China's state-owned China National Petroleum Corporation and China Petrochemical Corporation, or Sinopec Group, have petitioned Beijing to waive or reduce the consumption tax on refined products to alleviate losses in the refining sector, according to a newspaper report on Tuesday.
The Economic Observer quoted a source in Sinopec as saying that the refinery losses could worsen in the second quarter because retail prices in China are not high enough to cover rising crude oil prices.
Last week, CNPC's listed arm PetroChina reported a loss of Yuan 6.13 billion ($943 million) from its refining business in the first three months of this year, while Sinopec's listed arm Sinopec Corp. recorded an operating loss of Yuan 576 million by its refining segment.
According to industry sources, the crude oil feedstock processed in the first quarter was sourced in the last quarter of 2010.
And now that the companies start to run the higher-priced crude oil purchased in the first quarter, they are expected to record even bigger losses as domestic retail prices have lagged behind crude costs.
Sinopec's chairman Fu Chengyu was quoted in the local press last week as saying that the company was losing about $20/barrel as the crude feedstock cost is around $110/b, whereas local retail product prices at current levels translate to approximately $90/b.
China hiked consumption taxes on fuels from January 1, 2009, which saw the tax on gasoline, naphtha and lubricant go to Yuan 1/liter from Yuan 0.20/liter and the tax on diesel, jet fuel and fuel oil go to Yuan 0.80/liter from Yuan 0.10/liter.
Unlike other countries, China requires that the tax to be paid in advance and oil companies can only recoup the tax by passing the cost on to the consumer.
Analysts said a reduction in the oil consumption tax would help oil companies better manage cash flow and reduce expenses, the report said.
Estimates show that Sinopec Group paid Yuan 30.3 billion in consumption taxes while CNPC incurred Yuan 22.9 billion in taxes, the report said.
A reduction in consumption tax will allow oil companies to remain profitable even if the price of Brent crude rises to $135/barrel, the report quoted Qiao Xiaofeng, an analyst from China Merchant Securities, as saying.
