Document/ExhibitDescriptionPagesSize 1: 20-F Petrochina Company Limited HTML 1.81M
16: COVER ¶ Comment-Response or Cover Letter to the SEC 2± 2K
2: EX-1.1 EX-1.1 Articles of Association 62 223K
3: EX-4.1 EX-4.1 2005 Management Performance Contract 2 13K
4: EX-4.2 EX-4.2 Crude Oil Mutual Supply Agreement 3 11K
5: EX-4.3 EX-4.3 Capital Contribution Agreement 42 126K
6: EX-4.4 EX-4.4 Transfer Agreement 20 52K
7: EX-4.5 EX-4.5 Supplementary Agreement, Dated June 9, 2005 3 13K
8: EX-8.1 EX-8.1 List of Major Subsidiaries 1 6K
9: EX-10.1 EX-10.1 Significant Differences of Gov'T Practices 3 15K
12: EX-13.1 EX-13.1 Certification of CEO Required by SEC. 1350 1 8K
13: EX-13.2 EX-13.2 Certification of CFO Required by SEC. 1350 1 8K
10: EX-12.1 EX-12.1 Certification of CEO Required by SEC. 302 2± 11K
11: EX-12.2 EX-12.2 Certification of CFO Required by SEC. 302 2± 11K
14: EX-16.1 EX-16.1 Code of Ethics for Senior Management 3 19K
15: EX-16.2 EX-16.2 Code of Ethics for Employees 3 15K
(Exact name of Registrant as specified in its charter)
PetroChina Company Limited
(Translation of Registrant’s name into English)
The People’s Republic of China
(Jurisdiction of incorporation or organization)
16 Andelu
Dongcheng District, Beijing, 100011
The People’s Republic of China
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act.
Title of
Name of each exchange
Each class
on which registered
American Depositary Shares, each representing 100
H Shares, par value RMB 1.00 per share*
New York Stock Exchange, Inc.
H Shares, par value RMB 1.00 per share
New York Stock Exchange, Inc.**
Securities registered or to be registered pursuant to
Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the
issuer’s classes of capital or common stock as of the close
of the period covered by the annual report:
State-owned shares, par value RMB 1.00 per share
158,241,758,000
H Shares, par value RMB 1.00 per share
17,582,418,000
***
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) or
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the
Registrant has elected to follow.
Item 17 Item 18
X
*
PetroChina’s H Shares are listed and traded on The Stock
Exchange of Hong Kong Limited.
**
Not for trading, but only in connection with the registration of
American Depository Shares.
***
Include 2,424,087,400 H Shares represented
by American Depositary Shares.
Unless the context otherwise requires, references in this annual
report to:
•
“CNPC” or “CNPC group” are to our parent,
China National Petroleum Corporation and its affiliates and
subsidiaries, excluding PetroChina, its subsidiaries and its
interests in long-term investments, and where the context refers
to any time prior to the establishment of CNPC, those entities
and businesses which were contributed to CNPC upon its
establishment.
•
“PetroChina”, “we”, “our”,
“our company” and “us” are to:
—
PetroChina Company Limited, a joint stock company incorporated
in the People’s Republic of China with limited liability
and its subsidiaries and branch companies, or
—
the CNPC group’s domestic crude oil and natural gas
exploration and production, refining and marketing, chemicals
and natural gas businesses that were transferred to us in the
restructuring of the CNPC group in 1999.
•
“PRC” or “China” are to the People’s
Republic of China, but do not apply to Hong Kong, Macau or
Taiwan for purposes of this annual report.
We publish our consolidated financial statements in Renminbi.
The audited consolidated financial statements included in this
annual report have been prepared as if the operations and
businesses transferred to us from CNPC were transferred as of
the earliest period presented or from the date of establishment
of the relevant unit, whichever is later, and conducted by us
throughout the period. In this annual report, IFRS refers to
International Financial Reporting Standards.
Conversion Table
1 barrel-of-oil equivalent
= 1 barrel of crude oil
= 6,000 cubic feet of natural gas
1 cubic meter
= 35.315 cubic feet
1 ton of crude oil
= 1 metric ton of crude oil
= 7.389 barrels of crude oil (assuming an API gravity
of 34 degrees)
Certain Oil and Gas Terms
Unless the context indicates otherwise, the following terms have
the meanings shown below:
“acreage”
The total area, expressed in acres, over which an entity has
interests in exploration or production. Net acreage is the
entity’s interest, expressed in acres, in the relevant
exploration or production area.
“API gravity”
An indication of the density of crude oil or other liquid
hydrocarbons as measured by a system recommended by the American
Petroleum Institute (API), measured in degrees. The lower the
API gravity, the heavier the compound.
“condensate”
Light hydrocarbon substances produced with natural gas that
condense into liquid at normal temperatures and pressures
associated with surface production equipment.
“crude oil”
Crude oil, including condensate and natural gas liquids.
For a given period, costs incurred to obtain access to proved
reserves and to provide facilities for extracting, treating,
gathering and storing the oil and gas.
“finding cost”
For a given period, costs incurred in identifying areas that may
warrant examination and in examining specific areas that are
considered to have prospects of containing oil and gas reserves,
including costs of drilling exploratory wells and
exploratory-type stratigraphic test wells. Finding cost is also
known as exploration cost.
“lifting cost”
For a given period, costs incurred to operate and maintain wells
and related equipment and facilities, including applicable
operating costs of support equipment and facilities and other
costs of operating and maintaining those wells and related
equipment and facilities. Lifting cost is also known as
production cost.
“natural gas liquids”
Hydrocarbons that can be extracted in liquid form together with
natural gas production. Ethane and pentanes are the predominant
components, with other heavier hydrocarbons also present in
limited quantities.
“offshore”
Areas under water with a depth of five meters or greater.
“onshore”
Areas of land and areas under water with a depth of less than
five meters.
“primary distillation capacity”
At a given point in time, the maximum volume of crude oil a
refinery is able to process in its basic distilling units.
“proved developed reserves”
Reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of
fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary
recovery are included as “proved developed reserves”
only after testing by a pilot project or after the operation of
an installed program has confirmed through production response
that increased recovery will be achieved.
“proved reserves”
Estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions,
i.e., prices and costs as of the date the estimate is
made. Prices include consideration of changes in existing prices
provided only by contractual arrangements, but not of
escalations based upon future conditions.
“proved undeveloped
reserves”
Reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled
units can be claimed only where it can be demonstrated with
certainty that there is
continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application
of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective
by actual tests in the area and in the same reservoir.
“reserve-to-production ratio”
For any given well, field or country, the ratio of proved
reserves to annual production of crude oil or, with respect to
natural gas, to wellhead production excluding flared gas.
“sales gas”
Marketable production of gas on an “as sold” basis,
excluding flared gas, injected gas and gas consumed in
operations.
“water cut”
For a given oil region, the percentage that water constitutes of
all fluids extracted from all wells in that region.
This annual report contains “forward-looking
statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. These
forward-looking statements are, by their nature, subject to
significant risks and uncertainties. These forward-looking
statements include, without limitation, statements relating to:
•
the amounts and nature of future exploration, development and
other capital expenditures;
•
future prices and demand for crude oil, natural gas, refined
products and chemical products;
•
development projects;
•
exploration prospects;
•
reserves potential;
•
production of oil and gas and refined and chemical products;
•
development and drilling potential;
•
expansion and other development trends of the oil and gas
industry;
•
the planned development of our natural gas operations;
•
the planned expansion of our refined product marketing network;
•
the planned expansion of our natural gas infrastructure;
•
the anticipated benefit from our proposed acquisition of certain
overseas assets from CNPC, our parent company;
•
the plan to continue to pursue attractive business opportunities
outside China;
•
our future overall business development and economic performance;
•
our anticipated financial and operating information regarding,
and the future development and economic performance of, our
business;
•
our anticipated market risk exposure arising from future changes
in interest rates, foreign exchange rates and commodity
prices; and
•
other prospects of our business and operations.
The words “anticipate”, “believe”,
“could”, “estimate”, “expect”,
“intend”, “may”, “plan”,
“seek”, “will” and “would” and
similar expressions, as they related to us, are intended to
identify a number of these forward-looking statements.
By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on
circumstances that will occur in the future and are beyond our
control. The forward-looking statements reflect our current
views with respect to future events and are not a guarantee of
future performance. Actual results may differ materially from
information contained in the forward-looking statements as a
result of a number of factors, including, without limitation,
the risk factors set forth in this annual report and the
following:
•
fluctuations in crude oil and natural gas prices;
•
failure to achieve continued exploration success;
•
failures or delays in achieving production from development
projects;
•
continued availability of capital and financing;
•
acquisitions and other business opportunities that we may pursue;
general economic, market and business conditions, including
volatility in interest rates, changes in foreign exchange rates
and volatility in commodity markets;
•
liability for remedial actions under environmental regulations;
•
impact of the PRC’s entry into the World Trade Organization;
•
the actions of competitors;
•
wars and acts of terrorism or sabotage;
•
changes in policies, laws or regulations of the PRC;
•
the other changes in global economic and political conditions
affecting the production, supply and demand and pricing of crude
oil, refined products, petrochemical products and natural
gas; and
•
the other risk factors discussed in this annual report, and
other factors beyond our control.
You should not place undue reliance on any forward-looking
statement.
ITEM 1 — IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISORS
Not applicable. However, see “Item 6 —
Directors, Senior Management and Employees —
Directors, Senior Management and Supervisors.”
C:
ITEM 2 — OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
C:
ITEM 3 — KEY INFORMATION
C:
Exchange Rates
Translations of amounts in this annual report from Renminbi into
U.S. dollars and vice versa have been made at the rate of
RMB 8.2765 to US$1.00, which was the noon buying rate in
New York City on December 31, 2004 for cable transfers in
Renminbi per U.S. dollar as certified for customs purposes
by the Federal Reserve Bank of New York. You should not construe
these translations as representations that the RMB amounts could
be converted into U.S. dollar amounts at that rate, or at
all.
The noon buying rate in New York City for cable transfers as
certified for customs purposes by the Federal Reserve Bank of
New York was US$1.00=RMB 8.2765 on June 24, 2005. The
following table sets forth the high and low noon buying rates
between Renminbi and U.S. dollars for each month during the
previous six months:
Noon buying rate
High
Low
(RMB per US$)
December 2004
8.2767
8.2765
January 2005
8.2765
8.2765
February 2005
8.2765
8.2765
March 2005
8.2765
8.2765
April 2005
8.2765
8.2765
May 2005
8.2765
8.2735
June 2005 (through June 24)
8.2765
8.2765
The following table sets forth the average noon buying rates
between Renminbi and U.S. dollars for each of 2000, 2001,
2002, 2003 and 2004, calculated by averaging the noon buying
rates on the last day of each month during the relevant year:
You should read the selected historical financial data set forth
below in conjunction with the consolidated financial statements
of PetroChina and their notes and “Item 5 —
Operating and Financial Review and Prospects” included
elsewhere in this annual report. In 2002, we retroactively
restated our prior years’ consolidated financial statements
to reflect the effect as if the operations of CNPC’s
refined products marketing enterprises we acquired from CNPC had
always been combined since inception as a result of the
application of the accounting treatment to the acquisition
discussed below. The selected historical income statement and
cashflow data for the years ended December 31, 2002, 2003
and 2004 and the selected historical balance sheet data as of
December 31, 2003 and 2004 set forth below are derived from
our audited consolidated financial statements included elsewhere
in this annual report. The selected historical income statement
data and cashflow data for the years ended December 31,2000 and 2001 and the selected historical balance sheet data as
of December 31, 2001 and 2002 set forth below are derived
from our audited financial statements, not included in this
annual report. The selected historical balance sheet data as of
December 31, 2000 set forth below are derived from our
unaudited financial statements, not included in this annual
report. The financial information included in this section may
not necessarily reflect our results of operations, financial
position and cash flows in the future.
We have prepared our consolidated financial statements in
accordance with IFRS. IFRS differ materially from the generally
accepted accounting principals in the U.S., or US GAAP. For a
discussion of significant differences between IFRS and US GAAP,
see Note 35 to our consolidated financial statements
included elsewhere in this annual report and
“Item 5 — Operating and Financial Review and
Prospects — Other Information — US GAAP
Reconciliation”.
In accordance with an acquisition agreement between CNPC and us
dated September 26, 2002, we acquired from CNPC the assets,
liabilities and interests related to CNPC’s refined
products marketing enterprises consisting primarily of service
stations and related facilities. Under IFRS, the acquisition is
a combination of entities under common control since the
CNPC’s refined products marketing enterprises and we are
under the common control of CNPC. As a result, we have accounted
for the acquisition in a manner similar to a uniting of
interests, whereby the assets and liabilities of the marketing
enterprises acquired are accounted for at historical cost to
CNPC with net liabilities of RMB 2,956 million at the
effective date. In 2002, our prior years’ consolidated
financial statements were restated to give effect to the
acquisition in these periods as if the operations of our company
and these marketing enterprises had always been combined in
these periods. See “Item 5 — Operating and
Financial Review and Prospects — General —
Acquisitions — Acquisition of Certain Refined Products
Marketing Enterprises from CNPC”.
(in millions, except for per share and per ADS data)
Non-current assets
Property, plant and equipment, less accumulated depreciation,
depletion and amortization
341,175
363,367
393,296
427,875
468,519
56,608
Long-term investments, at net book value
4,948
5,530
5,680
7,410
9,433
1,140
Prepaid operating lease rentals
3,924
5,383
6,249
7,252
12,248
1,480
Intangible and other assets
901
2,368
2,760
3,024
2,987
361
Total non-current assets
350,948
376,648
407,985
445,561
493,187
59,589
Total assets
432,046
462,665
483,149
531,735
609,928
73,694
Liabilities and shareholders’ equity
Current liabilities
Short-term debt
41,514
25,323
20,633
28,890
27,276
3,296
Accounts payable and accrued liabilities
39,550
53,210
57,793
64,180
70,696
8,542
Income tax payable
9,399
5,672
5,412
12,043
17,484
2,112
Other taxes payable
7,171
8,762
5,515
8,916
4,633
560
Total current liabilities
97,634
92,967
89,353
114,029
120,089
14,510
Non-current liabilities
Long-term debt
53,412
65,546
60,655
41,959
38,458
4,646
Deferred credits and other long-term obligations
1,196
1,380
1,684
2,000
2,438
294
Deferred income taxes
3,169
7,030
9,927
11,526
14,340
1,733
Total non-current liabilities
57,777
73,956
72,266
55,485
55,236
6,673
Total liabilities
155,411
166,923
161,619
169,514
175,325
21,183
Minority interest
4,989
5,136
4,854
5,608
9,391
1,135
Shareholders’ equity
271,646
290,606
316,676
356,613
425,212
51,376
Total liabilities and shareholders’ equity
432,046
462,665
483,149
531,735
609,928
73,694
Share capital, issued and outstanding, RMB 1.00 par value
State-owned shares
158,242
158,242
158,242
158,242
158,242
19,120
H shares and ADSs
17,582
17,582
17,582
17,582
17,582
2,124
US GAAP
Property, plant and equipment, less accumulated depreciation,
depletion and amortization
274,457
304,895
343,093
386,417
434,924
52,549
Total assets
365,328
404,193
432,946
492,784
576,481
69,653
Shareholders’ equity
227,489
251,914
283,464
329,205
403,012
48,693
Other Financial Data
Dividend per share
0.14
0.12
0.12
0.18
0.26
0.03
Dividend per ADS
14.14
11.98
12.00
17.82
26.34
3.18
Capital expenditures
(59,311
)
(59,964
)
(72,766
)
(82,929
)
(95,349
)
(11,520
)
Cash Flow Data
IFRS
Net cash provided by operating activities
102,490
82,854
97,290
137,236
137,299
16,589
Net cash used for investing activities
(59,307
)
(59,906
)
(70,611
)
(96,213
)
(98,533
)
(11,905
)
Net cash used for financing activities
(43,188
)
(29,906
)
(27,829
)
(39,769
)
(38,693
)
(4,675
)
(1)
Certain financial data for these periods and as of these dates
are derived from our unaudited consolidated financial
statements, not included in this annual report, and were
retroactively restated in 2002. See the paragraphs preceding
these table for a detailed description.
(2)
Certain financial data for these periods and as of these dates
are derived from our audited consolidated financial statements,
not included in this annual report, and were retroactively
restated in 2002. See the paragraphs preceding these tables for
a detailed description.
(3)
Historical income per share for the years ended
December 31, 2001, 2002, 2003 and 2004 has been calculated
by dividing the net profit by the number of 175,824 million
shares issued and outstanding for the periods presented.
Historical income per share for the year ended December 31,2000 has been calculated by dividing the net profit by the
weighted average number of 171,630 million shares issued
and outstanding for the period presented.
(4)
Historical income per ADS for the years ended December 31,2001, 2002, 2003 and 2004 has been calculated by dividing the
net profit by the number of 175,824 million shares issued
and outstanding for the periods presented, assuming each ADS
representing 100 H shares. Historical income per ADS
for the year ended December 31, 2000 has been calculated by
dividing the net profit by the weighted average number of
171,630 million shares issued and outstanding for the
period presented, assuming each ADS representing
100 H shares.
Our business is subject to various changing competitive,
economic and social conditions in the PRC. Such changing
conditions entail certain risks, which are described below.
•
Our operations are affected by the volatility of prices for
crude oil and refined products. We and China Petroleum and
Chemical Corporation, or Sinopec, set our crude oil median
prices monthly based on the Singapore trading prices for crude
oil. The PRC government publishes the retail median guidance
prices for gasoline and diesel based on the FOB Singapore,
Rotterdam and New York gasoline and diesel trading prices.
Historically, international prices for crude oil and refined
products have fluctuated widely in response to changes in many
factors, such as global and regional economic and political
developments and global and regional supply and demand for crude
oil and refined products. We do not have, and will not have,
control over the factors affecting international prices for
crude oil and refined products. We expect continued volatility
and uncertainty in international prices for crude oil and
refined products. Declines in crude oil prices may adversely
affect our business, results of operations and financial
condition, our capital expenditure plans and the value of our
proved reserves.
•
The crude oil and natural gas reserve data in this annual report
are only estimates. The reliability of reserve estimates depend
on a number of factors, assumptions and variables, such as the
quality and quantity of our technical and economic data and the
prevailing oil and gas prices applicable to our production, many
of which are beyond our control and may prove to be incorrect
over time. Results of drilling, testing and production after the
date of the estimates may require substantial upward or downward
revisions in our reserve data. Our actual production, revenues
and expenditures with respect to our reserves may differ
materially from these estimates because of these revisions.
•
Our proved crude oil reserves decreased gradually and modestly
from 2001 to 2003 because the decrease in the crude oil reserves
in our Daqing and Liaohe oil regions could not be offset by the
increase in the crude oil reserves in our oil regions in
northwestern China, such as the Xinjiang oil region, the
Changqing oil and gas region and the Tarim oil region. Although
our proved crude oil reserves increased slightly in 2004 mainly
as a result of the increases in the crude oil reserves in our
Xinjiang and Changqing oil regions, we cannot assure you that we
will be able to increase or maintain our crude oil reserves in
the future by our exploration activities in China. We are
actively pursuing business opportunities outside China to
supplement our domestic resources. For instance, in June 2005,
we entered into an agreement to acquire certain overseas crude
oil and natural gas assets from CNPC. We cannot assure you,
however, that we can successfully locate sufficient alternative
sources of crude oil supply or at all due to the complexity of
the international political, economic and other conditions. If
we fail to obtain sufficient alternative sources of crude oil
supply, our results of operations and financial condition may be
materially and adversely affected.
•
The United States Securities and Exchange Commission, as
required by Section 404 of the Sarbanes-Oxley Act of 2002,
adopted rules requiring every public company in the
United States to include a management report on such
company’s internal controls over financial reporting in its
annual report, which contains management’s assessment of
the effectiveness of the company’s internal controls over
financial reporting. In addition, an independent registered
public accounting firm must attest to and report on
management’s assessment of the effectiveness of the
company’s internal controls over financial reporting. These
requirements will first apply to our annual report on
Form 20-F for the fiscal year ending December 31,2006. Our management may conclude that our internal controls
over our financial reporting are not effective. Moreover, even
if our management concludes that our internal controls over
financial reporting are effective, our independent registered
public accounting firm may still be unable to attest to our
management’s assessment or may issue a report that
concludes that our internal controls over financial reporting
are not effective. In
preparation for the implementation of the requirements of
Section 404, we are undertaking company-wide documentation
of internal controls, performing the system and process
evaluation and testing required. During the course of our
evaluation, documentation and attestation, we have identified
certain deficiencies that could adversely affect our ability to
record, process, summarize and report financial data consistent
with our management’s assertions in our financial
statements. Although we have commenced planing for remedial
measures to make necessary improvements, we cannot assure you
that we will be able to remedy those identified deficiencies in
time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404. We are
also in the process of conducting further evaluation of our
internal control over financial reporting and may identify other
deficiencies that we may not be able to remedy in time by the
deadline for compliance with Section 404. If we fail to
achieve and maintain the adequacy of our internal controls, we
may not be able to conclude that we have effective internal
controls, on an ongoing basis, over financial reporting in
accordance with the Sarbanes-Oxley Act. Moreover, effective
internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial
reports and are important to help prevent fraud. As a result,
our failure to achieve and maintain effective internal controls
over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which
in turn could harm our business and negatively impact the
trading prices of our ADSs or H shares. Furthermore, we
have already incurred considerable costs and spent significant
management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley
Act. We anticipate that we will continue to incur considerable
costs and use significant resources for compliance with
Section 404.
•
Exploring for, producing and transporting crude oil and natural
gas and producing and transporting refined products and chemical
products involve many hazards. These hazards may result in:
—
fires;
—
explosions;
—
spills;
—
blow-outs; and
—
other unexpected or dangerous conditions causing personal
injuries or death, property damage, environmental damage and
interruption of operations.
Some of our oil and natural gas fields are surrounded by
residential areas or located in areas where natural disasters,
such as earthquakes, floods and sandstorms, tend to occur more
frequently than in other areas. As with many other companies
around the world that conduct similar businesses, we have
experienced accidents that have caused property damage and
personal injuries and death.
Significant operating hazards and natural disasters may cause
partial interruptions to our operations and property and
environmental damage that could have an adverse impact on our
financial condition.
Except limited insurance coverage for vehicles and certain
assets that we consider to be subject to significant operating
risks, we do not carry any other insurance for our property,
facilities or equipment in respect of our business operations.
We do not currently carry any third party liability insurance
against claims relating to personal injury or death, property or
environmental damage arising from accidents on our property or
relating to our operations. We also do not currently carry any
business interruption insurance. The limited insurance coverage
of our assets exposes us to substantial risks and will not cover
most losses.
CNPC owns approximately 90% of our share capital. This ownership
percentage enables CNPC to elect our entire board of directors
without the concurrence of any of our other shareholders.
Accordingly, CNPC is in a position to:
—
control our policies, management and affairs;
—
subject to applicable PRC laws and regulations and provisions of
our articles of association, determine the timing and amount of
dividend payments and adopt amendments to certain of the
provisions of our articles of association; and
—
otherwise determine the outcome of most corporate actions and,
subject to the requirements of the Listing Rules of the Hong
Kong Stock Exchange, cause our company to effect corporate
transactions without the approval of minority shareholders.
CNPC’s interests may sometimes conflict with those of some
or all of our minority shareholders. We cannot assure you that
CNPC, as controlling shareholder, will always vote its shares in
a way that benefits our minority shareholders.
•
In addition to its relationship with us as our controlling
shareholder, CNPC by itself or through its affiliates also
provides us with certain services and products necessary for our
business activities, such as construction and technical
services, production services and supply of material services.
The interests of CNPC and its affiliates as providers of these
services and products to us may conflict with our interests.
Although we have entered into a Comprehensive Products and
Services Agreement with CNPC and our transactions with CNPC over
the past three years have been conducted on open, fair and
competitive commercial terms, we have only limited leverage in
negotiating with CNPC and its affiliates over the specific terms
of the agreements for the provision of these services and
products.
•
The eastern and southern regions of China have a higher demand
for refined products and chemical products than the western and
northern regions. Most of our refineries and chemical plants are
located in the western and northern regions of China. While we
continue to expand the sales of these products in the eastern
and southern regions of China, we face strong competition from
Sinopec. In addition, we incur relatively higher transportation
costs for delivery of our refined products and chemical products
to certain areas of these regions from our refineries and
chemical plants in western and northern China. As a result, we
expect that we will continue to encounter difficulty in
increasing our sales of refined products and chemical products
in these regions.
•
We are currently constructing and renovating several natural gas
pipelines and plan to construct and renovate other natural gas
pipelines. In addition, we may, subject to obtaining requisite
licenses from the relevant authority, commence offshore crude
oil and natural gas exploration and production activities, which
could require substantial capital expenditures and investments.
We cannot assure you that the cash generated by our operations
will be sufficient to fund these development plans or that our
actual future capital expenditures and investments will not
significantly exceed our current planned amounts. If either of
these conditions arises, we may have to seek external financing
to satisfy our capital needs. Under such circumstance, our
inability to obtain sufficient funding for our development plans
could adversely affect our business, financial condition and
results of operations.
•
We are also subject to a number of risks relating to the PRC and
the PRC oil and gas industry. These risks are described as
follows:
—
Our operations, like those of other PRC oil and gas companies,
are subject to extensive regulations and control by the PRC
government. These regulations and control affect many material
aspects of our operations, such as exploration and production
licensing, industry-specific taxes and fees and environmental
and safety standards. As a result, we may face significant
constraints on our ability to implement our business strategies,
to develop or
expand our business operations or to maximize our profitability.
Our business may also be adversely affected by future changes in
certain policies of the PRC government with respect to the oil
and gas industry.
—
Currently, the PRC government must approve the construction and
major renovation of significant refining and petrochemical
facilities as well as the construction of significant natural
gas and refined product pipelines and storage facilities. We
presently have several significant projects pending approval
from the relevant government authorities and will need approvals
from the relevant government authorities in connection with
several other significant projects. We do not have control over
the timing and outcome of the final project approvals.
—
We receive most of our revenues in Renminbi. A portion of our
Renminbi revenues must be converted into other currencies to
meet our foreign currency obligations. The existing foreign
exchange limitations under the PRC laws and regulations could
affect our ability to obtain foreign exchange through debt
financing, or to obtain foreign exchange for capital
expenditures.
—
Because PRC laws, regulations and legal requirements dealing
with economic matters are relatively new and continue to evolve,
and because of the limited volume of published judicial
interpretations and the non-binding nature of prior court
decisions, the interpretation and enforcement of these laws,
regulations and legal requirements involve some uncertainty. We
have included the Mandatory Provisions and certain additional
requirements that are imposed by the Hong Kong Stock Exchange
Listing Rules in our Articles of Association for the purpose of
reducing the scope of difference between the Hong Kong company
law and the PRC Company Law. However, because the PRC Company
Law is different in certain important aspects from company laws
in the United States, Hong Kong and other common law
jurisdictions and because the PRC securities laws and
regulations are still at an early stage of development, you may
not enjoy shareholders’ protections that you may be
entitled to in other jurisdictions.
—
In addition to the adverse effect on our revenues, margins and
profitability from any future fall in oil and natural gas
prices, a prolonged period of low prices or other indicators
would lead to a review for impairment of our oil and natural gas
properties. This review would reflect management’s view of
long-term oil and natural gas prices. Such a review could result
in a charge for impairment which could have a significant effect
on our results of operations in the period in which it occurs.
See also “Item 4 — Information on the
Company — Regulatory Matters”,
“Item 5 — Operating and Financial Review and
Prospects”, “Item 8 — Financial
Information” and “Item 11 —
Quantitative and Qualitative Disclosures About Market Risk”.
We are one of the largest companies in China in terms of sales.
We are engaged in a broad range of petroleum and natural gas
related activities, including:
•
the exploration, development, production and sale of crude oil
and natural gas;
•
the refining, transportation, storage and marketing of crude oil
and petroleum products;
•
the production and marketing of basic petrochemical products,
derivative chemical products and other chemical
products; and
•
the transmission and storage of crude oil, refined products and
natural gas as well as sale of natural gas.
We are China’s largest producer of crude oil and natural
gas. Currently, substantially all of our crude oil and natural
gas reserves and production-related assets are located in China.
In the year ended December 31, 2004, we had total revenue
of RMB 388,633 million (US$46,956 million) and
net income of RMB 102,927 million
(US$12,436 million).
Our exploration, development and production activities commenced
in the early 1950s, when we conducted exploration activities in
the Yumen oil region in northwestern China. The discovery of
crude oil in 1959 in northeastern China’s Daqing oil
region, one of the world’s largest oil regions in terms of
proved crude oil reserves, marked the beginning of our
large-scale upstream activities. Over the past four decades, we
have conducted crude oil and natural gas exploration activities
in many regions of China. As of December 31, 2004, we had
estimated proved reserves of approximately 10,940.5 million
barrels of crude oil and approximately 44,553.6 billion
cubic feet of natural gas. We believe that we hold production
licenses for a majority of China’s proved crude oil
reserves and proved natural gas reserves. In the year ended
December 31, 2004, we produced 777.4 million barrels
of crude oil and 837.5 billion cubic feet of natural gas
for sale, representing an average production of 2.1 million
barrels of crude oil and 2.3 billion cubic feet of sales
natural gas per day. In 2004, we sold 730.2 million barrels
of crude oil and 781.4 billion cubic feet of natural gas.
Approximately 82% of the crude oil we sold in the year ended
December 31, 2004 was supplied to our refineries.
We commenced limited refining activities in the mid-1950s, when
we began producing gasoline and diesel at refineries in the
Yumen oil region. We now operate 25 refineries located in eight
provinces, three autonomous regions and one municipality. In
2004, our refineries processed approximately 697.8 million
barrels of crude oil or an average of 1.9 million barrels
per day. In the year ended December 31, 2004, we produced
approximately 60.2 million tons of gasoline, diesel and
kerosene and sold approximately 67.0 million tons of these
products. In the year ended December 31, 2004,
approximately 84% of the crude oil processed in our refineries
was provided by our exploration and production segment and
approximately 15% of the crude oil processed in our refineries
was imported. As of December 31, 2004, our retail
distribution network consisted of 14,039 service stations that
we own and operate, 427 service stations wholly owned by CNPC or
jointly owned by CNPC and third parties to which we provide
supervisory support and 2,937 franchise service stations.
Our chemicals operations commenced in the early 1950s, when we
began producing urea at our first petrochemical plant in Lanzhou
in northwestern China. In the early 1960s, we began producing
ethylene. We currently produce a wide range of basic and
derivative petrochemical products and other chemical products at
12 chemical plants located in five provinces and three autonomous
regions in China. Our other segments supply substantially all of
the hydrocarbon feedstock requirements of our chemicals
operations.
We are China’s largest natural gas transporter and seller
in terms of sales volume. Our natural gas transmission and
marketing activities commenced in Sichuan in southwestern China
in the 1950s. In 2004, our sales of natural gas totaled
781.4 billion cubic feet, of which 657.3 billion cubic
feet was sold through our natural gas and pipeline segment. As
of December 31, 2004, we owned and operated regional
natural gas pipeline networks consisting of 18,995 kilometers of
pipelines, of which 17,868 kilometers were operated by our
natural gas and pipeline segment. As of December 31, 2004,
we owned and operated a crude oil pipeline network consisting of
9,167 kilometers of pipelines with an average daily throughput
of approximately 2.0 million barrels of crude oil. As of
December 31, 2004, we also had a refined product pipeline
network consisting of 2,460 kilometers of pipelines with an
average daily throughput of approximately 28,243 tons of refined
products.
We have increased our efforts to pursue attractive business
opportunities outside China as part of our business growth
strategy to utilize both domestic and international resources to
strengthen our competitiveness. In connection with this
objective, we established PetroChina International Limited, a
wholly owned subsidiary, to focus on international oil and gas
exploration and development. In April 2002, we acquired Devon
Energy Indonesia Limited from Devon Energy Corporation for a
price of RMB 2,068 million (US$250 million).
Devon Energy Indonesia Limited holds interests in a number of
crude oil and natural gas exploration and production projects in
Indonesia, including a 30% interest in an oil and gas production
sharing contract relating to the Jabung block located in
Sumatra, Indonesia. In April 2003, we acquired a 50% equity
interest in Amerada Hess Indonesia Holdings Limited, which holds
a 30% interest in the oil and gas production sharing contract
relating to the Jabung block, for a price of
RMB 679 million (US$82 million). In connection
with these acquisitions, we have entered into several
take-or-pay agreements with a number of Singaporian customers to
supply them with natural gas produced in Indonesia. In the year
ended December 31, 2004, our revenue generated from our
acquired interests in these crude oil and natural gas
exploration and production companies in Indonesia was
RMB 994 million (US$120 million). In addition to
our reserves in the Jabung block as a result of our acquisition
of Devon Energy Indonesia Limited, we had a share of the
reserves of approximately 15.2 million barrels of crude oil
and approximately 76.5 billion cubic feet of natural gas in
the Jabung block, totaling approximately 28.0 million
barrel-of-oil equivalent, as of December 31, 2004, as a
result of our acquisition of a 50% interest in Amerada Hess
Indonesia Holdings Co. Our share of the production in the Jabung
block in 2004 derived from our 50% interest in Amerada Hess
Indonesia Holdings Co. was approximately 1.07 million
barrels of crude oil and approximately 3.67 billion cubic
feet of natural gas for sale, totalling approximately
1.68 million barrels-of-oil equivalent.
In June 2005, we entered into a capital contribution agreement
with China National Oil and Gas Exploration and Development
Corporation, or CNODC, Central Asia Petroleum Company Limited
and Zhong You Kan Tan Kai Fa Company Limited, or Newco, to
acquire a 50% interest in Newco, one of CNODC’s
subsidiaries, for a consideration of
RMB 20,741 million (US$2,506 million) which will be
paid to Newco as our capital contribution. Under this agreement,
CNODC, a wholly owned subsidiary of CNPC, will transfer certain
of its overseas oil and natural gas assets to Newco by December
2005. By the completion of the transactions contemplated by this
agreement, each of CNODC and us will own a 50% interest in
Newco. We will have the right to appoint four of the seven
directors of Newco, which will enable us to maintain effective
control over Newco. We also entered into a transfer agreement
with Newco at the same time to transfer all of our interest in
PetroChina International Limited, the operating entity of our
oil and natural gas assets in Indonesia, to Newco for a
consideration of RMB 579 million (US$70 million).
Upon its completion, the acquisition of Newco through capital
contribution will allow us to have a 50% share of the oil and
natural gas assets currently held by CNPC and located in ten
countries, including, among others, Kazakhstan, Venezuela and
Peru. Upon consummation of the transactions
described above, we expect to significantly expand our overseas
operations, increase the level of our oil and gas reserves and
production volumes effectively and streamline our existing
overseas business in Indonesia with the acquired businesses.
We currently expect to complete the acquisition and the transfer
by December 2005 and February 2006, respectively, subject to
completion of all necessary procedures for transferring the
target assets to Newco, applicable government approvals,
approval by our minority shareholders and certain other
conditions set out in the capital contribution agreement and the
transfer agreement. After completion of the acquisition and the
transfer, CNODC plans to transfer its 50% interest in Newco to
CNPC, which will result in CNPC holding the 50% interest in
Newco directly.
In addition, we are currently assessing the feasibility of
making further investments in international oil and gas markets.
In the year ended December 31, 2004, we imported
approximately 175.1 million barrels of crude oil, as
compared to 123.9 million and 72.3 million barrels of
crude oil in the years ended December 31, 2003 and 2002,
respectively. A substantial portion of our import crude oil in
2004 was processed in our refineries. We plan to continue to
increase the import volume of crude oil in the future.
Our Corporate Organization and Shareholding
Structure
PetroChina was established as a joint stock company with limited
liability under the Company Law of the PRC on November 5,1999 as part of a restructuring in which CNPC transferred to us
most of the assets, liabilities and interests of CNPC relating
to its exploration and production, refining and marketing,
chemicals and natural gas businesses. CNPC retained the assets
and liabilities relating to its remaining businesses and
operations, including assets and liabilities relating to
international exploration and production and refining and
pipeline operations. CNPC is our primary provider of a wide
range of services and products. On April 7, 2000,
PetroChina completed a global offering of H shares and ADSs.
Currently, CNPC owns an approximate 90% interest in PetroChina.
The following chart illustrates our corporate organization and
our shareholding structure:
(1)
Indicates approximate shareholding.
(2)
Includes subsidiary companies and branches without legal person
status.
(3)
Represents enterprises directly administered and operated by
such segment.
(4)
Includes PetroChina Planning & Engineering Institute,
PetroChina Exploration & Development Research
Institute, PetroChina International Limited, PetroChina
International Co., Ltd and PetroChina Refining &
Chemicals Technology Research Center.
Our legal name is
, and
its English translation is PetroChina Company Limited. Our
headquarters are located at 16 Andelu, Dongcheng District,
Beijing, China, 100011, and our telephone number at this address
is (86-10) 8488-6270. Our website address is
www.petrochina.com.cn. The information on our website is not
part of this annual report.
Launch of New Logo
Effective December 26, 2004, we began using a new logo
“”
that is jointly owned by us and CNPC. We have filed an
application to register the new logo as a trademark with the
State Trademark Bureau of the PRC.
We are engaged in crude oil and natural gas exploration,
development and production in China. Substantially all of our
total estimated proved crude oil and natural gas reserves are
located in China, principally in northeastern, northern,
southwestern and northwestern China. The Songliao basin, located
in Heilongjiang and Jilin provinces in northeastern China,
including the Daqing and Jilin oil regions, accounted for 48% of
our proved crude oil reserves as of December 31, 2004 and
49% of our crude oil production in 2004. We also have
significant crude oil reserves and operations in the area around
the Bohai Bay. The Bohai Bay basin includes the Liaohe, Dagang,
Huabei and Jidong oil regions and accounted for 20% of our
proved crude oil reserves as of December 31, 2004 and 22%
of our crude oil production in 2004. Our proved natural gas
reserves and production are generally concentrated in
northwestern and southwestern China, specifically in the Erdos,
Tarim and Sichuan basins.
We currently hold exploration licenses covering a total area of
approximately 445 million acres and production licenses
covering a total area of approximately 15.7 million acres.
In 2004, our exploration and production segment had income from
operations of RMB 125,571 million
(US$15,172 million).
To further develop our crude oil and natural gas businesses, we
have applied to the Ministry of Land and Resources for oil and
gas exploration and production licenses covering the southern
part of the South China Sea to commence offshore crude oil and
natural gas exploration and production. We cannot assure you
that we will ultimately obtain these licenses or that we will
have sufficient capital to fund these activities.
Reserves
Our estimated proved reserves as of December 31, 2004
totaled approximately 10,940.5 million barrels of crude oil
and approximately 44,553.6 billion cubic feet of natural
gas. As of December 31, 2004, proved developed reserves
accounted for 80.0% and 37.7% of our total proved crude oil and
natural gas reserves, respectively. Total proved hydrocarbon
reserves on a barrels-of-oil equivalent basis increased by 3.4%
from approximately 17,764.2 million barrels-of-oil
equivalent as of the end of 2003 to approximately
18,366.1 million barrels-of-oil equivalent as of the end of
2004. Natural gas as a percentage of total proved hydrocarbon
reserves increased from 38.5% as of December 31, 2003 to
40.4% as of December 31, 2004.
In addition to our reserves in the Jabung block as a result of
our acquisition of Devon Energy Indonesia Limited, we had a
share of the reserves of approximately 15.2 million barrels
of crude oil and approximately 76.5 billion cubic feet of
natural gas in the Jabung block, totaling approximately
28.0 million barrel-of-oil equivalent, as of
December 31, 2004, as a result of our acquisition of a 50%
interest in Amerada Hess Indonesia Holdings Co.
The following table sets forth our estimated proved reserves and
proved developed reserves of crude oil and natural gas as of
December 31, 2002, 2003 and 2004. We prepared our reserve
estimates as of December 31, 2002, 2003 and 2004 on the
basis of a report prepared by DeGolyer and MacNaughton,
independent engineering consultants, in accordance with
Statement of Financial Accounting Standards No. 69, or
SFAS No. 69. Our reserve estimates include only crude
oil and natural gas which we believe can be reasonably produced
within the current terms of our production licenses. See
“Regulatory Matters — Exploration Licenses and
Production Licenses” for a discussion
of our production licenses. Also see
“Item 3 — Key Information — Risk
Factors” for a discussion of the uncertainty inherent in
the estimation of proved reserves.
Represents natural gas remaining after field separation for
condensate removal and reduction for flared gas.
(2)
Excludes our share of the purchased reserves of approximately
16.8 million barrels of crude oil and approximately
76.6 billion cubic feet of natural gas in the Jabung block
in Indonesia, totaling approximately 29.6 million
barrel-of-oil equivalent, as a result of our acquisition of a
50% interest in Amerada Hess Indonesia Holdings Co. in April
2003.
(3)
Excludes our share of the production of approximately
1.2 million barrels of crude oil and approximately
1.0 billion cubic feet of natural gas in the Jabung block
in Indonesia, totaling approximately 1.4 million
barrels-of-oil equivalent, as a result of our acquisition of a
50% interest in Amerada Hess Indonesia Holdings Co. in
April 2003.
(4)
Excludes our share of the reserve extensions and discoveries of
approximately 0.69 million barrels of crude oil and
approximately 4.60 billion cubic feet of natural gas in the
Jabung block in Indonesia, totaling approximately
1.45 million barrels-of-oil equivalent, as a result of our
acquisition of a 50% interest in Amerada Hess Indonesia Holdings
Co. in April 2003.
(5)
Excludes our share of the production of approximately
1.07 million barrels of crude oil and approximately
3.67 billion cubic feet of natural gas in the Jabung block
in Indonesia, totaling approximately 1.68 million
barrels-of-oil equivalent, as a result of our acquisition of a
50% interest in Amerada Hess Indonesia Holdings Co. in April
2003.
(6)
Excludes our share of the proved developed reserves of
approximately 4.1 million barrels of crude oil and
approximately 21.3 billion cubic feet of natural gas in the
Jabung block in Indonesia, totaling approximately
7.7 million barrel-of-oil equivalent, as a result of our
acquisition of a 50% interest in Amerada Hess Indonesia Holdings
Co. in April 2003.
(7)
Excludes our share of the proved developed reserves of
approximately 2.9 million barrels of crude oil and
approximately 19.2 billion cubic feet of natural gas in the
Jabung block in Indonesia, totalling approximately
6.1 million barrel-of-oil equivalent, as a result of our
acquisition of a 50% interest in Amerada Hess Indonesia Holdings
Co. in April 2003.
The following tables set forth our crude oil and natural gas
proved reserves and proved developed reserves by region as of
December 31, 2002, 2003 and 2004.
Represents the Jidong and Yumen oil regions and our oil and gas
fields in Indonesia as a result of our acquisition of Devon
Energy Indonesia Limited in April 2002.
(2)
Represents natural gas remaining after field separation for
condensate removal and reduction for flared gas.
We are currently conducting exploration and development efforts
in 11 provinces, two municipalities under the direct
administration of the central government and three autonomous
regions in China. In September 2002, the State Development
Planning Commission, the predecessor of the National Development
and Reform Commission, approved our proposal to explore, in
cooperation with foreign companies, fifteen additional crude oil
and natural gas fields with an aggregate area of
75,071 square kilometers located in Qaiddam basin, Erdos
basin, Sichuan basin and Xinjiang basin. We believe that we have
more extensive experience in the exploration and development of
crude oil and natural gas than any of our principal competitors
in China. Since early 1950s, we have worked for nearly five
decades to develop exploration and recovery technologies and
methods tailored to the specific geological conditions in China.
The following table sets forth the number of wells we drilled,
or in which we participated, and the results thereof, for the
periods indicated.
