Sinopec Says 2008 Is Company's Most `Difficult' Year

By Wang Ying

Aug. 26 (Bloomberg) -- China Petroleum & Chemical Corp., Asia's biggest oil refiner, is facing its most ``difficult'' year as government subsidies and higher state-set fuel prices are not enough to offset record crude costs.

Sinopec, as the company is known, will cut its 2008 capital expenditure by 8.2 billion yuan ($1.2 billion) due to ``severe operating pressures'' and ``cash-flow constraints,'' Chairman Su Shulin told a press conference in Hong Kong today. The third and fourth quarters will be the most challenging, Su said.

The shares of the Hong Kong-listed company have slumped 33 percent this year as the government prevented the refiner from passing on higher crude costs to customers. China raised the prices of gasoline, diesel and jet fuel by at least 17 percent in June while oil prices almost doubled from a year earlier.

``With the refining business a money loser, insufficient cash flow is a real challenge for Sinopec,'' Grace Liu, an analyst with Guotai Junan Securities Hong Kong Co., said by telephone from the southern city of Shenzhen. ``Sinopec may improve in 2009 on potentially higher domestic fuel prices.''

Sinopec will continue to get subsidies in the third quarter for crude oil imports, Su said. The size of the subsidies, in the form of tax rebates, will be ``appropriate,'' Su said.

``Sinopec is facing unprecedented difficulties, which we believe is also temporary, and that hasn't changed the fundamentals of the company,'' Chief Financial Officer Dai Houliang told reporters. ``We are confident about the future.''

Postponing Projects

First-half profit slumped 77 percent from a year earlier to 8.26 billion yuan, while refining losses reached 46 billion yuan in the first six months, Sinopec said in a statement to the Shanghai Stock Exchange on Aug. 24.

The Beijing-based refiner plans to cut expenditure on exploration and development by 1.9 billion yuan, reduce its spending on refineries by 1.7 billion yuan and lower investment in chemical plants by 4.6 billion yuan, Su said.

``If the situation doesn't improve in the third and fourth quarters, there will be more projects to be adjusted or delayed,'' Su told reporters today.

Sinopec will postpone the operational startup of its Puguang gas field in Sichuan by up to a year because of the plan to cut spending, company spokesman Huang Wensheng said after the press conference. The startup is also affected by the 7.9- magnitude quake that hit the southwestern province on May 12, Huang said.

The company has reduced its 2008 natural gas production target by 8 percent to 8.28 billion cubic meters, according to data from Sinopec's 2007 annual report and numbers provided by the company during a presentation today.

Fuel Imports

Sinopec should cut fuel imports because of falling consumption, Su said today. China, the world's second-largest energy consumer after the U.S., boosted diesel and gasoline imports to a record last month to ensure supplies during the Beijing Olympics, which ended on Aug. 24. Diesel imports reached 970,000 metric tons and gasoline purchases 606,000 tons in July.

``Domestic demand for fuels is currently declining because of the recent oil-product price increases, the Olympics-related transportation restrictions, and because the seasonal peak in diesel demand from farmers has ended,'' he said.

China raised the prices of gasoline, diesel and jet fuel on June 20, the first increase since November last year. It is ``unclear'' if the government will increase fuel prices in the third quarter, Sinopec's Deputy Chief Financial Officer Liu Yun said today.

Tax Rebates

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 gained, hence the smaller subsidy, he said. Benchmark crude oil in New York has retreated 21 percent from its all-time high of $147.27 a barrel on July 11.

``The way in which the government will subsidize imports of refined fuels in the third quarter will be the same as it did in the second quarter,'' Dai said.

The government paid Sinopec and PetroChina Co. rebates of 75 percent on the 17 percent tax levied on crude imports in the second quarter. Sinopec received 22.93 billion yuan in the quarter, the company said in the Aug. 24 statement.

PetroChina and Sinopec will get back about 40 percent of the tax in the third quarter, the South China Morning Post reported today, citing people it didn't identify.

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

Windfall Tax

The refiner has not received any word from the government on a possible adjustment in the `trigger level' of the windfall tax, Dai said.

Chinese oil producers pay a windfall tax on revenue from crude sold for more than $40 a barrel under a levy introduced in March 2006, based on a global crude price of about $60.

The wider the gap between the `trigger level' and actual selling prices, the more tax companies have to pay. Crude prices on the New York Mercantile Exchange were at $113.51 a barrel at 7:54 p.m. Hong Kong time, up 58 percent from a year earlier.

China Petrochemical Corp., the parent of Hong Kong-listed Sinopec, is making ``preliminary'' preparations with China National Petroleum Corp. for a joint bid for Petro-Tech Peruana in Peru, Su said.

Sinopec Group, as China Petrochemical is known, is also doing the same with China National Petroleum Corp. for an Angolan oil and gas asset, Su said, without elaborating.

``Our listed unit Sinopec will participate in some overseas exploration projects in the long term, but will not directly get involved in the near future,'' Su said.

To contact the reporter on this story: Wang Ying in Hong Kong at wang30@bloomberg.net;