Company Quick10K Filing
PetroChina
20-F 2020-12-31 Filed 2021-04-29
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

Item 17 o Item 18 o
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
Part III
Item 17 - Financial Statements
Item 18 - Financial Statements
Item 19 - Exhibits
EX-4.1 h04189exv4w1.htm
EX-4.4 h04189exv4w4.htm
EX-4.24 h04189exv4w24.htm
EX-4.25 h04189exv4w25.htm
EX-4.26 h04189exv4w26.htm
EX-4.27 h04189exv4w27.htm
EX-4.28 h04189exv4w28.htm
EX-4.29 h04189exv4w29.htm
EX-8.1 h04189exv8w1.htm
EX-12.1 h04189exv12w1.htm
EX-12.2 h04189exv12w2.htm
EX-13.1 h04189exv13w1.htm
EX-13.2 h04189exv13w2.htm
EX-15.1 h04189exv15w1.htm
EX-15.2 h04189exv15w2.htm

PetroChina Earnings 2009-12-31

Balance SheetIncome StatementCash Flow

20-F 1 h04189e20vf.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)
   
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
    or
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009.
    or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    or
o
  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
 
 
 
 
(CHINESE CHARACTERS)
(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)
 
 
 
 
Li Hualin
Telephone number: 8610 59986223
Facsimile number: 8610 62099557
Email address: suxinliang@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
 
Name of Each Exchange on Which Registered
 
American Depositary Shares, each representing 100 H Shares, par value RMB1.00 per share*
  New York Stock Exchange, Inc.
H Shares, par value RMB1.00 per share
  New York Stock Exchange, Inc.**
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
 
None
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 
None
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
 
     
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 157,764,597,259 A Shares held by CNPC and 4,157,480,559 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 þ      No o
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 o      No þ
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 þ      No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes o      No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
o U.S. GAAP þ International Financial Reporting Standards as issued by the International Accounting Standards Board o 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 o       Item 18 o
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 o      No þ
(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 o      No o
 
 
* 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 1,970,667,300 H Shares represented by American Depositary Shares.
 


Table of Contents

 
Table of Contents
 
                     
            Page
 
    4  
    8  
                 
            Part I        
        Identity of Directors, Senior Management and Advisors     9  
        Offer Statistics and Expected Timetable     9  
        Key Information     9  
            Exchange Rates     9  
            Selected Financial Data     10  
            Risk Factors     12  
        Information on the Company     17  
            Introduction     17  
            Exploration and Production     24  
            Refining and Chemicals     35  
            Marketing     41  
            Natural Gas and Pipeline     44  
            Competition     47  
            Environmental Matters     48  
            Legal Proceedings     49  
            Properties     50  
            Intellectual Property     50  
            Regulatory Matters     50  
        Unresolved Staff Comments     57  
        Operating and Financial Review and Prospects     57  
            General     57  
            Operating Results     62  
            Liquidity and Capital Resources     69  
            Off-Balance Sheet Arrangements     74  
            Long-Term Contractual Obligations and Other Commercial Commitments and Payment Obligations     74  
            Research and Development     75  
            Trend Information     75  
            Other Information     76  
        Directors, Senior Management and Employees     77  
            Directors, Senior Management and Supervisors     77  
            Compensation     86  
            Board Practices     86  
            Employees     88  
            Share Ownership     88  
        Major Shareholders and Related Party Transactions     89  
            Major Shareholders     89  
            Related Party Transactions     89  
            Interests of Experts and Counsel     91  


2


Table of Contents

 
Table of Contents
 
                     
            Page
 
        Financial Information     92  
            Financial Statements     92  
            Significant Changes     93  
        The Offer and Listing     94  
            Nature of the Trading Market and Market Price Information     94  
        Additional Information     95  
            Memorandum and Articles of Association     95  
            Material Contracts     102  
            Foreign Exchange Controls     102  
            Taxation     102  
            Documents on Display     108  
        Quantitative and Qualitative Disclosures About Market Risk     108  
        Description of Securities Other Than Equity Securities     112  
                 
            Part II        
        Defaults, Dividends Arrearages and Delinquencies     112  
        Material Modifications to the Rights to Security Holders and Use of Proceeds     112  
        Controls and Procedures     113  
        Audit Committee Financial Expert     113  
        Code of Ethics     113  
        Principal Accountant Fees and Services     114  
        Exemptions from Listing Standards for Audit Committees     114  
        Purchases of Equity Securities by the Issuer and Affiliated Purchasers     115  
        Change In Registrant’s Certifying Accountant     115  
        Corporate Governance     115  
                 
            Part III        
        Financial Statements     116  
        Financial Statements     117  
        Exhibits     117  
 EX-4.1
 EX-4.4
 EX-4.24
 EX-4.25
 EX-4.26
 EX-4.27
 EX-4.28
 EX-4.29
 EX-8.1
 EX-12.1
 EX-12.2
 EX-13.1
 EX-13.2
 EX-15.1
 EX-15.2


3


Table of Contents

 
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, or
 
  •  the CNPC group’s domestic crude oil and natural gas exploration and production, refining and marketing, chemicals and natural gas businesses that were transferred to us in the restructuring of the CNPC group in 1999.
 
  •  “PRC” or “China” is to the People’s Republic of China, but does not apply to Hong Kong, Macau or Taiwan for purposes of this annual report.
 
We publish our consolidated financial statements in Renminbi or RMB. The audited consolidated financial statements included in this annual report have been prepared as if the operations and businesses transferred to us from CNPC were transferred as of the earliest period presented or from the date of establishment of the relevant unit, whichever is later, and conducted by us throughout the period. In this annual report, IFRS refers to International Financial Reporting Standards as issued by the International Accounting Standards Board.
 
In December 2008, the United States Securities and Exchange Commission (the “SEC“or the “Commission”) announced that it had approved revisions designed to modernize the oil and gas company reserves reporting requirements. The revisions became effective on January 1, 2010. For purposes of this annual report, the oil and gas reserve disclosure rules prior to the effectiveness of the revisions are referred to herein as the “old SEC reserve rules.” The new oil and gas reserve disclosure rules that became effective on January 1, 2010 are referred to herein as the “new SEC reserve rules.” Our reserve-related disclosure as of and for the years ended December 31, 2007 and 2008 comply with the old SEC reserve rules. Our reserve-related disclosure as of and for the year ended December 31, 2009 complies with the new SEC reserve rules.
 
Conversion Table
 
         
1 barrel-of-oil equivalent
  = 1 barrel of crude oil   = 6,000 cubic feet of natural gas
1 cubic meter
  = 35.315 cubic feet    
1 ton of crude oil
  = 1 metric ton of crude oil   = 7.389 barrels of crude oil (assuming an API gravity of 34 degrees)
 
Certain Oil and Gas Terms
 
Unless the context indicates otherwise, the following terms have the meanings shown below:
 
“acreage” The total area, expressed in acres, over which an entity has interests in exploration or production. Net acreage is the entity’s interest, expressed in acres, in the relevant exploration or production area.
 
“API gravity” An indication of the density of crude oil or other liquid hydrocarbons as measured by a system recommended by the American Petroleum Institute (API), measured in degrees. The lower the API gravity, the heavier the compound.


4


Table of Contents

 
“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 new SEC reserve rules, 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.
 
“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 together with natural gas production. Ethane and pentanes are the predominant components, with other heavier hydrocarbons also present in limited quantities.
 
“offshore” Areas under water with a depth of five meters or greater.
 
“onshore” Areas of land and areas under water with a depth of less than five meters.
 
“primary distillation capacity” At a given point in time, the maximum volume of crude oil a refinery is able to process in its basic distilling units.
 
“proved developed reserves” Under the old SEC reserve rules, proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
 
“proved reserves” Under the new SEC reserve 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


5


Table of Contents

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.
 
(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.
 
Under the old SEC reserve rules, proved reserves are estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and


6


Table of Contents

operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not of escalations based upon future conditions.
 
“proved undeveloped reserves” Under the old SEC reserve rules, proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.
 
“reserve-to-production ratio” For any given well, field or country, the ratio of proved reserves to annual production of crude oil or, with respect to natural gas, to wellhead production excluding flared gas.
 
“sales gas” Marketable production of gas on an “as sold” basis, excluding flared gas, injected gas and gas consumed in operations.
 
“undeveloped reserves” Under the new SEC reserve 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.
 
(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.


7


Table of Contents

 
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;
 
  •  failure to achieve continued exploration success;
 
  •  failures or delays in achieving production from development projects;
 
  •  continued availability of capital and financing;
 
  •  acquisitions and other business opportunities that we may pursue;
 
  •  general economic, market and business conditions, including volatility in interest rates, changes in foreign exchange rates and volatility in commodity markets;


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Table of Contents

 
  •  liability for remedial actions under environmental regulations;
 
  •  impact of the PRC’s entry into the World Trade Organization;
 
  •  the actions of competitors;
 
  •  wars and acts of terrorism or sabotage;
 
  •  changes in policies, laws or regulations of the PRC, including changes in applicable tax rates;
 
  •  the other changes in global economic and political conditions affecting the production, supply and demand and pricing of crude oil, refined products, petrochemical products and natural gas; and
 
  •  the other risk factors discussed in this annual report, and other factors beyond our control.
 
You should not place undue reliance on any forward-looking statement.
 
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.”
 
ITEM 2 — OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3 — KEY INFORMATION
 
Exchange Rates
 
The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars for each month during the previous six months and the most recent practicable date:
 
                 
    Noon Buying Rate(1)
    High   Low
    (RMB per US$)
 
December 2009
    6.8299       6.8244  
January 2010
    6.8295       6.8258  
February 2010
    6.8330       6.8258  
March 2010
    6.8270       6.8254  
April 2010
    6.8275       6.8240  
May 2010
    6.8310       6.8245  
June 2010 (ending as of June 18)
    6.8323       6.8267  
 
 
(1) The exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board.


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Table of Contents

 
Average Noon Buying Rates(1)
 
The following table sets forth the average noon buying rates between Renminbi and U.S. dollars for each of 2005, 2006, 2007, 2008 and 2009, calculated by averaging the noon buying rates on the last day of each month during the relevant year:
 
         
    Average Noon
    Buying Rate
    (RMB per US$)
 
2005
    8.1826  
2006
    7.9579  
2007
    7.5806  
2008
    6.9193  
2009
    6.8295  
 
 
(1) For periods prior to January 1, 2009, the exchange rates reflect the noon buying rates as reported by the Federal Reserve Bank of New York. For periods after January 1, 2009, the exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board.
 
Selected Financial Data
 
Historical Financial Information
 
You should read the selected historical financial data set forth below in conjunction with the consolidated financial statements of PetroChina and their notes and “Item 5 — Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected historical income statement and cash flow data for the years ended December 31, 2007, 2008 and 2009 and the selected historical statement of financial position data as of December 31, 2008 and 2009 set forth below are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected historical income statement data and cash flow data for the years ended December 31, 2005 and 2006 and the selected statement of financial position data as of December 31, 2005, 2006 and 2007 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.
 
                                         
    Year Ended December 31,(1)  
    2005     2006     2007     2008     2009  
                RMB     RMB     RMB  
    RMB     RMB                    
    (In millions, except for per share and per ADS data)  
 
Income Statement Data
                                       
Turnover
    554,063       691,448       837,542       1,072,604       1,019,275  
                                         
Operating expenses
                                       
Purchases, services and other
    (199,317 )     (270,112 )     (369,786 )     (562,851 )     (492,472 )
Employee compensation costs
    (29,770 )     (39,292 )     (50,940 )     (62,167 )     (65,977 )
Exploration expenses, including exploratory dry holes
    (15,569 )     (18,827 )     (20,956 )     (21,879 )     (19,398 )
Depreciation, depletion and amortization
    (51,803 )     (62,155 )     (67,423 )     (94,759 )     (92,259 )
Selling, general and administrative expenses
    (36,650 )     (43,400 )     (52,389 )     (59,617 )     (65,423 )
Taxes other than income taxes
    (23,997 )     (57,208 )     (73,806 )     (124,132 )     (135,465 )
Other (expenses)/incomes, net
    (3,083 )     (430 )     (1,225 )     12,372       (4,837 )
                                         
Total operating expenses
    (360,189 )     (491,424 )     (636,525 )     (913,033 )     (875,831 )
                                         
Profit from operations
    193,874       200,024       201,017       159,571       143,444  
                                         
Share of profit of affiliates and jointly controlled entities
    2,002       1,686       6,445       4,290       1,184  


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    Year Ended December 31,(1)  
    2005     2006     2007     2008     2009  
                RMB     RMB     RMB  
    RMB     RMB                    
    (In millions, except for per share and per ADS data)  
 
Exchange gain (loss), net
    85       272       (751 )     (1,081 )     (783 )
Interest income
    2,036       2,148       2,101       2,277       1,459  
Interest expense
    (2,929 )     (3,328 )     (3,673 )     (3,044 )     (5,272 )
                                         
Profit before income tax expense
    195,068       200,802       205,139       162,013       140,032  
Income tax expense
    (54,912 )     (50,615 )     (49,802 )     (35,211 )     (33,473 )
                                         
Profit for the year
    140,156       150,187       155,337       126,802       106,559  
                                         
Other comprehensive income/(loss)
                                       
Foreign currency translation difference
    (799 )     (358 )     (1,852 )     (2,676 )     (3,500 )
Income/(loss) from the change in the fair value of the financial assets available for sale
    83       (4 )     395       (340 )     191  
Income tax relating to components of other comprehensive income/(loss)
    (28 )     2       (87 )     67       (38 )
                                         
Other comprehensive loss (after tax net)
    (744 )     (360 )     (1,544 )     (2,949 )     (3,347 )
                                         
Total comprehensive income for the year
    139,412       149,827       153,793       123,853       103,212  
                                         
Profit for the year attributable to:
                                       
Owners of the company
    134,381       143,498       146,796       114,453       103,387  
Non-controlling interest
    5,775       6,689       8,541       12,349       3,172  
                                         
      140,156       150,187       155,337       126,802       106,559  
                                         
Basic and diluted earnings per share for profit
                                       
attributable to owners of the company(2)
    0.76       0.80       0.82       0.63       0.56  
Basic and diluted earnings per ADS for profit
                                       
attributable to owners of the company(3)
    76.02       80.16       81.69       62.54       56.49  
 
                                         
    As of December 31,(1)
    2005   2006   2007   2008   2009
    RMB   RMB   RMB   RMB   RMB
    (In millions, except for per share and per ADS data)
 
Statement of Financial Position Data
                                       
Inventories
    62,782       76,081       88,507       90,670       114,781  
Cash and cash equivalents
    83,034       50,869       68,817       33,150       86,925  
Total current assets
    178,926       165,778       235,902       224,946       294,383  
Total non-current assets
    606,483       714,509       833,709       971,289       1,155,905  
Total current liabilities
    156,878       181,993       200,150       265,651       388,553  
Total non-current liabilities
    81,862       75,675       86,742       82,744       154,034  
Equity attributable to owners of the company
    517,921       590,414       738,246       790,910       847,223  
Non-controlling interest
    28,748       32,205       44,473       56,930       60,478  
Total equity
    546,669       622,619       782,719       847,840       907,701  
Share capital
    179,021       179,021       183,021       183,021       183,021  
Other Financial Data
                                       
Dividend per share
    0.34       0.36       0.36       0.28       0.25  
Dividend per ADS
    33.80       35.75       36.25       28.14       25.42  
Capital expenditures
    (125,814 )     (149,493 )     (182,678 )     (232,377 )     (266,836 )

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    As of December 31,(1)
    2005   2006   2007   2008   2009
    RMB   RMB   RMB   RMB   RMB
    (In millions, except for per share and per ADS data)
 
Cash Flow Data
                                       
Net cash flows from operating activities
    207,656       202,701       207,633       172,465       261,972  
Net cash flows used for investing activities
    (91,445 )     (159,065 )     (183,656 )     (211,797 )     (261,453 )
Net cash flows from/used in financing activities
    (46,083 )     (75,385 )     (5,838 )     3,777       53,077  
 
 
(1) Due to business combinations under common control completed in 2005, 2008 and 2009, the relevant financial statements of our company have been restated in a manner similar to a uniting of interests whereby the assets and liabilities acquired are accounted for at carryover predecessor values to the other party to the business combination with all periods presented as if our operations and the business acquired have always been combined. The difference between the consideration paid by us and the net assets or liabilities of the business acquired is adjusted against equity.
 
(2) The basic and diluted earnings per share for the year ended December 31, 2005 was calculated by dividing the net profit with the weighted average number of 176,770 million shares issued and outstanding for the year presented. The basic and diluted earnings per share for the year ended December 31, 2006 was calculated by dividing the net profit with the number of 179,021 million shares issued and outstanding for the year presented. The basic and diluted earnings per share for the year ended December 31, 2007 was calculated by dividing the net profit with the weighted average number of 179,700 million shares issued and outstanding for the year presented. The basic and diluted earnings per share for the year ended December 31, 2008 was calculated by dividing the net profit with the number of 183,021 million shares issued and outstanding for the year presented. The basic and diluted earnings per share for the year ended December 31, 2009 was calculated by dividing the net profit with the number of 183,021 million shares issued and outstanding for the year presented.
 
