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Sinopec Calls for New Oil Pricing Mechanism
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Sinopec, Asia's top refiner, has called for a more market-oriented oil pricing mechanism in 2007 after struggling last year to refine more oil at higher cost for local consumption.


"A more market-based fuel pricing system will certainly benefit our business by smoothing our operation," Huang Wensheng, spokesperson for Beijing-based Sinopec, told China Daily yesterday.


"I do not believe timing is the priority in making the decision, but the determination of the authority is," he said. Because pricing is government-controlled rather than market-driven, Sinopec witnessed a huge refining deficit in 2006 due to a soaring crude import cost and the low price of refined oil sold domestically.


As a result, the refiner recently received State compensation of 5 billion yuan as it continues shouldering responsibility for processing crude oil to meet robust local demand.


In a public statement yesterday, Sinopec announced it processed 146.32 million tons of crude in 2006, up 4.56 percent over the previous year. Oil products Sinopec delivered to the market reached 111.68 million tons last year, growing 6.81 percent over 2005.


"The output volume unveiled is in line with our original plan. Despite the heavy loss, we still manage to refine more oil and to source from third party suppliers for rising local consumption," Huang said.


Sinopec's output is higher than many analysts expected given the huge deficit triggered by surging global oil prices last year, Liu Gu, a senior energy analyst with Shenzhen-based Guotai Jun'an Securities (Hong Kong) Ltd, told China Daily. He expects a positive market reaction to the listed refining giant's output announcement.


Although the refining output is up, the 4.56 percent growth rate for Sinopec in 2006 is the lowest in four years. Processing volume rose 5.3 percent in 2005, compared to 14 percent in 2004 and 10 percent in 2003, according to Bloomberg statistics.


"Under harsh market conditions, it is understandable for the refiner to slow down refining growth and even to import oil products from overseas to cover the deficit and to meet demand," Liu said.


Sinopec supplies around 80 percent of the fuels sold in China, working under rigid price controls that limit fluctuations within an 8 percent range.


As global prices soared in 2006 and import costs jumped, the refiner saw its loss widen to 12.6 billion yuan in the third quarter of 2006, compared to a 6.6 billion yuan loss a year earlier. Sinopec imports about 70 percent of the crude oil it uses for refining.


A more market-oriented oil product pricing mechanism would certainly be a shot in the arm for the development of Sinopec, Liu confirmed.


(China Daily January 19, 2007)


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