According to Li Yang, an official with the State Economic and Trade Commission (SETC), the merger is part of the oil refinery sector's plan to speed up its restructuring and improve its competitiveness now that China has entered the World Trade Organization (WTO).

The fragmented sector, troubled by a surplus in overall refining capacity for years, faces great challenges after China joined the WTO last December.

Under the WTO obligations, China slashed its tariffs on gasoline and diesel oil imports to 6 per cent at the beginning of the year from the previous 6-9 per cent.

China will increase imports of refined oil products by 15 per cent annually over the next four years.

Li would not discuss the specifics of the plan, saying "it is still under study."

Zhu Xingshang, an expert at the Energy Research Institute under the State Development Planning Commission, said he has learned that SETC intends to ask CNPC and Sinopec to pay owners of these small refineries for the merger as a first step towards closing them.

"It may be easier for SETC to close these small refineries through such a plan because CNPC and Sinopec are directly controlled by the State, but it will add fiscal burdens to the two oil companies," Zhu said.

There are nearly 130 oil refineries in China with a total production capacity of 250 million tons a year, four-fifths of which are used.

Half of these refineries are small plants run by local governments and have a capacity of just 1 million tons. The rest belongs to CNPC and Sinopec.

More than 110 small oil refineries have been closed thanks to a SETC-led campaign that started in 1998, cutting a refining capacity of 11 million tons.

Li said SETC will strengthen its efforts this year to continue to close small refineries and prevent the resurgence of those shut down.

"However, difficulties remain strong because the small refineries create the bulk of revenue and thousands of jobs for local governments even though they should be closed," Zhu said.

A spokesperson for Sinopec Corp, the listed subsidiary of Sinopec, said the two oil giants may merge these small refineries based on a government-formed assets transfer, the way the parent fully acquired China Star Oil Company last year.

Star Oil Company was China's No 4 oil company after China National Offshore Oil Corp.

"The listed Sinopec Corp will benefit from the plan if the small refineries can ultimately be closed, putting the domestic oil product market in order," the spokesperson said.

Sinopec Corp and PetroChina, the listed arm of CNPC, are suffering from small refineries' bad-quality and cheap oil products on the market. The two companies control the vast majority of the refining business of their parents.

Sinopec Corp now operates 25 oil refineries, the spokesperson said.

SETC has announced that China plans to refine 202 million tons of crude oil this year, compared with 193 million tons in 2001.

The nation has offered a quota of 22 million tons for this year's refined oil imports.