(3) The basic and diluted earnings per ADS for the year ended December 31, 2005 was calculated by dividing net profit with the weighted average number of 176,770 million shares issued and outstanding for the year presented, each ADS representing 100 H Shares. The basic and diluted earnings per ADS for the year ended December 31, 2006 was calculated by dividing the net profit with the weighted average number of 179,021 million shares issued and outstanding for the year presented, each ADS representing 100 H Shares. The basic and diluted earnings per ADS for the year ended December 31, 2007 was calculated by dividing the net profit with the weighted average number of 179,700 million shares issued and outstanding for the year presented, each ADS representing 100 H Shares. The basic and diluted earnings per ADS for the year ended December 31, 2008 was calculated by dividing the net profit with the number of 183,021 million shares issued and outstanding for the year presented, each ADS representing 100 H Shares. The basic and diluted earnings per ADS for the year ended December 31, 2009 was calculated by dividing the net profit with the number of 183,021 million shares issued and outstanding for the year presented, each ADS representing 100 H Shares.
 
Risk Factors
 
Our business is primarily subject to various changing competitive, economic and social conditions in the PRC. Such changing conditions entail certain risks, which are described below.
 
  •  The global financial crisis and economic downturn have adversely affected economies and businesses around the world, including in China. Due to the global economical downturn and a decrease in consumer demand, the economic situation in China has been quite severe since the second half of 2008. Although the Chinese economy has recovered recently, it is uncertain whether such recovery will continue into the rest of 2010 and beyond. Any recurrence of the global financial crisis which may be sparked by the recent market volatility attributed to concerns over several European countries including Greece, Portugal, Ireland and Spain may cause a further decline in the PRC economy. This change in the macro-economic conditions has and is expected to continue to have an adverse impact on our business and operations. Our profitability may be adversely affected due to the low growth in oil and gas demand. We have experienced pricing pressure on

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  our refined products, which has an adverse effect on our profitability. These factors may also lead to intensified competition for market share and available margin, with consequential potential adverse effects on volumes. The financial and economic situation may have a negative impact on third parties with whom we do, or may do, business. Any of these factors may affect our results of operations, financial condition and liquidity.
 
  •  In early 2003, several regions in Asia, including Hong Kong and China, were affected by the outbreak of SARS. Furthermore, in early 2008, severe snowstorms hit many areas of China and particularly affected southern China. Additionally, in May 2008, a major earthquake struck China’s populous Sichuan Province, causing great loss of life, numerous injuries, property loss and disruption to the local economy. Finally, in April 2009, an outbreak of H1N1 influenza occurred in Mexico and the United States and human cases of swine flu were and continue to be discovered in China and Hong Kong. Any future outbreak of SARS, avian flu or similar adverse public health development or an increase in the severity of H1N1 influenza or other contagious diseases, extreme unexpected bad weather or severe natural disasters would adversely affect our business and operating results.
 
  •  Our operations are affected by the volatility of prices for crude oil and refined products. We and China Petroleum and Chemical Corporation, or Sinopec, set our crude oil median prices monthly based on the Singapore trading prices for crude oil. In 2006, the PRC government, under its macroeconomic controls, introduced a mechanism for determining domestic prices of refined products. On December 18, 2008, the PRC government further modified this mechanism by linking the domestic prices of refined oil products to a number of factors, including international market prices, average domestic processing cost, tax, selling expenses and appropriate profit margin. Historically, international prices for crude oil and refined products have fluctuated widely in response to changes in many factors, such as global and regional economic and political developments, and global and regional supply and demand for crude oil and refined products. We do not have, and will not have, control over the factors affecting international prices for crude oil and refined products. A decline in crude oil prices will reduce our crude oil revenues derived from external customers. If crude oil prices remain at a low level for a prolonged period, our company has to determine and estimate whether our oil and gas assets may suffer impairment losses and, if so, the amount of the impairment losses. An increase in crude oil prices may, however, increase the production costs of refined products. In addition, a decline in refined products prices will reduce our revenue derived from refining operations. An increase in the refined products prices, however, will increase the production costs of chemical products which use refined products as raw materials.
 
In addition to the adverse effect on our revenues, margins and profitability from any future fall in oil and natural gas prices, a prolonged period of low prices or other indicators would lead to a review for impairment of our oil and natural gas properties. This review would reflect management’s view of long-term oil and natural gas prices. Such a review could result in a charge for impairment which could have a significant effect on our results of operations in the period in which it occurs.
 
  •  The crude oil and natural gas reserve data in this annual report are only estimates. The reliability of reserve 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 the estimates may require substantial upward or downward revisions in our reserve data. Our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates because of these revisions.
 
  •  Our proved crude oil reserves decreased gradually and modestly from 2001 to 2003 because the decrease in the crude oil reserves in our Daqing and Liaohe oil regions could not be offset by the increase in the crude oil reserves in our oil regions in northwestern China, such as the Xinjiang oil region, the Changqing oil and gas region and the Tarim oil region. Our proved crude oil reserves increased slightly in 2004, 2005, 2006 and 2007 compared to prior years. Our proved crude oil reserves slightly decreased in China in 2008 and 2009 as a result of the lower oil price in 2008 and 2009. We are actively pursuing business opportunities outside China to supplement our domestic resources. For instance, we acquired certain overseas crude oil and natural


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  gas assets from CNPC. We cannot assure you, however, that we can successfully locate sufficient alternative sources of crude oil supply or at all due to the complexity of the international political, economic and other conditions. If we fail to obtain sufficient alternative sources of crude oil supply, our results of operations and financial condition may be materially and adversely affected.
 
  •  The 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 commerce, industry and the home. Competition puts pressure on product prices, affects oil products marketing and requires continuous management focus on 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.
 
  •  Exploring for, producing and transporting crude oil and natural gas and producing and transporting refined products and chemical products involve many hazards. These hazards may result in:
 
  •  fires;
 
  •  explosions;
 
  •  spills;
 
  •  blow-outs; and
 
  •  other unexpected or dangerous conditions causing personal injuries or death, property damage, environmental damage and interruption of operations.
 
Some of our oil and natural gas fields are surrounded by residential areas or located in areas where natural disasters, such as earthquakes, floods and sandstorms, tend to occur more frequently than in other areas. As with many other companies around the world that conduct similar businesses, we have experienced accidents that have caused property damage and personal injuries and death.
 
Significant operating hazards and natural disasters may cause partial interruptions to our operations and property and environmental damage that could have an adverse impact on our financial condition.
 
We maintain insurance coverage against some, but not all, potential losses. We may suffer material losses resulting from uninsurable or uninsured risks or insufficient insurance coverage.
 
  •  As of December 31, 2009, CNPC beneficially owned approximately 86.285% of our share capital. This ownership percentage enables CNPC to elect our entire board of directors without the concurrence of any of our other shareholders. Accordingly, CNPC is in a position to:
 
  •  control our policies, management and affairs;
 
  •  subject to applicable PRC laws and regulations and provisions of our articles of association, 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.
 
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.
 
  •  CNPC may choose to undertake, without our involvement, overseas investments and operations in the oil and gas industry, including exploration and production of oil and gas, refining and LNG projects. CNPC’s overseas asset portfolio includes oil and gas development projects in Iran and Sudan, which countries are on the sanction list published and administrated by the Office of Foreign Assets Control, or OFAC, of the


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  U.S. Department of Treasury. 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 on OFACs sanction list. These investors may not wish to invest, and may divest their investment, in us because of our relationship with CNPC and its investments and activities in those OFAC sanctioned countries. As a result, the trading prices of our ADSs may be materially and adversely affected.
 
  •  In addition to its relationship with us as our controlling shareholder, CNPC by itself or through its affiliates also provides us with certain services and products necessary for our business activities, such as construction and technical services, production services and supply of material services. The interests of CNPC and its affiliates as providers of these services and products to us may conflict with our interests. Although we have entered into a Comprehensive Products and Services Agreement with CNPC and our transactions with CNPC over the past three years have been conducted on open, fair and competitive commercial terms, we have only limited leverage in negotiating with CNPC and its affiliates over the specific terms of the agreements for the future provision of these services and products.
 
  •  The eastern and southern regions of China have a higher demand for refined products and chemical products than the western and northern regions. Most of our refineries and chemical plants are located in the western and northern regions of China. 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. While we continue to expand the sales of these products in the eastern and southern regions of China, we face strong competition from Sinopec and China National Offshore Oil Corp, or CNOOC. As a result, we expect that we will continue to encounter difficulty in increasing our sales of refined products and chemical products in these regions.
 
  •  We are currently constructing new, and expanding some existing, refinery and petrochemical facilities and constructing several natural gas and oil pipelines, which could require substantial capital expenditures and investments. We cannot assure you that the cash generated by our operations will be sufficient to fund these development plans or that our actual future capital expenditures and investments will not significantly exceed our current planned amounts. If either of these conditions arise, 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.
 
  •  Compliance with changes in laws, regulations and obligations relating to climate change or environmental protection could result in substantial capital expenditure and reduced profitability from changes in operating costs.
 
  •  We are also subject to a number of risks relating to the PRC and the PRC oil and gas industry. These risks are described as follows:
 
  •  Our operations, like those of other PRC oil and gas companies, are subject to extensive regulations and control by the PRC government. These regulations and control affect many material aspects of our operations, such as exploration and production licensing, industry-specific 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 adversely affected by future changes in certain policies of the PRC government with respect to the oil and gas industry. For example, since March 26, 2006, we have been subject to a crude oil special gain levy imposed by the PRC government. On June 1, 2010, the Ministry of Finance and the State Administration of Taxation jointly promulgated a new resource tax regulation for the extraction of crude oil and natural gas. Pursuant to this regulation, effective from June 1, 2010, the resource tax payable by the resource tax payers in connection with their extraction of crude oil and natural gas in Xinjiang shall be collected based on value instead of volume. In the future if the Ministry of Finance and the State Administration of Taxation promulgate similar regulations applicable to any other provinces or regions in China, our results of operations may be adversely affected.
 
  •  Currently, the PRC government must approve the construction and major renovation of significant refining and petrochemical facilities as well as the construction of significant natural gas and refined


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  product pipelines and storage facilities. We presently have several significant projects pending approval from the relevant government authorities and will need approvals from the relevant government authorities in connection with several other significant projects. We do not have control over the timing and outcome of the final project approvals.
 
  •  We receive most of our revenues in Renminbi. A portion of our Renminbi revenues must be converted into other currencies to meet our foreign currency obligations. The existing foreign exchange limitations under the PRC laws and regulations could affect our ability to obtain foreign exchange through debt financing, or to obtain foreign exchange for capital expenditures. 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. On July 21, 2005, the PRC government introduced 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. From July 21, 2005 to December 31, 2009, the value of the Renminbi has appreciated significantly against the U.S. dollar. The appreciation of Renminbi against U.S. dollar may cause a decrease in our exportation of our products.
 
  •  A number of provinces and regions in which our oil and gas exploration and production activities are located have promulgated environment 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 to the oil and gas properties that were retired prior to the issuance of such regulations, we believe that the activities required to retire these assets need not to be performed to the level that would be in compliance with the regulations and our internal policy. The costs associated with these activities have not been included in the asset retirement obligations accrued since the issuance of these regulations. However, the governments of these provinces and regions could enact new regulations, amend the current regulations or retroactively apply the relevant requirements. If any of these regulations is determined to be applicable to assets other than those that were retired subsequent to the dates that these regulations were issued, we could be required to incur substantial costs associated with such asset retirement obligations. In addition, there may be additional provincial governments to enact new regulations that may require our company to perform additional asset retirement activities related to the assets retired before the establishment of our company’s internal policy and areas in which these assets were or continue to be located. Such potential new regulations could increase our asset retirement costs.
 
  •  Because PRC laws, regulations and legal requirements dealing with economic matters are relatively new and continue to evolve, and because of the limited volume of published judicial interpretations and the non-binding nature of prior court decisions, the interpretation and enforcement of these laws, regulations and legal requirements involve some uncertainty. Because the PRC Company Law is different in certain important aspects from company laws in the United States, Hong Kong and other common law jurisdictions, and because the PRC securities laws and regulations are still at an early stage of development, you may not enjoy shareholders’ protections that you may be entitled to in other jurisdictions.
 
  •  SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company in the United States to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. Although our management concluded that our internal control over our financial reporting for the fiscal year ended December 31, 2009 was effective, 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 achieve and 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.


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See also “Item 4 — Information on our Company — Regulatory Matters”, “Item 5 — Operating and Financial Review and Prospects”, “Item 8 — Financial Information” and “Item 11 — Quantitative and Qualitative Disclosures About Market Risk”.
 
ITEM 4 — INFORMATION ON THE COMPANY
 
Introduction
 
History and Development of Our Company
 
Overview of Our Operations
 
We are one of the largest companies in China in terms of sales. We are engaged in a broad range of petroleum and natural gas related activities, including:
 
  •  the exploration, development, production and sale of crude oil and natural gas;
 
  •  the refining 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 and trading of refined oil products; and
 
  •  the transmission of natural gas, crude oil and refined oil products as well as the sale of natural gas.
 
Prior to 2009, our business consisted of exploration and production segment, refining and marketing segment, chemicals and marketing segment, and natural gas and pipeline segment. We restructured our business segmentation in 2009 by dividing our business into four segments, including exploration and production, refining and chemicals, marketing segment, and natural gas and pipeline. As a result, the refining and chemicals segment now consists of 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 segment now consists of the marketing and trading of refined oil products.
 
We are China’s largest producer of crude oil and natural gas. Currently, substantially all of our crude oil and natural gas reserves and production-related assets are located in China. In the year ended December 31, 2009, we had turnover of RMB 1,019,275 million and profit attributable to the owners of our company of RMB 103,387 million.
 
Our exploration, development and production activities commenced in the early 1950s, when we conducted exploration activities in the Yumen oil region in northwestern China. The discovery of crude oil in 1959 in northeastern China’s Daqing oil region, one of the world’s largest oil regions in terms of proved crude oil reserves, marked the beginning of our large-scale upstream activities. Over more than five decades, we have conducted crude oil and natural gas exploration activities in many regions of China. As of December 31, 2009, we had estimated proved reserves of approximately 11,262.6 million barrels of crude oil and approximately 63,243.8 billion cubic feet of natural gas. We believe that we hold production licenses for a majority of China’s proved crude oil reserves and proved natural gas reserves. In the year ended December 31, 2009, we produced 843.5 million barrels of crude oil and 2,112.2 billion cubic feet of natural gas for sale, representing an average production of 2.31 million barrels of crude oil and 5.79 billion cubic feet of natural gas for sale per day. In the year ended December 31, 2009, a substantial majority of crude oil we sold was supplied to our refineries.
 
We commenced limited refining activities in the mid-1950s, when we began producing gasoline and diesel at refineries in the Yumen oil region. Our chemicals operations commenced in the early 1950s, when we began producing urea at our first petrochemical plant in Lanzhou in northwestern China. In the early 1960s, we began producing ethylene. We 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. In 2009, our refineries processed approximately 828.6 million barrels of crude oil or an average of 2.3 million barrels per day. In 2009, we produced approximately 73.2 million tons of gasoline, diesel and kerosene. In 2009, approximately 75.4% of the crude oil processed in our refineries was provided by our exploration and production segment and approximately


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23.0% of the crude oil processed in our refineries was imported. We are one of the major producers of ethylene in China. We produced 2,988.9 thousand tons of ethylene in 2009. In 2009, we produced 2,434.1 thousand tons of polyethylene, 1,800.9 thousand tons of polypropylene and 201.8 thousand tons of ABS, respectively.
 
As of December 31, 2009, our retail distribution network consisted of 16,607 service stations that we own and operate and 655 franchise service stations. In 2009, we sold approximately 101.25 million tons of gasoline, diesel and kerosene in total.
 
We are China’s largest natural gas transporter and seller in terms of sales volume. Our natural gas transmission and marketing activities commenced in Sichuan in southwestern China in the 1950s. In 2009, our sales of natural gas totaled 2,105.1 billion cubic feet. As of December 31, 2009, we owned and operated regional natural gas pipeline networks consisting of 28,595 kilometers of pipelines. As of December 31, 2009, we owned and operated a crude oil pipeline network consisting of 13,164 kilometers of pipelines with an average daily throughput of approximately 3.03 million barrels of crude oil. As of December 31, 2009, we also had a refined product pipeline network consisting of 8,868 kilometers of pipelines with an average daily throughput of approximately 48,803 tons of refined products.
 
We have increased our efforts to pursue attractive business opportunities outside China as part of our business growth strategy to utilize both domestic and international resources to strengthen our competitiveness. Since 2005, we have acquired interests in various oil and natural gas assets in twelve countries, including, among others, Kazakhstan, Venezuela and Iraq, which significantly expanded our overseas operations and effectively increased our oil and gas reserves and production volumes. In November 2009, we signed a contract to develop Iraq’s Rumaila oilfield, pursuant to which we hold a 37% stake in the operation of Rumaila project. In January 2010, we entered into a development and production contract in respect of the Halfaya Oilfield in Iraq for a term of 20 years, pursuant to which we own a 37.5% of the participating interest in Halfaya oilfield. We are currently assessing the feasibility of making further investments in international oil and gas markets.
 
In the year ended December 31, 2009, we imported approximately 326.5 million barrels of crude oil, as compared to 281.1 million barrels and 272.3 million barrels of crude oil in the years ended December 31, 2008 and 2007, respectively.
 
Acquisitions
 
On May 15, 2009, PetroChina Kunlun Gas Limited (“Kunlun Gas”), a wholly owned subsidiary of our company, entered into a transfer agreement with each of China Huayou Group Corporation and China Petroleum Pipeline Bureau, wholly owned subordinated entities of CNPC, pursuant to which Kunlun Gas agreed to acquire city gas business from the transferors. The targets of the acquisitions include the equity interests in eight companies held by China Huayou Group Corporation and China Petroleum Pipeline Bureau and relevant assets owned by China Huayou Group Corporation. Upon completion of the acquisition agreement, Kunlun Gas paid the transferors a consideration of approximately RMB1,093.9 million.
 