Year
Daqing
Xinjiang
Liaohe
Changqing
Huabei
Dagang
Sichuan
Others(1)
Total
2002
Net exploratory wells
drilled(2)
67
84
61
170
67
30
28
149
656
Crude oil
27
63
28
69
28
21
4
60
300
Natural gas
1
3
0
10
4
0
7
11
36
Dry(3)
39
18
33
91
35
9
17
78
320
Net development wells
drilled(2)
1,988
1,247
603
1,285
246
212
40
955
6,576
Crude oil
1,975
1,235
583
1,197
238
205
13
926
6,372
Natural gas
6
7
20
55
2
3
25
22
140
Dry(3)
7
5
0
33
6
4
2
7
64
2003
Net exploratory wells
drilled(2)
291
170
103
371
82
46
25
287
1,375
Crude oil
140
115
57
128
49
25
0
99
613
Natural gas
1
11
2
22
0
0
12
5
53
Dry(3)
150
44
44
221
33
21
13
183
709
Net development wells
drilled(2)
2,986
1,363
547
1,677
244
202
61
1,192
8,272
Crude oil
2,975
1,354
528
1,489
241
199
8
1,173
7,967
Natural gas
4
4
8
134
0
3
36
17
206
Dry(3)
7
5
11
54
3
0
17
2
99
2004
Net exploratory wells
drilled(2)
221
153
68
427
96
53
32
355
1,405
Crude oil
85
85
40
201
49
32
4
172
668
Natural gas
3
0
0
22
0
0
17
9
51
Dry(3)
133
68
28
204
47
21
11
174
686
Net development wells
drilled(2)
2,857
1,440
622
1,675
224
188
76
1,463
8,545
Crude oil
2,853
1,440
605
1,597
223
184
6
1,387
8,295
Natural gas
4
0
13
46
1
3
56
73
196
Dry(3)
0
0
4
32
0
1
14
3
54
(1)
Represents the Jilin, Tarim, Tuha, Qinghai, Jidong and Yumen oil
regions.
(2)
“Net” wells refer to the wells after deducting
interests of others. No third parties own any interests in any
of our wells.
(3)
“Dry” wells are wells with insufficient reserves to
sustain commercial production.
The following table sets forth our interests in developed and
undeveloped acreage by oil region and in productive crude oil
and natural gas wells as of December 31, 2004.
Acreage(1) (thousands of acres)
Productive wells(1)
Developed
Undeveloped
Oil region
Crude oil
Natural gas
Crude oil
Natural gas
Crude oil
Natural gas
Daqing
37,833
145
625.7
41.2
615.4
79.6
Liaohe
16,577
587
167.9
28.2
117.6
11.1
Xinjiang
15,182
70
317.6
39.1
53.4
8.8
Jilin
12,623
42
267.6
19.5
248.2
25.4
Changqing
9,864
514
271.7
632.0
386.6
2,143.0
Huabei
4,833
78
100.1
9.5
101.8
6.6
Dagang
3,181
53
86.4
15.3
75.5
23.5
Tuha
1,142
43
33.6
11.4
19.7
16.5
Tarim
565
79
113.1
72.2
47.3
84.8
Sichuan
396
987
324.0
372.6
8.2
87.9
Other
regions(2)
2,942
167
65.8
10.9
16.1
25.4
Total
105,138
2,765
2,373.5
1,251.9
1,689.8
2,512.6
(1)
Includes all wells and acreage in which we have an interest. No
third parties own any interests in any of our wells or acreage.
(2)
Represents the Qinghai, Jidong and Yumen oil regions.
Approximately 74.6% of our proved crude oil reserves are
concentrated in the Daqing, Liaohe and Xinjiang oil regions and
the Changqing oil and gas region, and approximately 87.9% of our
proved natural gas reserves are concentrated in the Changqing
oil and gas region, the Tarim oil region, the Sichuan gas region
and the Qinghai oil region. We believe that the Erdos, Junggar,
and Songliao basins and Bohai Bay have the highest potential for
increasing our crude oil reserve base through future exploration
and development, and that the Erdos, Sichuan and Qaiddam basins
have the highest potential for increasing our natural gas
reserve base through future exploration and development.
Production
The following table sets forth our historical average net daily
crude oil and natural gas production by region and our average
sales price for the periods ended December 31, 2002, 2003
and 2004.
For the year ended
December 31,
% of
2002
2003
2004
2004 total
Crude oil
production(1)
(thousands of barrels per day, except percentages or otherwise
indicated)
(millions of cubic feet per day, except percentages or otherwise
indicated)
Sichuan
808.2
849.0
905.7
39.6
Changqing
335.7
440.3
651.4
28.5
Daqing
137.7
136.2
135.4
5.9
Qinghai
92.3
122.5
145.5
6.4
Tuha
69.8
82.6
92.2
4.0
Xinjiang
53.3
75.9
95.7
4.2
Liaohe
56.0
57.6
58.7
2.6
Huabei
42.1
45.8
44.2
1.9
Tarim
24.6
34.7
89.2
3.9
Dagang
30.6
27.8
26.5
1.1
Other(4)
7.2
18.8
43.8
1.9
Total
1,657.5
1,891.2
2,288.3
100.0
%
Annual production (Bcf)
605.0
690.3
837.5
Average sales price
(RMB per Mcf)
19.20
19.37
21.11
(US$ per Mcf)
2.32
2.34
2.55
(1)
Production volumes for each region include our share of the
production from all of our cooperative projects with foreign
companies in that region.
(2)
Represents production from the Qinghai, Jidong and Yumen oil
regions, the Sichuan gas region and our share of production from
the oil and gas fields in Indonesia as a result of our
acquisition of Devon Energy Indonesia Limited in April 2002.
(3)
Represents production of natural gas for sale.
(4)
Represents production from the Jilin, Jidong and Yumen oil
regions and our share of production the oil and gas fields in
Indonesia as a result of our acquisition of Devon Energy
Indonesia Limited in April 2002.
In 2004, we supplied approximately 82.0%, 11.2%, 4.2% and 0.5%
of our total crude oil sales to our refineries, Sinopec’s
refineries, regional refineries controlled by unrelated third
parties in China and companies or entities outside China,
respectively. We entered into a crude oil mutual supply
framework agreement with Sinopec on December 1, 2004 for
the supply of crude oil to each other’s
refineries in 2005. Under this agreement, we agreed in principle
to supply 59.1 million barrels of crude oil to Sinopec, and
Sinopec agreed in principle to supply to us approximately
10.3 million barrels of crude oil in 2005 at negotiated
prices based on the Singapore market FOB prices for crude oil.
See “Item 5 — Operating and Financial Review
and Prospects — General — Factors Affecting
Results of Operations — Crude Oil Prices” for a
detailed discussion of the crude oil premium and discount
calculation agreement and its supplemental agreement. For the
years ended December 31, 2002, 2003 and 2004, the average
lifting costs of our crude oil and natural production were
US$4.34 per barrel-of-oil equivalent, US$4.39 per
barrel-of-oil equivalent and US$4.61 per barrel-of-oil
equivalent, respectively.
Principal Oil and Gas Regions
Daqing Oil Region
The Daqing oil region, our largest oil and gas producing
property, is located in the Songliao basin and covers an area of
approximately one million acres. The successful discovery and
development of the oil fields in the Daqing oil region marked a
critical breakthrough in the history of both our company and the
PRC oil and gas industry. In terms of proved hydrocarbon
reserves and annual production, the Daqing oil region is the
largest oil region in China and one of the most prolific oil and
gas properties in the world. We commenced exploration activities
in the Daqing oil region in 1955 and discovered oil in the
region in 1959. Annual crude oil production volume in the Daqing
oil region reached one million barrels per day in 1976 and
remained relatively stable until 2002. In 2003 and 2004, our
crude oil production volume in the Daqing oil region fell below
one million barrels per day to 985.3 thousand barrels per
day and 942.0 thousand barrels per day, respectively. As of
December 31, 2004, we produced crude oil from
20 fields in the Daqing oil region.
As of December 31, 2004, our proved crude oil reserves in
the Daqing oil region were 4,615.0 million barrels,
representing 42.2% of our total proved crude oil reserves. The
proved crude oil reserves in our Daqing oil region have
gradually decreased since 1996 because the crude oil production
exceeded the crude oil reserve additions in our Daqing oil
region in each year since 1996. As of December 31, 2002,
2003 and 2004, the proved crude oil reserves in our Daqing oil
region were 5,073.8 million barrels, 4,832.3 million
barrels and 4,615.0 million barrels, respectively. As a
result, we decreased the crude oil production in our Daqing oil
region over past years, and plan to continue to decrease the
crude oil production in our Daqing oil region each year in the
next few years. In 2004, our oil fields in the Daqing oil region
produced an average of 942.0 thousand barrels of crude oil
per day, representing approximately 44.4% of our total daily
crude oil production. The crude oil production in our Daqing oil
region decreased by 4.1% from 359.6 million barrels in 2003
to 344.8 million barrels in 2004. In 2004, the crude oil
reserve-to-production ratio of the Daqing oil region was
13.4 years, similar to that in 2003.
The crude oil we produce in the Daqing oil region has an average
API gravity of 35.7 degrees. In 2004, the crude oil we
produced in the Daqing oil region had an average water cut of
89.1%, increased from the average water cut of 88.4% in 2003.
Because the crude oil in the Daqing oil region is primarily
located in large reservoirs with relatively moderate depths of
approximately 900 meters to 1,500 meters and with
relatively simple geological structures and most of the crude
oil produced at Daqing is medium viscosity oil, lifting costs in
the Daqing oil region are relatively low among our oil regions.
Crude oil produced using enhanced recovery techniques accounted
for 22.6%, 25.1% and 29.9% of our crude oil production from the
Daqing oil region in 2002, 2003 and 2004, respectively.
Because our oil fields in the Daqing oil region are relatively
mature, the difficulty of extracting crude oil from these fields
has increased in recent years and is likely to continue to
increase gradually in the future. As a result, our lifting costs
at these fields increased by 9.76% from US$3.79 per barrel
for the year ended December 31, 2003 to US$4.16 per
barrel for the year ended
December 31, 2004. However, we have adopted a number of
measures to contain the increase in our lifting costs at these
fields. Those measures include:
•
terminating unprofitable or marginally profitable exploration
and production activities;
•
reducing expenditures on ancillary ground facilities in the
outer areas of the Daqing oil region;
•
increasing preventive maintenance to prolong the useful life of
our production facilities; and
•
applying new technologies to reduce energy consumption.
Although we plan to continue to carry out these measures to
contain the increase in our lifting costs, we expect our lifting
costs at these fields will continue to increase gradually in the
future.
We have an extensive transportation infrastructure network to
transport crude oil produced in the Daqing oil region to
internal and external customers in northeastern China and
beyond. Crude oil pipelines link our oil fields in the Daqing
oil region to the port of Dalian and the port of Qinhuangdao in
Bohai Bay, providing efficient transportation for selling Daqing
crude oil. These crude oil pipelines have an aggregate length of
2,590 kilometers and an aggregate throughput capacity of
approximately 900 thousand barrels per day.
Daqing’s crude oil has a low sulfur and high paraffin
content. As many refineries in China, particularly those in
northeastern China, are configured to refine Daqing crude oil,
we have a stable market for the crude oil we produce in the
Daqing oil region. In 2004, we refined approximately 75.1% of
Daqing crude oil in our own refineries, exported approximately
1.1% and sold the remaining portion to Sinopec or local
refineries.
Liaohe Oil Region
The Liaohe oil region is our second largest crude oil producing
property and is located in the northern part of the Bohai Bay
basin. We began commercial production in the Liaohe oil region
in 1971. The Liaohe oil region covers a total area of
approximately 580,000 acres. The Liaohe oil region is
China’s third largest oil region in terms of production in
2004.
As of December 31, 2004, proved crude oil reserves in the
Liaohe oil region were 1,123.1 million barrels,
representing 10.3% of our total proved oil reserves. In 2004,
our oil fields in the Liaohe oil region produced an average of
245.4 thousand barrels of crude oil per day, representing
approximately 11.6% of our total daily crude oil production. In
2004, the crude oil reserve-to-production ratio in the Liaohe
oil region was 12.5 years. In 2004, the crude oil we
produced in the Liaohe oil region had an average API gravity of
26 degrees and an average water cut of 74.2%. We have
proved crude oil reserves in 37 fields in the Liaohe oil
region, all of which are currently in production. We produce
several varieties of crude oil in the Liaohe oil region, ranging
from light crude oil to heavy crude oil and high pour point
crude oil.
We have easy access to crude oil pipelines for Liaohe crude oil.
The pipelines linking Daqing to Dalian port and Qinhuangdao port
pass through the Liaohe oil region. In 2004, we sold about
approximately 83.7% of the crude oil we produced at the Liaohe
oil region to our own refineries.
Xinjiang Oil Region
The Xinjiang oil region is located in the Junggar basin in
northwestern China. We commenced our operations in the Xinjiang
oil region in 1951. The Xinjiang oil region covers a total area
of approximately 900 thousand acres. As of
December 31, 2004, our proved crude oil reserves in the
Xinjiang oil region were 1,232.1 million barrels,
representing 11.3% of our total proved crude oil reserves. In
2004, our oil fields in the Xinjiang oil region produced an
average of 227.1 thousand barrels of crude oil per day,
representing approximately 10.7% of our total crude oil
production. In 2004, the crude oil reserve-to-production ratio
at the Xinjiang oil region was 14.8 years. In 2004, the
crude oil we produced in the Xinjiang oil region had an average
API gravity of 36.8 degrees and an average water cut of
72.6%.
Sichuan Gas Region
The Sichuan gas region is the largest natural gas region in
China in terms of annual natural gas production. We began
natural gas exploration and production in Sichuan in the 1950s.
The Sichuan gas region covers a total area of approximately
2.3 million acres. The natural gas reserve-to-production
ratio in the Sichuan gas region was 26.3 years in 2004. As
of December 31, 2004, we had 90 natural gas fields
under development in the Sichuan gas region.
As of December 31, 2004, our proved natural gas reserves in
the Sichuan gas region were 8,729.8 billion cubic feet,
representing 19.6% of our total proved natural gas reserves and
an increase of 7.4% from 8,131.4 billion cubic feet as of
December 31, 2003. In 2004, our natural gas production for
sale in the Sichuan gas region reached 331.5 billion cubic
feet, representing 39.6% of our total natural gas production for
sale and an increase of 7.0% from 309.9 billion cubic feet
in 2003.
In 2002, we discovered and proved significant natural gas
reserves in Luojiazhai gas field in the Sichuan gas region. As
of December 31, 2004, Luojiazhai gas field had a total
proved natural gas reserve of 1,143.5 billion cubic feet.
Currently, Luojiazhai gas field is the largest gas field in the
Sichuan basin. We have developed a broad range of technologies
relating to natural gas exploration, production, pipeline
systems and marketing activities tailored to local conditions in
Sichuan. We intend to continue to increase our natural gas
reserves, annual natural gas production and revenues in the
Sichuan gas region by adopting advanced technologies.
In November 2002, we obtained approval from the State
Development Planning Commission, the predecessor of the National
Development and Reform Commission, to construct pipelines to
transmit natural gas produced in the Sichuan gas region to major
cities in central China. This is known as the Zhong County to
Wuhan City natural gas pipeline project. By the end of 2004, we
completed the construction and commenced commercial operation of
the main line of the Zhong County to Wuhan City natural gas
pipeline and its Xiangfan branch pipeline and Huangshi branch
pipeline. In addition, we completed the welding of the main part
of the Xiangtan branch pipeline and expect to complete the
construction and commence the commercial operation of this
branch pipeline by the end of June 2005. See
“— Natural Gas and Pipeline — Expansion
of Our Natural Gas Transmission and Marketing Business” for
a discussion of the Zhong County to Wuhan City natural gas
pipeline project.
Changqing Oil and Gas Region
The Changqing oil and gas region covers parts of Shaanxi
Province and Gansu Province and the Ningxia and Inner Mongolia
Autonomous Regions. We commenced operations in the Changqing oil
and gas region in 1970. In 2004, we produced 60.3 million
barrels of crude oil in the Changqing oil and gas region.
In the early 1990s, we discovered the Changqing gas field, which
had total estimated proved natural gas reserves of
14,932.7 billion cubic feet as of December 31, 2004,
representing 33.5% of our total proved natural gas reserves. In
January 2001, we discovered the Sulige gas field with total
proved natural gas reserves of 2,500.2 billion cubic feet.
In 2004 we produced 238.4 billion cubic feet of natural gas
for sale in the Changqing oil and gas region, representing an
increase of 48.4% from 160.7 billion cubic feet in 2003.
The establishment of a natural gas pipeline from Shaanxi to
Beijing in 1997 has significantly expanded the range of target
markets for natural gas produced in the Changqing oil and gas
region over the years. In the eight years following the
establishment of the pipeline, we significantly increased daily
natural gas production for sale in the Changqing oil and gas
region. We are constructing an additional natural gas pipeline
from Shaanxi to Beijing, which is designed to have an annual
throughput capacity of 423.8 billion cubic feet of natural
gas upon its
completion, and expect to complete the construction of this
pipeline in 2005. See “— Natural Gas and
Pipeline — Expansion of Our Natural Gas Transmission
and Marketing Business” for a discussion of this additional
Shaanxi to Beijing natural gas pipeline project.
Tarim Oil and Gas Region
The Tarim oil and gas region is located in the Tarim basin in
northwestern China with a total area of approximately
590 thousand acres. As of December 31, 2004, our
proved crude oil reserves in the Tarim oil region were
507.6 million barrels. The Kela 2 natural gas field,
which we discovered in 1998 in the Tarim oil and gas region, had
estimated proved natural gas reserves of approximately
6,320.5 billion cubic feet as of December 31, 2004. As
of December 31, 2004, the proved natural gas reserves in
the Tarim oil and gas region reached 10,897.8 billion cubic
feet, representing 24.5% of our total proved natural gas
reserves. Currently, the Kela 2 natural gas field is the largest
natural gas field in China in terms of proved natural gas
reserves.
In 2004, we produced 32.6 billion cubic feet of natural gas
for sale in the Tarim oil and gas region. We have completed the
construction of the pipelines to deliver natural gas in the
Tarim oil and gas region to the central and eastern regions of
China where there is strong demand for natural gas transmitted
through our West to East natural gas pipeline project. See
“— Natural Gas and Pipeline — Expansion
of Our Natural Gas Transmission and Marketing Business” for
a discussion of our West to East natural gas pipeline project.
We plan to significantly increase our natural gas production in
the Tarim oil and gas region as a result of the commencement of
the operation of this West to East natural gas pipeline.
We engage in refining and marketing operations in China through
25 refineries, 22 regional sales and distribution branch
companies and one lubricants branch company. These operations
include crude oil refining and the transportation, storage and
marketing of refined products, including gasoline, diesel,
kerosene and lubricant, in wholesale, retail and export markets.
In 2004, our refining and marketing segment had income from
operations of RMB 11,981 million
(US$1,448 million).
The following sets forth the highlights of our refining and
marketing segment in 2004:
•
as of December 31, 2004, our refineries’ annual
primary distillation capacity totaled 771.4 million barrels
of crude oil per year, or 2,113.5 thousand barrels per day;
•
we processed 697.8 million barrels of crude oil, or
1.9 million barrels per day;
•
we produced approximately 60.2 million tons of gasoline,
diesel and kerosene and sold approximately 67.0 million
tons of these products;
•
as of December 31, 2004, our retail distribution network
consisted of:
—
14,039 service stations owned and operated by us,
—
427 service stations wholly owned by CNPC or jointly owned by
CNPC and third parties and to which we provide supervisory
support, and
—
2,937 franchise service stations owned and operated by third
parties with which we have long-term refined product supply
agreements; and
•
in 2004, our service stations, which are located throughout
China, sold approximately 30.2 million tons of gasoline and
diesel, representing 46.5% of the total of these products sold
through our marketing operations.
Refining
Our refineries are located in eight provinces, three autonomous
regions and one municipality in the northeastern, northwestern
and northern regions of China.
Refined Products
We produce a wide range of refined products at our refineries.
Some of our refined products are consumed internally as
feedstocks for our chemical operations. The table below sets
forth production volume for our principal refined products for
each of the three years ended December 31, 2002, 2003 and
2004.
We generally adjust our product mix to reflect market demand and
to focus on the production of high margin products. This has
resulted in an overall modest increase in the production of
lighter refined products which generally are higher margin
products, such as gasoline. Our production volume of lubricants,
a high margin product, decreased 12.2% from
1,358.9 thousand tons in 2002 to 1,192.5 thousand tons
in 2003, due primarily to the shutting down of inefficient
lubricant production facilities in Jilin Petrochemical and
Dagang Petrochemical and the maintenance of lubricant production
facilities in Daqing Refinery and Daqing Petrochemical. In 2004,
we increased our production volume of lubricants to
1,467.8 thousand tons to meet the growing market demands
for lubricants. We have decreased our production of low margin
products, such as fuel oil.
In recent years, we have made significant capital investments in
facility expansions and upgrades to improve product quality to
meet evolving market demand and environmental requirements in
China. In each of the three years ended December 31, 2002,
2003 and 2004, our capital expenditures for our refining and
marketing segment were RMB 10,503 million,
RMB 12,650 million, and RMB 17,467 million
(US$2,110 million), respectively. These capital
expenditures were incurred primarily in connection with our
refining facility upgrades and expansion of our refined product
retail marketing network and storage infrastructure. We built or
renovated 19 refining facilities in 2004, including, among
others, the hydrocracking unit at Daqing Petrochemical with a
designed annual capacity of 1,200 thousand tons and the
delayed coking unit at Karamy Petrochemical with an annual
capacity of 1,200 thousand tons. In 2004, we acquired or
constructed an aggregate of 2,276 service stations that are
owned and operated by us. In addition, we have also focused on
enhancing our processing technologies and methods. These efforts
have enabled us to improve the quality of refined products at
our refineries, particularly that of gasoline and diesel. We
believe that our refined products generally meet product
specification and environmental protection requirements as set
by the PRC government, including the specification limiting the
olefin and sulfur content in gasoline.
Our Refineries
Most of our refineries are strategically located close to our
crude oil storage facilities, along our crude oil and refined
product transmission pipelines and/or railways. These systems
provide our refineries with secure supplies of crude oil and
facilitate our distribution of refined products to the domestic
markets. In each of the three years ended December 31,2002, 2003 and 2004, our exploration and production operations
supplied approximately 94%, 86% and 84% respectively, of the
crude oil processed in our refineries.
The table below sets forth certain operating statistics
regarding our refineries as of December 31, 2002, 2003 and
2004.
Represents the primary distillation capacity of crude oil and
condensate.
(2)
Includes Lanzhou Refinery, which was merged into Lanzhou
Petrochemical in October 2000 as part of our ongoing
restructuring.
(3)
Includes a 19.05% minority interest held by unrelated third
parties in Jinzhou Petrochemical Company Limited in the relevant
periods.
(4)
Includes Jilin Chemical Industrial Company Limited, in which we
held a 67.29% equity interest in the relevant periods. Data
regarding the primary distillation capacity, refining throughput
and conversion equivalent of Jilin Petrochemical includes a
32.71% minority interest held by unrelated third parties in
Jilin Chemical Industrial Company Limited in the relevant
periods.
(5)
Stated in fluid catalytic cracking, delayed coking and
hydrocracking equivalent/ topping (percentage by weight), based
on 100% of balanced distillation capacity.
In each of the three years ended December 31, 2002, 2003
and 2004, the average utilization rate of the primary
distillation capacity at our refineries was 79.1%, 85.6% and
93.2%, respectively. The average yield for our four principal
refined products (gasoline, kerosene, diesel and lubricants) at
our refineries was 63.7%, 64.2% and 65.3% respectively, in the
same periods. “Yield” represents the number of tons of
a refined product expressed as a percentage of the number of
tons of crude oil from which that product is processed. In each
of the three years ended December 31, 2002, 2003 and 2004,
the yield for all refined products at our refineries was 91.3%,
91.4% and 91.5% respectively.
Dalian Petrochemical, Fushun Petrochemical and Lanzhou
Petrochemical were our leading refineries in terms of both
primary distillation capacity and throughput in 2004. They are
all located close to our major oil fields in the northeast and
northwest regions of China and produce a wide
range of refined products. In October 2000, we consolidate
Lanzhou Refinery into Lanzhou Petrochemical as part of our
ongoing restructuring. Lanzhou Petrochemical has a strategic
position in our plan to expand our markets in refined product
sales in the southwestern and central regions of China. It is
located in the northwestern part of China, providing easy access
to markets in the southwestern and central regions in China. In
2002, we increased the primary distillation capacity at Dalian
Petrochemical by 34.5 thousand barrels per day. In 2002,
2003 and 2004, we increased the throughput of Dalian
Petrochemical by 15.0 thousand barrels per day,
51.1 thousand barrels per day and 54.6 thousand
barrels per day, respectively. We expect the throughput of
Dalian Petrochemical to continue to increase in the future. As
of December 31, 2004, these four refineries had an
aggregate primary distillation capacity of 267.5 million
barrels per year, or 732.9 thousand barrels per day,
representing approximately 34.7% of the total primary
distillation capacity of all our refineries as of the same date.
In 2004, these four refineries processed an aggregate of
259.7 million barrels of crude oil, or 709.6 thousand
barrels per day, representing approximately 37.2% of our total
throughput in the same period.
Marketing
We market a wide range of refined products, including gasoline,
diesel, kerosene and lubricants, through an extensive network of
sales personnel and independent distributors and a broad
wholesale and retail distribution system across China. As of
December 31, 2004, our marketing network consisted of:
•
approximately 790 regional wholesale distribution outlets
nationwide. Substantially all of these outlets are located in
high demand areas such as economic centers across China,
particularly in the coastal areas, along major railways and
along the Yangtze River; and
•
14,039 service stations owned and operated by us,
427 service stations wholly owned by CNPC or jointly owned
by CNPC and third parties that exclusively sell refined products
produced or supplied by us and to which we provide supervisory
support under contractual arrangement, and 2,937 franchise
service stations owned and operated by third parties.
In September 2002, we acquired from CNPC all of the assets and
liabilities of 686 refined products marketing enterprises. These
assets consist primarily of 2,994 service stations and
478 storage facilities located in more than 500 counties in
15 provinces and autonomous regions in the PRC. We believe
that the addition of these service stations and storage
facilities has provided us with an important platform to further
expand and develop our refined product sales and distribution
network and develop our retail distribution channels.
In 2004, we sold approximately 64.9 million tons of
gasoline and diesel. The PRC government and other
institutional customers, including railway, transportation and
fishery operators, are our long-term purchasers of the gasoline
and diesel that we produce. We sell gasoline and diesel to these
customers at the ex-factory median prices published by the
PRC government with an 8% floating range. See
“— Regulatory Matters —
Pricing — Refined Products” for a discussion of
refined product pricing. In 2004, sales of gasoline and diesel
to these customers accounted for approximately 1% and 10% of our
total sales of gasoline and diesel, respectively. The following
table
sets forth our refined product sales volumes by principal
product category for each of the three years ended
December 31, 2002, 2003 and 2004.
Year ended December 31,
Product
2002
2003
2004
(in thousands of tons)
Diesel
33,167.1
36,680.7
43,178.3
Gasoline
19,001.3
19,872.5
21,714.2
Fuel oil
4,327.8
5,748.7
5,747.4
Naphtha
4,142.5
4,836.2
5,325.9
Kerosene
1,884.5
1,789.1
2,116.2
Lubricants
1,997.0
1,774.5
1,974.0
Asphalt
1,344.0
1,711.3
2,348.7
Paraffin
868.7
1,055.5
1,138.1
Total
66,732.9
73,468.5
83,542.8
Wholesale Marketing
We sell refined products both directly and through independent
distributors into various wholesale markets, as well as to
utility, commercial, petrochemical, aviation, agricultural,
fishery and transportation companies in China. We sold
approximately 64.9 million tons of gasoline and diesel
through our wholesale operations in 2004, including transfers to
our retail operations. We sold approximately 1.0 million
tons of gasoline and diesel through our wholesale operations to
Sinopec in 2004, representing approximately 2% of our total
sales of these products in the same period. In 2004, we sold
approximately 18.7 million tons of our other principal
refined products.
As part of the restructuring of the CNPC group in 1999, we
completed the implementation of a plan to consolidate our
wholesale operations and reduce distribution layers and the
number of wholesale outlets. In 2001, we completed a series of
initiatives to change the business scope, adjust the business
functions or shut down operations in respect of 558 county level
outlets. In addition, we merged 18 municipal level outlets in
2001. In 2002, we continued these initiatives by integrating our
markets in Shandong Province and Anhui Province, enhancing our
logistics system and shutting down a number of inefficient oil
storage facilities. In 2003, we further consolidated our
wholesale operations. In 2004, we consolidated our sales
operations in the southern and central regions of China,
respectively, by establishing a branch company in each area
which is fully engaged in sales and marketing. We believe the
implementation of this strategy has increased the overall
efficiency of our marketing operations.
Retail Marketing
In 2004, we sold approximately 30.2 million tons of
gasoline and diesel through our service station network,
accounting for 46.5% of the total of these products sold through
our marketing operations in the same period. Although sales
volumes vary significantly by geographic region, the weighted
average sales volume of gasoline and diesel per business day at
our service station network in 2002, 2003 and 2004 was 4.8 tons,
4.9 tons and 5.5 tons per service station, respectively.
We sell our refined products to service stations owned and
operated by CNPC. These service stations sell exclusively
refined products produced or supplied by us in accordance with
contractual arrangements between CNPC and us. Under these
contractual arrangements, we also provide supervisory support to
these service stations.
We currently operate a majority of our service stations under
the tradename of “PetroChina”. We intend to gradually
adopt our new logo “
”
for all our service stations in the next few years.
Most of the service stations in our service station network are
concentrated in the northern, northeastern and northwestern
regions of China where we have a dominant wholesale market
position. However, the eastern and southern regions of China
have a higher demand for gasoline and diesel. We have made
significant efforts in recent years to expand our sales and
market share in those regions through expanding the number of
our service stations and storage facilities in those regions. As
part of our expansion initiatives, in 2001, we commenced
negotiations with BP Amoco p.l.c. with the purposes of
establishing a Sino-foreign equity joint venture to engage in
the development and operation of service stations in Guangdong
Province. On May 14, 2004, we entered into the Joint
Venture Contract and the Articles of Association with BP Global
Investments Limited, a subsidiary of BP Amoco p.l.c., to
form BP PetroChina Petroleum Company Limited in Guangdong
Province. We and BP Global Investments Limited hold 51% and 49%
equity interests in BP PetroChina Petroleum Company Limited,
respectively. We expect that BP PetroChina Petroleum Company
Limited will build, acquire and manage approximately 500 service
stations in Guangdong Province within three years from its
establishment. As of December 31, 2004, BP PetroChina
Petroleum Company Limited owned and operated 395 service
stations in the eastern and northern regions of Guangdong
Province.
We invested a total of RMB 10,117 million in expanding our
service station network in 2004, of which 71% was invested in
the eastern and southern regions of China. In 2004, we sold
approximately 13,130 thousand tons of gasoline and diesel
through our owned and franchised service stations in these
regions, as compared to approximately 8,280 thousand tons and
approximately 9,916 thousand tons we sold in 2002 and 2003,
respectively.
In 2004, we acquired or constructed an aggregate of 2,276
service stations that are owned and operated by us, of which
1,423 are in the eastern and southern regions of China. We plan
to further increase our retail market share and improve the
efficiency of our retail operations, with a continued focus on
the eastern and southern regions of China. We plan to invest
approximately RMB 7,300 million in 2005 to expand our
service station network by adding approximately 1,500 new
service stations.
The following table sets forth the number of the service
stations in our marketing network as of December 31, 2004:
Owned and operated by
us(1)
14,039
Wholly owned by CNPC or jointly owned by CNPC and third
parties(2)
427
Franchised
2,937
Total
17,403
(1)
Includes 395 service stations owned and operated by
BP PetroChina Petroleum Company Limited.
(2)
These service stations exclusively sell refined products
produced or supplied by us. We also provide supervisory support
to these service stations.
In order to improve the efficiency and profitability of our
existing service station network, we standardize the interior
and exterior of our service stations, our service procedures,
staff uniforms and the product quality of all our service
stations. We are in the process of promoting the use of pre-paid
gasoline/ diesel filling cards at our service stations. We have
equipped 620 service stations located in 14 municipalities
with facilities that allow customers to purchase gasoline or
diesel with their pre-paid filling cards. In addition to selling
gasoline and diesel, we have gradually increased the sale of
lubricants and other non-fuel products at our service stations.
Through 12 chemical plants, we produce basic petrochemical
products, derivative petrochemical products, and other chemical
products. In 2004, our chemicals and marketing segment had
income from operations of RMB 7,655 million
(US$925 million).
Our chemical plants are located in five provinces and three
autonomous regions in China. Most of our chemical plants are
co-located with our refineries and are also connected with the
refineries by pipelines, providing additional production
flexibility and opportunities for cost competitiveness. Our
exploration and production, refining and natural gas operations
supply substantially all of the hydrocarbon feedstock
requirements for our chemicals operations. We believe that the
proximity of our refineries to our chemical plants promotes
efficiency in production, secures feedstock supply and minimizes
the risk of production interruption. Our production capacity and
our market share in China for chemical products allow us to
solidify our dominant position in the northern and western
regions of China. In addition, our stable customer base in the
eastern and southern regions of China provides us with the
opportunity to expand our market share in these regions.
Our Chemical Products
The table below sets forth the production volumes of our
principal chemical products for each of the three years ended
December 31, 2002, 2003 and 2004.
We are one of the major producers of ethylene in China. We use
the bulk of the ethylene we produce as a principal feedstock for
the production of many chemical products, such as polyethylene.
In 2001, we implemented a five-year plan to invest RMB
10,000 million to upgrade our ethylene production
facilities at Daqing Petrochemical, Jilin Petrochemical,
Liaoyang Petrochemical,
Dushanzi Petrochemical and Lanzhou Petrochemical. As of
December 31, 2004, we had invested approximately RMB
4,187 million (US$506 million) for these upgrade
projects. Except for the on-going project at Lanzhou
Petrochemical, we have completed all of the other upgrading
projects we implemented in 2001. As of December 31, 2004,
we had a total ethylene production capacity of 1,850 thousand
tons per year, as compared to 1,730 thousand tons of ethylene
production capacity as of December 31, 2003. In 2004, the
production volume of ethylene increased by 1.5% from
1,818 thousand tons in 2003 to 1,846 thousand tons. We are
currently conducting further upgrading of our ethylene
production facilities. We expect to complete the further
upgrading of the ethylene production facilities at Daqing
Petrochemical, Lanzhou Petrochemical, Jilin Petrochemical and
Liaoyang Petrochemical prior to 2007, and the ethylene
production facilities at Dushanzi Petrochemical by 2008. The
petrochemical ethylene projects at Fushun Petrochemical and
Sichuan Petrochemical are pending for approval of the National
Development and Reform Commission. We expect to have a total
ethylene production capacity of 2,960 thousand tons per year in
2007.
In 2004, the monthly average capacity utilization rate at our
ethylene production facilities was 99.6%. The cost of ethylene
production is an important component of our overall chemical
production costs. Reduction of energy consumption and raw
material loss is a key factor in reducing ethylene production
costs. After we implemented a series of measures in 2003 and
2004 to reduce energy consumption, the average energy
consumption of our ethylene production facilities decreased from
794.6 kilograms of standard oil per ton in 2002 to 754.1
kilograms in 2003 and 734.3 kilograms in 2004. However, this is
still significantly higher than the world average of 500 to 690
kilograms of standard oil per ton. We plan to continue to
implement measures to reduce our energy consumption.
In addition, high ethylene percentage loss has also contributed
to the relative high cost of our ethylene production. In order
to reduce high ethylene percentage loss in our ethylene
production, we have implemented a series of measures at our
chemical plants in the past two years, such as improving our
process management of key units for ethylene production,
reducing unplanned temporary interruptions of our chemical
facilities and enhancing pyrolysis material composition and
production plans. As a result, the average ethylene percentage
loss at our chemical plants decreased from 0.83% in 2002 to
0.57% in 2003 and to 0.54% in 2004. We believe that these
measures will enable us to continue to reduce the cost of our
ethylene production without incurring significant capital
expenditures.
We produce a number of synthetic resin products, including
polyethylene, polypropylene and ABS. As of December 31,2004, our production capacities for polyethylene, polypropylene
and ABS were 1,212.5 thousand tons, 988.5 thousand tons and 220
thousand tons, respectively. In 2004, we produced 1,309.5
thousand tons, 961.6 thousand tons and 228.1 thousand tons of
polyethylene, polypropylene and ABS, respectively. Currently,
China imports significant volumes of these products to meet the
domestic demand due to an inadequate supply of high-quality
domestically produced polyethylene, polypropylene and ABS. We
intend to increase the production, and improve the quality, of
these products. We are currently building new production
facilities with new technology for the production of these
products in Daqing Petrochemical, Daqing Refining and Chemical,
Jilin Petrochemical, Lanzhou Petrochemical and other branch
companies. We experienced a decrease in the production volume of
ABS in 2002. This decrease was due primarily to the termination
of the lease for a major ABS production line at Daqing
Petrochemical Company in 2002. Since 2002, we have implemented a
number of measures to upgrade our ABS production facilities at
our petrochemical companies in order to replace the lost ABS
production capacity at Daqing Petrochemical Company. In 2003,
Jilin Petrochemical Company increased its ABS production
capacity to 170.0 thousand tons per year by upgrading its ABS
production facilities. Primarily as a result of this, the
production volume of ABS increased by 25.2% to 208.7 thousand
tons in 2003. In 2004, our production volume of ABS was 228.1
thousand tons, representing an increase of 9.3% from 2003. Our
production volume of polyethylene and polypropylene in 2004
increased by 8.4% and 4.9%, respectively, as compared with 2003.
Our chemical products are distributed to a number of industries
that manufacture components used in a wide range of
applications, including automotive, construction, electronics,
medical manufacturing, printing, electrical appliances,
household products, insulation, packaging, paper, textile,
paint, footwear, agriculture and furniture industries.
The following table sets forth the sales volumes of our chemical
products by principal product category for each of the three
years ended December 31, 2002, 2003 and 2004.
We are China’s largest natural gas transporter and seller
in terms of sales volume, with revenues of
RMB 18,255 million (US$2,206 million) and total
sales volume of 781.4 billion cubic feet in 2004, of which
657.3 billion cubic feet was sold by our natural gas and
pipeline segment. In 2004, our natural gas and pipeline segment
had income from operations of RMB 2,535 million
(US$306 million). We sell natural gas primarily to
fertilizer and chemical companies, commercial users and
municipal utilities owned by local governments.
The following table sets forth the length of our natural gas
pipelines as of December 31, 2002 2003 and 2004 and the
volume of natural gas sold by us in each of the three years
ended December 31, 2002, 2003 and 2004.
Length of natural gas pipelines used by our natural gas segment
(km)
12,299
14,017
17,868
Total length of natural gas pipelines (km)
13,391
15,144
18,995
Volume of natural gas sold by our natural gas segment (Bcf)
486.3
543.4
657.3
Total volume of natural gas
sold(1)(Bcf)
588.4
651.0
781.4
(1)
Represents the aggregate volume of natural gas sold by our
natural gas and pipeline segment and our exploration and
production segment, including the sales to our natural gas and
pipeline segment by our exploration and production segment.
Currently, natural gas consumption in China represents 2.6% of
China’s total primary energy consumption. The PRC
government has forecast that natural gas consumption in China
will represent 6% of China’s total primary energy
consumption in 2010. We believe this growth will provide us with
the opportunity to expand our natural gas business.
In addition, we also conduct the operation of crude oil and
refined product transmission and storage infrastructure in the
natural gas and pipeline segment.
Our Principal Markets for Natural Gas
In 2004, 50.7%, 21.4%, 17.8%, 3.0%, 2.3% and 4.8% of our natural
gas sales were to the southwestern, northern, northwestern,
northeastern, central, and eastern regions of the PRC,
respectively.
Currently, Sichuan Province and Chongqing Municipality in
southwest China are two of our principal markets for natural
gas. We sold 296.4 billion cubic feet of natural gas to
Sichuan Province and Chongqing Municipality in 2004, as compared
to 276.2 billion cubic feet in 2003, representing
approximately 37.9% of our total natural gas sales in 2004. We
supply natural gas to Sichuan Province and Chongqing
Municipality from our exploration and production operations in
the Sichuan oil region. Our natural gas pipelines in these areas
are well developed, consisting of a natural gas transmission
network with a total length of approximately
6,644 kilometers. As these areas lack adequate supply of
alternative energy resources, such as coal, we believe that we
can further expand our natural gas sales as energy demand
increases in these areas.
Beijing Municipality, Tianjin Municipality, Hebei Province and
Shandong Province in northern China have high energy consumption
levels. These areas are also important markets for our natural
gas transmission and marketing business. We sold an aggregate of
140.2 billion cubic feet of natural gas to these areas in
2004, as compared to 122.2 billion cubic feet in 2003. Our
natural gas sales to Beijing Municipality increased 12.2% from
83.1 billion cubic feet in 2003 to 93.2 billion cubic
feet in 2004. We supply natural gas to Beijing Municipality,
Tianjin Municipality and Hebei Province primarily from the
Changqing oil region through the Shaanxi to Beijing natural gas
pipeline, which is one of
our natural gas trunk pipelines, and from the Huabei and Dagang
oil regions. Currently, we have 2,046 kilometers of natural gas
pipelines in these areas.
Henan Province, Anhui Province, Shanghai Municipality and other
provinces and cities in the Yangtze River Delta, Wuhan City and
other regions in Hubei Province, Hunan Province, Lanzhou City
and other areas in Gansu Province, Qinghai Province and Shanxi
Province are also natural gas markets we are developing. In
2004, we completed the construction and commenced commercial
operation of the mainlines of the West to East natural gas
pipeline and the Zhong County to Wuhan City natural gas
pipeline, which link our Xinjiang, Changqing and Sichuan gas
fields with these areas.
Each year, we must supply natural gas to customers subject to
the government-formulated guidance supply plan first as required
by the PRC government. We enter into natural gas supply
contracts with those customers on the basis of the amount of
natural gas to be supplied according to the guidance supply plan
for the following year’s supply.
We have entered into long-term take-or-pay contracts with 16
municipalities and enterprises in Qinghai Province, Gangsu
Province, Shanxi Province and Tianjin Municipality, 25
municipalities and enterprises in Hubei Province and Hunan
Province, 12 municipalities in Shandong Province and 40
municipalities and enterprises in Henan Province, Anhui
Province, Shanghai Municipality and other provinces located in
the Yangtze River Delta. Under these take-or-pay contracts, we
have agreed in principle to supply natural gas to these
customers in the next 20 to 25 years at prices determined
based on the ex-factory prices published by the National
Development and Reform Commission, formerly the State
Development Planning Commission, supplemented by the pipeline
transportation tariffs. See “— Regulatory
Matters — Pricing — Natural Gas” for a
discussion of natural gas pricing.
In 2004, we sold 583 billion cubic feet, or 88.7% of the
natural gas sales volume of our natural gas and pipeline
segment, to customers not subject to the government-formulated
guidance supply plan, such as commercial end users and municipal
utilities, representing a 26.4% increase over 2003. We believe
that sales volume of our natural gas to customers not subject to
the government-formulated guidance supply plan as a percentage
of our total sales will continue to increase. See
“— Regulatory Matters —
Pricing — Natural Gas” for a discussion of the
government-formulated guidance supply plan.
Driven by environmental and efficiency concerns, the PRC
government is increasingly encouraging industrial and
residential use of natural gas to meet primary energy and
environmental protection needs. The PRC government has adopted a
number of laws and regulations to require municipal governments
to increase the use of clean energy, such as natural gas and
liquefied petroleum gas, to replace the use of raw coal. Several
municipal governments, including that of Beijing, have adopted
policies to facilitate natural gas consumption in order to
reduce the air pollution level. The PRC government has also
adopted a preferential value-added tax rate of 13% for natural
gas production as compared to a 17% value-added tax rate for
crude oil production.
We believe that these policies have had a positive effect on the
development and consumption of natural gas in many
municipalities that are our existing or potential markets for
natural gas. We believe that these favorable policies will
continue to benefit our natural gas business.
Natural Gas Transmission Infrastructure
As of December 31, 2004, our natural gas and pipeline
segment owned and operated approximately 17,868 kilometers of
natural gas pipelines in China, which represented the vast
majority of China’s onshore natural gas pipelines. Our
existing natural gas pipelines form regional natural gas supply
networks in southwestern and northern China. Our experience in
the design, construction management and operation of our
existing natural gas pipelines has enabled us to develop
relatively advanced technologies and skills in China in long
distance pipeline design, construction and automated operational
communications. We believe that we will continue to benefit
from those technologies and skills in the future expansion of
our natural gas pipeline networks and their ancillary facilities.
Expansion of Our Natural Gas Transmission and Marketing
Business
In September 2001, we completed the construction of a natural
gas pipeline from Sebei, Qinghai Province, to Xining City,
Qinghai Province and Lanzhou City, Gansu Province, of which the
total length of the main line is approximately 930 kilometers.
The capital investment for this project was
RMB 2,220 million, which was funded by cash generated
by our operations.
In March 2002, we completed the construction, and commenced the
operation, of a natural gas pipeline from Cangzhou City to Zibo
City with a total length of 213.5 kilometers. We own a 70%
interest in this project. An unrelated natural gas company in
Shandong Province holds the remaining interest in this project.
