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 h05015exv4w1.htm
EX-4.4 h05015exv4w4.htm
EX-4.25 h05015exv4w25.htm
EX-4.26 h05015exv4w26.htm
EX-8.1 h05015exv8w1.htm
EX-12.1 h05015exv12w1.htm
EX-12.2 h05015exv12w2.htm
EX-13.1 h05015exv13w1.htm
EX-13.2 h05015exv13w2.htm
EX-15.1 h05015exv15w1.htm
EX-15.2 h05015exv15w2.htm

PetroChina Earnings 2010-12-31

Balance SheetIncome StatementCash Flow

20-F 1 h05015e20vf.htm 20-F e20vf
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, 2010.
    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 1,862,364,900 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     16  
            Introduction     16  
            Exploration and Production     20  
            Refining and Chemicals     28  
            Marketing     33  
            Natural Gas and Pipeline     35  
            Competition     37  
            Environmental Matters     38  
            Legal Proceedings     39  
            Properties     39  
            Intellectual Property     40  
            Regulatory Matters     40  
        Unresolved Staff Comments     47  
        Operating and Financial Review and Prospects     47  
            General     47  
            Operating Results     50  
            Liquidity and Capital Resources     57  
            Off-Balance Sheet Arrangements     62  
            Long-Term Contractual Obligations and Other Commercial Commitments and
Payment Obligations
    62  
            Research and Development     62  
            Trend Information     63  
            Other Information     63  
        Directors, Senior Management and Employees     64  
            Directors, Senior Management and Supervisors     64  
            Compensation     74  
            Board Practices     74  
            Employees     76  
            Share Ownership     77  
        Major Shareholders and Related Party Transactions     77  
            Major Shareholders     77  
            Related Party Transactions     77  
            Interests of Experts and Counsel     78  


2


Table of Contents

 
Table of Contents
 
                     
            Page
 
        Financial Information     79  
            Financial Statements     79  
            Dividend Policy     79  
            Significant Changes     80  
        The Offer and Listing     81  
            Nature of the Trading Market and Market Price Information     81  
        Additional Information     82  
            Memorandum and Articles of Association     82  
            Material Contracts     82  
            Foreign Exchange Controls     82  
            Taxation     83  
            Documents on Display     88  
        Quantitative and Qualitative Disclosures About Market Risk     88  
        Description of Securities Other Than Equity Securities     92  
                 
            Part II        
        Defaults, Dividends Arrearages and Delinquencies     92  
        Material Modifications to the Rights to Security Holders and Use of Proceeds     92  
        Controls and Procedures     93  
        Audit Committee Financial Expert     93  
        Code of Ethics     93  
        Principal Accountant Fees and Services     94  
        Exemptions from Listing Standards for Audit Committees     94  
        Purchases of Equity Securities by the Issuer and Affiliated Purchasers     94  
        Change In Registrant’s Certifying Accountant     95  
        Corporate Governance     95  
                 
            Part III        
        Financial Statements     96  
        Financial Statements     97  
        Exhibits     97  
 EX-4.1
 EX-4.4
 EX-4.25
 EX-4.26
 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.
 
  •  “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. 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 year ended December 31, 2008 complies with the old SEC reserve rules. Our reserve-related disclosure as of and for the years ended December 31, 2009 and 2010 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.
 
“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


4


Table of Contents

 
(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 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.


5


Table of Contents

 
(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
 
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


6


Table of Contents

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;


8


Table of Contents

 
  •  liability for remedial actions under environmental regulations;
 
  •  the actions of competitors;
 
  •  wars and acts of terrorism or sabotage;
 
  •  changes in policies, laws or regulations of the PRC, including changes in applicable tax rates;
 
  •  the other changes in global economic and political conditions affecting the production, supply and demand and pricing of crude oil, refined products, petrochemical products and natural gas; and
 
  •  the other risk factors discussed in this annual report and other factors beyond our control.
 
You should not place undue reliance on any forward-looking statements.
 
PART I
 
ITEM 1 — IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 
Not applicable. However, see “Item 6 — Directors, Senior Management and Employees — Directors, Senior Management and Supervisors” and “Item 16C — Principal Accountant Fees and Services”.
 
ITEM 2 — OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3 — KEY INFORMATION
 
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$)
 
November 2010
    6.6892       6.6330  
December 2010
    6.6745       6.6000  
January 2011
    6.6364       6.5809  
February 2011
    6.5965       6.5520  
March 2011
    6.5743       6.5483  
April 2011
    6.5477       6.4900  
May 2011 (ending as of May 6, 2011)
    6.4955       6.4920  
 
 
(1) The exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board.