On June 18, 2009, an acquisition agreement was entered into between PetroChina West Pipeline Branch Company and CNPC West Pipeline Company Limited, pursuant to which Western Pipeline Branch Company agreed to acquire the western pipeline assets from the transferor. Upon completion of the acquisition on June 30, 2009, the parties referred to the appraised net assets value of the western pipeline assets as at March 31, 2009, the valuation date, and adjusted the consideration by reference to the change in the net asset value of the western pipeline assets for the period from the valuation date to the completion date on a dollar-for-dollar basis. The final consideration paid by our company to the transferor was approximately RMB8,355.4 million.
 
On August 28, 2009, our company entered into an equity transfer agreement with CNPC Exploration and Development Company Ltd. (“CNPC E&D”) and CNPC Central Asia Petroleum Company Limited (“CNPC Central Asia”), pursuant to which our company agreed to acquire the 100% share capital in South Oil Exploration and Development Co., Ltd. from CNPC E&D and CNPC Central Asia. Upon completion of the acquisition, the company will pay a consideration of approximately RMB2,813.3 million to CNPC E&D and CNPC Central Asia. Such consideration will be adjusted by reference to the final appraised value filed with the State-owned Assets Supervision and Administration Commission. Any net profit or loss incurred during the period from the valuation


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date to the completion date shall be attributable to the transferors. As at the end of the reporting period, the transaction has not yet been completed.
 
On August 28, 2009, several asset transfer agreements were entered into between ten of our company’s branch companies and ten subordinated entities of CNPC (including CNPC Daqing Petrochemical Factory), pursuant to which our company agreed to acquire refinery equipment assets from the transferors. Upon completion of the acquisition on November 30, 2009, the parties referred to the appraised net asset value of the refinery equipment assets as at February 28, 2009, the valuation date, and adjusted the consideration by reference to the change in the net asset value of the refinery equipment assets for the period from the valuation date to the completion date on a dollar-for-dollar basis. The final consideration paid by our company to the transferors was approximately RMB11,327.2 million.
 
On August 28, 2009, PetroChina Amu Darya Natural Gas Exploration and Development (Beijing) Company Limited, a wholly owned subsidiary of the company, and China National Petroleum Corporation International (“CNPCI”), a subsidiary of CNPC, entered into the Contractual Rights Transfer Agreement, pursuant to which we have agreed to acquire from CNPCI the contractual rights under the production sharing contract on the Bagtyiarlyk area at Amu Darya Right Bank in Turkmenistan, and the relevant assets and liabilities formed in the course of CNPCI’s fulfillment of the same. Upon completion of the acquisition, the company will pay the consideration in the sum of approximately US$1,186.5 million (approximately RMB8,106.6 million), of which the company will pay approximately US$350.5 million in cash to CNPCI, and assume bank loans amounting to approximately US$836.0 million owed by CNPCI in the course of performing its obligations under the production sharing contract. The consideration is determined by reference to the valuation results and will be adjusted by reference to the final valuation results filed with the State-owned Assets Supervision and Administration Commission and the change in value of the net asset in connection with this acquisition for the period from the valuation date to the completion date. As at the end of the reporting period, the acquisition has not yet been completed. The Amu Darya Project is an offshore natural gas project cooperation between CNPC and the Government of Turkmenistan on a product sharing basis. The product sharing contract under the Amu Darya Project involves an area of approximately 14,300 square kilometers. The term of the contract is 35 years.
 
On December 30, 2009, Kunlun Gas, a wholly owned subsidiary of our company, and Daqing Petroleum Administrative Bureau, a wholly owned subordinated entity of CNPC, entered into an asset transfer agreement, pursuant to which Kunlun Gas will acquire the 100% equity interest in Daqing Oilfield Zhongqing Gas Holdings Co., Ltd. held by Daqing Petroleum Administrative Bureau. Upon completion of the acquisition, Kunlun Gas will pay to the Daqing Petroleum Administrative Bureau the consideration in the amount of approximately RMB1,088.1 million, representing the net asset value of the target equity interest as at the date of valuation. This consideration will be adjusted by any gain/loss attributable to the target equity interest which arise between the reference date of valuation and the completion date on the basis of such floor price of the target equity interest as submitted for the open tender by the Daqing Petroleum Administrative Bureau. As at the end of the reporting period, the acquisition has not yet been completed.
 
In addition, we have launched a series of overseas acquisitions, for example:
 
  •  In May 2009, PetroChina International (Singapore) Pte. Ltd., an indirectly wholly owned subsidiary of our company, acquired from Keppel Oil and Gas Services Pte Ltd approximately 45.51% share capital in Singapore Petroleum Company Limited (“SPC”) and completed the mandatory general cash offer for all the remaining shares in the capital of SPC in October, 2009;
 
  •  In November 2009, Mangistau Investments B.V., a joint venture equally owned by CNPC E&D and JSC National Company “KazMunayGas”, acquired 100% of the common shares of JSC Mangistaumunaigas, which is one of the major oil-producing companies in Kazakhstan. CNPC E&D is 50% owned by our company;
 
  •  In February 2010, PetroChina International Investment Company Limited, a subsidiary of our company, and Canada’s Athabasca Oil Sands Corp. (“AOSC”) entered into a share purchase agreement, a joint venture agreement, a shareholder agreement, a loan agreement and a put/call option agreement for the acquisition of the oil sand asset projects of AOSC; and


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  •  In March 2010, CS CSG (Australia) Pty Ltd entered into an acquisition agreement with Arrow Energy Limited (“Arrow”) for the acquisition of all the shares in Arrow. Arrow is an Australian integrated energy company focusing on the development of coal seam gas throughout eastern Australia and Asia. CS CSG (Australia) Pty Ltd is a joint venture equally owned by PetroChina International (Singapore) Pte. Ltd. and Shell Energy Holdings Australia Ltd.
 
Our Corporate Organization and Shareholding Structure
 
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. CNPC retained the assets and liabilities relating to its remaining businesses and operations, including assets and liabilities relating to international exploration and production and refining and pipeline operations. CNPC is our primary provider of a wide range of services and products. On April 7, 2000, 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 RMB 16.7 per share. The A Shares were listed on the Shanghai Stock Exchange on November 5, 2007. As of December 31, 2009, CNPC beneficially owned 157,919,717,259 shares, which include 155,120,000 H Shares indirectly held by CNPC through Fairy King Investments Limited, an overseas wholly owned subsidiary of CNPC, representing approximately 86.285% of the share capital of PetroChina.
 
The following chart illustrates our corporate organization structure as of December 31, 2009:
 
(FLOW CHART)
 
 
(1) Indicates approximate shareholding.
 
(2) Indicates approximate shareholding, including the 155,120,000 H Shares indirectly held by CNPC through Fairy King Investments Limited, an overseas wholly owned subsidiary of CNPC, as of December 31, 2009.
 
(3) Includes PetroChina Planning & Engineering Institute, PetroChina Exploration & Development Research Institute, IT Service Center, PetroChina Petrochemical Research Institute and several other companies.


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The following chart illustrates our management structure:
 
(FLOW CHART)
 


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For a description of our principal subsidiaries, see Note 19 to our consolidated financial statements.
 
General Information
 
Our legal name is “ (CHINESE CHARACTERS)” and its English translation is PetroChina Company Limited. Our headquarters are located at 9 Dongzhimen North Street, Dongcheng District, Beijing, China, 100007, and our telephone number at this address is (86-10) 5998-6223. Our website address is www.petrochina.com.cn. The information on our website is not part of this annual report.
 
Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.


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(MAP)
 
 


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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. The Songliao basin, located in Heilongjiang and Jilin provinces in northeastern China, including the Daqing and Jilin oil regions, accounted for 37.6% of our proved crude oil reserves as of December 31, 2009 and 39.9% of our crude oil production in 2009. We also have significant crude oil reserves and operations in the area around the Bohai Bay. The Bohai Bay basin includes the Liaohe, Dagang, Huabei and Jidong oil regions and accounted for 19.5% of our proved crude oil reserves as of December 31, 2009 and 17.8% of our crude oil production in 2009. In 2009, we discovered Tanan, Nanbeier, Yongpinghe and Honggouzi oil fields. Our proved natural gas reserves and production are generally concentrated in northwestern and southwestern China, specifically in the Erdos, Tarim and Sichuan basins. As of December 31, 2009, our overseas proved crude oil reserves accounted for 6.6% of our total proved crude oil reserves and our overseas proved natural gas reserves accounted for 1.4% of our total proved natural gas reserves. In 2009, our overseas crude oil production accounted for 10.4% of our total crude oil production and our overseas natural gas production accounted for 4.5% of our total natural gas production.
 
We currently hold exploration and exploitation licenses for oil and gas (including coal seam gas) covering a total area of approximately 458.7 million acres, consisting of the exploration licenses covering a total area of approximately 436.7 million acres and the exploitation licenses covering a total area of approximately 22.0 million acres. In 2009, our exploration and production segment had profit from operations of RMB 105,019 million.
 
To further develop our crude oil and natural gas businesses, we have obtained oil and gas exploration licenses covering an area of 41.82 million acres in South China Sea. The crude oil and natural gas exploration in that area is currently under way.
 
Reserves
 
Our estimated proved reserves as of December 31, 2009 totaled approximately 11,262.6 million barrels of crude oil and approximately 63,243.8 billion cubic feet of natural gas. As of December 31, 2009, proved developed reserves accounted for 69.9% and 48.9% of our total proved crude oil and natural gas reserves, respectively. Total proved hydrocarbon reserves on a barrels-of-oil equivalent basis increased by 1.8% from approximately 21,419.5 million barrels-of-oil equivalent as of December 31, 2008 to approximately 21,803.2 million barrels-of-oil equivalent as of December 31, 2009, taking account of our overseas crude oil reserves of 747.0 million barrels and overseas natural gas reserves of 866.9 billion cubic feet, totaling 891.5 million barrels-of-oil equivalent. Natural gas as a percentage of total proved hydrocarbon reserves increased from 47.6% as of December 31, 2008 to 48.3% as of December 31, 2009.
 
We prepared our reserve estimates as of December 31, 2007, 2008 and 2009 on the basis of reports prepared by two independent engineering consultants, DeGolyer & MacNaughton and Gaffney, Cline & Associates (Consultants) Pte Ltd. Our reserve estimates include only crude oil and natural gas which we believe can be reasonably produced within the current terms of our production licenses. See “Regulatory Matters — Exploration Licenses and Production Licenses” for a discussion of our production licenses. Also see “Item 3 — Key Information — Risk Factors” for a discussion of the uncertainty inherent in the estimation of proved reserves.
 
Our reserve data for 2009 was prepared in accordance with the SEC’s final rules on “Modernization of Oil and Gas Reporting”, which became effective on January 1, 2010 and for annual reports for accounting periods ending on or after December 31, 2009. The comparative information for 2007 and 2008 is not restated.
 
New SEC Reserve Disclosures
 
In December 2008, the SEC announced that it had approved revisions designed to modernize the oil and gas company reserve reporting requirements. The most significant amendments to the requirements included the following:
 
  •  Economic producibility of reserves and discounted cash flows are now based on a 12-month unweighted average commodity price unless contractual arrangements designate the price to be used.

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  •  Probable and possible reserves may be disclosed separately on a voluntary basis.
 
  •  Reserves may be classified as proved undeveloped if there is a high degree of confidence that the quantities will be recovered and they are scheduled to be drilled within the next five years, unless the specific circumstances justify a longer time.
 
  •  Reserves may be estimated through the use of reliable technology in addition to flow tests and production history.
 
  •  Additional disclosure is required regarding the qualifications of the chief technical person who oversees the reserves estimation process. We are also required to provide a general discussion of our internal controls used to assure the objectivity of the reserves estimate.
 
  •  Reserves in foreign countries or continents must be presented separately if they represent more than 15% of our total oil and gas proved reserves.
 
  •  The definition of oil and gas producing activities has expanded and focuses on the marketable product rather than the method of extraction.
 
All reserve estimates involve some degree of uncertainty. The uncertainty depends chiefly on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of these data.
 
Internal Controls Over Reserves Estimates
 
We have appointed a Reserve Assessment Directing Team (the “RAD Team”). The leader of the RAD Team is our Vice President in charge of our upstream business. The responsibilities of the RAD Team include:
 
  •  formulation of reserve development strategies;
 
  •  arrangement of annual reserves; and
 
  •  review of the reserve assessment results.
 
We have established a special reserve management department in our exploration and production segment. Each of the officers and employees of that department has over 20 years’ experience in oil industry and over 10 years’ experience in SEC-guided reserve assessment. Many members of that department have national-level registered qualifications in reserve expertise. Each regional company has established a reserve management committee and a multi-disciplinary reserve study office. The reserve study office is responsible for the calculation of the newly discovered reserves and updating of the assessment of the existing reserves. The results of our oil and gas reserve assessment are subject to a two-level review by both the regional companies and our exploration and production company and the final examination and approval of the RAD Team.
 
In addition, we commissioned independent assessment firms to independently reassess our annually assessed proved reserves in accordance with relevant SEC rules. We disclose the proved reserves so assessed by the independent assessment firms pursuant to relevant SEC requirements.
 
Third-Party Reserve Report
 
We commissioned DeGolyer and MacNaughton, an independent petroleum engineering consulting firm based in the United States, to carry out an independent assessment of our reserves in China and certain other countries as of December 31, 2007, 2008 and 2009. DeGolyer and MacNaughton has been providing petroleum consulting services throughout the world for over 70 years. DeGolyer and MacNaughton does not have any financial interest, including stock ownership, in our company. The fees of DeGolyer and MacNaughton are not contingent on the results of its evaluation.
 
Mr. R.M. Shuck, a Senior Vice President with DeGolyer and MacNaughton is primarily responsible for the preparation of our reserve report. Mr. R.M. Shuck is a petroleum engineer and a Registered Professional Engineer in the State of Texas. Mr. R.M. Shuck is also a member of the Society of Petroleum Engineers and has 32 years of experience in oil and gas reservoir studies and evaluations.


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We also commissioned Gaffney, Cline & Associates (Consultants) Pte Ltd, as independent reserve auditors, to carry out an independent assessment of our reserves estimation and valuation in Algeria, Chad, Kazakhstan and Venezuela as of December 31, 2007, 2008 and 2009. Gaffney, Cline & Associates (Consultants) Pte Ltd’s senior partners, officers, and employees have no direct or indirect financial interest in either our company or our affiliated companies. Gaffney, Cline & Associates (Consultants) Pte Ltd’s remuneration was not in any way contingent upon reported reserve estimates.
 
The reserve report of Gaffney, Cline & Associates (Consultants) Pte Ltd has been compiled under the supervision of Mr. David S. Ahye Mr. Ahye is Gaffney, Cline & Associates (Consultants) Pte Ltd’s regional director for the Asia Pacific region, based in Singapore. He has over 30 years’ experience in the petroleum industry and has managed numerous reserves certification audits. Mr. Ahye holds a Bachelor’s Degree (Honors) in Chemical Engineering.
 
For detailed information about our net proved reserves estimates, please refer to the summary of the reports of DeGolyer & MacNaughton and Gaffney, Cline & Associates (Consultants) Pte Ltd as filed hereto as exhibit 15.1 and exhibit 15.2 of this annual report.
 
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, 2007, 2008 and 2009.
 
                         
    Crude Oil   Natural Gas(1)   Combined(1)
    (Millions of barrels)   (Bcf)   (BOE, in millions)
 
Proved developed and undeveloped reserves
                       
Reserves as of December 31, 2007
    11,705.6       57,110.6       21,223.9  
Revisions of previous estimates
    (574.0 )     (636.3 )     (680.0 )
Extensions and discoveries
    885.4       6,579.0       1,982.0  
Improved recovery
    75.0       0       75.0  
Production for the year
    (870.7 )     (1,864.1 )     (1,181.4 )
Reserves as of December 31, 2008
    11,221.3       61,189.2       21,419.5  
Revisions of previous estimates
    (192.6 )     (1,272.8 )     (404.6 )
Extensions and discoveries
    1,004.5       5,439.6       1,911.1  
Improved recovery
    72.9       0       72.9  
Production for the year
    (843.5 )     (2,112.2 )     (1,195.7 )
Reserves as of December 31, 2009
    11,262.6       63,243.8       21,803.2  
Proved developed reserves
                       
As of December 31, 2007
    9,047.1       26,047.1       13,388.3  
As of December 31, 2008
    8,324.1       26,666.8       12,768.6  
As of December 31, 2009
    7,870.8       30,948.8       13,038.9  
Proved undeveloped reserves
                       
As of December 31, 2007
    2,658.5       31,063.5       7,835.6  
As of December 31, 2008
    2,897.2       34,522.4       8,650.9  
As of December 31, 2009
    3,391.8       32,295.0       8,774.3  
 
 
(1) Represents natural gas remaining after field separation for condensate removal and reduction for flared gas.


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The following tables set forth our crude oil and natural gas proved reserves and proved developed reserves by region as of December 31, 2007, 2008 and 2009.
 
