Company Quick10K Filing
PetroChina
20-F 2019-12-31 Filed 2020-04-29
20-F 2018-12-31 Filed 2019-04-29
20-F 2017-12-31 Filed 2018-04-27
20-F 2016-12-31 Filed 2017-04-27
20-F 2015-12-31 Filed 2016-04-28
20-F 2014-12-31 Filed 2015-04-29
20-F 2013-12-31 Filed 2014-04-25
20-F 2012-12-31 Filed 2013-04-26
20-F 2011-12-31 Filed 2012-04-26
20-F 2010-12-31 Filed 2011-05-10
20-F 2009-12-31 Filed 2010-06-25

PTR 20F Annual Report

Part I
Item 1 - Identity of Directors, Senior Management and Advisors
Item 2 - Offer Statistics and Expected Timetable
Item 3 - Key Information
Item 4 - Information on The Company
Item 4A - Unresolved Staff Comments
Item 5 - Operating and Financial Review and Prospects
Item 6 - Directors, Senior Management and Employees
Item 7 - Major Shareholders and Related Party Transactions
Item 8 - Financial Information
Item 9 - The Offer and Listing
Item 10 - Additional Information
Item 11 - Quantitative and Qualitative Disclosures About Market Risk
Item 12 - Description of Securities Other Than Equity Securities
Part II
Item 13 - Defaults, Dividends Arrearages and Delinquencies
Item 14 - Material Modifications To The Rights To Security Holders and Use of Proceeds
Item 15 - Controls and Procedures
Item 16A - Audit Committee Financial Expert
Item 16B - Code of Ethics
Item 16C - Principal Accountant Fees and Services
Item 16D - Exemptions From Listing Standards for Audit Committees
Item 16E - Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F - Change in Registrant's Certifying Accountant
Item 16G - Corporate Governance
Item 16H - Mine Safety Disclosure
Part III
Item 17 - Financial Statements
Item 18 - Financial Statements
Item 19 - Exhibits
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PetroChina Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d836220d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F

 

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the fiscal year ended December 31, 2019.

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  

Date of event requiring this shell company report                     

 

  

For the transition period from                      to                     

Commission File Number 1-15006

 

 

LOGO

(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)

 

 

9 Dongzhimen North Street

Dongcheng District, Beijing 100007

The People’s Republic of China,

(Address of principal executive offices)

 

 

Wu Enlai

Telephone number: 8610 59982622

Facsimile number: 8610 62099557

Email address: sunbo05@petrochina.com.cn

Address: 9 Dongzhimen North Street, Dongcheng District, Beijing 100007, The People’s Republic of China

(Name, telephone, e-mail and/or facsimile number and address of registrant’s contact person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class

  Trading Symbol  

Name of Each Exchange on Which Registered

American Depositary Shares, each representing 100

H Shares, par value RMB1.00 per share*

H Shares, par value RMB1.00 per share

 

PTR

 

New York Stock Exchange, Inc.

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:

 

A Shares, par value RMB1.00 per share***

   161,922,077,818(1)

H Shares, par value RMB1.00 per share

   21,098,900,000****

 

(1)

Includes 146,882,339,136 A Shares held by CNPC and 15,039,738,682 A Shares held by the public shareholders.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

If this is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer  ☒                Accelerated Filer  ☐                Non-Accelerated Filer  ☐                Emerging Growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))by the registered public accounting firm that prepared or issued its audit report.    Yes  ☒    No  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

            ☐  U.S. GAAP

   ☒  International Financial Reporting Standards as issued by the International Accounting Standards Board    ☐  Other            

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐

 

*

   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.

***

   PetroChina’s A Shares became listed on the Shanghai Stock Exchange on November 5, 2007.

****

   Includes 709,929,100H Shares represented by American Depositary Shares.

 

 

 


Table of Contents

Table of Contents

 

              Page  

Certain Terms and Conventions

     1  

Forward-Looking Statements

     5  
     Part I   

Item 1

     Identity of Directors, Senior Management and Advisors      7  

Item 2

     Offer Statistics and Expected Timetable      7  

Item 3

     Key Information      7  
     Selected Financial Data      8  
     Risk Factors      10  

Item 4

     Information on the Company      19  
     Introduction      19  
     Exploration and Production      21  
     Refining and Chemicals      30  
     Marketing      33  
     Natural Gas and Pipeline      35  
     Competition      37  
     Environmental Matters      38  
     Properties      40  
     Intellectual Property      40  
     Regulatory Matters      41  

Item 4 A

     Unresolved Staff Comments      49  

Item 5

     Operating and Financial Review and Prospects      49  
     General      49  
     Operating Results      54  
     Liquidity and Capital Resources      63  
     Off-Balance Sheet Arrangements      67  
     Long-Term Contractual Obligations and Other Commercial Commitments and Payment Obligations      68  
     Research and Development      68  
     Trend Information      69  
     Other Information      72  

Item 6

     Directors, Senior Management and Employees      73  
     Directors, Senior Management and Supervisors      73  
     Compensation      84  
     Board Practices      84  
     Employees      87  
     Share Ownership      87  

Item 7

     Major Shareholders and Related Party Transactions      87  
     Major Shareholders      87  
     Related Party Transactions      88  
     Interests of Experts and Counsel      90  

Item 8

     Financial Information      91  
     Financial Statements      91  
     Legal Proceedings      91  
     Dividend Policy      91  
     Significant Changes      92  

Item 9

     The Offer and Listing      92  
     Trading Market Information      92  

Item 10

     Additional Information      92  
     Memorandum and Articles of Association      92  
     Material Contracts      97  
     Foreign Exchange Controls      97  

 

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Table of Contents
              Page  
     Taxation      98  
     Documents on Display      104  

Item 11

     Quantitative and Qualitative Disclosures About Market Risk      104  

Item 12

     Description of Securities Other Than Equity Securities      109  
     Part II   

Item 13

     Defaults, Dividends Arrearages and Delinquencies      110  

Item 14

     Material Modifications to the Rights to Security Holders and Use of Proceeds      110  

Item 15

     Controls and Procedures      110  

Item 16 A

     Audit Committee Financial Expert      112  

Item 16 B

     Code of Ethics      112  

Item 16 C

     Principal Accountant Fees and Services      112  

Item 16 D

     Exemptions from Listing Standards for Audit Committees      113  

Item 16 E

     Purchases of Equity Securities by the Issuer and Affiliated Purchasers      113  

Item 16 F

     Change in Registrant’s Certifying Accountant      113  

Item 16 G

     Corporate Governance      113  

Item 16 H

     Mine Safety Disclosure      115  
     Part III   

Item 17

     Financial Statements      115  

Item 18

     Financial Statements      115  

Item 19

     Exhibits      115  

 

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CERTAIN TERMS AND CONVENTIONS

Conventions Which Apply to this Annual Report

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”, “the 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.

 

 

“PRC” or “China” are to the People’s Republic of China, but does not apply to its Hong Kong, Macau and Taiwan for purposes of this annual report.

We publish our consolidated financial statements in Renminbi or RMB. In this annual report, IFRS refers to International Financial Reporting Standards as issued by the International Accounting Standards Board.

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.

 

“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.

 

“developed reserves”

Under the reserves rules of the Securities and Exchange Commission, or SEC, developed reserves are reserves of any category that can be expected to be recovered:

 

  (i) through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and

 

 (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

 

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“development cost”

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 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 during 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 reserves”

Under the SEC reserves rules, proved reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible — from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations — prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

 

  (i) The area of the reservoir considered as proved includes:

 

  (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.

 

  (ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.

 

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  (iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.

 

  (iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when:

 

  (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.

 

  (v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

 

“reserves-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.

 

“undeveloped reserves”

Under the SEC reserves rules, undeveloped reserves are reserves of any category 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.

 

  (i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.

 

  (ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.

 

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  (iii) Under no circumstances shall estimates for 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 projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.

 

“water cut”

For a given oil region, the percentage that water constitutes of all fluids extracted from all wells in that region.

References to:

 

   

BOE is to barrels-of-oil equivalent,

 

   

Mcf is to thousand cubic feet, and

 

   

Bcf is to billion cubic feet.

 

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FORWARD-LOOKING STATEMENTS

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 the 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;

 

   

effects of the recent COVID-19 pandemic;

 

   

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;

 

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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;

 

   

the actions of competitors;

 

   

wars and acts of terrorism or sabotage;

 

   

changes in policies, laws or regulations of the PRC, including changes in applicable tax rates and oil and gas pipeline network reforms;

 

   

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 statements.

 

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PART I

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” and “Item 16C — Principal Accountant Fees and Services”.

Item 2 — OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3 — KEY INFORMATION

 

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Selected Financial Data

Historical Financial Information

You should read the selected historical financial data set forth below in conjunction with our consolidated financial statements and the notes and “Item 5 — Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected consolidated statement of comprehensive income (except for ADS data) and cash flow data for the years ended December 31, 2017, 2018 and 2019 and the selected consolidated statement of financial position data as of December 31, 2018 and 2019 set forth below are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of comprehensive income data (except for ADS data) and cash flow data for the years ended December 31, 2015 and 2016 and the selected consolidated statement of financial position data as of December 31, 2015, 2016 and 2017 set forth below are derived from our audited financial statements not included in this annual report. Our consolidated financial statements were prepared in accordance with IFRS as issued by the International Accounting Standards Board. The financial information included in this section may not necessarily reflect our results of operations, financial position and cash flows in the future.

 

     As of or for the Year Ended December 31,  
     2015(4)     2016(4)     2017(4)     2018(4)     2019  
     RMB     RMB     RMB     RMB     RMB  
     (In millions, except for per share, per ADS data and percentages)  

Consolidated Statement of Comprehensive Income Data

  

Revenue

     1,736,663       1,627,588       2,032,298       2,374,934       2,516,810  

Total operating expenses

     (1,657,733     (1,564,926     (1,961,462     (2,251,992     (2,395,048

Profit from operations

     78,930       62,662       70,836       122,942       121,762  

Profit before income tax expense

     56,815       46,574       55,691       116,770       103,214  

Income tax expense

     (15,726     (15,919     (16,296     (42,790     (36,199

Profit for the year

     41,089       30,655       39,395       73,980       67,015  

Attributable to:

          

Owners of the Company

     35,234       8,222       23,537       53,036       45,682  

Non-controlling interests

     5,855       22,433       15,858       20,944       21,333  

Basic and diluted earnings per share attributable to owners of the Company(1)

     0.19       0.04       0.13       0.29       0.25  

Basic and diluted net earnings per ADS(2)

     19.25       4.49       12.86       28.98       24.96  

Consolidated Statement of Financial Position Data

          

Total current assets

     353,560       385,199       430,294       438,241       466,913  

Total non-current assets

     2,048,512       2,019,003       1,983,205       2,002,636       2,265,997  

Total assets

     2,402,072       2,404,202       2,413,499       2,440,877       2,732,910  

Total current liabilities

     479,653       507,530       588,551       596,430       661,419  

Total non-current liabilities

     585,403       529,870       446,960       435,556       627,186  

Total liabilities

     1,065,056       1,037,400       1,035,511       1,031,986       1,288,605  

Equity attributable to owners of the Company

     1,177,721       1,187,337       1,192,572       1,213,783       1,230,156  

Non-controlling interests

     159,295       179,465       185,416       195,108       214,149  

Total equity

     1,337,016       1,366,802       1,377,988       1,408,891       1,444,305  

Other Financial Data

          

Dividend declared and proposed per share

     0.09       0.06       0.13       0.18       0.14  

Dividend declared and proposed per ADS

     8.73       5.93       13.00       17.88       14.37  

Capital expenditures

     203,302       172,961       219,346       256,106       296,776  

Return on net assets (%)(3)

     3.0       0.7       2.0       4.4       3.7  

Consolidated Statement of Cash Flow Data

          

Net cash flows from operating activities

     261,855       268,897       368,729       353,256       359,610  

Net cash flows used for investing activities

     (217,112     (176,310     (243,790     (267,812     (332,948

Net cash flows used for financing activities

     (44,673     (70,454     (96,746     (125,703     (27,276

 

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(1)

For the years ended December 31, 2015, 2016, 2017, 2018 and 2019, respectively, basic and diluted earnings per share were calculated by dividing the profit attributable to owners of the Company by 183,021 million, the total number of shares outstanding in each of these financial years.

(2)

Each ADS represents 100 H Shares. The basic and diluted earnings per ADS were calculated with the same method as that used for the calculation of the basic and diluted earnings per share.

(3)

Return on net assets is calculated as “Profit for the year attributable to owners of the Company” divided by “Equity attributable to owners of the Company”.

(4)

(a) The comparative data in the table was restated as if Dalian West Pacific Petrochemical Co., Ltd. was consolidated since the earliest year presented. Please refer to “Item 4 — Information on the Company — Acquisitions and Divestment” and Note 40 to our consolidated financial statements, and (b) We have initially applied IFRS 16 on January 1, 2019 and IFRS 15 and IFRS 9 on January 1, 2018. According to the adopted transition plan, the comparative data has not been restated. For a detailed description of the changes and impacts of these accounting standards, please refer to “Note 3 (aa) New Accounting Standards” in our financial statements.

 

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Risk Factors

Our business is primarily subject to various changing competitive, economic and social conditions. Such changing conditions entail certain risks, which are described below.

Risks Related to Macro Economic Conditions

Our operations may be adversely affected by international and domestic economic conditions. As the oil and gas industry is sensitive to macro-economic trends, oil and gas prices tend to fluctuate along with changes in macro-economic conditions. We may experience pricing pressure on our refined products in recessionary periods, which would have an adverse effect on our profitability. Changes in macro-economic conditions can affect the demand for certain of our products. These factors may also lead to intensified competition for market share, with consequential potential adverse effects on sales volumes. Inflation may lead to increase in our operating costs. Notwithstanding the measures taken by the PRC government to control inflation, China may experience an increase in inflation in the future and our operating costs may become higher than anticipated. The financial and economic situation may also have a negative impact on third parties with whom we do business, and may impact their ability to perform contractual obligations to us. In addition, other factors that affect the macro economy, such as declining population growth rates, conflicts and wars, trade and tariff policies, and major public health events, such as the recent COVID-19 pandemic, may have an adverse impact on oil and gas and petrochemical industries, including us. Any of these factors may adversely affect our financial condition, results of operations and liquidity.

Risks Related to Competition

The oil, gas and petrochemicals industries are highly competitive. There is strong competition, both within the oil and gas industry and with other industries, in supplying the fuel needs of commercial, industrial and residential markets. In recent years, with the intensive reform of China’s petroleum, refining and chemical, natural gas, LNG, pipelines and refined oils sales industries, we have been facing increasingly intense competition in the exploration, refinery, chemical, sales, and oil and gas service sectors from privately-owned companies, foreign-invested enterprises and other state-owned enterprises that recently entered the oil and gas industries. In addition, the rapid development of unconventional oil and gas resources, new energy sources and new products also poses competition with the conventional energy and petrochemical industries. Competition puts pressure on product prices, affects oil products marketing and requires continuous management focus on identifying new trends, reducing unit costs and improving efficiency. The implementation of our growth strategy requires continued technological advances and innovation, including advances in exploration, production, refining, petrochemicals manufacturing technology and advances in technology related to energy usage. Our performance could be impeded if competitors developed or acquired intellectual property rights to technology that we required or if our innovation lagged the industry.

The Eastern and Southern regions of China have a higher demand for refined products and chemical products than the Western and Northern regions. Although we have strived to increase our refinery capacity in the Southern regions of China over recent years, most of our refineries and chemical plants are located in the Northeastern and Northwestern regions of China. We incur relatively higher transportation costs for delivery of our refined products and chemical products to certain areas of the Eastern and Southern regions from our refineries and chemical plants in Western and Northern China. We face strong competition from other traditional domestic oil companies, local independent refineries and other competitors. 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.

Risks Related to Outbound Investments and Trading

We are subject to various political, legal and regulatory environments in foreign developing countries where we operate, some of which are known to be unstable and differ in certain significant respects from those

 

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prevailing in developed countries. The main factors affecting our outbound investments include unstable political situations, unstable tax policies and unstable regulatory regimes. CNPC, our controlling shareholder, and its affiliates and subsidiaries may choose to undertake, without our involvement, overseas investments, operations and trading in the oil and gas industry, including certain exploration and production of oil and gas, refining, transportation, trading, engineering construction and technical services, operations of pipelines and liquefied natural gas, or LNG projects, or other business activities in certain countries or with certain entities that are subject to U.S. economic sanctions or are designated as State Sponsors of Terrorism, including Iran, Sudan, Cuba, Myanmar, Russia and Venezuela.

In 2018, the United States withdrew from the Joint Comprehensive Plan of Action (“JCPOA”) and reimposed certain sanctions against Iran, which were conditionally lifted in 2015 following entry into the JCPOA. These reimposed sanctions have implications for non-U.S. companies, including requiring foreign companies to cease participation in projects in certain sectors of Iran (including the energy sector), and, except for eight countries and regions (including China) which were granted a Significant Reduction Exception (“SRE”) to be able to continue to import limited oil, prohibiting or restricting oil imports from Iran. The SREs expired in May 2019, and the United States announced that no additional waivers would be re-issued. Pursuant to section 13(r) to the U.S. Securities Exchange Act of 1934, reporting issuers are required to disclose whether they or any of their affiliates have knowingly engaged in certain activities, transactions, or dealings related to Iran during the reporting period, including activities not prohibited by U.S. or other law. In 2019, our controlling shareholder, CNPC, held indirect interests in certain oil and gas development projects in Iran, namely, (i) the MIS oil fields in which CNPC obtained a 100% interest in 2010, (ii) the North Azadegan oilfield, in which CNPC obtained a 100% interest in 2009 and (iii) the South Pars gas field project. Regarding the South Pars gas field project, CNPC first obtained a 100% interest in 2009. After ceasing participation in the project in 2012, CNPC in July 2017 regained a 30% investment and operating interest in the South Pars gas field project under a new Iran Petroleum Contract (the “IPC”). In November 2018, CNPC took over another shareholder’s interest pursuant to the IPC but the project was on hold. In October 2019, CNPC withdrew from the project. From the re-imposition of U.S. sanctions until May 2019, CNPC had been providing minimal support and extraction-related services to the MIS oilfield and the North Azadgan oilfield to recover its investment pursuant to the project agreements and in line with the SRE issued to China. Since May 2019, CNPC has suspended extracting oil from the two oilfields. In 2019 (until May), CNPC transported back to China approximately 1.47 million tons of crude oil that it extracted from the MIS oilfield and the North Azadgan oilfield, of which approximately 0.41 million tons were resold to our company’s refineries. In 2019, crude oil that we processed from the foregoing source accounted for 0.32% of the total oil processed by our refineries and contributed 0.08% of our total revenue.

Since July 2014, the United States has adopted economic sanctions against certain Russian persons and entities, including various entities operating in the financial, energy and defense sectors, such as Rosneft, Gazprom, Transneft, OAO Novatek and Yamal LNG. These sanctions prohibit U.S. persons from transacting in, providing financing for or otherwise dealing in debt issuance by certain of these entities, or restrict exports and transfer of technologies to certain of these entities. CNPC had certain pre-existing trading and investment relationships with some of these sanctioned Russian entities. For example, CNPC entered into a long-term agreement with each of Rosneft and Transneft to import crude oil from Russia in 2009 and a long-term agreement with Rosneft to import crude oil from Russia in June 2013. CNPC has resold, and will for the foreseeable future resell, all or a substantial portion of the imported crude oil from Rosneft and Transneft under the crude oil agreements to us. In 2014, CNPC signed a long-term agreement with Gazprom to import natural gas from Russia, which was assigned to one of our subsidiaries in 2019. CNPC also indirectly holds 20% equity interest in OAO Yamal LNG and 10% equity interest in Arctic LNG 2, both of which are subsidiaries of OAO Novatek, another sanctioned Russian entity. In May 2014, we entered into a long-term LNG import agreement with a subsidiary of OAO Yamal LNG to import LNG from Russia.

In August 2017, the United States imposed economic sanctions against the Government of Venezuela and certain state-owned entities, including Petroleos de Venezuela, S.A. (“PdVSA”). These sanctions prohibit

 

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U.S. persons from transacting in, providing financing for or otherwise dealing in “new debt” issued by these entities on or after August 25, 2017, with certain exceptions for short-term debt. Neither CNPC nor PetroChina purchased such new debt securities issued by the Government of Venezuela or by PdVSA, nor did they provide any assistance to third parties in this regard. In 2019, the United States issued enhanced sanction measures against Venezuela, which included blocking the property of Venezuelan government and its controlled entities, and introducing new restrictions on Venezuela’s oil sector. Under these programs, persons determined to be operating in the oil sector of the Venezuelan economy, or to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person included on the list of SDNs and Blocked Persons, may also be subject to risk of being designated for blocking sanctions. CNPC has longstanding trading and investment activities in Venezuela. In 2019, we purchased a small amount of oil product sourced from Venezuela for processing and resale, which contributed approximately 0.7% of our total revenue in 2019. CNPC has suspended purchases of oil from Venezuela. In 2008, CNPC Exploration and Development Company Limited (“CNPC E&D”), a joint venture held as to 50% by us and 50% by a wholly-owned subsidiary of CNPC, acquired 40% stake in the Sinovensa block located in Carabobo, Monagas State, Venezuela. The other 60% stake of the block is held by PdVSA, which also serves as the operator of the block. The block produces and sells heavy oil. We also indirectly hold minority interests in a few other small projects in Venezuela. For the year ended December 31, 2019, the share of profit generated from the Sinovensa block and these other projects accounted for approximately 1.4% of our total profit.

We closely monitor the possible impacts of U.S. sanctions against the countries and entities which have trading or investment relationships with CNPC or us. We will continue to manage our risk exposure and to endeavor that our activities do not violate any applicable economic sanctions administered by the United States. However, we cannot assure you that current or future regulations or developments related to economic sanctions will not have a material adverse impact on our business or reputation. Certain U.S. based investors may not wish to invest and have proposed or adopted divestment or similar initiatives regarding investments in companies that do business with countries and entities that are subject to U.S. sanctions. These investors may not wish for CNPC or us to make investments or conduct activities in the countries or with the entities that are the subject of U.S. sanctions and may divest their investment in us because of our relationship with CNPC and its investments and activities in those countries or with those entities that are the subject of U.S. sanctions. As a result, the trading prices of our ADSs may be adversely affected.