In October 2004, we completed the construction of the main line
of our West to East natural gas pipeline and commenced
commercial operation in December 2004. Our West to East natural
gas pipeline project is designed to link our natural gas fields
in Xinjiang and Changqing with Henan Province, Anhui Province,
Shanghai Municipality and other areas in the Yangtze River
Delta. The total length of the main line for the West to East
natural gas pipeline project is 3,786 kilometers. As of
December 31, 2004, we had invested
RMB 25,300 million in this project. We are currently
constructing and will continue in the next few years the
construction of the branch pipelines and connecting pipelines
for the West to East natural gas pipeline project, including the
pipeline connecting our West to East natural gas pipeline with
the second Shaanxi to Beijing natural gas pipeline. This
connecting pipeline starts at Qingshan in Jiangsu Province and
ends at Anping in Hebei Province with a total length of
910 kilometers. We commenced the construction of this
connecting pipeline at the end of 2004 and expect to complete
the construction and commence commercial operation by the end of
2005. As of May 31, 2005, we had entered into take-or-pay
contracts with 40 subscribers and distributors to supply them
with natural gas through the West to East natural gas pipeline.
We believe that the successful completion of this natural gas
pipeline and associated storage facilities will substantially
enhance our ability to capitalize on anticipated growth in
demand for natural gas in these regions.
The Zhong County to Wuhan City natural gas pipeline is designed
to link the Sichuan gas region with Wuhan City, the other areas
in Hubei province and Hunan Province, and has a designed annual
throughput capacity of 105.9 billion cubic feet of natural
gas. We commenced the construction of the pipeline in August
2003. In December 2004, we completed the construction and
commenced commercial operation of the main line of the Zhong
County to Wuhan City natural gas pipeline and its Xiangfan
branch pipeline and Huangshi branch pipeline. We expect to
complete the construction and commence commercial operation of
the Xiangtan branch line by the end of June 2005. As of
May 31, 2005, we had entered into take-or-pay contracts
with 25 municipalities and enterprises in Hubei Province and
Hunan Province to supply them with natural gas to be transmitted
through the main line and branch lines of the Zhong County to
Wuhan City pipeline.
We are in the process of constructing the second natural gas
pipeline from Shaanxi to Beijing Municipality with a total
length of 860 kilometers. This second Shaanxi to Beijing natural
gas pipeline will deliver natural gas from our Changqing oil and
gas region to Shaanxi Province, Shanxi Province, Hebei Province
and Beijing Municipality with a designed annual throughput
capacity of 423.8 billion cubic feet of natural gas. We
expect to complete the construction of the second Shaanxi to
Beijing natural gas pipeline in 2005.
On July 4, 2002, we, Sinopec and an international
investment consortium, which consists of six multinational
energy companies including Shell International Gas Limited, OAO
Gazprom and ExxonMobil China Gas Pipeline Limited, entered into
a West to East Joint Venture Framework Agreement. This agreement
contemplates a number of structural and operation principles
relating to the West to East project. However, the parties to
the agreement failed to, after thorough discussions
among all parties, reach a consensus with respect to the
construction and operation of the West to East pipeline project.
As a result, all parties agreed to terminate the agreement. Upon
the termination of the agreement, we expect to independently
construct and operate this pipeline. All of the parties to the
agreement hope that they will have other cooperation
opportunities in the future.
Crude Oil and Refined Product Transportation and Storage
Infrastructure
In order to improve management effectiveness, operating
efficiency and safety of our crude oil and refined product
transportation and storage businesses, we transferred the
pipeline operations and some storage infrastructure related to
the pipeline operations for our crude oil and refined products
from the refining and marketing segment to the natural gas
segment in January 2001, which was then renamed the natural gas
and pipeline segment. See “Item 5 —
Operating and Financial Review and Prospects —
General — Overview”.
We have an extensive network for the transportation, storage and
distribution of both crude oil and refined products, which
covers many regions of China. Our goal is to exploit and
optimize our existing infrastructure to further consolidate our
presence as the leading integrated oil and gas company in China.
As of December 31, 2004, our crude oil transportation and
storage infrastructure consisted of:
•
9,167 kilometers of crude oil pipelines with an average daily
throughput of approximately 2.0 million barrels; and
•
crude oil storage facilities with an aggregate storage capacity
of approximately 13.9 million cubic meters.
We deliver crude oil to customers through our pipeline and
storage facility network, through crude oil storage facilities
that we lease from third parties and by ships leased by
customers. In 2004, approximately 86.1% of our crude oil
production was delivered to our refineries through our crude oil
pipeline network. We believe that our crude oil pipeline network
is sufficient for our current and anticipated transportation
needs. During the past three years, we have not experienced any
delays in delivering crude oil due to pipeline capacity
constraints.
Our transportation and storage infrastructure also includes:
•
2,460 kilometers of refined product pipelines with an average
daily throughput of approximately 28,243 tons; and
•
refined product storage facilities with a total storage capacity
of approximately 16.6 million cubic meters.
Most of our refineries are located in the northeastern and
northwestern regions of China. Our ability to distribute
products through our own product distribution infrastructure to
the eastern and southern regions will provide us with greater
flexibility in supplying refined products to the domestic
markets across China. We plan to continue to enhance our product
distribution infrastructure in the northeastern, northwestern,
northern and southwestern regions where we already have a
significant market share, and to expand our product distribution
infrastructure in the eastern and southern regions by acquiring
and constructing transportation storage facilities and
distribution storage facilities in these regions.
In October 2002, we completed the construction, and commenced
the operation, of a refined product pipeline from Lanzhou, Gansu
Province, to Chengdu, Sichuan Province and Chongqing
Municipality. This pipeline connects Lanzhou Petrochemical
Company directly with the southwestern region of China. In this
region, there is a lack of crude oil resources and refining
capacity, which has resulted in the demand for refined products
significantly exceeding supply. This pipeline has a total length
of 1,250 kilometers and a throughput capacity of five million
tons of refined products per year.
Together with the expansion of our service stations, we expect
that our pipelines, primary storage and secondary distribution
storage facilities will significantly enhance our existing
distribution infrastructure for refined products. We believe
that our enhanced distribution infrastructure will help us
increase the sales of our refined products.
Competition
As an oil and gas company operating in a competitive industry,
we compete in each of our business segments in both China and
international markets for desirable business prospects and for
customers. Our principal competitors in China are Sinopec,
including its subsidiary China National Star Petroleum
Corporation, or CNSPC, and China National Offshore Oil
Corporation, or CNOOC.
Exploration and Production Operations
We are the largest onshore oil and gas company in China in terms
of proved crude oil and natural gas reserves as well as crude
oil and natural gas production and sales. However, we compete
with Sinopec for the acquisition of desirable crude oil and
natural gas prospects. We believe that our experience in crude
oil and natural gas exploration and production and our advanced
exploration technologies that are suitable for diverse
geological conditions in China will enable us to maintain our
dominant position in discovering and acquiring desirable crude
oil and natural gas prospects in China.
Refining and Marketing and Chemicals and Marketing
Operations
We compete directly with Sinopec in our refining and marketing
and chemicals and marketing operations on the basis of price,
quality and customer service. Most of our refineries and
chemical plants are located in the northeastern, northwestern
and northern regions of China where we have the dominant market
share for refined products and chemical products. We also sell
our refined products and chemical products in the eastern,
southern, southwestern and central-southern regions of China,
where our products have a considerable market share. The eastern
and southern regions of China, where refined products and
chemical products are in higher demand, are important markets
for our refined products and chemical products. Sinopec has a
strong presence in the eastern and southern regions of China in
competition with us, and most of Sinopec’s refineries,
chemical plants and distribution networks are located in these
regions in close proximity to these markets. We expect that we
will continue to face competition from, among other competitors,
Sinopec in increasing our refined products and chemical products
sales in these regions. See “Item 3 — Key
Information — Risk Factors”.
We also face competition from imported refined products and
chemical products on the basis of price and quality. As a result
of China’s entry into the WTO, we expect that competition
from foreign producers of refined products and chemical products
may increase as tariff and non-tariff barriers for imported
refined products and chemical products will be reduced or
eliminated over time, including the opening over time of retail
and wholesale markets in China for refined products and chemical
products to foreign competition. Our ability to compete with
foreign producers of refined products and chemical products will
depend on our ability to reduce our production costs and improve
the quality of our products. See “Item 3 —
Key Information — Risk Factors”.
Natural Gas and Pipeline Operations
We are the largest supplier of natural gas in terms of volume of
natural gas supplied. Currently, we face very limited
competition in the supply of natural gas in Beijing
Municipality, Tianjin Municipality, Hebei Province, Shanghai
Municipality, Jiangsu Province, Zhejiang Province, Anhui
Province, Henan Province, Hubei Province, Hunan Province and the
northwestern regions of China, our existing principal markets
for natural gas. Currently, Sinopec has natural gas fields in
Sichuan Province and sells natural gas to users in that
province. We, therefore, have limited competition from
Sinopec in our markets in Sichuan Province. Further, we intend
to expand our markets for natural gas into the coastal regions
in eastern China where we may face competition from CNOOC and,
to a lesser extent, Sinopec. We believe that our dominant
natural gas resources base, our relatively advanced technologies
and skills in managing long distance pipelines will enable us to
continue to be a dominant player in the natural gas markets in
China.
C:
Environmental Matters
Together with other companies in the industries in which we
operate, we are subject to numerous national, regional and local
environmental laws and regulations concerning our oil and gas
exploration and production operations, petroleum and
petrochemical products and other activities. In particular,
these laws and regulations:
•
require an environmental evaluation report to be submitted and
approved prior to the commencement of exploration, production,
refining and chemical projects;
•
restrict the type, quantities, and concentration of various
substances that can be released into the environment in
connection with drilling and production activities;
•
limit or prohibit drilling activities on certain lands lying
within protected areas; and
•
impose criminal and civil liabilities for pollution resulting
from oil, natural gas and petrochemical operations.
These laws and regulations may also restrict air emissions and
discharges to surface and subsurface water resulting from the
operation of natural gas processing plants, chemical plants,
refineries, pipeline systems and other facilities that we own.
In addition, our operations may be subject to laws and
regulations relating to the generation, handling, storage,
transportation, disposal and treatment of waste materials.
We anticipate that the environmental laws and regulations to
which we are subject will become increasingly strict and are
therefore likely to have an increasing impact on our operations.
It is difficult, however, to predict accurately the effect of
future developments in such laws and regulations on our future
earnings and operations. Some risk of environmental costs and
liabilities is inherent in certain of our operations and
products, as it is with other companies engaged in similar
businesses. We cannot assure you that material costs and
liabilities will not be incurred. However, we do not currently
expect any material adverse effect on our financial condition or
results of operations as a result of compliance with such laws
and regulations. We paid pollutant discharge fees of
approximately RMB 113 million and
RMB 155 million and RMB 182 million
(US$22 million) in 2002, 2003 and 2004, respectively.
To meet future environmental obligations, we are engaged in a
continuous program to develop effective environmental protection
measures. This program includes research on:
•
reducing sulphur levels in heavy fuel oil and diesel fuel;
•
reducing olefin and benzene content in gasoline and the quantity
of emissions and effluents from our refineries and petrochemical
plants; and
•
developing and installing monitoring systems at our facilities
and developing environmental impact assessments for major
projects.
Our capital expenditures on environmental programs in 2002, 2003
and 2004 were approximately RMB 1,363 million,
RMB 1,076 million and RMB 1,345 million
(US$163 million), respectively.
On December 23, 2003, a gas blow-out incident occurred at
our Luojia No. 16H gas well located in Kaixian County,
Chongqing Municipality. The gas blow-out caused the leakage of a
large quantity of sulfurated hydrogen, resulting in injuries and
death to many residents living in the surrounding areas. The PRC
government investigated this gas blow-out and found CNPC, who
had provided
drilling services to us for the Luojia No. 16H gas well,
liable. This incident has not had, and we do not believe it will
have, a material adverse effect on our results of operations and
financial condition. Because a number of our production
facilities are located in populated areas, we have established a
series of preventative measures to improve the safety of our
employees and surrounding residents and minimize disruptions or
other adverse effects on our business. Theses measures include:
•
providing each household in areas surrounding our production
facilities with printed materials to explain and illustrate
safety and protection knowledge and skills; and
•
enhancing the implementation of various safety production
measures we have adopted previously.
We believe that these preventative measures have helped minimize
the possibility of similar incidents resulting in serious
casualties and environmental consequences. In addition, the
adoption of these preventative measures has not required
significant capital expenditures to date, and therefore, will
not have a material adverse effect on our results of operations
and financial condition.
C:
Legal Proceedings
We are not involved in any judicial and arbitral proceedings,
the results of which, in the aggregate, would have a material
adverse impact on our financial condition.
Properties
Under a restructuring agreement we entered into with CNPC on
March 10, 2000 in connection with the restructuring of the
CNPC group and the establishment of our company, CNPC undertook
to us the following:
•
CNPC would use its best endeavours to obtain formal land use
right certificates to replace the entitlement certificates in
relation to the 28,649 parcels of land, which were leased or
transferred to us from CNPC, within one year from August,
September and October 1999 when the relevant entitlement
certificates were issued;
•
CNPC would complete, within one year from November 5, 1999,
the necessary governmental procedures for the requisition of the
collectively owned land on which 116 service stations owned by
us are located; and
•
CNPC would obtain individual building ownership certificates in
our name for all of the 57,482 buildings transferred to the
Company by CNPC, before November 5, 2000.
As of December 31, 2004, CNPC obtained formal land use
right certificates for 26,549 of the 28,649 parcels of land and
ownership certificates for some buildings. The necessary
governmental procedures for the above-mentioned service stations
located on collectively owned land have not been completed to
date. Our directors confirm that the use of and the conduct of
relevant activities at the above-mentioned parcels of land,
service stations and buildings are not affected by the fact that
the relevant land use right certificates or individual building
ownership certificates have not been obtained or the fact that
the relevant governmental procedures have not been completed.
Our directors believe that this will not have any material
adverse effect on our results of operations and financial
condition.
We own substantially all of the equipment and production
facilities relating to the business activities of all our
segments. We hold production licenses covering all of our
interests in developed and undeveloped acreage and productive
crude oil and natural gas wells. See
“— Exploration and Production —
Properties”.
China’s oil and gas industry is subject to extensive
regulation by the PRC government with respect to a number of
aspects of exploration, production, transmission and marketing
of crude oil and natural gas as well as production,
transportation and marketing of refined products and chemical
products. The following central government authorities exercise
control over various aspects of China’s oil and gas
industry:
•
The Ministry of Land and Resources has the authority for
granting, examining and approving oil and gas exploration and
production licenses, the administration of registration and
transfer of exploration and production licenses.
•
The Ministry of Commerce, which was established in March 2003 to
consolidate the authorities and functions of the former State
Economic and Trade Commission and the former Ministry of Foreign
Trade and Economic Cooperation:
—
sets the import and export volume quotas for crude oil and
refined products according to the overall supply and demand for
crude oil and refined products in China as well as the WTO
requirements for China;
—
issues import and export licenses for crude oil and refined
products to oil and gas companies that have obtained import and
export quotas; and
—
examines and approves production sharing contracts and
Sino-foreign equity and cooperative joint venture contracts.
•
The National Development and Reform Commission, which was
established in March 2003 to consolidate the authorities and
functions of the former State Development Planning Commission
and the former State Economic and Trade Commission:
—
has the industry administration and policy coordination
authority over China’s oil and gas industry;
—
determines mandatory minimum volumes and applicable prices of
natural gas to be supplied to certain fertilizer producers;
—
publishes guidance prices for natural gas and retail median
guidance prices for certain refined products, including gasoline
and diesel;
—
approves significant petroleum, natural gas, oil refinery and
chemical projects set forth under the Catalogues of Investment
Projects Approved by the Central Government; and
—
approves Sino-foreign equity and cooperative projects exceeding
certain capital amounts.
Exploration Licenses and Production Licenses
The Mineral Resources Law authorizes the Ministry of Land and
Resources to exercise administrative authority over the
exploration and production of mineral resources within the PRC.
The Mineral Resources Law and its supplementary regulations
provide the basic legal framework under which exploration
licenses and production licenses are granted. The Ministry of
Land and Resources has the authority to issue exploration
licenses and production licenses. Applicants must be companies
approved by the State Council to engage in oil and gas
exploration and production activities.
Applicants for exploration licenses must first register with the
Ministry of Land and Resources blocks in which they intend to
engage in exploration activities. The holder of an exploration
license is obligated to make a progressively increasing annual
minimum exploration investment relating to the exploration
blocks in respect of which the license is issued. Investments
range from RMB 2,000 per
square kilometer for the initial year to RMB 5,000 per
square kilometer for the second year, and to RMB 10,000 per
square kilometer for the third and subsequent years.
Additionally, the holder has to pay an annual exploration
license fee that starts at RMB 100 per square kilometer for
each of the first three years and increases by an additional RMB
100 per square kilometer per year for subsequent years up
to a maximum of RMB 500 per square kilometer. The maximum
term of an exploration license is seven years, subject to twice
renewal upon expiration of the original term, with each renewal
being for a two-year term. At the exploration stage, an
applicant can also apply for a progressive exploration and
production license that allows the holder to test and develop
reserves not yet fully proven. The progressive exploration and
production license has a maximum term of 15 years. Upon the
reserves becoming proved for a block, the holder must apply for
a full production license in order to begin production. In
addition, the holder needs to obtain the right to use that block
of land. Generally, the holder of a full production license must
obtain a land use rights certificate for industrial land use
covering that block of land.
The Ministry of Land and Resources issues production licenses to
applicants on the basis of the reserve reports approved by the
relevant authorities. Production license holders are required to
pay an annual production right usage fee of RMB 1,000 per
square kilometer. Administrative rules issued by the State
Council provide that the maximum term of a production license is
30 years. However, in accordance with a special approval
from the State Council, the Ministry of Land and Resources has
issued production licenses effective March 2000 to PetroChina
for all of its crude oil and natural gas reservoirs with terms
coextensive with the projected productive life of those
reservoirs, ranging up to 55 years. Production licenses to
be issued to us in the future will be subject to the 30-year
maximum unless we obtain additional special approvals from the
State Council. Each of our production licenses is renewable upon
our application 30 days prior to expiration. Oil and gas
price increases may extend the productive life of our crude oil
and natural gas reservoirs beyond the current terms of the
relevant production licenses.
Among the major PRC oil and gas companies, PetroChina and
Sinopec have exploration licenses and production licenses for
the exploration and production of onshore crude oil and natural
gas in China. CNOOC and Sinopec (through its subsidiary CNSPC)
have exploration licenses and production licenses for the
exploration and production of offshore crude oil and natural gas
in China.
Pricing
Crude Oil
PetroChina and Sinopec set their crude oil median prices each
month based on the average Singapore market FOB prices for crude
oil of different grades in the previous month. In addition,
PetroChina and Sinopec negotiate a premium or discount to
reflect transportation costs, the differences in oil quality and
market supply and demand. The National Development and Reform
Commission will mediate if PetroChina and Sinopec cannot agree
on the amount of premium or discount.
Refined Products
Prior to October 2001, PetroChina set its retail prices based on
the published retail median guidance prices of gasoline and
diesel published by the State Development Planning Commission,
the predecessor of the National Development and Reform
Commission, with an allowable upward or downward adjustment of
up to 5%. Since October 2001, PetroChina has set its retail
prices within an 8% floating range of the published retail
median guidance prices of gasoline and diesel. These retail
median guidance prices of gasoline and diesel vary in each
provincial level distribution region. Since October 2001, the
National Development and Reform Commission has published the
retail median guidance prices of gasoline and diesel from time
to time based on the weighted average FOB Singapore, Rotterdam
and New York trading prices for diesel and gasoline plus
transportation costs
and taxes. Generally, adjustments will be made only if the
weighted average prices fluctuate beyond 8% of the previously
published retail median guidance price.
PetroChina sets the wholesale prices for its gasoline and diesel
on the basis of its retail prices and a discount to its retail
prices of at least 5.5% as required by the National Development
and Reform Commission.
In addition, the National Development and Reform Commission sets
the ex-factory median prices for gasoline and diesel sold to the
PRC government and other institutional customers, including
airlines and railway operators. These ex-factory median prices
are calculated with reference to the average FOB Singapore,
Rotterdam and New York trading prices for gasoline and diesel in
the previous month. PetroChina may set the prices it charges its
customers on the basis of the ex-factory median prices set by
the National Development and Reform Commission, which may be
adjusted upward or downward up to 8%.
Chemical Products
PetroChina determines the prices of all of its chemical products.
Natural Gas
The price of natural gas has two components:
•
ex-factory price; and
•
pipeline transportation tariff.
Prior to January 2002, our natural gas price was comprised of
wellhead price, pipeline transportation tariff and purification
fee. In January 2002, the State Development Planning Commission,
the predecessor of the National Development and Reform
Commission, merged the purification fee into the wellhead price
to establish a unified natural gas ex-factory price.
Ex-factory prices vary depending on whether or not the natural
gas sold is within the government-formulated natural gas supply
plan. For natural gas sold within the government-formulated
supply plan, the National Development and Reform Commission
fixes ex-factory prices according to the nature of the
customers. Most of these customers are fertilizer producers.
For natural gas sold above the government-formulated natural gas
supply plan, the National Development and Reform Commission
publishes the median guidance ex-factory price with permissible
upward or downward adjustments of 10% by the natural gas
producer.
PetroChina negotiates the actual ex-factory price with
commercial natural gas users and municipal governments within
the adjustment range.
The National Development and Reform Commission sets the pipeline
transportation tariff for the natural gas transported by
pipelines constructed prior to 1991. For the natural gas
transported by pipelines constructed after 1991, PetroChina
submits to the National Development and Reform Commission for
examination and approval proposed pipeline transmission tariffs
based on the capital investment made in the pipeline, the
depreciation period for the pipeline, the ability of end users
to pay and PetroChina’s profit margin.
Production and Marketing
Crude Oil
Each year, the National Development and Reform Commission
publishes the projected target for the production and sale of
crude oil by PetroChina, Sinopec and CNOOC, based on the
domestic consumption estimates submitted by domestic producers,
including PetroChina, Sinopec and CNOOC, the production capacity
of these companies as well as the forecast of international crude
oil prices. The actual production levels are determined by the
producers themselves and may vary from the submitted estimates.
Refined Products
Previously, only PetroChina, Sinopec and joint ventures
established by the two companies had the right to conduct
gasoline and diesel wholesale business. Other companies,
including foreign invested companies, were not allowed to engage
in wholesale of gasoline and diesel in China’s domestic
market. In general, only domestic companies, including
Sino-foreign joint venture companies, were permitted to engage
in retail of gasoline and diesel. Since January 1, 2005
when Interim Measures on Administration over the Market of
Refined Products became effective, all entities meeting certain
requirements are allowed to submit applications to the Ministry
of Commerce to conduct gasoline and diesel wholesale and retail
businesses. See “Item 3 — Key
Information — Risk Factors” for a discussion of
the likely impact on the distribution of refined products in
China after China’s admission to the WTO.
Natural Gas
The National Development and Reform Commission publishes in each
year the production targets for natural gas producers based on
the annual production target prepared on the basis of
consumption estimates submitted by all natural gas producers
such as PetroChina. The National Development and Reform
Commission also formulates the annual natural gas guidance
supply plan, which requires natural gas producers to distribute
a specified amount of natural gas to specified fertilizer
producers. The actual production levels of natural gas, except
the amount supplied to the fertilizer producers, are determined
by the natural gas producers.
Foreign Investments
Cooperation in Exploration and Production with Foreign
Companies
Currently, only CNPC and Sinopec have the right to cooperate
with foreign companies in onshore crude oil and natural gas
exploration and production in China. CNOOC and Sinopec (through
its subsidiary CNSPC) have the right to cooperate with foreign
companies in offshore crude oil and natural gas exploration and
production in China.
Sino-foreign cooperation projects and foreign parties in onshore
oil and gas exploration and production in China are generally
selected through open bids and bilateral negotiations. Those
projects are generally conducted through production sharing
contracts. The Ministry of Commerce must approve those contracts.
As authorized by the Regulations of the PRC on Exploration of
Onshore Petroleum Resources in Cooperation with Foreign
Enterprises, CNPC has the right to enter into joint cooperation
arrangements with foreign oil and gas companies for onshore
crude oil and natural gas exploration and production. PetroChina
does not have the capacity to enter into production sharing
contracts directly with foreign oil and gas companies under
existing PRC law. Accordingly, CNPC will continue to enter into
production sharing contracts. After signing a production sharing
contract, CNPC will, subject to approval of the Ministry of
Commerce, assign to PetroChina most of its commercial and
operational rights and obligations under the production sharing
contract as required by the Non-competition Agreement between
CNPC and PetroChina. See “Item 7 — Major
Shareholders and Related Party Transactions — Contract
for the Transfer of Rights under Production Sharing
Contracts”.
Transportation and Refining
The PRC regulations permit foreign minority ownership in
pipeline transportation, oil storage facilities and oil jetties.
There is no express general restriction on foreign investment in
refineries and
petrochemical facilities. However, construction of new refinery
or ethylene facilities, expansion of existing refinery
facilities and upgrading of existing ethylene facilities by
increasing annual production capacity of more than
200 thousand tons are subject to the approval of relevant
government authorities. The production of ethylene with an
annual production capacity exceeding 600 thousand tons must
be conducted by companies majority-owned by Chinese entities.
Furthermore, when appropriate, projects must receive necessary
approvals from relevant PRC government agencies. See
“Item 3 — Key Information — Risk
Factors”.
Import and Export
The import and export of crude oil and the export of refined
products is subject to automatic filing and quota control in
China. Currently, 25 companies are qualified to import
crude oil and 120 companies are qualified to export refined
products. The import of refined products was subject to quota
and licensing control until the end of 2003. Since
January 1, 2004, the import of refined products by
state-owned entities has been exempted from import quota,
licensing control and is subject to automatic filing control.
The Ministry of Commerce sets the annual import and export
volumes and quotas for crude oil and refined products by taking
into account the supply and demand in China as well as the WTO
requirements for China. The Ministry of Commerce is also
responsible for issuing import and export licenses for products
subject to quotas. Upon receiving quota allocation, refining
companies or enterprises can import crude oil through
State-authorized import companies. See
“Item 3 — Key Information — Risk
Factors” for a discussion of the expected opening of
domestic markets to foreign competition in China.
The PRC government authorities have granted PetroChina the right
to conduct crude oil and refined product import and export
business. PetroChina holds quota to import and export crude oil
and refined products, and conducts import and export of crude
oil and refined products through its affiliates, China National
United Oil Corporation and PetroChina International Co., Ltd.,
which are qualified to import and export crude oil and refined
products.
Capital Investment and Financing
Capital investments in exploration and production of crude oil
and natural gas made by Chinese oil and gas companies are
subject to approval by or filing with relevant government
authorities. The development of new oil field with an annual
production capacity equal to or exceeding one million tons and
new natural gas field with an annual production capacity equal
to or exceeding two billion cubic meters is required to be
approved by the National Development and Reform Commission. Any
other development project of crude oil and natural gas needs to
be filed with the National Development and Reform Commission.
Oil and gas companies need to obtain approval from the National
Development and Reform Commission and the State Administration
of Foreign Exchange to borrow from foreign banks and foreign
governments in connection with those capital investments.
PetroChina is subject to a variety of taxation, fees and
royalty. The table below sets forth the various taxation, fees
and royalty payable by PetroChina or by Sino-foreign oil and gas
exploration and development cooperative projects. Since
January 1, 2000, PetroChina and its wholly owned
subsidiaries and branch companies have been taxed on a
consolidated basis as approved by the Ministry of Finance and
the State Taxation Bureau.
Tax item
Tax base
Tax Rate
Corporate income tax
Taxable income
Generally at a rate of 33%. However, our qualified branch
companies in the west regions of the PRC are entitled to a rate
of 15%. Tax concession or exemption enjoyed by any subsidiary or
branch company continues to apply.
Value-added tax
Revenue
13% for liquified natural gas, natural gas, agricultural film
and fertilizers and 17% for other items. PetroChina charges
value-added tax from its customers at the time of settlement on
top of the selling prices of its products on behalf of the
taxation authority. The value-added tax paid by PetroChina for
purchasing materials to be consumed during the production
process and for charges paid for drilling and other engineering
services and labor are deducted from output value-added tax
payable by PetroChina. 11% of the value-added tax paid in
connection with export of gasoline is subject to rebate.
Sales volume
5% for the Sino-foreign oil and gas exploration and development
cooperative projects. However input value-added tax cannot be
deducted.
Business tax
Revenue from transportation services
3%
Consumption tax
Aggregate volume sold or self-consumed
RMB 277.6 per ton for gasoline; since January 1, 1999,
RMB 388.64 per ton for leaded gasoline.
RMB 117.6 per ton for diesel
All consumption taxes paid in connection with export of gasoline
are subject to a full rebate.
Resource tax
Aggregate volume sold or self-consumed
RMB 8 to 30 per ton for crude oil
RMB 2 to 15 per thousand cubic meter for natural gas
The actual applicable rate for each oil field may differ
depending on the resource differences, volume of the exploration
and production activities and costs required for the production
at the particular oil field.
Progressive rate of 0–12.5% for crude oil and 0–3% for
natural gas
(1)
Payable only by Sino-foreign oil and gas exploration and
development cooperative projects. The project entity of those
cooperative projects is not subject to any other resource tax or
fee.
The PRC Highway Law, as amended on October 31, 1999,
provides that the PRC government will collect funds for highway
maintenance by imposing fuel taxes. The State Council will
formulate specific implementation methods and procedures for the
imposition of fuel tax. The State Council has not yet announced
or published any specific rate, implementation method or
procedure for the imposition of the tax.
Environmental Regulations
China has adopted extensive environmental laws and regulations
that affect the operation of the oil and gas industry. There are
national and local standards applicable to emissions control,
discharges to surface and subsurface water, and the generation,
handling, storage, transportation, treatment and disposal of
waste materials.
The environmental regulations require a company, such as us, to
register or file an environmental impact report with the
relevant environmental bureau for approval before it undertakes
any construction of a new production facility or any major
expansion or renovation of an existing production facility. The
new facility or the expanded or renovated facility will not be
permitted to operate unless the relevant environmental bureau
has inspected to its satisfaction that environmental equipment
that satisfies the environmental protection requirements has
been installed for the facility. A company that wishes to
discharge pollutants, whether it is in the form of emission,
water or materials, must submit a pollutant discharge
declaration statement detailing the amount, type, location and
method of treatment. After reviewing the pollutant discharge
declaration, the relevant environmental bureau will determine
the amount of discharge allowable under the law and will issue a
pollutant discharge license for that amount of discharge subject
to the payment of discharge fees. If a company discharges more
than is permitted in the pollutant discharge license, the
relevant environmental bureau can fine the company up to several
times the discharge fees payable by the offending company for
its allowable discharge, or require the offending company to
close its operation to remedy the problem.
ITEM 5 — OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
General
You should read the following discussion together with our
consolidated financial statements and their notes included
elsewhere in this annual report. Our consolidated financial
statements have been prepared in accordance with IFRS, which
differ in many material respects from US GAAP. Note 35 to
our consolidated financial statements included elsewhere in this
annual report and the section headed “— Other
Information — US GAAP Reconciliation” summarize
the significant differences between IFRS and US GAAP as
they relate to us.
In accordance with an acquisition agreement between CNPC and us
dated September 26, 2002, we acquired from CNPC the assets,
liabilities and interests related to CNPC’s refined
products marketing enterprises consisting primarily of service
stations and related facilities for RMB 3,200 million.
Under IFRS, the acquisition is a combination of entities under
common control since the CNPC’s refined products marketing
enterprises and us are under the common control of CNPC. As a
result, we have accounted for the acquisition in a manner
similar to a uniting of interests, whereby the assets and
liabilities of the marketing enterprises acquired are accounted
for at historical cost to CNPC with net liabilities of RMB
2,956 million at the effective date. Our prior years’
consolidated financial statements were restated in 2002 to give
effect to the acquisition in such periods as if the operations
of our company and these marketing enterprises have always been
combined in such periods. The difference between RMB
3,200 million paid and the net liabilities transferred from
CNPC has been adjusted against equity. See
“— Acquisition of Certain Refined Products
Marketing Enterprises from CNPC”.
Overview
We are engaged in a broad range of petroleum and natural gas
related activities, including:
•
the exploration, development, production and sale of crude oil
and natural gas;
•
the refining, transportation, storage and marketing of crude oil
and petroleum products;
•
the production and marketing of basic petrochemical products,
derivative chemical products and other chemical
products; and
•
the transmission and storage of crude oil, refined products and
natural gas as well as sale of natural gas.
We are China’s largest producer of crude oil and natural
gas and are one of the largest companies in China in terms of
sales. In the year ended December 31, 2004, we produced
approximately 777.4 million barrels of crude oil and
approximately 837.5 billion cubic feet of natural gas for
sale. Our refineries also processed approximately
697.8 million barrels of crude oil in the year ended
December 31, 2004. In the year ended December 31,2004, we had total revenue of RMB 388,633 million
(US$46,956 million) and net income of RMB
102,927 million (US$12,436 million).
Effective January 1, 2001, our pipeline operations were
transferred from the refining and marketing segment to the
natural gas segment, which was subsequently renamed as the
natural gas and pipeline segment. Accordingly, our results of
operations, together with the corresponding assets and
liabilities, of certain pipeline operations are reclassified
from the refining and marketing segment to the natural gas and
pipeline segment to reflect the changes in the manner under
which these operations are managed.
Factors Affecting Results of Operations
Our results of operations and the period-to-period comparability
of our financial results are affected by a number of external
factors, including changes in the prices of crude oil, refined
products, natural gas and chemical products, decrease in our
crude oil reserves in China and fluctuations in exchange rates
and interest rates.
Our results of operations are substantially affected by crude
oil prices. From June 1998 to March 2001, the PRC government
published benchmark prices for crude oil in China which were
adjusted on a monthly basis to equal Singapore market FOB prices
for similar grades of crude oil, supplemented by an amount equal
to the customs duty payable on the import of crude oil. Since
March 2001, the PRC government has ceased publishing benchmark
prices for crude oil in China and we and Sinopec have set our
crude oil median prices monthly based on the Singapore market
FOB prices for crude oil. Our actual realized crude oil prices
include a premium on, or discount from, the median prices which
primarily reflects transportation costs, differences in oil
quality and market supply and demand conditions.
Prior to September 1, 1999, the premiums and discounts
applied to our crude oil sales were largely determined through
negotiations between CNPC and Sinopec, our largest customer.
Since September 1, 1999, these discounts and premiums have
been determined in accordance with a crude oil premium and
discount calculation agreement and its supplemental agreement we
entered into with Sinopec. These agreements establish premiums
and discounts which effect adjustments to the benchmark prices.
These agreements do not obligate either party to purchase or
sell any crude oil and is thus subject to renegotiation. Under
these agreements, the National Development and Reform
Commission, formerly the State Development Planning Commission,
will mediate if we cannot agree with Sinopec on the premium or
discount applicable to a particular crude oil purchase. The
table below sets forth the median prices for our principal
grades of crude oil in 2002, 2003 and 2004 and the negotiated
premiums and discounts applicable to those grades of crude oil
since June 2001.
Median prices for principal grades
Premium/(discount)
of crude oil (RMB/barrel)
(RMB/barrel)
Grade of
Year 2002
Year 2003
Year 2004
June 2001-
July 2002-
January 2003-
Since
crude oil
Benchmark
average
average
average
June 2002
December 2002
December 2003
January 2004
Daqing
Minas
198.7
240.8
300.7
0.9
0
–0.3
0
Jidong
Minas
198.7
240.8
300.7
0.9
0
–0.3
0
Huabei
Minas
198.7
240.8
300.7
1.6
1.3
1
1.3
Dagang
Cinta
192.6
237.0
290.5
1.7
1.4
1.4
1.4
Tarim
Minas
198.7
240.8
300.7
–30.4
–34.6
–33.7
–34.6
Tuha
Tapis
203.9
247.0
329.2
–25.1
–25.5
–25.5
–25.5
In 2004, the median prices for our principal grades of crude oil
and crude oil produced in our Daqing oil region were RMB
295.8 per barrel and RMB 300.7 per barrel,
respectively.
Increases or decreases in the price of crude oil in China have a
significant effect on the revenue from our exploration and
production segment. In the year ended December 31, 2004,
our average realized selling price for crude oil was RMB 280
(US$33.88) per barrel, increased by 24.4% from RMB 225 per
barrel in the year ended December 31, 2003. As a result,
the revenue from our exploration and production segment
increased 25.4% from RMB 177,271 million in the year ended
December 31, 2003 to RMB 222,305 million
(US$26,860 million) in the year ended December 31,2004. See “Item 4 — Information on the
Company — Regulatory Matters — Pricing”
for a more detailed discussion of current PRC crude oil pricing
regulations.
Refined Product Prices
Until June 5, 1998, the State Development Planning
Commission, the predecessor of the National Development and
Reform Commission, set wholesale and retail prices for our major
refined products (gasoline, diesel and kerosene). However,
during the first six months of 1998, due to then prevailing
market conditions and increased smuggling of refined products,
actual wholesale prices in the refined products market were
lower than the wholesale prices set by the PRC government. In
June 1998, the State Development Planning Commission pegged the
prices of refined products of gasoline and diesel to the FOB
Singapore trading prices, supplemented by transportation costs,
customs duties, insurance charges, taxes and retail margins.
Prior to October 2001, the State Development Planning Commission
published from time to time retail median gasoline and diesel
guidance prices for major cities and provinces. Once published,
the retail median prices remained unchanged until either we or
Sinopec requested an adjustment and demonstrated that the
cumulative change of the FOB Singapore gasoline or diesel
trading price from the then applicable retail median guidance
price exceeded 5%. Since October 2001, the State Development
Planning Commission or the National Development and Reform
Commission has adjusted such retail median prices from time to
time to reflect the FOB Singapore, Rotterdam and New York
trading prices for gasoline and diesel, supplemented by
transportation costs and taxes. See
“Item 4 — Information on the
Company — Regulatory Matters — Pricing”
for a more detailed discussion of current PRC refined products
pricing regulations.
Prior to October 2001, based on the published median gasoline
and diesel guidance prices, we and Sinopec set our respective
retail prices with an allowable upward or downward adjustment of
up to 5% in individual markets. Since October 2001, we and
Sinopec have set our retail prices within an 8% floating range
of the published median gasoline and diesel guidance prices. We
determine the prices of other refined products with reference to
the published median guidance prices of gasoline and diesel. Our
retail prices may differ from those of Sinopec within a given
market. Our average realized selling prices tend to be higher in
the western and northern regions of China, where we dominate the
market, as compared to our average realized selling prices in
the eastern and southern regions, where Sinopec has a stronger
presence.
The following table sets forth the retail median prices for
90(#) gasoline and 0(#) diesel published by the State
Development Planning Commission or the National Development and
Reform Commission from January 2004 to December 2004 when such
adjustments were made.
We determine and set the prices of all chemical products
produced by our chemicals business segment.
Natural Gas Prices
Prior to January 2002, our natural gas price was comprised of
wellhead price, pipeline transportation tariff and purification
fee. Since January 2002, the State Development Planning
Commission, the predecessor of the National Development and
Reform Commission, has merged the purification fee into the
wellhead price to establish a unified natural gas ex-factory
price. As a result of the price merger, our natural gas price is
comprised of the following two components:
•
Ex-factory Price. We set our ex-factory price within a
10% floating range of the median ex-factory price published by
the National Development and Reform Commission, except for
natural gas sold within the PRC government’s natural gas
supply plan, which must be sold at prices determined by the
National Development and Reform Commission; and
•
Pipeline Transportation Tariff. The National Development
and Reform Commission sets the pipeline transportation tariff
for natural gas transported by pipelines constructed prior to
1991. For natural gas transported by pipelines constructed after
1991, we prepare a tariff schedule
based on our actual cost plus a profit margin and submit it to
the National Development and Reform Commission for approval.
We sell our natural gas at prices which exceed our production
and transportation costs.
The results of operations of these segments will be impacted to
the extent that our prices do not vary to reflect increases or
decreases in our costs. See “Item 4 —
Information on the Company — Regulatory
Matters — Pricing” for a further discussion of
these pricing controls.
Foreign Currency Exposure
For a discussion of the effect of exchange rate fluctuations on
our results of operations, please see
“Item 11 — Quantitative and Qualitative
Disclosures About Market Risk — Foreign Exchange Rate
Risk”.
Interest Rate Exposure
For a discussion of the effect of interest rate changes on our
results of operations, please see “Item 11 —
Quantitative and Qualitative Disclosures About Market
Risk — Interest Rate Risk”.
Critical Accounting Policies
The preparation of our consolidated financial statements
requires our management to select and apply significant
accounting policies, the application of which may require
management to make judgments and estimates that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities as of the date of our
financial statements, and the reported amounts of revenue and
expenses during the reporting period. Notwithstanding the
presentation of our principal accounting policies in Note 3
to our consolidated financial statements included elsewhere in
this annual report, we have identified the accounting policies
below as most critical to our business operations and the
understanding of our financial condition and results of
operations presented in accordance with IFRS. Although these
estimates are based on our management’s best knowledge of
current events and actions, actual results ultimately may differ
from those estimates.
Accounting of Oil and Gas Exploration and Development
Activities
We use successful efforts method of accounting, with specialized
accounting rules that are unique to the oil and gas industry,
for oil and gas exploration and production activities. Under
this method, geological and seismic costs incurred are expensed
prior to the discovery of proved reserves. However, all costs
for developmental wells, support equipment and facilities, and
mineral interests in oil and gas properties are capitalized.
Costs of exploratory wells are capitalized as construction in
progress pending determination of whether the wells find proved
reserves. The costs of exploratory wells will be further
capitalized pending determination of whether the wells find
sufficient economically exploitable reserves. For exploratory
wells located in regions that do not require substantial capital
expenditures before the commencement of production, the
evaluation of the economic benefits of the reserves in such
wells will be completed within one year following the completion
of the exploration drilling. Where such evaluation indicates
that no economic benefits can be obtained, the relevant costs of
exploratory wells will be converted to dry hole exploration
expenses. For exploratory wells that find economically
exploitable reserves located in regions that require substantial
capital expenditures even before the commencement of production,
the costs of such exploratory wells will not be further
capitalized until further exploratory work is in progress or a
decision is made to commence such explanatory work. Otherwise,
the costs of such exploratory wells will be converted to dry
hole exploration expenses. We have never capitalized any costs
related to our oil and natural assets that incurred prior the
proof of relevant reserves.
The estimation of the quantities of recoverable oil and gas
reserves in oil and gas fields is integral to effective
management of our exploration and production operations. Because
of the subjective judgments involved in developing and assessing
such information, engineering estimates of the quantities of
recoverable oil and gas reserves in oil and gas fields are
inherently imprecise and represent only approximate amounts.
Before estimated oil and gas reserves are designated as
“proved”, certain engineering criteria must be met in
accordance with industry standards and the regulations of the
United States Securities and Exchange Commission. Proved oil and
gas reserves are the estimated quantities of crude oil, natural
gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and
operating conditions. Therefore, these estimates do not include
probable or possible reserves. Our proved reserve estimates are
updated annually by an independent, qualified and experienced
oil and gas reserve engineering firm in the United States. Our
oil and gas reserve engineering department has policies and
procedures in place to ensure that these estimates are
consistent with these authoritative guidelines. Among other
factors as required by authoritative guidelines, this estimation
takes into account recent information about each field,
including production and seismic information, estimated
recoverable reserves of each well, and oil and gas prices and
operating costs as of the date the estimate is made. Prices
include consideration of changes in existing prices provided
only by contractual arrangements, but not on escalations based
upon future conditions. Therefore, as prices and cost levels
change from year to year, the estimate of proved reserves also
changes. We have no costs of unproved properties capitalized in
oil and gas properties.
Despite the inherent imprecision in these engineering estimates,
estimated proved oil and gas reserve quantity has a direct
impact on certain amounts reported in the financials statements.
In addition to the capitalization of costs related to oil and
gas properties on the balance sheet discussed earlier, estimated
proved reserves also impact the calculation of depreciation,
depletion and amortization expenses of oil and gas properties.
The cost of oil and gas properties is amortized at the field
level on the unit of production method. Unit of production rates
are based on the total oil and gas reserves estimated to be
recoverable from existing facilities based on the current terms
of our production licenses. Our reserve estimates include only
crude oil and natural gas which management believes can be
reasonably produced within the current terms of the production
licenses that are granted by the Ministry of Land and Resources,
ranging from 30 years to 55 years from the effective
date of issuance in March 2000, renewable upon application
30 days prior to expiration. Consequently, the impact of
changes in estimated proved reserves is reflected prospectively
by amortizing the remaining book value of the oil and gas
property assets over the expected future production. If proved
reserve estimates are revised downward, earnings could be
effected by higher depreciation expense or an immediate
write-down of the property’s book value had the downward
revisions been significant. See “— Property,
Plant and Equipment” below. Given our large number of
producing properties in our portfolio, and the estimated proved
reserves, it is unlikely that any changes in reserve estimates
will have a significant effect on prospective charges for
depreciation, depletion and amortization expenses.
