China Petroleum & Chemical Corp, Asia's biggest oil refiner, is facing its most "difficult" year in 2008 even as it receives state subsidies for selling fuels at below cost and the government raises oil product prices.

The most "difficult" time will be the third and fourth quarters, Chairman Su Shulin said at a press conference in Hong Kong yesterday. Domestic demand for oil products will rise "steadily" in the second half while global crude oil prices stay high, so refining margins will remain pressured, Chief Financial Officer Dai Houliang said at the conference.

China controls fuel prices to limit their impact on inflation in the world's fastest-growing major economy, curbing refiners' ability to pass on crude oil costs. Benchmark crude in New York has doubled in the second quarter from a year earlier, with prices reaching a record US$147.27 a barrel on July 11.

China Petroleum, also known as Sinopec, will continue to receive government subsidies in the third quarter for importing crude to be processed into fuels for domestic consumption, Su said. The amount of subsidies for the third quarter, in the form of tax rebates, will be "appropriate," Su said.

The Beijing-based company's first-half profit fell 77 percent from a year earlier to 8.26 billion yuan (US$1.21 billion). Its refining business incurred a loss of 46 billion yuan in the first six months, Sinopec said in a statement to the Shanghai Stock Exchange on Friday.

The crude import subsidy Sinopec is getting in the third quarter will be less than that for the previous three months, Dai said. Crude prices have fallen and domestic fuel prices have risen, hence the smaller subsidy, he said. Oil in New York has retreated 21 percent from its all-time high on July 11, according to Bloomberg News.

Sinopec and PetroChina Co will receive rebates on the value-added taxes they pay to import crude oil between July and September, the South China Morning Post reported yesterday, citing people it didn't identify.

The companies will get about 40 percent of the 17 percent tax on crude imports in the third quarter, the newspaper said. Full VAT rebates on refined fuel imports will continue for the two companies, it said. The situation in the fourth quarter is "unclear", according to the report.

China raised the prices of gasoline, diesel and jet fuel by at least 17 percent on June 20, the first increase since November last year, partly to help narrow refiners' losses.

Sinopec was losing about 3,000 yuan on each ton of refined products because of the high crude costs, company spokesman Chen Ge said in May.

It is unclear if the government will increase fuel prices in the third quarter, Sinopec's Deputy Chief Financial Officer Liu Yun said yesterday.

(Shanghai Daily August 27, 2008)