In July 2012, the U.S. Treasury Department’s Office of Foreign Assets Control, OFAC, added Bank of Kunlun Co., Ltd., or Kunlun Bank, an affiliate of our company due to common control by CNPC, to its “List of Foreign Financial Institutions Subject to Part 561”, which was replaced by the list of Correspondent Account of Payable-Through Account Sanctions, pursuant to the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. OFAC reported that Kunlun Bank provided financial services to at least six Iranian banks that were on OFAC’s sanctions list during 2012. These financial services included holding accounts, making transfers and paying letters of credit on behalf of the designated banks. In 2018, Kunlun Bank has discontinued the business activities which are subject to U.S. sanctions. Since November 2018, Kunlun Bank’s settlement business involving Iran has been limited to settlement of humanitarian materials, limited crude oil trade within the framework of applicable SRE exemptions, and other business activities that are not subject to sanctions, and it has ceased business cooperation with the banks that are subject to secondary sanctions. Beginning in May 2019, Kunlun Bank further ceased involvement in settlement activities related to Iranian crude oil trade. Our company has no involvement in or control over such activities of Kunlun Bank or CNPC and CNPC subsidiaries and affiliates, and we have never received any revenue or profit derived from these activities.

Risks Related to Government Regulation

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

 

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operations, such as exploration and production licensing, industry-specific and product-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 affected by future changes in certain policies of the PRC government with respect to the oil and gas industry. For example, on March 19, 2019, the PRC government passed the Opinions on Implementation of the Reform of the Operation Mechanism of Oil and Gas Pipeline Network (the “Opinion”). According to the Opinion, the PRC government will carry out reforms of the oil and gas pipeline operation mechanism. An oil and gas pipeline network operator shall be established, which will have diversified investors with state-owned capital holding the majority stake. The Opinion states that the PRC government would form an oil and gas market system with multi-channel suppliers in the upstream, an integrated pipeline network with high efficiency in the middle-stream, and a fully competitive market in the downstream, to improve the efficiency of oil and gas resource allocation. On May 24, 2019, a number of Chinese government agencies jointly issued the Regulations on the Fair Opening of Oil and Gas Pipeline Network Facilities, pursuant to which, from May 24, 2019, oil and gas pipeline network operators shall provide non-discriminatory services of oil and gas transportation, storage, gasification, loading and unloading, transshipment to users who meet the accessing conditions; without proper reasons, they must not delay the signing of or refuse to sign service contracts with users who meet the accessing conditions, and must not make unreasonable requirements. On December 9, 2019, the Chinese government established the China Oil & Gas Pipeline Network Corporation (the “National Pipeline Network Company”). The National Pipeline Network Company is in discussions with the Company regarding a possible acquisition of certain pipeline assets from the Company. As at the date of this report, no definitive agreement has been reached. There is no assurance that the definitive agreement, if any, will not bring any adverse effect on the development of our natural gas and pipeline business and our operation results.

Currently, the PRC government must approve the construction and major renovation of significant refining and petrochemical facilities as well as the construction of significant crude oil, 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.

Because PRC laws, regulations and legal requirements dealing with economic matters 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. 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 a stage of development, you may not enjoy the shareholders’ protections that you may be entitled to in other jurisdictions.

Risks Related to Controlling Shareholder

As of December 31, 2019, CNPC beneficially owned approximately 80.41% 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 and management affairs;

 

   

subject to applicable PRC laws and regulations and provisions of our articles of association, affect 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 regulatory requirements of the jurisdictions in which our shares are listed, cause our company to effect corporate transactions without the approval of minority shareholders.

 

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CNPC’s interests may sometimes conflict with those of some or all of our minority shareholders. We cannot assure you that CNPC, as our 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, materials supply services, social services and financial services. The interests of CNPC and its affiliates as providers of these services and products to us may conflict with our interests.

Risks Related to Pricing and Exchange Rate

Our operations are affected by the volatility of prices for crude oil, refined products and natural gas. We set our crude oil median prices monthly based on the international trading prices for crude oil.

In recent years, international prices for crude oil have fluctuated substantially in response to changes in global and regional economy, politics and supply and demand for crude oil. We do not have, and will not have, control over factors affecting international prices for crude oil. Fluctuations and volatility in crude oil prices have a significant impact in our results of operations. A decline in crude oil prices may reduce revenues from, and may result in a loss in, our exploration and production segment. For example, since the beginning of March 2020, the international crude oil price has fallen sharply due to a pessimistic outlook on the world economy affected by the COVID-19 pandemic and oversupply of crude oil in the global market. The decline in international crude oil prices is expected to greatly affect the Company’s upstream business profits and oil and gas import costs, and affect the Company’s downstream business profits through China’s pricing mechanism of refined oil products, thereby adversely affecting the Company’s overall sales revenue and profits. Further, if crude oil prices remain at a low level for a prolonged period, our company would be required to determine and estimate whether our oil and gas assets may suffer impairment and, if so, the amount of the impairment. An increase in crude oil prices may, however, increase the production costs of refined products, reduce demand for our products and affect our operating profits.

The PRC government has gradually improved its refined oil pricing mechanism. When there is a change in the average crude oil price in the international market during a given time period, the PRC government can adjust refined oil prices. When international crude oil price experiences sustained increases or becomes significantly volatile, the PRC government may increase its control over the refined oil prices. As a result, the regulation on refined product prices by the PRC government may reduce our profit and cause our refining assets to suffer impairment.

We negotiate the actual settlement price with natural gas users within the price range permitted by the PRC government. When the domestic price is lower than the international natural gas price, the cost of our imported natural gas will be higher than the sales price of our natural gas, which may reduce our revenues and profit, or result in losses, cause our natural gas assets to suffer impairment.

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. The value of Renminbi against U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The PRC government has implemented a floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of foreign currencies. Because most of our imports of crude oil, equipment and other materials and our outbound investments are settled in foreign currencies, the exchange rates between RMB and U.S. dollars and any other relevant foreign currencies may have an effect on our purchase costs and our investment costs.

 

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Risks Related to Environmental Protection and Safety Production

Compliance with changes in laws, regulations and obligations relating to environmental protection and safety production could result in substantial expenditures and reduced profitability from increases in operating costs. In recent years, the PRC government has implemented environmental protection and safety production laws and regulations and has gradually improved refined oil standards which have stricter requirements for our business, and led to an increase in our operating costs. In the future, the PRC government will implement more stringent environmental protection and safety production regulations and impose higher standards on refined oil products. Compliance with these new regulations and standards will increase our costs and expenses.

Our oil and gas exploration and production activities shall comply with relevant PRC environmental protection laws and regulations governing abandonment and disposal processes for oil and gas exploration and production activities. We have established standard abandonment procedures pursuant to these laws and regulations. We have included under our asset retirement obligations the costs for these abandonment activities and this asset retirement obligation is based on our best estimate of future abandonment expenditures. In addition, PRC national or local governments may enact stricter environmental protection regulations and our abandonment costs may increase as a result.

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 such as earthquake, tsunami and health epidemics such as the current COVID-19 pandemic, may cause partial interruptions to our operations and property and environmental damage that could have an adverse impact on our financial condition.

Risks Related to COVID-19

In January 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020 it was declared a pandemic. Between January 2020 and the date of this report, the COVID-19 disease has spread to many countries, with the number of reported cases and related deaths increasing daily and, in many countries, exponentially. Many countries’ governments have imposed increasingly stringent restrictions to help avoid, or slow down, the spreading of COVID-19, including, for example, restrictions on international and local travel, public gatherings and participation in meetings, as well as closures of universities, schools, stores and restaurants, with some countries imposing strict curfews. In China, various forms of restrictions were imposed and continue to be in place, and there can be no assurance that these restrictions will not be extended further on one or more occasions. These measures have led to a significant decline in demand for, and prices of, our refined oil products and natural gas, and the restrictions are expected to have an adverse effect in the short to medium-term on our oil and gas business chains. Globally, these widespread restrictions in various countries across the world are expected to also result in a decrease in demand for oil, thereby also putting pressure on global oil prices.

We continue to monitor developments closely as the COVID-19 pandemic develops. The impact of the COVID-19 pandemic on our business will depend on a range of factors which we are not able to accurately predict, including the duration, severity and scope of the pandemic, the geographies impacted, the impact of the pandemic on economic activity in China and globally, and the nature and severity of measures adopted by governments. These factors include, but are not limited to:

 

   

The deterioration of socio-economic conditions and disruptions to our operations, such as its supply chain, or refining or distribution capabilities, which may result in increased costs due to the need for

 

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more complex supply chain arrangements, to expand existing facilities or to maintain inefficient facilities, or in a reduction of our sales volumes.

 

   

Reductions or volatility in demand for crude oil and refined and petrochemical products due to quarantine or other travel restrictions, economic hardship, retail closures or illness, which may impact our revenue and market share.

 

   

Significant volatility in financial markets (including exchange rate volatility) and measures adopted by governments and central banks that further restrict liquidity, which may limit our access to funds, lead to shortages of cash or increase the cost of raising such funds.

 

   

An adverse impact on our ability to engage in new, or consummate pending, strategic transactions on the agreed terms and timetable or at all.

As of the date of this report, there is significant uncertainty relating to the severity of the near- and long-term adverse impact of the COVID-19 pandemic on the global economy, global financial markets and the Chinese economy, and we are unable to accurately predict the near-term or long-term impact of the COVID-19 pandemic on our business. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to marco-economic conditions, pricing and our liquidity. See also “Risk Factors — Risks Related to Marco Economic Conditions”, “Risk Factors — Risks Related to Pricing and Exchange Rate.” and “Risk Factors — Risks Related to Liquidity”.

Risks Related to Climate Change

In recent years, the oil industry has faced an increasingly severe challenge imposed by global climate change. Numerous international, domestic and regional treaties and agreements that restrict the emission of greenhouse gas have been executed and become effective. China and some other countries in which we operate have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These include adoption of carbon emission quota and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energies. These requirements may lead to a substantial increase in our expenditures, make our products more expensive, lengthen our project time, reduce the demand for hydrocarbons, and shift hydrocarbon demand toward relatively low carbon sources such as natural gas. Current and pending greenhouse gas regulations may also increase our compliance costs, such as those for monitoring or sequestering emissions. As a result, our results of operations and our strategic investment may be adversely affected.

Risks Related to Insurance

Due to the fact that oil industry is susceptible to high and industry-specific risks in nature, the current ordinary commercial insurance cannot cover all the business areas in which we operate. We maintain insurance coverage against liability risks relating to assets that have significant operational risks, auto risks, and third-party liabilities for personal, property, and environmental risks, but not all, potential losses. We may suffer material losses resulting from uninsurable or uninsured risks or insufficient insurance coverage.

Risks Related to Oil and Gas Reserves

The crude oil and natural gas reserves data in this annual report are only estimates. The reliability of reserves estimates depends 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, some of which are beyond our control and may prove to be incorrect over time. Results of drilling, testing and production after the date of estimates may require substantial upward or downward revisions in our reserves data. Our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates because of these revisions.

 

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We are actively pursuing business opportunities outside China to improve our international operations. We cannot assure you, however, that we can successfully locate sufficient, if any, alternative sources of crude oil supply 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.

Risks Related to Liquidity

We have made best endeavors to ensure an appropriate level of liquidity and financing ability. However, as we are currently making our efforts to find high-quality large-scale reserves, strengthening capacity building in key areas, constructing new, and expanding some existing, refinery and petrochemical facilities and constructing several natural gas and oil pipelines, we may have to make 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. Our inability to obtain sufficient funding for our development plans could adversely affect our business, financial condition and results of operations.

Risks Related to Effectiveness of Internal Control over Financial Reporting

The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring every public company in the United States to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Although our management concluded that our internal control over our financial reporting as of December 31, 2019 was effective, and our independent registered public accounting firm has issued an attestation report, which concluded that our internal control over financial reporting was effective in all material aspects as of December 31, 2019, we may discover other deficiencies in the course of our future evaluation of our internal control over our financial reporting and may be unable to remediate such deficiencies in a timely manner. If we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to conclude that we have effective internal control over financial reporting on an ongoing basis, in accordance with the Sarbanes-Oxley Act. Moreover, effective internal control is necessary for us to produce reliable financial reports and is important to prevent fraud. As a result, our failure to maintain effective internal control 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, H Shares or A Shares.

Risks Related to Audit Reports Prepared by an Auditor who is not Inspected by the Public Company Accounting Oversight Board

As a company with shares registered with the U.S. Securities and Exchange Commission, or the SEC, and traded publicly in the United States, our independent registered public accounting firm is required under the laws of the United States to be registered with the Public Company Accounting Oversight Board, or the PCAOB, and undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. The PCAOB, however, is currently unable to inspect a registered public accounting firm’s audit work relating to a company’s operations in China where the documentation of such audit work is located in China. Accordingly, our independent registered public accounting firm’s audit of our operations in China is not subject to the PCAOB inspection. In recent years, the SEC and the PCAOB have issued a number of joint statements highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. As part of a continued regulatory focus in the United States on access to audit and other

 

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information currently protected by national law, in particular the PRC’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the New York Stock Exchange of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected. It is unclear if this proposed legislation would be enacted.

The PCAOB has conducted inspections of independent registered public accounting firms outside of China and has at times identified deficiencies in the audit procedures and quality control procedures of those accounting firms. Such deficiencies may be addressed in those accounting firms’ future inspection process to improve their audit quality. Due to the lack of PCAOB inspections of audit work undertaken in China, our investors do not have the benefit of the PCAOB inspection of our independent registered public accounting firm’s audit work and audit quality control procedures.

Risks Related to SEC Litigation Against the “Big Four” PRC-based Accounting Firms

On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting firms, including our independent registered public accounting firm, from, among other things, practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of “Big Four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of “Big Four” accounting firms agreed to settlement terms that include a censure, undertakings to make a payment to the SEC, procedures and undertakings as to future requests for documents by the SEC and possible additional proceedings and remedies should those undertakings not be adhered to.

Had the settlement terms not been adhered to, the Chinese member firms of “Big Four” accounting firms could have been suspended from practicing before the SEC, which could in turn delay the timely filing of our financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another registered public accounting firm to audit and issue an opinion on our financial statements and our internal control over financial reporting. A delinquency in our filing of the annual report with the SEC may result in the NYSE initiating delisting procedures, which could harm our reputation and have other material adverse effects on our overall growth and prospect.

Risks Related to Employee Misconduct

We may not be able to detect or prevent employee misconduct, including misconduct by senior management, and such misconduct may damage our reputation and could adversely affect the trading price of our ordinary shares and ADSs.

We have gradually reinforced and enhanced our internal control and corporate governance policies and procedures in order to strengthen our ability to detect and prevent employee misconduct. We cannot assure you, however, that we will be able to detect or prevent such misconduct in a timely fashion, or at all. If we fail to prevent employee misconduct, our reputation may be harmed, and the trading price of our ordinary shares and ADSs could be adversely affected.

Risks Related to Cyber Security

Our activities depend heavily on the reliability and security of our information technology (“IT”) systems. Our IT systems may suffer disruptions due to cyber-attack, computer intrusions and viruses, technical

 

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failure and disruptions, power and network outages or natural disasters. We have adopted multi-layer technological measures for prevention and detection of cybersecurity problems, and we also train our employees in order to improve their awareness and ability to detect and respond to cybersecurity situations. If our measures prove to be insufficient, the cybersecurity disruptions could damage or destroy assets, compromise business systems, result in proprietary information being altered, lost, or stolen; result in employee, customer, or third-party information or material intellectual property being compromised, cause physical harm to people or the environment, or otherwise disrupt our business operations. We could incur significant costs to remedy the effects of a major cybersecurity disruption in addition to costs in connection with resulting regulatory actions, litigation or reputational harm. As a result, we and our customers, employees, or third parties could be adversely affected, potentially having a material adverse effect on our business and financial conditions.

Item 4 — INFORMATION ON THE COMPANY

Introduction

History and Development of Our Company

Our legal name is “中国石油天然气股份有限公司” and its English translation is PetroChina Company Limited.

We are the largest oil and gas producer and seller occupying a leading position in the oil and gas industry in the PRC and one of the largest companies in the world. We are engaged in a broad range of petroleum and natural gas related activities, including the exploration, development, production and marketing of crude oil and natural gas; the refining of crude oil and petroleum products, as well as the production and marketing of basic petrochemical products, derivative chemical products and other chemical products; the marketing of refined oil products and trading; and the transmission of natural gas, crude oil and refined oil products as well as the sale of natural gas.

Currently, substantially all of our crude oil and natural gas reserves and production-related assets are located in China. Our exploration, development and production activities commenced in the early 1950s. Over more than six decades, we have conducted crude oil and natural gas exploration activities in many regions of China.

We commenced limited refining activities in the mid-1950s. Our chemicals operations commenced in the early 1950s. In the early 1960s, we began producing ethylene. Our natural gas transmission and marketing activities commenced in Sichuan in Southwestern China in the 1950s.

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. Since 2005, we have acquired interests in various oil and natural gas assets in several countries, which significantly expanded our overseas operations and effectively increased our oil and gas reserves and production volumes. We are currently assessing the feasibility of making further investments in international oil and gas markets. At the same time, we have been maintaining certain proportion of imported crude oil and natural gas in accordance with our needs. In 2019, we imported approximately 711.0 million barrels of crude oil, as compared to 640.6 million barrels and 684.9 million barrels of crude oil in 2017 and 2018, respectively.

We were 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 and liabilities of CNPC relating to its exploration and production, refining and marketing, chemicals and natural gas businesses.

On April 7, 2000, we completed a global offering of H Shares and ADSs. In September 2005, we completed a follow-on offering of over 3 billion H Shares at the price of HK$6.00 per share. In October 2007, we issued 4 billion A Shares at an issue price of RMB16.7 per share. The A Shares were listed on the Shanghai Stock Exchange on November 5, 2007. As of December 31, 2019, CNPC beneficially owned 146,882,339,136 A

 

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Shares and 291,518,000 H Shares in us, representing approximately 80.41% of our share capital in aggregate. The H Shares held by CNPC were through Fairy King Investments Limited, an overseas wholly owned subsidiary of CNPC.

For a description of our principal subsidiaries, see Note 18 to our consolidated financial statements.

Our headquarters are located at 9 Dongzhimen North Street, Dongcheng District, Beijing, China, 100007, and our telephone number at this address is (86-10) 5998-2622. Our website address is www.petrochina.com.cn. The information on our website is not part of this annual report. Our annual report on form 20-F and other reports filed electronically with the SEC can be found on the SEC’s website www.sec.gov.

Our Corporate Organization Structure

The following chart illustrates our corporate organization structure as of December 31, 2019.

 

 

LOGO

 

(1)

Indicates approximate shareholding.

(2)

Indicates approximate shareholding, including the 291,518,000 H Shares indirectly held by CNPC as of December 31, 2019 through Fairy King Investments Limited, a wholly owned overseas subsidiary of CNPC, and not including the 5,871,476,228 A Shares transferred to and held in a trust account as collaterals for the exchangeable bonds issued by CNPC.

(3)

Includes PetroChina Exploration & Development Research Institute, PetroChina Planning & Engineering Institute, IT Service Center, PetroChina Petrochemical Research Institute and several other companies.

Acquisitions and Divestment

On September 27, 2018, we entered into an equity purchase agreement with Total S.A. to acquire the 22.407% equity interest held by Total S.A. in Dalian West Pacific Petrochemical Co., Ltd. (“Dalian West Pacific”). On December 6, 2018, we entered into an equity purchase agreement with each of Sinochem Group Co., Ltd. and Sinochem International Oil (Hong Kong) Co. Ltd., to acquire 8.424% and 25.208% equity interests in Dalian West Pacific, respectively. On May 17, 2019, the transaction was completed. Upon the completion of the transaction, together with our existing equity interest, we held a total equity interest of 84.475% in Dalian West Pacific and it became one of our principal subsidiaries. We have accounted for this transaction as combination of entities under common control and restated our financial statements and certain of our operating data, including volumes of imported crude oil, production capacity of refineries, production and sales volumes of refined and chemical products, average realized prices of refined products, ect., as if Dalian West Pacific was consolidated since the earliest year presented.

For information on capital expenditures, please see “Item 5 — Operating and Financial Review and Prospects — Liquidity and Capital Resources — Capital Expenditures and Investments.”

 

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Exploration and Production

We engage in crude oil and natural gas exploration, development and production. 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. Meanwhile, we have enhanced our overseas cooperation and expanded our strategic presence in five major overseas oil and gas cooperation regions by conducting new project development. In 2019, the crude oil and natural gas produced by us at overseas regions accounted for 18.7% and 7.0% of our total production of crude oil and natural gas, respectively.

We currently hold exploration and exploitation licenses for oil and gas (including coal seam gas) covering a total area of approximately 288.0 million acres, including the exploration licenses covering a total area of approximately 256.9 million acres and the exploitation licenses covering a total area of approximately 31.1 million acres.

The following table sets forth the financial and operating data of our exploration and production segment for each of the years ended December 31, 2017, 2018 and 2019:

 

     Year Ended December 31,  
     2017      2018      2019  

Revenue (RMB in millions)

     505,430        658,712        676,320  

Profit from operations (RMB in millions)

     15,475        73,519        96,097  

Proved developed and undeveloped reserves

        

Crude oil (million barrels)

     7,481.3        7,640.8        7,253.3  

Natural gas (Bcf)

     76,887.6        76,467.0        76,236.0  

Production

        

Crude oil (million barrels)

     887.0        890.3        909.3  

Natural gas for sale (Bcf)

     3,423.4        3,607.6        3,908.0  

Reserves

As of December 31, 2019, our total estimated proved reserves of crude oil was approximately 7,253.3 million barrels and our total estimated proved reserves of natural gas was approximately 76,236.0 Bcf. As of December 31, 2019, proved developed reserves for crude oil and natural gas accounted for 75.5% and 52.3% of our total proved crude oil and natural gas reserves, respectively. Total proved hydrocarbon reserves, including our overseas crude oil reserves of 753.5 million barrels and overseas natural gas reserves of 1,702.9 Bcf, decreased by 2.1% from approximately 20,385.3 million BOE as of December 31, 2018 to approximately 19,959.3 million BOE as of December 31, 2019. Natural gas as a percentage of total proved hydrocarbon reserves increased from 62.5% as of December 31, 2018 to 63.7% as of December 31, 2019.

Approximately 54% and 33% of our estimated proved reserves as of December 31, 2019 and 2018, respectively, were assessed by our internal assessment team and audited by our independent engineering consultants. The other part of our estimated proved reserves as of December 31, 2018 and 2019 and all of the estimated proved reserves as of 2017 were based on the assessment performed by our independent engineering consultants according to the reserves assessment methodology generally adopted in the U.S. Our independent engineering consultants for 2017, 2018 and 2019 were DeGolyer and MacNaughton, Ryder Scott Company L.P., GLJ Petroleum Consultants and McDaniel & Associates Consultants Ltd. Our reserves estimates include only crude oil and natural gas which we believe can be reasonably produced within the current terms of our production licenses or within the terms of the licenses which we are reasonably certain can be renewed. See “Regulatory Matters — Exploration Licenses and Production Licenses” for a discussion of our production licenses. Also see “Item 3 — Key Information — Risk Factors — Risks Related to Oil and Gas Reserves” for a discussion of the uncertainty inherent in the estimation of proved reserves.