We did not incur and do not anticipate to incur any material
dismantlement, restoration or abandonment cost given the nature
of our onshore producing activities and current PRC regulations
governing such activities.
In addition, due to the importance of these estimates to better
understanding the perceived value and future cash flows of a
company’s oil and gas operations, we have also provided
supplemental disclosures of “proved” oil and gas
reserve estimates prepared in accordance with authoritative
guidelines elsewhere in this annual report.
We record property, plant and equipment, including oil and gas
properties, initially at cost less accumulated depreciation,
depletion and amortization. Cost represents the purchase price
of the asset and other costs incurred to bring the asset into
existing use. Subsequent to their initial recognition, property,
plant and equipment are carried at revalued amount, being the
estimated fair value at the date of the revaluation less
accumulated depreciation and impairment losses. Revaluations are
performed by independent qualified valuers on a regular basis to
ensure that the carrying amount does not differ materially from
that which would be determined using fair value at the balance
sheet date. Revaluation surpluses pertaining to revalued assets
depreciated or disposed of are retained in the revaluation
reserve and will not be available to offset against possible
future revaluation losses. As disclosed in Note 16 to our
consolidated financial statements included elsewhere in this
annual report, our property, plant and equipment, excluding oil
and gas reserves, were revalued as of June 30, 1999.
Subsequently, our refining and chemical production equipment was
revalued as of September 30, 2003.
Depreciation, depletion and amortization to write off the cost
or valuation of each asset, other than oil and gas properties,
to its residual value is calculated using the straight-line
method over the estimated useful live of such asset as follows:
Land and buildings
25-50 years
Plant and machinery
10-15 years
Equipment and motor vehicles
3-16 years
We do not provide depreciation for construction in progress
until it is completed and ready for use.
The useful lives of non-oil-and-gas properties are estimated at
the time these purchases are made after considering future
changes, business developments and our strategies. Estimated
production lives for oil aid gas properties are also made after
considering the specific factors discussed under
“— Oil and Gas Reserves” above, Should there
be unexpected adverse changes in these circumstances or events,
which include, among others, declines in projected operating
results and negative industry or economic trends we would be
required to assess the need to shorten the useful lives and/or
make impairment provisions.
In performing this impairment assessment, we review internal and
external sources of information to identify indications of these
unexpected adverse changes. The sources utilized to identify
indications of impairment are often subjective in nature and
require us to use judgment in applying such information to our
businesses. Our interpretation of this information has a direct
impact on whether an impairment assessment is performed as at
any given balance sheet date. Such information is particularly
significant as it relates to our oil and gas properties. If an
indication of impairment is identified, the recoverable amount
of each cash generating unit is estimated, which is the higher
of its net selling price and its value in use, which is the
estimated net present value of future cash flows to be derived
from the continuing use of the asset and from its ultimate
disposal. To the extent the carrying amount of a cash generating
unit exceeds the recoverable amount, an impairment loss is
recognized in the income statement.
Depending on our assessment of the overall materiality of the
asset under review and complexity of deriving reasonable
estimates of the recoverable value, we may perform such
assessment utilizing internal resources or we may engage
external advisors to advise us in making this assessment.
Regardless of the resources utilized, we are required to make
many assumptions in making this assessment, including our
utilization of such asset, plans to continue to produce and
develop proved and associated probable or possible reserves, the
cash flows to be generated based on assumptions for future
commodity prices and development costs, appropriate market
discount rates and the projected market and regulatory
conditions. Changes in any of these assumptions could result in
a material change to future estimates of the recoverable value
of any asset.
Accounts receivables are stated at cost less provision for
impairment. Accounts where there are indications that a
receivable may be impaired or not collectible, a provision would
be recorded based on best estimates to reduce the receivable
balance to the amount that is expected to be collected. Factors
considered in making a provision include the historical payment
and collection experience, debtors’ credit worthiness and
appropriate discount rates. The recording of provisions requires
the application of judgments about the ultimate resolution of
these accounts receivable. As a result, provisions are reviewed
at each balance sheet date and adjusted to reflect our current
best estimates.
Deferred Tax Assets
We are required to exercise considerable judgment in making
provisions for deferred tax under the liability method. Under
this method, deferred income tax is provided for temporary
differences arising between the tax bases of assets and
liabilities and their carrying values for financial reporting
purposes. Specifically, we must make estimates of projected
capital expenditures to be incurred and the resulting
incremental timing difference that such capital expenditures
would generate for the determination of the amount of temporary
difference that will be recovered. We use currently enacted tax
rates to determine deferred income tax. If these rates change,
we would have to adjust our deferred tax in the period in which
these changes happen through the income statement.
The principal temporary differences arise from depreciation on
oil and gas properties and equipment and allowances for
impairment of receivables, inventories, investments and
property, plant and equipment. Deferred tax assets relating to
the carry-forward of unused tax losses are recognized to the
extent that it is probable that future taxable income will be
available against which the unused tax losses can be utilized.
Revenue Recognition
Sales are recognized upon delivery of products and customer
acceptance, if any, or performance of services, net of sales
taxes and discounts. Revenues are recognized only when we have
transferred to the buyer the significant risks and rewards of
ownership of the goods, and when the amount of revenue and the
costs incurred or to be incurred in respect of the transaction
can be measured reliably.
We sell part of the natural gas produced by us under take-or-pay
contracts entered into with our customers. Customers who entered
into such a take-or-pay contract are required to buy or pay for
the minimum amount of natural gas specified in the contract.
Revenues from the sale and transportation of natural gas under
take-or-pay contracts are recognized under the above accounting
policies. Any advance payment for natural gas that has not been
consumed will be recorded as deferred revenue until the natural
gas has been actually consumed.
We entered into a Crude Oil Mutual Supply Framework Agreement
with Sinopec, which can be characterized as a buy/sell contract,
and recognized the revenue derived from this agreement in our
consolidated statements of income. Since the transactions under
the agreement are separately invoiced and settled and cannot be
offset with each other, they were not treated as non-monetary
transactions as defined in APB Opinion No. 29
“Accounting for Non-monetary transactions”. In
February 2005, the U.S. Securities and Exchange Commission
issued a letter to the oil and gas industry requesting
additional disclosures regarding buy/sell contracts.
Accordingly, we have reviewed such transactions and estimated
that, if we are required to report the net amount of such
buy/sell contracts, our reported amount in the line items of
“Sales and other operating revenues” and
“Purchase, services and other” for the year ended
December 31, 2004 would be reduced by RMB 2,217
million (US$268 million) and RMB 2,217 million
(US$268 million), respectively. No change will occur to our
net income as a result of this.
In addition to the above significant accounting policies and
estimates, in connection with the preparation and reconciliation
of our financial statements in accordance with US GAAP, we
believe the following additional accounting estimate is also
critical.
One-time Remedial Payments for Staff Housing
As disclosed in Note 35(c) to our consolidated financial
statements included elsewhere in this annual report, certain of
our employees who joined the workforce prior to
December 31, 1998 and have housing conditions below local
standards are to be reimbursed for such differences. These
one-time remedial payments have been borne or are to be borne by
our State-owned shareholder, CNPC. Under IFRS, such direct
payments to employees or reimbursements will not be recorded in
our consolidated income statement. US GAAP contain no such
exemption but require this principal shareholder’s action
on our behalf to be recorded in the consolidated income
statement. During the year ended December 31, 2002, we and
CNPC completed the process of estimating the amounts payable to
qualified employees at the level of the affected business units
as a whole. We have reflected this best available estimate of
such payments in determining our net income for the year ended
December 31, 2002, under US GAAP. Since this amount is
borne by our State-owned shareholder, a corresponding amount has
been included as an addition to the other reserves in our
shareholders’ equity. This estimate did not significantly
change in 2003 and 2004. The estimation process of such payments
down to level of the individual employees is still on going.
Actual results may differ from these estimates at the time when
more information becomes available.
For detailed discussions of significant differences between IFRS
and US GAAP, see Note 35 to our consolidated financial
statements included elsewhere in this annual report and the
section headed “— Other Information —
US GAAP Reconciliation” below.
Acquisitions
Acquisitions of Overseas Assets
In April 2002, we acquired Devon Energy Indonesia Limited from
Devon Energy Corporation for a price of RMB 2,068 million
(US$250 million). Devon Energy Indonesia Limited holds
interests in a number of crude oil and natural gas exploration
and production project in Indonesia, including a 30% interest in
an oil and gas production sharing contract relating to the
Jabung block located in Sumatra, Indonesia. In April 2003, we
acquired a 50% equity interest in Amerada Hess Indonesia
Holdings Limited, which holds a 30% interest in the oil and gas
production sharing contract relating to the Jabung block, for a
price of RMB 679 million (US$82 million).
In June 2005, we entered into a capital contribution agreement
to acquire a 50% interest in Newco, one of CNODC’s
subsidiaries, for a consideration of
RMB 20,741 million (US$2,506 million) which will
be paid to Newco as our capital contribution. Upon consummation
of the transaction, we will own a 50% interest in certain
overseas oil and gas assets transferred by CNODC to Newco. We
expect to complete the acquisition by December 2005, subject to
completion of all necessary procedures for transferring the
relevant overseas assets of CNODC to Newco, approval by our
minority shareholders, applicable government approvals and
certain other conditions set out in the capital contribution
agreement. We also entered into a transfer agreement to transfer
all of our interest in PetroChina International Limited to Newco
for a consideration of RMB 579 million
(US$70 million). See “Item 4 —
Information on the Company — Introduction —
History and Development of the Company — Overview of
Our Operations.”
Upon completion of the acquisition and transfer, we will obtain
control over Newco by having the right to appoint four of the
seven directors. Our investment in Newco and the transfer of
PetroChina International Limited to Newco will be accounted for
in a manner similar to a uniting of interests since these
transactions are among entities under common control by CNPC.
Our consolidated financial statements will be restated as if
operations of PetroChina and Newco had always been combined.
We plan to continue to pursue attractive opportunities outside
China as part of our business growth strategy to utilize both
domestic and international resources to strengthen our
competitiveness. As we continue to implement this strategy, we
expect that acquisitions of overseas assets will over time have
a material effect on our results of operations and financial
condition.
Acquisition of Certain Refined Products Marketing
Enterprises from CNPC
In accordance with an acquisition agreement between CNPC and us
dated September 26, 2002, we acquired from CNPC the assets,
liabilities and interests related to CNPC’s refined
products marketing enterprises consisting primarily of service
stations and related facilities for RMB 3,200 million. The
acquisition price was determined on the basis of independent
valuation and appraisals of the assets and liabilities of these
marketing enterprises under applicable rules and regulations
promulgated in the PRC. Of the RMB 3,200 million in
purchase price, RMB 430 million was paid in cash,
RMB 1,124 million was set off against receivables from
CNPC, and the remaining balance of RMB 1,646 million
was included as payables to CNPC as of December 31, 2003.
Under IFRS, the acquisition is a combination of entities under
common control since the CNPC’s refined products marketing
enterprises and us are under the common control of CNPC. As a
result, we have accounted for the acquisition in a manner
similar to a uniting of interests, whereby the assets and
liabilities of the marketing enterprises acquired are accounted
for at historical cost to CNPC with net liabilities of
RMB 2,956 million at the effective date. Our prior
years’ consolidated financial statements were restated in
2002 to give effect to the acquisition in these periods as if
the operations of our company and these marketing enterprises
have always been combined in these periods. The difference
between RMB 3,200 million paid and the net liabilities
transferred from CNPC has been adjusted against equity.
C:
Operating Results
The following discussion is based on our historical results of
operations. As a result of the factors discussed above, such
results of operations may not be indicative of our future
operating performance.
Our income statement for each of the three years ended
December 31, 2002, 2003 and 2004 is summarized in the table
below.
The table below sets forth our revenues by business segment for
each of the three years ended December 31, 2002, 2003 and
2004 as well as the percentage changes in revenues for the
periods shown.
2003
2004
vs.
vs.
2002
2003
2002
2004
2003
(RMB in millions, except percentages)
Sales and other operating revenues
Exploration and production
147,308
177,271
20.3
%
222,305
25.4
%
Refining and marketing
174,621
223,584
28.0
295,598
32.2
Chemicals and marketing
29,661
39,211
32.2
57,179
45.8
Natural gas and pipeline
12,733
15,067
18.3
18,255
21.2
Total
364,323
455,133
24.9
%
593,337
30.4
%
Less intersegment sales
(119,899
)
(151,354
)
(26.2
)
(204,704
)
35.2
Consolidated net sales from operations
244,424
303,779
24.3
%
388,633
27.9
%
The table below sets forth our operating profits by business
segment for each of the three years ended December 31,2002, 2003 and 2004, as well as the percentage changes in
operating income for the periods shown. Other income from
operations shown below consists of research and development,
business services and infrastructure support to our operating
business segments.
For the year ended December 31, 2004, our total revenue was
RMB 388,633 million (US$46,956 million),
representing an increase of 27.9% from the year ended
December 31, 2003. Our net income in the year ended
December 31, 2004 was RMB 102,927 million
(US$12,436 million), increased 47.9% from the year ended
December 31, 2003. For the first time since our initial
public offering in April 2000, we realized a net income of more
than RMB100,000 million. Our basic and diluted earnings per
share for the year ended December 31, 2004 was
RMB 0.59, representing an increase of 47.9% from
RMB 0.40 for the year ended December 31, 2003.
Total Revenue. Total Revenue increased 27.9% from
RMB 303,779 million for the year ended
December 31, 2003 to 388,633 million
(US$46,956 million) for the year ended December 31,2004. The increase was due primarily to increases in our
realized selling prices of crude oil, gasoline, diesel and
chemical products, as well as increases in the sales volume of
natural gas, refined products and chemical products. The average
realized selling price for crude oil increased 24.6%
Operating Expenses. Operating expenses increased
18.3% from RMB 204,593 million for the year ended
December 31, 2003 to RMB 242,047 million
(US$29,245 million) for the year ended December 31,2004. This increase was due primarily to (i) a 28.1%
increase in purchases, services and other expenses, (ii) a
14.2% increase in employee compensation costs, (iii) a
10.8% increase in exploration expenses, (iv) a 14.5%
increase in depreciation, depletion and amortization and
(v) a 17.7% increase in taxes other than income tax.
Purchases, Services and Other Expenses. Purchases,
services and other expenses increased 28.1% from
RMB 90,850 million for the year ended
December 31, 2003 to RMB 116,353 million
(US$14,058 million) for the year ended December 31,2004. This increase was due primarily to increases in our
purchase expenses of crude oil, refined products and chemical
products associated with increases in the prices and purchase
volume of crude oil and refined products as well as increases in
the purchase volume of chemical products as we increased our
production and sales of these products in 2004. In 2004, we
purchased 121.8 million barrels of crude oil,
12.0 million tons of refined products and 990 thousand
tons of chemical products, as compared to 89.5 million
barrels of crude oil, 9.6 million tons of refined products
and 27 thousand tons of chemical products in 2003.
Employee Compensation Costs. Employee compensation costs
increased 14.2% from RMB 19,542 million for the year
ended December 31, 2003 to RMB 22,309 million
(US$2,695 million) for the year ended December 31,2004. This increase was due primarily to an increase of RMB
2,033 million in salaries and other benefits and an
increase of RMB 691 million in employee compensation
costs as a result of the expansion of our retail distribution
network.
Depreciation, Depletion and Amortization. Depreciation,
depletion and amortization increased 14.5% from
RMB 40,531 million for the year ended
December 31, 2003 to RMB 46,411 million
(US$5,608 million) for the year ended December 31,2004. This increase was due primarily to an increase of
RMB 4,530 million in depreciation and depletion
relating to the newly acquired assets.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased 10.2% from
RMB 23,930 million for the year ended
December 31, 2003 to RMB 26,377 million
(US$3,187 million) for the year ended December 31,2004. This increase was due primarily to an increase of
RMB 1,230 million in transportation expenses a result
of our increased sales volume of refined products and an
increase of RMB 760 million in repairment expenses.
Exploration Expenses. Exploration expenses increased
10.8% from RMB 10,577 million for the year ended
December 31, 2003 to RMB 11,723 million
(US$1,416 million) for the year ended December 31,2004. This increase was due primarily to increased expenditures
in exploration activities for the purpose of increasing our
crude oil and gas reserves.
Expenses Relating to the Shutting Down of Manufacturing
Facilities and Units. Expenses relating to shutting down of
manufacturing facilities and units decreased by 90.7% from
RMB 2,355 million for the year ended December 31,2003 to RMB 220 million (US$27 million) for the
year ended December 31, 2004. The expenses related to
shutting down low efficiency assets in our refining and
marketing segment and our chemicals and marketing segment in
2004 amounted to RMB 192 million and
RMB 28 million, respectively.
Taxes Other than Income Taxes. Taxes other than income
taxes increased 17.7% from RMB 15,879 million for the
year ended December 31, 2003 to
RMB 18,685 million (US$2,258 million) for the
year ended December 31, 2004. This increase was due
primarily to an increase of RMB 1,201 million in
consumption tax as a result of increased sales volume of
gasoline and diesel and an increase of RMB 272 million
in resources compensation fees as a result of increased revenues
of crude oil.
Income From Operations. As a result of the factors
discussed above, income from operations increased 47.8% from
RMB 99,186 million for the year ended
December 31, 2003 to RMB 146,586 million
(US$17,711 million) for the year ended December 31,2004.
Net Exchange Loss. Net exchange loss decreased
59.4% from RMB 180 million for the year ended
December 31, 2003 to RMB 73 million
(US$9 million) for the year ended December 31, 2004.
This decrease was due primarily to a decrease in the average
outstanding balance of foreign exchange borrowings in 2004.
Net Interest Expense. Net interest expense
decreased 28.3% from RMB 1,669 million for the year
ended December 31, 2003 to RMB 1,196 million
(US$144 million) for the year ended December 31, 2004.
This decrease was due primarily to a decrease in the average
outstanding balance of interest-bearing debts as a result of
sufficient cashflow derived from operating activities.
Income Before Income Taxes. Income before income
taxes increased 49.7% from RMB 98,322 million for the
year ended December 31, 2003 to
RMB 147,141 million (US$17,778 million) for the
year ended December 31, 2004.
Income Taxes. Income taxes increased 51.6% from
RMB 28,072 million for the year ended
December 31, 2003 to RMB 42,563 million
(US$5,143 million) for the year ended December 31,2004, due primarily to an increase in income before income taxes.
Net Income. As a result of the factors discussed
above, net income increased 47.9% from
RMB 69,614 million for the year ended
December 31, 2003 to RMB 102,927 million
(US$12,436 million) for the year ended December 31,2004.
Exploration and Production
Sales and Other Operating Revenue. Sales and other
operating revenue increased 25.4% from
RMB 177,271 million for the year ended
December 31, 2003 to RMB 222,305 million
(US$26,860 million) for the year ended December 31,2004. This increase resulted primarily from an increase in the
average realized selling price of crude oil and an increase in
sales volume of natural gas by our exploration and production
segment in 2004. Our average realized selling price of crude oil
for the year ended December 31, 2004 was US$33.88 per
barrel, representing an increase of 24.6% from US$27.20 per
barrel for the year ended December 31, 2003. Our
exploration and production segment sold 781.4 billion cubic
feet of natural gas in the year ended December 31, 2004, as
compared to 651.0 billion cubic feet of natural gas in the
year ended December 31, 2003.
Intersegment sales increased 36.8% from
RMB 128,963 million for the year ended
December 31, 2003 to RMB 176,458 million
(US$21,320 million) for the year ended December 31,2004. This increase resulted primarily from an increase in the
average selling price of crude oil and an increase of sales
volume of natural gas.
Sales of crude oil to Sinopec decreased 3.8% from
RMB 25,008 million for the year ended
December 31, 2003 to RMB 24,053 million
(US$2,906 million) for the year ended December 31,2004. This decrease was due primarily to a decrease in our sales
volume to Sinopec.
Operating Expenses. Operating expenses increased 13.9%
from RMB 84,901 million for the year ended
December 31, 2003 to RMB 96,734 million
(US$11,688 million) for the year ended December 31,2004. This increase was due primarily to (i) an increase of
RMB 3,057 million in purchase expenses for import of
crude oil, (ii) an increase of RMB 1,140 million
in exploration expenses as a result of increased expenditures in
exploration activities for the purpose of improving recovery of
crude oil and gas reserves, (ii) an increase of
RMB 2,013 million in depletion and depreciation
charges and (iii) an increase of
RMB 1,246 million in salaries and other benefits.
Income From Operations. As a result of the factors
discussed above, income from operations increased 35.9% from
RMB 92,370 million for the year ended
December 31, 2003 to RMB 125,571 million
(US$15,172 million) for the year ended December 31,2004.
Sales and Other Operating Revenue. Sales and other
operating revenue increased 32.2% from
RMB 223,584 million for the year ended
December 31, 2003 to RMB 295,598 million
(US$35,715 million) for the year ended December 31,2004. This increase was due primarily to increases in the
selling prices and the sales volumes of our principal refined
products.
Sales revenue from gasoline increased 28.0% from
RMB 60,073 million for the year ended
December 31, 2003 to RMB 76,919 million
(US$9,294 million) for the year ended December 31,2004 due primarily to increases in the selling prices and the
sales volume of gasoline. The average realized selling price of
gasoline increased 17.2% from RMB 3,023 per ton for
the year ended December 31, 2003 to RMB 3,542
(US$428.0) per ton for the year ended December 31, 2004. We
sold approximately 21.7 million tons of gasoline for the
year ended December 31, 2004, representing an increase of
9.3% from approximately 19.9 million tons for the year
ended December 31, 2003.
Sales revenue from diesel increased 36.2% from
RMB 100,336 million for the year ended
December 31, 2003 to RMB 136,649 million
(US$16,510 million) for the year ended December 31,2004 due primarily to increases in the selling prices and the
sales volume of diesel. The average realized selling price of
diesel increased 15.7% from RMB 2,735 per ton for the
year ended December 31, 2003 to RMB 3,165 (US$382.4)
per ton for the year ended December 31, 2004. We sold
43.2 million tons of diesel for the year ended
December 31, 2004, representing an increase of 17.7% from
36.7 million tons for the year ended December 31, 2003.
Sales revenue from kerosene increased 42.6% from
RMB 4,125 million for the year ended December 31,2003 to RMB 5,881 million (US$711 million) for
the year ended December 31, 2004 due primarily to increases
in the selling prices and sales volume of kerosene. The average
realized selling price of kerosene increased 20.5% from
RMB 2,306 per ton for the year ended December 31,2003 to RMB 2,779 (US$335.8) per ton for the year ended
December 31, 2004. The sales volume of kerosene increased
18.4% from approximately 1.8 million tons for the year
ended December 31, 2003 to approximately 2.1 million
tons for the year ended December 31, 2004.
Intersegment sales revenue increased 29.6% from
RMB 16,867 million for the year ended
December 31, 2003 to RMB 21,862 million
(US$2,641 million) for the year ended December 31,2004, due primarily to increases in the selling prices and sales
volume of our refined products.
Operating Expenses. Operating expenses increased 29.8%
from RMB 218,549 million for the year ended
December 31, 2003 to RMB 283,617 million
(US$34,268 million) for the year ended December 31,2004. This increase was due primarily to (i) increases in
purchase prices and purchase volumes of crude oil and refined
products, (ii) an increase in employee salary and benefits
and (iii) an increase in sales and administrative expenses.
Our purchase expenses of direct materials increased by
RMB 58,363 million (US$7,052 million) in 2004, of
which RMB 57,629 million (US$6,963 million) was
due to the increases in crude oil purchase prices and purchase
volume. Salary and benefits increased by
RMB 1,130 million (US$137 million) and sales and
administrative expenses increased by RMB 1,870 million
(US$226 million) in 2004.
Income From Operations. As a result of the factors
discussed above, income from operations increased 137.9% from
RMB 5,035 million for the year ended December 31,2003 to RMB 11,981 million (US$1,448 million) for
the year ended December 31, 2004.
Chemicals and Marketing
Sales and Other Operating Revenue. Sales and other
operating revenue increased 45.8% from
RMB 39,211 million for the year ended
December 31, 2003 to RMB 57,179 million
(US$6,909 million) for the year ended December 31,2004. This increase was due primarily to increases in the
selling prices and sales volumes of chemical products. The
average realized selling prices of synthetic resin, synthetic
fibres, rubber and urea were RMB 8,257, RMB 11,434,
RMB 10,703 and RMB 1,274 per ton, respectively, for
the year ended December 31, 2004,
representing increases of 39.1%, 27.6%, 22.3% and 16.6%,
respectively, from the year ended December 31, 2003. Our
chemicals and marketing segment sold 11,867 thousand tons
of chemical products for the year ended December 31, 2004,
representing an increase of 9% from the year ended
December 31, 2003.
Operating Expenses. Operating expenses increased 29.7%
from RMB 38,170 million for the year ended
December 31, 2003 to RMB 49,524 million
(US$5,984 million) for the year ended December 31,2004, due primarily to an increase of
RMB 7,464 million (US$902 million) in the
purchase expenses of direct materials and an increase of
RMB 1,080 million (US$130 million) in the sales
and administrative expenses.
Income From Operations. As a result of the factors
discussed above, income from operations increased by
RMB 6,614 million from RMB 1,041 million for
the year ended December 31, 2003 to
RMB 7,655 million (US$925 million) for the year
ended December 31, 2004.
Natural Gas and Pipeline
Sales and Other Operating Revenue. Sales and other
operating revenue increased 21.2% from
RMB 15,067 million for the year ended
December 31, 2003 to RMB 18,255 million
(US$2,206 million) for the year ended December 31,2004, due primarily to increases in natural gas sales revenue
and pipeline transmission revenue as a result of increases in
the sales volume and the pipeline transmission volume of natural
gas. Our natural gas and pipeline segment sold
657.3 billion cubic feet natural gas in the year ended
December 31, 2004, representing an increase of 21% from
543.4 billion cubic feet in the year ended December 31
2003, which resulted in an increase in sales revenue of
RMB 1,931 million (US$233 million). The increase
of RMB 1,055 million (US$127 million) in our
income from pipeline transmission of natural gas in 2004 was
attributable to an increase in the pipeline transmission volume
of natural gas from 520.3 billion cubic feet in 2003 to
616.0 billion cubic feet in 2004.
Operating Expenses. Operating expenses increased 19.6%
from RMB 13,145 million for the year ended
December 31, 2003 to RMB 15,720 million
(US$1,899 million) for the year ended December 31,2004, due primarily to (i) an increase of
RMB 1,402 million (US$169 million) in purchase
expenses of natural gas primarily as a result of the increase of
110.4 billion cubic feet in the natural gas purchase volume
and (ii) an increase of RMB 1,102 million
(US$133 million) in depreciation expenses.
Income From Operations. As a result of the factors
discussed above, income from operations increased 31.9% from
RMB 1,922 million for the year ended December 31,2003 to RMB 2,535 million (US$306 million) for
the year ended December 31, 2004.
For the year ended December 31, 2003, our total revenue was
RMB 303,779 million, representing an increase of 24.3%
from the year ended December 31, 2002. Our net income in
the year ended December 31, 2003 was
RMB 69,614 million, increased by 48.4% from the year
ended December 31, 2002. For the first time since our
initial public offering in April 2000, we achieved profitability
in each of our exploration and production, refining and
marketing, chemicals and marketing, and natural gas and pipeline
segments. Our basic and diluted earnings per share for the year
ended December 31, 2003 was RMB 0.40, representing an
increase of 48.1% from RMB 0.27 for the year ended
December 31, 2002.
Total Revenue. Total Revenue increased 24.3% from
RMB 244,424 million for the year ended
December 31, 2002 to RMB 303,779 million for the
year ended December 31, 2003. The increase
was due primarily to increases in our realized selling prices of
crude oil, gasoline, diesel and chemical products, as well as
increases in the sales volume of refined products, chemical
products and natural gas. The average realized selling price for
crude oil increased 21.0% from US$22.48 per barrel for the
year ended December 31, 2002 to US$27.20 per barrel
for the year ended December 31, 2003.
Operating Expenses. Operating expenses increased
18.9% from RMB 172,083 million for the year ended
December 31, 2002 to RMB 204,593 million for the
year ended December 31, 2003. This increase was due
primarily to a 26.7% increase in purchases, services and other
expenses, a 20.3% increase in employee compensation costs, a
30.7% increase in exploration expenses, a 11.0% increase in
expenses relating to workforce reduction and the shutting down
of manufacturing facilities and units and a 10.2% increase in
depreciation, depletion and amortization.
Purchases, Services and Other Expenses. Purchases,
services and other expenses increased 26.7% from
RMB 71,690 million for the year ended
December 31, 2002 to RMB 90,850 million for the
year ended December 31, 2003. This increase was due
primarily to a RMB 14,380 million increase in the cost
of refined product raw materials as a result of increases in the
prices and purchase volume of crude oil and a
RMB 1,490 million increase in the cost of chemicals
raw materials as a result of increases in the prices of
principal refined products. In 2003, our refining and marketing
segment purchased 89.0 million barrels of crude oil, as
compared to 39.8 million barrels in 2002. The average
realized prices of our gasoline and diesel increased by 17.6%
and 14.7%, respectively, in 2003.
Employee Compensation Costs. Employee compensation costs
increased 20.3% from RMB 16,248 million for the year
ended December 31, 2002 to RMB 19,542 million for
the year ended December 31, 2003. This increase resulted
primarily from an increase of RMB 2,262 million in
salaries and other benefits and an increase of
RMB 326 million in employee compensation costs as a
result of the expansion of our retail distribution network in
2003.
Exploration Expenses. Exploration expenses increased
30.7% from RMB 8,095 million for the year ended
December 31, 2002 to RMB 10,577 million for the
year ended December 31, 2003. This increase was due
primarily to increased expenditures in exploration activities
for the purpose of increasing our oil and gas reserves.
Depreciation, Depletion and Amortization. Depreciation,
depletion and amortization increased 10.2% from
RMB 36,782 million for the year ended
December 31, 2002 to RMB 40,531 million for the
year ended December 31, 2003. This increase was due
primarily to an increase of RMB 2,420 million in
current depreciation, depletion and amortization expenses
relating to the newly acquired assets.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased 6.5% from
RMB 22,474 million for the year ended
December 31, 2002 to RMB 23,930 million for the
year ended December 31, 2003. This increase was due
primarily to an increase of RMB 1,150 million in
impairment of accounts receivable.
Expenses Relating to Workforce Reduction and the Shutting
Down of Manufacturing Facilities and Units. We did not lay
off any employees for the year ended December 31, 2003, but
we shut down some low efficiency manufacturing facilities and
units of our refining and marketing segment and our chemicals
and marketing segment. Consequently, expenses relating to work
force reduction and the shutting down of manufacturing
facilities and units for the year ended December 31, 2003
consisted only of the costs for shutting down of manufacturing
facilities and units of RMB 2,355 million,
representing an increase of 11.0% from
RMB 2,121 million for the year ended December 31,2002.
Taxes Other than Income Taxes. Taxes other than income
taxes increased 8.7% from RMB 14,613 million for the
year ended December 31, 2002 to
RMB 15,879 million for the year ended
December 31, 2003. This increase was due primarily to an
increase of RMB 679 million in
consumption tax and surcharges as a result of increased
production volume of gasoline and diesel and an increase of
RMB 214 million in resources compensation fees as a
result of increased revenues for crude oil and natural gas.
Income From Operations. As a result of the factors
discussed above, income from operations increased 37.1% from
RMB 72,341 million for the year ended
December 31, 2002 to RMB 99,186 million for the
year ended December 31, 2003.
Net Exchange Loss. Net exchange loss decreased
43.0% from RMB 316 million for the year ended
December 31, 2002 to RMB 180 million for the year
ended December 31, 2003. This decrease was due primarily to
a decrease in the average proportion of foreign exchange
borrowings and an adjustment in the currency mix of foreign
exchange borrowings by repaying some of the foreign debts
denominated in foreign currencies with relatively high exchange
rate risk, such as Euro and British Sterling.
Net Interest Expense. Net interest expense
decreased 45.3% from RMB 3,053 million for the year
ended December 31, 2002 to RMB 1,669 million for
the year ended December 31, 2003. This decrease was due
primarily to a decrease in the average proportion of
interest-bearing debts and decreases in the average interest
rates.
Income Before Income Taxes. Income before income
taxes increased 42.0% from RMB 69,240 million for the
year ended December 31, 2002 to
RMB 98,322 million for the year ended
December 31, 2003.
Income Taxes. Income Taxes increased 26.3% from
RMB 22,231 million for the year ended
December 31, 2002 to RMB 28,072 million for the
year ended December 31, 2003, due primarily to an increase
in income before income taxes.
Net Income. As a result of the factors discussed
above, net income increased 48.4% from
RMB 46,910 million for the year ended
December 31, 2002 to RMB 69,614 million for the
year ended December 31, 2003.
Exploration and Production
Sales and Other Operating Revenue. Sales and other
operating revenue increased 20.3% from RMB 147,308 million
for the year ended December 31, 2002 to
RMB 177,271 million for the year ended
December 31, 2003. This increase resulted primarily from an
increase in the average realized selling price of crude oil and
an increase in sales volume of natural gas by our exploration
and production segment in 2003. Our average realized selling
price of crude oil for the year ended December 31, 2003 was
US$27.20 per barrel, representing an increase of 21.0% from
US$22.48 per barrel for the year ended December 31,2002. Our exploration and production segment sold
651.0 billion cubic feet of natural gas for the year ended
December 31, 2003, as compared to 588.4 billion cubic
feet of natural gas for the year ended December 31, 2002.
Intersegment sales increased 21.4% from
RMB 106,266 million for the year ended
December 31, 2002 to RMB 128,963 million for the
year ended December 31, 2003. Similarly, this increase
resulted primarily from an increase in the average selling price
of crude oil and an increase of sales volume of natural gas in
2003.
Sales of crude oil to Sinopec increased 9.8% from
RMB 22,778 million for the year ended
December 31, 2002 to RMB 25,008 million for the
year ended December 31, 2003. This increase was due
primarily to an increase in the average selling prices of crude
oil.
Operating Expenses. Operating expenses increased 12.9%
from RMB 75,169 million for the year ended
December 31, 2002 to RMB 84,901 million for the
year ended December 31, 2003. This increase was due
primarily to (i) an increase of RMB 2,482 million
in exploration expenses as a result of increased expenditures in
exploration activities for the purpose of improving recovery of
oil and gas reserves, (ii) an increase of
RMB 2,758 million in depletion of oil and gas property
as a
result of newly acquired assets, (iii) an increase of
RMB 1,421 million in salaries and other benefits and
(iv) an increase of RMB 1,383 million in
impairment of receivables.
Income From Operations. As a result of the factors
discussed above, income from operations increased 28.0% from
RMB 72,139 million for the year ended
December 31, 2002 to RMB 92,370 million for the
year ended December 31, 2003.
Refining and Marketing
Sales and Other Operating Revenue. Sales and other
operating revenue increased 28.0% from
RMB 174,621 million for the year ended
December 31, 2002 to RMB 223,584 million for the
year ended December 31, 2003. This increase was due
primarily to increases in the selling prices and the sales
volumes of our principal refined products.
Sales revenue from gasoline increased 23.0% from
RMB 48,834 million for the year ended
December 31, 2002 to RMB 60,073 million for the
year ended December 31, 2003 due primarily to increases in
the selling prices and the sales volume of gasoline. The average
realized selling price of gasoline increased 17.6% from
RMB 2,570 per ton for the year ended December 31,2002 to RMB 3,023 per ton for the year ended
December 31, 2003. We sold 19.9 million tons of
gasoline for the year ended December 31, 2003, representing
an increase of 4.6% from 19.0 million tons for the year
ended December 31, 2002.
Sales revenue from diesel increased 26.9% from
RMB 79,081 million for the year ended
December 31, 2002 to RMB 100,336 million for the
year ended December 31, 2003 due primarily to increases in
the selling prices and the sales volume of diesel. The average
realized selling price of diesel increased 14.7% from
RMB 2,384 per ton for the year ended December 31,2002 to RMB 2,735 per ton for the year ended
December 31, 2003. We sold 36.7 million tons of diesel
for the year ended December 31, 2003, representing an
increase of 10.5% from 33.2 million tons for the year ended
December 31, 2002.
Sales revenue from kerosene increased 6.8% from
RMB 3,864 million for the year ended December 31,2002 to RMB 4,125 million for the year ended
December 31, 2003 due primarily to increases in the selling
price of Kerosene despite a slight decrease of the sales volume
of kerosene in 2003. The average realized selling price of
kerosene increased 12.5% from RMB 2,050 per ton for
the year ended December 31, 2002 to RMB 2,306 per ton
for the year ended December 31, 2003.
Intersegment sales revenue increased 68.9% from
RMB 9,988 million for the year ended December 31,2002 to RMB 16,867 million for the year ended
December 31, 2003 due primarily to increases in the selling
prices and the sales volumes of our principal refined products.
Operating Expenses. Operating expenses increased 27.2%
from RMB 171,803 million for the year ended
December 31, 2002 to RMB 218,549 million for the
year ended December 31, 2003. This increase was due
primarily to increases in purchase prices of crude oil and
refined products from third parties, as well as an increase in
the purchase volume of crude oil from third parties. Our crude
oil purchase expenses increased by RMB 36,330 million
in 2003, of which RMB 26,480 million was due to the
increase in crude oil purchase prices and
RMB 9,850 million was due to the increase in crude oil
purchase volume. Although our purchase volume of refined
products from third parties decreased slightly in 2003, our
total purchase expenses of refined products from third parties
increased by RMB 1,850 million in the same period due
primarily to increases in purchase prices.
Income From Operations. As a result of the factors
discussed above, income from operations increased 78.7% from
RMB 2,818 million for the year ended December 31,2002 to RMB 5,035 million for the year ended
December 31, 2003.
Sales and Other Operating Revenue. Sales and other
operating revenue increased 32.2% from
RMB 29,661 million for the year ended
December 31, 2002 to RMB 39,211 million for the
year ended December 31, 2003, due primarily to increases in
the selling prices and sales volumes of chemical products. The
average realized selling prices of synthetic resin, synthetic
fibres, rubber and urea were RMB 5,938, RMB 8,959,
RMB 8,753 and RMB 1,093, respectively, for the year
ended December 31, 2003, representing increases of 14.1%,
15.4%, 32.5% and 6.7%, respectively, from the year ended
December 31, 2002. Our chemicals and marketing segment sold
10,880 thousand tons of chemical products for the year ended
December 31, 2003, representing an increase of 18.26% from
the year ended December 31, 2002.
Operating Expenses. Operating expenses increased 16.3%
from RMB 32,823 million for the year ended
December 31, 2002 to RMB 38,170 million for the
year ended December 31, 2003, due primarily to an increase
of RMB 5,855 million in the purchase expenses of
direct materials.
Income (Loss) From Operations. As a result of the factors
discussed above, we recorded income from operations of
RMB 1,041 million for the year ended December 31,2003. We recorded a loss of RMB 3,162 million for the
year ended December 31, 2002.
Natural Gas and Pipeline
Sales and Other Operating Revenue. Sales and other
operating revenue increased 18.3% from
RMB 12,733 million for the year ended
December 31, 2002 to RMB 15,067 million for the
year ended December 31, 2003, due primarily to increases in
the sales volume of natural gas and the pipeline transmission
prices and volume and the addition of the results of a refined
product pipeline. Our natural gas and pipeline segment sold
543.4 billion cubic feet natural gas in the year ended
December 31, 2003, representing an increase of 11.7% from
486.3 billion cubic feet in the year ended December 31
2002, which resulted in an increase of
RMB 937 million. The increase of
RMB 1,241 million in our income from pipeline
transmission of natural gas, crude oil and refined products in
2003 was attributable to (i) a RMB 686 million
increase due to increases in crude oil and natural gas
transmission prices and (ii) a RMB 456 million
increase due to the addition of the results of the
Lanzhou — Chengdu — Chongqing refined
product pipeline.
Operating Expenses. Operating expenses increased 17.6%
from RMB 11,181 million for the year ended
December 31, 2002 to RMB 13,145 million for the
year ended December 31, 2003, due primarily to (i) an
increase of RMB 1,402 million in purchase expenses of
natural gas primarily as a result of the increase of
1.6 billion cubic feet in the natural gas purchase volume
and (ii) an increase of RMB 330 million in
depreciation expenses.
Income From Operations. As a result of the factors
discussed above, income from operations increased 23.8% from
RMB 1,552 million for the year ended December 31,2002 to RMB 1,922 million for the year ended
December 31, 2003.
C:
Liquidity and Capital Resources
Our primary sources of funding include cash generated by
operating activities, short-term and long-term borrowings and
cash and cash equivalents. Historically, our primary uses of
funds were for operating activities, capital expenditures,
repayment of short-term and long-term borrowings and
distributions of dividends to shareholders. Our payments to CNPC
are limited to dividends and payments for services provided to
us by CNPC. In the year ended December 31, 2004, we
distributed as dividends 45% of our reported net income. We
expect that we will continue to distribute as dividends
approximately 40% to 50% of our reported net income for all
years. See “Item 8 Financial Information —
Dividend Policy” for a discussion of factors which may
affect the determination by our board of directors of the
appropriate level of dividends.
We finance a significant portion of our business operations with
short-term borrowings, including short-term debt obtained from
PRC State-owned banks. As of December 31, 2004, short-term
debt comprised approximately 5.5% of our capital employed as
compared to approximately 6.7% as of December 31, 2003. Our
ability to obtain adequate financing to satisfy our capital
expenditure and debt servicing requirements may be limited by
our financial condition and our results of operations and the
liquidity of international and domestic capital markets. Prior
to accessing international and domestic capital markets, we must
obtain approval from various PRC government authorities. In
general, we must obtain PRC government approval for any project
involving significant capital investment for our refining and
marketing, chemicals and marketing and natural gas and pipeline
segments. For a more detailed discussion of factors which may
affect our ability to satisfy our financing requirements, see
“Item 3 — Key Information — Risk
Factors”.
We plan to fund the capital and related expenditures described
in this annual report principally through cash generated by
operating activities, short-term and long-term borrowings and
cash and cash equivalents. Net cash generated by operating
activities in the year ended December 31, 2004 was
RMB 137,299 million (US$16,589 million). As of
December 31, 2004, we had cash and cash equivalents of
RMB 11,304 million (US$1,366 million). While each
of the projects described in this annual report for which
significant capital expenditures will be required is important
to our future development, we do not believe that failure to
implement any one of these projects would have a material
adverse effect on our financial condition or results of
operations. If the price of crude oil undergoes a steep decline
in the future, it is likely that we would delay or reduce the
scale of the capital expenditures for our exploration and
production segment.
Our shareholders approved at our shareholders’ meeting held
on May 28, 2003 the proposed issuances of our corporate
bonds in the principal amount of up to
RMB 1,500 million and RMB 4,000 million to PRC
citizens and enterprises. Upon the grant of PRC government
approval, we issued a portion of these corporate bonds in the
principal amount of RMB 1,500 million in October 2003.
We received RMB 1,500 million in the net proceeds from
this issuance. We intend to use the proceeds received from the
issuance of these corporate bonds for various crude oil and
natural gas exploration projects in a number of our oil and gas
regions, as well as for upgrading refining facilities in Daqing
Petrochemical and constructing the natural gas pipeline from
Zhong County to Wuhan City. However, the issuance of the
remaining portion of these corporate bonds will be subject to
market conditions. We cannot assure you that we will complete
the issuance of the remaining portion of these corporate bonds
in accordance with the terms approved by our shareholders.
However, we do not believe failure to complete the issuance of
the remaining portion of these corporate bonds would have a
material adverse effect on our financial condition. In addition,
we consider from time to time opportunities to fund our capital
needs by accessing into domestic equity capital markets.
We currently do not have any outstanding options, warrants or
other rights for any persons to require us to issue any common
stock at a price below its market value. We do not currently
intend to issue any such rights or to otherwise issue any common
stock for a price below its market value.
In addition, we did not have for the year ended
December 31, 2004, and do not currently have, any
transactions, arrangements or other relationships with
unconsolidated entities or other persons that are reasonably
likely to materially affect the liquidity or availability of or
requirements for our capital resources.
The table below sets forth our cash flows for each of the three
years ended December 31, 2002, 2003 and 2004 and our cash
equivalents at the end of each period.
