase overseas exports to avoid losses.
Petroleum products have such a high export share that they are among the nation's four major export items. Domestic refiners import all crude oil, refine it, and have exported half of their output. The domestic market faces pressure for price stabilization, while the overseas market follows global prices, which is said to be better in terms of profit.
Another refining industry official said, "Because last year's reduced export volume has become the cap baseline, the restriction feels even tighter," and added, "The government has mentioned compensating business operators for losses, but there are no concrete measures yet, and even internally it is difficult to gauge the scale of losses."