9


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 2006, 2007, 2008, 2009 and 2010, 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$)
 
2006
    7.9579  
2007
    7.5806  
2008
    6.9193  
2009
    6.8295  
2010
    6.7603  
 
 
(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, 2008, 2009 and 2010 and the selected historical statement of financial position data as of December 31, 2009 and 2010 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, 2006 and 2007 and the selected statement of financial position data as of December 31, 2006, 2007 and 2008 set forth below are derived from our audited financial statements not included in this annual report. Our consolidated financial statements were prepared in accordance with IFRS as issued by the International Accounting Standards Board. The financial information included in this section may not necessarily reflect our results of operations, financial position and cash flows in the future.
 
                                         
    As at or For the Year Ended December 31,(1)
    2006   2007   2008   2009   2010
    RMB   RMB   RMB   RMB   RMB
    (In millions, except for per share and per ADS data)
 
Turnover
    691,448       837,542       1,072,604       1,019,275       1,465,415  
Total operating expenses
    (491,424 )     (636,525 )     (913,033 )     (875,831 )     (1,277,638 )
Profit from operations
    200,024       201,017       159,571       143,444       187,777  
Profit before income tax expense
    200,802       205,139       162,013       140,032       189,305  
Income tax expense
    (50,615 )     (49,802 )     (35,211 )     (33,473 )     (38,513 )
Profit for the year
    150,187       155,337       126,802       106,559       150,792  
Profit for the year attributable to owners of the parent company
    143,498       146,796       114,453       103,387       139,992  
Non-controlling interest
    6,689       8,541       12,349       3,172       10,800  
Basic and diluted earnings per share for profit attributable to owners of the parent company(2)
    0.80       0.82       0.63       0.56       0.76  
Basic and diluted net earnings per ADS(5)
    80.16       81.69       62.54       56.49       76.49  
Total current assets
    165,778       235,902       224,946       294,383       286,392  
Total non-current assets
    714,509       833,709       971,289       1,155,905       1,370,095  
Total assets
    880,287       1,069,611       1,196,235       1,450,288       1,656,487  
Total current liabilities
    181,993       200,150       265,651       388,553       429,736  


10


Table of Contents

                                         
    As at or For the Year Ended December 31,(1)
    2006   2007   2008   2009   2010
    RMB   RMB   RMB   RMB   RMB
    (In millions, except for per share and per ADS data)
 
Total non-current liabilities
    75,675       86,742       82,744       154,034       216,622  
Total liabilities
    257,668       286,892       348,395       542,587       646,358  
Equity attributable to owners of the parent company
    590,414       738,246       790,910       847,223       938,926  
Non-controlling interest
    32,205       44,473       56,930       60,478       71,203  
Total equity
    622,619       782,719       847,840       907,701       1,010,129  
Other Financial Data
                                       
Dividend per share
    0.36       0.36       0.28       0.25       0.34  
Dividend per ADS
    35.75       36.25       28.14       25.42       34.42  
Capital expenditures
    149,493       182,678       232,377       266,836       276,212  
Net cash flows from operating activities
    202,701       207,633       172,465       261,972       310,686  
Net cash flows used for investing activities
    (159,065 )     (183,656 )     (211,797 )     (261,453 )     (291,192 )
Net cash flows from/used in financing activities
    (75,385 )     (5,838 )     3,777       53,077       (60,944 )
Net cash flows from operating activities per share (RMB)(3)
    1.13       1.16       0.94       1.43       1.70  
Net cash flows from operating activities per ADS (RMB)(5)
    113.23       115.56       94.23       143.14       169.75  
Net assets per share attributable to owners of the parent company (RMB)(4)
    3.30       4.03       4.32       4.63       5.13  
Net assets per ADS attributable to owners of the parent company (RMB)(5)
    329.80       403.37       432.14       462.91       513.02  
Return on net assets(%)
    24.3       19.9       14.5       12.2       14.9  
 
 
(1) Due to business combinations under common control completed in 2008 and 2009, the relevant financial statements of the company have been restated in a manner identical to a pooling of interests to reflect the acquisitions.
 
(2) As at December 31, 2006, basic and diluted earnings per share were calculated by dividing the net profit with the number of shares issued for this financial year of 179.021 billion. As at December 31, 2007, basic and diluted earnings per share were calculated by dividing the net profit with the weighted average number of shares issued for this financial year of 179.700 billion. As at December 31, 2008, 2009 and 2010 respectively, basic and diluted earnings per share were calculated by dividing the net profit with the number of shares issued for each of these financial years of 183.021 billion.
 