Net cash provided by (used for) financing activities
(27,829
)
(39,769
)
(38,693
)
Cash and cash equivalents at the end of period
9,977
11,231
11,304
Our cash and cash equivalents increased by
RMB 73 million from RMB 11,231 million as of
December 31, 2003 to RMB 11,304 million
(US$1,366 million) as of December 31, 2004,
representing a 0.6% increase over 2003.
Cash Generated by Operating Activities
Our net cash generated by operating activities was
RMB 137,299 million (US$16,589 million) for the
year ended December 31, 2004, representing an increase of
RMB 63 million from RMB 137,236 million for
the year ended December 31, 2003, due primarily to an
increase of RMB 84,854 million in sales revenue which
was partially offset by an increase of
RMB 25,503 million in our purchase expenses, a
decrease of RMB 24,507 million in working capital
deficit and an increase of RMB 14,491 million in
income tax expense.
We had a working capital deficit of RMB 27,855 million
as of December 31, 2003 and RMB 3,348 million
(US$405 million) as of December 31, 2004. This
decrease in working capital deficit was due primarily to an
increase of RMB 16,899 million in inventory and an
increase of RMB 8,993 million in receivables under the
resale agreements.
Our net cash generated by operating activities increased 41.1%
from RMB 97,290 million for the year ended
December 31, 2002 to RMB 137,236 million for the
year ended December 31, 2003. This increase was due
primarily to an increase of RMB 60,171 million in
sales revenue and an increase of RMB 1,370 million in
collection of accounts receivable.
We had a working capital deficit of RMB 14,189 million
as of December 31, 2002 and RMB 27,855 million as
of December 31, 2003. This increase in working capital
deficit primarily reflected an increase in long-term borrowings
due within a year from RMB 6,143 million as of
December 31, 2002 to RMB 19,672 million as of
December 31, 2003.
Our notes and other receivables include notes receivable from
customers. Other receivables represent advances to employees,
non-trade related receivables from other companies, and
receivables from government agencies. Allowance for doubtful
accounts were primarily related to other receivables which we
estimated to be uncollectible. Our notes receivable do not
include past due customer amounts and, as a majority portion of
our notes receivable are approved by banks, we do not have
special arrangements with respect to extended payment terms on
notes receivable.
Short-term debt (including current portion of long-term debt)
20,633
28,890
27,276
Long-term debt
60,655
41,959
38,458
Total debt
81,288
70,849
65,734
Less:
Cash and cash equivalents
9,977
11,231
11,304
Time deposits with term exceeding three months
2,612
2,640
1,400
Receivables under resale agreements
9,786
24,224
33,217
Net debt
58,913
32,754
19,813
See Note 22 to our consolidated financial statements
included elsewhere in this annual report for information
regarding the maturity profile of debt, currency and interest
rate structure.
The debts which were guaranteed by CNPC amounted to
RMB 939 million, RMB 853 million and
RMB 756 million (US$91 million) as of
December 31, 2002, 2003 and 2004, respectively. As of
December 31, 2000, we had repaid all short-term debts
guaranteed by CNPC. CNPC and we have undertaken to the Hong Kong
Stock Exchange that we will continue to, on a best endeavor
basis, approach each lender with respect to these guaranteed
debts with a view toward obtaining the unconditional release of
such guarantees.
Of the total debts outstanding as of December 31, 2004,
approximately 27.1% were fixed-rate loans and approximately
72.9% were floating-rate loans. Of the total debts outstanding
as of December 31, 2004, approximately 85.1% were
denominated in Renminbi, approximately 13.2% were denominated in
the U.S. dollar and approximately 1.7% were denominated in
other major foreign currencies.
Our debts included short-term and long-term debts owed to China
Petroleum Finance Company Limited of
RMB 24,702 million, RMB 25,188 million and
RMB 23,168 (US$2,799 million) as of December 31,2002, 2003 and 2004, respectively. The amount of such short-term
debts as of December 31, 2002, 2003 and 2004 were
RMB 570 million, RMB 610 million and
RMB 600 million (US$72 million), respectively.
The amount of such long-term debts as of December 31, 2002,
2003 and 2004 were RMB 24,132 million,
RMB 24,578 million and RMB 22,568 million
(US$2,727 million), respectively. These debts were
unsecured with interest bearing at below the prime rate as
published by the People’s Bank of China. We also maintain a
portion of our deposits at China Petroleum Finance Company
Limited at an interest rate of 0.72%.
Our net cash used for financing activities decreased 2.7% from
RMB 39,769 million for the year ended
December 31, 2003 to RMB 38,693 million
(US$4,675 million) for the year ended December 31,2004. This decrease resulted primarily from the following:
•
an increase in the repayment of long-term loans leading to an
increase of RMB 14,832 million in cash outflow;
•
an increase in the distribution of dividends leading to an
increase of RMB 4,650 million in cash outflow; and
•
a decrease in new short-term loans leading to a decrease of
RMB 1,339 million in cash inflow;
This decrease was offset primarily by the following:
•
an increase in new long-term loans leading to an increase of
RMB 12,791 million in cash inflow; and
•
a decrease in the repayment of short-term loans leading to a
decrease of RMB 8,673 million in cash outflow.
Our net cash used for financing activities increased 42.9% from
RMB 27,829 million for the year ended
December 31, 2002 to RMB 39,769 million for the
year ended December 31, 2003. This increase resulted
primarily from the following:
•
an increase in the distribution of dividends leading to an
increase of RMB 12,028 million in cash outflow;
•
a decrease in new long-term loans leading to a decrease of
RMB 7,062 million in cash inflow; and
•
a decrease in new short-term loans leading to a decrease of
RMB 3,600 million in cash inflow;
This increase was offset primarily by the following:
•
a decrease in the repayment of long-term loans leading to a
decrease of RMB 5,993 million in cash outflow; and
•
a decrease in the repayment of short-term loans leading to a
decrease of RMB 4,177 million in cash outflow.
As at December 31, 2004, our loans of
RMB 50 million were secured loans (including financing
leases and bank loans), of which RMB 29 million of bank
loans were secured by our plants and equipment in the aggregate
value of RMB 218 million. We consider financing leases
as secured debts. As at December 31, 2004, the debts
incurred by us by way of financing leases amounted to
RMB 21 million. The net book value of the properties,
plant and equipment under financing leases was RMB
175 million.
Our debt to equity ratio (calculated by dividing
interest-bearing debts by the aggregate of interest-bearing
debts and shareholder’s equity) as of December 31,2004 was 13.4%, as compared to 16.6% as of December 31,2003.
Capital Expenditures and Investments
Our net cash used for investing activities includes capital
expenditures and investments, offset by proceeds from the sale
of assets and dividends received. The table below sets forth our
capital expenditures and investments (including non dry hole
exploration expenses) by business segment for each of the years
ended December 31, 2002, 2003 and 2004 as well as those
anticipated for the year ending December 31, 2005. Actual
capital expenditures and investments for periods after
January 1, 2005 may differ materially from the amounts
indicated below.
Our capital expenditures and investments increased 15.2% from
RMB 88,815 million for the year ended December 31,2003 to RMB 102,354 million (US$12,367 million) for
the year ended December 31, 2004. This increase was due
primarily to an increase of RMB 7,894 million
(US$954 million) in capital expenditures and investments in
exploration activities and an increase of RMB 4,817 million
(US$582 million) in capital expenditures and investments in
constructing our sales network of refined products. Taking into
account the exclusion of the investments relating to the non-dry
hole exploration expenses, our capital expenditures for the
years ended 2002, 2003 and 2004 would have been RMB
72,766 million, RMB 82,929 million and RMB
95,349 million, (US$11,520 million), respectively.
As of December 31, 2004, the capital expenditures
contracted for at the balance sheet date but not recognized in
our consolidated financial statements were approximately RMB
5,370 million (US$649 million).
Exploration & Production
A majority of our capital expenditures and investments relate to
our exploration and production segment. Our capital expenditures
and investments for the segment for the year ended
December 31, 2004 totaled RMB 66,493 million
(US$8,034 million), including RMB 18,313 million for
exploration activities and RMB 43,217 million for
development activities. Our capital expenditures and investments
for the year ended December 31, 2003, totaled RMB
58,599 million, including RMB 15,136 million for
exploration activities and RMB 39,587 million for
development activities. The increase in our capital expenditures
and investments from the year ended December 31, 2003 to
the year ended December 31, 2004 was due primarily to
increased capital expenditures for crude oil exploration
activities in our Daqing, Tarim and Changqing oil regions and
increased capital expenditures for natural gas exploration
activities in our Tarim, Sichuan and Erdos basins. Taking into
account the exclusion of the investments relating to the non-dry
hole exploration expenses, the capital expenditures of our
exploration and production segment for the years ended
December 31, 2002, 2003 and 2004 would have been RMB
46,078 million, RMB 52,713 million and RMB
59,488 million (US$7,188 million), respectively.
Our anticipated capital expenditures and investments for our
exploration and production segment for the year ending
December 31, 2005 amount to RMB 66,660 million.
Approximately RMB 16,460 million is expected to be used for
exploration activities and approximately RMB 50,200 million
for development activities. We plan to focus our exploration
efforts in Erdos, Junggar, Tarim, Songliao, Sichuan and Bohai
Bay basins.
Refining and Marketing
Our capital expenditures for our refining and marketing segment
for each of the three years ended December 31, 2002, 2003
and 2004 were RMB 10,503 million, RMB 12,650 million
and RMB 17,467 (US$2,110 million), respectively. The
increase in 2004 is due primarily to an increase in capital
expenditures for further expansion of our sales network of
refined products.
Our anticipated capital expenditures for our refining and
marketing segment for the year ending December 31, 2005
amount to RMB 14,590 million, which include:
•
approximately RMB 7,340 million for the construction of the
sales network of refined products; and
•
approximately RMB 7,250 million for the construction and
expansion of refining facilities.
Chemicals and Marketing
Our capital expenditures for our chemicals and marketing segment
for each of the three years ended December 31, 2002, 2003
and 2004 were RMB 3,140 million,
RMB 3,898 million and RMB 4,319 million
(US$522 million), respectively. The increase in 2004 was
due primarily to the
increased capital expenditures for upgrading the ethylene
facilities in Daqing Petrochemical, Jilin Petrochemical and
Lanzhou Petrochemical.
Our anticipated capital expenditures for our chemicals and
marketing segment for the year ending December 31, 2005
amount to RMB 8,350 million, which mainly include capital
expenditures for upgrading the ethylene facilities in Daqing
Petrochemical, Jilin Petrochemical, Lanzhou Petrochemical and
Dushanzi Petrochemical and for the construction of the PTA
project at Liaoyang Petrochemical.
Natural Gas and Pipeline
Our capital expenditures for our natural gas and pipeline
segment for each of the three years ended December 31,2002, 2003 and 2004 were RMB 12,912 million,
RMB 13,530 million and RMB 13,901 million
(US$1,680 million), respectively. The increase in 2004
resulted primarily from increased capital expenditures for the
Zhong County to Wuhan natural gas pipeline and the second
Shaanxi-Beijing natural gas pipeline.
Our anticipated capital expenditures for our natural gas and
pipeline segment for the year ending December 31, 2005
amount to approximately RMB 12,400 million. Of this amount,
approximately RMB 7,000 million is expected to be invested
in the West to East natural gas pipeline project, the Zhong
County to Wuhan natural gas pipeline and the second
Shaanxi-Beijing natural gas pipeline and approximately RMB
5,400 million is expected to be invested in natural gas
storage infrastructure projects, other natural gas pipelines and
the pipelines for the transmission of crude oil and refined
products. See “Item 4 — Information on the
Company — Natural Gas and Pipeline —
Expansion of Our Natural Gas Transmission and Marketing
Business” for a more detailed discussion of the expansion
plans of our natural gas and pipeline segment.
Corporate and Other
Our non-segment-specific capital expenditures and investments
for each of the three years ended December 31, 2002, 2003
and 2004 were RMB 133 million and RMB 138 million
and RMB 174 million (US$21 million), respectively. Our
non segment-specific capital expenditures and investments
related primarily to purchase of non-segment-specific equipment
and research and development activities.
Our anticipated non-segment-specific capital expenditures and
investments for the year ending December 31, 2005 amount to
RMB 1,000 million. These planned capital expenditures and
investments mainly include capital expenditures for scientific
research and the development of our information system, water
and power supply system, transportation system and
telecommunication system, which are mutually beneficial to our
business segments.
The Restructuring of Our Long-Term Investments
In 2002, we entered into a number of transactions to streamline
our long-term investments and to focus our resources on our core
business activities. We entered into a share transfer agreement
with each of Xian Feitian Science, Industrial and Trading Group
Company Limited, or Xi’an Feitian, and Wuhan Luzhou
Enterprise (Group) Company Limited, or Wuhan Luzhou, on
May 23, 2002. Under the share transfer agreements, we
transferred 27% and 8.9% of the state-owned legal person shares
in Petroleum Long Champ (Group) Co., Ltd., or Long Champ, to
Xi’an Feitian and Wuhan Luzhou, respectively. The share
transfer agreements were approved by the Ministry of Finance and
became effective on December 31, 2002. We ceased having any
interest in Long Champ upon completion of the share transfers.
We entered into a share transfer agreement with China Electronic
Information Industrial Group Company, or China Electronic, on
July 12, 2002. Under the share transfer agreement, we
transferred 51.6% of the state-owned legal person shares in
Gansu Tristar Petrochemical (Group) Co., Ltd., or
Tristar, to China Electronic. On July 25, 2002, the
Ministry of Finance granted its approval to the transfer of the
state-owned legal person shares in Tristar and the share
transfer agreement became effective. We ceased having any
interest in Tristar upon completion of the share transfer.
We have used the entire proceeds received from the transfer of
shares in Long Champ and cash provided by our cash and cash
equivalents to purchase Long Champ’s equity interest in
three crude oil pipeline transmission enterprises. We have used
the entire proceeds received from the transfer of shares in
Tristar and cash provided by our cash and cash equivalents to
purchase certain Tristar’s refining and chemical assets or
businesses. We believe that the purchase of these assets and
businesses did not have a material adverse impact on our
financial condition or results of operations.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors.
Long-Term Contractual Obligations and Other Commercial
Commitments
and Payment Obligations
The tables below set forth certain information in connection
with our long-term contractual obligations and other commercial
commitments outstanding as of December 31, 2004.
The table below sets forth the estimated annual payments we are
obligated to make with respect to our exploration and production
licenses to the Ministry of Land and Resources.
Year
Annual payment
(RMB in millions)
2005
618
2006
681
2007 and thereafter
712
We sell a substantial portion of our natural gas under long-term
take-or-pay contracts. Under these contracts, the customers are
required to take or pay, and we are obligated to deliver,
minimum quantities of natural gas annually.
As of December 31, 2004, our future minimum delivery
commitments under such take-or-pay contracts are as follows:
Quantities
(billion of cubic feet)
2005
229
2006
443
2007
581
2008
637
2009
701
2010 and thereafter
6,111
C:
Research and Development
We have a research and development management department,
directly under which there are three research institutions.
Except for our branch companies which are engaged in marketing
activities, each of our branch companies has its own research
and development management department. Most of our branch
companies have their own research institutions. Our research and
development management departments are mainly responsible for
managing and coordinating the research and development
activities conducted by each of the research institutions. As of
December 31, 2004, we had 22,182 employees engaged in
research and development functions.
In 2004, we applied for 221 patents and 159 trademarks in China.
We obtained patent rights for 157 patents in the same period.
In each of the three years ended December 31, 2002, 2003
and 2004, our total expenditures for research and development
were approximately RMB 1,806 million, RMB
2,411 million and RMB 2,936 million (US$355 million),
respectively.
Exploration and Production
China’s major oil and gas fields are characterized by a
broad range of geological conditions, and a majority of
China’s oil and gas fields are in continental sedimentary
basins with complex structures. We have developed effective
exploration and production techniques and methods that are
suitable for these geological conditions. Our research and
development efforts with respect to our exploration and
production business focus on:
•
geological structures of crude oil and natural gas reserves;
•
oil and gas exploration and development;
•
oil and gas production and pipeline transportation; and
In order to organize and coordinate our research and development
activities related to our refining and chemicals businesses, we
established PetroChina Refining & Chemicals Technology
Research Center in July 2003, which is responsible for
developing research strategies and managing and coordinating
major research projects. We have established four research and
development centers in Daqing Petrochemical, Liaoyang
Petrochemical, Lanzhou Petrochemical and Jilin Petrochemical to
carry out the research and development of certain of our major
refining and chemicals research projects. In order to enhance
our competitiveness and develop core technologies, we plan to
integrate the resources of our down-stream scientific research
and development system in the near future.
C:
Trend Information
Streamlining of Production Facilities
We plan to continue to streamline our production facilities
within the next several years to further improve our operating
efficiency and competitiveness by consolidating or shutting down
some of our production facilities. We do not believe that the
implementation of such plans will have a material adverse impact
on our financial position, although we believe that it could
have a material adverse effect on our results of operations
because we would be required under our accounting policies to
recognize in our income statement any impairment loss or
impairment provision associated with shutting down our
production facilities. See “— General —
Critical Accounting Policies” and
“— General — Factors Affecting Results
of Operations” above for a detailed discussion of other
trend information.
C:
Other Information
Inflation
Inflation or deflation has not had a significant impact on our
results of operations for the year ended December 31, 2004.
We did not engage for the year ended December 31, 2004, and
do not currently engage, to a material extent, in any trading
activities involving commodity contracts that are accounted for
at fair value but for which a lack of market price quotations
makes it necessary to apply fair value estimation techniques.
Related Party Transactions
For a discussion of related party transactions, see
“Item 7 — Major Shareholders and Related
Party Transactions — Related Party Transactions”
and Note 32 to our consolidated financial statements
included elsewhere in this annual report.
US GAAP Reconciliation
We prepared our consolidated financial statements in accordance
with IFRS. This basis of accounting may differ from US GAAP.
Such differences involve methods for measuring the amounts shown
in the financial statements, as well as additional disclosures
required by US GAAP.
A summary of the principal differences and additional
disclosures applicable to us is set out below:
Revaluation of Property, Plant and Equipment
As described in Note 16 to our consolidated financial
statements, the property, plant and equipment, excluding oil and
gas reserves, transferred to us by CNPC were appraised as of
June 30, 1999, as required by the relevant PRC regulations,
by a firm of independent valuers registered in the PRC, China
Enterprise Appraisal. As at September 30, 2003, a
revaluation of our refining and chemical production equipment
was undertaken by a firm of independent valuers registered in
the PRC, China United Assets Appraiser Co., Ltd, on a
depreciated replacement cost basis.
The June 1999 revaluation resulted in RMB 80,549 million in
excess of the prior carrying value and a revaluation loss of RMB
1,122 million on certain property, plant and equipment.
The September 2003 revaluation resulted in RMB 872 million
in excess of the carrying value of certain property, plant and
equipment immediately prior to the revaluation and a revaluation
loss of RMB 1,257 million.
With respect to the RMB 872 million revaluation gain
resulting from the 2003 revaluation, RMB 98 million were
related to property, plant and equipment that in 1999
experienced revaluation loss, and were credited to the income
statement. The remaining RMB 774 million was credited to
the revaluation reserve in the shareholders’ equity.
With respect to the RMB 1,257 million revaluation loss
resulting from the 2003 revaluation, RMB 768 million were
related to property, plant and equipment that in 1999
experienced revaluation gain. The remaining RMB 489 million
were charged to the income statement.
The depreciation charge, which includes impairment charge, on
the revaluation surplus was RMB 8,157 million in 2002, RMB
8,053 million in 2003 and RMB 8,170 million in 2004.
The depreciation charge on the revaluation loss was RMB
112 million in 2002, RMB 144 million in 2003 and RMB
830 million in 2004.
The loss on disposal of property, plant and equipment, which
includes shut down of manufacturing assets, was RMB
224 million in 2002, RMB 451 million in 2003 and RMB
523 million in 2004.
For purposes of reconciling to the US GAAP financial data, the
effect of the revaluation, the related depreciation charges and
loss on disposal is reversed. A deferred tax asset relating to
the reversal of the effect of revaluation in 1999 is
established, together with a corresponding increase in the
shareholders’ equity. Under a special approval granted by
the Ministry of Finance, the effect of the revaluation in 1999
is available as additional depreciation base for purposes of
determining taxable income.
Related Party Transactions
We have disclosed in Note 31 to our consolidated financial
statements included elsewhere in this annual report transactions
with significant customers and in Notes 13, 15, 21, 22
and 32 to our consolidated financial statements transactions and
balances with our immediate parent, CNPC, and related companies.
CNPC is owned by the PRC government, which also owns a
significant portion of the productive assets in the PRC. IFRS
exempts state controlled enterprises from disclosing
transactions with other state controlled enterprises. IFRS also
excludes from related parties government departments and
agencies to the extent that such dealings are in the normal
course of business. US GAAP contains no similar exemptions but
requires disclosure of material related party transactions. We
believe that we have provided meaningful disclosures of related
party transactions through the major customer disclosures in
Note 31 to our consolidated financial statements included
elsewhere in this annual report and the transactions with the
CNPC Group disclosed in Note 32 to our consolidated
financial statements. Although the majority of our activities
are conducted with the PRC government authorities and its
affiliates and other state controlled enterprises, none
individually constitutes a major customer or supplier other than
those disclosed.
One-time Remedial Payments for Staff Housing
The Ministry of Finance of the PRC issued several public notices
and regulations during 2000 and 2001 with respect to the
one-time remedial payments for staff housing payable to certain
employees who joined the workforce prior to December 31,1998 and have housing conditions below local standards as
determined in accordance with government regulations and
guidelines. These Ministry of Finance notices and regulations
also provided that the portion of remedial payments attributable
to the periods prior to a restructuring of the employer
enterprise from a wholly state-owned status to a less than
wholly state-owned status is to be borne by the state
shareholder of the enterprise.
The restructuring that resulted in our formation took place in
November 1999. As such, the one-time remedial housing payments
payable to our eligible employees have been born or are to be
borne by CNPC, our principal shareholder.
Under IFRS, such direct payments to employees or reimbursements
will not be recorded through our consolidated income statement.
US GAAP contains no such exemption but requires this principal
shareholder’s action on our behalf to be recorded in the
consolidated income statement. In the last quarter of year 2002,
we and CNPC completed the process of estimating the amount that
are payable to our qualified employees. This amount, RMB
2,553 million, was reflected in determining our net income
for the year ended December 31, 2002, under US GAAP. Since
this amount is borne by CNPC, a corresponding amount has been
included as an addition to the other reserves in our
shareholders’ equity.
Recent US Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 123 (revised 2004),
“Share-Based Payment,” or FAS 123(R), which is a
revision of FASB Statement No. 123, “Accounting for
Stock-Based Compensation.” FAS 123(R) supersedes APB
Opinion No. 25, “Accounting for Stock Issued to
Employees,” and amends FASB Statement No. 95,
“Statement of Cash Flows.” Generally, the approach in
FAS 123(R) is similar to the approach described in
Statement No. 123. However, FAS 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative. FAS 123(R) is effective as of the start of the
first fiscal year commencing after June 15, 2005, and thus,
will apply to us beginning in the year ending December 31,2006. We are evaluating the transition provisions allowed by FAS
123(R) and do not expect the adoption of FAS 123(R) will have a
material impact on our financial condition and results of
operations.
On November 24, 2004, the FASB issued Statement
No. 151, “Inventory Costs”, an amendment of
ARB No. 43, Chapter 4 (FAS 151).
FAS 151 requires that abnormal amounts of idle capacity and
spoilage costs be excluded from the cost of inventory and
expensed when incurred. The provisions of FAS 151 are
applicable to inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not expect the
adoption of FAS 151 will have a material impact on our
financial condition or results of operations.
On December 15, 2004, the FASB issued Statement
No. 153, “Exchanges of Nonmonetary Assets”, an
amendment of APB Opinion No. 29 (FAS 153).
FAS 153 requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis,
unless (1) neither the asset received nor the asset
surrendered has a fair value that is determinable within
reasonable limits or (2) the transactions lack commercial
substance. FAS 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. We do not expect the adoption of
FAS 153 will have a material impact on our financial
condition or results of operations.
Quantitative Disclosure Relating to US GAAP and
IFRS
Net income. Net income under US GAAP increased 43.4% from
RMB 75,419 million for the year ended
December 31, 2003 to RMB 108,135 million
(US$13,065 million) for the year ended December 31,2004. This increase was due primarily to an increase of
RMB 33,313 million (US$4,025 million) in the net
income under IFRS as discussed in “Item 5 —
Operating and Financial Review and Prospects —
Operating Results”.
Shareholders’ equity. Shareholders’ equity
under US GAAP increased 22.4% from RMB 329,205 million
as of December 31, 2003 to RMB 403,012 million
(US$48,693 million) as of December 31, 2004. This
increase was due primarily to the net income of
RMB 108,135 million (US$13,065 million) under US
GAAP, which was partially offset by the payment of (i) the
final dividend of RMB 13,947 million
(US$1,685 million) for the year ended December 31,2003 and (ii) the interim dividend of
RMB 20,381 million (US$2,463 million) for the
year ended December 31, 2004.
Net income. Net income under US GAAP increased 51.3% from
RMB 49,837 million for the year ended
December 31, 2002 to RMB 75,419 million for the
year ended December 31, 2003. This increase was due
primarily to (i) the increase of
RMB 22,704 million in the increase of net income under
IFRS as discussed in “Item 5 — Operating and
Financial Review and Prospects — Operating
Results” and (ii) the decrease in the year ended
December 31, 2003 of RMB 2,553 million in
one-time remedial payments for staff housing.
Shareholders’ equity. Shareholders’ equity
under US GAAP increased 16.1% from RMB 283,464 million
as of December 31, 2002 to RMB 329,205 million as
of December 31, 2003. This increase was due primarily to
the net income under US GAAP for the year ended
December 31, 2003 of RMB 75,419 million
(US$9,112 million), which was partially offset by the
payment of (i) the final dividend for the year ended
December 31, 2002 of RMB 12,299 million and
(ii) the interim dividend for the year ended
December 31, 2003 of RMB 17,379 million.
Environmental Expenses and Capital Expenditures
We paid pollutant discharge fees of approximately RMB
113 million, RMB 155 million and RMB 182 million
(US$22 million), respectively, in 2002, 2003 and 2004. Our
capital expenditures on environmental programs in 2002, 2003 and
2004 were approximately RMB 1,363 million, RMB
1,076 million and RMB 1,345 million
(US$163 million), respectively. There were no material
environmental liabilities accrued as of December 31, 2004.
ITEM 6 — DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES
C:
Directors, Senior Management and Supervisors
Our board of directors consists of thirteen directors, three of
whom are independent non-executive directors. The directors are
elected at a meeting of our shareholders for a term of three
years, renewable upon re-election and re-appointment. The
functions and duties conferred on the board of directors include:
•
convening shareholders’ meetings and reporting its work to
the shareholders’ meetings;
•
implementing the resolutions of the shareholders’ meetings;
•
determining our business plans and investment plans;
•
formulating our annual budget and final accounts;
•
formulating our proposals for dividend and bonus distributions
and for the increase or reduction of capital; and
Five of the directors are currently affiliated with CNPC or an
affiliate of CNPC.
The PRC Company Law requires a joint stock company with limited
liability to establish a supervisory committee. This requirement
is reflected in our articles of association. The supervisory
committee is responsible for monitoring our financial matters
and overseeing the actions of our board of directors and our
management personnel. The supervisory committee consists of
seven supervisors, six of whom are elected, including four
shareholders representatives and two independent supervisors,
and may be removed, by the shareholders in a general meeting and
one of whom is an employees’ representative who is elected
by our staff, and may be removed, by our staff. Three of our
supervisors are affiliated with CNPC. The term of office of our
supervisors is three years, renewable upon re-election and
re-appointment. An elected supervisor cannot concurrently hold
the position of a director, manager or financial controller. The
functions and powers conferred on the supervisory committee
include:
•
attending board meetings;
•
examining our financial affairs;
•
examining balance sheets, profit and loss accounts, business
reports, dividend distribution proposals and other financial
information proposed at shareholders’ general meetings by
the directors from time to time; and
•
overseeing the actions of our board of directors and our senior
management personnel in carrying out their duties.
In the event that any action of our directors adversely affects
our interests, supervisors shall confer with or initiate legal
proceedings against such directors on our behalf. A resolution
proposed at any meeting of the supervisory committee shall be
adopted only if it is approved by two-thirds or more of our
supervisors.
Our senior management is elected by and serve at the discretion
of our board of directors.
Chen Geng, aged 58, is Chairman of the board of
directors of PetroChina and President of CNPC. Mr. Chen is
a senior economist. Mr. Chen graduated from Beijing
Economics Institute (currently Capital University of Economics
and Business), majoring in Labor Economics, and has over
30 years’ experience in China’s oil and gas
industry. From October 1983, Mr. Chen was Deputy Director
of Changqing Petroleum Exploration Bureau. From April 1985, he
was Deputy Director of the Labour Department under the Ministry
of Petroleum Industry. From August 1988, he was Director of the
Labour Bureau of CNPC. From December 1993, he was Assistant
President of CNPC. From September 1997, he was Vice President of
CNPC and from March 1998, he was Deputy Director of the State
Petroleum and Chemical Industry Bureau. In February 2001,
Mr. Chen was appointed as a Vice President of CNPC. He has
been a director of PetroChina since June 8, 2001 and was
President of PetroChina from December 3, 2002 to May 2004.
He was appointed as President of CNPC in April 2004 and Chairman
of the board of directors of PetroChina in May 2004.
Jiang Jiemin, aged 49, is a Vice Chairman of the
board of directors of PetroChina and President of PetroChina.
Mr. Jiang is a senior economist. Mr. Jiang graduated
from the University of Shandong in industrial economics
management. He has almost 30 years’ experience in
China’s oil
and gas industry. Mr. Jiang was a Deputy Director of
Shengli Petroleum Administration Bureau from March, 1993 and
Director of Qinghai Petroleum Administration Bureau from
November 1994. Mr. Jiang was an Assistant President of CNPC
and the Head of the Preparation Committee of the Restructuring
and Listing of CNPC from February 1999 to November 1999 when he
was appointed a director and Vice President of PetroChina. In
June 2000, Mr. Jiang became a Vice Governor of Qinghai
Province, a position he held until April 2004 when he was
appointed as a Vice President of CNPC. Mr. Jiang has been a
Vice Chairman and President of PetroChina since May 2004.
Ren Chuanjun, aged 60, is a Vice Chairman of the
board of directors of PetroChina. Mr. Ren is a Vice
President of CNPC. Mr. Ren is a senior economist.
Mr. Ren graduated from Hefei Industry University and has
over 30 years’ experience in China’s oil and gas
and chemical fibers industries. Mr. Ren became a Deputy
General Manager and General Manager of China Yizheng Fiber
Industrial United Corporation in 1983. From 1994, he worked as a
Vice Minister of China National Textile Council as well as a
Vice Chairman of the board of directors of Yizheng Fiber United
Corporation and Yizheng Fiber Company Limited. Mr. Ren
acted as a Vice President of CNPC from April 1998. Mr. Ren
worked as Senior Vice President of PetroChina from
November 5, 1999 to November 2002. He has been a director
of PetroChina since November 5, 1999 and a Vice Chairman of
PetroChina since December 3, 2002.
Su Shulin, aged 42, is a director and Senior Vice
President of PetroChina. Mr. Su is a senior engineer.
Mr. Su graduated from Daqing Petroleum Institute and
received a master’s degree at Harbin Institute of
Technology. Mr. Su has many years’ experience in
China’s oil and gas industry. Since 1996, Mr. Su had
worked as a Director Assistant, Director of the First Oil and
Natural Gas Development Department, a Standing Deputy Director
and Director of Daqing Petroleum Administration Bureau until
November 5, 1999 when he was appointed as a Vice President
of PetroChina and General Manger and Chairman of Daqing Oilfield
Company, a subsidiary of PetroChina. Mr. Su held his
positions as General Manager and Chairman of Daqing Oilfield
Company until December 2003. Mr. Su has been a director of
PetroChina since November 19, 2002 and Senior Vice
President of PetroChina since December 3, 2002.
Duan Wende, aged 53, is a director and a Vice
President of PetroChina. Mr. Duan is a senior engineer. He
graduated from the University of Nankai, majoring in economics
management and pursued post master’s degree studies at the
Postgraduate School of the Chinese Academy of Social Sciences in
investment economics while working. He has over
30 years’ experience in China’s petrochemical
industry. From April 1975 to June 1999, he held a number of
positions, including the Deputy Factory Manager of Fushun
Factory No. 628 and a chemical fibres factory, Commander of
Command Office of Fushun Petrochemical Corporation ethylene
project, Deputy Factory Manager of an ethylene petrochemical
factory, the Factory Manager of an acrylic fibres petrochemical
factory and a detergent factory. From May 1999, Mr. Duan
was Deputy Manager of Fushun Petrochemical Corporation and from
October 1999, Mr. Duan was Manager of Fushun Petrochemical
Branch Company. From October 1999, he was General Manager of
Fushun Petrochemical Branch Company. He has been an Assistant
President of CNPC since August 2001. He has been a director and
Vice President of PetroChina since May 2004 and March 2002,
respectively, and a Vice President of CNPC since December 2003.
Wang Fucheng, aged 54, is a director and Vice
President of PetroChina. Mr. Wang is a senior economist.
Mr. Wang graduated from the Shandong Normal University and
has over 30 years’ experience in China’s oil and
gas industry. Mr. Wang worked in the Shengli Oil Field,
Zhongyuan Oil Field and Liaohe Oil Field. From 1986 to 1999,
Mr. Wang worked as Senior Executive of the Shengli Oil
Field, Deputy Director of the Liaohe Oil Exploration Bureau,
Director of the Liaohe Oil Exploration Bureau and General
Manager of the Branch Office of Liaohe Oil Field. Mr. Wang
has been a director of PetroChina since June 30, 2000 and a
Vice President of PetroChina since July 12, 2000.
Zheng Hu, aged 58, is a director of PetroChina and
a Vice President of CNPC. Mr. Zheng is a senior engineer.
He graduated from the Beijing Petroleum Institute and has over
30 years’
experience in China’s oil and gas industry. From 1990 to
1992, Mr. Zheng acted as vice director of Beijing Petroleum
Managers Training Institute. From 1992 to 1999, Mr. Zheng
worked as Deputy General Manager and General Manager of China
Petroleum Technology & Development Corporation, as
Deputy General Manager and General Manager of China Petroleum
Materials and Equipment (Group) Corporation, Director of
Personnel and Labour Department of CNPC. He has been a director
of PetroChina since June 30, 2000 and a Vice President of
CNPC since August 2000.
Zhou Jiping, aged 52, is a director of PetroChina
and a Vice President of CNPC. Mr. Zhou is a senior
engineer, and holds a master’s degree in marine geologic
structure from the Nanhai Marine Research Institute of the China
Academy of Sciences. He has over 30 years’ experience
in China’s oil and gas industry. Mr. Zhou was the
Exploration Manager of the Exploration and Development
Department of China National Offshore Oil Corporation, Manager
of the Overseas Department of the International Cooperation
Bureau of CNPC, President of China National Oil & Gas
Exploration and Development Corporation in Vanuatu and President
of China National Oil & Gas Exploration and Development
Corporation in Papua New Guinea. Mr. Zhou has also worked
as Vice Director of the International Exploration and
Development Cooperation Bureau of CNPC, Vice President of China
National Oil & Gas Exploration and Development
Corporation from November 1996. He has been President of China
National Oil & Gas Exploration and Development
Corporation and concurrently Deputy Director of the
International Exploration and Development Cooperation Bureau of
CNPC since December 1997, President of China National
Oil & Gas Exploration and Development Corporation since
October 1998, Assistant to the President of CNPC and
concurrently President of China National Oil & Gas
Exploration and Development Corporation since August 2001 and
Vice President of CNPC since December 2003. Mr. Zhou has
been a director of PetroChina since May 2004.
Gong Huazhang, aged 58, is a director of
PetroChina. Mr. Gong is General Accountant of CNPC.
Mr. Gong is a senior accountant. Mr. Gong graduated
from Yangzhou Business School and has over 30 years’
experience in China’s oil and gas industry. Mr. Gong
worked as Chief Accountant, Deputy Director and Director of the
Finance Bureau of CNPC from 1991. Mr. Gong has been
Director of the Finance and Assets Department of CNPC since
October 1998 and has been General Accountant of CNPC since
February 1999. Mr. Gong has been a director of PetroChina
since November 5, 1999.
Zou Haifeng, aged 58 , is a director of
PetroChina. Mr. Zou is a Deputy Manager of Jilin
Petrochemical Branch Company and the Chairman of the Supervisory
Committee of Jilin Chemical Industrial Company Limited.
Mr. Zou is a senior engineer. Mr. Zou graduated from
Northeastern Industry Institute and has nearly
30 years’ experience in the petrochemical industry.
Since 1994, Mr. Zou has been a Deputy Manager of Jilin
Petrochemical Group Corporation and a Director and Deputy
Manager of Jilin Chemical Industrial Company Limited.
Mr. Zou has been a Deputy Manager of Jilin Petrochemical
Branch Company, a subsidiary of PetroChina since July, 1999 and
a director of PetroChina since November 5, 1999.
Independent Non-executive Directors
Chee-Chen Tung, aged 62, is an independent
non-executive director of PetroChina. Mr. Tung is Chairman
and Chief Executive Officer of Orient Overseas (International)
Limited (OOIL). He was educated at the University of Liverpool,
England, where he received his Bachelor of Science degree. He
later acquired a Master’s degree in Mechanical Engineering
at the Massachusetts Institute of Technology in the United
States. Mr. Tung served as Chairman of Hong Kong
Shipowner’s Association between 1993 and 1995. From 1999 to
2001, Mr. Tung served as Chairman of the Hong Kong General
Chamber of Commerce, an independent non-executive Director of
Zhejiang Expressway Company Limited, Bank of China (Hong Kong)
Limited, Sing Tao News Corporation Limited, Wing Hang Bank and
Cathay Pacific Airways, a member of the Hong Kong Port
Development Board. Mr. Tung is also Chairman of the
Institute for Shipboard Education Foundation, Chairman of the
Court of the International Academics Center of the Hong Kong
Polytechnic
University, a member of the Board of Trustees of the University
of Pittsburgh, and a member of the Board of Visitors of the
School of Foreign Service, Georgetown University. Mr. Tung
has been an independent non-executive director of PetroChina
since November 5, 1999.
Liu Hongru, aged 74, is an independent
non-executive director of PetroChina. Mr. Liu graduated
from the Economics Department of the University of Moscow in
1959 with an associate doctor’s degree. Mr. Liu worked
as a Vice Governor of the Agricultural Bank of China, a Vice
Governor of the People’s Bank of China, a Deputy Director
of the State Economic Restructuring Committee and Chairman of
China Securities Regulatory Commission. Mr. Liu is
currently a Deputy Director of the Economic Committee under the
Chinese People’s Political Consultative Conference, and
concurrently serves as a Vice President of China Finance and
Banking Society, a Vice President of China National Debt
Association and Director of Shanghai Finance and Law Research
Institute. Mr. Liu is also a professor at each of Beijing
University, the Graduate School of People’s Bank of China
and the City University of Hong Kong. Mr. Liu also acts as
independent non-executive director or non-executive director for
other four companies listed in Hong Kong Stock Exchange and
has the relevant accounting and financial management expertise
required by the Hong Kong Stock Exchange Listing Rules.
Mr. Liu served as an independent supervisor of PetroChina
from December 1999 to November 2002. Mr. Liu has been an
independent non-executive director of PetroChina since
November 19, 2002.
Franco Bernabè, aged 56, is an independent
non-executive director of PetroChina. Mr. Bernabè is
the Chairman of the Franco Bernabe Group and Vice Chairman of
H3G. He is also Vice Chairman of Rothschild Europe. He used to
serve as the executive president of ENI and Telecom Italia. He
also serves as a special representative of the Italian
government for the reconstruction of the Balkan region.
Mr. Bernabè joined ENI in 1983 to become the assistant
to the chairman; in 1986 he became director for development,
planning and control; and between 1992 and 1998 was the Chief
Executive Officer of ENI. Mr. Bernabè led the
restructuring program of the ENI Group, making it one of the
world’s most profitable oil companies. Between 1998 and
1999, Mr. Bernabè was the Chief Executive Officer of
Telecom Italia. Prior to his joining ENI, Mr. Bernabe was
the head of economic studies at FIAT. He was also a senior
economist at the OECD Department of Economics and Statistics in
Paris. Earlier, he was a professor of economic politics at the
School of Industrial Administration, Turin University.
Mr. Bernabè has been an independent non-executive
director of PetroChina since June 30, 2000.
Secretary to the Board of Directors
Li Huaiqi, aged 55, is the secretary to the board
of directors of PetroChina. Mr. Li is a senior economist.
He has over 30 years’ experience in China’s oil
and gas industry. Mr. Li worked with Daqing, Liaohe, Nanhai
and Huabei oil and gas companies. From 1992 to 1996, Mr. Li
worked as Deputy Director of Foreign Affairs Bureau and Chairman
of the Foreign Service Company of CNPC and as Director of
Foreign Affairs Bureau of CNPC. In 1999, Mr. Li was
appointed as Director of the International Co-operation
Department (Foreign Affairs Bureau) of CNPC. Mr. Li has
been the secretary to the board of directors of PetroChina since
August 29, 2001.
Other Senior Management Personnel
Wang Guoliang, aged 52, is Chief Financial Officer
of PetroChina. Mr. Wang has a master’s degree and is a
senior accountant. He graduated from Heilongjiang Business
College and Hebei University. He has over 20 years’
experience in China’s oil and gas industry. Mr. Wang
worked as a Vice President of CNPC Finance Co., Ltd. from 1995
to 1997 and as a Deputy General Manager and General Accountant
of China National Oil & Gas Exploration and
Exploitation Corporation from 1998 to November 5, 1999 when
he was appointed as Chief Financial Officer of PetroChina. He
was also General Manager of PetroChina’s Financial
Department from November 1999 to March 2002.
Liu Baohe, aged 58, is a Vice President of
PetroChina. Mr. Liu is a senior engineer. Mr. Liu
graduated from Beijing Petroleum Institute and has over
30 years’ experience in China’s oil and gas
industry. From 1994 to 1997, Mr. Liu worked as Vice
Director and Director of the Exploration and Production Bureau
of CNPC. Mr. Liu was Director of the Department of Oil and
Gas Exploitation of CNPC from 1998 to 1999. From 1999 to August
2001, Mr. Liu worked as Deputy General Manager of the
exploration and production segment of PetroChina. From September
2001, Mr. Liu was a Vice President of PetroChina. From
September 2001 to December 2002, he was also General Manager of
the Exploration and Production Branch Company of PetroChina.
Jia Chengzao, aged 56, is Chief Geologist of
PetroChina. Mr. Jia is a doctor degree holder, a senior
engineer and a Fellow of China Scientific Institute. He
graduated from Nanjing University and has over
25 years’ experience in China’s oil and
geological industry. From 1994, Mr. Jia held several senior
management positions at Tarim Oil Exploration and Exploitation
Headquarters, including Deputy Chief Geologist, Chief Geologist
and Deputy Commander. Since 1998, he has been a Vice Director of
the Oil Exploration and Exploitation Scientific Research
Institute of CNPC. From 1999, Mr. Jia worked as a Deputy
General Manager of China Petroleum Tarim Oil Field Branch
Company and a Vice Director of China Oil Exploration and
Exploitation Research Institute. Mr. Jia has been Chief
Geologist of PetroChina since July 2000. Since December 2002,
Mr. Jia has also been Director of China Oil Exploration and
Exploitation Research Institute.
Supervisors
Li Kecheng, aged 61, is Chairman of
PetroChina’s supervisory committee. Mr. Li is a senior
engineer. Mr. Li graduated from Beijing Science and
Technology University and has over 30 years’
experience in China’s oil and gas industry. From 1986 to
1992, Mr. Li was the head of the Petroleum Pipeline Bureau
and a senior executive of the Northeastern Oil Transmission
Administration Bureau. Since November 1992, Mr. Li has been
taking several senior administrative positions at CNPC.
Mr. Li has been Chairman of PetroChina’s supervisory
committee since November 5, 1999.
Wen Qingshan, aged 46, is a supervisor of
PetroChina. Mr. Wen is a senior accountant. Mr. Wen
graduated from Jilin Yanbian University. He served as Deputy
Chief Accountant of the Finance and Assets Department of CNPC
from November 1998 to May 1999, when he was appointed as a
Deputy Director of the Finance and Assets Department of CNPC.
Mr. Wen has been Director of the Finance and Assets
Department of CNPC since May 2002. Mr. Wen has been a
supervisor of PetroChina since November 19, 2002.
