PetroChina, Sinopec seek tax break extension to Q2

Chinese state refiners have asked the government to extend a major tax rebate on imported diesel for April to June to boost imports before the Olympics, as they struggle with high costs, industry sources said on Thursday.

PetroChina <0857.hk> and Sinopec Corp <0386.hk> wanted Beijing to continue the suspension of the 17 percent value added tax (VAT) charged on imported fuel, they said, as the country is again confronted with diesel shortages and rationing at pumps.

"They are now waiting for government approval," said one source in Beijing.

The tax has been put on hold since December, helping China to rack up diesel imports to record-high levels of 200,000 barrels per day (bpd) in December and January.

The communist government had decided to halt the tax temporarily, to avoid stoking high inflation and angering the masses by raising retail fuel prices again following the hike in November.

Beijing is battling inflation at its highest in over a decade and has vowed not to raise state-capped oil product prices in the short-term.

The government raised fuel prices in November for the first time in 17 months, after shortages of gasoline and diesel convulsed the country and triggered rationing in hard-hit areas.

"Chances that Beijing would approve the extension are very high," said another Chinese source.

"Diesel supplies are getting tighter and refiners are building stocks for the Olympics. Demand is also rising as the weather improves," he added.

If approved, the Asian market would see a fresh wave of diesel buying from PetroChina and Sinopec, and that will further boost prices at a time of robust global demand and sustained run cuts by Northeast Asian refiners.

Gas oil's crack spread to Dubai crude in the Singapore oil hub have already broken successive record highs at around $30 a barrel.

Armed with the tax rebate, Sinopec could again rev up diesel imports, as it had also won a $1.7 billion government bailout to compensate for refining losses incurred during 2007 and the first quarter of this year. [ID:nHKG310433]

PetroChina typically offset downstream losses from huge earnings derived from its heavily slated upstream business and do not get similar subsidies, sources said.

RATIONING

Diesel supply in China is falling as independent refiners are cutting runs in the face of lofty crude oil prices at around $100 a barrel , after hitting records above $111.

These smaller refiners cover 15 percent of Chinese oil demand of around 7 million bpd.

"Again these teapot refiners can't stomach heavy losses, given a price-controlled market," said a Sinopec oil distributor.

Wholesale diesel prices in the booming east coast jumped to nearly 7,000 yuan ($993) a tonne, from 6,300 yuan ($894) early this month.

China is facing diesel rationing once again, sparking fears of a nationwide shortage -- reminiscent of late-2007 when the world's second-biggest energy user suffered the worst fuel crisis in four years. Some sales units of PetroChina and Sinopec have halted sales to independent dealers since last week in parts of China, despite Beijing's order that they open the taps to the private sector.

Rationing had emerged in southern Guangdong province, the suburb of Shanghai -- China's financial hub -- and some regions of the landlocked southwestern province of Yunnan.

($1 = 7.05 yuan)