(3) As at December 31, 2006, cash flows from operating activities per share were calculated by dividing the cash flows from operating activities with the number of shares issued for this financial year of 179.021 billion. As at December 31, 2007, cash flows from operating activities per share were calculated by dividing the cash flows from operating activities with the weighted average number of shares issued for this financial year of 179.700 billion. As at December 31, 2008, 2009 and 2010 respectively, cash flows from operating activities per share were calculated by dividing the cash flows from operating activities with the number of shares issued for each of these financial years of 183.021 billion.
 
(4) As at December 31, 2006, net asset per share were calculated by dividing the shareholders’ equity with the number of shares issued for each of these financial years of 179.021 billion. As at December 31, 2007, 2008, 2009 and 2010 respectively, net asset per share was calculated by dividing the shareholders’ equity with the number of shares issued for each of these financial years of 183.021 billion.
 
(5) Each ADS represents 100 H Shares. The basic and diluted earnings per ADS were calculated with the same method as that used for the calculation of the basic and diluted earnings per share. The cash flows from operating activities per ADS were calculated with the same method as that used for the calculation of the basic and diluted earnings per share. Net assets per ADS attributable to owners of the parent company per ADS were calculated with the same method as that used for the calculation of the net assets per share attributable to owners of the parent company.

11


Table of Contents

 
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.
 
Risks Related to Macro-economic Conditions
 
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 was severe in the second half of 2008 and in 2009. This change in the macro-economic conditions had an adverse impact on our business and operations. In 2010, China’s economy improved significantly, but the risk of inflation became more prominent. The uncertainties in the global financial and economic environment still exist and oil and gas prices can be very volatile, influenced by changes in supply and demand. These uncertainties may impact China’s macro-economic environment, which in turn may affect our results of operations, financial condition and business prospect.
 
Risks Related to Competition
 
The oil, gas and petrochemicals industries are highly competitive. There is strong competition, both within the oil and gas industry and with other industries, in supplying the fuel needs of commercial, industrial and residential markets. 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.
 
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 China Petroleum and Chemical Corporation, or Sinopec, and China National Offshore Oil Corporation, 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.
 
Risks Related to Governmental, Legal and Political Factors
 
We are subject to various political, legal and regulatory environments in foreign countries where we operate, some of which are known to be unstable and differ in certain significant respects from those prevailing in developed countries. In addition, CNPC, our controlling shareholder, 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 Liquefied Natural Gas (LNG) projects. CNPC’s overseas asset portfolio includes oil and gas development projects in Iran, Sudan, Cuba and Syria, which are on the sanction list published and administrated by the Office of Foreign Assets Control, or OFAC, of the 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.
 
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


12


Table of Contents

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. As of December 1, 2010, such new resource tax regulation applied to 12 provinces and regions in western China. 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 crude oil, natural gas and refined product pipelines and storage facilities. We presently have several significant projects pending approval from the relevant government authorities and will need approvals from the relevant government authorities in connection with many other significant projects. We do not have control over the timing and outcome of the final project approvals.
 
Because PRC laws, regulations and legal requirements dealing with economic matters 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.
 
Risks Related to Controlling Shareholder
 
As of December 31, 2010, CNPC beneficially owned approximately 86.292% 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.
 
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.
 
Risks Related to Pricing and Exchange Rate
 
Our operations are affected by the volatility of prices for crude oil, refined products and natural gas. We and Sinopec set our crude oil median prices monthly based on the Singapore trading prices for crude oil. 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


13


Table of Contents

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 gas assets and refining and chemicals assets. Such impairment could have a significant effect on our results of operations in the period in which it occurs.
 
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 exchange rate 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, 2010, 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.
 
Risks Related to Environmental Protection and Hazards
 
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.
 
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.
 
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;


14


Table of Contents

 
  •  blow-outs; and
 
  •  other unexpected or dangerous conditions causing personal injuries or death, property damage, environmental damage and interruption of operations.
 
Some of our oil and natural gas fields are surrounded by residential areas or located in areas where natural disasters, such as earthquakes, floods and sandstorms, tend to occur more frequently than in other areas. As with many other companies around the world that conduct similar businesses, we have experienced accidents that have caused property damage and personal injuries and death.
 
Significant operating hazards and natural disasters such as earthquake, tsunami and health epidemics 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.
 
Risks Related to Oil and Gas Reserves
 
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.
 
We are actively pursuing business opportunities outside China to supplement our domestic resources. For instance, we acquired certain overseas crude oil and natural gas assets from CNPC. We cannot assure you, however, that we can successfully locate sufficient alternative sources of crude oil supply or at all due to the complexity of the international political, economic and other conditions. If we fail to obtain sufficient alternative sources of crude oil supply, our results of operations and financial condition may be materially and adversely affected.
 
