China Petroleum and Chemical Corp, also known as Sinopec, and PetroChina Co said the Ministry of Finance would provide a monthly subsidy to compensate for their losses from processing expensive imported crude oil.

The subsidy move is seen as a necessary incentive to encourage processing by the nation's two dominant refiners which are not able to pass on the higher costs of crude oil to consumers as the government caps gasoline and diesel prices to rein in inflation.

In separate statements over the weekend, Sinopec, Asia's top refiner, and PetroChina said they would be paid an "appropriate" state bailout against refining losses monthly starting April 1. Unlike Sinopec which had subsidies for more than three years, this will be the first time PetroChina will get a handout.

Orient Securities analyst Wang Jin said the subsidy would come in the form of a 75 percent cut of the 17 percent value added tax paid by oil firms on crude imports. Assuming crude at US$100 per barrel, Sinopec could get 6 billion yuan (US$857 million) per month and PetroChina 1 billion yuan, Wang said.

The subsidy will benefit Sinopec more than PetroChina as the former relies on imports for about 80 percent of its crude needs.

Sinopec has estimated its first-quarter net profit tumbled by more than 50 percent. "But for the second half, earnings may be much better than the first half if crude prices retreat a bit," Wang said.

The ministry said last week it would refund the VAT on gasoline and diesel imported by Sinopec and PetroChina in the second quarter.

Sinopec fell 4.99 percent to 9.91 yuan (US$1.45) and PetroChina rose 0.25 percent to 16.06 yuan yesterday.

(Shanghai Daily April 22, 2008)