 

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Our reserves data in 2017, 2018 and 2019 were prepared in accordance with the SEC’s rules on oil and gas reporting.

Internal Controls Over Reserves Estimates

We have appointed a Reserves Assessment Directing Team, or the RAD Team. The leader of the RAD Team is our vice president in charge of our upstream business.

We have implemented a practicing professional certification regime to supervise our employees engaged in oil and gas reserves evaluation and auditing functions. We have set up a team of reserves auditors covering our headquarter office and regional companies to perform reserves evaluation and audits. Meanwhile, we have established a special reserves management department in our exploration and production segment. Each of the officers and employees of that department has over 20 years of experience in oil industry and many years of experience in SEC-guided reserves evaluation. All of the members of that department have been recognized as national-level reserves experts. Each regional company has established a reserves management committee and a multi-disciplinary reserves research office. Mr. Duan Xiaowen from the Reserves Administration Division of our exploration and production branch company, is the person in charge of our reserves estimation. Mr. Duan holds a bachelor’s degree in geology and a master’s degree in business administration. He has over 25 years of work experience in oil and gas exploration and development industry and has been engaged in reserves estimate and management for a long time. Since 2008, Mr. Duan has been involved in the supervision of reserves estimation and management in our company. In 2016, Mr. Duan became the division head primarily responsible for overseeing the preparation of the reserves estimates, estimation technology and management. The reserves research offices of the regional companies are responsible for estimating newly discovered reserves and updating the estimates of existing reserves. The results of our oil and gas reserves assessment are subject to a two-level review by both the regional companies and our exploration and production branch company, with final examination and approval by the RAD Team.

In addition, we commissioned independent assessment firms to independently reassess or audit our annually assessed proved reserves in accordance with relevant SEC rules. We disclose the reserves in accordance with the SEC requirements.

Third-Party Reserves Reports

DeGolyer and MacNaughton, an independent petroleum engineering consulting firm based in the United States, carried out an independent assessment and audit of our reserves in China and certain other countries as of December 31, 2017, 2018 and 2019. Mr. Thomas C. Pence, a senior vice president of DeGolyer and MacNaughton, is primarily responsible for supervising the preparation of our reserves report. Mr. Pence is a Registered Professional Engineer in Texas, a member of the International Society of Petroleum Engineers, and has over 36 years of experience in oil and gas reservoir studies and reserves evaluations.

Ryder Scott Company, L.P. (“Ryder Scott”), an independent petroleum engineering consulting firm based in the United States, carried out an independent assessment of certain of our selected petroleum assets such as in Chad, West Qurna and Peru as of December 31, 2017, 2018 and 2019. Mr. Timour Baichev, a vice president of Ryder Scott, was responsible for overseeing the estimate of the reserves, future production and income as stated in the reserves report. Mr. Timour Baichev is a licensed professional engineer and has over 35 years of experience in the petroleum reserves estimation and evaluation.

GLJ Petroleum Consultants (“GLJ”), a petroleum consulting firm based in Canada, carried out an independent assessment of our reserves for certain gas and oil properties in Canada as of December 31, 2017, 2018 and 2019. Ms. Trisha S. MacDonald was the project manager for the evaluation. She is a senior engineer and has over 10 years of relevant experience.

 

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McDaniel & Associates Consultants Ltd., a petroleum consulting firm with its headquarters in Canada, carried out an independent assessment of our reserves held through PetroKazakhstan Inc. as of December 31, 2017, 2018 and 2019. Mr. Cam T. Boulton, an executive vice president of McDaniel & Associates Consultants Ltd., was responsible for supervising the preparation of our reserves report. Mr. Boulton is a member of the Association of Professional Engineers and Geoscientists of Alberta and a member of Society of Petroleum Engineers. He has over 10 years’ experience in oil and gas reservoir evaluation.

None of the above consulting firms or their partners, senior officers or employees has any direct or indirect financial interest in our company and the remunerations to the firms are not in any way contingent upon reported reserves estimates.

For detailed information about our net proved reserves estimates, please refer to the summary reports of reserves filed herewith as exhibits to this annual report on Form 20-F.

 

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The following table sets forth our estimated proved reserves (including proved developed reserves and proved undeveloped reserves), proved developed reserves and proved undeveloped reserves of crude oil and natural gas as of December 31, 2017, 2018 and 2019.

 

     Crude Oil and
Condensate
    Natural Gas(1)     Combined  
     (Million barrels)     (Bcf)     (BOE, in millions)  

Proved developed and undeveloped reserves On a consolidated basis:

      

Reserves as of December 31, 2016

     7,437.8       78,711.8       20,556.4  

Revisions of previous estimates

     486.2       (1,750.8     194.6  

Extensions and discoveries

     346.3       3,350.0       904.6  

Improved recovery

     98.0       —         98.0  

Purchased

     —         —         —    

Production for the year

     (887.0     (3,423.4     (1,457.7

Reserves as of December 31, 2017

     7,481.3       76,887.6       20,295.9  

Revisions of previous estimates

     334.7       (1,377.9     105.2  

Extensions and discoveries

     427.5       4,564.9       1,188.3  

Improved recovery

     95.9       —         95.9  

Purchased

     191.7       —         191.7  

Production for the year

     (890.3     (3,607.6     (1,491.7

Reserves as of December 31, 2018

     7,640.8       76,467.0       20,385.3  

Revisions of previous estimates

     (49.7     (765.6     (177.1

Extensions and discoveries

     480.6       4,442.6       1,221.0  

Improved recovery

     90.9       —         90.9  

Production for the year

     (909.3     (3,908.0     (1,560.8

Reserves as of December 31, 2019

     7,253.3       76,236.0       19,959.3  

Proved developed reserves

      

As of December 31, 2017

     5,592.9       39,242.6       12,133.2  

Of which: domestic

     5,037.0       37,325.4       11,257.9  

Overseas

     555.9       1,917.2       875.3  

As of December 31, 2018

     5,843.1       40,128.2       12,531.1  

Of which: domestic

     5,203.4       38,433.2       11,609.0  

Overseas

     639.7       1,695.0       922.1  

As of December 31, 2019

     5,473.8       39,869.6       12,118.7  

Of which: domestic

     4,840.0       38,376.3       11,236.0  

Overseas

     633.8       1,493.3       882.7  

Proved undeveloped reserves

      

As of December 31, 2017

     1,888.4       37,645.0       8,162.7  

Of which: domestic

     1,584.9       37,376.7       7,814.3  

Overseas

     303.5       268.3       348.4  

As of December 31, 2018

     1,797.7       36,338.8       7,854.2  

Of which: domestic

     1,626.4       36,046.9       7,634.2  

Overseas

     171.3       291.9       220.0  

As of December 31, 2019

     1,779.5       36,366.4       7,840.6  

Of which: domestic

     1,659.8       36,156.8       7,686.0  

Overseas

     119.7       209.6       154.6  

Share of proved developed and undeveloped reserves in associates and joint ventures calculated by the equity method

      

As of December 31, 2017

     395.3       372.3       457.3  

As of December 31, 2018

     321.4       429.4       392.9  

As of December 31, 2019

     287.1       393.6       352.7  

 

(1)

Represents natural gas remaining after field separation for condensate removal and reduction for flared gas.

As of December 31, 2019, our total proved developed and undeveloped reserves on consolidated basis and on equity method, were 20,312 million BOE, including 7,540 million barrels of crude oil and condense, and 76,629.6 bcf of natural gas.

Our proved undeveloped reserves were 7,840.6 million BOE as of December 31, 2019. The main changes in our proved undeveloped reserves in 2019 included (i) an increase of 1,221.0 million BOE through extensions and

 

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discoveries; (ii) an increase of 90.9 million BOE through improved recovery; (iii) a decrease of 91.3 million BOE due to our optimization adjustment in the investment plans with respect to certain existing proved undeveloped reserves considering certain new discoveries; and (iv) the conversion of 1,234.2 million BOE of proved undeveloped reserves into proved developed reserves. In 2019, we spent RMB 166,115 million on developing proved undeveloped reserves. The overwhelming majority of our proved undeveloped reserves were situated around the oil fields that are currently producing. The majority of our proved undeveloped reserves are already scheduled for development within five years after initial booking.

Some of our proved undeveloped reserves of natural gas are being developed more than five years after their initial disclosure primarily due to the effect of long-term natural gas supply contracts. The sale of natural gas produced from our reserves located in China is subject to our long-term contractual obligations to provide a stable supply of natural gas to customers. We sell all of the natural gas through our pipelines and under long-term supply arrangements with customers.

There are mainly two types of long-term supply arrangements. The first is multi-year supply contracts with terms ranging from 20 to 30 years that can be extended upon mutual agreement. The second type is renewable annual contracts. The majority of the natural gas produced from our gas fields in China is put into our nationwide, long-range pipeline system to be sold to customers who have entered into multi-year supply contracts with us in the areas where the long-range pipeline system covers. A small portion of the natural gas produced by our company is put into local or internal pipeline systems to be sold to customers in the areas adjacent to our gas fields. These customers typically have formed de-facto long-term relationships with our company over the years and enter into supply contracts with us before the year end to determine the amount of gas to be purchased for the next year, with such contracts being renewed every year. In general, our supply relationships with customers under the annual contracts have existed for more than ten years.

Mainly as a result of our contractual obligations to ensure a long-term, stable supply of natural gas to customers, we must maintain a relatively large amount of proved undeveloped natural gas reserves and develop them over an extended period of time (in some cases, longer than five years).

The following tables set forth our crude oil and natural gas proved reserves and proved developed reserves by region as of December 31, 2017, 2018 and 2019.

 

     As of December 31,  
     2017      2018      2019  
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
 
     (Million barrels)  

Crude oil reserves

                 

Daqing

     1,513.7        1,283.9        1,487.4        1,272.5        1,300.9        1,137.4  

Changqing

     2,049.2        1,413.9        2,095.2        1,423.6        2,098.7        1,376.2  

Xinjiang

     927.3        855.9        1,000.0        894.6        975.8        834.3  

Other regions(1)

     2,991.1        2,039.2        3,058.2        2,252.4        2,877.9        2,125.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,481.3        5,592.9        7,640.8        5,843.1        7,253.3        5,473.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     As of December 31,  
     2017      2018      2019  
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
 
     (Bcf)  

Natural gas reserves(2)

                 

Changqing

     25,509.2        9,107.4        25,425.8        9,406.5        25,589.5        9,362.5  

Tarim

     22,918.7        14,054.7        22,805.9        13,844.9        22,633.8        14,184.2  

Chuanyu

     13,838.0        6,756.5        13,882.7        7,857.5        14,421.5        7,953.2  

Other regions(1)

     14,621.7        9,324.0        14,352.6        9,019.3        13,591.2        8,369.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     76,887.6        39,242.6        76,467.0        40,128.2        76,236.0        39,869.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents other oil regions in China and our overseas oil and gas fields.

(2)

Represents natural gas remaining after field separation for condensate removal and reduction for flared gas.

Exploration and Development

We are currently conducting exploration and development efforts in 12 provinces, two municipalities under the direct administration of the central government and three autonomous regions in China as well as in certain regions in other countries. 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.

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      Changqing      Others(1)      Total  
2017                  
   Net exploratory wells drilled(2)      217        132        868        608        1,825  
  

Crude oil

     184        69        539        346        1,138  
  

Natural gas

     13        11        59        108        191  
  

Dry(3)

     20        52        270        154        496  
   Net development wells drilled(2)      3,205        1,520        6,020        3,731        14,476  
  

Crude oil

     3,185        1,504        4,217        2,898        11,804  
  

Natural gas

     10        13        1,746        820        2,589  
  

Dry(3)

     10        3        57        13        83  
2018                  
  

Net exploratory wells drilled(2)

     231        130        885        532        1,778  
  

Crude oil

     207        100        503        299        1,109  
  

Natural gas

     15        11        65        89        180  
  

Dry(3)

     9        19        317        144        489  
   Net development wells drilled(2)      3,421        1,630        6,233        3,893        15,177  
  

Crude oil

     3,398        1,619        4,086        2,990        12,093  
  

Natural gas

     16        11        2,098        885        3,010  
  

Dry(3)

     7        —          49        18        74  
2019                  
  

Net exploratory wells drilled(2)

     211        157        584        627        1,579  
  

Crude oil

     195        148        359        381        1,083  
  

Natural gas

     2        9        49        109        169  
  

Dry(3)

     14        —          176        137        327  
   Net development wells drilled(2)      3,008        1,274        5,948        4,273        14,503  
  

Crude oil

     2,990        1,270        4,319        3,243        11,822  
  

Natural gas

     12        4        1,586        1,007        2,609  
  

Dry(3)

     6        —          43        23        72  

 

(1)

Represents the Liaohe, Jilin, Huabei, Dagang, Sichuan, Tarim, Tuha, Qinghai, Jidong, Yumen, Zhejiang, southern and other 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.

 

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We had 885 wells in the process of being drilled and 7,843 wells with multiple completions as of December 31, 2019.

Oil-and-Gas Properties

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, 2019.

 

                   Acreage(1)
(Thousand acres)
 
     Productive Wells(1)      Developed      Undeveloped  

Oil Region

   Crude
Oil
     Natural
Gas
     Crude
Oil
     Natural
Gas
     Crude
Oil
     Natural
Gas
 

Daqing

     77,788        650        1,289.15        104.90        637.13        139.29  

Changqing

     66,537        18,620        1,553.13        6,694.83        914.67        2,908.71  

Xinjiang

     35,171        305        428.70        63.44        289.04        23.47  

Other regions(2)

     76,079        6,351        1,735.10        1,606.28        998.61        2,568.13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     255,575        25,926        5,006.08        8,469.45        2,839.45        5,639.60  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 Liaohe, Jilin, Huabei, Dagang, Southwestern, Tarim, Tuha, Qinghai, Jidong, Yumen, Zhejiang, Southern and other oil regions.

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 years ended December 31, 2017, 2018 and 2019.

 

     For the Year Ended
December 31,
     % of
2019 Total
 
     2017      2018      2019  

Crude oil production(1)

           

(thousand barrels per day, except percentages or otherwise indicated)

           

Daqing

     668.8        632.6        608.7        24.4  

Changqing

     479.9        480.9        488.8        19.6  

Xinjiang

     229.0        232.2        252.1        10.1  

Other(2)

     1,052.4        1,093.4        1,141.6        45.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,430.1        2,439.1        2,491.2        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Annual production (million barrels)

     887.0        890.3        909.3     

Average sales price (US$ per barrel)

     50.64        68.28        60.96     

Natural gas production(1)(3)

           

(million cubic feet per day, except percentages or otherwise indicated)

           

Changqing

     3,121.7        3,275.3        3,481.3        32.5  

Tarim

     2,277.3        2,353.4        2,535.2        23.7  

Chuanyu

     1,844.1        1,979.9        2,375.6        22.2  

Other(4)

     2,136.1        2,275.3        2,314.9        21.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,379.2        9,883.9        10,707.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Annual production (Bcf)

     3,423.4        3,607.6        3,908.0     

Average realized price (US$ per Mcf)

     5.18        5.85        5.39     

 

(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 Liaohe, Jilin, Huabei, Dagang, Tarim, Tuha, Qinghai, Jidong, Yumen and other oil regions and our share of overseas production as a result of our acquisition of overseas assets.

(3)

Represents production of natural gas for sale.

(4)

Represents production from the Daqing, Qinghai, Tuha, Xinjiang, Liaohe, Huabei, Dagang, Jilin, Jidong, Yumen and other oil and gas regions and our share of overseas production as a result of our acquisition of overseas assets.

 

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In 2019, we supplied a substantial majority of our total crude oil sales to our own refineries. In addition, we and Sinopec supply crude oil to each other’s refineries to allow supplies to be easily obtained from nearby resources.

The following table sets forth our average sales prices and average lifting costs of crude oil and natural gas of our company on an overall basis and those in China in 2017, 2018 and 2019.

 

     Crude Oil Average
Realized Prices

(RMB/ton)
     Natural Gas
Average Realized Prices
(RMB/Kilostere)
     Average Lifting
Cost

(US$/BOE)
 

2017

        

Overall

     2,526        1,235        11.53  

—China

     2,494        1,225        12.71  

2018

        

Overall

     3,338        1,367        12.31  

—China

     3,289        1,338        13.55  

2019

        

Overall

     3,107        1,313        12.11  

—China

     3,097        1,437        13.29  

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. In 2017, 2018 and 2019, our crude oil production volume in the Daqing oil region was 668.8 thousand barrels, 632.6 thousand barrels and 608.7 thousand barrels per day, respectively. As of December 31, 2019, we produced crude oil from 40 fields in the Daqing oil region.

As of December 31, 2019, our proved crude oil reserves in the Daqing oil region were 1,300.9 million barrels, representing 17.9% of our total proved crude oil reserves. As of December 31, 2017 and 2018, the proved crude oil reserves in our Daqing oil region were 1,513.7 million barrels and 1,487.4 million barrels, respectively. In 2019, the crude oil reserves-to-production ratio of the Daqing oil region was 5.7 years.

Daqing’s crude oil has 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.

Changqing Oil and Gas Region

The Changqing oil and gas region covers parts of Shaanxi Province, Gansu Province, Ningxia, Inner Mongolia and Shanxi Province. In 2019, we discovered the Qingcheng oilfied in the Changqing oil and gas region. As of December 31, 2019, the proved reserves in the Qingcheng oilfied were 121.1 million barrels. As of December 31, 2019, our proved crude oil reserves in the Changqing oil region were 2,098.7 million barrels, representing 28.9% of our total proved crude oil reserves. In 2019, our crude oil production in the Changqing oil region averaged 488.8 thousand barrels per day, representing approximately 19.6% of our total daily crude oil production. In 2019, the crude oil reserves-to-production ratio at the Changqing oil region was 11.8 years.

In the early 1990s, we discovered the Changqing oil and gas region, which had total proved natural gas reserves of 25,589.5 Bcf as of December 31, 2019, representing 33.6% of our total proved natural gas reserves. In January 2001, we discovered the Sulige gas field in the Changqing oil and gas region, which had total proved natural gas reserves of 14,913.9 Bcf as of December 31, 2019. Sulige gas field is currently the largest gas field in China. In 2019, the Changqing oil and gas region produced 1,270.7 Bcf of natural gas for sale, representing an increase of 6.3% from 1,195.5 Bcf in 2018.

 

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Xinjiang Oil Region

The Xinjiang oil region is one of our four largest crude oil producing properties and 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 900,000 acres.

As of December 31, 2019, our proved crude oil reserves in the Xinjiang oil region were 975.8 million barrels, representing 13.5% of our total proved crude oil reserves. In 2019, our oil fields in the Xinjiang oil region produced an average of 252.1 thousand barrels of crude oil per day, representing approximately 10.1% of our total daily crude oil production. In 2019, the crude oil reserves-to-production ratio at the Xinjiang oil region was 10.6 years.

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 590,000 acres. In 1998, we discovered the Kela 2 natural gas field in the Tarim oil and gas region. In 2019, we discovered the Bozi-Dabei gas field in the Tarim oil and gas region. As of December 31, 2019, the proved reserves in the Bozi-Dabei gas field were 3,937.3 Bcf. As of December 31, 2019, the proved natural gas reserves in the Tarim oil and gas region were 22,633.8 Bcf, representing 29.7% of our total proved natural gas reserves.

In 2019, we produced 925.4 Bcf 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-East Gas Pipelines.

Chuanyu Gas Region

We began natural gas exploration and production in the Chuanyu gas region in the 1950s. The Chuanyu gas region covers a total area of approximately 2.3 million acres. The natural gas reserves-to-production ratio in the Chuanyu gas region was approximately 16.6 years in 2019. As of December 31, 2019, we had 115 natural gas fields under development in the Chuanyu gas region. In 2019, we discovered the Sichuan shale gas field in the Chuanyu gas region. As of December 31, 2019, the proved reserves in the Sichan shale gas field were 1,405.3 Bcf.

As of December 31, 2019, our proved natural gas reserves in the Chuanyu gas region were 14,421.5 Bcf, representing 18.9% of our total proved natural gas reserves and an increase of 3.9% from 13,882.7 Bcf as of December 31, 2018. In 2019, our natural gas production for sale in the Chuanyu gas region reached 867.1 Bcf, representing 22.2% of our total natural gas production for sale.

 

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Refining and Chemicals

We now operate 30 enterprises located in nine provinces, four autonomous regions and three municipalities to engage in refining of crude oil and petroleum products, as well as the production and marketing of basic petrochemical products, derivative chemical products and other chemical products.

The comparative data for 2017 and 2018 throughout the section of “Refining and Chemical” was restated to reflect our acquisition of the interest in Dalian West Pacific as if it was consolidated from the first financial year presented. Please refer to “Item 4 — Information on the Company — Acquisitions and Divestment”) and Note 40 to our consolidated financial statements.

The following table sets forth the financial and operating data of our refining and chemicals segment for each of the years ended December 31, 2017, 2018 and 2019.

 

     Year Ended December 31,  
     2017      2018      2019  

Revenue (RMB in millions)

     735,486        911,224        902,679  

Profit from operations (RMB in millions)

     43,075        44,701        13,764  

Crude oil processed (million barrels)

     1,067.9        1,180.5        1,228.4  

Crude oil primary distillation capacity (million barrels/year)

     1,420.9        1,454.2        1,463.0  

Production of refined oil products (thousand tons)

     97,499        111,148        117,791  

Refining

Refined Products

We produce a wide range of refined products at our refineries. Some of the refined products are for our internal consumption and used as raw materials in our petrochemical operation. The table below sets forth production volumes for our principal refined products for each of the years ended December 31, 2017, 2018 and 2019.

 

     Year Ended December 31,  

Principal Product

   2017      2018      2019  
     (In thousand tons)  

Diesel

     50,053        54,311        54,628  

Gasoline

     39,074        45,794        50,430  

Kerosene

     8,372        11,043        12,733  

Lubricants

     1,636        1,600        1,630  

Fuel oil

     2,115        1,937        1,672  

Naphtha

     10,242        11,950        12,829  

Our Refineries

Most of our refineries are strategically located close to our crude oil production and storage bases along our crude oil and refined product transmission pipelines and railways, which provide our refineries with secure supplies of crude oil and facilitate our distribution of refined products to the domestic markets.

In 2019, facing excessive oil refining capacity in China, to enhance our competition and efficiency in the refining and chemical business, we vigorously promoted the restructuring of refining and chemical products, actively increased the production of chemical products, while striving to reduce the production of refined oil products, with production of high value-added products increasing significantly and jet fuel and high-grade gasoline production achieving double-digit growth. We reduced the diesel-gasoline ratio from 1.19 in 2018 to 1.08 in 2019.