Risks Related to New Construction or Expansion
 
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.
 
Risks Related to Effectiveness of Internal Control Over Financial Reporting
 
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, 2010 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


15


Table of Contents

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.
 
See also “Item 4 — Information on the Company — Regulatory Matters”, “Item 5 — Operating and Financial Review and Prospects”, “Item 8 — Financial Information” and “Item 11 — Quantitative and Qualitative Disclosures About Market Risk”.
 
ITEM 4 — INFORMATION ON THE COMPANY
 
Introduction
 
History and Development of Our Company
 
Our legal name is “ (COMPANY LOGO ) ” and its English translation is PetroChina Company Limited.
 
We are the largest oil and gas producer and seller occupying a leading position in the oil and gas industry in the PRC and one of the largest companies in the world. We are engaged in a broad range of petroleum and natural gas related activities, including the exploration, development, production and 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.
 
Currently, substantially all of our crude oil and natural gas reserves and production-related assets are located in China. Our exploration, development and production activities commenced in the early 1950s. Over more than five decades, we have conducted crude oil and natural gas exploration activities in many regions of China. We commenced limited refining activities in the mid-1950s. Our chemicals operations commenced in the early 1950s. In the early 1960s, we began producing ethylene. Our natural gas transmission and marketing activities commenced in Sichuan in southwestern China in the 1950s.
 
We have increased our efforts to pursue attractive business opportunities outside China as part of our business growth strategy to utilize both domestic and international resources to strengthen our competitiveness. Since 2005, we have acquired interests in various oil and natural gas assets in several countries, which significantly expanded our overseas operations and effectively increased our oil and gas reserves and production volumes. We are currently assessing the feasibility of making further investments in international oil and gas markets. At the same time, we have been gradually increasing the proportion of the imported crude oil. In the year ended December 31, 2010, we imported approximately 359.1 million barrels of crude oil, as compared to 326.5 million barrels and 281.1 million barrels of crude oil in the years ended December 31, 2009 and 2008, respectively.
 
We were established as a joint stock company with limited liability under the Company Law of the PRC on November 5, 1999 as part of a restructuring in which CNPC transferred to us most of the assets and liabilities of CNPC relating to its exploration and production, refining and marketing, chemicals and natural gas businesses.
 
On April 7, 2000, we completed a global offering of H Shares and ADSs. In September 2005, we completed a follow-on offering of over 3 billion H Shares at the price of HK$6.00 per share. In October 2007, we issued 4 billion A Shares at an issue price of RMB 16.7 per share. The A Shares were listed on the Shanghai Stock Exchange on November 5, 2007. As of December 31, 2010, CNPC beneficially owned 157,932,289,259 shares, which include 167,692,000 H Shares indirectly held by CNPC through Fairy King Investments Limited, an overseas wholly owned subsidiary of CNPC, representing approximately 86.292% of the share capital of PetroChina.
 
For a description of our principal subsidiaries, see Note 19 to our consolidated financial statements.
 
Our headquarters are located at 9 Dongzhimen North Street, Dongcheng District, Beijing, China, 100007, and our telephone number at this address is (86-10) 5998-6223. 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.


16


Table of Contents

Our Corporate Organization Structure
 
The following chart illustrates our corporate organization structure as of December 31, 2010.
 
(FLOW CHART)
 
 
(1) Indicates approximate shareholding.
 
(2) Indicates approximate shareholding, including the 167,692,000 H Shares indirectly held by CNPC as of December 31, 2010 through Fairy King Investments Limited, a wholly owned overseas subsidiary of CNPC.
 
(3) Includes PetroChina Planning & Engineering Institute, PetroChina Exploration & Development Research Institute, IT Service Center, PetroChina Petrochemical Research Institute and several other companies.
 
Acquisitions
 
On November 25, 2010, we entered into an acquisition agreement with China National United Oil Corporation, a subsidiary of CNPC, for the acquisition from China National United Oil Corporation of the 4.356% equity interest in PetroChina Fuel Oil Company Limited for a cash consideration of approximately RMB390 million. As at the end of the reporting period, the transaction has not been completed.
 
In addition, we have launched a series of overseas acquisitions, for example:
 
In January 2010, we, together with other partners, won the bidding in a tender for the Halfaya Oilfield project. In accordance with the requirements, the partners formed a joint operating company, and entered into a contract for the development and production in Iraq’s Halfaya Oilfield with a term of 20 years. Pursuant to the contract, we will own 37.5% participating interest in the Halfaya Oilfield and will act as one of the operators for the development of the Halfaya Oilfield.
 
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.
 