Sun Xianfeng, aged 52, is a supervisor of
PetroChina. Mr. Sun graduated from Huadong Petroleum
Institute in September 1977. Mr. Sun worked as Deputy
Director of the Supervisory Bureau of CNPC from November 1996,
before being transferred to the Eighth Office of the State
Council Compliance Inspectors’ General Office (Supervisory
Committee of Central Enterprises Working Commission) as its
temporary head in June 1998. He has been Deputy Director of the
Audit Department of CNPC since October 2000, and has worked
concurrently as Director of the Audit Services Center of CNPC
since December 2000. Mr. Sun has been a supervisor of
PetroChina since May 2004.
Xu Fengli, aged 57, is a supervisor of PetroChina.
Mr. Xu is a senior accountant. Mr. Xu graduated from
Xi’an Petroleum Institute in July 1985. Mr. Xu has
been Chief Accountant of Fushun Petrochemical Corporation since
November 1995, Deputy Director of Finance and Assets Department
of CNPC since November 1998, Deputy General Manager of the
Finance Department of PetroChina since December 1999 and
Director of the Administrative Office of the Supervisory
Committee of PetroChina since October 2003. Mr. Xu has been
a supervisor of PetroChina since May 2004.
Sun Chongren, aged 54, is a supervisor of
PetroChina and an employee representative of PetroChina’s
supervisory committee. Mr. Sun graduated from Huadong
Petroleum Institute and has 30 years’ experience in
China’s oil and gas industry. Mr. Sun has been working
at Liaohe Petroleum
Administration Bureau for 30 years. Since 1996, he has been
a senior executive and Chairman of the workers’ union of
Liaohe Petroleum Administration Bureau. Mr. Sun has been a
supervisor of PetroChina since November 5, 1999.
Zhang Youcai, aged 63, is an independent
supervisor of PetroChina. Mr. Zhang is a professor.
Mr. Zhang graduated from Nanjing Industrial University and
has over 30 years’ experience in enterprise management
and financing. Mr. Zhang worked as Chief Manager of Nantong
Fertilizer Factory, Deputy Director of Nantong Municipal
Industrial Bureau, Vice Chairman of Nantong Municipal
Development and Planning Committee and Vice Mayor of Nantong
city, until his appointment as Mayor of Nantong city in April
1984. Mr. Zhang was a Vice Minister of the Ministry of
Finance from December 1989 to July 2002. He also served as
General Director of the State Asset Administration Bureau from
May 1994 to July 1998. Mr. Zhang has been an independent
supervisor of PetroChina since November 19, 2002.
Wu Zhipan, aged 48, is an independent supervisor
of PetroChina. Mr. Wu acquired a Doctor in Laws from
Beijing University School of Law in 1988, and was a visiting
scholar at Harvard Law School from 1991 to 1992. Mr. Wu is
a Vice President of Beijing University. He is concurrently an
expert consultant of the Supreme People’s Court, an
arbitrator on the Arbitrator Panel of the China International
Economic and Trade Arbitration Commission and a Director of
China and Economic Law Society. Mr. Wu is the author of a
number of legal publications and has rich experience in law
practice. Mr. Wu has been an independent supervisor of
PetroChina since December 3, 1999.
Compensation
Senior Management Compensation System
Our senior management compensation system links our senior
management members’ financial interests, including those of
our executive directors and our supervisors, with our results of
operations and the performance of our shares. All of our senior
management members have entered into performance contracts with
us. Under this system, the senior management members’
compensation system has three components, namely, fixed
salaries, performance bonuses and stock appreciation rights. The
variable components in their compensation account for
approximately 70% to 75% of our senior management officers’
total potential compensation, including up to 25% forming the
performance bonus component and approximately 50% to 70% forming
the stock appreciation rights component. Variable compensation
rewards are linked to the attainment of specific performance
targets, such as net income, return on capital and cost
reduction targets. The chart below sets forth the components of
the total potential compensation for key officers.
% Stock
% Fixed
appreciation
% Performance
salary
rights
bonus
Chairman
30
70
0
President
25
60
15
Vice President
25
60
15
Department GM
25
50
25
We have granted stock appreciation rights to 300 persons,
including members of the board of directors and the supervisory
committee, president, vice presidents and departmental managers,
general managers and deputy general managers of specialized
companies and local subsidiaries. Upon exercise of these stock
appreciation rights, members of the senior management will not
receive any of our shares, but will, by way of stock
appreciation rights, receive a monetary sum that is calculated
on the basis of the price of our H shares. In 2004, none of the
directors and senior management exercised any of the stock
appreciation rights granted to them. Since companies are not
permitted to repurchase and hold their own shares for offering
stock options under current PRC law, we expect to calculate our
book gains and losses on the basis of share prices and in
accordance with stock appreciation rights measures and make cash
payment of such compensations.
Directors’ and Supervisors’ Compensation
Our directors and supervisors, who hold senior management
positions or are otherwise employed by us, receive compensation
in the form of salaries, housing allowances, other allowances
and benefits in kind, including our contribution to the pension
plans for these directors and supervisors.
The aggregate amount of salaries, housing allowances, other
allowances and benefits in kind paid by us to the five highest
paid individuals of PetroChina during the year ended
December 31, 2004 was RMB 1,645,118. We paid RMB 39,683 as
our contribution to the pension plans in respect of those
individuals in the year ended December 31, 2004.
The aggregate amount of salaries or other compensation, housing
allowances, other allowances and benefits in kind paid by us to
our directors, who hold senior management positions or are
otherwise employed by us, during the year ended
December 31, 2004 was RMB 1,594,932.
Save as disclosed, no other payments have been paid or are
payable, in respect of the year ended December 31, 2004, by
us or any of our subsidiaries to our directors. In addition, we
have no service contracts with our directors that provide for
benefits to our directors upon the termination of their
employment with us.
In 2004, we paid RMB 43,063 as our contribution to the pension
plans in respect of our directors and supervisors, who hold
senior management positions or are otherwise employed by us. The
aggregate amount of salaries or other compensation, housing
allowances, other allowances and benefits in kind paid by us to
our supervisors, who hold senior management positions or are
otherwise employed by us, during the year ended
December 31, 2004 was RMB 417,411.
C:
Board Practices
Our board of directors has four principal committees: an audit
committee, an investment and development committee, an
evaluation and remuneration committee and a health, safety and
environment committee.
Audit Committee
Our audit committee is currently composed of three non-executive
independent directors, Mr. Franco Bernabè,
Mr. Chee-Chen Tung and Mr. Liu Hongru, and one
non-executive director, Mr. Gong Huazhang. Mr. Franco
Bernabè serves as the chairman of the committee. Under our
audit committee charter, the chairman of the committee must be
an independent director and all resolutions of the committee
must be approved by independent directors. The audit
committee’s major responsibilities include:
•
supervising the integrity of financial reporting process to
ensure fair, transparent and true financial disclosure;
•
evaluating the effectiveness of the internal control and risk
management framework;
•
inspecting and supervising the effectiveness of the internal
audit functions;
•
reviewing the independent auditing process, evaluating the
performance of external auditors annually and raising proposals
together with the supervisory committee to the
shareholders’ meetings with respect to the retention of
external auditors and the compensation of such external auditors;
receiving and dealing with submissions and complaints by
employees regarding accounting, internal control or auditing
matters.
Investment and Development Committee
The current members of our investment and development committee
are Ren Chuanjun, as chairman of the committee, and Su Shulin.
The investment and development committee’s major
responsibilities include:
•
studying strategic action plans as proposed by our President and
making recommendations to the board of directors;
•
studying the annual investment budget as proposed by our
President and making recommendations to the board of
directors; and
•
reviewing preliminary feasibility studies and feasibility
studies for material investment projects requiring approval of
the board of directors and making recommendations to the board
of directors.
Evaluation and Remuneration Committee
The current members of our evaluation and remuneration committee
are Liu Hongru, as chairman of the committee, Mr. Zheng Hu
and Mr. Zou Haifeng. The evaluation and remuneration
committee’s major responsibilities include:
•
managing the performance evaluations for our President and
monitoring performance evaluations led by our President for
Senior Vice President, Vice Presidents, Chief Financial Officer
and other senior management personnel;
•
studying our incentive plan, compensation plan and stock
appreciation rights plan, supervising and evaluating the
implementation of these plans and making recommendations for
improvements to and perfection of such plans.
Health, Safety and Environment Committee
The current members of our health, safety and environment
committee are Duan Wende, as chairman of the committee,
Mr. Zhou Jiping and Mr. Wang Fucheng. The health,
safety and environment committee’s major responsibilities
include:
•
supervising the effective implementation of our Health, Safety
and Environmental Protection Plan;
•
making recommendations to the board of directors and our
President for major decisions with respect of health, safety and
environmental protection;
•
inquiring the occurrence of and responsibilities for material
accidents and supervising the remedial measures of material
accidents.
As of December 31, 2002, 2003 and 2004, we had 419,598,
417,229 and 424,175 employees, respectively. The table below
sets forth the number of our employees by business segment as of
December 31, 2004.
Employees
% of total
Exploration and production
236,591
55.8
Refining and marketing
116,813
27.5
Chemicals and marketing
57,765
13.6
Natural gas and pipeline
10,191
2.4
Other(1)
2,815
0.7
Total
424,175
100.0
%
(1)
Including PetroChina Exploration & Development Research
Institute, PetroChina Plan and Design Institute, PetroChina
Refining & Chemicals Technology Research Center, and
the management of our headquarters and specialized companies.
Our employees participate in various retirement benefit plans
organized by municipal and provincial governments whereby we are
required to make monthly insurance contributions to these plans
at rates ranging from 16% to 22% of the employees’ salary.
Expenses incurred by us in connection with the retirement
benefit plans were approximately RMB 2,109 million, RMB
2,193 million and RMB 2,476 million
(US$299 million), respectively, for the three years ended
December 31, 2002, 2003 and 2004, respectively.
In 2004, we have not experienced any strikes, work stoppages,
labour disputes or actions which affected the operation of any
of our businesses. We consider our relationship with our
employees to be good.
C:
Share Ownership
Director Zou Haifeng currently has 3,550 A shares of Jilin
Chemical Industrial Stock Company, a subsidiary of PetroChina.
Other directors, senior officers and supervisors do not have
share ownership in PetroChina or any of PetroChina’s
affiliates. We have granted stock appreciation rights relating
to our H shares to our directors, senior officers and
supervisors. Upon exercise of these stock appreciation rights,
members of the senior management will not receive any of our
shares, but will, by way of stock appreciation rights, receive a
momentary sum which is calculated on the basis of the price of
our H shares. Because the relevant PRC laws limit the
ownership of the H shares of a company incorporated under
the PRC laws to only non-PRC nationals, and companies are not
permitted to repurchase and hold their own shares for offering
stock appreciation rights under current PRC law, our directors,
senior officers and supervisors do not hold our H shares
under the stock options granted to them. Instead, we expect to
calculate the book gains and losses on the basis of share prices
and in accordance with our stock appreciation rights granting
criteria to be finalized, and make cash payments of such
compensation to our directors, senior officers and supervisors.
ITEM 7 — MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
C:
Major Shareholders
Prior to the restructuring of the CNPC group in November 1999,
CNPC was one of the largest companies in the PRC in terms of
sales. As part of the restructuring of the CNPC group, CNPC
transferred to PetroChina substantially all its businesses and
assets in China relating to the exploration and production of
crude oil and natural gas, refining and marketing, chemicals and
natural gas sales and transmission. Since the restructuring of
the CNPC group, CNPC has engaged in crude oil and natural gas
exploration and production business activities outside the PRC
and limited chemicals production and retail of refined products.
CNPC’s primary business activities relate to the provision
of various services and products to PetroChina.
PetroChina was established on November 5, 1999 with CNPC as
its sole promoter. As of December 31, 2004, CNPC owned
158,241,758,000 State-owned shares, representing approximately
90% of the share capital of PetroChina, and, accordingly, CNPC
is our controlling shareholder.
The shares held by CNPC are state-owned shares in the share
capital of PetroChina. However, CNPC has identical voting
rights. Holders of state-owned shares and H shares are deemed to
be shareholders of different classes for certain matters which
may have effect on their respective interest.
As of December 31, 2004, Warren E. Buffett, Berkshire
Hathaway Inc., OBH, Inc., National Indemnity Company, GEICO
Corporation and Government Employees Insurance Company, as a
group as defined under Rule 13d-1(b)(1)(ii)(J) of the
Securities Exchange Act of 1934, as amended, collectively owned
2,347,761,000 H shares, representing approximately 1.3% of
the total outstanding share capital of PetroChina, or
approximately 13.4% of the H shares of PetroChina.
C:
Related Party Transactions
As CNPC directly owns approximately 90% of our total outstanding
share capital, transactions between us and CNPC constitute
connected transactions for us under the Listing Rules of the
Hong Kong Stock Exchange. The waiver in respect of these
connected transactions by Hong Kong Stock Exchange is valid from
January 1, 2003 to December 31, 2005.
CNPC and PetroChina are expected to continue to conduct all of
the connected transactions referred to in the following
agreements:
Comprehensive Products and Services Agreement
CNPC and PetroChina will continue to conduct the transactions
contemplated by the Comprehensive Products and Services
Agreement which was entered into between CNPC and us on
March 10, 2000, under which: (1) we have agreed to
provide to CNPC, and (2) CNPC has agreed to provide to us,
a range of products and services which may be required from time
to time by either party.
Products and Services Provided by Us to the CNPC
Group
Under the Comprehensive Products and Services Agreement, we have
agreed to provide to CNPC certain products and services,
including crude oil, natural gas, refined products, chemical
products, and services such as supply of water, electricity, gas
and heating, quantifying and measuring services and quality
inspection services.
Products and Services Provided by the CNPC Group to
Us
CNPC has agreed to supply us a wider range of products and
services, including the following categories:
•
construction and technical services,
•
production services,
•
supply of material services,
•
social services,
•
ancillary services, and
•
financial services.
Individual Product and Service Implementation Agreement
We and our affiliates may enter into, from time to time and as
required, individual Product and Service Implementation
Agreements with CNPC and its affiliates.
As the individual Product and Service Implementation Agreement
is only intended to provide for the supply of specific products
and services contemplated by the Comprehensive Product and
Services Agreement, these agreement does not constitute a new
connected transaction.
We and CNPC will continue to perform the Land Use Rights Leasing
Contract entered into between CNPC and us on March 10,2000, under which CNPC has agreed to lease the land use rights
of an aggregate of 42,476 parcels of land to us in connection
with our business and operations, covering an aggregate area of
approximately 1,145 million square meters located
throughout the PRC, for a term of 50 years for an annual
fee in the amount of RMB 2,000 million. The total amount of
the fees payable after ten years from the effective date of
the contract may be adjusted (to reflect market conditions at
such time of adjustment, including market prices, inflation or
deflation and other important factors) by consent reached
between CNPC and us. In addition, any governmental, legal or
other administrative taxes and fees to be paid in connection
with the leased properties will be borne by CNPC. However, we
have agreed to share proportionately on a reasonable basis with
CNPC any additional amount of such taxes and fees payable as a
result of changes in policies of the PRC government after the
effective date of this contract.
Buildings Leasing Contract and Supplementary Building Leasing
Agreement
We and CNPC will continue to perform the Buildings Leasing
Contract entered into between CNPC and us on March 10,2000, under which CNPC has agreed to lease to us a total of 191
buildings covering an aggregate area of 269,770 square
meters.
These 191 buildings were leased to us at a price of RMB
145 per square meter per year, or is, at an aggregate
annual fee of RMB 39,116,650, for a term of 20 years. In
addition, we have agreed to pay for any governmental, legal or
other administrative taxes and maintenance charges to be paid in
connection with these 191 buildings.
Subsequent to the execution of this contract, on
September 26, 2002, we entered into a Supplemental
Buildings Leasing Agreement with CNPC, under which CNPC agreed
to lease to us an additional 404 buildings covering an aggregate
area of 442,730 square meters.
We entered into this Supplementary Building Leasing Agreement as
a result of the expansion of our production and operations.
These 404 buildings are mainly used for the crude oil and
natural gas exploration activities, the West-East natural gas
pipeline project and the construction of the refining and
chemical products production base in the northeastern region of
the PRC.
We have agreed to pay approximately RMB 157 million
annually for these 404 buildings under the Supplemental
Buildings Leasing Agreement. We and CNPC will adjust the area
and quantity of the properties leased under the Building Leasing
Contract and the Supplemental Buildings Leasing Agreement every
three years by taking into account changes in the production and
operations of each party as well as in the market price. The
Supplemental Buildings Leasing Agreement came into effect on
January 1, 2003 and will expire simultaneously with the
Building Leasing Contract. However, provisions in the Building
Leasing Contract that do not conflict with the Supplemental
Buildings Leasing Agreement will remain in full force.
We and CNPC will continue to perform the three intellectual
property licensing contracts, including a Trademark Licensing
Contract, a Patent and Know-how Licensing Contract and a
Computer Software Licensing Contract entered into between CNPC
and us on March 10, 2000. Under these licensing contracts,
CNPC has granted us exclusive rights to use certain trademarks
(including the “CNPC” trademark), patents, know-how
and computer software of CNPC for no consideration. These
intellectual property rights relate to the assets and businesses
of CNPC that were transferred to us in the restructuring of the
CNPC group.
Contract for the Transfer of Rights under Production Sharing
Contracts
We and CNPC will continue to perform the Contract for the
Transfer of Rights under Production Sharing Contracts dated
March 10, 2000. As part of the restructuring, CNPC
transferred to us relevant rights and obligations, excluding the
rights and obligations relating to CNPC’s supervisory
functions, under 23 Production Sharing Contracts entered into by
CNPC with a number of international oil and natural gas
companies.
We and CNPC will continue to perform the Guarantee of Debts
Contract dated March 10, 2000. As part of the restructuring
of the CNPC group, we assumed all of CNPC’s debts relating
to the assets transferred to us in the restructuring of the CNPC
group.
Under this contract, CNPC has agreed to guarantee certain of our
debts totalling approximately RMB 756 million (including
principal and interest) as of December 31, 2004 for no
consideration.
Deposits with China Petroleum Finance Company Limited
We placed deposits with China Petroleum Finance Company Limited,
or CP Finance, a subsidiary of CNPC and a non-bank financial
institution approved by the People’s Bank of China, in the
amount of RMB 2,861 million, RMB 2,331 million and
RMB 1,782 million (US$215 million) as of
December 31, 2002, 2003 and 2004, respectively. The
deposits yield interest at prevailing saving deposit rates.
Related Party Transactions with CNPC (HK)
As part of the restructuring of the CNPC group and in
preparation for our listing on HKSE, and as disclosed in our
prospectus dated March 27, 2000, CNPC entered into the
Contract for the Transfer of Rights under Production Sharing
Contracts with us whereby the relevant rights and obligations
(other than the supervisory functions related to CNPC’s
role as representative of the PRC government) of CNPC under
certain contracts, including the Xinjiang Karamay Oilfield Area
Blocks 9(1)-9(5) Petroleum Contract dated July 1,1996, entered into between CNPC and Hafnium Limited, or the
Xinjiang Contract, and the Liaohe Oilfield Leng Jiapu Area
Petroleum Contract dated December 30, 1997, entered into
between CNPC and Beckbury International Limited, or the Liaohe
Contract, were novated to us.
CNPC (Hong Kong) Limited, or CNPC (HK) is a 57.5% owned
subsidiary of CNPC. CNPC is our controlling shareholder which
holds approximately 90% of our issued share capital. Upon the
effective novation by CNPC to us of its interests in the above
petroleum production contracts (i.e., Xinjiang Contract and the
Liaohe Contract), certain transactions under these petroleum
production sharing contracts constitute connected transactions
between CNPC (HK) and us.
Summary of the major terms and conditions of these related party
transactions under the Xinjiang Contract and the Liaohe Contract
are as follows:
(1) Production sharing and development cost
apportionment between CNPC (HK) and us. We and CNPC
(HK) share the oil and natural gas produced from the
Karamay Oilfield Area Blocks 9(1)-9(5), as to 46% by us and 54%
by CNPC (HK), and from the Liaohe Oilfield Leng Jiapu Area, as
to 30% by us and 70% by CNPC (HK). CNPC (HK) is responsible
for all of the development costs in respect of the Karamay
Oilfield Area Blocks 9(1)-9(5). We are responsible for 30% and
CNPC (HK) is responsible for 70% of the development costs
in respect of the Liaohe Leng Jiapu Oilfield.
(2) Provision of assistance by us to CNPC
(HK). We are have agreed to provide assistance to CNPC
(HK) for, among other things: (i) leasing warehouses,
terminal facilities, barges, pipelines and land;
(ii) obtaining approvals necessary for the petroleum
operations; and (iii) obtaining office space, office
supplies, transportation and communication facilities.
CNPC (HK) has agreed to pay us an annual assistance fee in
the amount of US$50,000 for each of the Karamay Oilfield Area
Blocks 9(1)-9(5) and the Liaohe Leng Jiapu Oilfield Area. The
amount of such fee was determined through negotiations by taking
into account the actual circumstances and conditions, including
the scope of the projects and the level of demand for such
assistance. This fee is accounted for as operating costs and
shared by us and CNPC (HK) in accordance with procedures
described in the Xinjiang Contract and the Liaohe Contract.
(3) Payment of training fees. In the course
of development and operations of each oilfield, CNPC
(HK) is obligated to pay us an amount of US$50,000 annually
for training of our personnel for each of the Karamay Oilfield
Area Blocks 9(1)-9(5) and the Liaohe Leng Jiapu Oilfield Area.
The amount of this fee was determined through negotiations by
taking into account the actual circumstances and conditions,
including the scope of the projects and the level of demand for
training.
(4) Sale of crude oil by CNPC (HK) to
us. CNPC (HK) has the right to deliver its share of
oil production from each of the Karamay Oilfield Area Blocks
9(1)-9(5) and the Liaohe Leng Jiapu Oilfield Area to a
destination of its choice, except for destinations which
infringe on the political interests of the PRC. However, given
the transportation costs and the prevailing oil prices, the
purchaser of the oil production attributable to CNPC
(HK) from each of the Karamay Oilfield Area Blocks
9(1)-9(5) and the Liaohe Leng Jiapu Oilfield Area is likely to
be CNPC or its affiliates, including us, which will purchase oil
produced in the Karamay Oilfield Area Blocks 9(1)-9(5) and the
Liaohe Leng Jiapu Oilfield Area at the market price. Since the
entering into of the petroleum production sharing contracts,
CNPC (HK) has sold all of its share of the oil production
to CNPC or its affiliates, including us. As far as our board of
directors is aware, CNPC (HK) intends to continue with this
arrangement. Although there is no contractual obligation on us
to purchase oil production from the Karamay Oilfield Area Blocks
9(1)-9(5) and the Liaohe Leng Jiapu Oilfield Area, from a
commercial perspective, we intend to continue to make such
purchases. The price of various grades of crude oil sold will be
determined either with reference to the price approved by the
relevant PRC authorities or with reference to the prevailing
price in arm’s length transactions of crude oil of a
similar quality in the market, adjusted to take into account the
terms of transportation, payment and other factors.
As of December 31, 2004, we had unsecured short-term and
long-term loans from CP Finance in an aggregate amount of RMB
23,168 million (US$2,799 million). The average annual
interest rate on these loans is 4.55%.
C:
ITEM 8 — FINANCIAL INFORMATION
Financial Statements
See pages F-1 to F-62 following Item 19.
Dividend Policy
Our board of directors will declare dividends, if any, in
Renminbi with respect to H shares on a per share basis and will
pay such dividends in HK dollars. Any final dividend for a
financial year shall be subject to shareholders’ approval.
The Bank of New York will convert the HK dollar dividend
payments and distribute them to holders of ADSs in
U.S. dollars, less expenses of conversion. The holders of
the H shares will share proportionately on a per share basis in
all dividends and other distributions declared by our board of
directors.
The declaration of dividends is subject to the discretion of our
board of directors. Our board of directors will take into
account factors including the following:
•
general business conditions;
•
our financial results;
•
capital requirements;
•
contractual restrictions on the payment of dividends by us to
our shareholders or by our subsidiaries to us;
•
our shareholders’ interests;
•
the effect on our debt ratings; and
•
other factors our board of directors may deem relevant.
We may only distribute dividends after we have made allowance
for:
•
recovery of losses, if any;
•
allocations to the statutory common reserve fund;
•
allocations to the statutory common welfare fund; and
•
allocations to a discretionary common reserve fund if approved
by our shareholders.
The minimum and maximum aggregate allocations to the statutory
funds are 15% and 20%, respectively, of our net income
determined in accordance with PRC accounting rules. Under PRC
law, our distributable earnings will be equal to our net income
determined in accordance with PRC accounting rules or IFRS,
whichever is lower, less allocations to the statutory and
discretionary funds.
Subject to the above and to ensure that our dividend policy is
consistent with that of major international oil and gas
companies, we currently expect that we will distribute as
dividends
approximately 40% to 50% of our reported net income for all
years commencing on or after January 1, 2000. We believe
that our dividend policy strikes a balance between two important
goals:
•
providing our shareholders with a competitive return on
investment; and
•
assuring sufficient reinvestment of profits to enable us to
achieve our strategic objectives.
An interim dividend of RMB 0.115919 (US$0.0140) per H share
(inclusive of applicable tax) for the six months ended
June 30, 2004 was paid to our shareholders on
October 8, 2004. On May 26, 2005, our shareholders
approved the payment of a final dividend of RMB 0.147511
(US$0.0178) per H share (inclusive of applicable tax) for
the year ended December 31, 2004. The final dividend was
calculated on the basis of 45% of our net income for the year
ended December 31, 2004. The final dividend was paid on
June 10, 2005.
Nature of the Trading Market and Market Price Information
Our ADSs, each representing 100 H shares, par value RMB
1.00 per H share, have been listed and traded on the
New York Stock Exchange since April 6, 2000 under the
symbol “PTR”. Our H shares have been listed and
traded on the Hong Kong Stock Exchange since April 7, 2000.
Prior to these listings, there was no public market for our
equity securities. The New York Stock Exchange and the Hong Kong
Stock Exchange are the principal trading markets for our ADSs
and H shares, respectively.
As of December 31, 2004, there were 17,582,418,000
H shares issued and outstanding. As of December 31,2004, there were 185 registered holders of American depositary
receipts evidencing 24,240,874 ADSs. The depositary of the ADSs
is The Bank of New York.
The high and low closing sale prices of the H shares on the Hong
Kong Stock Exchange and of the ADSs on the New York Stock
Exchange for each quarterly period since listing in 2000 and for
each month in 2005 (through June 24, 2005) are set forth
below.
The following is a summary based on the significant provisions
of our articles of association currently in effect, which was
filed with the Commission as an exhibit to our annual report on
Form 20-F for the fiscal year ended December 31,2001 (File No. 1-15006). We hereby incorporate by
reference the relevant exhibit to this annual report.
between a holder of H shares and any of our directors,
supervisors, general managers, deputy general managers or other
senior officers; or
•
between a holder of H shares and a holder of State-owned shares,
arising from any provision of the articles of association, any
right or obligation conferred or imposed by the PRC Company Law
or any other relevant law or administrative regulation which
concerns our affairs
must, with certain exceptions, be referred to arbitration at
either the China International Economic and Trade Arbitration
Commission in the PRC or the Hong Kong International Arbitration
Center. Our articles of association provide that such
arbitration will be final and conclusive.
Restrictions on Transferability and the Share
Register
The articles of association provide that PRC investors are not
entitled to be registered as holders of H shares.
As provided in the articles of association, we may refuse to
register a transfer of H shares unless:
•
any relevant transfer fee is paid;
•
the instrument of transfer is accompanied by the share
certificates to which it relates, or such other evidence is
given as may be reasonably necessary to show the right of the
transferor to make the transfer;
•
the instrument of transfer is in respect of one class of shares
only; and
•
the transfer is conducted in accordance with the laws and
administrative regulations of or required by the securities
exchanges on which the shares are listed.
We are required to keep a register of our shareholders which
shall be comprised of various parts, including one part which is
to be maintained in Hong Kong in relation to H shares to be
listed on the Hong Kong Stock Exchange.
Dividends
We may distribute dividends twice a year, with the final
dividend for any financial year being subject to the approval of
the shareholders by way of an ordinary resolution. The articles
of association allow for distribution of dividends in the form
of cash or shares.
Dividends may only be distributed, however, after allowance has
been made for:
allocations to the statutory common welfare fund; and
•
allocations to a discretionary common reserve fund if approved
by the shareholders.
The minimum and maximum aggregate allocations to the statutory
funds are 15% and 20%, respectively, of our net income
determined in accordance with PRC accounting rules.
The articles of association require us to appoint on behalf of
the holders of H shares a receiving agent which is registered as
a trust corporation under the Trustee Ordinance of Hong Kong to
receive dividends declared by us in respect of the H shares on
behalf of such shareholders. The articles of association require
that cash dividends in respect of H shares be declared in
Renminbi and paid by us in HK dollars.
Voting Rights and Shareholders’ Meetings
Our board of directors will convene a shareholders’ annual
general meeting once every year and within six months’ from
the end of the preceding financial year. Our board will convene
an extraordinary general meeting within two months of the
occurrence of any one of the following events:
•
where the number of directors is less than the number stipulated
in the PRC Company law or two-thirds of the number specified in
our articles of association;
•
where our unrecovered losses reach one-third of the total amount
of our share capital;
•
where shareholders holding 10% or more of our issued and
outstanding voting shares request in writing the convening of an
extraordinary general meeting; or
•
where our board deems necessary or our board of supervisors so
request.
Meetings of a special class of shareholders must be called in
certain enumerated situations when the rights of the holders of
such class of shares may be modified or adversely affected, as
discussed below. Resolutions proposed by shareholders holding 5%
or more of the total number of voting shares will be included in
the agenda for the relevant annual general meeting if they are
matters which fall within the scope of the functions and powers
of shareholders in general meeting.
All shareholders’ meetings must be convened by our board by
written notice given to shareholders not less than 45 days
before the meeting. Based on the written replies received by us
20 days before a shareholders’ meeting, we will
calculate the number of voting shares represented by
shareholders who have indicated that they intend to attend the
meeting. Where the number of voting shares represented by those
shareholders amount to more than one-half of our total voting
shares, we may convene the shareholders’ general meeting,
regardless of the number of shareholders who actually attend.
Otherwise, we will, within five days, inform the shareholders
again of the motions to be considered and the date and venue of
the meeting by way of public announcement. After the
announcement is made, the shareholders’ meeting may be
convened. The accidental omission by us to give notice of a
meeting to, or the non-receipt of notice of a meeting by, a
shareholder will not invalidate the proceedings at that
shareholders’ meeting.
Shareholders at meetings have the power, among other things, to
approve or reject our profit distribution plans, the annual
budget, the financial statements, an increase or decrease in
share capital, the issuance of debentures, the merger or
liquidation of PetroChina and any amendment to our articles of
association. In addition, the rights of a class of shareholders
may not be modified or abrogated, unless approved by a special
resolution of all shareholders at a general shareholders’
meeting and by a special resolution of shareholders of that
class of shares at a separate meeting. Our articles of
association enumerate, without limitation, certain amendments
which would be deemed to be a modification or abrogation of the
rights of a class of shareholders, including increasing or
decreasing the number of shares of a class disproportionate to
increases or decreases
of other classes of shares, removing or reducing rights to
receive dividends in a particular currency or creating shares
with voting or equity rights superior to shares of such class.
Each H share is entitled to one vote on all matters submitted to
a vote of our shareholders at all shareholders’ meetings,
except for meetings of a special class of shareholders where
only holders of shares of the affected class are entitled to
vote on the basis of one vote per share of the affected class.
Shareholders are entitled to attend and vote at meetings either
in person or by proxy. Proxies must be in writing and deposited
at our legal address, or such other place as is specified in the
meeting notice, not less than 24 hours before the time for
holding the meeting at which the proxy proposes to vote or the
time appointed for the passing of the relevant resolutions. When
the instrument appointing a proxy is executed by the
shareholder’s attorney-in-fact, such proxy when deposited
must be accompanied by a notarially certified copy of the
relevant power of attorney or other authority under which the
proxy was executed.
Except for those actions discussed below which require
supermajority votes, resolutions of the shareholders are passed
by a simple majority of the voting shares held by shareholders
who are present in person or by proxy. Special resolutions must
be passed by more than two-thirds of the voting rights
represented held by shareholders who are present in person or by
proxy.
The following decisions must be adopted by special resolution:
•
an increase or reduction of our share capital or the issue of
shares of any class, warrants and other similar securities;
•
the issue of our debentures;
•
our division, merger, dissolution and liquidation;
any other matters considered by the shareholders in a general
meeting and which they have resolved by way of an ordinary
resolution to be of a nature which may have a material impact on
us and should be adopted by special resolution.
All other actions taken by the shareholders, including the
appointment and removal of our directors and independent
auditors and the declaration of normal dividend payments or
stock distributions, will be decided by an ordinary resolution
of the shareholders.
In addition, certain amendments to the articles of association
require the approval and consent of the relevant PRC authorities.
Any shareholder resolution which is in violation of any laws or
regulations of the PRC or the articles of association will be
null and void.
Board of Directors
Directors will be elected by shareholders at a general meeting.
Because the shares do not have cumulative voting rights, a
holder of a majority of our shares is able to elect all of the
directors. Directors are elected for a term of three years.
Meetings of the board of directors shall be held at least twice
every year and shall be convened by the Chairman of the board of
directors, who shall notify all directors 10 days before
each meeting.
Our board of directors is accountable to the shareholders in
general meetings and exercises the following functions and
powers to:
(a) be responsible for the convening of shareholders’
meetings and reporting on its work to the shareholders at such
meetings;
(b) implement the resolutions passed by the shareholders in
general meetings;
(c) determine our business plans and investment proposals;
(d) formulate our annual preliminary and final budgets;
(e) formulate our profit distribution proposal and loss
recovery proposals;
(f) formulate proposals for the increase or reduction of
our registered capital and the issuance of our debentures;
(g) draw up plans for our merger, division or dissolution;
(h) decide on our internal management structure;
(i) appoint or remove our president and to appoint or
remove the vice presidents and other senior officers, including
the financial controller, based on the recommendation of the
general manager, and to decide on their remuneration;
(j) formulate our basic management system;
(k) formulate proposals for any amendment of our articles
of association; and
(l) exercise any other powers conferred by the shareholders
in general meetings.
Except for items (f), (g) and (k), which require the
affirmative vote of more than two-thirds of all of our
directors, resolutions on any other items may be approved by the
affirmative vote of a simple majority of our directors.
In addition to obligations imposed by laws, administrative
regulations or the listing rules of the stock exchanges on which
our H shares are listed, the articles of association place on
each of our directors, supervisors, president, vice presidents
and any other senior officers a duty to each shareholder, in the
exercise of our functions and powers entrusted to such person:
•
not to cause us to exceed the scope of business stipulated in
our business license;
•
to act honestly in our best interests;
•
not to expropriate our property in any way, including, without
limitation, usurpation of opportunities which benefit us; and
•
not to expropriate the individual rights of shareholders,
including, without limitation, rights to distributions and
voting rights, save and except according to a restructuring
which has been submitted to the shareholders for their approval
in accordance with the articles of association.
Our articles of association further place on each of our
directors, supervisors, president, vice presidents and senior
officers:
•
a duty, in the exercise of such person’s powers and
discharge of such person’s duties, to exercise the care,
diligence and skill that a reasonably prudent person would
exercise in comparable circumstances;
•
a fiduciary obligation, in the exercise of our powers entrusted
to him or her, not to place himself or herself in a position
where his or her duty to us and his or her interests may
conflict; and
•
a duty not to direct a person or entity related or connected to
a director, supervisor, president, vice president or senior
officer in certain relationships enumerated in the articles of
association to act in a manner which such director, supervisor,
president, vice president or senior officer is prohibited from
doing.
Subject to compliance with all relevant laws and administrative
regulations, the shareholders in a general meeting may by
ordinary resolution remove any director before the expiration of
his term of
office. Subject to certain qualifications, a director,
supervisor, president, vice president or other senior officer
may be relieved of liability for a specific breach of his or her
duties by the informed consent of shareholders in a general
meeting.
Board of Supervisors
The board of supervisors is composed of seven members appointed
to monitor our financial matters:
•
to verify financial reports and other financial information
which have been prepared by the board and which are proposed to
be presented at shareholders’ meetings, and
•
to oversee our directors, president, vice presidents and other
senior officers in order to prevent such persons from abusing
their authority or infringing upon our interest.
The board of supervisors’ powers are generally limited to
investigating and reporting to shareholders and management on
our affairs and to calling shareholders’ extraordinary
general meetings.
One member of the board of supervisors will be an employee
representative appointed by our employees. The remaining members
will be appointed by the shareholders in a general meeting. One
member of the board of supervisors shall be the chairman. A
member of the board of supervisors may not be a director, the
president, a vice president or the financial controller. The
term of office of each member of the board of supervisors is
three years, including the term of office of the chairman of the
board of supervisors, both of which terms of office are
renewable upon re-election and re-appointment. Reasonable
expenses incurred by the board of supervisors in carrying out
its duties will be paid by us.
The board of supervisors is accountable, and will report, to the
shareholders in the shareholders’ general meetings.
Restrictions on Large or Controlling Shareholders
Our articles of association provide that, in addition to any
obligation imposed by laws and administrative regulations or
required by the listing rules of the stock exchanges on which
our H shares are listed, a controlling shareholder shall
not exercise his voting rights in a manner prejudicial to the
interests of the shareholders generally or of some part of the
shareholders:
•
to relieve a director or supervisor from his or her duty to act
honestly in our best interests;
•
to approve the expropriation by a director or supervisor of our
assets in any way, including, without limitation, opportunities
which may benefit us; or
•
to approve the expropriation by a director or supervisor of the
individual rights of other shareholders, including, without
limitation, rights to distributions and voting rights, except
according to a restructuring of our company which has been
submitted for approval by the shareholders in a general meeting
in accordance with our articles of association.
A controlling shareholder, however, will not be precluded by our
articles of association or any laws and administrative
regulations or the listing rules of the stock exchanges on which
our H shares are listed from voting on these matters.
A controlling shareholder is defined by our articles of
association as any person who acting alone or in concert with
others:
•
is in a position to elect more than one-half of the board of
directors;
•
has the power to exercise, or to control the exercise of, 30% or
more of our voting rights;
•
holds 30% or more of our issued and outstanding shares; or
In May 2005, our shareholders approved our amended articles of
association at the annual general meeting of shareholders, which
is subject to approval by the State-owned Assets Supervision and
Administration Commission of the PRC, or SASAC, before they
become effective. Accordingly, we are still governed by our
current articles of association in effect, pending this
approval. We expect this approval to be granted in due course.
In this subsection, we describe the significant changes that
will come into effect upon the approval of SASAC. In the
subsection above, we describe our current articles of
association. Both subsections must be read in conjunction in
order to understand how we will function after the amended
articles of association have been approved. We have filed our
amended articles of association with the Commission as an
exhibit to this annual report on Form 20-F.
The amended articles of associations increase the minimum
frequency of mandatory meetings of the board of directors from
twice to four times every year and remove the explicit
requirement of notifying all directors 10 days before each
meeting.
The amended articles of associations provide that we will make
the following documents available at our Hong Kong
representative office for inspection by the public and
shareholders free of charge and for copying by shareholders at
reasonable charges:
• a complete duplicate of the register of shareholders;
• a report showing the status of our issued share
capital;
• the latest audited financial statements,
directors’ report, auditors’ report, and
supervisors’ Reports;
• our special resolutions;
• reports showing the number and nominal value of
securities repurchased by us since the end of the last financial
year, the aggregate amount paid for such securities and the
maximum and the minimum prices paid in respect of each class of
securities repurchased;
• a copy of the latest annual examination report filed
with the State Administration of Industry and Commerce of the
PRC; and
• for shareholders only, copies of the shareholder
meetings’ minutes.
Shareholders’ General Meetings
The amended articles of associations provide that when any
shareholder is required to abstain from voting on any particular
resolution or restricted to voting only for or against any
particular resolution under the Listing Rules, any votes cast by
or on behalf of such shareholder in contravention of such
requirement or restriction shall not be counted.
Board of Directors
The amended articles of associations provide that when a
director or any of his associates has a material interest in any
board resolution, the relevant transaction will be dealt with by
conducting a board meeting rather than circulating written board
resolution. If an independent non-executive director and its
affiliates has no material interests in the transaction, he
should be present at such board meeting.
The amended articles of associations impose additional
responsibilities upon the secretary of our board of directors,
who will
•
organize board meetings and general meetings; and
•
circulate minutes of the meetings of the board of directors to
all directors for their signature and records within
14 days after the board meeting is held, and make the
minutes available for inspection.
Financial and Accounting Systems and Profit
Distribution
The amended articles of associations provide that we will not
exercise our power to forfeit the unclaimed dividends until
after the expiry of the applicable limitation period under the
relevant PRC law.
The Renminbi currently is not a freely convertible currency. We
receive most of our revenues in Renminbi. A portion of our
Renminbi revenues must be converted into other currencies to
meet our foreign currency obligations. We have substantial
requirements for foreign currency, including:
•
debt service on foreign currency-denominated debt;
•
purchases of imported equipment and materials; and
•
payment of any dividends declared in respect of the H shares.
Under the existing foreign exchange regulations in China, we may
undertake current account foreign exchange transactions,
including the payment of dividends, without prior approval from
the State Administration of Foreign Exchange by producing
commercial documents evidencing such transactions, provided that
they are processed through Chinese banks licensed to engage in
foreign exchange transactions. The PRC government has stated
publicly that it intends to make the Renminbi freely convertible
in the future. However, uncertainty exists as to whether the PRC
government may restrict access to foreign currency for current
account transactions if foreign currency becomes scarce in the
PRC.
Foreign exchange transactions under the capital account,
including principal payments with respect to foreign
currency-denominated obligations, continue to be subject to
limitations and require the prior approval of the State
Administration of Foreign Exchange. These limitations could
affect our ability to obtain foreign exchange through debt
financing, or to obtain foreign exchange for capital
expenditures.
We have been, and will continue to be, affected by changes in
exchange rates in connection with our ability to meet our
foreign currency obligations and will be affected by such
changes in connection with our ability to pay dividends on the
H shares in Hong Kong dollars and on ADSs in
US dollars. We believe that we have or will be able to
obtain sufficient foreign exchange to continue
to satisfy these obligations. We do not engage in any financial
contract or other arrangement to hedge our currency exposure.
We are not aware of any other PRC laws, decrees or regulations
that restrict the export or import of capital or that affect the
remittance of dividends, interest or other payments to
non-resident holders.
Taxation
The following discussion addresses the main PRC tax consequences
of the ownership of H shares or ADSs purchased in
connection with the global offering and held by the investor as
capital assets.
Dividends and Individual Investors
Under the Provisional Regulations of China Concerning Questions
of Taxation on Enterprises Experimenting with the Share System
(the “Provisional Regulations”) and other applicable
tax laws and regulations, dividends paid by PRC companies on
shares experimenting with the share system to individuals are
generally subject to a PRC withholding tax of 20%. However, on
July 21, 1993, the PRC State Administration of Taxation
issued the Notice Concerning the Taxation of Gains on Transfer
and Dividends from Shares (Equities) Received by Foreign
Investment Enterprises, Foreign Enterprises and Foreign
Individuals (the “Tax Notice”). Under the Tax Notice,
dividends paid by a PRC company to foreign persons with respect
to shares listed on an overseas stock exchange (“Overseas
Shares”), including the H shares and ADSs, are not
subject to PRC withholding tax for the time being.
The Individual Income Tax Law of the PRC was amended effective
January 1, 1994 and states that it supersedes any
contradictory prior administrative regulation concerning
individual income tax. The amended Individual Income Tax Law can
be interpreted as providing that all foreign individuals are
subject to the 20% withholding tax on dividends paid by a PRC
company on its Overseas Shares unless specifically exempted by
the financial authority of the State Council of the PRC.
However, in a letter dated July 26, 1994 to the former
State Commission for Restructuring the Economic System, the
former State Council Securities Committee and the China
Securities Regulatory Commission, the PRC State Administration
of Taxation restated the exemption. In the event that the letter
is withdrawn, a 20% tax may be withheld on dividends paid to
you, subject to reduction by an applicable tax treaty between
China and the country where you reside. To date, the relevant
tax authorities have not collected withholding tax from dividend
payments on such shares exempted under the Tax Notice.