In 2017, 2018 and 2019, our exploration and production operations supplied approximately 63.8%, 56.7% and 55.7%, respectively, of the crude oil processed in our refineries.

 

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The table below sets forth certain operating statistics regarding our refineries as of December 31, 2017, 2018 and 2019.

 

     As of December 31,  
     2017      2018      2019  

Primary distillation capacity(1) (thousand barrels per day)

        

Jilin Petrochemical

     198.4        198.4        198.4  

Fushun Petrochemical

     222.7        222.7        222.7  

Lanzhou Petrochemical

     212.6        212.6        212.6  

Dushanzi Petrochemical

     202.4        202.4        202.4  

Dalian Petrochemical

     415.0        415.0        415.0  

Dalian West Pacific

     202.4        202.4        202.4  

Guangxi Petrochemical

     202.4        202.4        202.4  

Sichuan Petrochemical

     202.4        202.4        202.4  

Yunnan Petrochemical

     263.2        263.2        263.2  

Other refineries

     1,771.4        1,862.5        1886.8  
  

 

 

    

 

 

    

 

 

 

Total

     3,892.9        3,984.0        4,008.3  
  

 

 

    

 

 

    

 

 

 

 

(1)

Represents the primary distillation capacity of crude oil and condensate.

 

     As of December 31,  
     2017      2018      2019  

Refining throughput (thousand barrels per day)

        

Jilin Petrochemical

     181.6        164.4        186.1  

Fushun Petrochemical

     158.9        175.1        176.4  

Lanzhou Petrochemical

     178.3        187.7        185.2  

Dushanzi Petrochemical

     149.1        147.2        124.9  

Dalian Petrochemical

     217.4        323.0        324.4  

Dalian West Pacific

     139.6        158.0        146.0  

Guangxi Petrochemical

     143.3        186.6        196.5  

Sichuan Petrochemical

     147.5        131.5        177.2  

Yunnan Petrochemical

     81.4        204.4        216.9  

Other refineries

     1,528.6        1,556.4        1,632.0  
  

 

 

    

 

 

    

 

 

 

Total

     2,925.7        3,234.3        3,365.6  
  

 

 

    

 

 

    

 

 

 

In each of the years ended December 31, 2017, 2018 and 2019, the average utilization rate of the primary distillation capacity at our refineries was 79.1%, 82.5% and 85.1%, respectively, and the average yield for our four principal refined products (gasoline, kerosene, diesel and lubricants) at our refineries was 68.6%, 70.6% and 71.8%, respectively. “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 years ended December 31, 2017, 2018 and 2019, the overall refining yield at our refineries was 93.3%, 93.7% and 93.5%, respectively.

In 2019, Jilin Petrochemical, Fushun Petrochemical, Lanzhou Petrochemical, Dushanzi Petrochemical, Dalian Petrochemical, Dalian West Pacific, Guangxi Petrochemical, Sichuan Petrochemical and Yunnan Petrochemical were our leading refineries in terms of both primary distillation capacity and refining throughput.

To maintain efficient operations of our facilities and lower production costs, we have endeavored to achieve the most cost-efficient proportions of various types of crude oil in our refining process. We purchase a portion of our crude oil requirements from third-party international suppliers located in different countries and regions. In 2019, we purchased crude oil sourced from Iran and Russian companies which are subject to U.S. economic sanctions, and Sudan which is designated as a State Sponser of Terrorism by the U.S., for use in our refining operations. The revenue generated from our refineries from the crude oil sourced from the Russian companies Rosneft and Transneft, Iran and Sudan accounted for 3.2%, 0.08% and 0.1% of our total revenue in 2019. See “Item 3 — Key Information — Risk Factors — Risks Related to Outbound Investments and Trading.”

 

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Chemicals

Most of our chemical plants are close to our refineries and are connected to the refineries by pipelines, providing additional production flexibility and opportunities for cost competitiveness. The raw materials required by our chemicals operations are mainly supplied by our own refineries.

Our Chemical Products

The table below sets forth the production volumes of our principal chemical products for each of the years ended December 31, 2017, 2018 and 2019.

 

     Year Ended December 31,  
       2017          2018          2019    
     (In thousand tons)  

Basic petrochemicals

        

Ethylene

     5,764        5,569        5,863  

Derivative petrochemicals

        

Synthetic resin

     9,404        9,165        9,580  

Synthetic fiber raw materials and polymer

     1,390        1,388        1,309  

Synthetic rubber

     809        869        910  

Other chemicals

        

Urea

     1,439        828        1,208  

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. As of December 31, 2019, our annual ethylene production capacity was 6,010 thousand tons. We produce a number of synthetic resin products, including polyethylene, polypropylene and ABS. As of December 31, 2019, our annual production capacities for polyethylene, polypropylene and ABS were 5,062 thousand tons, 4,220 thousand tons and 705 thousand tons, respectively. 

Marketing of Chemicals

Our chemical products are distributed to a number of industries including the 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 years ended December 31, 2017, 2018 and 2019.

 

     Year Ended December 31,  

Product

   2017      2018      2019  
     (In thousand tons)  

Derivative petrochemicals

  

Synthetic resin

     9,166.0        9,489.1        9,777.8  

Synthetic fiber

     76.9        75.8        39.1  

Synthetic rubber

     813.6        899.6        1,011.1  

Intermediates

     10,324.6        10,480.2        11,354.7  

Other chemicals

        

Urea

     1,171.8        732.3        1,561.2  

 

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Table of Contents

Marketing

We engage in the marketing of refined products through 36 regional sales companies including two distribution branch companies, one lubricant branch company, one fuel oil company and one convenience store chain company, PetroChina uSmile Company Limited, operated under the trade name “uSmile”. These operations include the transportation and storage of the refined products, the wholesale, retail and export of gasoline, diesel, kerosene, lubricant, asphalt and other refined products, and non-oil business. In addition, with respect to our international trading sector, we have optimized the import and export resources, focused on synergies, actively expanded into the high-end markets, and maintained growth in trading volume and improved operation results.

The following table sets forth the financial and operating data of our marketing segment for each of the years ended December 31, 2017, 2018 and 2019:

 

     Year Ended December 31,  
     2017      2018     2019  

Revenue (RMB in millions)

     1,660,456        2,003,105       2,165,391  

Profit /(Loss) from operations (RMB in millions)

     8,279        (6,450     (565

External sales volume of refined oil products (thousand tons)*

     170,735        178,648       187,712  

 

*

The comparative data for 2017 and 2018 in the table was restated as if Dalian West Pacific was consolidated since the earliest year presented. Please refer to “Item 4 — Information on the Company — Acquisitions and Divestment” and Note 40 to our consolidated financial statements.

With respect to our domestic sales business, 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, 2019, our marketing network consisted of:

 

   

Numerous nationwide wholesale distribution outlets. Almost all of these outlets are located in high demand areas across China, particularly in the coastal areas, along major railways and along the Yangtze River; and

 

   

22,365 service stations, consisting of 20,955 service stations owned and operated by us and 1,410 franchised service stations owned and operated by third parties.

In addition, in order to adapt to changes in market condition and customer demand, we enhanced integrated marketing for refined products, fuel cards, non-oil business, lubricants and gas, and enhanced marketing through internet. We optimized our supply chain, upgraded the facilities and services at our gas stations, and enhanced the marketing of our non-oil businesses.

Our international trade business actively played a role in adjusting supply and demand, creating profit through business synergy. We optimized crude oil and natural gas imports, strengthened oil and gas sales, expanded refined oil exports and the high-end market, strengthened terminal network layout and cross-region and cross-city operations, enhanced transactions ability, and effectively managed operational risks.

The PRC government and other institutional customers, including railway, transportation and fishery operators, are long-term purchasers of the gasoline and diesel that we produce. We sell gasoline and diesel to these customers based on the supply prices for special customers published by the PRC government. See “— Regulatory Matters — Pricing — Refined Products” for a discussion of refined product pricing.

In 2017, 2018 and 2019, our share in China’s refined oil retail market was 37.0%, 36.4% and 36.7%, respectively.

 

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The following table sets forth our sales volumes of diesel, gasoline, kerosene and lubricants for each of the years ended December 31, 2017, 2018 and 2019.

 

     Year Ended December 31,  

Product

   2017      2018      2019  
     (In thousand tons)  

Diesel

     87,324        86,904        90,163  

Gasoline

     65,293        71,125        76,366  

Kerosene*

     18,118        20,619        21,183  

Lubricants

     1,283        1,158        977  

 

*

The comparative data for 2017 and 2018 in the table was restated as if Dalian West Pacific was consolidated since the earliest year presented. Please refer to “Item 4 — Information on the Company — Acquisitions and Divestment” and Note 40 to our consolidated financial statements.

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. Our gasoline and diesel sales also include the amount we transferred to our retail operations.

Retail Marketing

The weighted average sales volume of gasoline and diesel per business day at our service station network was 10.5 tons, 10.3 tons and 10.1 tons per service station in 2017, 2018 and 2019, respectively.

 

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Natural Gas and Pipeline

We are China’s largest natural gas transporter and seller in terms of sales volume. We sell natural gas primarily to industrial companies, power plants, fertilizer and chemical companies, commercial users and municipal utilities owned by local governments. In addition, we also transmit crude oil and refined products in the natural gas and pipeline segment.

The following table sets forth the financial and operating data of our natural gas and pipeline segment for each of the years ended December 31, 2017, 2018 and 2019:

 

     As of December 31 or Year
Ended December 31,
 
     2017      2018      2019  

Revenue (RMB in millions)

     295,786        362,626        391,023  

Profit from operations (RMB in millions)

     15,688        25,515        26,108  

Total length of natural gas pipelines (km)

     51,315        51,751        53,291  

Total length of crude oil pipeline (km)

     19,670        20,048        20,091  

Total length of refined oil products pipeline (km)

     11,389        11,728        13,762  

Total volume of natural gas sold (Bcf)

     7,026.2        7,654.7        9,149.8  

Our Principal Markets for Natural Gas

We sell our natural gas across China. Our natural gas supply covers all provinces, municipalities under direct administration of the central government and autonomous regions of China, other than Macau and Taiwan. We supply natural gas to Tibet by LNG tanker trucks.

The Bohai Rim is one of our principal markets for natural gas. The natural gas supplied to Bohai Rim is primarily sourced from the Changqing oil and gas region and transmitted through the Shaanxi to Beijing natural gas pipeline system.

The Yangtze River Delta and Southwestern region in China are also our principal markets. We supply natural gas to these regions primarily from our domestic production sites and through long-distance pipelines and by LNG tanker trucks.

In addition, provinces such as Inner Mogolia, Hubei, Anhui and Fujian consume more and more natural gas and have become another significant natural gas market of us.

Driven by environmental and efficiency concerns, the PRC government is increasingly encouraging industrial and residential use of natural gas. The PRC government has adopted a number of laws and regulations to require local governments to increase the use of clean energy, such as natural gas and liquefied petroleum gas, to reduce carbon emissions and environmental pollution. Several local governments have adopted policies to facilitate an increase in natural gas consumption in order to reduce air pollution. The PRC government has also adopted preferential value-added tax rate for natural gas production. The current value-added tax rate for natural gas is 9%, while the value-added tax rate for crude oil and refined oil products is 13%. In 2017, the PRC government issued a new policy to accelerate the large-scale and high-efficient utilization of natural gas in urban gas, industrial fuel, gas-fired power generation and transportation, and to significantly increase the proportion of use of natural gas in primary energy consumption. The overall goal of the policy is that the proportion of natural gas in the primary energy consumption to reach around 10% by 2020 and 15% by 2030, and the underground gas storage to form an effective working gas volume of over 14.8 billion cubic meters by 2020 and over 35 billion cubic meters by 2030.

We believe that these policies have had a positive effect on the development and consumption of natural gas in our existing or potential markets for natural gas. We believe that these favorable policies will continue to benefit our natural gas business.

 

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Natural Gas Transmission Infrastructure

As of December 31, 2019, we owned and operated approximately 53,291 kilometers of natural gas pipelines in China, representing the vast majority of China’s onshore natural gas pipelines. Our existing natural gas pipelines form a national trunk network for natural gas supply and the regional natural gas supply networks in Northwestern, Southwestern, Northern and central China as well as the Yangtze River Delta. Our main natural gas pipelines in operation include the First West-East Gas Pipeline, the Second West-East Gas Pipeline, the Third West-East Gas Pipeline, Zhong County-Wuhan Gas Pipeline, the four Shaanxi-Beijing Gas Pipelines and the Sebei-Lanzhou Gas Pipelines. In 2019, our main natural gas pipelines under construction included the middle section of the China-Russia East Natural Gas Pipeline, the Fujian-Guangdong branch line of the Third West-East Gas Pipeline and a number of other interconnection projects.

The China-Russia East Natural Gas Pipeline will extend from Heihe to Shanghai with a total length of 3,691 kilometers and a designed annual throughput capacity of 38.0 billion cubic meters. The total length of the north section of the China-Russia East Natural Gas Pipeline is 715 kilometers, which has been completed and put into operation on December 2, 2019. The total length of the middle section will be 1,110 kilometers, which is expected to be completed and put into operation by November 2020. The total length of the south section will be 1,446 kilometers, which is expected to be completed and put into operation by June 2025.

In 2018, we started the construction of the Fujian-Guangdong branch line of the Third West-East Gas Pipeline, which has a total length of 575 kilometers and a designed annual throughput capacity of 5.8 billion cubic meters. We completed the construction of the Guangzhou-Chaozhou section of the branch line in December 2019.

Crude Oil Transportation Infrastructure

We have an extensive network for transportation, storage and distribution of crude oil, which covers many regions of China. As of December 31, 2019, we had crude oil pipelines of 20,091 kilometers. Our main crude oil pipelines in operation include the China-Russia Crude Oil Pipeline, the Western Crude Oil Pipeline, the Northeastern Crude Oil Pipeline and the Lanzhou-Chengdu Crude Oil Pipeline.

Refined Product Transportation Infrastructure

As of December 31, 2019, we had refined product pipelines of 13,762 kilometers. Our main refined product pipelines in operation include the Lanzhou-Zhengzhou-Changsha Refined Oil Pipeline, the Western Refined Oil Pipeline, and the Lanzhou-Chengdu-Chongqing Refined Oil Pipeline. In 2019, we completed the construction of a major part of the Jinzhou-Zhengzhou Refined Oil Pipeline and expect to complete construction and put it into operation by the end of 2020. This line has a total length of 1,666.12 kilometers and a designed throughput capacity of 13 million tons per annum.

During the past three years, we have not experienced any delays in delivering natural gas, crude oil and refined products due to pipeline capacity constraints.

Reform of the Oil and Gas Pipeline Network Operation Mechanism

On March 19, 2019, the PRC government passed the Opinions on Implementation of the Reform of the Operation Mechanism of Oil and Gas Pipeline Network (the “Opinion”). According to the Opinion, the PRC government will carry out reforms of the oil and gas pipeline operation mechanism. An oil and gas pipeline network operator will be established, which will have diversified investors with state-owned capital holding the majority stake. The Opinion states that the PRC government will form an oil and gas market system with multi-channel suppliers in the upstream, an integrated pipeline network with high efficiency in the middle-stream, and a fully competitive market in the downstream, to improve the efficiency of oil and gas resource allocation. On

 

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May 24, 2019, a number of Chinese government agencies jointly issued the Regulations on the Fair Opening of Oil and Gas Pipeline Network Facilities, pursuant to which, from May 24, 2019, oil and gas pipeline network operators shall provide non-discriminatory services of oil and gas transportation, storage, gasification, loading and unloading, transshipment to users who meet the accessing conditions; without proper reasons, they must not delay the signing of, or refuse to sign service contracts with users who meet the accessing conditions, and must not impose unreasonable requirements. On December 9, 2019, the Chinese government established China Oil & Gas Pipeline Network Corporation (the “National Pipeline Network Company”). The National Pipeline Network Company is in discussions with the Company regarding a possible acquisition of certain pipeline assets from the Company. As at the date of this report, no definitive agreement has been reached. For this potential transaction, the Company will continue to adhere to the principles of fairness, equality and marketization in order to serve the interests of the shareholders of the Company as a whole. Please refer to “Item 3 — Risk Factors — Risks Related to Government Regulation”

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 China Petrochemical Corporation, or Sinopec Group, 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 other domestic oil and gas companies for the acquisition of desirable crude oil and natural gas prospects. Similarly, we face some competition in the development of offshore oil and gas resources. In 2019, the Chinese government lifted the restrictions on foreign investment in oil and gas exploration and development, which had been limited to joint ventures and cooperation, introduced market competition mechanisms in the oil and gas industry to support private enterprises participating in oil and gas exploration and development. These policy changes mean that the barriers to entering the area of oil and gas exploration have been removed, and the Company’s exploration and development business may face heightened competition from foreign capital and private enterprises. In addition, the competition of international energy supply has intensified, the crude oil market continues to fluctuate, and price volatility has become frequent. We believe that our experience in crude oil and natural gas exploration and production and our advanced exploration and development technologies that are suitable for the diverse geological conditions in China will enable us to maintain our dominant position in discovering and developing crude oil and natural gas reserves in China.

Refining and Chemicals Operations and Marketing Operations

We compete with our primary competitor Sinopec in our refining and chemicals operations and marketing operations on the basis of price, quality and customer service. Most of our refineries and chemical plants are located in the Northeastern and Northwestern regions of China where we have the dominant market share for refined products and chemical products. We sell the remainder of our refined products and chemical products to 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. Moreover, as the newly constructed facilities of CNOOC commenced operation in the same region, large quantity of chemical products have been marketed into that area, which made the competition even intense. We expect that we will continue to face competition in our refined products and chemical products sales in these regions.

 

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In recent years, China has gradually liberalized the restrictions on market access for the refining and chemical industry. The refining and chemical industry led by us and Sinopec has been rapidly transformed into diversified market participants. Some large state-owned enterprises and private enterprises have entered the refining and chemical industry. Local refineries have rapidly emerged, and international refining and chemical companies have recently opened large refineries in China. The restrictions on foreign investment in wholesale and retail chains of refined oil have been further liberalized. In 2019, the Chinese government issued policies to further liberalize market access for private enterprises, encouraging private enterprises to enter the industries of refineries and sales, and to construct storage and transportation infrastructure for refined oil, and encourage qualified enterprises to participate in crude oil imports and refined oil exports. We expect to continue to face strong market competition.

We also face competition from imported refined products and chemical products in terms of price and quality. In recent years, competition from foreign producers of refined products and chemical products has increased as a result of changes in China’s tariff policies toward imported refined products and chemical products. In response, we have sought to reduce our production costs, improve the quality of our products and optimize our product mix.

In addition, we also face competition from alternative energies. China has become the world’s largest user of new and renewable energy sources. The sharing economy and alternative energy sources are developing rapidly. As the preferential policies towards natural gas, electric power, hydrogen, and other sources of energy for vehicles have been implemented, alternative eneregies have been evolving iterately resulting in a continous slow down in the growth rate of refined oil consumption.

Natural Gas and Pipeline Operations

We are the largest natural gas supplier in the PRC in terms of sales volume. Currently, we mainly face competition from Sinopec, CNOOC, coal-based natural gas producers and importers of natural gas and LNG in the supply of natural gas to Beijing, Tianjin, Hebei Province, Shanghai, Jiangsu 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 Chongqing Municipality and sells natural gas to users in places such as Sichuan Province, Chongqing, Hunan Province, Jiangsu Province, Zhejiang Province and Shanghai. We have also expanded into the coastal regions in Eastern and Southern China where we may face competition from CNOOC and Sinopec. The PRC government has published reform policy with an aim to integrate existing pipeline resources for independent operation and intensify market competition. (See “Item 3 — Risk Factors — Risks related to Government Regulation”, “Item 4 — Information on the Company — Natural Gas and Pipeline”) and “Item 5 — Operating and Financial Review and Prospects — Trend Information”). We believe that our advantages in natural gas resources, production, sales and technologies will enable us to continue to be a dominant player in the natural gas markets in China.

See “Item 3 — Key Information — Risk Factors — Risks Related to Competition”.

Environmental Matters

Like other companies in the industries in which we operate, we are subject to numerous national, regional and local environmental laws and regulations promulgated by the governments in those jurisdictions. These laws and regulations concern our oil and gas exploration and production operations, petroleum and petrochemical products and other activities. In particular, some of 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;

 

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limit or prohibit drilling activities within protected areas and certain other areas; and

 

   

impose penalties for pollution resulting from oil, natural gas and petrochemical operations, including criminal and civil liabilities for serious pollution.

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 are subject to laws and regulations relating to the generation, handling, storage, transportation, disposal and treatment of solid 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 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 RMB333 million in 2017. In 2018, the PRC government began to charge environmental protection tax instead of pollutant discharge fees. As we have adopted advanced pollution control technologies, some of our enterprises have obtained reductions of environmental protection tax. In 2018 and 2019, we paid a total environmental protection tax of approximately RMB140 and RMB139 million, respectively.

To meet future environmental obligations, we are engaged in a continuous program to develop effective environmental protection measures. This program includes:

 

   

building environment-friendly projects;

 

   

reducing sulfur content in gasoline and diesel fuel;

 

   

reducing olefins and benzene content in gasoline, and continuously reducing emissions and effluents from our refineries and petrochemical plants; and

 

   

developing and installing monitoring systems at our pollutant discharge openings.

Our capital expenditures on environmental programs in 2017, 2018 and 2019 were approximately RMB4.17 billion, RMB2.70 billion and RMB2.30 billion, respectively.

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. These 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 effective safety production measures we have adopted previously.

We believe that these preventative measures have helped reduce the possibility of incidents that may result 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.

See “Item 3 — Key Information — Risk Factors — Risks Related to Environmental Protection and Safety” and “Item 3 — Key Information — Risk Factors — Risks Related to Climate Change”.

 

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Properties, Plants and Equipment

We own substantially all of our properties, plants and equipment relating to our business activities. We hold exploration and production licenses covering all of our interests in developed and undeveloped acreage, oil and natural gas wells and relevant facilities.

See the description of our properties, plants and equipment relating to our business activities included elsewhere in this “Item 4 — Information on the Company” and “Item 7 — Major Shareholders and Related Party Transactions — Related Party Transactions”.

Intellectual Property

Our company logo “ LOGO ” is jointly owned by us and CNPC and has been used since December 26, 2004. Together with CNPC, we have applied for trademark registrations of the logo with the State Trademark Bureau of the PRC. To date, most of our applications for registration of LOGO and our other trademarks have been approved and certain others are either in the process of review or public announcement phase. In addition, together with CNPC, we have applied for international trademark registration for our logo in other jurisdictions. We have received 506 International Trademark Registration Certificates for our logo covering more than 50 jurisdictions.

