Sinopec Group Spares no Efforts to Ensure Oil Product Supply   

Sinopec Group recently required its subordinate companies to closely track the market trend, strengthen oil product supply as well as ensure the stability of the oil product market.
   Except for Hong Kong and Mocao regions, Sinopec Group announced on April 19 to suspend oil product exports to other regions in the world.
   As early as June 2008, both PetroChina and Sinopec Corp have once stopped oil products exports due to insufficient supply of oil products at home. According to comments from insiders, such a suspension may occur once again this year. In addition, PetroChina and China National Offshore Oil Corp (CNOOC) probably take the same measure to halt their finished oil product export business to guarantee the oil supply in the domestic market.
   In Q1 Financial Report of Sinopec Corp (SH: 600028) issued on April 28, the company has posted a net profit of RMB20.50 billion in Q1, up 24.49% year on year (YOY), and a total sales income of RMB588.84 billion, climbing 34.25% YOY. The company's exploration and production business saw a 14.3% YOY increase in the operating income to RMB13.14 billion, and the company's chemical business saw a 64% YOY jump to RMB9.31 billion. Its refining business suffered a loss of RMB576 million, while its crude oil processing volume gained 7.4% YOY to 54.256 million tons.
   Furthermore, PetroChina saw a 13.9% growth in Q1 net profits, but its refining business had a loss of RMB6.142 billion.
   For the second time, the Chinese oil products market faces supply shortage and refinery losses.
   With further climb in oil prices and efforts to loosen the refineries' cost pressure, Sinopec Corp and PetroChina have impetrated the Chinese government to cut the consumption tax of oil products. It is calculated that the consumption tax of gasoline & diesel oil in Q1 2011 will cost Sinopec Corp approximately RMB30.3 billion, and PetroChina about RMB22.9 billion. If the consumption tax is exempted, refineries of both PetroChina and Sinopec Corp would not suffer losses even with Brent crude oil price settling around US$135/barrel, according to analysts.
   Since January 1st, 2009, the Chinese government has raised the consumption tax of oil products. Since then, taxes on gasoline, naphtha, solvent oil and lubricating oil have been enhanced from RMB0.2 per liter to RMB1.0 per liter, and taxes on diesel oil, aviation kerosene and fuel oil have been up from RMB0.1 per liter to RMB0.8 per liter. Despite disputes from the very beginning, the levy of the consumption tax still starts from refineries.
   A source said that PetroChina and Sinopec Corp had previously advised relevant departments to collect the tax from the consumption sector and this time directly apply for temporary exemption from the consumption tax on finished oil products for the purpose of alleviating refineries' cost pressure.
   According to relevant reports, on May 2-3, Shandong Jincheng Petrochemical Group Co Ltd increased its diesel oil' retail price by RMB90/t to RMB8 600/t, breaking Shandong province's diesel oil retail price ceiling of RMB8 495. Salesmen said that the price hike may continue in recent months. This also faces penalty for violating the national oil products prices limit.
   On April 7, the Chinese government raised oil product prices. From April 7 to May 3, international oil prices were up as much as 6.19%, far beyond 4%, which is the fluctuation range stipulated for the domestic pricing mechanism of oil products, for 22 working days as of May 9. Therefore, China adjusted oil product prices based on aforementioned factors as well as in accordance with the pricing mechanism.
   Local refineries (non-state-owned petroleum firms) in Shandong province expand their production capacity one after another as a hedge against the short supply of oil products. Two 6 million t/a atmospheric and vacuum distillation units will be put into production this year by Shangdong Huaxing Petrochemical Group Co Ltd and Shandong Dongming Petrochemical Group Co Ltd, respectively. Furthermore, Shandong Zhenghe Group will install an additional 5 million t/a atmospheric and vacuum distillation unit. Other projects to be commissioned this year include a 5 million t/a refining expansion project of Shandong Haihua Group as well as a 5 million t/a heavy oil multipurpose utilization project of Shandong Weifang Hongrun Petrochemical Auxiliary Co Ltd. All those abovementioned refineries are hopeful to reach 10-million-ton refining scale.
   There are two reasons for why Shandong local refineries expand production in large scale. On the one hand, the National Development and Reform Commission made it clear that in 2011, China will abandon those low-efficiency and low-quality refining facilities with a production capacity of less than 1 million t/a; on the other hand, though confronting many difficulties, such as continued profit reduction, soaring crude oil prices and low operation rates due to the unstable crude oil supply, local refineries have no other choices but expand their production capacity to cope with the industry policy adjustment.
   Some analysts said that local refineries make profits not from their refining businesses but from by-products like liquid gas or its derivatives. Therefore, the core businesses of local refineries may be adjusted to some extent, for example, from the previous single refining system to the chemical & refining mix. However, in a relatively long period, the scale expansion of local refineries will exert no significant influence on the structure of China's refining and chemical industries.