Subsidies and support keep refiners in the black and fuel price in check
With stubbornly high crude prices and the need to tame inflation, China has been rolling out a range of policies this year to oil firms to encourage processing without having to raise fuel prices.
These have helped raise the full-year earnings forecasts for Sinopec Corp, Asia’s largest refiner, which only remained in the black in the first quarter by booking a 7.4-billion-yuan (US$1.06 billion) government subsidy.
PetroChina Co, the nation’s top oil and gas producer and the No. 2 refiner which had posted a 31.5-percent first-quarter profit decline, is waiting to see whether the government will announce a more friendly upstream tax levy formula, which has been widely expected.
This year’s supportive series started with Sinopec announcing in March it received a state handout of 12.3 billion yuan for 2007 and the first quarter to cover its refining loss made by importing expensive crude oil while selling refined products at state-imposed prices.
With crude rates climbing and fears of a supply disruption, the Ministry of Finance said it would provide tax rebates to the state parents of Sinopec and PetroChina on imports of gasoline and diesel during the second quarter. Only days later the pair said they would receive monthly subsidies against refining losses starting April, which analysts said would come in the form of a 75-percent cut of the 17-percent value-added tax paid on crude imports.
The moves have aided the refining sector and indicate there will be no fuel prices hikes by the government in the short term in China, where inflation was close to an 11-year high in March. To refineries, the cut in VAT on crude imports is seen as more crucial than a rebate on refined product imports given its large amount, analysts said.
Playing it by ear
“A monthly basis means the government wants to play it by ear. On one hand, the policy is to keep Sinopec in the black, while on the other it won’t let Sinopec earn too much,” said China Merchants Securities analyst Qiu Xiaofeng, adding the monthly subsidy may not be implemented if crude drops below US$95 a barrel.
New York crude, which touched a record high of US$119.93 a barrel on Monday, was quoted at US$111.90 at 2:54pm yesterday Singapore time, 76 percent higher than a year ago.
These measures could help ease fuel shortages in the domestic market as Sinopec would be more willing to supply fuels to some 30,000 independent pump stations, Qiu said. Additional supplies, previously hoarded by dealers who bet fuel prices would be raised, could also be released.
But Qiu said refineries would still suffer losses when crude is above US$115, even with the rebates. Other policies on tax and pricing should be introduced to curb consumption growth, he added.
Another key step in energy policy reform expected this year would be the adjustment of the upstream windfall tax levied on crude sales in China. The levy was introduced in March 2006, when the international crude price was about US$60, to subsidize the vulnerable farming, fishing and transport industries. The tax was assessed at between 20 and 40 percent of the portion of the price over US$40 a barrel.
Hu Weiping, oil and gas director at the National Development and Reform Commission’s energy bureau, said last week the US$40 trigger level was too low and needed to be adjusted as it was putting heavy operational pressures on oil firms, according to Bloomberg.
The tax levy paid is about US$30 per barrel based on an assumed crude price of US$115, according to a report by brokerage CLSA Ltd.
”If China’s national energy security policy makers could lift the tax trigger point from US$40 a barrel to US$80, the tax levy would be halved to about US$14 per barrel, potentially boosting PetroChina’s net profit this year by US$10.2 billion, or a whopping 49 percent,” the report said.
Hu said the NDRC thought the trigger level should be hiked as early as this year but the final say rested with the Ministry of Finance.
PetroChina’s bill for the windfall tax rose more than fivefold to 15.7 billion yuan last year. Sinopec paid 6.5 billion yuan under the tax in the first quarter, compared to 1 billion yuan a year earlier.
Key Developments In Policies For Oil Companies in 2008
March 30: Sinopec said it had received a government subsidy of 4.9 billion yuan for 2007 and 7.4 billion yuan for the first quarter of this year to cover refining losses.
April 15: The Ministry of Finance said it will refund the 17-percent value added tax on up to 1 million tons of gasoline and 2.5 million tons of diesel to be imported during the second quarter by Sinopec’s parent China Petrochemical Corp and PetroChina parent CNPC.
April 19: Sinopec and PetroChina said starting April 1 they would be paid an “appropriate” state subsidy on monthly basis - a 75-percent cut of the 17-percent value added tax they paid on crude imports, according to analysts.
April 24: Hu Weiping, oil and gas director of NDRC’s energy bureau, said the US$40 a barrel trigger level for the upstream tax levy should be raised as early as this year, but the Ministry of Finance has the final say.
Tags: CNPC, Gas, inflation, NDRC, oil, PetroChina, Sinopec