As of December 31, 2019, we owned approximately 18,363 patents in China and other jurisdictions. We were granted 2,742 patents in 2019.

 

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Regulatory Matters

Overview

China’s oil and gas industry is subject to extensive regulation by the PRC government with respect to 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 China’s oil and gas industry:

 

   

The Ministry of Natural Resources, or the MNR, has the authority to grant, examine and approve mineral resources exploration and production licenses, and to oversee the registration and transfer of exploration and production licenses;

 

   

The Ministry of Commerce, or the MOFCOM,

 

   

sets and grants import and export volume quotas for crude oil and refined products in accordance with the market supply and demand in China as well as WTO requirements for China; and

 

   

issues import and export licenses for crude oil and refined products to oil and gas companies that have obtained import and export quotas.

 

   

The National Development and Reform Commission, or the NDRC:

 

   

is responsible for industry administration, industry policy and policy coordination over China’s oil and gas industry;

 

   

publishes guidance prices for natural gas and maximum retail prices for certain refined products, including gasoline and diesel;

 

   

formulates the plan for aggregate import and export volume of crude oil and refined products in accordance with the market supply and demand in China;

 

   

approves significant petroleum, natural gas, oil refinery and chemical projects set forth under the Catalogs of Investment Projects Approved by the Central Government; and

 

   

approves Sino-foreign equity and cooperative projects of certain types.

Exploration Licenses and Production Licenses

The Mineral Resources Law authorizes the MNR 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 MNR has the authority to issue mineral resources 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 MNR 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 in each corresponding block. Investments range from RMB2,000 per square kilometer for the initial year to RMB5,000 per square kilometer for the second year, and to RMB10,000 per square kilometer for the third and subsequent years. Additionally, the holder has to pay an annual mining right occupancy fee that starts at RMB100 per square kilometer for each of the first three years and increases by an additional RMB100 per square kilometer per year for subsequent years up to a maximum of RMB500 per square kilometer. The maximum term of an oil and natural gas exploration license is seven years, subject to renewal upon expiration of the original term, with each renewal being up to two years. 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. Upon the detection and confirmation of the quantity of reserves in a certain

 

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block, the holder must apply for a production license based on economic evaluation, market conditions and development planning in order to shift into the production phase in a timely fashion. 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 MNR issues production licenses to applicants on the basis of the reserves reports approved by the relevant authorities. Production license holders are required to pay an annual production right usage fee of RMB1,000 per square kilometer. Administrative rules issued by the State Council provide that the maximum term of a production license is 30 years, 20 years, or 10 years as applicable to large, medium and small mineral blocks, respectively. In accordance with a special approval from the State Council, the MNR has issued production licenses with terms coextensive with the projected productive life of the assessed proven reserves as discussed above. Each of our production licenses is renewable upon our application 30 days prior to expiration. If oil and gas prices increase, the productive life of our crude oil and natural gas reservoirs may be extended beyond the current terms of the relevant production licenses.

Among the major PRC oil and gas companies, the exploration licenses and production licenses held by us, Sinopec and CNOOC account for the majority of mining rights in China. Among those companies, we and Sinopec primarily engage in onshore exploration and production, while CNOOC primarily engages in offshore exploration and production. According to the new policies of the Chinese government, private enterprises and foreign-invested enterprises are expected to obtain exploration licenses in the future.

Pricing

Crude Oil

According to the Measures for Administration of Petroleum Products Price issued by NDRC on January 13, 2016, crude oil prices shall be determined by the market. We and Sinopec set the crude oil median prices each month based on the average international market FOB prices for crude oil of different grades in the previous month. In addition, we and Sinopec negotiate a premium or discount to reflect transportation costs, the differences in oil quality and the supply and demand.

Refined Products

The prices of our gasoline and diesel products are subject to government regulation.

On December 18, 2008, the NDRC issued the Notice on Implementing Price and Tax Reform of Refined Oil, which improved the pricing mechanism for refined oil products. Under the improved mechanism, the domestic ex-factory prices of refined oil products are determined on the basis of the relevant international crude oil prices, by taking into consideration the average domestic processing cost, tax and a pre-determined profit margin. The prices of diesel and gasoline continue to follow the government guiding prices. The highest retail price set for gasoline and diesel is calculated by using the relevant ex-factory price and a determined profit margin for retailing activities.

On March 26, 2013, the NDRC issued the Notice on Further Improvement of Refined Oil Pricing Mechanism and the amended and restated Measures for Oil Prices Management (on trial). Under this new system, (i) the price adjustment period was shortened from 22 working days to 10 and the 4% limit on the price adjustment range was eliminated; (ii) the composition of the basket of crudes to which refined oil products prices are linked was adjusted in light of the composition of the imported crudes and changes in crudes trading on the international market; and (iii) the refined oil products pricing mechanism was further enhanced.

In order to promote the oil product quality upgrading, on September 16, 2013, the NDRC issued the Circular regarding Relevant Opinions on the Pricing Policy for Oil Product Quality Upgrading, pursuant to

 

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which the price increase standard for the auto-use gasoline and diesel upgraded to China IV Standard shall be set as RMB290 per ton and RMB370 per ton, respectively, and the price increase standard for the auto-use gasoline and diesel upgraded from China IV to China V Standard shall be set at RMB170 per ton and RMB160 per ton, respectively.

On January 12, 2015, the NDRC issued the Notice on Reducing Domestic Refined Oil Prices, pursuant to which, since January 13, 2015, the price for No. 98 gasoline is to be determined by the production and operation enterprises themselves.

On January 13, 2016, the NDRC issued the Notice on Issues Concerning Further Improving the Pricing Mechanism for Refined Oil and its exhibit Regulation on Oil Pricing, pursuant to which, starting from January 13, 2016, downward adjustment of the refined oil price is subject to a floor of US$40 per barrel. Accordingly, when the international crude oil price drops to US$40 per barrel or below, the refined oil price in China shall not be adjusted downwards and the unadjusted amount shall be allocated to the reserve fund to be used for energy saving, reduction of emission, improving the oil quality and securing a safe supply of refined oil. When the international crude oil price surges to US$130 per barrel or above, appropriate financial and taxation policies shall be adopted to ensure the production and supply of refined oil but the refined oil price shall in principle remain unadjusted or shall only be slightly adjusted upwards. This regulation also liberalized the ex-factory price of liquefied petroleum gas.

On December 15, 2016, the Ministry of Finance (“MOF”) and NDRC issued Circulation on Collection of Risk Reserves for Oil Price Control (the “Rules”), pursuant to which, effective January 13, 2016, when the price of crude oil in international market drops below the lower limit set by the Chinese government, domestic enterprises which are engaged in production, commissioned processing and import and export of such refined oil products as gasoline and diesel shall make full payment of risk reserves according to sales volumes and the corresponding collection rates. “Sales volumes” refer to the actual sales volumes of such enterprises between the two adjacent window periods of price adjustment. Collection rates for risk reserves are determined with reference to the unadjusted prices of refined oil products. The NDRC and the MOF jointly determine the collection rates on a quarterly basis and notify the collection agencies in writing.

On December 22, 2016, MOF issued Notice on Proper Collection of Risk Reserves for Oil Price Adjustment in 2016, pursuant to which, if the subsidiaries (limited to listed companies) of CNPC, Sinopec and CNOOC have already recognized the risk reserves accrued as operation revenue, such subsidiaries may opt to have such risk reserves to be paid by their parent companies out of the net profit.

Aviation Kerosene

The ex-factory price of aviation kerosene is determined by the supply and demand parties subject to a limit of the CIF price in the Singapore market.

Chemical Products

We determine the prices of all of our chemical products based on market conditions.

Natural Gas

On June 28, 2013, the NDRC announced the initiation of a program for the adjustment of natural gas prices from July 10, 2013. The program consists of (i) changing the pricing mechanism of natural gas from ex-factory price to citygate price, and no longer differentiating the prices payable by users in different provinces; (ii) establishing the mechanism linking the citygate price of natural gas to the price of alternative energy with a view to gradually shift to a market-driven pricing mechanism for natural gas; (iii) adopting differential pricing approaches towards the existing usage and the incremental usage so as to establish as soon as practicable a new pricing mechanism for natural gas while reducing the impact that the pricing reform will have on existing gas users.

 

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On August 10, 2014, based on the natural gas price reform roadmap, the NDRC issued price adjustment programs for non-residential use stock natural gas, pursuant to which, effective September 1, 2014, (i) the natural gas citygate price for non-residential use was increased by RMB400 per thousand cubic meters; (ii) no adjustment will be made to the citygate price for natural gas consumed by residential users; and (iii) further action will be taken to implement the policy in connection with the liberalization of the sales price of imported liquefied natural gas and the ex-factory prices for shale gas, coal-seam gas and coal gas.

On February 26, 2015, the NDRC announced the unification of the prices of domestic natural gas of existing and incremental gas volume starting from April 1, 2015.

On November 18, 2015, the NDRC announced the reduction of the price of natural gas for non-residential use from November 20, 2015, whereby the citygate price ceiling for non-resident users was decreased by RMB700 per thousand cubic meters while the preferential policy and price for natural gas used by fertilizer makers remain unchanged. With a view to improve the market-driven pricing mechanism for natural gas, since November 20, 2016, suppliers and non-residential users can negotiate prices of natural gas up to 20% above the benchmark price for non-residential use.

On October 15, 2016, the NDRC issued Clarifying the Price Policy for Gas Storage Facilities, which announced that the prices for natural gas purchase and sale to be conducted by and the prices of gas storage services to be provided by the gas storage facilities shall be formed through the operation of market.

On November 5, 2016, NDRC issued Notice on Enhancing Price Liberalization for Gas Used as Fertilizer Feedstock, pursuant to which, effective November 10, 2016, prices for gas used as fertilizer feedstock were fully liberalized and subject to negotiations between the vendors and the purchasers. It encourages the trading of the natural gas used by fertilizer makers in the oil and gas exchange centers in order to achieve open and transparent pricing of gas as fertilizer feedstock.

On November 11, 2016, the NDRC issued Notice on Relevant Issues concerning the Price Policy for Natural Gas Citygate Price in Fujian Province, which expressly liberated the citygate natural gas price in Fujian Province and made Fujian the first province that would implement fully liberated citygate natural gas price.

On August 29, 2017, the NDRC issued Notice on Reduction of the Benchmark Citygate Price of Non-residential Natural Gas, which reduced the benchmark city gate price of non-residential natural gas by RMB100 per thousand cubic meters effective September 1, 2017.

On May 25, 2018, NDRC issued Notice on Straightening Out the Citygate Price of Natural Gas for Residential Use (the “Notice”), pursuant to which, effective June 10, 2018, prices of natural gas for residential use will no longer be subject to the highest citygate price limit. Instead, the suppliers and users may negotiate prices up to 120% of the reference base rate, which is the same as the base rate for non-residential use. The citygate price of natural gas for residential use may not be increased until the first anniversary of the Notice. According to the Notice, where there is a significant difference between the price of natural gas for residential use and non-residential use, any increase in the citygate price for residential use may not exceed RMB350 per thousand cubic meters in the first year, with any remaining price difference to be rolled over into subsequent years. The policy also rolled out seasonal natural gas prices with a view to encourage market-oriented pricing.

On March 27, 2019, NDRC issued the Notice of the NDRC on Adjusting The Citygate Benchmark Price of Natural Gas, pursuant to which, benchmark citygate price of natural gas in each province, autonomous region and municipality was adjusted from April 1, 2019 in light of the adjustment of natural gas value-added tax rate.

Pipeline Transmission Tariff

Pipeline transmission tariffs for crude oil, refined oil and natural gas are set by the government. Cross province transmission tariffs are set by the NDRC and provincial transmission tariffs are set by the provincial level branches of the NDRC.

 

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For those pipelines constructed prior to 1984, which were funded by the government, the transmission tariff is a uniform flat tariff determined based on the principle of minimum profit margin. For those pipelines constructed with the funds of the enterprises after 1984, the tariffs must be submitted to the NDRC for examination and approval on a case by case basis and based on the capital investment made in the pipeline, the operation period for the pipeline and a reasonable profit margin.

On October 9, 2016, the NDRC issued Regulation on Administration of the Pipeline Transmission Tariff for Natural Gas (on trial) and Rules on Supervision and Review of the Costs Used in Setting the Pipeline Transmission Tariff (on trial), which provides that effective January 1, 2017, the pipeline transmission tariff for natural gas shall be reviewed and determined on the principle of “permissible costs plus reasonable margins”, and the rules intended to regulate the tariff charged by companies engaged in cross-province pipeline transmission operation.

On August 29, 2017, the NDRC issued the Notice on Approving the Inter-provincial Natural Gas Pipeline Transmission Tariff”, which published the transmission tariff for 13 inter-provincial pipelines companies including PetroChina Beijing Natural Gas Pipeline Co., Ltd. and others.

On March 27, 2019, the NDRC issued the Notice on Adjusting the Inter-provincial Pipeline Natural Gas Transmission Tariff, which adjusted the transmission tariff for 13 inter-provincial pipelines companies including PetroChina Beijing Natural Gas Pipeline Co., Ltd. and others.

Production and Marketing

Crude Oil

Each year, the NDRC publishes the projected target for the production and process of crude oil in China based on the domestic consumption estimates submitted by domestic producers, including but not limited to us, Sinopec and CNOOC, the production of these companies as well as the forecast of international crude oil prices. The actual production volumes are determined by the producers themselves and may vary from estimates. The Ministry of Commerce and its local branches are responsible for supervising and managing the crude oil market. Enterprises that meet certain operating conditions may apply for the permit for crude oil sales and warehousing business.

Refined Products

Previously, only we, Sinopec and joint ventures of 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 December 11, 2004, wholly foreign-owned enterprises are permitted to conduct refined oil retail business. Since January 1, 2007, when the Measures on the Administration of the Refined Products Market became effective, all entities meeting certain requirements are allowed to submit applications to the MOFCOM to conduct refined oil products wholesale, retail and storage businesses. On July 28, 2018, the PRC government removed the restriction that a Chinese partner must hold a majority share in the construction and operation of a retail oil station chain which has more than 30 outlets and sells refined products of different types and brands supplied through multiple channels. On August 27, 2019, the State Council canceled government approval of qualifications for operation of refined oil wholesale warehousing and delegated the approval of refined oil retail qualifications to local municipal governments.

Natural Gas

The NDRC determines each year the annual national natural gas production target based on the natural gas production targets submitted by domestic natural gas producers. Domestic natural gas producers determine their

 

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annual natural gas production targets on the basis of consumption estimates. The actual production volume of each producer is determined by the producer itself, which may deviate from the production target submitted by it. The NDRC also formulates the annual natural gas supply guideline, which requires natural gas producers to distribute a specified amount of natural gas to the designated key municipalities and key enterprises.

Foreign Investments

Cooperation in Exploration and Production with Foreign Companies

Currently, CNPC is one of the few Chinese companies that have the right to cooperate with foreign companies in onshore crude oil and natural gas exploration and production in China. CNOOC has 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 MOFCOM 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. We do not have the capacity to enter into production sharing contracts directly with foreign oil and gas companies under existing PRC law. Accordingly, CNPC will enter into production sharing contracts. After signing a production sharing contract, CNPC will, subject to approval of the MOFCOM, assign to us most of its commercial and operational rights and obligations under the production sharing contract as required by the Non-competition Agreement between CNPC and us.

In 2019, the Chinese government lifted the restrictions on foreign investment in oil and gas exploration. As a result, foreign companies are allowed to enter the oil and gas exploration and production sector by wholly-owned enterprieses.

Transportation and Refining

Since December 1, 2007, PRC regulations have encouraged foreign investment in the construction and operation of oil and gas pipelines and storage facilities. On March 10, 2015, PRC lifted the restrictions on foreign investment in refineries with a production capacity of below 10 million tons per annum. Furthermore, when appropriate, projects must receive necessary approvals from relevant PRC government agencies. See “Item 3 — Key Information — Risk Factors — Risks Related to Government Regulation.”

The State Further Liberalized Oil And Gas Market Access

On June 30, 2019, the NDRC and the MOFCOM jointly issued Special Management Measures for Foreign Investment Access (Negative List) (2019 Edition), pursuant to which, the restrictions on oil and gas exploration and development that were previously limited to joint ventures and cooperation were lifted.

On December 22, 2019, the Central Committee of the Communist Party of China and the State Council issued the Opinions on Creating a Better Development Environment to Support the Reform and Development of Private Enterprises, which further liberalized market access for private enterprises. It states that in key industries and fields such as power, telecommunications, railways, oil and gas, the state liberalizes competitive businesses and further introduces market competition mechanisms. It encourages private enterprises to enter the industries of oil and gas exploration and development, refining and sales, and construction of infrastructures such as storage, transportation and pipeline transportation of crude oil, natural gas and refined oil. It encourages qualified enterprises to participate in crude oil imports and refined oil exports.

 

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Import and Export

Since January 1, 2002, state-owned trading companies have been allowed to import crude oil under an automatic licensing system. Non-state-owned trading companies have been allowed to import crude oil and refined products subject to quotas. The export of crude oil and refined oil products by both state-owned trading companies and non-state-owned trading companies is subject to quota control. The MOFCOM has granted us the right to conduct crude oil and refined product import and export business.

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 following projects are subject to approval by the NDRC or the competent local authorities:

 

   

facilities for taking delivery of and storing liquefied petroleum gas (excluding accessory projects of oil or gas fields or refineries);

 

   

new facilities for taking delivery of or storing imported liquefied natural gas (including expansion on a different site other than the original facilities);

 

   

oil or gas transmission pipeline networks (excluding gathering and transmission pipeline networks of oil or gas fields);

 

   

new refineries, expansion of existing primary processing refineries;

 

   

new ethylene, paraxylene (PX), diphenylmethane diisocyanate (MDI) projects; and

 

   

new coal-to-olefins projects, new coal to paraxylene (PX) projects, and new coal-to-methanol projects with a capacity of 1 million tons per annum or more.

Taxes, Fees and Royalties

We are subject to a variety of taxes, fees and royalties. The table below sets forth the major taxes, fees and royalty fees payable by us or by Sino-foreign oil and gas exploration and development cooperative projects. Our subsidiaries which have legal person status should report and pay enterprise income tax to the relevant tax authorities based on the applicable laws and regulations.

 

Tax Item

  

Tax
Base

  

Tax
Rate

Enterprise income tax

   Taxable income    25%, or 15% for qualified taxpayers in certain western regions of China.

Value-added tax

   Revenue   

Prior to July 1, 2017, value added tax rates were 17%, 13%, 11% and 6%, as applicable. In particular, 13% was for liquefied natural gas, natural gas, liquefied petroleum gas, agricultural film and fertilizers and 17% for oil products and other products.

 

Effective July 1, 2017, the rate of 13% was canceled and the applicable rate for natural gas has been changed from 13% to 11%.

 

Effective May 1, 2018, the rate of 17% was changed to 16% and the rate of 11% was changed to 10%.

 

Effective April 1, 2019, the rate of 16% was changed to 13% and the rate of 10% was changed to 9%.

 

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Consumption tax

   Aggregate volume sold or self-consumed   

RMB1.52 per liter for gasoline, naphtha, solvent naphtha and lubricant and RMB1.2 per liter for diesel, aviation kerosene and fuel oil.

 

Collection of taxes on aviation kerosene continues to be suspended.

Resource tax

   Sales   

6%, exemption or reduction may apply if qualified.

 

From April 1, 2018 to March 31, 2021, shale gas production enjoys a 30% reduction.

Crude oil special gain levy

   Sales amount above specific threshold    Five-level progressive tax rates from 20% to 40%, taxable if the crude oil price reaches the threshold of US$65 per barrel.

Environmental protection tax

   Air pollution equivalent, water pollution equivalent, solid waste pollution equivalent and noise exceeding the standard decibel   

Effective January 1, 2018, the PRC government started to impose environmental protection tax. Different emissions apply their corresponding tax rates.

 

If a taxpayer’s emission of taxable atmospheric pollutants or water pollutants is less than 30% of the national and local pollutant discharge standards, the environmental protection tax shall be levied at 75%. If the taxpayer’s emission of taxable atmospheric pollutants or water pollutants is less than 50% of the national and local pollutant discharge standards, the environmental protection tax shall be levied at 50%.

Mining right occupancy fees

   Area    RMB100 to RMB500 per square kilometer per year for exploration; RMB1,000 per square kilometer per year for production.

Royalty fee(1)

   Production volume    Progressive rate of 0-12.5% for crude oil and 0-3% for natural gas.

 

(1)

It shall be paid in cash and is only applicable to Sino-foreign oil and gas exploration and development cooperative projects in China. However, effective December 1, 2010, the royalty fee payable by new Sino-foreign oil and gas exploration and development cooperative projects in Western regions was replaced by the resource tax, while those cooperative projects under contracts signed before December 1, 2010 continue to be subject to the royalty fee until the contracts expire. Effective November 1, 2011, the royalty fee payable by new Sino-foreign oil and gas exploration and development cooperative projects in the whole country was replaced by the resource tax, while those cooperative projects under contracts signed before November 1, 2011 continue to be subject to the royalty fee until the contracts expire.

Environmental Regulations

We are subject to various PRC national environmental laws and regulations and also environmental regulations promulgated by the local governments in whose jurisdictions we have operations. The PRC government 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 disposal, generation, handling, storage, transportation, treatment and disposal of solid waste materials, reduction of carbon emission and upgrade of the standards for refined products.

The environmental regulations require a company, such as us, to register or file an environmental impact report with the relevant environmental authority 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

 

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the expanded or renovated facility will not be permitted to operate unless the relevant environmental authority has inspected the environmental equipment installed at the facility and decides it satisfies the environmental protection requirements. Companies that need to discharge pollutants, whether in the form of gas, water or solid wastes, must submit application for pollutant discharge permits. The application must state in detail the types of discharge, discharge outlet, types of pollutants, concentration and amount of discharge. After reviewing the application materials, the relevant environmental administrative department will determine to issue a discharge permit to the company, specifying the types of permitted pollutants, the permitted concentration and amount. If a company’s discharges deviated from what were permitted, the relevant administrative department may impose fines on the company or order the company to suspend or close down its operation for resolving the issues. In addition, companies discharging taxable pollutants should declare and pay corresponding environmental protection taxes in accordance with the PRC Environmental Protection Tax Law and its implementing regulations.

In recent years, the Chinese government has endeavored to promote low-carbon and emission reduction policies and has set a goal of increasing the proportion of non-fossil energy consumption. In order to reduce environmental pollution, the Chinese government has also raised the standards of oil products several times in recent years. After several years of upgrading and renovating our oil refining facilities, we have satisfied the relevant standards on time. In addition, we are also required to comply with relevant laws and regulations regarding management of hazardous chemicals.