                                                 
    As of December 31,  
    2007     2008     2009  
    Proved
          Proved
          Proved
       
    Developed
          Developed
          Developed
       
    and
    Proved
    and
    Proved
    and
    Proved
 
    Undeveloped     Developed     Undeveloped     Developed     Undeveloped     Developed  
    (Millions of barrels)  
 
Crude oil reserves
                                               
Daqing
    3,856.1       3,324.3       3,548.0       2,912.0       3,463.4       2,740.8  
Liaohe
    1,121.0       888.1       895.9       675.2       795.7       581.8  
Xinjiang
    1,354.9       1,198.9       1,302.6       1,106.6       1,395.1       1,117.6  
Changqing
    1,488.9       1,194.8       1,624.5       1,256.7       1,783.8       1,298.8  
Jilin
    784.2       463.4       819.8       441.0       771.6       393.4  
Dagang
    523.2       346.7       520.8       352.7       602.9       364.9  
Tarim
    590.3       379.7       594.0       371.3       584.8       277.0  
Huabei
    448.0       307.0       431.5       281.8       487.9       298.5  
Qinghai
    200.1       186.3       177.8       157.5       176.6       146.5  
Tuha
    164.7       91.7       162.3       97.8       134.6       87.9  
Sichuan
    9.5       4.4       13.1       3.6       19.9       3.5  
Jidong
    413.1       126.0       379.2       133.5       314.0       95.0  
Other regions(1)
    751.5       535.8       751.8       534.4       732.3       465.1  
                                                 
Total
    11,705.6       9,047.1       11,221.3       8,324.1       11,262.6       7,870.8  
                                                 
 
                                                 
    As of December 31,  
    2007     2008     2009  
    Proved
          Proved
          Proved
       
    Developed
          Developed
          Developed
       
    and
    Proved
    and
    Proved
    and
    Proved
 
    Undeveloped     Developed     Undeveloped     Developed     Undeveloped     Developed  
    (Bcf)  
 
Natural gas reserves(2)
                                               
Sichuan
    10,400.5       4,365.5       11,285.4       4,030.4       11,177.3       4,219.0  
Changqing
    19,105.0       6,943.9       19,261.7       6,901.6       20,363.2       9,884.4  
Xinjiang
    1,537.1       999.3       4,061.8       2,028.7       3,497.9       2,156.6  
Daqing
    3,039.7       1,046.2       2,961.1       960.6       3,028.1       1,261.4  
Qinghai
    4,352.8       3,003.5       4,302.1       2,948.4       4,903.2       3,554.9  
Tarim
    15,114.3       7,918.8       15,516.4       7,722.7       16,892.1       7,758.3  
Liaohe
    386.4       296.2       283.2       193.6       133.9       100.5  
Tuha
    581.6       350.4       609.4       382.3       589.8       397.0  
Huabei
    193.1       119.2       207.8       133.7       140.0       119.6  
Dagang
    347.4       197.1       289.7       148.9       261.7       93.1  
Jilin
    1,169.9       104.1       1,180.5       113.4       1,177.0       450.6  
Jidong
    191.4       40.4       203.3       96.7       137.5       31.8  
Other regions(1)
    691.4       662.5       1,026.8       1,005.8       942.1       921.6  
                                                 
Total
    57,110.6       26,047.1       61,189.2       26,666.8       63,243.8       30,948.8  
                                                 
 
 
(1) Represents Yumen and other oil regions and our overseas oil and gas fields as a result of our acquisition of overseas assets.
 
(2) Represents natural gas remaining after field separation for condensate removal and reduction for flared gas.


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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. We believe that we have more extensive experience in the exploration and development of crude oil and natural gas than any of our principal competitors in China. Since the early 1950s, we have been working on developing exploration and recovery technologies and methods tailored to the specific geological conditions in China.
 
The following table sets forth the number of wells we drilled, or in which we participated, and the results thereof, for the periods indicated.
 
                                                                             
Year
      Daqing   Xinjiang   Liaohe   Changqing   Huabei   Dagang   Sichuan   Others(1)   Total
 
2007
  Net exploratory wells drilled(2)     294       183       68       447       104       70       48       415       1,629  
    Crude oil     103       103       49       186       47       59       3       141       691  
    Natural gas     12       15             41                   30       16       114  
    Dry(3)     179       65       19       220       57       11       15       258       824  
    Net development wells drilled(2)     4,670       1,350       529       3,087       528       260       83       2,377       12,884  
    Crude oil     4,643       1,346       515       2,652       259       252       8       2,208       11,883  
    Natural gas     17       4       11       384       269       8       75       163       931  
    Dry(3)     10             3       51                         6       70  
2008
  Net exploratory wells drilled(2)     234       162       63       583       94       91       67       354       1,648  
    Crude oil     71       72       38       207       42       69       2       136       637  
    Natural gas     1       15       0       26       0       0       38       12       92  
    Dry(3)     162       75       25       350       52       22       27       206       919  
    Net development wells drilled(2)     4,238       1,887       356       5,079       415       238       100       2,887       15,200  
    Crude oil     4,223       1,868       349       4,469       225       226       2       2,685       14,047  
    Natural gas     4       18       6       528       186       8       77       179       1,006  
    Dry(3)     11       1       1       82       4       4       21       23       147  
2009
  Net exploratory wells drilled(2)     306       149       77       688       77       67       61       369       1,794  
    Crude oil     297       140       77       540       77       67       2       258       1,458  
    Natural gas     9       9       0       148       0       0       59       111       336  
    Dry(3)     227       69       58       331       27       22       29       278       1,041  
    Net development wells drilled(2)     4,924       681       93       7,288       299       155       147       1,516       15,103  
    Crude oil     4,923       674       84       6,808       224       148       8       1,162       14,031  
    Natural gas     1       7       9       480       75       7       139       354       1,072  
    Dry(3)     10       0       0       133       0       0       23       5       171  
 
 
(1) Represents the Jilin, Tarim, Tuha, Qinghai, Jidong, Yumen 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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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, 2009.
 
                                                 
                Acreage(1)  
    Productive Wells(1)     Developed     Undeveloped  
Oil Region
  Crude Oil     Natural Gas     Crude Oil     Natural Gas     Crude Oil     Natural Gas  
                      (Thousands of acres)        
 
Daqing
    46,044       252       839.2       85.3       811.0       112.6  
Liaohe
    17,454       658       194.8       35.9       92.9       6.4  
Xinjiang
    19,792       134       304.1       52.0       167.6       27.2  
Jilin
    16,159       197       304.7       34.1       322.0       19.6  
Changqing
    23,397       3,853       548.5       2,202.8       537.4       2,725.5  
Huabei
    5,710       110       148.9       12.3       65.4       2.9  
Dagang
    3,503       72       107.4       24.5       87.8       21.4  
Tuha
    1,727       114       51.5       24.8       24.4       10.7  
Tarim
    1,025       249       107.0       75.7       62.7       275.3  
Sichuan
    423       1,826       335.5       401.3             520.9  
Other regions(2)
    5,526       517       74.5       32.5       58.9       25.2  
Total
    140,760       7,982       3,016.1       2,981.1       2,230.1       3,747.8  
                                                 
 
 
(1) Includes all wells and acreage in which we have an interest. No third parties own any interests in any of our wells or acreage.
 
(2) Represents the Qinghai, Jidong and Yumen and other oil regions.
 
Approximately 66.0% of our proved crude oil reserves are concentrated in the Daqing, Liaohe and Xinjiang oil regions and the Changqing oil and gas region, and approximately 84.3% of our proved natural gas reserves are concentrated in the Changqing oil and gas region, the Tarim oil and gas region, the Sichuan gas region and the Qinghai oil region. We believe that the Erdos, Junggar, and Songliao basins and Bohai Bay have the highest potential for increasing our crude oil reserve base through future exploration and development, and that the Erdos, Tarim, Sichuan, and Qaidam basins have the highest potential for increasing our natural gas reserve base through future exploration and development.
 
Production
 
The following table sets forth our historical average net daily crude oil and natural gas production by region and our average sales price for the periods ended December 31, 2007, 2008 and 2009.
 
                                 
    For the Year Ended
   
    December 31,   % of
    2007   2008   2009   2009 Total
 
Crude oil production(1)
                               
(thousands of barrels per day, except percentages or otherwise indicated)
                               
Daqing
    847.3       813.2       806.2       34.9  
Liaohe
    231.3       224.6       202.4       8.8  
Xinjiang
    249.4       246.9       220.5       9.5  
Changqing
    246.9       279.8       318.1       13.8  
Tarim
    131.6       132.7       112.2       4.9  
Huabei
    90.8       89.7       86.3       3.7  
Jilin
    120.0       121.2       115.5       5.0  


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    For the Year Ended
   
    December 31,   % of
    2007   2008   2009   2009 Total
 
Dagang
    91.2       92.2       87.8       3.8  
Tuha
    44.8       46.7       32.8       1.4  
Other(2)
    264.5       332.0       329.2       14.2  
                                 
Total
    2,317.8       2,379.0       2,311.0       100  
                                 
Annual production (million barrels)
    846.0       870.7       843.5          
Average sales price
                               
(RMB per barrel)
    496.3       608.1       368.2          
(US$ per barrel)
    65.27       87.55       53.9          
Natural gas production(1)(3)
                               
(millions of cubic feet per day, except percentages or otherwise indicated)
                               
Sichuan
    1,329.8       1,364.6       1,381.4       23.9  
Changqing
    838.4       1,024.5       1,434.1       24.8  
Daqing
    123.7       136.0       156.5       2.7  
Qinghai
    286.0       378.1       378.1       6.5  
Tuha
    111.5       107.0       94.0       1.6  
Xinjiang
    102.3       129.9       173.4       3.0  
Liaohe
    43.9       40.8       38.7       0.7  
Huabei
    39.1       38.9       45.1       0.8  
Tarim
    1,383.1       1,564.1       1,650.3       28.5  
Dagang
    43.0       44.2       43.1       0.7  
Other(4)
    158.7       265.2       392.0       6.8  
                                 
Total
    4,459.5       5,093.3       5,786.7       100  
                                 
Annual production (Bcf)
    1,627.7       1,864.2       2,112.2          
Average sales price
                               
(RMB per Mcf)
    29.2       32.8       32.7          
(US$ per Mcf)
    3.84       4.72       4.78          
 
 
(1) Production volumes for each region include our share of the production from all of our cooperative projects with foreign companies in that region.
 
(2) Represents production from the Qinghai, Jidong, 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 Jilin, Jidong, Yumen and other oil regions and our share of overseas production as a result of our acquisition of overseas assets.
 
In 2009, we supplied approximately 81.1% of our total crude oil sales to our refineries, 5.5% to Sinopec’s refineries, 9.4% to companies or entities outside China, and the remaining 4.0% to regional refineries or other entities. We entered into a crude oil mutual supply framework agreement with Sinopec on December 30, 2009 for the supply of crude oil to each other’s refineries in 2010. Under this agreement, we agreed in principle to supply 5.41 million tons of crude oil to Sinopec. For the years ended December 31, 2007, 2008 and 2009, the average lifting costs of our crude oil and natural gas production were US$7.75 per barrel-of-oil equivalent, US$9.48 per barrel-of-oil equivalent and US$9.12 per barrel-of-oil equivalent, respectively.

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Principal Oil and Gas Regions
 
Daqing Oil Region
 
The Daqing oil region, our largest oil and gas producing property, is located in the Songliao basin and covers an area of approximately one million acres. The successful discovery and development of the oil fields in the Daqing oil region marked a critical breakthrough in the history of both our company and the PRC oil and gas industry. In terms of proved hydrocarbon reserves and annual production, the Daqing oil region is the largest oil region in China and one of the most prolific oil and gas properties in the world. We commenced exploration activities in the Daqing oil region in 1955 and discovered oil in the region in 1959. Annual crude oil production volume in the Daqing oil region reached one million barrels per day in 1976 and remained relatively stable until 2002. In 2007, 2008 and 2009, our crude oil production volume in the Daqing oil region was 847.3 thousand barrels per day, 813.2 thousand barrels per day, and 806.2 thousand barrels per day, respectively. As of December 31, 2009, we produced crude oil from 20 fields in the Daqing oil region.
 
As of December 31, 2009, our proved crude oil reserves in the Daqing oil region were 3,463.4 million barrels, representing 30.8% of our total proved crude oil reserves. The proved crude oil reserves in our Daqing oil region have gradually decreased since 1996 because the crude oil production exceeded the crude oil reserve additions in our Daqing oil region in each year since 1996. As of December 31, 2007, 2008 and 2009, the proved crude oil reserves in our Daqing oil region were 3,856.1 million barrels, 3,548.0 million barrels, and 3,463.4 million barrels, respectively. In 2009, our oil fields in the Daqing oil region produced an average of 806.2 thousand barrels of crude oil per day, representing approximately 34.9% of our total daily crude oil production. The crude oil production in our Daqing oil region decreased by 0.86% from 297.6 million barrels in 2008 to 294.3 million barrels in 2009. In 2009, the crude oil reserve-to-production ratio of the Daqing oil region was 11.6 years, compared to 11.92 years in 2008.
 
The crude oil we produce in the Daqing oil region has an average API gravity of 35.7 degrees. In 2009, the crude oil we produced in the Daqing oil region had an average water cut of 91.5%, increased from the average water cut of 91.2% in 2008.
 
The crude oil in the Daqing oil region is primarily located in large reservoirs with relatively moderate depths of approximately 900 meters to 1,500 meters and with relatively simple geological structures and most of the crude oil produced at Daqing is medium viscosity oil. Crude oil produced using enhanced recovery techniques accounted for 27.0%, 27.4%, and 30.5% of our crude oil production from the Daqing oil region in 2007, 2008 and 2009, respectively.
 
Because our oil fields in the Daqing oil region are relatively mature, the difficulty of extracting crude oil from these fields has increased in recent years and is likely to continue to increase gradually in the future. As a result, our lifting costs at these fields increased by 4.0% from US$9.72 per barrel for the year ended December 31, 2008 to US$10.11 per barrel for the year ended December 31, 2009. However, we have adopted a number of measures to control the increase in our lifting costs at these fields. Those measures include:
 
  •  implementing ground optimization and simplification projects and reducing investments with low or no return so as to control cost from the source; and
 
  •  applying new technologies to reduce energy consumption to increase our ability to maximize profit.
 
Although we plan to continue to carry out these measures to control the increase in our lifting costs, we expect our lifting costs at these fields will continue to increase gradually in the future.
 
We have an extensive transportation infrastructure network to transport crude oil produced in the Daqing oil region to internal and external customers in northeastern China and beyond. Crude oil pipelines link our oil fields in the Daqing oil region to the port of Dalian and the port of Qinhuangdao in Bohai Bay, providing efficient transportation for selling Daqing crude oil. These crude oil pipelines have an aggregate length of 2,500 kilometers and an aggregate throughput capacity of approximately 1,067.7 thousand barrels per day.
 
Daqing’s crude oil has a low sulfur and high paraffin content. As many refineries in China, particularly those in northeastern China, are configured to refine Daqing crude oil, we have a stable market for the crude oil we produce


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in the Daqing oil region. In 2009, we refined approximately 76.5% of Daqing crude oil in our own refineries, exported approximately 1.7% and sold the remaining portion to Sinopec or other local refineries.
 
Liaohe Oil Region
 
The Liaohe oil region is one of our four largest crude oil producing properties and is located in the northern part of the Bohai Bay basin. We began commercial production in the Liaohe oil region in 1971. The Liaohe oil region covers a total area of approximately 580,000 acres.
 
As of December 31, 2009, our proved crude oil reserves in the Liaohe oil region were 795.7 million barrels, representing 7.1% of our total proved oil reserves. In 2009, our oil fields in the Liaohe oil region produced an average of 202.4 thousand barrels of crude oil per day, representing approximately 8.8% of our total daily crude oil production. In 2008, the crude oil reserve-to-production ratio in the Liaohe oil region was 11.4 years. In 2009, the crude oil we produced in the Liaohe oil region had an average API gravity of 26 degrees and an average water cut of 81.4%. We have proved crude oil reserves in 38 fields in the Liaohe oil region, all of which are currently in production. We produce several varieties of crude oil in the Liaohe oil region, ranging from light crude oil to heavy crude oil and high pour point crude oil.
 
We have easy access to crude oil pipelines for Liaohe crude oil. The pipelines linking Daqing to Dalian port and Qinhuangdao port pass through the Liaohe oil region. In 2009, we sold about approximately 87.4% of the crude oil we produced at the Liaohe oil region to our own refineries.
 
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, 2009, our proved crude oil reserves in the Xinjiang oil region were 1,395.1 million barrels, representing 12.4% of our total proved crude oil reserves. In 2009, our oil fields in the Xinjiang oil region produced an average of 220.5 thousand barrels of crude oil per day, representing approximately 9.5% of our total daily crude oil production. In 2009, the crude oil reserve-to-production ratio at the Xinjiang oil region was 17.2 years. In 2009, the crude oil we produced in the Xinjiang oil region had an average API gravity of 36.8 degrees and an average water cut of 77.5%.
 
Sichuan Gas Region
 
We began natural gas exploration and production in Sichuan in the 1950s. The Sichuan gas region covers a total area of approximately 2.3 million acres. The natural gas reserve-to-production ratio in the Sichuan gas region was approximately 22.2 years in 2009. As of December 31, 2009, we had 112 natural gas fields under development in the Sichuan gas region.
 
As of December 31, 2009, our proved natural gas reserves in the Sichuan gas region were 11,177,3 billion cubic feet, representing 17.7% of our total proved natural gas reserves and a decrease of 1.0% from 11,285.4 billion cubic feet as of December 31, 2008. In 2009, our natural gas production for sale in the Sichuan gas region reached 504.2 billion cubic feet, representing 23.9% of our total natural gas production for sale and an increase of 1.0% from 499.4 billion cubic feet in 2008.
 
