UPDATE 3-Sinopec fuel output undershoots as China revs up

(Adds detail, background)

By Judy Hua

HONG KONG, Jan 21 (Reuters) - Chinese refining giant Sinopec Corp (0386.HK) undershot its fuel processing target in 2007, it said on Monday, highlighting the tension between China's need to supply its hungry economy and its desire to keep a lid on prices.

Sinopec (SNP.N) (600028.SS) increased throughput at its refineries by 6.3 percent in 2007, less than a targeted 6.6 percent rise. Production of diesel, which keeps China's truckers on the road, rose only 3.8 percent. But Sinopec's crude oil production rose 2.3 percent, beating a target of 2.1 percent.

China's economy has led the world in driving up prices for commodities, including crude oil, which hit an all-time record above $100 per barrel earlier this month.

But China's government is determined to restrain inflation and keeps a tight control on prices, obliging state-controlled Sinopec to accept losses on every litre of fuel - and to step in when smaller rivals cut their loss-making refining activity.

"With oil product prices frozen and crude prices remaining high, the fate of Sinopec lies in government subsidy," said BOCI analyst Lawrence Lau.

Industry sources have said Sinopec is likely to win a government bailout of more than $1.38 billion for 2007, taking the sting out of persistent refining losses. That would mark the third cash infusion in as many years for China's No. 2 oil and gas producer.

Lau said he expected Sinopec's refining losses to be 12 billion yuan ($1.66 billion) in 2007.

Sinopec did not provide separate figures for the fourth quarter of 2007, when shortages at the pump forced the government to step in to ease the crisis, raising prices by about 10 percent from Nov.1 and suspending diesel import tax in December.

The shortage of diesel was so severe that Sinopec and its fellow state-backed oil giant PetroChina (0857.HK) resorted to buying on the international market.

The forays onto the diesel market have continued in 2008, with imports of about 400,000 tonnes in January, oil industry sources have said.

Sinopec has previously said it is targeting refined oil product output of 120 million tonnes in 2008, which is only 3 million tonnes more than it refined in 2007.

Although the government has vowed not to raise prices again in the short term, analysts interpreted that as a ploy to deter hoarding ahead of the Chinese New Year holiday next month and said such orders might do little in practice to improve supplies.

Liang Shuhe, deputy chief of the foreign trade department at the Ministry of Commerce, said last week that China's apparent demand for oil products was likely to rise 5 percent in 2008, compared to a 3 percent rise in the first 11 months of last year, the period for which the latest figures are available.

Shares in Sinopec fell 9 percent on Monday, in line with PetroChina's 8.4 percent drop, and underperforming the 5.5 percent loss on the benchmark Hang Seng Index .HSI.

Sinopec said in a statement on its Web site (www.sinopec.com) that its natural gas production rose 10.3 percent to 283 billion cubic feet in 2007. Crude throughput was 155.58 million tonnes during the year.

For a full production details, please click here 080121.pdf. For a summary table please click on [ID:nHKG46679]

The company did not release its average oil selling price, which will be disclosed in its full-year earnings report. ($1=7.241 Yuan) (Editing by Tom Miles and Sambit Mohanty)