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Asian Petroleum Review : Jan-March 2011
22 Next, the two big state-run oil firms, Sinopec and PetroChina , plan to process a record volume of crude oil this month. That will increase sup- plies of fuel, although it could be weeks or months before the impact is felt across China and service stations feel secure enough to stop rationing fuel. Sinopec, Asia's top refiner, has slashed diesel exports by 70 percent and offered its refineries incentives to maximise diesel output. Since that means their naphtha production could fall, Sinopec is importing naphtha to make up for any shortfall. The efforts to improve diesel supply are the fruit of the fuel price reform two years ago, which laid out a deal: the government guaranteed steady margins while crude was cheap, but refiners had to keep the market supplied when times got tough. The deal could be tested if crude oil prices go much more beyond $80. The last time Sinopec and PetroChina were forced to lose money on refining, they slowed production and exported fuel, forcing the government to concede billions of dollars in subsidies to keep supplies flowing. The latest rise in fuel prices - - by 3 percent on Oct 26 - - may not have been enough to unlock sufficient diesel supplies. "The increase was small, crude oil prices kept on rising and power rationing continued, so a lot of people who had hoarded fuel just stayed on the sidelines and did not let go of it, like in 2007 and 2008," said the Sinopec analyst. PLENTY OF COAL BUT POWERLESS Amongst the areas experiencing power shortages are parts of northern Shanxi, the second largest coal- producing province, where generators were shut down to conserve energy or mothballed as operating margins were squeezed by coal costs, up by more than 10 percent since September. The local power grid firm has warned of shortages of up to 5 to 6 gigawatts, or 20 to 25 percent of de- mand by year's end. "Coal stocks in at least six 1 GW power plants were only enough for a week's generation. And some others have run out of money to buy coal." That could cause havoc if customers suddenly flood back to the market on Jan 1. In winter months, China's second biggest power source, hydroelectricity, is at a seasonal low and coal transport often becomes congested. Some buyers expecting coal prices to rise have been scouting for supply overseas, particularly in South Africa, as ship- ments from nearby Australia and Indonesia have been disrupted by rain. Rising coal prices could make matters worse, said Hu Zhaoguang, vice president of State Power Economic Research Institute, a think tank under the State Grid Corp of China. Thomson Reuters Asia Petroleum Review A miner works at an underground coal mine in Xiaoyi county, Shanxi province. REUTERS "The high coal price was the main culprit " - Li Jianwei, vice-president of the Shanxi Power Industry Association.