third parties than the exploration and production segment was receiving from external sales.
Why did this happen? Prior to the change in the transfer pricing policy, the exploration and production segment certainly had an incentive to sell to outside customers. Referring to the Table, in 1999, the segment received an average price of RMB 1444 per ton from external sales as compared with RMB 901 per ton from inter-segment sales.
But the anomalous behavior persisted after the change in the transfer pricing policy. Indeed, the scale of the disparity increased rather than diminished with the passing years. By 2002, the price that the refining segment was paying to buy crude from third parties exceeded the price that the exploration and production segment was receiving from external sales by over 32%.
Two factors could explain why Sinopec’s refining segment bought crude from third parties at a higher price than Sinopec’s exploration and production segment received from external sales. One is quality differences. The difference in the price of crude from Sinopec’s largest oil field, Shengli, and PetroChina’s largest field, Daqing, is about 12%.3 Another factor is the cost of inland transportation, which can range up to RMB 300 per ton, depending on the mode and distance.
3 In December 2003, prices of crude oil, ex-oilfield and excluding value-added tax, were: RMB 1641 per ton at Shengli and RMB 1831 per ton at Daqing.
© December 2003, I.P.L. Png