In 2007, we discovered significant natural gas reserves in the Guang’an field in the Sichuan gas region in our border expansion in that region. As of December 31, 2009, the Guang’an gas field had a proved natural gas reserve of 1,541.8 billion cubic feet. We have developed a broad range of technologies relating to natural gas exploration, production, pipeline systems and marketing activities tailored to local conditions in Sichuan.
 
Changqing Oil and Gas Region
 
The Changqing oil and gas region covers parts of Shaanxi Province and Gansu Province and the Ningxia and Inner Mongolia Autonomous Regions. We commenced operations in the Changqing oil and gas region in 1970. As


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of December 31, 2009, our proved crude oil reserves in the Changqing oil region were 1,783.8 million barrels, representing 15.8% of our total proved crude oil reserves. In 2009, our crude oil production in the Changqing oil region were an average of 318.1 thousand barrels per day, representing approximately 13.8% of our total daily crude oil production. In 2009, the crude oil reserve-to-production ratio at the Changqing oil region was 18.1 years. In 2009, the crude oil we produced in the Changqing oil region had an average API gravity of 35 degrees and an average water cut of 51.3%.
 
In the early 1990s, we discovered the Changqing gas field, which had total estimated proved natural gas reserves of 20,363.2 billion cubic feet as of December 31, 2009, representing 32.2% of our total proved natural gas reserves. In January 2001, we discovered the Sulige gas field, which had total estimated proved natural gas reserves of 7,674.1 billion cubic feet as of December 31, 2009. Sulige gas field is currently the largest gas field in China. In 2009 we produced 523.4 billion cubic feet of natural gas for sale in the Changqing oil and gas region, representing an increase of 39.6% from 375.0 billion cubic feet in 2008.
 
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. As of December 31, 2009, our proved crude oil reserves in the Tarim oil region were 584.8 million barrels. The Kela 2 natural gas field, which we discovered in 1998 in the Tarim oil and gas region, had proved natural gas reserves of approximately 5,439.2 billion cubic feet as of December 31, 2009. As of December 31, 2009, the proved natural gas reserves in the Tarim oil and gas region reached 16,892.1 billion cubic feet, representing 26.7% of our total proved natural gas reserves.
 
In 2009, we produced 602.4 billion cubic feet of natural gas for sale in the Tarim oil and gas region. We have completed the construction of the pipelines to deliver natural gas in the Tarim oil and gas region to the central and eastern regions of China where there is strong demand for natural gas transmitted through our West to East natural gas pipeline project. See “— Natural Gas and Pipeline — Nature Gas Transmission Infrastructure” for a discussion of our West to East natural gas pipeline project. The commencement of the operation of this West to East natural gas pipeline significantly increased our natural gas production in the Tarim oil and gas region.


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(MAP)


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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.
 
In 2009, our refining and chemicals segment had a profit from operations of RMB17,308 million.
 
The following sets forth the highlights of our refining and chemicals segment in 2009:
 
  •  as of December 31, 2009, our refineries’ annual primary distillation capacity totaled 975 million barrels of crude oil per year, or 2,671.2 thousand barrels per day;
 
  •  we processed 828.6 million barrels of crude oil, or 2.3 million barrels per day; and
 
  •  we produced approximately 73.2 million tons of gasoline, diesel and kerosene.
 
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, 2007, 2008 and 2009.
 
                         
    Year Ended December 31,  
Product
  2007     2008     2009  
    (In thousands of tons)  
 
Diesel
    47,345.4       48,294.4       48,827.7  
Gasoline
    22,018.7       23,465.2       22,114.3  
Fuel oil
    4,162.0       4,076.5       3,057.1  
Naphtha
    7,491.9       7,225.8       8,041.2  
Asphalt
    1,563.4       2,093.3       2,307.1  
Kerosene
    2,017.2       2,208.8       2,252.9  
Lubricants
    1,760.4       1,767.9       1,401.1  
Paraffin
    1,003.0       948.5       770.5  
                         
Total
    87,362.0       90,080.4       88,771.9  
                         
 
In recent years, we have made significant capital investments in facility expansions and upgrades to improve product quality to meet evolving market demand and environmental requirements in China. In each of the years ended December 31, 2007, 2008 and 2009, our capital expenditures for our refining and chemicals segment were RMB21,499 million, RMB30,619 million and RMB42,558 million, respectively. These capital expenditures were incurred primarily in connection with the expansion of our refining facilities and the upgrading of our product quality. In 2009, we had completed the construction or renovation of 18 refining projects including, among others, the expansion of the 5 million tons per year refining unit at Huhhot Petrochemical, the renovation of the 5 million tons per year refining unit at Ningxia Petrochemical, and the expansion of the 320,000 tons per year styrene unit at Jilin Petrochemical. In addition, we have also focused on enhancing our processing technologies and methods. These efforts have enabled us to improve the quality of refined products at our refineries, particularly that of gasoline and diesel. We believe that our refined products are capable of meeting product specification and environmental protection requirements as set by the PRC government.
 
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/or railways, which provide our refineries with secure supplies of crude oil and facilitate our distribution of refined products to the domestic markets. In each of the years


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ended December 31, 2007, 2008 and 2009, our exploration and production operations supplied approximately 80%, 77% and 75.4%, respectively, of the crude oil processed in our refineries.
 
The table below sets forth certain operating statistics regarding our refineries as of December 31, 2007, 2008 and 2009.
 
                         
    As of December 31,  
    2007     2008     2009  
 
Primary distillation capacity(1) (thousand barrels per day)
                       
Lanzhou Petrochemical
    212.6       212.6       212.6  
Dalian Petrochemical
    415.0       415.0       415.0  
Fushun Petrochemical
    186.2       186.2       236.9  
Dushanzi Petrochemical
    121.5       121.5       202.4  
Daqing Petrochemical
    121.5       121.5       121.5  
Jinzhou Petrochemical
    131.6       131.6       131.6  
Jinxi Petrochemical
    131.6       131.6       131.6  
Jilin Petrochemical
    141.7       141.7       141.7  
Urumqi Petrochemical
    121.5       121.5       121.5  
Other refineries
    996.9       996.9       956.4  
                         
Total
    2,580.1       2,580.1       2,671.2  
                         
Refining throughput (thousand barrels per day)
                       
Lanzhou Petrochemical
    213.9       202.3       211.6  
Dalian Petrochemical
    233.5       267.2       281.5  
Fushun Petrochemical
    196.6       193.1       187.9  
Dushanzi Petrochemical
    81.2       90.0       120.9  
Daqing Petrochemical
    124.3       117.1       124.7  
Jinzhou Petrochemical
    133.6       132.5       117.2  
Jinxi Petrochemical
    133.6       126.8       79.9  
Jilin Petrochemical
    146.1       136.3       144.9  
Urumqi Petrochemical
    106.1       110.3       106.3  
Other refineries
    887.6       946.4       895.3  
                         
Total
    2,256.5       2,322.0       2,270.2  
                         
 
                         
    As of December 31,  
    2007     2008     2009  
 
Conversion equivalent(2) (percent)
                       
Lanzhou Petrochemical
    53.3       53.3       53.3  
Dalian Petrochemical
    27.8       44.9       44.9  
Fushun Petrochemical
    70.7       70.7       55.6  
Dushanzi Petrochemical
    41.7       41.7       57.0  
Daqing Petrochemical
    76.7       80.0       80.0  
Jinzhou Petrochemical
    84.6       84.6       84.6  
Jinxi Petrochemical
    66.2       66.2       66.2  
Jilin Petrochemical
    61.4       61.4       61.4  
Urumqi Petrochemical
    51.7       51.7       56.7  
Average of other refineries
    53.2       55.5       56.9  
 
 
(1) Represents the primary distillation capacity of crude oil and condensate.


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(2) Stated in fluid catalytic cracking, delayed coking and hydrocracking equivalent/ topping (percentage by weight), based on 100% of balanced distillation capacity.
 
In each of the years ended December 31, 2007, 2008 and 2009, the average utilization rate of the primary distillation capacity at our refineries was 97.7%, 94.9% and 87.7%, respectively. The average yield for our four principal refined products (gasoline, kerosene, diesel and lubricants) at our refineries was 65.6%, 65.8% and 65.4%, respectively, in the same periods. “Yield” represents the number of tons of a refined product expressed as a percentage of the number of tons of crude oil from which that product is processed. In each of the years ended December 31, 2007, 2008 and 2009, the yield for all refined products at our refineries was 93.0%, 92.7% and 93.1%, respectively.
 
Dalian Petrochemical, Fushun Petrochemical, Lanzhou Petrochemical and Dushanzi Petrochemical were our leading refineries in terms of both primary distillation capacity and throughput in 2009. They are all located close to our major oil fields in the northeast and northwest regions of China and produce a wide range of refined products. Lanzhou Petrochemical has a strategic position in our plan to expand our markets in refined product sales in the southwestern and central regions of China. It is located in the northwestern part of China, providing easy access to markets in the southwestern and central regions in China. As of December 31, 2009, these four refineries had an aggregate primary distillation capacity of 389.4 million barrels per year, or 1,066.9 thousand barrels per day, representing approximately 39.9% of the total primary distillation capacity of all our refineries as of the same date. In 2009, these four refineries processed an aggregate of 292.7 million barrels of crude oil, or 801.9 thousand barrels per day, representing approximately 35.3% of our total throughput in the same period.
 
To maintain effective 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. As a result, in 2009, we purchased a small amount of crude oil, through independent suppliers, from Sudan, a country that is on the U.S. sanction list. The Sudanese crude oil we purchased were mingled with crude oil from other sources during the refining process.
 
Chemicals
 
Most of our chemical plants are near to our refineries and are also connected with the refineries by pipelines, providing additional production flexibility and opportunities for cost competitiveness. Our exploration and production and natural gas and pipeline operations supply substantially all of the hydrocarbon feedstock requirements for our chemicals operations. We believe that the proximity of our refineries to our chemical plants promotes efficiency in production, secures feedstock supply and minimizes the risk of production interruption. Our production capacity and our market share in China for chemical products allow us to solidify our dominant position in the northern and western regions of China. In addition, our stable customer base in the eastern and southern regions of China provides us with the opportunity to expand our market share in these regions.


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Our Chemical Products
 
The table below sets forth the production volumes of our principal chemical products for each of the years ended December 31, 2007, 2008 and 2009.
 
                         
    Year Ended December 31,
    2007   2008   2009
    (In thousand tons)
 
Basic petrochemicals
                       
Propylene
    3,083.2       3,152.4       3,278.0  
Ethylene
    2,581.5       2,675.6       2,988.9  
Benzene
    827.8       943.5       1,021.7  
Derivative petrochemicals
                       
Synthetic resin
                       
Polyethylene
    2,101.2       2,153.7       2,434.1  
Polypropylene
    1,630.2       1,730.0       1,800.9  
ABS
    215.0       198.9       201.8  
Other synthetic resin products
    16.1       16.9       43.5  
Synthetic fiber
                       
Polyacrylic fiber
    79.3       61.6       72.6  
Terylene fiber
    48.1       35.7       19.6  
Other synthetic fiber products
    9.3       9.0       8.0  
Synthetic rubber
                       
Styrene butadiene rubber
    210.6       249.6       300.8  
Other synthetic rubber products
    100.0       94.4       119.3  
Intermediates
                       
Alkylbenzene
    197.5       205.4       176.6  
Other chemicals
                       
Urea
    3,634.5       3,823.7       3,973.3  
 
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, 2009, our annual ethylene production capacity was 3,710 thousand tons, representing an increase of 36.9% from 2,710 thousand tons in the year ended December 31, 2008. Our production volume of ethylene increased by 11.7% from 2,675.6 thousand tons in 2008 to 2,988.9 thousand tons in 2009. The petrochemical ethylene projects at Fushun Petrochemical, Sichuan Petrochemical and Daqing Petrochemical have been approved by the National Development and Reform Commission and we are currently in the process of implementing these projects.
 
In 2009, the monthly average capacity utilization rate at our ethylene production facilities was 98.6%. The cost of ethylene production is an important component of our overall chemical production costs. Reduction of energy consumption and raw material loss is a key factor in reducing ethylene production costs. We have implemented a series of measures to reduce energy consumption. The average energy consumption of our ethylene production facilities was 743.8, 713.8 and 682.2 kilograms of standard oil per ton in 2007, 2008 and 2009, respectively. We plan to continue to implement measures to reduce our energy consumption.
 
The average ethylene percentage loss at our chemical plants in 2009 was 0.86%. High ethylene percentage loss has contributed to the relatively high cost of our ethylene production. In order to reduce high ethylene percentage loss in our ethylene production, we will continue to implement a series of measures at our chemical plants in the future, such as improving our process management of key units for ethylene production, reducing unplanned temporary interruptions of our chemical facilities and enhancing pyrolysis material composition and production plans.


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We produce a number of synthetic resin products, including polyethylene, polypropylene and ABS. As of December 31, 2009, our production capacities for polyethylene, polypropylene and ABS were 3,112 thousand tons, 2,524 thousand tons and 325 thousand tons, respectively. In 2009, we produced 2,434.1 thousand tons of polyethylene, 1,800.9 thousand tons of polypropylene and 201.8 thousand tons of ABS, respectively, which respectively increased by 13.0% , 4.1% and 1.5% as compared with 2008. Currently, China imports significant volumes of these products to meet the domestic demand due to an inadequate supply of domestically produced polyethylene and polypropylene. We intend to increase the production, and improve the quality, of these products. We are building new production facilities with new technology for the production of these products in Daqing Petrochemical, Daqing Refining and Chemical, Fushun Petrochemical, Sichuan Petrochemical/Jilin Petrochemical and other branch companies to meet this target.
 
Marketing of Chemicals
 
Our chemical products are distributed to a number of industries that manufacture components used in a wide range of applications, including automotive, construction, electronics, medical manufacturing, printing, electrical appliances, household products, insulation, packaging, paper, textile, paint, footwear, agriculture and furniture industries.
 
The following table sets forth the sales volumes of our chemical products by principal product category for each of the years ended December 31, 2007, 2008 and 2009.
 
                         
    Year Ended December 31,
Product
  2007   2008   2009
    (In thousands of tons)
 
Derivative petrochemicals
                       
Synthetic resin
                       
Polyethylene
    2,102.4       2,194.9       2,350.5  
Polypropylene
    1,434.8       1,549.1       1,939.0  
ABS
    216.7       327.1       302.4  
Synthetic fiber
                       
Terylene fiber
    56.6       41.7       18.7  
Polyacrylic fiber
    71.6       67.5       107.5  
Synthetic rubber
                       
Butadiene styrene rubber
    219.0       233.8       327.0  
Intermediates
                       
Alkylbenzene
    156.6       164.6       165.4  
Other chemicals
                       
Urea
    3,662.2       4,393.2       4,054.1  


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Marketing
 
We engage in the marketing of refined products through 31 regional sales branch companies, three distribution branch companies, one lubricants branch company and one fuel oil company. These operations include the transportation and storage of the refined products, and the wholesale, retail and export of gasoline, diesel, kerosene, lubricant, paraffin, asphalt and other refined products. For the year ended December 31, 2009, our marketing segment had an profit from operations of RMB13,265 million. In 2009, we sold approximately 101.25 million tons of gasoline, diesel and kerosene.
 
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, 2009, our marketing network consisted of:
 
  •  Approximately 837 regional wholesale distribution outlets nationwide. Substantially all of these outlets are located in high demand areas such as economic centers across China, particularly in the coastal areas, along major railways and along the Yangtze River; and
 
  •  16,607 service stations owned and operated by us and 655 franchise service stations owned and operated by third parties.
 
In 2009, we sold approximately 95.4 million tons of gasoline and diesel. The PRC government and other institutional customers, including railway, transportation and fishery operators, are our long-term purchasers of the gasoline and diesel that we produce. We sell gasoline and diesel to these customers at the supply prices for special customers published by the PRC government. See “— Regulatory Matters — Pricing — Refined Products” for a discussion of refined product pricing. In 2009, sales of gasoline and diesel to these customers accounted for approximately 2.3% and 8.5% of our total sales of gasoline and diesel, respectively.
 
The following table sets forth our refined product sales volumes for each of the years ended December 31, 2007, 2008 and 2009.
 
                         
    Year Ended December 31,  
Product
  2007     2008     2009  
    (In thousands of tons)  
 
Diesel
    54,376.9       56,081.0       64,659.4  
Gasoline
    27,003.1       29,399.4       30,777.1  
Kerosene
    3,781.8       4,797.6       5,816.9  
Lubricants
    2,378.4       2,003.4       1,795.8  
 
Wholesale Marketing
 
We sell refined products both directly and through independent distributors into various wholesale markets, as well as to utility, commercial, petrochemical, aviation, agricultural, fishery and transportation companies in China. Our gasoline and diesel sales also include the amount we transferred to our retail operations. We made wholesale sales of approximately 2.35 million tons of gasoline and diesel to Sinopec in 2009, representing approximately 2.5% of our total sales of these products in the same period.
 
Retail Marketing
 
The weighted average sales volume of gasoline and diesel per business day at our service station network was 8.4 tons per service station in 2007, 9.6 tons per service station in 2008 and 10.1 tons per service station in 2009.
 
We sell our refined products to service stations owned and operated by CNPC. These service stations sell exclusively refined products produced or supplied by us in accordance with contractual arrangements between CNPC and us. Under these contractual arrangements, we also provide supervisory support to these service stations.
 