Dividends and Foreign Enterprises
According to the Provisional Regulations and other applicable
tax laws and regulations, dividends paid by PRC companies to
foreign enterprises are ordinarily subject to a PRC withholding
tax levied at a flat rate of 20%. However, according to the Tax
Notice, a foreign enterprise with no permanent establishment in
China receiving dividends paid on Overseas Shares will
temporarily not be subject to the 20% withholding tax. If such
withholding tax becomes applicable in the future, such rate may
still be reduced under relevant tax treaties, if applicable.
Tax Treaties
If you are a resident or citizen of a country that has entered
into a double-taxation treaty with the PRC, you may be entitled
to a reduction in the amount of tax withheld, if any, imposed on
the payment of dividends. The PRC currently has such treaties
with a number of countries, including but not limited to:
Under each one of such treaties, the rate of withholding tax
imposed by China’s taxation authorities is generally
reduced. For example, under the double taxation treaty between
China and the United States, China may tax dividends paid by us
to an eligible U.S. holder up to a maximum of 10% of their
gross amount. Under the treaty, an eligible U.S. holder is
a person who, by reason of domicile, residence, place or head
office, place of incorporation or any other criterion of similar
nature is subject to taxation in the United States, as
applicable under the treaty’s “treaty shopping
provisions”.
Capital Gains
The Tax Notice provides that gains realized by foreign
enterprises upon the sale of Overseas Shares which are not held
by entities established by such enterprises in the PRC and gains
realized by foreign individuals upon the sale of Overseas Shares
are not subject to withholding tax for the time being. However,
as far as individuals are concerned, the Individual Income Tax
Law of the PRC, as amended on October 31, 1993 and
effective on January 1, 1994, provides for a capital gains
tax of 20% on individuals. On January 28, 1994, the
Provisions for Implementing the Individual Income Tax Law of the
PRC was promulgated which provides that the measures to levy
individual income tax on the gains realized on the sale of
shares will be made in the future by the Ministry of Finance and
subject to the approval of the State Council. On June 20,1994, February 9, 1996 and March 30, 1998, the
Ministry of Finance and the State Administration of Taxation
issued notices providing that temporarily no capital gains tax
will be imposed on gains from the sale of shares by individuals.
However, it is uncertain whether the above exemption for foreign
enterprises and foreign individuals will continue to apply or be
renewed in the future. If such exemption does not apply or is
not renewed, and the Tax Notice is found not to apply, as a
holder of H shares or ADSs you may be subject to a 20% tax
on capital gains, unless reduced by an applicable double
taxation treaty.
Additional PRC Tax Considerations
Under the Provisional Regulations of the People’s Republic
of China Concerning the Stamp Duty, a stamp duty is not imposed
by the PRC on the transfer of shares, such as the H shares
or ADSs, of PRC publicly traded companies that take place
outside of China.
C:
Significant Differences in Corporate Governance Practices
We have filed a summary of the significant differences in our
corporate governance practices for purposes of
Section 303A.11 of the New York Stock Exchange Listed
Company Manual with the Commission as an exhibit to this annual
report on Form 20-F and have disclosed the same on our
website, www.petrochina.com.cn, which may be accessed as
follows:
1.
From our main web page, first click on “Investor
Relations”.
Finally, click on “Significant Differences In Corporate
Governance Practices For Purposes Of Section 303A.11 of The
New York Stock Exchange Listed Company Manual”.
C:
Documents on Display
You may read and copy documents referred to in this annual
report on Form 20-F that have been filed with the
U.S. Securities and Exchange Commission at the
Commission’s public reference room located at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the public reference
rooms and their copy charges.
The Commission allows us to “incorporate by reference”
the information we file with the Commission. This means that we
can disclose important information to you by referring you to
another document filed separately with the Commission. The
information incorporated by reference is considered to be part
of this annual report on Form 20-F.
ITEM 11 — QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
In the normal course of business, we hold or issue various
financial instruments which expose us to interest rate and
foreign exchange rate risks. Additionally, our operations are
affected by certain commodity price movements. We historically
have not used derivative instruments for hedging or trading
purposes. Such activities are subject to policies approved by
our senior management. Substantially all of the financial
instruments we hold are for purposes other than trading. We
regard an effective market risk management system as an
important element of our treasury function and are currently
enhancing our systems. A primary objective of our market risk
management is to implement certain methodologies to better
measure and monitor risk exposures.
The following discussions and tables, which constitute
“forward-looking statements” that involve risks and
uncertainties, summarize our market-sensitive financial
instruments including fair value, maturity and contract terms.
Such discussions address market risk only and do not present
other risks which we face in the normal course of business.
Interest Rate Risk
Our interest risk exposure arises from changing interest rates.
The tables below provide information about our financial
instruments including various debt obligations that are
sensitive to changes in interest rates. The tables present
principal cash flows and related weighted-average interest rates
at expected maturity dates. Weighted-average variable rates are
based on effective rates as of December 31, 2002, 2003 and
2004. The information is presented in Renminbi equivalents, our
reporting currency.
Foreign Exchange Rate Risk
We conduct our business primarily in Renminbi. However, a
portion of our RMB revenues are converted into other currencies
to meet foreign currency financial instrument obligations and to
pay for imported equipment, crude oil and other materials.
Foreign currency payments for imported equipment represented
12.2%, 15.5% and 18.6% of our total payments for equipment in
2002, 2003 and 2004 respectively. Foreign currency payments for
imported crude oil and other materials represented 7.7%, 10.8%
and 9.6% of our total payments for materials in 2002, 2003 and
2004 respectively.
The Renminbi is not a freely convertible currency. Limitation in
foreign exchange transactions imposed by the PRC government
could cause future exchange rates to vary significantly from
current or historical exchange rates. The tables below provide
information about our financial instruments including foreign
currency denominated debt instruments that are sensitive to
foreign currency exchange rates. The tables below summarize such
information by presenting principal cash flows and related
weighted-average interest rates at expected maturity dates in
RMB equivalents, using the exchange rates in effect as of
December 31, 2002, 2003 and 2004, respectively.
Due to the declining interest rates in recent years in China,
the PRC government has implemented a program to adjust interest
rates on certain fixed RMB loans periodically to reflect the
market rates in effect published by the People’s Bank of
China, or the PBOC, from time to time. As a result, these
previously fixed RMB loans are categorized as variable rate
loans as of December 31, 2002, 2003 and 2004. The newly
adjusted rates usually become effective one year after the
announcement by the PBOC. The average interest rates on these
loans are calculated based on the then effective rates as of
December 31, 2002, 2003 and 2004, respectively.
Commodity Price Risk
We are engaged in a broad range of petroleum related activities.
The hydrocarbon commodity markets are influenced by global as
well as regional supply and demand conditions. The PRC
government currently publishes prices for onshore crude oil,
gasoline and diesel according to international benchmark prices.
A decline in prices of crude oil and refined products could
adversely affect our financial performance. We historically have
not used commodity derivative instruments to hedge the potential
price fluctuations of crude oil and other refined products.
Therefore, during 2002, 2003 and 2004, we were exposed to the
general price fluctuations of broadly traded oil and gas
commodities.
ITEM 12 — DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
Not applicable.
C:
PART II
ITEM 13 — DEFAULTS, DIVIDENDS ARREARAGES AND
DELINQUENCIES
None.
C:
ITEM 14 — MATERIAL MODIFICATIONS TO THE RIGHTS
TO SECURITY HOLDERS
None.
C:
ITEM 15 — CONTROLS AND PROCEDURES
Our Chairman, who performs the functions of Chief Executive
Officer, and our Chief Financial Officer, after evaluating the
effectiveness of PetroChina’s disclosure controls and
procedures (as defined in the United States Exchange Act
Rules 13a-15(e) and 15d(e)) as of the end of the period
covered by this annual report, have concluded that, as of such
date, PetroChina’s disclosure controls and procedures were
effective to ensure that material information required to be
disclosed in the reports that we file and furnish under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission’s rules and regulations, except as disclosed in
the following paragraphs.
In preparation for certain internal control reporting
requirements set forth in Section 404 of the Sarbanes-Oxley
Act, we are undertaking company-wide documentation of internal
controls, performing the system and process evaluation and
testing required (and any necessary remediation) in an effort to
comply with such requirements by the effective date for
compliance. Our efforts to implement standardized internal
control procedures and develop the internal tests necessary to
verify the proper application of the internal control procedures
and their effectiveness will be a key area of focus for our
board of directors, our audit committee and our senior
management.
In the course of preparation for the implementation of the
requirements of Section 404 of the Sarbanes-Oxley Act, we
have identified certain internal control deficiencies that could
adversely affect our ability to record, process, summarize and
report financial data consistent with our management’s
assertions in our financial statements. The significant
deficiencies and weakness that we have discovered did not relate
to fraud or require any material adjustments to our financial
statements. Specifically, the identified areas would require us
to: (1) enhance our internal audit function by developing
and executing a formal audit plan at the head office and
regional company level, enhancing its effectiveness and timely
communicating identified deficiencies to management,
(2) enhance the security and access control of information
systems, and (3) improve the experience and knowledge of
our employees.
Following the identification of these issues, we commenced
planning for remedial measures to make the necessary
improvements as soon as practicable. Our board of directors and
audit committee have been advised of these issues. Under the
supervision and with the participation of our senior management,
including our Chairman and Chief Financial Officer, we are in
the process of conducting further evaluation of our internal
control over financial reporting. We plan to design enhanced
processes and controls to address these and any other issues
that might be identified through our review. As we are still in
the evaluation process, we may identify other conditions that
may result in significant deficiencies or material weaknesses in
the future. If we discover such conditions, we will take action
to correct them. We are committed to taking appropriate steps
for remediation, as needed.
There were no changes in our internal control over financial
reporting that occurred during the year ended December 31,2004 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
C:
ITEM 16A — AUDIT COMMITTEE FINANCIAL EXPERT
Our audit committee is composed of three non-executive
independent directors, Messrs. Franco Bernabé,
Chee-Chen Tung and Liu Hongru, and one non-executive director,
Gong Huazhang. See “Item 6 — Directors,
Senior Management and Employees — Board
Practices — Audit Committee”. Our board of
directors has determined that Liu Hongru, our non-executive
independent director, is qualified as a “financial
expert,” as defined in Item 16A of Form 20-F.
C:
ITEM 16B — CODE OF ETHICS
We have adopted a Code of Ethics that applies to our Chief
Executive Officer, Chief Financial Officer, Chief Accounting
Officer, other executives and senior officers and a separate
Code of Ethics that applies to all of our employees. We have
included these two Codes of Ethics as Exhibit 16.1 and
Exhibit 16.2 to this annual report. These two Codes of
Ethics are also posted on our website,
www.petrochina.com.cn, and may be accessed as follows:
1.
From our main web page, first click on “Investor
Relations”.
2.
Next, click on “Corporate Governance Structure”.
3.
Finally, click on “Code of Ethics for Senior
Management” or “Code of Ethics for Employees of
PetroChina Company Limited”.
C:
ITEM 16C — PRINCIPAL ACCOUNTANT FEES AND
SERVICES
PricewaterhouseCoopers has served as PetroChina’s
independent public accountants for each of the fiscal years in
the three-year period ended December 31, 2004, for which
audited financial statements appear in this annual report on
Form 20-F. The auditors are elected annually at the annual
general meeting of PetroChina.
The offices of PricewaterhouseCoopers are located at
Prince’s Building, 22nd Floor, Central, Hong Kong.
The following table presents the aggregate fees for professional
audit services and other services rendered by
PricewaterhouseCoopers to PetroChina for each of the years ended
December 31, 2003 and 2004.
Audit fees consist of fees billed for the annual audit services
and other audit services, which are those services that only the
external auditor reasonably can provide, and include the group
audit, statutory audits, and assistance with and review of
documents filed with the Commission.
Other fees mainly include fees billed for advisory services in
assisting our management to evaluate and improve our internal
control procedures over financial reporting as required under
Section 404 of the Sarbanes-Oxley Act.
Audit Committee Pre-approved Policies and
Procedures
Currently, all non-audit services to be provided by our
independent public accountants, PricewaterhouseCoopers, must be
approved by our audit committee.
During 2004, services relating to all audit-related fees
provided to us by PricewaterhouseCoopers were approved by our
audit committee in accordance with the de minimis
exception to the pre-approval requirement provided by
paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
C:
ITEM 16D — EXEMPTIONS FROM LISTING STANDARDS FOR
AUDIT COMMITTEES
Not applicable.
C:
ITEM 16E — PURCHASES OF EQUITY SECURITIES BY THE
ISSUER AND ITS AFFILIATES
Not applicable.
C:
PART III
ITEM 17 — FINANCIAL STATEMENTS
We have elected to provide the financial statements and related
information specified in Item 18 in lieu of Item 17.
C:
ITEM 18 — FINANCIAL STATEMENTS
See page F-1 to F-62 following Item 19.
C:
ITEM 19 — EXHIBITS
(a) See Item 18 for a list of the financial statements
as part of this annual report.
Crude Oil Mutual Supply Framework Agreement, dated
December 1, 2004, between China Petroleum and Chemical
Corporation and PetroChina (English translation)
4.3
Capital Contribution Agreement, dated June 9, 2005, among
China National Oil and Gas Exploration and Development
Corporation, Central Asia Petroleum Company Limited, Zhong You
Kan Tan Kai Fa Company Limited and PetroChina (English
Translation)
4.4
Transfer Agreement, dated June 9, 2005, between Zhong You
Kan Tan Kai Fa Company Limited and PetroChina (English
Translation)
Supplementary Agreement to Comprehensive Products and Services
Agreement, dated June 9, 2005, between CNPC and PetroChina
(English Translation)
4.6
Form of Non-competition Agreement between CNPC and PetroChina
(together with English
translation)(2)
4.7
Form of Comprehensive Products and Services Agreement between
CNPC and PetroChina (together with English
translation)(2)
4.8
Form of Land Use Rights Leasing Contract between CNPC and
PetroChina (together with English
translation)(2)
4.9
Form of Buildings Leasing Contract between CNPC and PetroChina
(together with English
translation)(2)
4.10
Form of Trademark Licensing Contract between CNPC and PetroChina
(together with English
translation)(2)
4.11
Form of Patent and Know-how Licensing Contract between CNPC and
PetroChina (together with English
translation)(2)
4.12
Form of Computer Software Licensing Contract between CNPC and
PetroChina (together with English
translation)(2)
4.13
Form of Contract for Transfer of Rights under Production Sharing
Contracts between CNPC and PetroChina (together with English
translation)(2)
4.14
Form of Guarantee of Debts Contract between CNPC and PetroChina
(together with English
translation)(2)
4.15
Form of Contract for the Supervision of Certain Sales
Enterprises between CNPC and PetroChina (together with English
translation)(2)
4.16
Form of Agreement for Transfer of Rights and Interests under the
Crude Oil Premium and Discount Calculation Agreement between
China Petrochemical Corporation, CNPC and PetroChina (together
with English
translation)(2)
4.17
Form of Agreement for the Transfer of Rights and Interests under
the Retainer Contracts relating to Oil Exploration and
Exploitation in Lengjiapu Area, Liaohe Oil Region and
No. 9.1-9.5 Areas, Karamay Oil Field (together with English
translation)(2)
Incorporated by reference to our Registration Statement on
Form F-1 (File No. 333-11566) filed with the
Commission, as declared effective on March 29, 2000.
The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly
caused and authorized the undersigned to sign this annual report
on its behalf.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of PetroChina Company
Limited:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, of cash flows and
of changes in equity present fairly, in all material respects,
the consolidated financial position of PetroChina Company
Limited (the “Company”) and its subsidiaries (the
“Group”) at December 31, 2003 and 2004, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in
conformity with International Financial Reporting Standards.
These financial statements are the responsibility of the
Company’s management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
International Financial Reporting Standards vary in certain
significant respects from accounting principles generally
accepted in the United States. The application of the latter
would have affected the determination of consolidated net income
for each of the three years in the period ended
December 31, 2004 and the determination of consolidated
shareholders’ equity at December 31, 2003 and 2004 to
the extent summarized in Note 35 to the consolidated
financial statements.
(Amounts in millions except for per share data or unless
otherwise stated)
1
ORGANIZATION AND PRINCIPAL ACTIVITIES
PetroChina Company Limited (the “Company”) was
established in the People’s Republic of China (the
“PRC” or “China”) on November 5, 1999
as a joint stock company with limited liability as a result of a
group restructuring (the “Restructuring”) of China
National Petroleum Corporation (“CNPC”) in preparation
for the listing of the Company’s shares in Hong Kong and in
the United States of America. (See Note 24.) The Company
and its subsidiaries are collectively referred to as the
“Group”.
The Group is principally engaged in (i) the exploration,
development and production of crude oil and natural gas,
(ii) the refining, transportation, storage and marketing of
crude oil and petroleum products, (iii) the production and
sale of chemicals, and (iv) the transmission, marketing and
sale of natural gas. (See Note 34.)
2
BASIS OF PREPARATION
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
(“IFRS”) issued by the International Accounting
Standards Board (“IASB”). This basis of accounting
differs from the accounting principles generally accepted in the
United States of America (“US GAAP”)
(Note 35). The statements are prepared on the historical
cost convention as modified by the revaluation of certain
property, plant and equipment.
The preparation of financial statements in conformity with IFRS
requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Although these estimates are based
on management’s best knowledge of current events and
actions, actual results ultimately may differ from those
estimates.
In September 2002, the Company acquired from CNPC the assets,
liabilities and interests related to CNPC’s refined
products marketing enterprises comprising primarily of service
stations and related facilities for RMB 3,200. The Company has
accounted for the acquisition in a manner similar to a uniting
of interests, whereby the assets and liabilities of the
marketing enterprises acquired were accounted for at historical
cost to CNPC, and the consolidated financial statements were
restated in the prior year to give effect to the acquisition
with all periods presented as if the operations of the Company
and these marketing enterprises had always been combined. The
difference between the RMB 3,200 acquisition price and the net
liabilities transferred from CNPC was adjusted against equity.
The consolidated financial statements are expressed in Renminbi
(“RMB”), the national currency of the PRC. Solely for
the convenience of the reader, the December 31, 2004,
financial statements have been translated into United States
dollars at the noon buying rate in New York City on
December 31, 2004, for cable transfers in Renminbi as
certified for customs purposes by the Federal Reserve Bank of
New York of US$1.00 = RMB 8.2765. No representation is made that
the Renminbi amounts could have been, or could be, converted
into United States dollars at that rate or at any other certain
rate on December 31, 2004, or at any other date.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
3
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. Subsidiaries are
those entities in which the Group has an interest of more than
one half of the voting rights or otherwise has power to govern
the financial and operating policies.
Subsidiaries are consolidated from the date on which control is
transferred to the Group and are no longer consolidated from the
date that control ceases. The purchase method of accounting is
used to account for the acquisition of subsidiaries. The cost of
an acquisition is measured as the fair value of the assets given
up, shares issued or liabilities undertaken at the date of
acquisition plus costs directly attributable to the acquisition.
Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess
of the cost of acquisition over the fair value of the
Group’s share of the net assets of the subsidiary acquired
is recorded as goodwill. Intercompany transactions, balances and
unrealized gains on transactions between group companies are
eliminated; unrealized losses are also eliminated unless cost
cannot be recovered. Where necessary, accounting policies of
subsidiaries have been changed to ensure consistency with the
policies adopted by the Group.
A listing of the Group’s principal subsidiaries is set out
in Note 36.
(b) Investments in equity affiliates
Investments in equity affiliates are accounted for by the equity
method. Under this method the Group’s share of the
post-acquisition profits or losses of equity affiliates is
recognized in the income statement and its share of
post-acquisition movements in reserves is recognized in
reserves. The cumulative post-acquisition movements are adjusted
against the cost of the investment. Equity affiliates are
entities in which the Group generally has between 20% and 50% of
the voting rights, or over which the Group has significant
influence, but which it does not control. Unrealized gains on
transactions between the Group and its equity affiliates are
eliminated to the extent of the Group’s interest in the
equity affiliates; unrealized losses are also eliminated unless
the transaction provides evidence of an impairment of the asset
transferred. The Group’s investment in equity affiliates
includes goodwill (net of accumulated amortization) on
acquisition. When the Group’s share of losses in an equity
affiliate equals or exceeds its interest in the equity
affiliate, the Group does not recognize further losses, unless
the Group has incurred obligations or made payments on behalf of
the equity affiliate.
A listing of the Group’s principal equity affiliates is
shown in Note 17.
(c) Foreign currencies
Items included in the financial statements of each entity in the
Group are measured using the currency that best reflects the
economic substance of the underlying events and circumstances
relevant to that entity. Substantially all assets and operations
of the Group are located in the PRC, and the measurement
currency is RMB. The Group also owns certain crude oil and
natural gas exploration and production operations in Indonesia
and the measurement currency for these operations is US dollars.
The consolidated financial statements are presented in RMB,
which is the measurement currency of the parent and most of the
consolidated entities.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
Foreign currency transactions of the Group are accounted for at
the exchange rates prevailing at the date of the transactions;
gains and losses resulting from the settlement of such
transactions and from the translation of monetary assets and
liabilities denominated in foreign currencies are recognized in
the consolidated income statement. Monetary assets and
liabilities are translated at balance sheet date exchange rates.
Income statement and cash flows of foreign entities are
translated into the Group’s reporting currency at average
exchange rates for the year and their balance sheets are
translated at the exchange rates at year end. Currency
translation differences are recognized in shareholders’
equity.
The Group did not enter into any hedge contracts during any of
the years presented. No foreign currency exchange gains or
losses were capitalized for any years presented.
(d) Financial instruments
Financial instruments carried at the balance sheet date include
cash and bank balances, investments, receivables, payables,
leases and debts. Where necessary the particular recognition
methods adopted are disclosed in the individual policy
statements associated with each item.
Derivatives are recognized at fair value with changes in the
fair value recognized in the income statement. The Group did not
hold any derivative financial instruments for hedging or risk
management purpose in any of the years presented.
(e) Investments
The Group classifies its investments into the following
categories: trading, held-to-maturity and available-for-sale.
Investments that are acquired principally for the purpose of
generating a profit from short-term fluctuations in price are
classified as trading investments and included in current
assets; the Group did not hold any investment in this category
during the year presented. Investments with fixed maturity that
the management has the intent and ability to hold to maturity
are classified as held-to-maturity and are included in current
assets if their respective maturity dates are twelve months or
less from balance sheet date, or in non-current assets if their
respective maturity dates are more than twelve months from
balance sheet date; during the year the Group did not hold any
investment in this category. Investments intended to be held for
an indefinite period of time, which may be sold in response to
needs for liquidity or changes in interest rates, are classified
as available-for-sale; these are included in non-current assets
unless management has the express intention of holding the
investment for less than twelve months from the balance sheet
date or unless they will need to be sold to raise operating
capital, in which case they are included in current assets.
Management determines the appropriate classification of its
investments at the time of the purchase and re-evaluates such
designation on a regular basis.
All purchases and sales of investments are recognized on the
effective acquisition or sale date. Cost of purchase includes
transaction costs. Available-for-sale investments measured at
fair value except there are no quoted market prices in active
markets and whose fair values cannot be reliably measured using
valuation techniques. Available-for-sale investments carried at
cost are subject to review for impairment.
(f) Property, plant and equipment
Property, plant and equipment, including oil and gas properties
(Note 3(g)), are initially recorded at cost less
accumulated depreciation, depletion and amortization. Cost
represents the purchase price of the asset and other costs
incurred to bring the asset into existing use. Subsequent to
their
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
initial recognition, property, plant and equipment are carried
at revalued amount. Revaluations are performed by independent
qualified valuers on a regular basis.
In the intervening years between independent revaluations, the
directors review the carrying values of the property, plant and
equipment and adjustment is made where the carrying value
differs from fair value. As at September 30, 2003, an
exercise was undertaken by independent qualified valuers,
resulting in minor adjustments to the carrying values, as
described in Note 16. Increases in the carrying amount
arising on revaluation are credited to the revaluation reserve.
Decreases in valuation of property, plant and equipment are
first offset against increases from earlier valuations in
respect of the same asset and are thereafter charged to the
income statement. All other decreases in valuation are charged
to the income statement. Any subsequent increases are credited
to the income statement up to the amount previously charged.
Revaluation surpluses pertaining to revalued assets depreciated
or disposed of are retained in the revaluation reserve and will
not be available for offsetting against possible future
revaluation losses.
Depreciation, depletion and amortization to write off the cost
or valuation of each asset, other than oil and gas properties,
to their residual values over their estimated useful lives is
calculated using the straight-line method.
The Group uses the following useful lives for depreciation,
depletion and amortization purposes:
Buildings
25-40 years
Plant and machinery
10-15 years
Equipment and motor vehicles
3-16 years
No depreciation is provided for construction in progress until
they are completed and ready for use.
Property, plant and equipment, including oil and gas properties
(Note 3(g)), are reviewed for possible impairment when
events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognised
for the amount by which the carrying amount of a cash generating
unit exceeds the higher of its net selling price and its value
in use, which is the estimated net present value of future cash
flows to be derived from the continuing use of the assets in the
cash generating unit and from their ultimate disposal.
Gains and losses on disposal of property, plant and equipment
are determined by reference to their carrying amount and are
taken into account in determining net income.
Interest and other costs on debts to finance the construction of
property, plant and equipment are capitalized during the period
of time that is required to complete and prepare the property
for its intended use. Costs for planned major maintenance
activities, primarily related to refinery turnarounds, are
expensed as incurred except for costs of components that result
in improvements and betterments which are capitalized as part of
property, plant and equipment and depreciated over their useful
lives.
(g) Oil and gas properties
The successful efforts method of accounting is used for oil and
gas exploration and production activities. Under this method,
all costs for development wells, support equipment and
facilities, and proved mineral interests in oil and gas
properties are capitalised. Costs of exploratory wells are
capitalised as construction in progress pending determination of
whether the wells find proved
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
reserves. Proved oil and gas reserves are the estimated
quantities of crude oil, natural gas and natural gas liquids
which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate
is made. Prices include consideration of changes in existing
prices provided only by contractual arrangements, but not on
escalations based upon future conditions. Geological and
geophysical costs are expensed when incurred. Costs of
exploratory wells are capitalized pending a determination of
whether sufficient quantities of potentially economic oil and
gas reserves have been discovered. Exploratory wells in areas
not requiring major capital expenditures are evaluated for
economic viability within one year of completion of drilling.
The related well costs are expensed as dry holes if it is
determined that such economic viability is not attained. For
wells that found economically viable reserves in areas where a
major capital expenditure would be required before production
can begin, the related well costs remain capitalized only if
additional drilling is under way or firmly planned. Otherwise
the well costs are expensed as dry holes. The Group has no costs
of unproved properties capitalised in oil and gas properties.
The Ministry of Land and Resources in China issues production
licenses to applicants on the basis of the reserve reports
approved by relevant authorities. Administrative rules issued by
the State Council provide that the maximum term of a production
license is 30 years. However, in accordance with a special
approval from the State Council, the Ministry of Land and
Resources has issued production licenses effective March 2000 to
the Group for all of its crude oil and natural gas reservoirs
with terms coextensive with the projected production life of
those reservoirs, ranging up to 55 years. Production
licenses to be issued to the Group in the future will be subject
to the 30-year maximum unless additional special approvals can
be obtained from the State Council. Each of the Group’s
production licenses is renewable upon application by the Group
30 days prior to expiration. Future oil and gas price
increases may extend the productive lives of crude oil and
natural gas reservoirs beyond the current terms of the relevant
production licenses. Payments on such licenses are made annually
and are expensed as incurred. The cost of oil and gas properties
is amortized at the field level on the unit of production
method. Unit of production rates are based on oil and gas
reserves estimated to be recoverable from existing facilities
based on the current terms of the Group’s production
licenses. The Group’s reserve estimates include only crude
oil and natural gas which management believes can be reasonably
produced within the current terms of these production licenses.
The Group did not incur and does not anticipate to incur any
material dismantlement, restoration or abandonment cost given
the nature of its onshore producing activities and current PRC
regulations governing such activities.
(h) Intangible assets
Expenditure on acquired patents, trademarks, technical know-how
and licenses is capitalized and amortized using the
straight-line method over their useful lives, generally over
10 years. Intangible assets are not revalued. The Group
does not have capitalized internally generated intangible
assets. The carrying amount of each intangible asset is reviewed
annually and adjusted for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized whenever the
carrying amount of an asset exceeds its recoverable amount. The
impairment loss is recognized in the consolidated income
statement. The recoverable amount is measured as the higher of
net selling price and value in use which is the present value of
estimated future cash flows to be derived from continuing use of
the asset and from its ultimate disposal.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
(i) Leases
Leases of property, plant and equipment where the Group assumes
substantially all the benefits and risks of ownership are
classified as capital leases. Capital leases are capitalized at
the inception of the leases at the lower of the fair value of
the leased property and the estimated present value of the
underlying lease payments. Each lease payment is allocated
between the liability and finance charges so as to achieve a
constant rate on the finance balance outstanding. Property,
plant and equipment acquired under capital lease are generally
depreciated over the useful life of the asset as the Group
usually obtains ownership of such leased assets by the end of
the leased term.
Leases of assets under which substantially all of the risks and
benefits of ownership are effectively retained by the lessor are
classified as operating leases. Payments made under operating
leases are expensed on a straight-line basis over the lease
term. Payments made to the PRC’s land authorities to secure
land use rights are treated as operating leases. Land use rights
are generally obtained through advance lump-sum payments and the
terms for use range up to 50 years.
(j) Related
parties
Related parties are corporations in which CNPC is a major
shareholder and is able to control or exercise significant
influence.
(k) Inventories
Inventories are oil products, chemical products, and materials
and supplies, which are stated at the lower of cost and net
realizable value. Cost is determined by the weighted average
cost method. The cost of finished goods comprises raw materials,
direct labor, other direct costs and related production
overheads, but excludes interest expense. Net realizable value
is the estimate of the selling price in the ordinary course of
business, less the cost of completion and selling expenses.
(l) Trade
receivables
Trade receivables are carried at original invoice amount less
provision made for impairment of these receivables. Such
provision for impairment of trade receivables is established if
there is objective evidence that the Group will not be able to
collect all amounts due according to the original terms of the
receivables. The amount of the provision is the difference
between the carrying amount and the recoverable amount, being
the present value of expected cash flows, discounted at the
market rate of interest for similar borrowers.
(m) Cash and cash
equivalents
Cash and cash equivalents are carried in the balance sheet at
cost and comprise cash in hand and investments with maturities
of three months or less from the time of purchase.
(n) Debts
Debts are recognized initially at the proceeds received, net of
transaction costs incurred. In subsequent periods, debts are
stated at amortized cost using the effective yield method. Any
difference between proceeds (net of transaction costs) and the
redemption value is recognized in the income statement over the
period of the debts, except for the portion eligible for
capitalization.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
(o) Taxation
The Company has obtained approval from the State Administration
for Taxation to report taxable income on a consolidated basis.
Deferred income tax is provided, using the liability method, for
temporary differences arising between the tax bases of assets
and liabilities and their carrying values for financial
reporting purposes. Currently enacted tax rates are used to
determine deferred income tax.
The principal temporary differences arise from depreciation on
oil and gas properties and equipment and allowances for
impairment of receivables, inventories, investments and
property, plant and equipment. Deferred tax assets relating to
the carryforward of unused tax losses are recognized to the
extent that it is probable that future taxable income will be
available against which the unused tax losses can be utilized.
The Group also incurs various other taxes which are not income
taxes. “Taxes other than income taxes”, which form
part of the operating expenses, primarily comprise consumption
tax, resource tax, urban construction tax, education surcharges
and business tax.
(p) Revenue
recognition
Sales are recognized upon delivery of products and customer
acceptance, if any, or performance of services, net of sales
taxes and discounts. Revenues are recognized only when the Group
has transferred to the buyer the significant risks and rewards
of ownership of the goods, and when the amount of revenue and
the costs incurred or to be incurred in respect of the
transaction can be measured reliably.
The Group markets a portion of its natural gas production under
take-or-pay contracts. Customers under the take-or-pay contracts
are required to take or pay for the minimum natural gas
deliveries specified in the contract clauses. Revenue
recognition for natural gas sales and transmission tariff under
the take-or-pay contracts follows the accounting policies
described in this note. Payments received from customers for
natural gas not yet taken are recorded as deferred revenues
until actual deliveries.
In November 2004 FASB’s Emerging Issues Task Force (EITF)
discussed EITF Issue no. 04-13, “Accounting for
Purchases and Sales of Inventory with the Same
Counterparty”, in order to consider whether or not
“buy/sell” contractual arrangements should be reported
net in the Statement of Income and accounted for as non-monetary
transactions. There was a further EITF meeting in March 2005 but
no consensus was reached on this issue and further discussion is
planned.
Buy/sell contractual arrangements in this context are defined as
those entered into concurrently or in contemplation of one
another with the same counterparty.
The Group entered into buy/sell contracts with Sinopec for crude
oil and reported the revenue gross in the Consolidated
Statements of Income. Title of the commodity passes to the buyer
on delivery, purchases and sales may not necessarily take place
at the same time and amounts are separately invoiced and
settled; there is no legal right of offset. The Group considers
therefore that these are not non-monetary transactions and are
then outside the scope of APB Opinion No. 29,
“Accounting for Nonmonetary Transactions”. In
addition, the guidance provided in EITF No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an
Agent”, EITF No. 02-3, “Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management
Activities” and EITF No. 03-11, “Reporting
Realized Gains and Losses on Derivative Instruments That Are
Subject to FASB Statement No. 133 and Not Held for
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
Trading Purposes as Defined in Issue No. 02-3” has
been considered in determining the presentation of the results
of the Group’s operations. As a result of a communication
to the oil and gas industry issued by the US Securities and
Exchange Commission in February 2005 requesting additional
disclosures regarding buy/sell contracts, the Group reviewed
such contracts and has estimated that, if buy/sell contracts
were required to be reported net, both “Sales and other
operating revenues” and “Purchase, services and
other” for 2004 would be reduced by RMB 2,217 (2003:
RMB 1,747; 2002: RMB 963) with no impact on net income.
(q) Provisions
Provisions are recognized when the Group has a present legal or
constructive obligation as a result of past events, it is
probable that an outflow of resources will be required to settle
the obligation, and a reliable estimate of the amount can be
made.
(r) Research and
development expenses
Research expenditure incurred is recognized as an expense. Costs
incurred on development projects are recognized as intangible
assets to the extent that such expenditure is expected to
generate future economic benefits. Research and development
expenses were RMB 1,806, RMB 2,411 and RMB 2,936
for the years ended December 31, 2002, 2003 and 2004,
respectively.
(s) Retirement benefit
plans
The Group contributes to various employee retirement benefit
plans organized by municipal and provincial governments under
which it is required to make monthly contributions to these
plans at rates prescribed by the related municipal and
provincial governments. The municipal and provincial governments
undertake to assume the retirement benefit obligations of
existing and future retired employees of the Group.
Contributions to these plans are charged to expense as incurred.
(t) Share appreciation
rights
Compensation under the share appreciation rights is measured as
the amount by which the quoted market price of the
Company’s H Shares exceeds the grant price.
Compensation is accrued as a charge to compensation expense over
the vesting service period. The compensation accrued during a
vesting service period is adjusted in subsequent periods for
changes, either upward or downward to the grant price, in the
quoted market price of the Company’s shares. The amount of
compensation and the effect of subsequent changes are included
in the employee compensation cost of the income statement; the
related liability is included in the salaries and welfare
payable.
(u) Reclassification
Certain balances of the prior year have been reclassified to
conform with current year presentation, including separate
presentation of advance operating lease payments in Note 19.
(v) New accounting
developments
In December 2003, the IASB issued amendments to thirteen
existing IFRS standards under its “Improvements
Project”. The amendments will become effective on
January 1, 2005. The Group has not adopted these revised
standards and does not expect the adoption of these revised
standards would have a material effect on the results of
operation and the financial position of the Group.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
In December 2004, the IASB issued IFRS 6 “Exploration for
and Evaluation of Mineral Resources”. Adoption of IFRS 6 is
required for annual periods beginning on or after
January 1, 2006. IFRS 6 permits an entity to develop an
accounting policy for exploration and evaluation assets without
specifically considering the requirement of paragraph 11
and 12 of IAS 8 and allows an entity to use the accounting
policies applied immediately before adopting IFRS 6. IFRS 6
requires entities recognizing exploration and evaluation assets
to perform an impairment test on these assets. However, IFRS 6
allows variation in recognition of impairment from that
specified in IAS 36 but measures the impairment as set forth in
IAS 36 once impairment is identified. The Group’s
accounting policies with respect to exploration and evaluation
asset are described in Note 3(g) and 3(f). The Group is
evaluating the manner and effect of adoption of IFRS 6.
The following standards of IASB also will be effective
January 1, 2005-IFRS 2, “Share-based
Payment”, IFRS 3, “Business Combination”,
IFRS 4, “Insurance Contracts”, and IFRS 5,
“Non Current Assets Held for Sale and Discontinued
Operations”. The Group is evaluating the manner of adoption
of these IFRS and does not expect the adoption of these new
standards will have a material effect on the financial condition
or results of operations of the Group.
Social security costs represent contributions to funds for staff
welfare organized by the municipal and provincial governments
including contribution to the retirement benefit plans
(Note 26).
5 SHUT DOWN OF MANUFACTURING
ASSETS
During the years ended December 31, 2002, 2003 and 2004,
the Group provided RMB 2,121, RMB 2,355 and
RMB 220 respectively for the shut down of certain less
efficient operating facilities in the refining and chemical
manufacturing plants. The charges represented the net book value
of the facilities.
Amounts capitalized are debt costs related to funds borrowed
specifically for the purpose of acquiring qualifying assets.
Interest rates on such capitalized debts ranged 5.02% to 5.43%
in 2002, 5.02% in 2003 and 5.02% in 2004.
In accordance with the relevant PRC income tax rules and
regulations, the PRC income tax rate applicable to the Group is
principally 33% (2003: 33%; 2002: 33%). Operations of the Group
in certain regions in China have qualified for certain tax
incentives in the form of reduced income tax rate to 15% through
the year 2010 or accelerated depreciation of certain plant and
equipment.
The tax on the Group’s income before income taxes differs
from the theoretical amount that would arise using the basic tax
rate in the PRC applicable to the Group as follows:
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
8 BASIC AND DILUTED NET INCOME
PER SHARE
Basic and diluted net income per share for the years ended
December 31, 2002, 2003 and 2004 have been computed by
dividing net income by the number of 175,824 shares issued
and outstanding for the respective years.
A final dividend in respect of 2001 of
RMB 0.050272 per share amounting to a total of
RMB 8,839 was paid on June 21, 2002, and was accounted
for in shareholders’ equity as an appropriation of retained
earnings in the year ended December 31, 2002.
(ii)
An interim dividend in respect of 2002 of
RMB 0.050113 per share amounting to RMB 8,811 was
paid on October 8, 2002, and was accounted for in
shareholders’ equity as an appropriation of retained
earnings in the year ended December 31, 2002.
(iii)
A final dividend in respect of 2002 of
RMB 0.069951 per share amounting to a total of
RMB 12,299 was paid on June 12, 2003, and was
accounted for in shareholders’ equity as an appropriation
of retained earnings in the year ended December 31, 2003.
(iv)
An interim dividend in respect of 2003 of
RMB 0.098841 per share amounting to a total of
RMB 17,379 was paid on October 8, 2003, and was
accounted for in shareholders’ equity as an appropriation
of retained earnings in the year ended December 31, 2003.
(v)
A final dividend in respect of 2003 of
RMB 0.079324 per share amounting to a total of
RMB 13,947 was paid on June 2, 2004, and was accounted
for in shareholders’ equity as an appropriation of retained
earnings in the year ended December 31, 2004.
(vi)
As authorized by shareholders in the Annual General Meeting on
May 18, 2004, the Board of Directors, in a meeting held on
August 26, 2004, resolved to distribute an interim dividend
in respect of 2004 of RMB 0.115919 per share amounting
to a total of RMB 20,381.The interim dividend was paid on
October 8, 2004, and was accounted for in
shareholders’ equity as an appropriation of retained
earnings in the year ended December 31, 2004.
(vii)
At the meeting on March 16, 2005, the Board of Directors
proposed a final dividend in respect of 2004 of
RMB 0.147511 per share amounting to a total of
RMB 25,936. These financial statements do not reflect this
dividend payable, which will be accounted for in
shareholders’ equity as an appropriation of retained
earnings in the year ended December 31, 2005.
The weighted average effective interest rates on bank deposits
were 1.30% and 1.23% for the years ended December 31, 2003
and 2004, respectively.
11 RECEIVABLES UNDER RESALE
AGREEMENTS
Securities purchased under agreements to resell (“resale
agreements”) are recorded as receivables under resale
agreements. The difference between purchase and resell prices is
treated as interest income and accrued over the life of resale
agreements using the effective yield method.
Resale agreements are accounted for as collateralized financing
transactions and are recorded at their contractual amounts plus
interest accrued. The underlying collaterals are principally the
PRC government bonds.
12
NOTES RECEIVABLE
Notes receivable represent mainly the bills of acceptance issued
by banks for sales of goods and products. All notes receivable
are due within one year.
Cost of inventory (approximates cost of goods sold) recognized
as expense amounted to RMB 112,986, RMB 134,935 and
RMB 165,025 for the years ended December 31, 2002,
2003 and 2004, respectively.
Inventories of the Group carried at net realizable value
amounted to RMB 2,249 and RMB 3,282 at
December 31, 2003 and 2004, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
Other receivables consist primarily of taxes other than income
taxes refund receivables, subsidies receivable, and receivables
for the sale of materials and scrap.
Amounts due from CNPC and fellow CNPC subsidiaries are interest
free, unsecured and repayable in accordance with normal
commercial terms.
Movements in allowance for impairment of other receivables are
as follows:
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
The RMB 411 at December 31, 2004 for capitalized
exploratory well costs over one year are principally related to
wells that are under further evaluation of drilling results or
pending completion of development planning.
Buildings owned by the Group are on leased land. The net book
values of the buildings owned by the Group analysed by the
following categories of lease terms:
The depreciation charge of the Group included RMB 1,753,
RMB 1,487 and RMB 3,789 relating to impairment
provision for property, plant and equipment held for use for the
years ended December 31, 2002, 2003 and 2004, respectively.
Of this amount, RMB 1,384, RMB 863 and RMB 798
for the years ended December 31, 2002, 2003 and 2004
respectively was related to the Chemicals and Marketing segment,
RMB 369, RMB 624 and RMB 1,398 for the years
ended December 31, 2002, 2003 and 2004 respectively was for
the Refining and Marketing segment, and RMB Nil,
RMB Nil and RMB 1,593 for the years ended
December 31, 2002, 2003 and 2004 respectively was for the
Exploration and Production segment.
Repair and maintenance costs were RMB 5,060, RMB 4,721
and RMB 6,205 for the years ended December 31, 2002,
2003 and 2004, respectively.
Bank debts are secured on property, plant and equipment at net
book value of RMB 152 and RMB 218 at December 31,2003 and 2004, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
A valuation of the Group’s property, plant and equipment,
excluding oil and gas reserves, was carried out during 1999 by
independent valuers. The valuation was based on depreciated
replacement costs.
As at September 30, 2003, a revaluation of the Group’s
refining and chemical production equipment was undertaken by a
firm of independent valuers, China United Assets Appraiser Co.,
Ltd, in the PRC on a depreciated replacement cost basis.
The June 1999 revaluation resulted in RMB 80,549 in
excess of the prior carrying value and a revaluation loss of
RMB 1,122 on certain property, plant and equipment.
The September 2003 revaluation resulted in RMB 872 in
excess of the carrying value of certain property, plant and
equipment immediately prior to the revaluation and a revaluation
loss of RMB 1,257.
With respect to the RMB 872 revaluation gain resulting from
the 2003 revaluation, RMB 98 were related to property,
plant and equipment that in 1999 experienced revaluation loss,
and were credited to the income statement. The remaining
RMB 774 was credited to the revaluation reserve in the
shareholders’ equity.
With respect to the RMB 1,257 revaluation loss resulting
from the 2003 revaluation, RMB 768 were related to
property, plant and equipment that in 1999 experienced
revaluation gain. The remaining RMB 489 were charged to the
income statement.
17
INVESTMENTS IN EQUITY AFFILIATES
Principal affiliates accounted for under the equity method are:
Attributable
Country of
Paid-up/
Equity
Incorporation
Registered
Interest
Company Name
and Operations
Capital
Held (%)
Principal Activities
Dalian West Pacific Petrochemical Co., Ltd.
PRC
USD258
28.4
Production and sale of refined and petrochemical products
China Marine Bunker (PetroChina) Co., Ltd.