In 2010, CS CSG (Australia) Pty Ltd. (the “Joint Venture Company”) was formed as a joint venture company by PetroChina International Investment Company Limited (a wholly owned subsidiary of the company) and Shell Energy Holdings Australia Ltd. PetroChina International Investment Company Limited holds 50% equity interest in the Joint Venture Company. On August 23, 2010, the Joint Venture Company acquired 100% equity interest in Arrow Energy Limited for a total consideration of approximately 3.5 billion Australian Dollars (“AUD”) (approximately RMB 21,120 million), representing AUD4.70 per share of Arrow Energy in cash. The Joint Venture Company has now been renamed as “Arrow Energy Holdings Pty Ltd”.
 
On January 31, 2011, PetroChina International (London) Company Limited (“PCI”), a wholly owned subsidiary of the company, has submitted a conditional binding and irrevocable offer to INEOS European Holdings Limited and INEOS Investments International Limited (together, the “Sellers”), two wholly owned subsidiaries of British petrochemical conglomerate INEOS Group Holdings plc, for the establishment of joint ventures in Europe


17


Table of Contents

engaged in trading and refining activities. After the above offer was made, PCI and the Sellers have entered into a number of documents, including the acquisition agreement and the reorganization agreement which were concluded on April 8, 2011. Pursuant to the acquisition agreement, PCI will acquire 50.1% of all the issued and outstanding shares in the capital of INEOS Refining Limited and 49.9% of all the issued and outstanding shares in the capital of INEOS Refining II Limited. The total cash consideration payable by PCI is US$1,015 million. The proposed transaction is subject to a number of closing conditions.


18


Table of Contents

(MAP)


19


Table of Contents

 
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. In the year ended December 31, 2010, the crude oil and natural gas produced by us at overseas regions accounted for 10.3% and 3.8% of our total production of crude oil and natural gas, respectively.
 
We currently hold exploration and exploitation licenses for oil and gas (including coal seam gas) covering a total area of approximately 458.4 million acres, consisting of the exploration licenses covering a total area of approximately 436.4 million acres and the exploitation licenses covering a total area of approximately 22.0 million acres. 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.
 
The following table sets forth the financial and operating data of our exploration and production segment for each of the years ended December 31, 2008, 2009 and 2010:
 
                         
    Year Ended December 31,
    2008   2009   2010
 
Revenue (RMB in millions)
    626,367       405,326       544,884  
Income from operations (RMB in millions)
    240,470       105,019       153,703  
Proved developed and undeveloped reserves
                       
Crude oil (million barrels)
    11,221.3       11,262.6       11,277.7  
Natural gas (Bcf)
    61,189.2       63,243.8       65,502.7  
Production
                       
Crude oil (million barrels)
    870.7       843.5       857.7  
Natural gas for sale (Bcf)
    1,864.2       2,112.2       2,221.2  
 
Reserves
 
Our estimated proved reserves as of December 31, 2010 totaled approximately 11,277.7 million barrels of crude oil and approximately 65,502.7 billion cubic feet of natural gas. As of December 31, 2010, proved developed reserves for crude oil and natural gas accounted for 67.4% and 47.5% 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 21,803.2 million barrels-of-oil equivalent as of December 31, 2009 to approximately 22,194.8 million barrels-of-oil equivalent as of December 31, 2010, taking account of our overseas crude oil reserves of 788.6 million barrels and overseas natural gas reserves of 947.4 billion cubic feet, totaling 946.5 million barrels-of-oil equivalent. Natural gas as a percentage of total proved hydrocarbon reserves increased from 48.3% as of December 31, 2009 to 49.2% as of December 31, 2010.
 
We prepared our reserve estimates as of December 31, 2008, 2009 and 2010 on the basis of reports prepared by two independent engineering consultants, DeGolyer and 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 and 2010 were 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 2008 is not restated.
 
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. We have established a special reserve management


20


Table of Contents

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. Mr. Wang Yongxiang, one of our technical experts, is in charge of the reserve estimation of the company. Mr. Wang is the head of the reserve estimate department under the company’s exploration and production segment. Mr. Wang holds a master’s degree in petroleum geology. He has over 25 years of working experience in oil and gas exploration and development. He has been working in reserve study and management for many years and is a state-certified reserve valuer. Mr. Wang has been the technical person primarily responsible for overseeing the preparation of the reserves estimates, oil and gas reserve estimation technology and management since 1999. The reserve study offices of the regional companies are 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, 2008, 2009 and 2010. 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. Thomas C. Pence, a Vice President of DeGolyer and MacNaughton, is primarily responsible for the preparation of our reserve report. Mr. Thomas C. Pence is a petroleum engineer and a Registered Professional Engineer in the State of Texas. Mr. Thomas C. Pence is also a member of the International Society of Petroleum Engineers and has over 28 years of experience in oil and gas reservoir studies and evaluations.
 