We currently use “ (LOGO)” for all our service stations.
 
Most of the service stations in our service station network are concentrated in the northern, northeastern and northwestern regions of China where we have a dominant wholesale market position. However, the eastern and


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southern regions of China have a higher demand for gasoline and diesel. We have made significant efforts in recent years to expand our sales and market share in the eastern and southern regions of China through expanding the number of our service stations and storage facilities in these regions.
 
We invested a total of RMB10,177 million in expanding our service station network in 2009. In 2009, we sold approximately 27,847 thousand tons of gasoline and diesel through our owned and franchised service stations in the eastern and southern regions of China, as compared to approximately 25,660 thousand tons and 26,370 thousand tons we sold in 2007 and 2008, respectively.
 
In 2009, we acquired or constructed an aggregate of 692 service stations that are owned and operated by us, of which 480 are in the eastern and southern regions of China. We plan to further increase our retail market share and improve the efficiency of our retail operations, with a continued focus on the eastern and southern regions of China.
 
We plan to invest approximately RMB12,000 million in 2010 to expand our service station network and storage infrastructure by developing new oil storage facilities, service stations and informationization projects.
 
The following table sets forth the number of service stations in our marketing network as of December 31, 2009:
 
         
Owned and operated by us(1)
    16,607  
Franchised
    655  
Total
    17,262  
 
 
(1) Includes 462 service stations owned and operated by BP PetroChina Petroleum Company Limited.
 
In order to improve the efficiency and profitability of our service station network, through several years’ efforts, we have completed the standardization upgrade of most of our service stations and have further standardized our service procedures, staff uniforms and client service quality of all our service stations. We have been making great efforts to implement a centralized service station computerized management system covering all the service stations across the country. We plan to use this system in all our service stations across the country by end of 2010. In addition, we are making great efforts to promote the use of pre-paid gasoline/diesel filling cards at our service stations. We are developing convenience-store-like service stations with a view to improving the management and client service quality of our service stations. In addition to selling gasoline and diesel, we have planned to gradually increase the sale of lubricants and other non-fuel products at our service stations.


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Natural Gas and Pipeline
 
We are China’s largest natural gas transporter and seller in terms of sales volume, with turnover of RMB77,658 million and total sales volume of 2,105.1 billion cubic feet in 2009. In 2009, our natural gas and pipeline segment generated profit from operations of RMB19,046 million. We sell natural gas primarily to fertilizer and chemical companies, commercial users and municipal utilities owned by local governments. In addition, we also conduct the operation of crude oil and refined product transmission in the natural gas and pipeline segment.
 
The following table sets forth the length of our natural gas pipelines as of December 31, 2007, 2008 and 2009 and the volume of natural gas sold by us in each of the years ended December 31, 2007, 2008 and 2009.
 
                         
    As of December 31 or Year
    Ended December 31,
    2007   2008   2009
 
Total length of natural gas pipelines (km)
    22,043       24,037       28,595  
Total length of crude oil pipeline (km)
    10,559       11,028       13,164  
Total length of refined oil products pipeline (km)
    2,669       2,656       8,868  
Total volume of natural gas sold(1) (Bcf)
    1,538.7       1,802.8       2,105.1  
 
 
(1) Representing the natural gas sold to third parties
 
Our Principal Markets for Natural Gas
 
In 2009, 23.0%, 22.8%, 23.6%, 17.9%, 4.9% and 7.8% of our natural gas sales were to the southwestern, northern, eastern, northwestern, northeastern and central regions of the PRC, respectively.
 
Currently, Sichuan Province and Chongqing Municipality in southwest China are two of our principal markets for natural gas. We sold 454.3 billion cubic feet of natural gas to Sichuan Province and Chongqing Municipality in 2009, representing approximately 21.6% of our total natural gas sales in 2009. We supply natural gas to Sichuan Province and Chongqing Municipality from our exploration and production operations in the Sichuan oil region. Our natural gas pipelines in these areas are well developed, consisting of a natural gas transmission network with a total length of approximately 7,305 kilometers. As these areas lack adequate supply of alternative energy resources, such as coal, we believe that we can further expand our natural gas sales as energy demand increases in these areas.
 
Beijing Municipality, Tianjin Municipality, Hebei Province and Shandong Province in northern China have high energy consumption levels. These areas are also important markets for our natural gas transmission and marketing business. We sold an aggregate of 415.8 billion cubic feet of natural gas to these areas in 2009, as compared to 349 billion cubic feet in 2008. Our natural gas sales to Beijing Municipality increased 15.6% from 197.2 billion cubic feet in 2008 to 227.8 billion cubic feet in 2009. We supply natural gas to Beijing Municipality, Tianjin Municipality and Hebei Province primarily from the Changqing oil region through the Shaanxi to Beijing natural gas pipeline, which is one of our natural gas trunk pipelines, and from the Huabei and Dagang oil regions. Currently, we have 3,090 kilometers of natural gas pipelines in these areas.
 
Shanghai Municipality, Jiangsu Province, Zhejiang Province and Anhui Province located in Yangtze River Delta of eastern China have become our significant natural gas markets. In 2009, we sold 496.5 billion cubic feet of natural gas to this area, representing approximately 23.6% of our total natural gas sales in 2009.
 
Each year, we must supply natural gas to customers subject to the government-formulated guidance supply plan first as required by the PRC government. We enter into natural gas supply contracts with those customers on the basis of the amount of natural gas to be supplied according to the guidance supply plan for the following year’s supply.
 
Driven by environmental and efficiency concerns, the PRC government is increasingly encouraging industrial and residential use of natural gas to meet primary energy and environmental protection needs. The PRC government has adopted a number of laws and regulations to require municipal governments to increase the use of clean energy, such as natural gas and liquefied petroleum gas, to replace the use of raw coal. Several municipal governments, including that of Beijing, have adopted policies to facilitate natural gas consumption in order to reduce the air


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pollution level. The PRC government has also adopted a preferential value-added tax rate of 13% for natural gas production as compared to a 17% value-added tax rate for crude oil production.
 
We believe that these policies have had a positive effect on the development and consumption of natural gas in many municipalities that are our existing or potential markets for natural gas. We believe that these favorable policies will continue to benefit our natural gas business.
 
Natural Gas Transmission Infrastructure
 
As of December 31, 2009, our natural gas and pipeline segment owned and operated approximately 25,517 kilometers of natural gas pipelines in China, which represented the vast majority of China’s onshore natural gas pipelines. Our existing natural gas pipelines form regional natural gas supply networks in northwestern, southwestern, northern and central China as well as the Yangtze River Delta. Our experience in the design, construction management and operation of our natural gas pipelines has enabled us to develop relatively advanced technologies and skills in China in long distance pipeline design, construction and automated operational communications. We believe that we will continue to benefit from those technologies and skills in the future expansion of our natural gas pipeline networks and their ancillary facilities.
 
As of December 31, 2009, we constructed and operated the following main natural gas pipelines in China:
 
West to East Natural Gas Pipelines
 
Completed in 2004, the main line of our West to East natural gas pipelines project links our natural gas fields in Xinjiang and Changqing with Henan Province, Anhui Province, Shanghai Municipality and other areas in the Yangtze River Delta. The total length of the main line is 3,839 kilometers.
 
The West to East natural gas pipelines project also includes three additional connecting pipelines. These lines are: (i) Hebei to Nanjing pipeline, completed in January 2006, starting at Qingshan, Jiangsu Province and ending at Anping, Hebei Province, with a length of 886 kilometers; (ii) Huaiyang to Wuhan pipeline, completed in December 2006, starting at Huaiyang, Anhui Province and ending at Wuhan, Hubei Province, with a length of 455 kilometers; and (iii) Lanzhou to Yinchuan pipeline, completed in July 2007, starting at Lanzhou, Gansu Province and ending at Yinchuan, Ningxia Autonomous Region, with a total length of 402 kilometers.
 
Our West to East natural gas pipelines has a designed annual throughput capacity of 423.8 billion cubic feet. As of December 31, 2009, we entered into long-term take-or-pay contracts with 95 subscribers and distributors to supply them with natural gas through the West to East natural gas pipelines. We sold 496.5 billion cubic feet of natural gas through these pipelines in 2009, representing approximately 23.6% of our total natural gas sales in 2009.
 
We believe that the successful completion of this natural gas pipelines project and associated storage facilities substantially enhanced our ability to capitalize on the anticipated growth in demand of natural gas in the destination regions. We are currently expanding the transmission capacity of the West to East natural gas pipelines by upgrading the existing gas compression stations and building additional stations to increase the throughput capacity. In addition, we began constructing the second phase of West to East natural gas pipelines project in February 2008, which will connect Xinjiang Autonomous Region, Gansu Province, Ningxia Autonomous Region and Shaanxi Province with a natural gas pipeline of 4,843 kilometers.
 
Zhong County to Wuhan Municipality natural gas pipeline
 
The Zhong County to Wuhan Municipality natural gas pipeline links our natural gas fields in the Sichuan gas region to Wuhan Municipality and other regions in Hubei Province and Hunan Province, with a total length of 1,375 kilometers, including the main line of 719 kilometers and three branch lines with a total length of 656 kilometers. This line has a designed annual throughput capacity of 105.9 billion cubic feet. The main line and its Xiangfan branch line and Huangshi branch line were completed and put into commercial operation in December 2004 and the Xiangtan branch line was completed and put into commercial operation in July 2005.
 
As of December 31, 2009, we entered into long-term take-or-pay contracts with 29 subscribers and distributors to supply them with natural gas through our Zhong County to Wuhan Municipality natural gas pipeline. We sold


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77.7 billion cubic feet of natural gas through this pipeline in 2009, representing approximately 3.7% of our total natural gas sales for the period.
 
The First and Second Shaanxi to Beijing Municipality natural gas pipelines
 
The Shaanixi to Beijing Municipality natural gas pipelines link our Changqing oil and gas region with Shaanxi Province, Shanxi Province, Hebei Province and Beijing Municipality. The first line was completed in September 1997, with a length of 910 kilometers and a designed annual throughput capacity of 116.5 billion cubic feet. The second line was completed in July 2005, with a total length of 940 kilometers and a designed annual throughput capacity of 423.8 billion cubic feet.
 
As of December 31, 2009, we entered into long-term take-or-pay contracts with 78 subscribers and distributors to supply them with natural gas through our Shaanxi to Beijing Municipality natural gas pipelines. We sold 412.8 billion cubic feet of natural gas through these pipelines in 2009, representing approximately 19.7% of our total natural gas sales in 2009.
 
In addition to the major transmission infrastructures described above, we also operate other natural gas pipelines linking our domestic gas fields to natural gas consumption markets in China, including the pipeline network within the Sichuan gas region, the Sebei to Xining to Lanzhou natural gas pipeline, the Daqing to Harbin natural gas pipeline and Daqing to Qiqihar gas pipeline.
 
In 2008, we also commenced the construction of several natural gas pipeline projects to expand our existing transmission infrastructures. These projects include, but are not limited to, (i) Yongqing to Tangshan to Qinhuangdao natural gas pipeline of 321 kilometers that connects Beijing Municipality, Tianjin Municipality and Hebei Province, (ii) Changling to Changchun to Jihua natural gas pipeline of 221 kilometers that runs within the Jilin oil and gas region, and (iii) Naxi to Anbian natural gas pipeline of 106 kilometers that runs within the Sichuan gas region. The construction of these projects has been completed.
 
In 2009, we commenced the construction of the second West to East Pipeline, the third Shaanxi-Beijing Pipeline, the Taian to Qingdao Pipeline and the Qinhuangdao to Shenyang Pipeline projects. The second West to East Pipeline includes one main line, 8 branch lines and 3 underground storage facilities, with a total length of 8,704 kilometers. The main line of the second West to East Pipeline has a length of 4,978 kilometers. The western section of the main line extends from Horgos to Zhongwei with a length of 2,461 kilometers and a designed annual throughput capacity of 30 billion cubic feet. The eastern section of the main line extends from Zhongwei to Guangzhou with a length of 2,517 kilometers and a designed annual throughput capacity of 28 billion cubic feet. The third Shaanxi to Beijing Pipeline has a total length of 819.2 kilometers and a designed annual throughput capacity of 15 billion cubic feet. The Taian to Qingdao Pipeline has a total length of 355 kilometers and a designed annual throughput capacity of 15 billion cubic feet. The Qinhuangdao to Shenyang Pipeline has a total length of 421 kilometers and a designed annual throughput capacity of 15 billion cubic feet.
 
Crude Oil and Refined Product Transportation and Storage Infrastructure
 
We have an extensive network for the transportation, storage and distribution of both crude oil and refined products, which covers many regions of China. Our goal is to exploit and optimize our existing infrastructure to further consolidate our presence as the leading integrated oil and gas company in China.
 
In 2005, we completed the construction of the PRC portion of the Sino-Kazakhstan oil pipeline. The PRC portion, starting at Ala Mountain Pass and ending at Dushanzi in Xinjiang Autonomous Region, has a total length of 246 kilometers. Commercial operation of the Sino-Kazakhstan oil pipeline was commenced in July 2006.
 
In June 2007, we completed the construction and commenced the commercial operation of the Dagang to Zaozhuang oil pipeline, which starts at Dagang, Tianjin and ends at Zaozhuang, Shandong Province, with a total length of 679 kilometers.
 
The Lanzhou to Zhengzhou to Changsha refined oil pipeline was approved by the National Development and Reform Commission in December 2007 and we commenced the construction of that pipeline thereafter. We


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finished the construction and commenced the operation of the section from Lanzhou to Zhengzhou in April 2009 and the section from Zhengzhou to Wuhan in August 2009.
 
In May 2009, we commenced the construction of the Mohe to Daqing section on the Russia to China crude oil transmission pipeline. This section has a length of 927 kilometers and a designed annual throughput capacity of 15 million tons.
 
As of December 31, 2009, our crude oil transportation and storage infrastructure consisted of:
 
  •  13,164 kilometers of crude oil pipelines with an average daily throughput of approximately 3.03 million barrels; and
 
  •  crude oil storage facilities with an aggregate storage capacity of approximately 21.7 million cubic meters.
 
We deliver crude oil to customers through our pipeline and storage facility network, through crude oil storage facilities that we lease from third parties and by ships leased by customers. In 2009, approximately 90.21% of our crude oil production was delivered to refineries through our crude oil pipeline network. During the past three years, we have not experienced any delays in delivering crude oil due to pipeline capacity constraints.
 
Our transportation and storage infrastructure also includes:
 
  •  8,868 kilometers of refined product pipelines with an average daily throughput of approximately 48,803 tons; and
 
  •  refined product storage facilities with a total storage capacity of approximately 26.0 million cubic meters.
 
Most of our refineries are located in the northeastern and northwestern regions of China. Our ability to distribute products through our own product distribution infrastructure to the eastern and southern regions will provide us with greater flexibility in supplying refined products to the domestic markets across China. We plan to continue to enhance our product distribution infrastructure in the northeastern, northwestern, northern and southwestern regions where we already have a significant market share, and to expand our product distribution infrastructure in the eastern and southern regions by acquiring and constructing transportation storage facilities and distribution storage facilities in these regions.
 
Together with the expansion of our service stations, we expect that our pipelines, primary storage and secondary distribution storage facilities will significantly enhance our existing distribution infrastructure for refined products. We believe that our enhanced distribution infrastructure will help us increase the sales of our refined products.
 
Competition
 
As an oil and gas company operating in a competitive industry, we compete in each of our business segments in both China and international markets for desirable business prospects and for customers. Our principal competitors in China are Sinopec, including its subsidiary China National Star Petroleum Corporation, or CNSPC, and CNOOC.
 
Exploration and Production Operations
 
We are the largest onshore oil and gas company in China in terms of proved crude oil and natural gas reserves as well as crude oil and natural gas production and sales. However, we compete with Sinopec for the acquisition of desirable crude oil and natural gas prospects. Similarly, we face some competition in the development of offshore oil and gas resources. 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 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.


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Refining and Chemicals Operations and Marketing Operations
 
We compete with 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. As a result, the competition has further intensified. We expect that we will continue to face competition from, among other competitors, Sinopec and CNOOC in our refined products and chemical products sales in these regions. See “Item 3 — Key Information — Risk Factors”.
 
We also face competition from imported refined products and chemical products on the basis of price and quality. As a result of China’s entry into the WTO and the continuous expansion of China’s free trade zones, competition from foreign producers of refined products and chemical products has increased and the retail and wholesale markets in China for refined products and chemical products will be gradually opened to foreign competition as tariff and non-tariff barriers for imported refined products and chemical products are being lifted over time. For example, sales of chemical products imported from the Middle East have increased rapidly in China in recent years. We will face more and more challenges in the competition of refined and chemical products. All these force us to reduce our production costs, improve the quality of our products and optimize our product mix. See “Item 3 — Key Information — Risk Factors”.
 
Natural Gas and Pipeline Operations
 
We are the largest natural gas supplier in the PRC. Currently, we face very limited competition in the supply of natural gas in Beijing Municipality, Tianjin Municipality, Hebei Province, Shanghai Municipality, Jiangsu Province, Zhejiang Province, Anhui Province, Henan Province, Hubei Province, Hunan Province and the northwestern regions of China, our existing principal markets for natural gas. Currently, Sinopec has natural gas fields in Sichuan Province and Chongqing Municipality and sells natural gas to users in Sichuan and Chongqing. We, therefore, have limited competition from Sinopec in our markets in Sichuan Province and Chongqing Municipality. Further, we intend to expand our markets for natural gas into the coastal regions in southeastern China where we may face competition from CNOOC and, to a lesser extent, Sinopec. We believe that our dominant natural gas resources base, our relatively advanced technologies and skills in managing long distance pipelines will enable us to continue to be a dominant player in the natural gas markets in China.
 