Item 4A — UNRESOLVED STAFF COMMENTS

We do not have any unresolved staff comment.

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. The comparative data for 2017 and 2018 throughout this Item 5 was restated to reflect our acquisition of the interest in Dalian West Pacific as if it was consolidated since the earliest year presented. Please refer to “Item 4 — Information on the Company — Acquisitions and Divestment” and Note 40 to our consolidated financial statements. In addition, we have initially applied IFRS 16 on January 1, 2019 and IFRS 15 and IFRS 9 on January 1, 2018. According to the adopted transition plan, the comparative data for 2017 and 2018 throughout this Item 5 has not been restated. For a detailed description of the changes and impacts of these accounting standards, please refer to “Note 3 (aa) New Accounting Standards” in our financial statements.

Overview

We are engaged in a broad range of petroleum and natural gas related activities, including:

 

   

exploration, development, production and sale of crude oil and natural gas;

 

   

refining of crude oil and petroleum products, and production and marketing of basic petrochemical products, derivative chemical products and other chemical products;

 

   

marketing and trading of refined oil products; and

 

   

transmission of natural gas, crude oil and refined oil products 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 revenue. In 2019, we produced approximately 909.3 million barrels of crude oil and approximately

 

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3,908.0 Bcf of natural gas for sale. Our refineries processed approximately 1,228.4 million barrels of crude oil in 2019. In 2019, our revenue was RMB2,516,810 million and net profit attributable to owners of the Company was RMB45,682 million.

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, production and sales volume of our principal products, operating costs and the regulatory environment.

Prices of Principal Products

The fluctuations in the prices of crude oil, refined products, chemical products and natural gas have a significant impact on our revenue. See “Item 4 — Information on the Company — Regulatory Matters — Pricing” for a more detailed discussion of current PRC pricing regulations and “Item 3 — Risk Factors — Risks Related to Pricing and Exchange Rate”.

The table below sets forth the average realized prices of our principal products in 2017, 2018 and 2019.

 

     2017      2018      2019  

Crude oil (US$/barrel)

     50.64        68.28        60.96  

Natural gas (US$/thousand cubic feet)

     5.18        5.85        5.39  

Gasoline (US$/barrel)

     111.26        124.88        110.63  

Kerosene (US$/barrel)

     66.57        86.73        78.08  

Diesel (US$/barrel)

     90.84        110.38        102.16  

Production and Sales Volume for Oil and Gas Products

Our results of operations are also affected by production and sales volumes. Our crude oil and natural gas production volumes depend primarily on the level of the proved developed reserves in the fields in which we have an interest, as well as other factors such as the general macroeconomic environment and market supply and demand conditions, while the sales of crude oil, natural gas, refined oil and chemical products are subject to marketing capabilities and competitive environment.

Operating costs

The general macroeconomic environment and market supply and demand conditions may also affect our operating costs. For example, labor costs and the price index (CPI) in general in the countries where we operate are affected by the global and local macroeconomic environment. Changes in commodity prices may also affect our operating costs, as it would affect our ability to pass on the change in such commodity prices through a change in the prices of our products.

Regulatory Environment

Our operating activities are subject to extensive regulations and control by the PRC government, including the issuance of exploration and production licenses, the imposition of industry-specific taxes or product-specific taxes and levies and the implementation of environmental policies and safety standards. Our results of operations will be affected by any future changes of such regulatory environment.

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

 

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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 for Oil and Gas Exploration and Production Activities

We use the 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 geophysical costs incurred are expensed when incurred. However, all costs for developmental wells, support equipment and facilities, and proved 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. 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 well exploration expenses. The relevant costs will be classified as oil and gas assets and go through impairment review if the evaluation indicates that economic benefits can be obtained. For wells with 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 wells. We have no material costs of unproved properties capitalized in oil and gas properties.

Oil and Gas 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 SEC. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether the estimate is a deterministic estimate or probabilistic estimate. Therefore, these estimates do not include probable or possible reserves. Our proved reserves estimates are assessed or audited annually by independent, qualified and experienced oil and gas reserves engineering firms in the United States and Canada. Our oil and gas reserves engineering department has policies and procedures in place to ensure that these estimates are consistent with these authoritative guidelines. Among other factors 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. The price shall be the average price during the 12-month period before the ending date of the period covered by this report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. The costs shall be that prevailing at the end of the period.

 

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Despite the inherent imprecision in these engineering estimates, estimated proved oil and gas reserves quantity has a direct impact on certain amounts reported in the financial 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 reserves estimates include only crude oil and natural gas which the management believes can be reasonably produced within the current terms of the production licenses that are granted by the Ministry of Natural 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 reserves estimates are revised downward, earnings could be affected 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 reserves estimates will have a significant effect on prospective charges for depreciation, depletion and amortization expenses.

In addition, due to the importance of these estimates in 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 reserves estimates prepared in accordance with authoritative guidelines elsewhere in this annual report.

Property, Plant and Equipment

Where it is probable that property, plant and equipment, including oil and gas properties, will generate future economic benefits, their costs are initially recorded in the consolidated statement of financial position as assets. Cost represents the purchase price of the asset and other costs incurred to bring the asset into expected use. Subsequent to their initial recognition, property, plant and equipment are carried at cost less accumulated depreciation, depletion and amortization (including any impairment).

Depreciation, to write off the cost 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 Company uses the following useful lives for depreciation purposes:

 

Buildings and plant

     8-40 years  

Equipment and machinery

     4-30 years  

Motor vehicles

     4-14 years  

Other

     5-12 years  

No depreciation is provided on construction in progress until the assets are completed and ready for use.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

Property, plant and equipment, including oil and gas properties, are reviewed for possible impairments when events or changes in circumstances indicate that the carrying amount may not be recoverable. Determination as to whether and how much an asset is impaired involves management estimates and judgments such as future crude oil prices, prices of refined products and chemical products, the operation costs, the product mix, production volumes and the oil and gas reserves. Certain estimates and assumptions adopted by the management in the impairment reviews and calculations are formed by the internal professional team (including operations and finance teams) by reference to external institutions’ analysis reports and taking into account current economic conditions. The other estimates and assumptions are consistent with the assumptions used in our business plans.

 

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In forming the relevant estimates and assumptions for impairment tests by our management, our internal professional team (including operations and finance teams) forms a preliminary conclusion by reference to the external institutions’ analysis reports and our historical financial data, and taking into account current economic conditions and our business plans. Then, the preliminary conclusion is reviewed and approved by the management. The approved estimates and assumptions are then utilized by our subsidiaries and branches to perform the impairment tests.

When determining whether there are indications of impairment for oil and gas properties, we consider internal factors, mainly including the decline of production and reserves volumes at the late development stage of certain oil blocks and a significant drop in economic benefits of certain oil blocks resulting from the lower price of crude oil, and external factors, mainly including a significant drop in international prices of crude oil, resulting from the imbalance of supply and demand of crude oil. When an indication of impairment of certain oil blocks is identified, we will perform the impairment tests on the oil blocks. An impairment loss is recognized for the amount by which the carrying amount of the cash-generating unit exceeds the higher of its fair value less costs to sell and its value in use. Value in use is determined by reference to the discounted expected future cash flows to be derived from the cash-generating unit.

The expected medium-to-long-term future international prices of crude oil utilized by us when estimating the expected future cash flows are determined mainly based upon the forecast of the international prices of crude oil made by principal international investment institutions combined with the judgment and analysis of the future trends of international prices of crude oil made by us. We calculated the expected future cash flows of each oil block according to the estimates of future production volume levels per year stated in the oil and gas reserves reports, the estimates of operation costs of oil and gas made by us, and taking into account its future capital expenditure plan. We refer to the weighted average cost of capital of the oil and gas industry when determining the discount rate and makes relevant adjustments according to specific risks in different countries or regions. In the year ended December 31, 2017, 2018 and 2019, the after-tax discount rates adopted by most of our oil and gas regions were between 7.6% - 11.0%, 7.3% - 11.5%, and 6.4% - 15.4%, respectively.

Given the broad scope of our property, plant and equipment, the impairment test involves numerous assumptions, which are interrelated to each other to a certain extent. For example, the estimates and judgments with respect to the product mix, production costs and oil and gas reserves may vary along with the changes in crude oil prices. The sensitivity analysis performed after taking into account the interrelationship among all of the estimates and judgments would be neither cost efficient nor time efficient. As a result, the management believes that a sensitivity analysis of relevant assumptions on impairment is not practicable. Favorable changes to some assumptions might have avoided the need to impair any assets or make it necessary to reverse an impairment loss recognized in prior periods, whereas unfavorable changes might have caused an additional unknown number of other assets to become impaired, or resulted in larger impacts on impaired assets.

Our operating results in the following fiscal year may deviate from management’s estimates or judgments. This would require an adjustment to the provision for impairment of the property, plant and equipment disclosed in Note 15 to the consolidated financial statements.

Gains and losses on disposals of property, plant and equipment are determined by reference to their carrying amounts and are recorded in the consolidated profit or loss.

Interest and other costs on borrowings to finance the purchase and construction of property, plant and equipment are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Costs for repairs and maintenance activities are expensed as incurred except for costs of components that result in improvements or betterments which are capitalized as part of property, plant and equipment and depreciated over their useful lives.

 

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Asset Retirement Obligation

Provision is recognized for the future decommissioning and restoration of oil and gas properties. The amounts of the provision recognized are the present values of the estimated future expenditures. The estimation of the future expenditures is based on current local conditions and requirements, including legal requirements, technology, price level, etc. In addition to these factors, the present values of these estimated future expenditures are also impacted by the estimation of the economic lives of oil and gas properties. Changes in any of these estimates will impact the operating results and the financial position of the Company over the remaining economic lives of the oil and gas properties.

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 statement of comprehensive income for each of the years ended December 31, 2017, 2018 and 2019 is summarized in the table below.

 

     Year Ended December 31,  
     2017*     2018*     2019  
     (RMB in millions)  

Revenue

     2,032,298       2,374,934       2,516,810  

Operating expenses

     (1,961,462     (2,251,992     (2,395,048

Profit from operations

     70,836       122,942       121,762  

Exchange (loss)/gain, net

     (1,184     1,120       1  

Interest expense, net

     (19,929     (18,939     (26,778

Share of profit of affiliates and joint ventures

     5,968       11,647       8,229  

Profit before income tax expense

     55,691       116,770       103,214  

Income tax expense

     (16,296     (42,790     (36,199

Profit for the year attributable to non-controlling interests

     15,858       20,944       21,333  

Profit for the year attributable to owners of the Company

     23,537       53,036       45,682  

 

*

We have initially applied IFRS 16 on January 1, 2019 and IFRS 15 and IFRS 9 on January 1, 2018. According to the adopted transition plan, the comparative data has not been restated. For a detailed description of the changes and impacts of these accounting standards, please refer to “3 (aa) New Accounting Standards” in our financial statements.

The table below sets forth our revenue by business segment for each of the years ended December 31, 2017, 2018 and 2019 as well as the percentage changes in revenue for the periods shown.

 

     2017     2018     2018
vs.
2017
    2019     2019
vs.
2018
 
     (RMB in millions, except percentages)  

Revenue

          

Exploration and production

     505,430       658,712       30.3     676,320       2.7

Refining and chemicals

     735,486       911,224       23.9     902,679       (0.9 )% 

Marketing

     1,660,456       2,003,105       20.6     2,165,391       8.1

Natural gas and pipeline

     295,786       362,626       22.6     391,023       7.8

Headquarters and others

     2,057       2,376       15.5     3,700       55.7
  

 

 

   

 

 

     

 

 

   

Total

     3,199,215       3,938,043       23.1     4,139,113       5.1

Less intersegment sales

     (1,166,917     (1,563,109     34.0     (1,622,303     3.8
  

 

 

   

 

 

     

 

 

   

Consolidated net sales from operations

     2,032,298       2,374,934       16.9     2,516,810       6.0
  

 

 

   

 

 

     

 

 

   

 

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The table below sets forth our operating income by business segment for each of the years ended December 31, 2017, 2018 and 2019, as well as the percentage changes in operating income for the periods shown. Loss from operations for headquarters and others shown below consists of expenses for research and development, business services and infrastructure support to our operating business segments.

 

     2017     2018     2018
vs.
2017
    2019     2019
vs.
2018
 
     (RMB in millions, except percentages)  

Profit/(loss) from operations

          

Exploration and production

     15,475       73,519       375.1     96,097       30.7

Refining and chemicals

     43,075       44,701       3.8     13,764       (69.2 )% 

Marketing

     8,279       (6,450     (177.9 )%      (565     (91.2 )% 

Natural gas and pipeline

     15,688       25,515       62.6     26,108       2.3

Headquarters and others

     (11,681     (14,343     22.8     (13,642     (4.9 )% 
  

 

 

   

 

 

     

 

 

   

Total

     70,836       122,942       73.6     121,762       (1.0 )% 
  

 

 

   

 

 

     

 

 

   

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Consolidated Results of Operations

Overview

In 2019, our revenue was RMB2,516,810 million, representing an increase of 6.0% as compared to 2018. Net profit attributable to owners of the Company was RMB45,682 million, representing a decrease of 13.9% as compared to 2018. Basic earnings per share were RMB0.25, representing a decrease of RMB0.04 as compared to 2018.

Revenue Revenue increased by 6.0% from RMB2,374,934 million in 2018 to RMB2,516,810 million in 2019. This was primarily due to the comprehensive impact of the increase in sales volume, partially offset by a decrease in selling prices of a majority of oil and gas products.

The table below sets out external sales volume and average realized prices for our major products in 2018 and 2019 and the respective percentage of change:

 

     Sales Volume
(‘000 ton)
    Average Realized Price
(RMB/ton)
 
     2018      2019      Percentage
of Change

(%)
    2018      2019      Percentage
of Change

(%)
 

Crude oil*

     110,457        150,322        36.1       3,213        3,162        (1.6

Natural gas (hundred million cubic meters, RMB/’000 cubic meter)**

     2,167.54        2,590.91        19.5       1,367        1,313        (4.0

Gasoline

     71,125        76,366        7.4       7,024        6,487        (7.6

Diesel

     86,904        90,163        3.8       5,478        5,286        (3.5

Kerosene

     20,619        21,183        2.7       4,534        4,255        (6.2

Heavy oil

     19,964        18,095        (9.4     3,335        3,249        (2.6

Polyethylene

     4,644        4,985        7.3       8,816        7,443        (15.6

Lubricant

     1,158        977        (15.6     7,875        8,047        2.2  

 

*

The sales volumes of crude oil listed above represents all our external sales volume of crude oil.

**

The sales volumes of natural gas listed above represents all our external sales volume of natural gas, and the decrease in average realized price of natural gas in 2019 as compared to 2018 was primarily due to a decrease in the average realized price of natural gas in our international trade business.

 

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Operating Expenses Operating expenses increased by 6.4% from RMB2,251,992 million in 2018 to RMB2,395,048 million in 2019, of which:

Purchases, Services and Other Expenses Purchases, services and other expenses increased by 9.3% from RMB1,553,784 million in 2018 to RMB1,697,834 million in 2019. This was primarily due to an increase in the Company’s expenses relating to purchase of oil and gas products and other international trading activities.

Employee Compensation Costs Employee compensation costs (including salaries and additional costs such as insurance, housing provident funds and training fees) increased by 6.9% from RMB144,391 million in 2018 to RMB154,318 million in 2019. This was primarily due to the increase in employee remuneration and contribution to social security funds.

Exploration Expenses Exploration expenses increased by 10.9% from RMB18,726 million in 2018 to RMB20,775 million in 2019. This was primarily due to increased exploration efforts to enhance reserves and production.

Depreciation, Depletion and Amortization Depreciation, depletion and amortization decreased by 3.0% from RMB232,276 million in 2018 to RMB225,262 million in 2019. This was primarily due to a combined effect of the Company’s provision of asset impairment in order to optimize asset structure and solidify asset quality, and implementation of the new lease standards. As a result of implementation of the new lease standards, we recognized depreciation expenses of RMB14,973 million over the assets that we had right of use in 2019.

Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by 7.9% from RMB74,477 million in 2018 to RMB68,596 million in 2019. This was primarily due to the fact that the Company strictly controlled non-production expenses in order to continue to implement the plan of broadening sources of income, reducing expenditures and costs, and enhancing profitability, and a decrease of RMB16,682 in lease expenditures as compared to 2018 as a result of implementation of new lease standards.

Taxes other than Income Taxes Taxes other than income taxes increased by 3.5% from RMB220,677 million for 2018 to RMB228,436 million in 2019, among which the consumption tax increased by RMB12,479 million from RMB152,494 million in 2018 to RMB164,973 million in 2019; the resource tax increased by RMB49 million from RMB24,339 million in 2018 to RMB24,388 million in 2019; and crude oil special gain levy decreased by RMB3,979 million from RMB4,750 million in 2018 to RMB771 million in 2019.

Other Income/(Expenses), net Net other income in 2019 was RMB173 million, while the net other expenses in 2018 was RMB7,661 million, primarily due to a decrease in net losses from disposal of fixed assets and oil and gas assets.

Profit from Operations The profit from operations in 2019 was RMB121,762 million, representing a decrease of 1.0% from RMB122,942 million in 2018.

Net Exchange Gain Net exchange gain in 2019 was RMB1 million, representing a decrease of 99.9% from RMB1,120 million in 2018. This is primarily due to the changes in exchange rate of the Renminbi against the US Dollar during the period.

Net Interest Expense Net interest expense increased by 41.4% from RMB18,939 million in 2018 to RMB26,778 million in 2019, primarily due to the effects of lease liabilities recognized under the new lease standards and the accrued interest expenses. Excluding the impact of the new lease standards, net interest expenses increased by 1.9% as compared to 2018.

Profit Before Income Tax Expense Profit before income tax expense decreased by 11.6% from RMB116,770 million in 2018 to RMB103,214 million in 2019.

 

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Income Tax Expense The income tax expense decreased by 15.4% from RMB42,790 million in 2018 to RMB36,199 million in 2019, which was primarily due to the decrease in the Company’s profit before income tax expense in 2019 as compared to 2018.

Profit for the Year Net profit in 2019 decreased by 9.4% to RMB67,015 million from RMB73,980 million in 2018.

Profit Attributable to Non-controlling Interests Profit attributable to non-controlling interests increased by 1.9% from RMB20,944 million in 2018 to RMB21,333 million in 2019, primarily due to changes in the profit structure of the Company’s subsidiaries.

Profit Attributable to Owners of the Company Profit attributable to owners of the Company decreased by 13.9% from RMB53,036 million in 2018 to RMB45,682 million in 2019.

Segment Results

Exploration and Production

Revenue Revenue of the exploration and production segment in 2019 was RMB676,320 million, representing an increase of 2.7% from RMB658,712 million in 2018. This increase was primarily due to the increase in the sales volume of oil and gas, partially offset by the decline in the price of crude oil. In 2019, the oil imported from Russia, Kazakhstan and certain other countries amounted to 39.95 million tons, representing an increase of 8.9% over the 36.69 million tons in 2018. The revenue from the sales of imported oil from Russia, Kazakhstan and certain other countries was RMB131,723 million in 2019, representing an increase of 2.7% from RMB128,308 million in 2018. The average realized crude oil price of the Company in 2019 was US$60.96 per barrel, representing a decrease of 10.7% from US$68.28 per barrel in 2018.

Operating Expenses Operating expenses of the exploration and production segment decreased by 0.8% from RMB585,193 million in 2018 to RMB580,223 million in 2019. This was primarily due to a decrease in depreciation, depletion and amortization, and taxes and fees other than income tax, partially offset by an increase in exploration costs. In 2019, The cost for importing oil from Russia, Kazakhstan and certain other countries amounted to RMB130,941 million, representing an increase of 1.8% from RMB128,637 million in 2018.

In 2019, the unit oil and gas lifting cost of the Company was US$12.11 per barrel, representing a decrease of 1.6% from US$12.31 per barrel in 2018.

Profit from Operations In 2019, our domestic operations adhered to the principle of profit-orientation to promote the increase of reserves and production, realized an increase in crude oil production and a significant increase in natural gas production, strengthened the control of investment costs at the source, refined the management of production and operation costs, and promoted quality improvement and profitability. Our overseas operations, adhered to profitable development, strictly managed early-stage investment projects, optimized the investment structure, and strived to promote sales and maximize revenue. In 2019, the exploration and production segment realized an operating profit of RMB96,097 million, representing an increase of 30.7% from RMB73,519 million in 2018, maintaining its status as a main profit contributor of the Company.

Refining and Chemicals

Revenue The revenue of the refining and chemicals segment decreased by 0.9% from RMB911,224 million in 2018 to RMB902,679 million in 2019, primarily due to a combined effect of the changes in sales volume and prices of refined oil products, and the marketization of internal settlement prices.

Operating Expenses Operating expenses of the refining and chemicals segment increased by 2.6% from RMB866,523 million in 2018 to RMB888,915 million in 2019, primarily due to an increase in the cost of crude oil and feedstock, and an increase in the production costs of auxiliary materials and power.

 

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In 2019, the cash processing cost of refineries of the Company was RMB168.64 per ton, remaining basically the same as compared to 2018.

Profit from Operations In 2019, the refining and chemicals segment continued to deepen benchmarking management to facilitate the transition from cost benchmarking to business benchmarking; tap into internal talent and vigorously strengthen management and control over costs and expenses; adhere to the principles of market and profit-orientation, promote the upgrading of refined oil quality and the research and development of high value-added chemical products, optimize product structure and enhance profitability. However, as affected by factors such as excessive domestic refining capacity, narrower margins, a fall in prices of chemical products and the marketization of internal settlement prices which resulted in a fall in prices, the refining and chemicals segment realized an operating profit of RMB13,764 million in 2019, representing a decrease of 69.2% as compared to RMB44,701 million in 2018. Specifically, the refining operations recorded an operating profit of RMB10,337 million, representing a decrease of 72.0% as compared to RMB36,878 million in 2018, while the chemical operations realized an operating profit of RMB3,427 million, representing a decrease of 56.2%, as compared to RMB7,823 million in 2018.

Marketing

Revenue The revenue of the marketing segment increased by 8.1% from RMB2,003,105 million in 2018 to RMB2,165,391 million in 2019, primarily due to an increase in international trading volume of oil and gas products.

Operating Expenses Operating expenses of the marketing segment increased by 7.8% from RMB2,009,555 million in 2018 to RMB2,165,956 million in 2019, primarily due to an increase in the expenditures for purchase of refined oil.