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 certain countries such as Algeria, Chad and Kazakhstan as of December 31, 2008, 2009 and 2010. 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. 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 and MacNaughton and Gaffney, Cline & Associates (Consultants) Pte Ltd filed hereto as exhibit 15.1 and exhibit 15.2 of this annual report.


21


Table of Contents

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, 2008, 2009 and 2010.
 
                         
    Crude Oil   Natural Gas(1)   Combined(1)
    (Millions of barrels)   (Bcf)   (BOE, in millions)
 
Proved developed and undeveloped reserves
                       
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  
Revisions of previous estimates
    (77.8 )     (1,455.8 )     (320.3 )
Extensions and discoveries
    876.9       5,935.9       1,866.2  
Improved recovery
    73.7       0       73.7  
Production for the year
    (857.7 )     (2,221.2 )     (1,228.0 )
Reserves as of December 31, 2010
    11,277.7       65,502.7       22,194.8  
Proved developed reserves
                       
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       13,028.9  
As of December 31, 2010
    7,605.4       31,102.4       12,789.1  
Proved undeveloped reserves
                       
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  
As of December 31, 2010
    3,672.3       34,400.3       9,405.7  
 
 
(1) Represents natural gas remaining after field separation for condensate removal and reduction for flared gas.
 
Our proved undeveloped reserves were 9,405.7 million BOE in 2010, representing an increase of 631.4 million BOE comparing with 2009. The main changes in our proved undeveloped reserves in 2010 include (i) an increase of 1,811.8 million BOE to proved undeveloped reserves through extensions and discoveries as well as improved discoveries; and (ii) the conversion of 1,180.4 million BOE of proved undeveloped reserves into proved developed reserves. In 2010, we spent more than RMB 90,000 million on developing proved undeveloped reserves. The overwhelming majority of our proved undeveloped reserves are situated around the oil fields that are currently producing. A majority of our proved undeveloped reserves are already scheduled to be developed within the next five years. A portion of our natural gas proved undeveloped reserves are anticipated to take more than five years to be fully developed due to characteristics of the development projects and contractual or pipeline capacity restrictions.
 
The following tables set forth our crude oil and natural gas proved reserves and proved developed reserves by region as of December 31, 2008, 2009 and 2010.
 
                                                 
    As of December 31,
    2008   2009   2010
    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
    3,548.0       2,912.0       3,463.4       2,740.8       3,178.1       2,533.4  
Changqing
    1,624.5       1,256.7       1,783.8       1,298.8       1,946.8       1,310.5  
Xinjiang
    1,302.6       1,106.6       1,395.1       1,117.6       1,418.6       1,109.6  


22


Table of Contents

                                                 
    As of December 31,
    2008   2009   2010
    Proved
      Proved
      Proved
   
    Developed
      Developed
      Developed
   
    and
  Proved
  and
  Proved
  and
  Proved
    Undeveloped   Developed   Undeveloped   Developed   Undeveloped   Developed
    (Millions of barrels)
 
Other regions(1)
    4,746.2       3,048.8       4,620.3       2,713.6       4,734.2       2,651.9  
                                                 
Total
    11,221.3       8,324.1       11,262.6       7,870.8       11,277.7       7,605.4  
                                                 
 
                                                 
    As of December 31,
    2008   2009   2010
    Proved
      Proved
      Proved
   
    Developed
      Developed
      Developed
   
    and
  Proved
  and
  Proved
  and
  Proved
    Undeveloped   Developed   Undeveloped   Developed   Undeveloped   Developed
    (Bcf)
 
Natural gas reserves(2)
                                               
Changqing
    19,261.7       6,901.6       20,363.2       9,884.4       21,244.4       10,853.4  
Tarim
    15,516.4       7,722.7       16,892.1       7,758.3       19,147.7       7,822.9  
Sichuan
    11,285.4       4,030.4       11,177.3       4,219.0       10,512.5       2,814.8  
Other regions(1)
    15,125.7       8,012.1       14,811.2       9,087.1       14,598.1       9,611.3  
                                                 
Total
    61,189.2       26,666.8       63,243.8       30,948.8       65,502.7       31,102.4  
                                                 
 
 
(1) Represents other oil regions in China 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.
 
Exploration and Development
 
We are currently conducting exploration and development efforts in 12 provinces, two municipalities under the direct administration of the central government and three autonomous regions in China as well as in certain regions of other countries. We believe that we have more extensive experience in the exploration and development of crude oil and natural gas than any of our principal competitors in China.
 
The following table sets forth the number of wells we drilled, or in which we participated, and the results thereof, for the periods indicated.
 