Environmental Matters
 
Together with other companies in the industries in which we operate, we are subject to numerous national, regional and local environmental laws and regulations and environmental regulations promulgated by the governments in whose jurisdictions we have operations. 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;
 
  •  limit or prohibit drilling activities within protected areas and certain other areas; and


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  •  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 certain of our operations and products, as it is with other companies engaged in similar businesses. We cannot assure you that material costs and liabilities will not be incurred. However, we do not currently expect any material adverse effect on our financial condition or results of operations as a result of compliance with such laws and regulations. We paid pollutant discharge fees of approximately RMB231 million, RMB200 million and RMB301 million in 2007, 2008 and 2009, respectively.
 
To meet future environmental obligations, we are engaged in a continuous program to develop effective environmental protection measures. This program includes research on:
 
  •  building environment-friendly projects;
 
  •  reducing sulphur levels in heavy fuel oil and diesel fuel;
 
  •  reducing olefin and benzene content in gasoline, and continuously reducing the quantity of emissions and effluents from our refineries and petrochemical plants; and
 
  •  developing and installing monitoring systems at our pollutant discharge openings and developing environmental impact assessments for construction projects.
 
Our capital expenditures on environmental programs in 2007, 2008 and 2009 were approximately RMB2,299 million, RMB1,366 million and RMB1,336 million, 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 minimize 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.
 
Legal Proceedings
 
We are involved in certain legal proceedings concerning matters arising in the ordinary course of our business. We believe, based on currently available information, that these proceedings, individually or in the aggregate, will not have a material adverse effect on our results of operations or financial condition.


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Properties
 
Under a restructuring agreement we entered into with CNPC on March 10, 2000, CNPC undertook to us the following:
 
  •  CNPC would use its best endeavors to obtain formal land use right licenses to replace the entitlement certificates in relation to the 28,649 parcels of land, which were leased or transferred to us from CNPC, within one year from August, September and October 1999 when the relevant entitlement certificates were issued;
 
  •  CNPC would complete, within one year from November 5, 1999, the necessary governmental procedures for the requisition of the collectively owned land on which 116 service stations owned by us are located; and
 
  •  CNPC would obtain individual building ownership certificates in our name for all of the 57,482 buildings transferred to us by CNPC, before November 5, 2000.
 
As of December 31, 2009, CNPC obtained formal land use right certificates for 27,765 of the 28,649 parcels of land and ownership certificates for some buildings. The governmental procedures for the above-mentioned service stations located on collectively owned land have not been completed to date. We believe that the use of and the conduct of relevant activities at the above-mentioned parcels of land, service stations and buildings are not affected by the fact that the relevant land use right certificates or building ownership certificates have not been obtained or the fact that the relevant governmental procedures have not been completed. Our directors believe that this will not have any material adverse effect on our results of operations and financial condition.
 
We hold exploration and production licenses covering all of our interests in developed and undeveloped acreage, oil and natural gas wells and relevant facilities. See “— Exploration and Production — Properties”.
 
Intellectual Property
 
Our company logo “ (LOGO)” is jointly owned by us and CNPC and has been used since December 26, 2004. We have applied for trademark registrations of the logo with the State Trademark Bureau of the PRC. To date, several of our applications have been approved and others are either in the process of review or public announcement phase. In addition, we have applied for international trademark registration for our logo in other jurisdictions. We have received 27 Madrid International Trademark Registration Certificates for our logo covering 50 jurisdictions and 390 trademark registration certificates from individual countries and regions.
 
As of December 31, 2009, we owned approximately 3,800 patents in China and other jurisdictions. We were granted 700 patents in China in 2009.
 
Regulatory Matters
 
Overview
 
China’s oil and gas industry is subject to extensive regulation by the PRC government with respect to a number of aspects of exploration, production, transmission and marketing of crude oil and natural gas as well as production, transportation and marketing of refined products and chemical products. The following central government authorities exercise control over various aspects of China’s oil and gas industry:
 
  •  The Ministry of Land and Resources has the authority for granting, examining and approving oil and gas exploration and production licenses, the administration of registration and transfer of exploration and production licenses.
 
  •  The Ministry of Commerce:
 
  •  sets the import and export volume quotas for crude oil and refined products according to the overall supply and demand for crude oil and refined products in China as well as the WTO requirements for China;


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  •  issues import and export licenses for crude oil and refined products to oil and gas companies that have obtained import and export quotas; and
 
  •  examines and approves production sharing contracts and Sino-foreign equity and cooperative joint venture contracts.
 
  •  The National Development and Reform Commission:
 
  •  has the industry administration and policy coordination authority over China’s oil and gas industry;
 
  •  determines mandatory minimum volumes and applicable prices of natural gas to be supplied to certain fertilizer producers;
 
  •  publishes guidance prices for natural gas and retail median guidance prices for certain refined products, including gasoline and diesel;
 
  •  approves significant petroleum, natural gas, oil refinery and chemical projects set forth under the Catalogues of Investment Projects Approved by the Central Government; and
 
  •  approves Sino-foreign equity and cooperative projects exceeding certain capital amounts.
 
Exploration Licenses and Production Licenses
 
The Mineral Resources Law authorizes the Ministry of Land and Resources to exercise administrative authority over the exploration and production of mineral resources within the PRC. The Mineral Resources Law and its supplementary regulations provide the basic legal framework under which exploration licenses and production licenses are granted. The Ministry of Land and Resources has the authority to issue exploration licenses and production licenses. Applicants must be companies approved by the State Council to engage in oil and gas exploration and production activities.
 
Applicants for exploration licenses must first register with the Ministry of Land and Resources blocks in which they intend to engage in exploration activities. The holder of an exploration license is obligated to make a progressively increasing annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. Investments range from 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 exploration license 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 twice 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 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 Ministry of Land and Resources issues production licenses to applicants on the basis of the reserve reports approved by the relevant authorities. Production license holders are required to pay an annual production right usage fee of RMB1,000 per square kilometer. Administrative rules issued by the State Council provide that the maximum term of a production license is 30 years. In accordance with a special approval from the State Council, the Ministry of Land and Resources 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 PetroChina, Sinopec and CNOOC account for the majority of mining rights in China. Among those companies,


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PetroChina and Sinopec primarily engage in onshore exploration and production, while CNOOC primarily engages in offshore exploration and production.
 
Pricing
 
Crude Oil
 
PetroChina and Sinopec set their crude oil median prices each month based on the average Singapore market FOB prices for crude oil of different grades in the previous month. In addition, PetroChina and Sinopec negotiate a premium or discount to reflect transportation costs, the differences in oil quality and market supply and demand. The National Development and Reform Commission will mediate if PetroChina and Sinopec cannot agree on the amount of premium or discount.
 
Refined Products
 
Since October 2001, PetroChina has set its retail prices within an 8% floating range of the published retail median guidance prices of gasoline and diesel published by the National Development and Reform Commission (but after March 26, 2006, the price of diesel for fishing vessels has been set in line with the published retail base price, with no upward adjustment for the time being). These retail median guidance prices of gasoline and diesel vary in each provincial level distribution region. From October 2001 to early 2006, the National Development and Reform Commission published the retail median guidance prices of gasoline and diesel from time to time based on the weighted average FOB Singapore, Rotterdam and New York trading prices for diesel and gasoline plus transportation costs and taxes. Generally, adjustments were made only if the weighted average prices fluctuate beyond 8% of the previously published retail median guidance price. In 2006, the PRC government, under its macro economic controls, introduced a mechanism for determining the prices of refined products.
 
On December 18, 2008, the PRC government further improved the pricing mechanism and the domestic prices of refined oil products continue to be indirectly linked to the international market. Under the improved mechanism, the domestic selling price of the refined oil products are determined on the basis of the corresponding international crude oil prices and by taking consideration of the average domestic processing cost, tax, selling expenses and appropriate profit margin. The prices of diesel and gasoline continue to follow the government set prices and the government guiding prices. The retail pries of diesel and gasoline are subject to highest retail prices set by the government. The highest retail price is determined on the basis of the ex-works price and the profit margin for retailing activities.
 
On May 7, 2009, the National Development and Reform Commission promulgated and implemented the Measures for Administration of Petroleum Price (on trial) (the “Oil Price Measures”). The Oil Price Measures officially specifies the relevant conditions and mechanisms for the adjustment of the prices of China’s domestic refined oil products. Under the Oil Price Measures, when the change in the average price of crude oil on the international market for 22 consecutive days exceeds 4%, prices of domestic refined oil products may be adjusted accordingly. When the price of crude oil on the international market becomes lower than US$80 per barrel, the prices of domestic refined oil products shall be computed on the basis of normal profit margin for processing. On the contrary, when the price of crude oil on the international market becomes higher than US$80 per barrel, the profit margin for processing shall be reduced until being reduced to zero. When the price of crude oil becomes higher than US$130 per barrel, appropriate financial and tax policies shall be adopted to ensure the production and supply of refined oil products and the stability of the domestic gasoline and diesel prices. Retailers of refined oil products may set the retail prices freely as long as their retail prices are not higher than the highest retail prices of gasoline and diesel set by the government.
 
Chemical Products
 
PetroChina determines the prices of all of its chemical products.
 
Natural Gas
 
The price of natural gas has two components: ex-works price and pipeline transportation tariff.


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Prior to December 26, 2005, ex-works prices varied depending on whether or not the natural gas sold was within the government-formulated natural gas supply plan. For natural gas sold within the government-formulated supply plan, the National Development and Reform Commission fixed ex-works prices according to the nature of the customers. Most of these customers were fertilizer producers. For natural gas sold to customers not subject to the government-formulated supply plan, the National Development and Reform Commission published median guidance ex-works prices, and allowed natural gas producers to adjust prices upward or downward by up to 10%.
 
On December 26, 2005, the National Development and Reform Commission reformed the mechanism for setting the ex-works prices of domestic natural gas by changing the ex-works prices to governmental guidance prices, and categorizing domestic natural gas into two categories. On the basis of the ex-works price set by the government, subject to the negotiations between the seller and the buyer, the actual ex-works price of the first category may float upward or downward up to 10%; while the actual ex-works price of the second category may float upward up to 10% and downward to any level. The price of the first category will be adjusted to the same level as the second category within three to five years. The National Development and Reform Commission does not allow PetroChina and Sinopec to charge different prices towards internal and external enterprises. On November 10, 2007, the National Development and Reform Commission increased the ex-works price of the industrial use natural gas by RMB400/thousand cubic meters.
 
On June 1, 2010, the National Development and Reform Commission raised the median ex-works prices of the domestic onshore natural gas and as a result of that, the median ex-works price of all the oil and gas fields in China increased by RMB0.23/cubic meter. At the same time, the National Development and Reform Commission combined the first category and the second category median ex-works prices of the natural gas from Dagang Oil Field, Liaohe Oil Field and Zhongyuan Oil Field, thus ending the “dual-track natural gas pricing system” as described above. In addition, the National Development and Reform Commission expanded the floating range of the median ex-works price by allowing the median ex-works price to float upward to 10% and downward to any level.
 
PetroChina negotiates the actual ex-works price with natural gas users within the benchmark price and the adjustment range set by the government.
 
The National Development and Reform Commission sets the pipeline transportation tariff for the natural gas transported by pipelines constructed prior to 1991. For natural gas transported by pipelines constructed after 1991, PetroChina submits to the National Development and Reform Commission for examination and approval proposed pipeline transmission tariffs based on the capital investment made in the pipeline, the depreciation period for the pipeline, the ability of end users to pay and PetroChina’s profit margin.
 
On April 25, 2010, the National Development and Reform Commission adjusted the originally government-set flat pipeline transportation tariff for the natural gas transported by pipelines. As a result of such adjustment, our average pipeline transportation tariff for the natural gas transported by pipelines increased from RMB0.06 per cubic meter to RMB0.14 per cubic meter.
 
Production and Marketing
 
Crude Oil
 
Each year, the National Development and Reform Commission publishes the projected target for the production and sale of crude oil by PetroChina, Sinopec and CNOOC, based on the domestic consumption estimates submitted by domestic producers, including PetroChina, Sinopec and CNOOC, the production of these companies as well as the forecast of international crude oil prices. The actual production levels are determined by the producers themselves and may vary from the submitted estimates. Since January 1, 2007, when the Measures on the Administration of the Refined Products Market promulgated by the Ministry of Commerce became effective, qualified domestic producers are permitted to engage in the sale and storage of crude oil. Foreign companies are also allowed to establish and invest in enterprises to conduct crude oil business.


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Refined Products
 
Previously, only PetroChina, Sinopec and joint ventures established by the two companies had the right to conduct gasoline and diesel wholesale business. Other companies, including foreign invested companies, were not allowed to engage in wholesale of gasoline and diesel in China’s domestic market. In general, only domestic companies, including Sino-foreign joint venture companies, were permitted to engage in retail of gasoline and diesel. Since 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 Ministry of Commerce to conduct refined oil products wholesale, retail and storage businesses.
 
Natural Gas
 
The National Development and Reform Commission publishes each year the production targets for natural gas producers based on the annual production target prepared on the basis of consumption estimates submitted by all natural gas producers such as PetroChina. The National Development and Reform Commission also formulates the annual natural gas guidance supply plan, which requires natural gas producers to distribute a specified amount of natural gas to specified fertilizer producers, municipal governments and enterprises. The actual production levels of natural gas, except the amount supplied to the fertilizer producers, are determined by the natural gas producers.
 
Foreign Investments
 
Cooperation in Exploration and Production with Foreign Companies
 
Currently, only CNPC and Sinopec have the right to cooperate with foreign companies in onshore crude oil and natural gas exploration and production in China. CNOOC 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 Ministry of Commerce must approve those contracts.
 
As authorized by the Regulations of the PRC on Exploration of Onshore Petroleum Resources in Cooperation with Foreign Enterprises, CNPC has the right to enter into joint cooperation arrangements with foreign oil and gas companies for onshore crude oil and natural gas exploration and production. PetroChina does not have the capacity to enter into production sharing contracts directly with foreign oil and gas companies under existing PRC law. Accordingly, CNPC will continue to enter into production sharing contracts. After signing a production sharing contract, CNPC will, subject to approval of the Ministry of Commerce, assign to PetroChina most of its commercial and operational rights and obligations under the production sharing contract as required by the Non-competition Agreement between CNPC and PetroChina. See “Item 7 — Major Shareholders and Related Party Transactions — Contract for the Transfer of Rights under Production Sharing Contracts”.
 
Transportation and Refining
 
Since December 1, 2007, PRC regulations encourage foreign investment in the construction and operation of oil and gas pipelines and storage facilities but restrict foreign investment in refineries with an annual capacity of 8 million tons or lower. Construction of new refinery or ethylene facilities, expansion of existing refinery facilities and upgrading of existing ethylene facilities by increasing annual production capacity of more than 200 thousand tons are subject to the approval of relevant government authorities. The ethylene production projects with an annual production capacity exceeding 800 thousand tons must be majority-owned by Chinese parties. Furthermore, when appropriate, projects must receive necessary approvals from relevant PRC government agencies. See “Item 3 — Key Information — Risk Factors”.
 
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 refine


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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 Ministry of Commerce has granted PetroChina 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 National Development and Reform Commission:
 
(1) new oil field development projects with an annual capacity of 1 million tons or above and new gas field development projects with an annual capacity of 2 billion cubic meters or above;
 
(2) facilities for taking delivery of, storing or transporting imported liquefied natural gas, and cross-province (region or municipality) major oil transmission pipeline facilities;
 
(3) cross-province (region or municipality) gas transmission facilities, or gas transmission facilities with an annual capacity of 500 million cubic meters or above;
 
(4) new refineries, first expansion of existing refineries, new ethylene projects, and transformation or expansion of existing ethylene projects which will result in an additional annual capacity of 200 thousand tons;
 
(5) new PTA, PX, MDI and TDI projects, and transformation of existing PTA and PX projects which will result in an additional capacity of 100 thousand tons;
 
(6) potassium mineral fertilizer projects with an annual capacity of 500 thousand tons or more; and
 
(7) national crude oil reserve facilities.
 
Taxation, Fees and Royalty
 
PetroChina is subject to a variety of taxation, fees and royalty. The table below sets forth the various taxation, fees and royalty payable by PetroChina or by Sino-foreign oil and gas exploration and development cooperative projects. Since January 1, 2000, PetroChina and its wholly owned subsidiary, Daqing Oilfield Company Limited, and branch companies have been taxed on a consolidated basis as approved by the Ministry of Finance and the State Taxation Bureau.
 
         
Tax Item
 
Tax Base
 
Tax Rate
 
Enterprise income tax
  Taxable income   Effective January 1, 2008, charged at the legal rate of 25%. However, certain of our qualified operations in west regions of the PRC are entitled to a rate of 15% prior to 2010.
         
Value-added tax
  Turnover   13% for liquified natural gas, natural gas, liquified petroleum gas, agricultural film and fertilizers and 17% for other items.
         
    Sales volume   5% for the Sino-foreign oil and gas exploration and development cooperative projects. However input value-added tax cannot be deducted.
         
Business tax
  Income from transportation services   3%
         
Consumption tax
  Aggregate volume sold or self-consumed   Effective January 1, 2009, the unit tax amount of the consumption tax for refined oil products was increased as follows:
         
      RMB1.0 per liter for unleaded gasoline
         
      RMB0.8 per liter for diesel.


