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China Petroleum & Chemical Corporation (Sinopec) disclosed yesterday that it would get State subsidy of 5 billion yuan (US$639 million) to cover its losses from oil refining.

Asia's top refiner announced in a statement that "the one-off compensation" from the government was to shore up its money-losing refining sector.

Related opinion: Subsidy is unjustified The monopoly oil company and its investors cheer, the public is left bewildered: Why has all this happened?

The country's oil exploration and production business reaped high profits as a result of soaring oil prices in the international market this year. But the refining segment suffered huge losses because the current pricing mechanism does not reflect price fluctuations on the world market.

About 70 per cent of Sinopec's crude oil for refineries comes from imports. It supplies oil products to the home market at government-fixed prices to fend off supply fluctuations and inflation.

"The compensation will help reduce our losses stemming from the refining business. It also indicates the current pricing mechanism is not fair for refiners," a senior official surnamed Wu with Sinopec told China Daily.

Strict controls over oil product prices have caused distortions in prices of refined and crude oil. "This has led to serious losses for many refinery enterprises", Sinopec said in a statement yesterday.

Sinopec's loss from processing almost doubled to 12.6 billion yuan (US$1.6 billion) in the third quarter from 6.6 billion yuan (US$844 million) a year earlier, the company said in October.

Cao Xiaoxi, chief engineer of Sinopec's Economic and Development Research Institute, agreed, saying the subsidy should not be dubbed as "protective."

"The loss is caused by policy flaws, so it should be covered by the State. It has nothing to do with market protectionism," Cao said.

The compensation to Sinopec's refinery business was 10 billion yuan (US$1.28 billion) last year.

Han Xuegong, a senior consultant for China National Petroleum Corp, said the State financial support would decline as price-mechanism problems are fixed, noting that this year's subsidy is only half of last year.

Although the government raised prices for major oil products twice this year, "it is not enough to make up for the deficit of Sinopec's refining business," Han said.

The fundamental solution is to reform the current pricing system, he added.

A fully market-oriented pricing mechanism, however, will take time, Han Wenke, director of the Energy Research Institute affiliated to the National Development and Reform Commission, told China Daily.

"It will not happen overnight. It will depend on market circumstances and the ups and downs of the global oil prices," he said.

(China Daily 12/28/2006 page1)