Sinopec rebate cut as refining nears break-even

By Judy Hua

HONG KONG, Sept 16 (Reuters) - China will cut a key tax rebate for oil firm Sinopec (0386.HK) (600028.SS) (SNP.N) this quarter, just as the tumbling oil price begins to return its refining operations to profit, a company source said on Tuesday.

"Based on discussions with the government, the tax rebate rate on crude imports will be cut to 40 percent in the third quarter from 75 percent in the second quarter, meaning the government rebate will be roughly halved," the company source said.

The fourth quarter rebate was uncertain, but could be reduced to zero if oil prices remain at the current level, he added.

High international crude oil prices have squeezed Sinopec hard, along with its rival PetroChina (601857.SS) (0857.HK) (PTR.N), since they are obliged to supply China with fuel at low prices set by a government wary of inflationary pressures.

Beijing finally bowed to pressure from refiners in late June, raising gasoline and diesel prices by nearly 20 percent as oil raced up towards a record of over $147 a barrel in July.

The increase eased pressure on refiners but was not enough to stem losses at Sinopec, where capped-price fuels like gasoline, diesel and kerosene make up about 60 percent of refining output.

Since then, crude oil CLc1 has slumped to below $93 a barrel, tipping the refining equation further towards break-even.

"If the oil price is below $95 a barrel, it's very likely that our refining operations will make a profit," said the Sinopec source, who declined to be named.

A company source at PetroChina said the break-even point for refining operations there was around $88 a barrel.

However, both companies may not actually see break-even refining for a month or more, since they are processing oil that has been in storage tanks, and cheap crude prices will take time to filter through to inventory.

The Sinopec source did not mention value-added tax rebates on refined oil products, which the company sometimes buys on the international market and imports to meet Chinese demand.

A system of VAT rebates, which applies to both companies, has replaced the huge annual subsidy payment Sinopec relied on to recoup many of its losses for the last three years.

Several analysts have said that the payouts -- $1.2 billion, $640 million and $1.7 billion over the past three years -- made it almost impossible to assess the company's value.

Credit rating agency Fitch placed Sinopec on Rating Watch Negative on Sept. 1, citing increasing concern over the government price restrictions and Sinopec's increasing reliance on subsidies. (Additional reporting by Ruth Wong; Writing by Tom Miles; Editing by Paul Bolding)