The mainland will continue to narrow the price gap between crude oil and refined petrochemical products in the future, Fitch Ratings said yesterday.

"There will be more frequent small price adjustments," although a full liberalization of the pricing mechanism is unlikely due to fears of inflation, the international rating agency said in a report commenting on the mainland's latest oil price hike and windfall tax.

National Development and Reform Commission (NDRC), the mainland's top economic planner that oversees a few strategic sectors, announced an increase in ex-factory and retail prices of major refined oil products late last month.

It also adopted windfall taxation on crude oil producers last Sunday, ranging between 20 per cent and 40 per cent for crude oil that sells at more than US$40 per barrel.

The two measures will be conducive to the oil and gas sector as a whole, Fitch said.

"The recent policy reforms in the Chinese oil and gas sector will be positive for industry players," the international rating agency said in a statement.

China's three top oil companies PetroChina, CNOOC and Sinopec are expected to benefit from the recent price increases, it said.

"Although the price increases are insufficient to allow Chinese refining sector to break even, it demonstrates the government's efforts at price reform so as to narrow the gap between the international oil price and the domestic retail price of refined oil products," said Ma Shang, associate director in Fitch's Asia Pacific energy and utilities team.

The move thereby enhanced investors' confidence in the sector, Ma added.

As for the windfall tax, Fitch said the mainland's upstream players were strong enough to cope with.

"The effect (of the tax) is moderated by their higher profitability at times of escalating oil price and their strong financial profiles," Ma said.

Analysts and researchers have predicted that a tax fee between 20 billion yuan (US$2.5 billion) and 30 billion yuan (US$3.75 billion) would be collected from the three firms in a year. The tax, according to NDRC, will be used to subsidize several industrial sectors affected by the refined oil price changes, including agriculture, forestry, fisheries and transportation.

PetroChina and CNOOC are likely to be more affected by the windfall tax because a bulk of their profits comes from exploration and production.

Sinopec's larger downstream business, however, will benefit most from the retail price hikes and potential subsidies from the government.

Asia's top refiner got a 9.4 billion (US$1.2 billion) one-off financial aid last year to offset its loss-making refining business. Fitch said there might be more such aids.

On Tuesday, CNOOC's shares fell 0.82 per cent to HK$6.05 (77 US cents), while those of PetroChina ended flat at HK$8.35 (US$1.07). However, Sinopec gained 1.09 per cent to HK$4.65 (60 US cents), compared to a 0.23 per cent rise of Hong Kong's benchmark Hang Seng index, which finished on Tuesday at 16,100.09, a five-year high.

Hong Kong stock market was closed yesterday due to Ching Ming Festival or Tomb-Sweeping Day, a public holiday.

(HK Edition 04/06/2006 page3)