                                                 
Year
      Daqing   Xinjiang   Changqing   Others(1)   Total
 
  2008     Net exploratory wells drilled(2)     234       162       583       669       1,648  
        Crude oil     71       72       207       287       637  
        Natural gas     1       15       26       50       92  
        Dry(3)     162       75       350       332       919  
        Net development wells drilled(2)     4,238       1,887       5,079       3,996       15,200  
        Crude oil     4,223       1,868       4,469       3,487       14,047  
        Natural gas     4       18       528       456       1,006  
        Dry(3)     11       1       82       53       147  
  2009     Net exploratory wells drilled(2)     533       218       1,019       1,065       2,835  
        Crude oil     297       140       540       481       1,458  
        Natural gas     9       9       148       170       336  
        Dry(3)     227       69       331       414       1,041  
        Net development wells drilled(2)     4,934       681       7,421       2,238       15,274  
        Crude oil     4,923       674       6,808       1,626       14,031  
        Natural gas     1       7       480       584       1,072  
        Dry(3)     10       0       133       28       171  
  2010     Net exploratory wells drilled(2)     157       169       680       634       1,640  
        Crude oil     146       131       431       342       1,050  
        Natural gas     1       1       100       61       163  

23


Table of Contents

                                                 
Year
      Daqing   Xinjiang   Changqing   Others(1)   Total
 
        Dry(3)     10       37       149       231       427  
        Net development wells drilled(2)     5,073       1,323       7,754       3,477       17,627  
        Crude oil     5,024       1,312       7,106       3,083       16,525  
        Natural gas     27       11       542       348       928  
        Dry(3)     22       0       106       46       174  
 
 
(1) Represents the Liaohe, Jilin, Huabei, Dagang, Sichuan, 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.
 
We had 627 wells in the process of being drilled and 4,919 wells with multiple completions as of December 31, 2010.
 
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, 2010.
 
                                                 
    Productive Wells(1)   Acreage(1)
        Natural
  Developed   Undeveloped
Oil Region
  Crude Oil   Gas   Crude Oil   Natural Gas   Crude Oil   Natural Gas
                (Thousands of acres)    
 
Daqing
    56,819       212       907.6       86.4       779.7       111.5  
Changqing
    32,923       4,722       636.0       2,428.7       434.0       2,558.4  
Xinjiang
    22,940       139       309.4       57.7       158.7       21.5  
Other regions(2)
    59,585       3,832       1,350.0       763.6       750.0       908.8  
                                                 
Total
    172,267       8,905       3,203.0       3,336.4       2,122.4       3,600.2  
                                                 
                                                 
 
 
(1) Includes all wells and acreage in which we have an interest. No third parties own any interests in any of our wells or acreage.
 
(2) Represents the Liaohe, Jilin, Huabei, Dagang, Sichuan, Tarim, Tuha, Qinghai, Jidong and Yumen and other oil regions.
 
Production
 
The following table sets forth our historical average net daily crude oil and natural gas production by region and our average sales price for the periods ended December 31, 2008, 2009 and 2010.
 
                                 
    For the Year Ended
   
    December 31,   % of
    2008   2009   2010   2010 Total
 
Crude oil production(1)
                               
(thousands of barrels per day, except percentages or otherwise indicated)
                               
Daqing
    813.2       806.2       805.6       34.3  
Changqing
    279.8       318.1       369.3       15.7  
Xinjiang
    246.9       220.5       220.5       9.4  
Other(2)
    1,039.1       966.2       954.3       40.6  
                                 
Total
    2,379.0       2,311.0       2,349.7       100  
                                 
Annual production (million barrels)
    870.7       843.5       857.7          
Average sales price (US$ per barrel)
    87.55       53.90       72.93          

24


Table of Contents

                                 
    For the Year Ended
   
    December 31,   % of
    2008   2009   2010   2010 Total
 
Natural gas production(1)(3)
                               
(millions of cubic feet per day, except percentages or otherwise indicated)
                               
Tarim
    1,564.1       1,650.3       1,674.2       27.5  
Changqing
    1,024.5       1,434.1       1,579.8       26.0  
Sichuan
    1,364.6       1,381.4       1,387.2       22.8  
Other(4)
    1,140.1       1,320.9       1,444.2       23.7  
                                 
Total
    5,093.3       5,786.7       6,085.4       100  
                                 
Annual production (Bcf)
    1,864.2       2,112.2       2,221.2          
Average sales price (US$ per Mcf)
    4.72       4.78       5.54          
 
 
(1) Production volumes for each region include our share of the production from all of our cooperative projects with foreign companies in that region.
 
