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Govt might scrap crude oil import subsidies

By Wan Zhihong (China Daily)
Updated: 2008-07-04 14:28

The government may scrap the subsidies to State refiners on crude imports, following the decision to raise the price of refined oil products on June 20.

The subsidies could end from this month itself, Shanghai Securities News reported yesterday, citing sources from the country's largest refiner Sinopec.

According to an official with a Sinopec refinery, the company did not get the notice on subsidies for July. "We had been notified that if we did not get the notice by the end of June, it (the subsidies) would stand cancelled," he said in the report.

China's two leading oil companies, PetroChina and Sinopec, yesterday declined to comment on the report.

Facing soaring global crude price, China began to give monthly subsidies to oil firms on crude imports from April. Industry insiders said the subsidies are given in the form of value-added tax refund, under which the government refunds 75 percent of value-added taxes on crude imports.

Under this mechanism, in April Sinopec received around 7 billion yuan of subsidies.

On June 20, the government raised the price of gasoline and diesel by as much as 18 percent to narrow the gap between the high crude price on the international market and the low price of refined oil products at home.

Analysts said the price rise would help domestic oil companies tide over the difficulties. Their refining businesses are seeing big losses due to the gap between high global crude price and low refined oil price. However, the price rise still cannot fully offset their losses as crude prices are surging even higher.

"Without the subsidies, the government may think of other measures to help domestic oil refiners," said Liu Gu, an analyst with Guotai Jun'an Securities in Shenzhen.

"As crude prices continue to surge, Chinese refiners are still facing difficulties. In our projection, Sinopec's profit will fall by over 60 percent in the second quarter," she said.

Sinopec may post a loss in the third quarter of this year if the country scraps the 75 percent refund on oil import taxes, Goldman Sachs Group Inc said in a report. The refiner said its first-quarter net profit fell 65.78 percent to 6.7 billion yuan because of rising costs and government control over fuel prices.

PetroChina, the nation's largest oil producer, said its first-quarter profit fell 31.5 percent as refining losses and windfall taxes cut its earnings from record crude prices.