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Oil Giants Call for Lifelines
Summary:Array

Cover story, issue no. 363, April 14 2008
Translation by Liu Peng
Original article:
[Chinese]

As price-controls in the oil industry have sparked shortages and losses for Chinese refineries, Sinopec and PetroChina are lobbying hard for preferential policies to paint their financial records from red to black.

The two oil giants are expected to publish their first quarterly financial reports at the end of April, but if they successfully secure tax incentives and permission to raise prices in time, the final drafts could be less pessimistic.  

In February, the two firms applied for a price rise, a cut in the value-added tax on imported crude oil and processed oil products, and a delay in the implementation of a special tax on oil income made beyond a government-set level.

They have maintained that as international crude oil prices had continuously hit new record highs while domestic processed oil prices remained significantly depressed, they have suffered great losses in the oil refinery business.

According to their financial reports in 2007, Sinopec and PetroChina respectively suffered losses of 13.67 billion and 20.68 billion yuan in oil refining and marketing sectors.

According to official statistics, China imported 45.53 million tons of crude oil and 9.08 million tons of processed oil products in the first quarter.

It is estimated that if the oil giants were exempted from a value-added tax on these imports, they would have saved up to 40 and 36 billion yuan on crude oil and processed oil product imports respectively.

If that materialized, industry analysts said Sinopec would have made 6 billion yuan in profit in the first quarter of 2008, and PetroChina pocketed more than 30 billion, adding that such calculations had excluded government subsidies.

Two Possible Formulas
One source told the EO that regulators were considering two policy responses to the price adjustment requests. One was to allow prices to rise; the other was to reduce or even cut out the value-added tax for oil imports while leaving the present oil product price unchanged. There was no mention of delaying the special oil revenue-based levy.

The source added that these initial policy responses had been handed over to policy-making authorities at higher levels, and that the final scheme was likely to come out before Sinopec and PetroChina released their quarterly financial reports on April 28 and 29 respectively.

Some market observers believed the price adjustments were unlikely to be approved. Sinopec's Board Chairman Su Shulin admitted: "The consumer price index (CPI) hit its eleven-year high in February, and inflation has great upward pressures, so there are great uncertainties over whether to raise domestic oil prices."  

Policymakers have been struggling to find a balance between corporate survival and the rising inflationary pressure that has affected Chinese livlihoods, all of which did not bode well for those who supported oil price bumps.

Publicly listed Sinopec and PetroChina are of a different breed than traditional state-owned ones. On the one hand, they assume a degree of social accountability; on the other, they must maintain high performance to satisfy their shareholders.

Market Sentiments
Some market watchers have expressed pessimism over the two companies' first quarter performance. Switzerland-based financial services company UBS Group predicted that despite the 7.4 billion yuan government subsidy for Sinopec in the first quarter, the later would still experience up to 8 or 9 billion yuan in losses.

China Merchants Securities analyst Qiu Xiaofeng pointed out that the average price of international crude oil in March reached 105 dollar per barrel. If the government neither raised the price nor subsidized Sinopec, despite its gains in the first few months of 2008, it would drown in losses in April.

Meanwhile, Zhao Youshan, Chairman of Petroleum Flow Committee of China General Chamber of Commerce, said that although the two oil giants' refinery operations were in the red, other services and products could compensate the losses.

He also stressed that the two oil giants were state-owned companies, adding under the context of high inflationary pressure, the firms should sacrifice some profits to answer their social responsibilities.

A previous Sinopec financial report showed that despite soaring international crude oil prices, gross profit margins in Sinopec's refinery operations rose to 3.18% in 2007 from -1.47% and 1.19% respectively in 2005 and 2006.

Exchange rates also complicated the equation. A source from Sinopec said that if, as some expected, the yuan appreciated another 10%, Sinopec could save 100 billion yuan in import costs.

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