Loss from Operations In 2019, the marketing segment actively responded to the challenges of excessive market resources and intensified competition, deepened the regional precise marketing and integrated marketing of refined products, fuel cards, non-oil business, and lubricants, accelerated the establishment of new retail models, and strived to pursue quality and profitability. In international trade, it accelerated the development of its global logistics and marketing network and strengthened the synergy between domestic and international resources to enhance profitability. In 2019, due to the strengthening of marketing measures and the marketization of internal settlement, the marketing segment recorded an operating loss of RMB565 million, representing a decrease of loss of RMB5,885 million as compared to the operating loss of RMB6,450 million in 2018.

Natural Gas and Pipeline

Revenue The revenue of the natural gas and pipeline segment amounted to RMB391,023 million in 2019, representing an increase of 7.8% as compared to RMB362,626 million in 2018, primarily due to an increase in the sales volume of natural gas.

Operating Expenses Operating expenses of the natural gas and pipeline segment amounted to RMB364,915 million in 2019, representing an increase of 8.2% as compared to RMB337,111 million in 2018, primarily due to the increase in the expenditure of natural gas purchase.

Profit from Operations In 2019, the natural gas and pipeline segment, based on the overall coordinated and effective operation of the industrial chain, deepened our resource management through “tagging”, prioritized the full production and sales of domestic gas, effectively controlled resource costs, continuously optimized resource flows and sales structures, and vigorously promoted online transactions. While consolidating the wholesale market, we actively expanded the end market. In 2019, the natural gas and pipeline segment realized an operating profit of RMB26,108 million, representing an increase of 2.3% as compared to RMB25,515 million in 2018.

In 2019, the natural gas and pipeline segment took active measures to control the loss from imported natural gas. However, as the cost of imported natural gas increased due to the changes in exchange rates, while the

 

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increases in the domestic natural gas price were restricted under a nationwide policy environment of reducing taxes and fees, the segment recorded a net loss of RMB30,710 million in sales of imported natural gas, representing an increase of loss of RMB5,803 million as compared to last year. The Company will endeavor to adopt effective measures to control losses.

In 2019, the Company’s international operations realized a revenue of RMB1,040,117 million, accounting for 41.3% of the Company’s total revenue. Profit before income tax expenses amounted to RMB18,885 million. The Company’s international operations maintained stable development and further improved its operating ability internationally.

Our four operating segments are exploration and production, refining and chemicals, marketing as well as natural gas and pipeline. Overseas operations do not constitute a separate operating segment. The financial data of overseas operations are included in the financial data of the respective operating segment mentioned above.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Consolidated Results of Operations

Overview

In 2018, our revenue was RMB2,374,934 million, representing an increase of 16.9% as compared to 2017. Net profit attributable to owners of the company was RMB53,036 million, representing an increase of 125.3% as compared to 2017. Basic earnings per share were RMB0.29, representing an increase of RMB0.16 as compared to 2017.

Revenue Our revenue increased by 16.9% from RMB2,032,298 million in 2017 to RMB 2,374,934 million in 2018. This increase was primarily due to an increase in the prices of a majority of our oil and gas products.

The table below sets out the external sales volume and average realized prices for our major products in 2017 and 2018 and the respective percentage changes for the periods shown:

 

     Sales Volume
(‘000 ton)
    Average Realized Price
(RMB/ton)
 
     2017      2018      Percentage
of Change

(%)
    2017      2018      Percentage
of Change

(%)
 

Crude oil*

     114,930        110,457        (3.9     2,392        3,213        34.3  

Natural gas (hundred million cubic meters, RMB/’000 cubic meter)**

     1,989.59        2,167.54        8.9       1,235        1,367        10.7  

Gasoline

     65,293        71,125        8.9       6,386        7,024        10.0  

Diesel

     87,324        86,904        (0.5     4,600        5,478        19.1  

Kerosene

     18,118        20,619        13.8       3,551        4,534        27.7  

Heavy oil

     23,395        19,964        (14.7     2,380        3,335        40.1  

Polyethylene

     4,739        4,644        (2.0     8,559        8,816        3.0  

Lubricant

     1,283        1,158        (9.7     7,693        7,875        2.4  

 

Note:  

*  The sales volumes of crude oil listed in the table above represent all of our external sales volumes. The decrease in crude oil sales volume in 2018 as compared to 2017 was primarily due to the decrease in our international trading volume of crude oil.

 

** The increase in natural gas average realized price in 2018 as compared to 2017 was primarily due to a combined effect of an increase in the entrepot trading price of natural gas and effective measures taken by the Company to optimize the structure of natural gas sales.

Operating Expenses Operating expenses increased by 14.8% from RMB1,961,462 million in 2017 to RMB2,251,992 million in 2018.

 

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Purchases, Services and Other Expenses Purchases, services and other expenses increased by 20.0% from RMB1,295,032 million in 2017 to RMB1,553,784 million in 2018. This increase was primarily due to an increase in expenses relating to the purchase of oil and gas products and other trading activities as a result of the increase in oil and gas prices.

Employee Compensation Costs Employee compensation costs (including salaries and additional costs such as insurance, housing funds and training fees) were RMB144,391 million in 2018, representing an increase of 14.9% from RMB125,703 million in 2017. This increase was primarily due to an increase in our employee salaries and costs according to our performance-based remuneration system and in line with the general increase in average employee salaries in the industry.

Exploration Expenses Exploration expenses decreased by 21.6% from RMB23,884 million in 2017 to RMB18,726 million in 2018. This decrease was primarily due to the fact that, we optimized our exploration deployment resulting in a decrease in dry well expenses.

Depreciation, Depletion and Amortization Depreciation, depletion and amortization decreased by 2.3% from RMB237,807 million in 2017 to RMB232,276 million in 2018. This decrease was primarily due to a decrease in the depletion of oil and gas properties as a result of an increase in the proved undeveloped reserves and the decrease in depletion ratio caused by the rise of oil and gas prices, partially offset by an increase in asset impairment provision in 2018 as compared to 2017.

Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by 4.0% from RMB77,557 million in 2017 to RMB74,477 million in 2018. This decrease was primarily due to our continuing efforts to broaden our income sources, reduce expenditure and costs, enhance efficiency, and strictly control our non-production related expenses.

Taxes other than Income Taxes Taxes other than income taxes increased by 10.0% from RMB200,704 million in 2017 to RMB220,677 million in 2018. This was primarily due to the increase in crude oil prices in 2018 as compared to 2017. In particular, (i) we incurred a crude oil special gain levy of RMB4,750 million in 2018 due to the increase in crude oil prices as a special gain levy is payable only if the crude oil price reaches US$65 per barrel or above, while in 2017, no crude oil special gain levy was incurred; (ii) the consumption tax we paid increased by RMB7,521 million from RMB144,973 million in 2017 to RMB152,494 million in 2018; and (iii) the resource tax we paid increased by RMB6,339 million from RMB18,000 million in 2017 to RMB24,339 million in 2018.

Other Expenses, net Net other expenses was RMB7,661 million in 2018, representing an increase of RMB6,886 million from RMB775 million in 2017. This was primarily due to a combined effect of the increase in the losses from disposal of assets, as partially offset by the increase in the VAT refund relating to the importation of natural gas as recognized in 2018.

Profit from Operations The profit from operations in 2018 was RMB122,942 million, representing an increase of 73.6% from RMB70,836 million in 2017.

Net Exchange Gain /(Loss) Net exchange gain in 2018 was RMB1,120 million, as compared to the net exchange loss of RMB1,184 million in 2017. This was primarily due to the appreciation of US Dollar against Renminbi as compared to the end of 2017.

Net Interest Expense Net interest expense decreased by 5.0% from RMB19,929 million in 2017 to RMB18,939 million in 2018, primarily due to a combined effect of a decrease in the average balance of interest-bearing borrowings, a decrease in interest expenses and an increase in income from deposits as compared to 2017.

 

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Profit Before Income Tax Expense Profit before income tax expense increased by 109.7% from RMB55,691 million in 2017 to RMB116,770 million in 2018.

Income Tax Expense The income tax expense increased by 162.6% from RMB16,296 million in 2017 to RMB42,790 million in 2018, which was primarily due to the increase in taxable income.

Profit for the Year As a result of the foregoing, our profit in 2018 increased by 87.8% from RMB39,395 million in 2017 to RMB73,980 million in 2018.

Profit Attributable to Non-controlling Interests Profit attributable to non-controlling interests increased by 32.1% from RMB15,858 million in 2017 to RMB20,944 million in 2018, which was primarily due to the increase in profits of certain of our subsidiaries in 2018.

Profit Attributable to Owners of the Company Profit attributable to owners of the company increased by 125.3% from RMB23,537 million in 2017 to RMB53,036 million in 2018.

Segment Results

Exploration and Production Segment

Revenue Revenue of the exploration and production segment was RMB658,712 million in 2018, representing an increase of 30.3% from RMB505,430 million in 2017. This increase was primarily due to the increase in the prices of crude oil and natural gas and increase in the sales volume of natural gas. Our average realized crude oil price in 2018 was US$68.28 per barrel, representing an increase of 34.8% from US$50.64 per barrel in 2017.

Operating Expenses Operating expenses of the exploration and production segment increased by 19.4% from RMB489,955 million in 2017 to RMB585,193 million in 2018. This increase was primarily due to the combined effects of (i) an increase in procurement expenditure resulting from the increase in volume and price of imported oil from Russia and Kazakhstan; (ii) the impairment provision for certain oil and gas assets with higher costs of development and production made in accordance with the accounting standards; and (iii) the increase in taxes other than income taxes as compared to 2017.

In 2018, the unit oil and gas lifting cost was US$12.31 per barrel, representing an increase of 6.8% from US$11.53 per barrel in 2017. Excluding the effect of changes in exchange rate, the lifting cost increased by 4.6% from 2017, primarily due to an increase in power, materials and labor costs in 2018 as compared to 2017.

Profit from Operations In 2018, we stressed our low-cost development strategy and meticulous management, continued to promote steady output of crude oil, made greater efforts in exploration and production in main gas areas and optimized our production structure, resulting in a steady increase in gas output. In overseas operations, we took advantage of the Belt and Road Initiative, actively promoted the international cooperation in our oil and gas business, and formulated our development strategy based on project potential and enhanced dynamic control and management of investment. In 2018, the exploration and production segment realized an operating profit of RMB73,519 million, representing an increase of RMB58,044 million from RMB15,475 million in 2017, and returned to its position as a main profit contributor of our company.

Refining and Chemicals Segment

Revenue The revenue of the refining and chemicals segment increased by 23.9% from RMB735,486 million in 2017 to RMB911,224 million in 2018. This increase was primarily due to the increase in the prices of refined products and the fact that we produced more high-profitability products as a result of our optimized product structure. Both the prices and sales volume of certain refined and chemical products increased.

 

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Operating Expenses Operating expenses of the refining and chemicals segment increased by 25.1% from RMB692,411 million in 2017 to RMB866,523 million in 2018. This increase was primarily due to the combined effects of (i) an increase in expenses associated with the purchase of crude oil and feedstock oil from external suppliers; and (ii) an impairment provision made in accordance with the accounting standards for certain facilities scheduled to be deactivated as a result of the regulations to promote the use of ethanol in vehicles.

In 2018, the cash processing cost of our refineries was RMB167.74 per ton, representing an increase of RMB0.15 per ton from RMB167.59 per ton in 2017, primarily due to an increase in power and labor cost as compared to 2017.

Profit from Operations In 2018, in our refining and chemicals segment, in response to market demand, we increased the processing load of the facilities with high efficiency, continued to adjust our product structure, increased production of high value-added and market-favorable products, and intensified management and control over our costs and expenses, maintaining a good position in profit contribution. In 2018, we realized operating profits of RMB44,701 million in the refining and chemicals segment, representing an increase of 3.8% as compared to RMB43,075 million in 2017. The refining operations recorded an operating profit of RMB36,878 million, representing an increase of 3.3% as compared to RMB35,687 million in 2017. Our chemical operations realized an operating profit of RMB7,823 million, representing an increase of 5.9%, as compared to RMB7,388 million in 2017.

Marketing Segment

Revenue Revenue of the marketing segment increased by 20.6% from RMB1,660,456 million in 2017 to RMB2,003,105 million in 2018. This increase was primarily due to the combined effects of (i) the increase in both sales volume and prices of products such as gasoline and kerosene, and the rise in the price of diesel as partially offset by the decrease in the sales volume of diesel; and (ii) the increase in revenue derived from trading of oil products.

Operating Expenses Operating expenses of the marketing segment increased by 21.6% from RMB1,652,177 million in 2017 to RMB2,009,555 million in 2018, primarily due to an increase in the expenses for purchase of refined oil from external suppliers.

(Loss) /profit from Operations In 2018, facing an unfavorable situation of substantial surplus in domestic resources and fiercer competition in the market, our domestic marketing segment adhered to the principle of market-orientation and efficiency, adopted active measures to address market competition, maximized efforts to increase our market share and enhance efficiency, and effectively ensured the proper downstream operations of our refineries, so as to realize the value of our industrial chain. In international trading, the marketing segment intensified coordination and cooperation with domestic industrial chains, and optimized the import and export of oil and gas resources. In 2018, affected by certain factors including fierce market competition and an adverse effect on profit from inventories due to a sharp decrease in oil prices in the fourth quarter, the marketing segment recorded an operating loss of RMB6,450 million, representing a decrease of RMB14,729 million as compared to the operating profit of RMB8,279 million in 2017.

Natural Gas and Pipeline Segment

Revenue Revenue of the natural gas and pipeline segment amounted to RMB362,626 million in 2018, representing an increase of 22.6% as compared to RMB295,786 million in 2017, primarily due to the increase in the sales volume of natural gas.

Operating Expenses Operating expenses of the natural gas and pipeline segment amounted to RMB337,111 million in 2018, representing an increase of 20.4% as compared to RMB280,098 million in 2017, primarily due to the increase in the expenses for purchasing natural gas.

 

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Profit from Operations In 2018, in the natural gas and pipeline segment, in line with the increased demand for natural gas in the domestic market, we optimized our marketing strategies, made great efforts to expand into the high-end and high-profitability market, and continued to enhance the value of our natural gas business chain. In 2018, we realized an operating profit of RMB25,515 million, representing an increase of 62.6% as compared to RMB15,688 million in 2017.

In 2018, the volume of imported natural gas and liquefied natural gas (LNG) increased substantially. We took active measures to control the loss arising from the imported natural gas, and recorded a net loss of RMB24,907 million in the sale of imported natural gas, representing an increase in loss of RMB960 million as compared to 2017. We will continue to adopt vigorous measures to control losses.

In 2018, our international operations realized revenue of RMB836,619 million, accounting for 35.2% of our total revenue. Profit before income tax expense amounted to RMB4,781 million. Our international operations maintained a healthy development with further improved operating ability.

Our four operating segments are exploration and production, refining and chemicals, marketing as well as natural gas and pipeline. Overseas operations do not constitute a separate operating segment. The financial data of overseas operations are included in the financial data of the respective operating segment mentioned above.

Liquidity and Capital Resources

Our primary sources of funding include cash generated by operating activities and short-term and long-term borrowings, which are expected to be sufficient for our funding requirements for at least the next twelve months. 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. For the year ended December 31, 2019, we distribute dividends of 45% of our net profit attributable to owners of the Company recorded under IFRS, and additional interim and final special dividends in return to our shareholders. 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.

Our financing ability may be limited by our financial condition, our results of operations and the international and domestic capital markets. Prior to accessing the international and domestic capital markets, we must obtain approval from the relevant PRC government authorities. In general, we must obtain PRC government approval for any project involving significant capital investment for our refining and chemicals, 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 — Risks Related to Liquidity”.

We plan to fund the capital and related expenditures described in this annual report principally through cash from operating activities, short-term and long-term borrowings and cash and cash equivalents. Net cash flows from operating activities in the year ended December 31, 2019 was RMB359,610 million. As of December 31, 2019, we had cash and cash equivalents of RMB86,409 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 declines sharply in the future, it is likely that we would delay or reduce the scale of the capital expenditures for each segment.

We currently do not have any outstanding options, warrants or other rights for any person 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.

 

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In addition, as of December 31, 2019, we did not 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 years ended December 31, 2017, 2018 and 2019 and our cash equivalents at the end of each year.

 

     Year Ended December 31,  
     2017     2018     2019  
     (RMB in millions)  

Net cash flows from operating activities

     368,729       353,256       359,610  

Net cash flows used for investing activities

     (243,790     (267,812     (332,948

Net cash flows used for financing activities

     (96,746     (125,703     (27,276

Currency translation difference

     (3,551     2,513       1,069  

Cash and cash equivalents at year end

     123,700       85,954       86,409  

Our cash and cash equivalents increased by 0.5% from RMB85,954 million as of December 31, 2018 to RMB86,409 million as of December 31, 2019.

Net Cash Flows from Operating Activities

Our net cash flows from operating activities amounted to RMB359,610 million for the year ended December 31, 2019, representing an increase of 1.8% from RMB353,256 million for the year ended December 31, 2018. This was mainly due to a combined effect of the changes in inventories, receivables, payables and contract obligations during the reporting period. As of December 31, 2019, we had cash and cash equivalents of RMB86,409 million. Our cash and cash equivalents were mainly denominated in US Dollars and Renminbi (approximately 57.2% were denominated in US Dollars, approximately 37.6% were denominated in Renminbi, approximately 3.6% were denominated in HK Dollars and approximately 1.6% were denominated in other currencies).

Our net cash flows from operating activities amounted to RMB353,256 million for the year ended December 31, 2018, representing a decrease of 4.2% from RMB368,729 million for the year ended December 31, 2017. This was mainly due to a combined effect of the changes in inventories, receivables and payables and other working capital and the increase in taxes, employee fees during the reporting period. As of December 31, 2018, we had cash and cash equivalents of RMB85,954 million. Our cash and cash equivalents were mainly denominated in Renminbi and US Dollars (approximately 46.2% were denominated in Renminbi, approximately 49.1% were denominated in US Dollars, approximately 2.1% were denominated in HK Dollars and approximately 2.6% were denominated in other currencies).

Net Cash Flows Used for Investing Activities

Our net cash flows used for investing activities in 2019 amounted to RMB332,948 million, representing an increase of 24.3% from RMB267,812 million in 2018. The increase was primarily due to an increase in capital expenditures in 2019.

Our net cash flows used for investing activities in 2018 amounted to RMB267,812 million, representing an increase of 9.9% from RMB243,790 million in 2017. The increase was primarily due to an increase in capital expenditures as a result of the adjustment of our investment plans based on the oil price trend and market changes in 2018.

Net Cash Flows Used for Financing Activities

Our net cash flows used for financing activities in 2019 was RMB27,276 million, representing a decrease of 78.3% from RMB125,703 million in 2018. This was primarily due to the changes in long and short-term borrowings during the reporting period.

 

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Our net cash flows used for financing activities in 2018 was RMB125,703 million, representing an increase of 29.9% from RMB96,746 million in 2017. This was primarily due to a decrease in new borrowings as a result of our efforts to optimize our debt structure and reduce our debt in 2018.

Our net borrowings as of December 31, 2017, 2018 and 2019 were as follows:

 

     As of December 31,  
     2017      2018      2019  
     (RMB in millions)  

Short-term borrowings (including current portion of long-term borrowings)

     184,601        145,150        175,840  

Long-term borrowings

     289,858        269,422        290,882  
  

 

 

    

 

 

    

 

 

 

Total borrowings

     474,459        414,572        466,722  
  

 

 

    

 

 

    

 

 

 

Less: cash and cash equivalents

     123,700        85,954        86,409  
  

 

 

    

 

 

    

 

 

 

Net borrowings

     350,759        328,618        380,313  
  

 

 

    

 

 

    

 

 

 

The following table sets out the remaining contractual maturity of borrowings as at the respective dates according to the earliest contractual maturity dates. The amounts set out below are contractual undiscounted cash flows, including principal and interest:

 

     As of December 31,  
     2018      2019  
    

(RMB in million)

 

Within 1 year

     158,782        188,771  

Between 1 and 2 years

     98,939        30,090  

Between 2 and 5 years

     150,837        253,918  

After 5 years

     43,879        31,576  
  

 

 

    

 

 

 

Total

     452,437        504,355  
  

 

 

    

 

 

 

Our total borrowings as of December 31, 2019 consisted of approximately 53.6% of fixed-rate loans and approximately 46.4% of floating-rate loans. Of our borrowings as of December 31, 2019, approximately 76.4% were denominated in Renminbi, approximately 21.5% were denominated in US Dollars and approximately 2.1% were denominated in other currencies.

Our total borrowings as of December 31, 2018 consisted of approximately 48.6% of fixed-rate loans and approximately 51.4% of floating-rate loans. Of our borrowings as of December 31, 2018, approximately 71.8% were denominated in Renminbi, approximately 25.9% were denominated in US Dollars and approximately 2.3% were denominated in other currencies.

Our total borrowings as of December 31, 2017 consisted of approximately 54.2% of fixed-rate loans and approximately 45.8% of floating-rate loans. Of our borrowings as of December 31, 2017, approximately 71.7% were denominated in Renminbi, approximately 26.5% were denominated in US Dollars and approximately 1.8% were denominated in other currencies.

Our debt to capital ratio (calculated by dividing interest-bearing debts by the aggregate of interest-bearing debts and shareholder’s equity; interest-bearing debts including various long and short term borrowings) as of December 31, 2017, 2018 and 2019 was 25.5%, 22.7% and 24.4%.

As of December 31, 2019, the outstanding amount of our debts secured by CNPC and its subsidiaries and other third parties was RMB22,313 million.

 

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Capital Expenditures and Investments

In 2019, we focused on the principles of quality for capital expenditures, continued to optimize our investment structure and control our overall capital expenditures, with a focus on the investment in upstream oil and gas projects in order to enhance our sustainable development capability. In 2019, our capital expenditures were RMB296,776 million, representing an increase of 15.9% from RMB256,106 million in 2018.

The table below sets forth our capital expenditures and investments by business segment for each of the years ended December 31, 2017, 2018 and 2019. Our board of directors has approved a total estimated capital expenditures of RBM295,000 million for 2020. Considering the impact of COVID-19 and the volatility in international oil prices, we intend to follow the principle of maintaining positive free cash flow, and dynamically adjust our capital expenditures for 2020. Please refer to “Item 3 — Key Information — Risk Factors — Risks Related to COVID-19”.

 

     2017      2018      2019  
     (RMB in
millions)
     %      (RMB in
millions)
     %      (RMB in
millions)
     %  

Exploration and production(1)

     161,997        74.87        196,109        76.57        230,117        77.54  

Refining and chemicals

     17,859        8.25        15,419        6.02        21,279        7.17  

Marketing

     10,982        5.08        17,010        6.64        17,618        5.94  

Natural gas and pipeline

     24,529        11.34        26,502        10.35        27,004        9.10  

Headquarters and others

     1,014        0.46        1,066        0.42        758        0.25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     216,381        100.00        256,106        100.00        296,776        100.00  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

If investments related to geological and geophysical exploration costs are included, the capital expenditures and investments for the exploration and production segment in 2017, 2018, 2019 would be RMB176,426 million, RMB206,256 million and RMB241,992 million, respectively.