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Tax Item
 
Tax Base
 
Tax Rate
 
      RMB1.0 per liter for naphtha, solvent naphtha and lubricants.
         
      RMB0.8 per liter for fuel oil
         
Resource tax
  Aggregate volume sold or self-consumed   Effective July 1, 2005, resource tax applicable to crude oil of our company was adjusted upward from the original RMB8 to 30 per ton to RMB14 to 30 per ton, and the resource tax for natural gas was adjusted from the original RMB2 to 15 per thousand cubic meter to RMB7 to 15 per thousand cubic meter.
         
    The actual applicable rate for each oil field may differ, depending on the resource differences, volume of the exploration and production activities and costs required for the production at the particular oil field.
         
    Effective from June 1, 2010, the resource tax payable by the resource tax payers in connection with their extraction of crude oil and natural gas in Xinjiang shall be collected based on value at the rate of 5%. The amount of the resource tax payable = sales value × tax rate. Taxpayers shall be eligible for a reduced resource tax rate in connection with their extraction of viscous oil, high pour-point oil, and high sour natural gas as well as enhanced oil recovery.
         
Compensatory fee for mineral resources
  Turnover   1% for crude oil and natural gas
         
Crude oil special gain levy
  Sales amount above specific threshold   Effective March 26, 2006, levied on the domestic crude oil sold at or above US$40/barrel, with a five-level progressive tax rates, varying from 20% to 40%
         
Exploration license fee
  Area   RMB100 to 500 per square kilometer per year
         
Production license fee
  Area   RMB1,000 per square kilometer per year
         
Royalty fee(1)
  Production volume   Progressive rate of 0-12.5% for crude oil and 0-3% for natural gas
 
 
(1) Payable only by Sino-foreign oil and gas exploration and development cooperative projects. The project entity of those cooperative projects is not subject to any other resource tax or fee.
 
The PRC Highway Law, as amended on October 31, 1999, provides that the PRC government will collect funds for highway maintenance by imposing fuel taxes. On December 18, 2008, the State Council promulgated the Circular on Implementing the Reform of Refined Oil Product Pricing and Relevant Tax and Charge Collection. According to the Circular, effective January 1, 2009, the PRC government ceased to impose the fuel oil tax. Instead, as part of the reform of the refined oil product pricing, the government used the existing system of taxation, methods of tax collection and means of taxation administration to further improve the refined oil product pricing mechanism. As a result, the unit tax amount of the consumption tax for refined oil products was increased.

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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. China has adopted extensive environmental laws and regulations that affect the operation of the oil and gas industry. There are national and local standards applicable to emissions control, discharges to surface and subsurface water and disposal, and the generation, handling, storage, transportation, treatment and disposal of solid waste materials.
 
The environmental regulations require a company, such as us, to register or file an environmental impact report with the relevant environmental bureau for approval before it undertakes any construction of a new production facility or any major expansion or renovation of an existing production facility. The new facility or the expanded or renovated facility will not be permitted to operate unless the relevant environmental bureau has inspected to its satisfaction that environmental equipment that satisfies the environmental protection requirements has been installed for the facility. A company that wishes to discharge pollutants, whether it is in the form of emission, water or materials, must submit a pollutant discharge declaration statement detailing the amount, type, location and method of treatment. After reviewing the pollutant discharge declaration, the relevant environmental bureau will determine the amount of discharge allowable under the law and will issue a pollutant discharge license for that amount of discharge subject to the payment of discharge fees. If a company discharges more than is permitted in the pollutant discharge license, the relevant environmental bureau can fine the company up to several times the discharge fees payable by the offending company for its allowable discharge, or require the offending company to close its operation to remedy the problem.
 
ITEM 4A — UNRESOLVED STAFF COMMENTS
 
We do not have any unresolved Staff comments that are required to be disclosed under this item.
 
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.
 
Overview
 
We are engaged in a broad range of petroleum and natural gas related activities, including:
 
  •  the exploration, development, production and sale of crude oil and natural gas;
 
  •  the refining of crude oil and petroleum products, and the production and marketing of basic petrochemical products, derivative chemical products and other chemical products;
 
  •  marketing and trading of refined oil products; and
 
  •  the transmission of natural gas, crude oil and refined oil products as well as the sale of natural gas.
 
We are China’s largest producer of crude oil and natural gas and are one of the largest companies in China in terms of sales. In the year ended December 31, 2009, we produced approximately 843.5 million barrels of crude oil and approximately 2,122.2 billion cubic feet of natural gas for sale. Our refineries also processed approximately 828.6 million barrels of crude oil in the year ended December 31, 2009. In the year ended December 31, 2009, we had turnover of RMB1,019,275 million and profit attributable to the owners of our company of RMB103,387 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 of crude oil, refined products, natural gas and chemical products, decrease in our crude oil reserves in China and fluctuations in exchange rates and interest rates.


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Crude Oil Prices
 
Our results of operations are substantially affected by crude oil prices. Our actual realized crude oil prices include a premium on, or discount from, the median prices which primarily reflects transportation costs, differences in oil quality and market supply and demand conditions.
 
The table below sets forth the median prices for our principal grades of crude oil in 2007, 2008 and 2009 and the negotiated premiums or discounts applicable to those grades of crude oil since 2007.
 
                                                         
        Median Prices for Principal Grades of
           
        Crude Oil (RMB/Barrel)   Premium/(Discount)
        Year 2007
  Year 2008
  Year 2009
  (RMB/Barrel)
Grade of Crude Oil
  Benchmark   Average   Average   Average   2007   2008   2009
 
Daqing
    Cinta       536       701       390       (3.8 )     (3.8 )     (3.8 )
Jidong
    Cinta       536       701       390       (3.8 )     (3.8 )     (3.8 )
Huabei
    Cinta       536       701       390       (3.9 )     (3.9 )     (3.9 )
Dagang
    Duri       512       651       350       (4 )     (4 )     (4 )
Tarim
    Cinta       536       701       390       (51 )     (51 )     (51 )
Tuha
    Minas       571       729       418       (36 )     (36 )     (36 )
 
Increases or decreases in the price of crude oil in China have a significant effect on the turnover from our exploration and production segment. Our turnover from the exploration and production segment for the year ended December 31, 2009 was RMB 405,326 million, representing a decrease of 35.3% from RMB626,367 million for the year ended December 31, 2008, mainly as a result of the decreases in the prices of crude oil. In the year ended December 31, 2009, our average realized selling price for crude oil was RMB368 per barrel, decreased by 39.5% from RMB608 per barrel in the year ended December 31, 2008. See “Item 4 — Information on the Company — Regulatory Matters — Pricing” for a more detailed discussion of current PRC crude oil pricing regulations.
 
Refined Product Prices
 
From October 2001 to December 18, 2008, we and Sinopec set our retail prices within an 8% floating range of the median gasoline and diesel guidance prices published by the National Development and Reform Commission or its predecessor, the State Planning Commission. Beginning from December 19, 2008, the PRC government set upper limits for the retail prices of various refined oil products, which had previously been allowed to float within a floating range of the median guidance prices. We determine the prices of other refined products with reference to the published median guidance prices of gasoline and diesel. Our retail prices may differ from those of Sinopec within a given market. Our average realized selling prices tend to be higher in the western and northern regions of China, where we dominate the market, as compared to our average realized selling prices in the eastern and southern regions, where Sinopec has a stronger presence. See “Item 4 — Information on the company — Regulatory Matters — Pricing” for a more detailed discussion of current PRC refined products pricing regulations.


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As of the end of 2008, the ex works prices were RMB 6,229 per ton for 90# gasoline and RMB 5,625 per ton for 0# diesel. The following table sets forth the adjustments that were made to such median prices from January 2009 to June 18, 2010, as published by the National Development and Reform Commission.
 
                 
    90(#)
  0(#)
Date
  Gasoline   Diesel
    (RMB/ton)   (RMB/ton)
 
January 15, 2009
    (140 )     (160 )
March 25, 2009
    290       180  
June 10, 2009
    400       400  
June 30, 2009
    600       600  
July 29, 2009
    (220 )     (220 )
September 2, 2009
    300       300  
September 30, 2009
    (190 )     (190 )
November 10, 2009
    480       480  
April 14, 2010
    320       320  
June 1, 2010
    (230 )     (220 )
 
Chemical Product Prices
 
We determine and set the prices of all chemical products produced by our chemicals business segment based on market conditions.
 
Natural Gas Prices
 
Our natural gas price is comprised of the ex-works price and pipeline transportation tariff.
 
We negotiate the actual ex-works price with natural gas users on the basis of the benchmark price set by the government and the adjustment range. See “Item 4 — Information on the company — Regulatory Matters — Pricing” for a more detailed discussion of current PRC natural gas products pricing regulations.
 
Foreign Currency Exposure
 
For a discussion of the effect of exchange rate fluctuations on our results of operations, please see “Item 11 — Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange Rate Risk”.
 
Interest Rate Exposure
 
For a discussion of the effect of interest rate changes on our results of operations, please see “Item 11 — Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk”.
 
Critical Accounting Policies
 
The preparation of our consolidated financial statements requires our management to select and apply significant accounting policies, the application of which may require management to make judgments and estimates that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of our financial statements, and the reported amounts of turnover 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.


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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 prior to the discovery of proved reserves. However, all costs for developmental wells, support equipment and facilities, and mineral interests in oil and gas properties are capitalized. Costs of exploratory wells are capitalized as construction in progress pending determination of whether the wells find proved reserves. For exploratory wells located in regions that do not require substantial capital expenditures before the commencement of production, the evaluation of the economic benefits of the reserves in such wells will be completed within one year following the completion of the exploration drilling. Where such evaluation indicates that no economic benefits can be obtained, the relevant costs of exploratory wells will be converted to dry hole exploration expenses. The relevant costs will be capitalized if the evaluation indicates that economic benefits can be obtained. For wells that found economically viable reserves in areas where a major capital expenditure would be required before production can begin, the related well costs remain capitalized only if additional drilling is under way or firmly planned. Otherwise the well costs are expensed as dry holes. We have no 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 geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Therefore, these estimates do not include probable or possible reserves. Our proved reserve estimates are updated annually by independent, qualified and experienced oil and gas reserve engineering firms in the United States. Our oil and gas reserve engineering department has policies and procedures in place to ensure that these estimates are consistent with these authoritative guidelines. Among other factors as required by authoritative guidelines, this estimation takes into account recent information about each field, including production and seismic information, estimated recoverable reserves of each well, and oil and gas prices and operating costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Therefore, as prices and cost levels change from year to year, the estimate of proved reserves also changes. We have no costs of unproved properties capitalized in oil and gas properties.
 
Despite the inherent imprecision in these engineering estimates, estimated proved oil and gas reserve quantity has a direct impact on certain amounts reported in the financials statements. In addition to the capitalization of costs related to oil and gas properties on the balance sheet discussed earlier, estimated proved reserves also impact the calculation of depreciation, depletion and amortization expenses of oil and gas properties. The cost of oil and gas properties is amortized at the field level on the unit of production method. Unit of production rates are based on the total oil and gas reserves estimated to be recoverable from existing facilities based on the current terms of our production licenses. Our reserve estimates include only crude oil and natural gas which management believes can be reasonably produced within the current terms of the production licenses that are granted by the Ministry of Land and Resources, ranging from 30 years to 55 years from the effective date of issuance in March 2000, renewable upon application 30 days prior to expiration. Consequently, the impact of changes in estimated proved reserves is reflected prospectively by amortizing the remaining book value of the oil and gas property assets over the expected future production. If proved reserve estimates are revised downward, earnings could be 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 reserve estimates will have a significant effect on prospective charges for depreciation, depletion and amortization expenses.


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In addition, due to the importance of these estimates to better understanding the perceived value and future cash flows of a company’s oil and gas operations, we have also provided supplemental disclosures of “proved” oil and gas reserve estimates prepared in accordance with authoritative guidelines elsewhere in this annual report.
 
Property, Plant and Equipment
 
We record property, plant and equipment, including oil and gas properties, initially at cost less accumulated depreciation, depletion and amortization. Cost represents the purchase price of the asset and other costs incurred to bring the asset into existing use. Subsequent to their initial recognition, property, plant and equipment are carried at revalued amount, being the estimated fair value at the date of the revaluation less accumulated depreciation and impairment losses. Revaluations are performed by independent qualified valuers on a periodic basis to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. Revaluation surpluses realized through the depreciation or disposal of revalued assets are retained in the revaluation reserve and will not be available to offset against possible future revaluation losses. As disclosed in Note 16 to our consolidated financial statements included elsewhere in this annual report, our property, plant and equipment, excluding oil and gas reserves, were revalued as of June 30, 1999. Subsequently, our refining and chemical production equipment and oil and gas properties were revalued as of September 30, 2003 and our oil and gas properties as of March 31, 2006.
 
Depreciation, depletion and amortization to write off the cost or valuation of each asset, other than oil and gas properties, to its residual value is calculated using the straight-line method over the estimated useful life of such asset as follows:
 
                 
Buildings and plant
            8-40 years  
Equipment and machinery
            4-30 years  
Motor vehicles
            4-14 years  
Other
            5-12 years  
 
We do not provide depreciation for construction in progress until it is completed and ready for use.
 
The useful lives of non-oil and gas properties are estimated at the time these purchases are made after considering future changes, business developments and our strategies. Estimated production lives for oil and gas properties are also made after considering the specific factors discussed under “— Oil and Gas Reserves” above. Should there be unexpected adverse changes in these circumstances or events, which include, among others, declines in projected operating results and negative industry or economic trends we would be required to assess the need to shorten the useful lives and/or make impairment provisions.
 
In performing this impairment assessment, we review internal and external sources of information to identify indications of these unexpected adverse changes. The sources utilized to identify indications of impairment are often subjective in nature and require us to use judgment in applying such information to our businesses. Our interpretation of this information has a direct impact on whether an impairment assessment is performed as at any given balance sheet date. Such information is particularly significant as it relates to our oil and gas properties. If an indication of impairment is identified, the recoverable amount of each cash generating unit is estimated, which is the higher of its fair value net of selling cost and its value in use, which is the estimated net present value of future cash flows to be derived from the continuing use of the asset and from its ultimate disposal. To the extent the carrying amount of a cash generating unit exceeds the recoverable amount, an impairment loss is recognized in the income statement.
 
Depending on our assessment of the overall materiality of the asset under review and complexity of deriving reasonable estimates of the recoverable value, we may perform such assessment utilizing internal resources or we may engage external advisors to advise us in making this assessment. Regardless of the resources utilized, we are required to make many assumptions in making this assessment, including our utilization of such asset, plans to continue to produce and develop proved and associated probable or possible reserves, the cash flows to be generated based on assumptions for future commodity prices and development costs, appropriate market discount rates and the projected market and regulatory conditions. Changes in any of these assumptions could result in a material change to future estimates of the recoverable value of any asset.


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Provision for Asset Decommissioning
 
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. In 2009, we restated our consolidated financial statements to reflect the corporate mergers between the certain subsidiaries of our company and the certain subsidiaries of CNPC. These corporate mergers, whether individually or taken as a whole, do not have a significant effect on our company.
 
Our income statement for each of the years ended December 31, 2007, 2008 and 2009 is summarized in the table below.
 
                         
    Year Ended December 31,  
    2007     2008     2009  
    (RMB in millions)  
 
Turnover
    837,542       1,072,604       1,019,275  
Operating expenses
    (636,525 )     (913,033 )     (875,831 )
Profit from operations
    201,017       159,571       143,444  
Exchange gain (loss), net
    (751 )     (1,081 )     (783 )
Interest expense, net
    (1,572 )     (767 )     (3,813 )
Share of profit of affiliates and jointly controlled entities
    6,445       4,290       1,184  
Profit before income tax expense
    205,139       162,013       140,032  
Income tax expense
    (49,802 )     (35,211 )     (33,473 )
Profit for the year attributable to non-controlling interest
    (8,541 )     (12,349 )     (3,172 )
                         
Profit for the year attributable to owners of the company
    146,796       114,453       103,387  
                         
 
The table below sets forth our turnover by business segment for each of the years ended December 31, 2007, 2008 and 2009 as well as the percentage changes in turnover for the periods shown.
 
                                         
                2008
          2009
 
                vs.
          vs.
 
    2007     2008     2007     2009     2008  
    (RMB in millions, except percentages)  
 
Turnover
                                       
Exploration and production
    473,117       626,367       32.4 %     405,326       (35.3 %
Refining and chemicals
    481,726       560,729       16.4 %     501,300       (10.6 )%
Marketing
    584,115       778,141       33.2 %     768,295       (1.3 )%
Natural gas and pipeline
    50,066       63,315       26.5 %     77,658       22.7 %
Other
    1,718       1,418       (17.5 )%     1,372       (3.2 )%
Total
    1,590,742       2,029,970       27.6 %     1,753,951       (13.6 )%
                                         
Less intersegment sales
    (753,200 )     (957.366 )     27.1 %     (734,676 )     (23.3 )%
                                         
Consolidated net sales from operations
    837,542       1,072,604       28.1 %     1,019,275       (5.0 )%
                                         


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The table below sets forth our operating income by business segment for each of the years ended December 31, 2007, 2008 and 2009, as well as the percentage changes in operating income for the periods shown. Other profit from operations shown below consists of research and development, business services and infrastructure support to our operating business segments.
 
                                         
                2008
          2009
 
                vs.