PRC
RMB 1,000
50
Supplying bunker oils, marine lubricant and fresh water to
foreign trading vessels and coastal vessels, transportation,
storage, import and export of oil products
Share of income of equity affiliates included in the statements
of income of the Group was RMB 268, RMB 985 and
RMB 1,824 for the years ended December 31, 2002, 2003
and 2004, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
Share of net profit of equity affiliates included in retained
earnings of the Group was RMB 584, RMB 1,860 at
December 31, 2003 and 2004, respectively. Dividends
received and receivable from equity affiliates were RMB 134, RMB
203 at December 31, 2003 and 2004, respectively.
Available-for-sale investments, comprising principally unlisted
equity securities, are classified as non-current assets, unless
they are expected to be realized within twelve months of the
balance sheet date or unless they will need to be sold to raise
operating capital.
Dividend income from available-for-sale investments was RMB 60,
RMB 69 and RMB 90 for the years ended December 31, 2002,
2003 and 2004, respectively.
Movements in provision for impairment of available-for-sale
investments are as follows:
Land use rights have terms up to 50 years. Advance lease
payments are principally for use of land sub-leased from
entities other than PRC land authorities. These advance
operating lease payments are amortized over the related lease
periods using the straight line method.
Amortization on intangible and other assets was RMB 552, RMB 635
and RMB 754 for the years ended December 31, 2002, 2003 and
2004, respectively.
Patents principally represent expenditure incurred in acquiring
processes and techniques that are generally protected by
relevant government authorities. Technical know-how amounts are
attributable to operational technology acquired in connection
with purchase of equipment. The technical know-how costs are
included as part of the purchase price by contracts and are
distinguishable.
Other assets primarily consist of long-term prepaid expenses to
service providers.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
At December 31,
Interest Rate and Final Maturity
2003
2004
RMB
RMB
Loans from related parties for working capital
Floating interest rate at LIBOR plus 0.40% per annum as of
December 31, 2004, with maturities through 2006
717
717
Loans for the development of oil fields and construction of
refining plants
Fixed interest rate at 1.55% per annum with maturities through
2022
586
554
Japanese Yen-denominated
loans:
Bank loans for the development of oil fields and construction of
refining plants
Fixed interest rates ranging from 4.10% to 5.30% per annum
with maturities through 2010
578
430
Euro-denominated loans:
Bank loans for the development of oil fields and construction of
refining plants
Fixed interest rates ranging from 2.00% to 8.30% per annum
with maturities through 2023
381
360
British Pound-denominated
loans:
Bank loans for the development of oil fields and construction of
refining plants
Fixed interest rate at 2.85% per annum with maturities through
2007
454
338
61,614
54,445
Capital lease obligations
56
21
Total long-term debt
61,670
54,466
Less: Current portion of long-term debt
(19,711)
(16,008)
41,959
38,458
For loans denominated in RMB with floating rates, the rates are
re-set annually on the respective anniversary dates based on
rates announced by the People’s Bank of China. For loans
denominated in currencies other than RMB with floating rates,
the rates are re-set quarterly or semi-annually as stipulated in
the respective agreements. Other loans represent loans from
independent third parties other than banks with interest rates
ranging from 1.55% to 6.32% per annum. Interest free loans
amounted to RMB 215 and RMB 87 at December 31, 2003 and
2004, respectively. Interest free loans were treated as
government assistance and no imputation of interest expense on
such loans was recognized in the Group’s consolidated
financial statements.
The Group’s debts include secured liabilities (leases and
bank debts) totalling RMB 170 and RMB 50 respectively, at
December 31, 2003, and 2004. Bank debts are secured over
certain of the Group’s property, plant and equipment
(Note 16). Lease liabilities are effectively secured as the
rights to the leased assets revert to the lessor in the event of
default.
The fair values are based on discounted cash flows using
applicable discount rates based upon the prevailing market rates
of interest available to the Group for financial instruments
with substantially the same terms and characteristics at the
balance sheet dates. Such discount rates ranged from 0.86% to
6.38% per annum as of December 31, 2004 depending on
the type of the debt. The carrying amounts of short-term debt
and capital lease obligations approximate their fair value.
Shut down of manufacturing assets and impairment of long-term
assets
1,039
2,454
Other
579
538
Total deferred tax assets
5,672
7,541
Deferred tax liabilities
Current
Sales (Note(i))
4,401
4,401
Non current
Accelerated tax depreciation
12,519
17,230
Other
278
250
Total deferred tax liabilities
17,198
21,881
Net deferred tax liabilities
11,526
14,340
(i)
Prior to the formation of the Company in November 1999, certain
crude oil sales were exempted from income tax. Upon formation of
the Company, such exemption ceased to be available. A portion of
the previously exempted items may become taxable at a later date
in certain circumstances at the discretion of the tax
authorities.
(ii)
There were no material unrecognized tax losses at
December 31, 2004.
At its formation in November, 1999, the registered capital of
the Company was RMB 160,000 consisting of 160 billion
state-owned shares of RMB 1.00 each issued to CNPC in accordance
with the restructuring agreement between the Company and CNPC in
exchange for certain assets and liabilities.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
On April 7, 2000, the Company completed a global initial
public offering (“Global Offering”) pursuant to which
17,582,418,000 shares of RMB 1.00 each, representing
13,447,897,000 H shares and 41,345,210 American Depositary
Shares (“ADSs”, each representing 100 H shares), were
issued at prices of HK$1.28 per H share and
US$16.44 per ADS, respectively, for which the net proceeds
to the Company were approximately RMB 20 billion. The
shares issued pursuant to the Global Offering rank equally with
existing shares. The H shares and ADSs are listed on the Stock
Exchange of Hong Kong Limited and the New York Stock Exchange
respectively.
The 17,582,418,000 H shares issued by the Company comprise
15,824,176,000 shares offered by the Company, and
1,758,242,000 shares offered by CNPC pursuant to an
approval from China Securities Regulatory Commission to convert
the state-owned shares owned by CNPC.
Shareholders’ rights are governed by the PRC Company Law
that requires an increase in registered capital to be approved
by the shareholders in general meeting and the relevant PRC
Government and regulatory authorities.
Revaluation surplus of property, plant and equipment (Note
e)
— gross
774
—
— tax
(247
)
—
Revaluation loss offset against previous revaluation surplus of
property, plant and equipment
— gross
(768
)
—
— tax
242
—
Ending balance
79,946
79,946
Capital Reserve
Beginning balance
(28,557
)
(28,557
)
Ending balance
(28,557
)
(28,557
)
Statutory Common Reserve Fund (Note a)
Beginning balance
20,128
26,370
Transfer from retained earnings
6,242
9,701
Ending balance
26,370
36,071
Statutory Common Welfare Fund (Note b)
Beginning balance
13,532
16,653
Transfer from retained earnings
3,121
4,851
Ending balance
16,653
21,504
Other Reserves
Beginning balance
(3,200
)
(3,200
)
Ending balance
(3,200
)
(3,200
)
91,212
105,764
(a)
Pursuant to PRC regulations and the Company’s Articles of
Association, the Company is required to transfer 10% of its net
profit, as determined under the PRC accounting regulations, to
statutory common reserve fund until the fund aggregates to 50%
of the Company’s registered capital. The transfer to this
reserve must be made before distribution of dividends to
shareholders.
The statutory common reserve fund shall only be used to make
good previous years’ losses, to expand the Company’s
production operations, or to increase the capital of the
Company. Upon approval by a resolution of shareholders’
general meeting, the Company may convert its statutory common
reserve fund into share capital and issue bonus shares to
existing shareholders in proportion to their original
shareholdings or to increase the nominal value of each share
currently held by them, provided that the balance of the reserve
fund after such issue is not less than 25% of the registered
capital.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
(b)
Pursuant to the PRC regulations and the Company’s Articles
of Association, the Company is required to transfer 5% to 10% of
its net income, as determined under the PRC accounting
regulations, to the statutory common welfare fund. This fund can
only be used to provide common facilities, of which the Group
retains the titles, and other collective benefits to the
Company’s employees. This fund is non-distributable other
than in liquidation. The directors have proposed to transfer 5%
(2003: 5%) of the net income, as determined under the PRC
accounting regulations, for the year ended December 31,2004 to the statutory common welfare fund.
(c)
The Company’s distributable reserve is the retained
earnings computed under the PRC accounting regulations, which
amounted to RMB 59,104 and RMB 95,248 as of December 31,2003 and 2004, respectively. The distributable reserve computed
under the PRC accounting regulations at December 31, 2004
has been arrived at after the accrual for the proposed final
dividend in respect of year 2004 of RMB 25,936 (Note 9
(vii)).
(d)
As of December 31, 2004, Revaluation surplus relating to
depreciation and disposals amounted to approximately RMB 38,064
and RMB 46,757 as of December 31, 2003 and 2004,
respectively.
(e)
The revaluation surplus recognized during the formation of the
Group in 1999 was partially utilized to offset against the
revaluation loss on the same assets arising in 2003
(Note 16). Additional valuation surplus arising in 2003 was
credited to the revaluation reserve.
26
PENSIONS
The Group participates in various retirement benefit plans
organized by municipal and provincial governments under which it
is required to make monthly contributions to these plans at
rates ranging from 16% to 22% of the employees’ basic
salary for the relevant periods. The Group currently has no
additional obligations for the payment of retirement and other
post-retirement benefits of employees other than the monthly
contributions described above. Expenses incurred by the Group in
connection with the retirement benefit plans were RMB 2,109, RMB
2,193 and RMB 2,476 respectively, for the years ended
December 31, 2002, 2003 and 2004.
27
FINANCIAL INSTRUMENTS
The Group holds or issues various financial instruments which
expose it to credit, interest rate, foreign exchange rate and
fair value risks. In addition, the Group’s operations are
affected by certain commodity price movements. The Group
historically has not used derivative instruments for hedging or
trading purposes. Such activities are subject to policies
approved by the Group’s senior management. Substantially
all of the financial instruments the Group holds is for purposes
other than trading. The Group regards an effective market risk
system as an important element of the Group’s treasury
function and is continuously enhancing its systems. A primary
objective is to implement certain methodologies to better
measure and monitor risk exposures.
(a) Credit risk
The carrying amounts of accounts receivable included in the
balance sheet represent the Group’s maximum exposure to
credit risk in relation to its financial assets. No other
financial assets carry a significant exposure to credit risk.
The Group has no significant concentration of credit risk. Cash
is placed with state-owned banks and financial institutions.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
(b) Interest rate risk
The Group is exposed to the risk arising from changing interest
rates. A detailed analysis of the Group’s debts, together
with their respective interest rates and maturity dates, are
included in Note 22.
(c)
Foreign exchange rate risk
Renminbi is not a freely convertible currency. Future exchange
rates of Renminbi could vary significantly from the current or
historical exchange rates as a result of controls that could be
imposed by the PRC government. The exchange rates of Renminbi
are affected by changes in PRC government policies. The exchange
rates of Renminbi are also affected by economic developments and
political changes domestically and internationally, and supply
and demand for Renminbi. The official exchange rate for the
conversion of Renminbi to US Dollars has generally been stable
recently. As Renminbi is the measurement currency of the Company
and most of its consolidated entities, the fluctuation of
exchange rates of Renminbi may have positive or negative impacts
on the results of operations of the Group. Because prices for
the Group’s crude oil and refined products are set
generally with reference to US Dollar-denominated international
prices, a devaluation of Renminbi against US Dollar may not have
a negative impact on the Group’s revenue, but may increase
the cost incurred by the Group to acquire imported materials and
equipment as well as the foreign currency-denominated
obligations of the Group. On the other hand, an appreciation of
Renminbi against US Dollar may decrease the Group’s
revenue, but the cost for acquiring imported materials and
equipment may be reduced. The results of operations and the
financial condition of the Group also may be affected by
fluctuations in exchange rates against Renminbi of a number of
other foreign currencies other than US Dollar.
(d)
Commodity price risk
The Group is engaged in a broad range of petroleum related
activities. The hydrocarbon commodity markets are influenced by
global as well as regional supply and demand conditions. The PRC
government currently publishes prices for onshore crude oil,
gasoline and diesel according to international benchmark prices.
A decline in prices of crude oil and refined products could
adversely affect its financial performance. The Group
historically has not used commodity derivative instruments to
hedge the potential price fluctuations of crude oil and other
refined products. Therefore, during 2003 and 2004, the Group was
exposed to the general price fluctuations of broadly traded oil
and gas commodities.
(e)
Fair values
The carrying amounts of the following financial assets and
financial liabilities approximate their fair value: cash,
short-term investments, trade receivables and payables, other
receivables and payables, lease obligations, short-term debt and
floating rate long-term debt. The fair value of the fixed rate
long-term debt is likely to be different from their carrying
amounts. As the majority of the debts are at variable rates, the
difference between fair value and carrying amounts is likely to
be immaterial. Analysis of the fair value and carrying amounts
of long-term debt are presented in Note 22.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
28
CONTINGENT LIABILITIES
(a) Bank and other
guarantees
At December 31, 2004, the Group had contingent liabilities
in respect of bank and other guarantees and other matters
arising in the ordinary course of business from which it is
anticipated that no material liabilities will arise.
CNPC and the Group have operated in China for many years. China
has adopted extensive environmental laws and regulations that
affect the operation of the oil and gas industry. The outcome of
environmental liabilities under proposed or future environmental
legislation cannot reasonably be estimated at present, and could
be material. Under existing legislation, however, management
believes that there are no probable liabilities, except for the
amounts which have already been reflected in the financial
statements, that will have a material adverse effect on the
financial position of the Group.
(c) Legal
contingencies
The Group is the named defendant in certain insignificant
lawsuits as well as the named party in other proceedings arising
in the ordinary course of business. While the outcomes of such
contingencies, lawsuits or other proceedings cannot be
determined at present, management believes that any resulting
liabilities will not have a material adverse effect on the
financial position of the Group.
(d) Leasing of roads,
land and buildings
According to the Restructuring Agreement entered into between
the Company and CNPC in 1999 upon the formation of the Company,
CNPC has undertaken to the Company the following:
•
CNPC will use its best endeavors to obtain formal land use right
certificates to replace the entitlement certificates in relation
to the 28,649 parcels of land which were leased or transferred
to the Company from CNPC, within one year from August, September
and October 1999 when the relevant entitlement certificates were
issued;
•
CNPC will complete, within one year from November 5, 1999,
the necessary governmental procedures for the requisition of the
collectively-owned land on which 116 service stations owned by
the Company are located; and
•
CNPC will obtain individual building ownership certificates in
the name of the Company for all of the 57,482 buildings
transferred to the Company by CNPC, before November 5, 2000.
As at December 31, 2004, CNPC has obtained formal land use
right certificates in relation to 26,549 out of the
above-mentioned 28,649 parcels of land, some building ownership
certificates for the above-mentioned buildings, but has
completed none of the necessary governmental procedures for the
above-mentioned service stations located on collectively-owned
land. The Directors of the Company confirm that the use of and
the conduct of relevant activities at the above-mentioned
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
parcels of land, service stations and buildings are not affected
by the fact that the relevant land use right certificates or
individual building ownership certificates have not been
obtained or the fact that the relevant governmental procedures
have not been completed. In management’s opinion, the
outcome of the above events will not have a material adverse
effect on the results of operations or the financial position of
the Group.
(e) Group
insurance
Except for limited insurance coverage for vehicles and certain
assets subject to significant operating risks, the Group does
not carry any other insurance for property, facilities or
equipment with respect to its business operations. In addition,
the Group does not carry any third-party liability insurance
against claims relating to personal injury, property and
environmental damages or business interruption insurance since
such insurance coverage is not customary in China. While the
effect of under-insurance on future incidents cannot be
reasonably assessed at present, management believes that it may
have a material impact on the operating results but will not
have a material adverse effect on the financial position of the
Group.
(f) Cost reduction
measures
The Group may further streamline its production facilities
within the next several years to further improve the operating
efficiency and competitiveness of the Group. Management has not
approved all significant actions to be taken to complete such
plans. Management does not believe such plans will have a
material adverse impact on the Group’s financial position,
but may have a material adverse effect on the Group’s
results of operations.
(g) Other
In December 2003, a gas blow-out incident occurred at one of the
gas wells of the Group. The blow-out caused the leakage of a
large quantity of sulfurated hydrogen, causing injuries and
death to many residents living in the surrounding area. As a
result of an investigation conducted by the PRC government,
CNPC, which provided drilling services for the well, was held
liable for this blow-out. The incident has not had, and the
Company does not believe it will have, a material adverse effect
on the results of operations and financial position of the Group.
29 COMMITMENTS
(a) Operating lease
commitments
Operating lease commitments of the Group are mainly for leasing
of land and buildings and equipment. Leases range from one to
fifty years and usually do not contain renewal options. Future
Operating lease expenses for land and buildings and equipment
were RMB 3,127, RMB 3,573 and RMB 3,873 for the
years ended December 31, 2002, 2003 and 2004 respectively.
Capital expenditure contracted for at the balance sheet date but
not recognized in the financial statements is as follows:
Oil and gas properties
896
645
Plant and equipment
10,055
4,614
Other
194
111
11,145
5,370
(c) Long-term natural
gas supply commitments
The Group markets a portion of its natural gas production under
long-term take-or-pay contracts. Under these contracts, the
customers are required to take or pay, and the Group is
obligated to deliver, minimum quantities of natural gas
annually. The prices for the natural gas are based on those
approved by the PRC State Development and Reform Commission at
the time of deliveries.
The Company is obligated to make annual payments with respect to
its exploration and production licenses to the Ministry of Land
and Resources. Payments incurred were approximately
RMB 202, RMB 296 and RMB 444 for the years ended
December 31, 2002, 2003 and 2004 respectively.
Estimated annual payments for the next five years are as follows:
RMB
2005
618
2006
681
2007
712
2008
712
2009
712
(e) Dividends
Dividends received from the Company are likely to be one of the
principal sources of funding for CNPC. Subject to the relevant
provisions of the PRC Company Law and the Articles of
Association of the Company, CNPC, as the major shareholder of
the Company, may seek to influence the determination of the
amount of dividends paid by the Company with a view to
satisfying its cash flow requirements including those relating
to its obligations to provide supplementary social services to
its employees and a limited number of third parties. The
Ministry of Finance has committed to provide subsidies to enable
CNPC to fund a portion of future operating shortfalls arising
out of CNPC’s obligations to provide social services. The
directors believe that these subsidies will substantially reduce
CNPC’s reliance on dividends from the Company.
30 ACQUISITION
On April 22, 2002 the Group acquired all of the share
capital of PetroChina International Indonesia Limited (formerly
Devon Energy Indonesia Ltd.) (“Devon”) for
RMB 2,068. This company is engaged in the exploration and
production of crude oil and natural gas in Indonesia. The
acquired business contributed turnover of RMB 632 and
operating profit of RMB 132 to the Group for the year ended
December 31, 2002.
In addition, the Group increased its equity interests in
PetroChina Tarim Oil (Gas) Transportation Limited
(“Tashu”) and Jilian (Jilin) Petrochemicals Limited
(“Jilian”) respectively by 53.1% in
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
November and 35% in December 2002 for a total consideration of
RMB 472, and the two entities became the subsidiaries of
the Company at the respective dates of acquisitions. The
acquired businesses did not contribute significant turnover and
operating profit to the Group for the year ended
December 31, 2002.
Other than for land and buildings, the fair value of the net
assets approximated the book value of the net assets acquired,
and no plant closure provisions or other restructuring
provisions were required.
The assets and liabilities arising from the acquisitions at the
respective dates of acquisitions were as follows:
The Group is part of a larger group of companies under CNPC and
has extensive transactions and relationships with members of the
CNPC group. Because of these relationships, it is possible that
the terms of these transactions are not the same as those that
would result from transactions among wholly unrelated parties.
Related parties refer to corporations in which CNPC is a major
shareholder and is able to control or exercise significant
influence.
CNPC itself is a state-owned enterprise. In accordance with a
specific exemption in IAS 24, “Related Party
Disclosure”, the Group does not accumulate or disclose
transactions with other state-owned enterprises as related party
transactions, other than those with other CNPC group companies
and significant customers as described in Note 31.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
The majority of the Group’s business activities are
conducted with state-owned enterprises. Sale of certain products
to these state-owned enterprises are at state-prescribed prices
which are similar to prices to other customers. The Group
considers that these sales are activities in the ordinary course
of business and has not accumulated or disclosed such related
party transactions.
As a result of the restructuring of CNPC to form the Company in
1999, the Company and CNPC entered into a Comprehensive Products
and Services Agreement for a range of products and services
which may be required and requested by either party; a Land Use
Rights Leasing Contract (Note 28(d)) under which CNPC
leases 42,476 parcels of land located throughout the PRC to the
Company; and a Buildings Leasing Contract under which CNPC
leases 191 buildings, located throughout the PRC to the Company.
The term of the Comprehensive Products and Services Agreement is
10 years commencing from November 5, 1999. The
products and services to be provided by the CNPC group to the
Company under the Comprehensive Products and Services Agreement
include construction and technical services, production
services, supply of material services, social services,
ancillary services, and financial services. The products and
services are provided in accordance with
(1) state-prescribed prices; or (2) where there is no
state-prescribed price, relevant market prices; or
(3) where neither (1) nor (2) is applicable,
actual cost incurred; or the agreed contractual price, being the
actual cost plus a margin of no more than 15% for certain
construction and technical services, and 3% for all other types
of services.
The Land Use Rights Contract provides for the lease of an
aggregate area of approximately 1,145 million square meters
of land located throughout the PRC to business units of the
Group for a term of 50 years at an annual fee of RMB 2,000.
The total fee payable for the lease of all such property may,
after the expiration of 10 years, be adjusted by agreement
between the Company and CNPC.
Under the Buildings Leasing Contract, 191 buildings covering an
aggregate area of 269,770 square meters located throughout
the PRC are leased at an aggregate annual fee of RMB 39 for a
term of 20 years.
The Company also entered into a Supplemental Buildings Leasing
Agreement with CNPC in September 2002 to lease an additional 404
buildings covering approximately 442,730 square meters at
an annual rental of RMB 157. The Supplemental Buildings Leasing
Agreement will expire at the same time as the Buildings Leasing
Agreement.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
In addition to the related party information shown elsewhere in
the financial statements, the following is a summary of
significant related party transactions entered into in the
ordinary course of business between the Group and entities
controlled by CNPC during the years indicated below:
Represents sale of crude oil, refined and chemical products
conducted principally at market prices.
(b)
Under the Comprehensive Products and Services Agreement entered
into between CNPC and the Company, certain construction and
technical services provided by CNPC are charged at cost plus an
additional cost of no more than 15%, including exploration and
development services and oilfield construction services.
(c)
Direct costs for exploration and development services comprise
geophysical survey, drilling, well cementing, logging, and well
testing.
(d)
The fees paid for other construction and technical services
comprise fees for construction of refineries and chemical plants
and technical services in connection with oil and gas
exploration and production activities such as oilfield
construction, technology research, engineering and design, etc.
(e)
The fees paid for production services comprise fees for the
repair of machinery, supply of water, electricity and gas,
provision of services such as communications, transportation,
fire fighting, asset leasing, environmental protection and
sanitation, maintenance of roads, manufacture of replacement
parts and machinery.
(f)
These represent expenditures for social welfare and support
services which are charged at cost.
(g)
Ancillary service charges represent mainly fees for property
management, the provision of training centers, guesthouses,
canteens, public shower rooms, etc.
(h)
The Group had deposits placed with China Petroleum Finance
Company Limited (“CP Finance”), a subsidiary of CNPC
and a non-bank financial institution approved by the
People’s Bank of China, amounting to RMB 2,861, RMB 2,331
and RMB 1,782 as of December 31, 2002, 2003 and 2004
respectively. The deposits yield interest at prevailing saving
deposit rates.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
(i)
The Group had unsecured short-term and long-term loans from CP
Finance amounting to RMB 24,702, RMB 25,188 and RMB 23,168 as of
December 31, 2002, 2003 and 2004 respectively, included
under loans from related parties. The loans were interest
bearing at market rates.
(j)
Rental expenses are calculated in accordance with the lease
agreements entered into between the Company and CNPC.
(k)
CNPC purchases materials on behalf of the Company and charges
commission thereon. The commission is calculated at rates
ranging from 1% to 5% of the goods purchased.
(l)
The Group had a 4.73%, 7.5% and 7.5% equity interest in CP
Finance at a book value of RMB 94, RMB 299 and RMB 299 as of
December 31, 2002, 2003 and 2004 respectively.
33 EMOLUMENTS OF DIRECTORS,
SUPERVISORS AND SENIOR MANAGEMENT
Details of the directors’ and supervisors’ emoluments
are as follows:
The emoluments of the directors and supervisors fall within the
following bands (including directors and supervisors whose term
expired during the year):
Fee for directors and supervisors disclosed above included RMB
66 thousand, RMB 62 thousand and RMB 95 thousand
respectively, for the year ended December 31, 2002, 2003
and 2004 paid to independent non-executive directors.
None of the directors and supervisors has waived their
remuneration during the years indicated above.
The five highest paid individuals in the Group for each of the
years indicated above were also directors or supervisors and
their emoluments are reflected in the analysis presented above.
The Company has adopted a share option scheme which is a share
appreciation right arrangement payable in cash to the recipients
upon exercise of the rights which became effective on the
initial public offering of the H shares of the Company on
April 7, 2000. The directors, supervisors and senior
executives of the Company are eligible for the scheme.
87,000,000 units of share appreciation rights were granted
to senior executives. 35,000,000 units were granted to the
directors and supervisors; of these 35,000,000 units,
33,130,000 units are outstanding, net of subsequent
forfeiture of 1,870,000 units by a former independent
director.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
The rights can be exercised on or after April 8, 2003, the
third anniversary of the grant, up to April 7, 2008. The
exercise price is the price as at the initial public offering
being HK$1.28 per share or approximately RMB 1.36 per
share.
As at December 31, 2004, none of the holders of the stock
appreciation rights has exercised the rights. The liability for
the units awarded under the scheme has been calculated based on
the difference between the exercise price and the market price
of the shares and amounted to approximately RMB 406 and RMB 367
at December 31, 2003 and 2004.
34 SEGMENT INFORMATION
The Group is engaged in a broad range of petroleum related
activities through its four major business segments: Exploration
and Production, Refining and Marketing, Chemicals and Marketing
and Natural Gas and Pipeline.
The Exploration and Production segment is engaged in the
exploration, development, production and sales of crude oil and
natural gas.
The Refining and Marketing segment is engaged in the refining,
transportation, storage and marketing of crude oil and petroleum
products.
The Chemicals and Marketing segment is engaged in the production
and sale of basic petrochemical products, derivative
petrochemical products, and other chemical products.
The Natural Gas and Pipeline segment is engaged in the
transmission of natural gas, crude oil and refined products, and
the sale of natural gas.
In addition to these four major business segments, the Other
segment includes the assets, income and expenses relating to
cash management, financing activities, the corporate centre,
research and development, and other business services to the
operating business segments of the Group.
Substantially all assets and operations of the Group are located
in the PRC, which is considered as one geographic location in an
economic environment with similar risks and returns. In addition
to its operations in the PRC in April 2002 the Group acquired
all the share capital of Devon Energy Indonesia Ltd., a company
engaging in the exploration and production of crude oil and
natural gas in Indonesia. In April 2003, the Group acquired for
RMB 679 a 50% interest in Amerada Hess Indonesia Holdings Co.,
which has a 30% interest in one of the oil and gas concessions
that the Group acquired in 2002.
The accounting policies of the operating segments are the same
as those described in Note 3 — “Summary of
Principal Accounting Policies”.
Segment capital expenditure — for property, plant and
equipment
59,488
17,467
4,319
13,901
174
95,349
Segment liabilities
93,871
73,529
18,484
35,385
99,711
320,980
Other liabilities
36,470
Elimination of intersegment balances
(182,125
)
Total liabilities
175,325
Note (a) —
Intersegment sales are conducted principally at market price.
Note (b) —
Segment result is income from operations before other costs.
Other costs include selling, general and administrative expenses
and other net (expense)/income.
Note (c) —
Segment results for the years ended December 31, 2002, 2003
and 2004 included impairment provision for property, plant and
equipment (Note 16) and shut down of manufacturing assets
(Note 5).
Note (d) —
Other liabilities mainly include income tax payable, other taxes
payable and deferred taxation.
Note (e) —
Elimination of intersegment balances represents elimination of
intersegment current accounts and investments.
Secondary reporting format — geographical
segments
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
35 SIGNIFICANT DIFFERENCES
BETWEEN IFRS AND US GAAP
The consolidated financial statements have been prepared in
accordance with IFRS, which differ in certain material respects
from the accounting principles generally accepted in the United
States of America (US GAAP). Such differences involve methods
for measuring the amounts shown in the financial statements, as
well as additional disclosures required by US GAAP.
Effect on net income of significant differences between IFRS and
US GAAP is as follows:
Reversal of property, plant and equipment revaluation gain
(80,555
)
(80,555
)
(9,733
)
Depreciation charges on property, plant and equipment
revaluation gain
37,273
45,443
5,490
Reversal of property, plant and equipment revaluation loss
1,513
1,513
183
Depreciation charges on property, plant and equipment
revaluation loss
(480
)
(1,310
)
(158
)
Loss on disposal of revalued property, plant and equipment
791
1,314
159
Deferred tax assets on revaluation
13,686
11,091
1,340
Minority interests
364
304
36
Effect on the retained earnings from the one-time remedial
payments for staff housing borne by the state shareholder of the
Company
(2,553
)
(2,553
)
(308
)
Effect on the other reserves of the shareholders’ equity
from the one-time remedial payments for staff housing borne by
the state shareholder of the Company
Payment to CNPC for acquisition of marketing enterprises
(3,200
)
—
—
—
Contribution from CNPC for one-time remedial staffing housing
2,553
—
—
—
Balance at end of year
283,464
329,205
403,012
48,693
In preparing the summary of differences between IFRS and US
GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the
estimates of revenues and expenses. Accounting estimates have
been employed in these financial statements to determine
reported amounts, including realizability, useful lives of
tangible and intangible assets, income taxes and other areas.
Actual results may differ from those estimates.
A summary of the principal differences and additional
disclosures applicable to the Group is set out below:
(a) Revaluation
of property, plant and equipment
As described in Note 16, the property, plant and equipment,
excluding oil and gas reserves, transferred to the Company by
CNPC were appraised as of June 30, 1999, as required by the
relevant PRC regulations, by a firm of independent valuers
registered in the PRC, China Enterprise Appraisal. As at
September 30, 2003, a revaluation of the Group’s
refining and chemical production equipment was undertaken by a
firm of independent valuers registered in the PRC, China United
Assets Appraiser Co., Ltd, on a depreciated replacement
cost basis.
The June 1999 revaluation resulted in RMB 80,549 in excess
of the prior carrying value and a revaluation loss of
RMB 1,122 on certain property, plant and equipment.
The September 2003 revaluation resulted in RMB 872 in
excess of the carrying value of certain property, plant and
equipment immediately prior to the revaluation and a revaluation
loss of RMB 1,257.
With respect to the RMB 872 revaluation gain resulting from
the 2003 revaluation, RMB 98 were related to property,
plant and equipment that in 1999 experienced revaluation loss,
and
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
were credited to the income statement. The remaining
RMB 774 was credited to the revaluation reserve in the
shareholders’ equity.
With respect to the RMB 1,257 revaluation loss resulting
from the 2003 revaluation, RMB 768 were related to
property, plant and equipment that in 1999 experienced
revaluation gain. The remaining RMB 489 were charged to the
income statement.
For purposes of reconciling to the US GAAP financial data,
the effect of the revaluation, the related depreciation charges
and loss on disposal is reversed. A deferred tax asset relating
to the reversal of the effect of revaluation in 1999 is
established, together with a corresponding increase in the
shareholders’ equity. Under a special approval granted by
the Ministry of Finance, the effect of the revaluation in 1999
is available as additional depreciation base for purposes of
determining taxable income.
(b) Related
party transactions
The Group has disclosed in Note 31, transactions with
significant customers and in Notes 13, 15, 21, 22 and
32 transactions and balances with its immediate parent, CNPC,
and related companies. CNPC is owned by the PRC government,
which also owns a significant portion of the productive assets
in the PRC. IFRS exempts state controlled enterprises from
disclosing transactions with other state controlled enterprises.
IFRS also excludes from related parties government departments
and agencies to the extent that such dealings are in the normal
course of business. US GAAP contains no similar exemptions but
requires disclosure of material related party transactions. The
Group believes that it has provided meaningful disclosures of
related party transactions through the major customer
disclosures in Note 31 and the transactions with the CNPC
Group disclosed in Note 32. Although the majority of the
Group’s activities are conducted with the PRC government
and its affiliates and other state controlled enterprises, none
individually constitutes a major customer or supplier other than
those disclosed.
(c) One-time
remedial payments for staff housing
The Ministry of Finance of the PRC issued several public notices
and regulations during the year ended December 31, 2000 and
2001 with respect to the one-time remedial payments for staff
housing payable to certain employees who joined the workforce
prior to December 31, 1998 and have housing conditions
below local standards as determined in accordance with
government regulations and guidelines. These Ministry of Finance
notices and regulations also provided that the portion of
remedial payments attributable to the periods prior to a
restructuring
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
of the employer enterprise from a wholly state-owned status to a
less than wholly state-owned status is to be borne by the state
shareholder of the enterprise.
The restructuring that resulted in the formation of the Group
took place in November 1999. As such, the one-time remedial
housing payments payable to the eligible employees of the Group
are to be borne by the state shareholder of the Group.
Under IFRS, such direct payments to employees or reimbursements
will not be recorded through the consolidated income statement
of the Group. US GAAP contains no such exemption but
requires this principal shareholder’s action on behalf of
the Company to be recorded in the consolidated income statement.
In the last quarter of year 2002, the Group and CNPC completed
the process of estimating the amount payable to qualified
employees of the Group. This amount, RMB 2,553, was
reflected in determining net income of the Group for the year
ended December 31, 2002, under US GAAP. Since this
amount is borne by CNPC, a corresponding amount has been
included as an addition to the other reserves in the
shareholders’ equity of the Group. There are no significant
changes in this estimates during 2003 and 2004.
(d) Recent
US accounting pronouncements
In December 2004, the FASB revised FAS No. 123
(FAS 123(R)). FAS 123(R), “Share-based
Payment”, requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements based on their fair values. Pro forma
disclosure is no longer an alternative to financial statement
recognition. FAS 123(R) is effective as of the beginning of
the Company’s first fiscal year that begins after
June 15, 2005. The Group is evaluating the transition
provisions allowed by FAS 123(R). The Group does not expect
the adoption of FAS 123(R) to have a material impact on the
Group’s financial position or operational results.
On November 24, 2004, the FASB issued Statement
No. 151, “Inventory Costs”, an amendment of ARB
No. 43, Chapter 4 (FAS 151). FAS 151
requires that abnormal amounts of idle capacity and spoilage
costs be excluded from the cost of inventory and expensed when
incurred. The provisions of FAS 151 are applicable to
inventory costs incurred during fiscal years beginning after
June 15, 2005. The Group does not expect the adoption of
FAS 151 to have a material impact on the Group’s
financial position or results of operation.
On December 15, 2004, the FASB issued Statement
No. 153, “Exchanges of Nonmonetary Assets”, an
amendment of APB Opinion No. 29 (FAS 153).
FAS 153 requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis,
unless (1) neither the asset received nor the asset
surrendered has a fair value that is determinable within
reasonable limits or (2) the transactions lack commercial
substance. FAS 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. The Group does not expect the adoption of
FAS 153 to have a material impact on the Group’s
financial position or results of operation.
On March 28, 2005, the Company has entered into an
acquisition agreement with CNPC. According to the acquisition
agreement, the Company has acquired the petroleum and natural
gas-related refinery and petrochemical businesses respectively
owned by CNPC’s wholly-owned
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in millions except for per share data or unless
otherwise stated)
subsidiaries, Ningxia Dayuan Refinery and Petrochemical Company
Limited and Qingyang Refinery and Petrochemical Company Limited,
from CNPC for which the Company paid a cash consideration of
RMB 9.14.
The acquisition has been completed on April 1, 2005.
The transaction was accounted for in a manner similar to a
uniting of interests, whereby the assets and liabilities of the
two entities acquired by the Company were recorded at historical
cost to CNPC. The difference between the RMB 9.14
acquisition price and the net liabilities transferred from CNPC
was adjusted against equity. Following is a summary of certain
summarized financial data at December 31, 2004 and for the
year then ended of the businesses acquired from CNPC.
RMB
Results of operations
Turnover
4,582
Net loss
(148
)
Financial position:
Current assets
822
Total assets
2,077
Current liabilities
1,237
Total liabilities
2,314
Net liabilities
(237
)
On June 8, 2005, the Board of Directors of the Company
approved entering into a purchase agreement whereby the Company
will acquire a 50% ownership interest in Zhong You Kan Tan Kai
Fa Company Limited (“Newco”). Currently Newco is 100%
owned by two wholly-owned subsidiaries of CNPC. The
Company’s investment in Newco is expected to be
approximately RMB 20,741. Concurrent with the purchase
agreement, the Company also agreed in a transfer agreement to
sell its wholly-owned subsidiary, PetroChina International
Limited, to Newco for a consideration of approximately
RMB 579.
The purchase and transfer agreements require approvals by
relevant regulatory authorities and the shareholders of the
Company.
Upon completion of the purchase and transfer agreements, the
Company will obtain control of the operational and financial
policies of Newco. Its investment in Newco and the transfer of
PetroChina International Limited to Newco will be accounted for
in a manner similar to a uniting of interests since these
transactions are among entities under common control by CNPC.
The consolidated financial statements of the Company will be
restated as if the operations of the Company and Newco had
always been combined.
38 APPROVAL OF FINANCIAL
STATEMENTS
The financial statements were approved by the board of directors
on March 16, 2005 and by the shareholders at the annual
general meeting held on May 26, 2005.
Share of equity affiliates’ costs of property acquisition,
exploration, and development
228
592
274
Proved Reserve Estimates
Oil and gas proved reserves cannot be measured exactly. Reserve
estimates are based on many factors related to reservoir
performance that require evaluation by the engineers
interpreting the available data, as well as price and other
economic factors. The reliability of these estimates at any
point in time depends on both the quality and quantity of the
technical and economic data, and the production performance of
the reservoirs as well as engineering judgment. Consequently,
reserve estimates are subject to revision as additional data
become available during the producing life of a reservoir. When
a commercial reservoir is discovered, proved reserves are
initially determined based on limited data from the first well
or wells. Subsequent data may better define the extent of the
reservoir and additional production performance, well tests and
engineering studies will likely improve the reliability of the
reserve estimate. The evolution of technology may also result in
the application of improved recovery techniques such as
supplemental or enhanced recovery projects, or both, which have
the potential to increase reserves beyond those envisioned
during the early years of a reservoir’s producing life.
Proved oil and gas reserves are the estimated quantities of
crude oil, natural gas and natural gas liquids which geological
and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future
conditions. Proved developed reserves are those reserves, which
can be expected to be recovered through existing wells with
existing equipment and operating methods. Proved undeveloped
reserves are those reserves, which are expected to be recovered
from new wells on undrilled acreage, or from existing wells
where relatively major expenditure is required.
The Ministry of Land and Resources in China issues production
licenses to applicants on the basis of the reserve reports
approved by relevant authorities. Administrative rules issued by
the State Council provide that the maximum term of a production
license is 30 years. However, in accordance with a special
approval from the State Council, the Ministry of Land and
Resources has issued production licenses effective March 2000 to
the Group for all of its crude oil and natural gas reservoirs
with terms coextensive with the projected productive life of
those reservoirs, ranging up to 55 years. Production
licenses to be issued to the Group in the future will be subject
to the 30-year maximum unless additional special approvals can
be obtained from the State Council. Each of the Group’s
production licenses is renewable upon application by the Group
30 days prior to expiration.
SUPPLEMENTARY INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES (UNAUDITED) —
(Continued)
(Amounts in millions unless otherwise stated)
Oil and gas price increases may extend the productive lives of
crude oil and natural gas reservoirs beyond the current terms of
the relevant production licenses.
Proved reserve estimates as of December 31, 2002, 2003 and
2004 were based on a report prepared by DeGolyer and
MacNaughton, independent engineering consultants. These reserve
estimates were prepared for each oil and gas region (as opposed
to individual fields within a region) and adjusted for the
estimated effects of using prices and costs prevailing at the
end of the period. The Company’s reserve estimates include
only crude oil and natural gas, which the Company believes can
be reasonably produced within the current terms of production
licenses.
SUPPLEMENTARY INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES (UNAUDITED) —
(Continued)
(Amounts in millions unless otherwise stated)
Estimated quantities of net proved oil and condensate and
natural gas reserves and of changes in net quantities of proved
developed and undeveloped reserves for each of the period
indicated are as follows:
At December 31, 2004, 10,910 million barrels of crude
oil and condensate and 44,362 billion cubic feet of natural
gas proved developed and undeveloped reserves are located within
China, and 31 million barrels of crude oil and condensate
and 192 billion cubic feet of natural gas proved developed
and undeveloped reserves are located in Indonesia.
SUPPLEMENTARY INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES (UNAUDITED) —
(Continued)
(Amounts in millions unless otherwise stated)
Standardized Measure
The following disclosures concerning the standardized measure of
future cash flows from proved oil and gas reserves are presented
in accordance with the US Statement of Financial Accounting
Standards No. 69. The amounts shown are based on prices and
costs at the end of each period, currently enacted tax rates and
a 10 percent annual discount factor. Since prices and costs
do not remain static, and no price or cost changes have been
considered, the results are not necessarily indicative of the
fair market value of estimated proved reserves, but they do
provide a common benchmark which may enhance the users’
ability to project future cash flows.
The standardized measure of discounted future net cash flows
related to proved oil and gas reserves at the end of each of the
three years in the period ended December 31, 2002, 2003 and
2004 is as follows (in millions of RMB):
Future net cash flows were estimated using period-end prices and
costs, and currently enacted tax rates.
Changes in the standardized measure of discounted net cash flows
for the Group for each of the three years in the period ended
December 31, 2002, 2003 and 2004 are as follows:
Crude Oil Mutual Supply Framework Agreement, dated
December 1, 2004, between China Petroleum and Chemical
Corporation and PetroChina (English translation)
Capital Contribution Agreement, dated June 9, 2005, among
China National Oil and Gas Exploration and Development
Corporation, Central Asia Petroleum Company Limited, Zhong You
Kan Tan Kai Fa Company Limited and PetroChina (English
Translation)
Supplementary Agreement to Comprehensive Products and Services
Agreement, dated June 9, 2005, between CNPC and PetroChina
(English Translation)
4.6
Form of Non-competition Agreement between CNPC and PetroChina
(together with English
translation)(2)
4.7
Form of Comprehensive Products and Services Agreement between
CNPC and PetroChina (together with English
translation)(2)
4.8
Form of Land Use Rights Leasing Contract between CNPC and
PetroChina (together with English
translation)(2)
4.9
Form of Buildings Leasing Contract between CNPC and PetroChina
(together with English
translation)(2)
4.10
Form of Trademark Licensing Contract between CNPC and PetroChina
(together with English
translation)(2)
4.11
Form of Patent and Know-how Licensing Contract between CNPC and
PetroChina (together with English
translation)(2)
4.12
Form of Computer Software Licensing Contract between CNPC and
PetroChina (together with English
translation)(2)
4.13
Form of Contract for Transfer of Rights under Production Sharing
Contracts between CNPC and PetroChina (together with English
translation)(2)
4.14
Form of Guarantee of Debts Contract between CNPC and PetroChina
(together with English
translation)(2)
4.15
Form of Contract for the Supervision of Certain Sales
Enterprises between CNPC and PetroChina (together with English
translation)(2)
4.16
Form of Agreement for Transfer of Rights and Interests under the
Crude Oil Premium and Discount Calculation Agreement between
China Petrochemical Corporation, CNPC and PetroChina (together
with English
translation)(2)
4.17
Form of Agreement for the Transfer of Rights and Interests under
the Retainer Contracts relating to Oil Exploration and
Exploitation in Lengjiapu Area, Liaohe Oil Region and
No. 9.1-9.5 Areas, Karamay Oil Field (together with English
translation)(2)
Incorporated by reference to our Registration Statement on
Form F-1 (File No. 333-11566) filed with the
Commission, as declared effective on March 29, 2000.
Dates Referenced Herein and Documents Incorporated by Reference
, and
its English translation is PetroChina Company Limited. Our
headquarters are located at 16 Andelu, Dongcheng District,
Beijing, China, 100011, and our telephone number at this address
is (86-10) 8488-6270. Our website address is
www.petrochina.com.cn. The information on our website is not
part of this annual report.
”
that is jointly owned by us and CNPC. We have filed an
application to register the new logo as a trademark with the
State Trademark Bureau of the PRC.