As of December 31, 2019, the capital commitments contracted but not provided for by us were approximately RMB56,856 million.

Exploration and Production

A majority of our capital expenditures and investments relate to our exploration and production segment. For each of the three years ended December 31, 2017, 2018 and 2019, capital expenditures in relation to the exploration and production segment amounted to RMB161,997 million, RMB196,109 million and RMB230,117, respectively. In 2019, our capital expenditures were primarily used for exploration activities in the key basins such as Songliao Basin, Erdos Basin, Tarim Basin, Sichuan Basin and Bohai Bay Basin and for development activities in the oil and gas fields of Daqing, Changqing, Liaohe, Xinjiang, Tarim and the Southwest region, as well as for the operation of existing projects and the development of new projects in the Middle East, Central Asia, the Americas and the Asia-Pacific regions, and realized an effective growth in our production and profitability.

We anticipate that the capital expenditures for our exploration and production segment in 2020 will be as follows. Domestic exploration activities will continue to be focused on the key basins such as Songliao Basin, Erdos Basin, Tarim Basin, Sichuan Basin and Bohai Bay Basin and we will strengthen the development of unconventional resources such as shale gas. We will endeavor to achieve an oil and gas equivalent output of more than 200 million tons in 2020. Overseas operations will still be aimed at the operation of existing projects in the Middle East, Central Asia, the Americas and the Asia-Pacific regions to endeavor to maintain good quality development and high profitability.

Refining and Chemicals

Our capital expenditures for our refining and chemicals segment for each of the years ended December 31, 2017, 2018 and 2019 were RMB17,859 million, RMB15,419 million and RMB21,279 million, respectively. In

 

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2019, our capital expenditures were mainly spent on the construction of large-scale refining and chemicals facilities, including projects such as the refining-chemical integration project at Guangdong Petrochemical, the project in relation to adjustment of product structure at Daqing Petrochemical, the large-scale refining-chemical projects of producing ethylene out of ethane in Changqing and Tarim, and certain other oil product quality upgrading projects.

Our capital expenditures for the refining and chemicals segment in 2020 are expected to be used primarily for the refining-chemical integration project at Guangdong Petrochemical, the Jieyang ABS project of Jilin Petrochemical, project in relation to adjustment of product structure at Daqing Petrochemical, the large-scale refining-chemical projects of producing ethylene out of ethane in Changqing and Tarim, and certain refining-chemical transformation and upgrading projects.

Marketing

Our capital expenditures for our marketing segment for each of the years ended December 31, 2017, 2018 and 2019 were RMB10,982 million, RMB17,010 million and RMB17,618 million, respectively. Our capital expenditures for the marketing segment in 2019 were mainly used for the construction and expansion of refined oil sales networks, engineering works for safety and environmental protection such as anti-seepage renovation of service stations, and construction of overseas facilities for storage, transmission and sale of oil and gas.

Our capital expenditures for our marketing segment for the year of 2020 are expected to be used primarily for the construction and expansion of refined oil sales networks and the construction of the overseas oil and gas centers storage and transmission facilities.

Natural Gas and Pipeline

Our capital expenditures for the natural gas and pipeline segment for each of the three years ended December 31, 2017, 2018 and 2019 were RMB24,529 million, RMB26,502 million and RMB27,004 million, respectively. Our capital expenditures for the natural gas and pipeline segment in 2019 were mainly used for construction projects of important natural gas trunk lines such as the China-Russia East Natural Gas Pipeline and the Fujian-Guangdong branch line of the Third West-East Gas Pipeline, LNG storage and transmission facilities for peak regulation, interconnection lines, branch lines and sales terminals.

Our capital expenditures for the natural gas and pipeline segment in 2020 are expected to be used primarily for the construction of key natural gas trunk line projects such as the China-Russia East Natural Gas Pipeline, the Shenzhen LNG storage and transmission project for peak regulation, the natural gas interconnection projects, as well as the construction of gas branches and sales terminals.

Headquarters and Others

Our non-segment capital expenditures and investments for each of the years ended December 31, 2017, 2018 and 2019 were RMB1,014 million, RMB1,066 million and RMB758 million, respectively, which were primarily used for setting up the research test platform and development of our IT system.

Our capital expenditures for the headquarters and others in 2020 are expected to be used for improvement of the scientific research facilities and development of our IT system.

Off-Balance Sheet Arrangements

As of December 31, 2019, there were no off-balance sheet arrangements that had or were 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.

 

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Long-Term Contractual Obligations and Other

Commercial Commitments and Payment Obligations

All information that is not historical in nature disclosed under “Item 5 — Operating and Financial Review and Prospects — Long-Term Contractual Obligations and Other Commercial Commitments and Payment Obligations” is deemed to be a forward looking statement. See “Forward-Looking Statements” for additional information.

The tables below set forth our long-term contractual obligations outstanding as of December 31, 2019.

 

     Payment Due by Period  

Contractual Obligations

   Total      Less Than
1 Year
     1-3 Years      3-5 Years      After
5 Years
 
     (RMB in millions)  

Long-term debt

     376,225        85,343        180,489        81,979        28,414  

Lease obligations

     276,154        14,304        26,546        24,554        210,750  

Capital commitments

     56,856        15,017        41,803        36        —    

Debt-related interest

     37,634        12,931        16,214        5,310        3,179  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     746,869        127,595        265,052        111,879        242,343  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We are obligated to make annual payment with respect to our exploration and production licenses to the Ministry of Natural Resources. The table below sets forth the estimated amount of the annual payments in the next five years:

 

Year

   Annual Payment  
     (RMB in millions)  

2020

     800  

2021

     800  

2022

     800  

2023

     800  

2024

     800  

Assets Retirement Obligation

Most of the provinces and regions in which our oil and gas exploration and production activities are located have promulgated environmental protection regulations, which set forth specific abandonment and disposal processes for oil and gas exploration and production activities. We have established standard abandonment procedures, including plugging all retired wells, dismantling all retired metering stations and other related facilities and performing site restoration, in response to the issuance of these provincial and regional regulations. As of December 31, 2019, the balance of assets retirement obligation was RMB137,935 million.

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, 2019, we had 39,377 employees in our research and development departments and institutions.

 

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In each of the years ended December 31, 2017, 2018 and 2019, our total expenditures for research and development (including capitalized expenditures) were approximately RMB 18,601 million, RMB21,045 million and RMB21,410 million, respectively.

Exploration and Production

Most of 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. Our research and development efforts with respect to our exploration and production business focus on:

 

   

theories and technologies of crude oil and natural gas exploration;

 

   

oil and gas development theories and technologies;

 

   

engineering technologies and equipment;

 

   

theories and technologies for oil and gas storage and transportation; and

 

   

technologies for security, energy conservation and environmental protection.

Refining and Chemicals

Currently, our research and development efforts in the refining and chemicals segment are focusing on the following areas:

 

   

technologies for clean refined oil products;

 

   

technologies for unqualified heavy oil processing;

 

   

refining-chemical integration technologies;

 

   

technologies for production of olefin aromatics;

 

   

technologies for new products of synthetic resin and synthetic rubber;

 

   

new catalyst and catalytic materials; and

 

   

technologies for safety, energy saving and environmental protection.

Trend Information

In 2020, the global economy is still running the risk of moving downhill because of, among other things, geopolitical tension, uncertainty of international trade situation, climate change and the spread of COVID-19 in various countries around the world. As supply and demand in the global oil market eases, international oil prices are expected to be maintained in the lower range, though likely to take a further downturn. China is set to be affected by COVID-19 significantly in its economic operation, but the fundamental trend of steady improvement and long-term improvement is not expected to change. The Company will adhere to its resources, marketization, internationalization and innovation strategies, implement new concepts of development, pushing ahead quality-based development, endeavor to reform and undertake breakthrough innovations in key areas, build a solid base for business security and environmental protection, increase its attention on green and low-carbon development, digital transformation, intelligent development and value creation to comprehensively improve quality and profitability and endeavor to make substantial progress to enhance the capabilities of growth and value creation.

In respect of exploration and production, the Company expects to optimize the deployment of exploration and production, and further consolidate the resource base. The Company expects to continue to increase risk exploration, focusing on target areas such as ancient carbonate rocks, deep and ultra-deep reservoir, unconventional and greenfield target areas, emphasizing in-depth preliminary survey, striving to make technical developments, leading to strategic discoveries and breakthroughs. By targeting spacious basins and pits loaded with oil and gas, and strengthening concentrated exploration, refining exploration and efficient evaluation, the

 

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Company will endeavor to locate recoverable reserves that can be economically producible with scale. The Company will level up trials in oil and gas exploration with a view to profitable development, control the rate of diminishing productivity and increase the recovery ratio, maintaining the overall stability of crude oil production levels and the higher growth for natural gas.

In respect of refining and chemicals, the Company will focus on the high quality development by pushing ahead business restructuring and technical innovation to effect a conversion and upgrading of refining activities. Focusing on market demand, resources will be prioritized to more profitable companies and most efficient processing routes. We expect to also enhance benchmark management and cost control, continuously improving technical and economic performance indicators. According to the technical characteristics of each equipment, we expect to optimize the crude oil resource pool and reduce the cost of raw materials, enhance the competitiveness of our chemical business and vigorously develop high-end and special and precise chemical products with key projects being pushed ahead in a well-ordered manner.

In respect of marketing, the Company expects to strengthen its marketing capabilities, coordinate resource deployment, to endeavor to ensure adequate supply for upstream production and realize value along the crude oil industrial chain. With a view of being customer-focused and market-oriented, efforts will be focused on market expansion, increasing retail sales volume and enhancing profitability, as well as scientifically organizing well-informed management and implementing innovative marketing strategies and methods, pushing ahead integration of multiple modes of business operations online and offline, improving performance appraisal and incentive schemes to enhance sales and profitability. We will also level up development of high-quality marketing networks in strategic areas, steadily explore the construction and operation of comprehensive supply stations providing oil, gas, power and hydrogen at the same time, enhancing marketing through convenience stores and exploring innovative non-oil based business models and operation mechanisms.

In respect of natural gas and pipeline, the Company will coordinate resources both domestic and abroad, improve the multiple gas supply system, enhance management on the demand-side and set up a resource allocation mechanism matching demand in the market. We will promote interacting and interconnecting projects and make LNG terminals and gas tanks operate in a more efficient manner, strive hard to make up for deficiencies from gas storage peak shaving in a timely manner and, endeavor to ensure stable supply to the market and smooth operations of our business chains. We will endeavor to develop the city gas market by integration into the provincial pipeline network, and strive to develop the urban gas market. Active changes will be made to marketing methods and we will carry out a “tagging” sales strategy, increase deployment of resources in high-profitability market, accelerate the pace of marketization of gas prices and promote value-added services to effect growing sales and profitability. Construction of such major pipelines for the purpose of increasing interconnection as the middle part of China-Russia East Natural Gas Pipeline and middle part of Third West-East Gas Pipeline will be accelerated and pipeline security management will be upgraded continuously for safe operation.

In respect of international operations, the Company will focus on enhancing profitability, continuously optimizing overseas strategic deployment and asset structure, engaging international petroleum companies in strategic cooperation and taking further steps in developing new projects. We will strengthen onshore exploration, implement progressive high-efficiency exploration and promote deep-water exploration to maximize economically recoverable reservoirs. Existing projects will be operated with high quality. We will keep a close watch on changes in various risks and take effective measures for safe and smooth operations of overseas projects, enhancing the strength and capability of our international business.

Impact of COVID-19

Since January 2020, the COVID-19 pandemic has had a significant impact on the Chinese and global economy, which has significantly impacted the Company. In order to prevent the spread of COVID-19, many

 

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governments have adopted strict restrictions, including restrictions on international and local travel, public gatherings and participation in meetings, and the closure of schools, shops, restaurants, and some factories. Some countries have imposed strict curfews. As a result, the market demand for, and the prices of, the Company’s oil and gas products have declined. All of our business segments have been significantly affected, and we face heightened challenges in operation and management along the entire oil and gas industry chain. Please refer to “Item 3 — Key Information — Risk Factors — Risks Related to COVID-19”. The Company actively responded to the COVID-19 pandemic and set up a leading group for prevention and control of the COVID-19 pandemic. The leading group has timely arranged various measures to protect employees’ health and safety, promote production and operation in a safe, stable and orderly manner. The Company will strive to broaden sources of income, reduce expenditure, cut costs, enhance efficiency, optimize debt repayment structure, actively promote price maximization, and accelerate the development of domestic natural gas business, and endeavor to minimize any loss arising from the COVID-19 pandemic and sustainably develop our business in the long run. As of the date of this report, there is still significant uncertainty about the short-term and long-term adverse effects of the COVID-19 pandemic on the global and Chinese economy and financial markets, as such, we cannot accurately predict the short-term or long-term impact of the COVID-19 on us. We will closely monitor any developments and make timely adjustments to our business decisions accordingly.

Volatility of International Crude Oil Prices

Since the beginning of March 2020, the international crude oil price has fallen sharply due to a pessimistic outlook on the world economy affected by the COVID-19 pandemic and oversupply of crude oil in the global market. The decline in international crude oil prices is expected to greatly affect the Company’s upstream business profits and oil and gas import costs, and affect the Company’s downstream business profits through China’s pricing mechanism of refined oil, thereby adversely affecting the Company’s overall sales revenue and profits. We are actively responding to the risk of crude oil price volatility, and strive to maintain stable and healthy development of production and operation. See “Item 3 — Key Information — Risk Factors — Risks Related to Pricing and Exchange Rate”.

Short-Term Readjustment of Natural Gas Price

On February 22, 2020, the NDRC issued the Notice on Interim Reduction of Gas Cost for Non-resident Use to Support Resumption of Work and Production (the “Notice”), pursuant to which, acting on the PRC government’s guideline in respect of proper coordination of anti-COVID-19 efforts as well as economic and social development, the cost of non-resident use of gas will be lowered in the short term. Starting from the date thereof to June 30, 2020, off-season price policies shall be implemented in advance for the city gate prices of natural gas for non-resident use, greater price discounts shall be provided to industries, such as chemical fertilizer producers, which are deeply affected by the COVID-19, and the end-user prices of natural gas shall be timely reduced. The sales revenue and profits of natural gas sales of our Company will be affected to certain extent. However, we will endeavor to optimize our production and operations and push ahead the sustainable development of high quality business.

The Chinese Government Further Liberalizes Oil and Gas Market Access

On June 30, 2019, the NDRC and the MOFCOM issued Special Management Measures for Foreign Investment Access (Negative List) (2019 Edition), pursuant to which, starting from the date thereof, the restrictions on oil and gas exploration and development being limited to joint ventures and cooperation will be lifted. On December 22, 2019, the Central Committee of the Communist Party of China and the State Council issued Opinions on Creating a Better Development Environment to Support the Reform and Development of Private Enterprises (“Opinion”). This Opinion intends to further liberalize market access for private enterprises. It aims to liberalize competitive businesses and further introduce market competition mechanisms in the key industries and fields such as power, telecommunications, railways, oil and natural gas, to support private enterprises to enter the fields of oil and gas exploration and development, refining and sales, and to build

 

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infrastructure such as storage, transportation and pipeline transportation of crude oil, natural gas and refined oil, and to support qualified enterprises to participate in crude oil imports and refined oil exports. These policy changes will intensify competition in the oil and gas industry in the long run, and may adversely affect our business development and operating results.

Reform of the Oil and Gas Pipeline Network Operation Mechanism

On March 19, 2019, the PRC government passed the Opinions on Implementation of the Reform of the Operation Mechanism of Oil and Gas Pipeline Network (the “Opinion”). According to the Opinion, the PRC government will carry out reforms of the oil and gas pipeline operation mechanism. An oil and gas pipeline network operator will be established, which will have diversified investors with state-owned capital holding the majority stake. The Opinion states that the PRC government will form an oil and gas market system with multi-channel suppliers in the upstream, an integrated pipeline network with high efficiency in the middle-stream, and a fully competitive market in the downstream, to improve the efficiency of oil and gas resource allocation. On May 24, 2019, a number of Chinese government agencies jointly issued the Regulations on the Fair Opening of Oil and Gas Pipeline Network Facilities, pursuant to which, from May 24, 2019, oil and gas pipeline network operators shall provide non-discriminatory services of oil and gas transportation, storage, gasification, loading and unloading, transshipment to users who meet the accessing conditions; without proper reasons, they must not delay, refuse to sign service contracts with users who meet the accessing conditions, and must not make unreasonable requirements. On December 9, 2019, the PRC government established the National Pipeline Network Company. The National Pipeline Network Company is in discussions with the Company regarding a possible acquisition of certain pipeline assets from the Company. As at the date of this report, no definitive agreement has been reached. For this potential transaction, the Company will continue to adhere to the principles of fairness, equality and marketization in order to serve the interests of the shareholders of the Company as a whole. However, there is no assurance that the definitive agreement, if any, will not bring any adverse effect on the development of our natural gas and pipeline business and our operation results. Please refer to “Item 3 — Risk Factors — Risks Related to Government Regulation”.

Other than as disclosed above and elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the periods covered in this annual report that are reasonably likely to have a material adverse effect on our net revenue, profit, liquidity or capital resources, or that would cause the disclosed financial information to be misleading.

Other Information

Inflation

Inflation or deflation did not have a significant impact on our results of operations for the year ended December 31, 2019.

Related Party Transactions

For a discussion of related party transactions, see “Item 7 — Major Shareholders and Related Party Transactions — Related Party Transactions” and Note 37 to our consolidated financial statements included elsewhere in this annual report.

Recent Developments in IFRS

For a detailed discussion of recent developments in IFRS, see Note 3 to our consolidated financial statements.

 

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Item 6 — DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors, Senior Management and Supervisors

As of the date of this report, our board of directors consists of 11 directors, five of whom are independent non-executive directors. Directors are elected at shareholder meetings for three-year term. The directors may be re-elected and re-appointed upon the expiration of his/her term of office. The functions and duties conferred on the board of directors include:

 

   

convening shareholders’ meetings and reporting its work to the shareholders’ meeting;

 

   

implementing the resolutions of the shareholders’ meeting;

 

   

determining our business plans and investment programs;

 

   

formulating our annual budget and final accounts;

 

   

formulating our profit distribution and loss recovery proposals;

 

   

formulating proposals for the increase or reduction of our registered capital and the issuance of our debentures or other securities and listings;

 

   

proposing to redeem shares, merge, spin-off, dissolve or otherwise change the form of the company;

 

   

deciding on our internal management structure;

 

   

appointing or dismissing the president of the company, and upon the nomination of the president, appointing or dismissing the senior vice president, vice president, chief financial officer and other senior management, and determining matters relating to their remuneration;

 

   

formulating our basic management system;

 

   

preparing amendments to our articles of association;

 

   

managing the information disclosures of our company; and

 

   

exercising any other powers and duties conferred by the shareholders at general meetings.

Six of the directors are affiliated with CNPC or its subsidiaries.

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 corporate actions of our board of directors and our senior management personnel. As of the date of this report, the supervisory committee consists of nine supervisors, five of whom were elected, and may be removed, by the shareholders in a general meeting, and four of whom are employees representatives who were elected by our staff, and may be removed, by our staff. The term of office of our supervisors is three years. The supervisors may be re-elected and re-appointed. A supervisor cannot concurrently hold the position of a director, president, senior vice president, vice president or chief financial officer in our company.

The supervisory committee shall be responsible to the shareholders’ meeting and shall exercise the following functions and powers in accordance with law:

 

   

to review the periodic reports prepared by the board of directors and issue written opinions in connection with such review;

 

   

to review our financial condition;

 

   

to oversee the performance of duties by the directors, the president, senior vice presidents, vice presidents, the chief financial officer and other senior officers of the company and to propose the removal of any of the foregoing persons who acts in contravention of any law, regulation, the company’s articles of association or any resolutions of the shareholders’ meeting;

 

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to demand any director, the president, senior vice president, vice president, the chief financial officer or any other senior officer who acts in a manner which is harmful to the company’s interest to rectify such behavior;

 

   

to check the financial information such as the financial report, business report and plans for distribution of profits to be submitted by the board of directors at the shareholders’ meetings and to authorize, in the company’s name, publicly certified and practicing auditors to assist in the re-examination of such information should any doubt arise in respect thereof;

 

   

to propose the convening of an extraordinary shareholders’ meeting, and convene and preside over a shareholders’ meeting when the board fails to perform its duties to do so as set forth in the PRC Company Law;

 

   

to submit proposals at the shareholders’ meetings;

 

   

to confer with any director, or initiate legal proceedings on behalf of the company against any director, the president, senior vice president, vice president, the chief financial officer or any other senior officer in accordance with Article 152 of the PRC Company Law;

 

   

to initiate investigations upon being aware of any extraordinary development in the operational conditions of the company;

 

   

together with the audit committee of the board of directors, to review the performance of the outside auditors on a yearly basis, and to propose the engagement, renewal of engagement and termination of engagement of the outside auditors, as well as the service fees with respect to the audit services;

 

   

to oversee the compliance of related party transactions; and

 

   

other functions and powers as set forth in the articles of association of the company.

Supervisors shall attend meetings of the board of directors as observers.

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 appointed by and serves at the supervision of our board of directors. The board of directors will review, evaluate and supervise the performance of the management and reward or punish the members of the management in accordance with relevant rules and regulations.

 

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The following table sets forth certain information concerning our directors, supervisors and executive officers as of the date of this report:

 

Name(1)

   Age     

Position

   Time of
Election(2)

Dai Houliang

     56      Chairman of the Board of Directors    March 2020

Li Fanrong

     56      Vice Chairman and Non-executive Director    March 2020

Liu Yuezhen

     58      Non-executive Director    May 2014

Lv Bo

     57      Non-executive Director    March 2020

Jiao Fangzheng

     57      Non-executive Director    June 2019

Duan Liangwei

     52      Executive Director and President    June 2017

Lin Boqiang

     62      Independent Non-executive Director    May 2014

Zhang Biyi

     66      Independent Non-executive Director    October 2014

Elsie Leung Oi-sie

     80      Independent Non-executive Director    June 2017

Tokuchi Tatsuhito

     67      Independent Non-executive Director    June 2017

Simon Henry

     58      Independent Non-executive Director    June 2017

Xu Wenrong

     58      Chairman of the Supervisory Committee   

Zhang Fengshan

     58      Supervisor   

Jiang Lifu

     56      Supervisor   

Lu Yaozhong

     54      Supervisor   

Wang Liang

     57      Supervisor   

Fu Suotang

     57      Supervisor appointed by employees’ representatives   

Li Jiamin

     56      Supervisor appointed by employees’ representatives   

Liu Xianhua

     56