(2) Represents production from the Liaohe, Jilin, Huabei, Dagang, Tarim, Tuha, Qinghai, Jidong, Yumen and other oil regions and our share of overseas production as a result of our acquisition of overseas assets.
 
(3) Represents production of natural gas for sale.
 
(4) Represents production from the Daqing, Qinghai, Tuha, Xinjiang, Liaohe, Huabei, Dagang, Jilin, Jidong, Yumen and other oil and gas regions and our share of overseas production as a result of our acquisition of overseas assets.
 
In 2010, we supplied a substantial majority of our total crude oil sales to our refineries. We entered into a crude oil mutual supply framework agreement with Sinopec on January 12, 2011 for the supply of crude oil to each other’s refineries in 2011. Under this agreement, we agreed in principle to supply 5.63 million tons of crude oil to Sinopec. For the years ended December 31, 2008, 2009 and 2010, the average lifting costs of our crude oil and natural gas production were US$9.48 per BOE, US$9.12 per BOE and US$9.97 per BOE, respectively.
 
Principal Oil and Gas Regions
 
Daqing Oil Region
 
The Daqing oil region, our largest oil and gas producing property, is located in the Songliao basin and covers an area of approximately one million acres. In 2008, 2009 and 2010, our crude oil production volume in the Daqing oil region was 813.2 thousand barrels per day, 806.2 thousand barrels per day and 805.6 thousand barrels per day, respectively. As of December 31, 2010, we produced crude oil from 20 fields in the Daqing oil region.
 
As of December 31, 2010, our proved crude oil reserves in the Daqing oil region were 3,178.1 million barrels, representing 28.2% of our total proved crude oil reserves. As of December 31, 2008 and 2009, the proved crude oil reserves in our Daqing oil region were 3,548.0 million barrels and 3,463.4 million barrels, respectively. In 2010, the crude oil reserve-to-production ratio of the Daqing oil region was 10.8 years.
 
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 15.73% from US$10.11 per barrel for the year ended December 31, 2009 to US$11.70 per barrel for the year ended December 31, 2010. However, we have adopted a number of measures to control the increase in our lifting costs at these fields.
 
Daqing’s crude oil has a low sulfur and high paraffin content. As many refineries in China, particularly those in northeastern China, are configured to refine Daqing crude oil, we have a stable market for the crude oil we produce in the Daqing oil region.

25


Table of Contents

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, 2010, our proved crude oil reserves in the Xinjiang oil region were 1,418.6 million barrels, representing 12.6% of our total proved crude oil reserves. In 2010, our oil fields in the Xinjiang oil region produced an average of 220.5 thousand barrels of crude oil per day, representing approximately 9.4% of our total daily crude oil production. In 2010, the crude oil reserve-to-production ratio at the Xinjiang oil region was 17.6 years.
 
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 20.8 years in 2010. As of December 31, 2010, we had 105 natural gas fields under development in the Sichuan gas region.
 
As of December 31, 2010, our proved natural gas reserves in the Sichuan gas region were 10,512.5 billion cubic feet, representing 16.0% of our total proved natural gas reserves and a decrease of 5.9% from 11,177.3 billion cubic feet as of December 31, 2009. In 2010, our natural gas production for sale in the Sichuan gas region reached 506.3 billion cubic feet, representing 22.8% of our total natural gas production for sale.
 
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, 2010, the Guang’an gas field had a proved natural gas reserve of 1,544.4 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. As of December 31, 2010, our proved crude oil reserves in the Changqing oil region were 1,946.8 million barrels, representing 17.3% of our total proved crude oil reserves. In 2010, our crude oil production in the Changqing oil region were an average of 369.3 thousand barrels per day, representing approximately 15.7% of our total daily crude oil production. In 2010, the crude oil reserve-to-production ratio at the Changqing oil region was 14.4 years.
 
In the early 1990s, we discovered the Changqing gas region, which had total estimated proved natural gas reserves of 21,244.4 billion cubic feet as of December 31, 2010, representing 32.4% of our total proved natural gas reserves. In January 2001, we discovered the Sulige gas field in Changqing gas region, which had total estimated proved natural gas reserves of 9,315.7 billion cubic feet as of December 31, 2010. Sulige gas field is currently the largest gas field in China. In 2010, we produced 576.6 billion cubic feet of natural gas for sale in the Changqing oil and gas region, representing an increase of 10.2% from 523.4 billion cubic feet in 2009.
 
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. 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 5,096.8 billion cubic feet as of December 31, 2010. As of December 31, 2010, the proved natural gas reserves in the Tarim oil and gas region reached 19,147.7 billion cubic feet, representing 29.2% of our total proved natural gas reserves.
 
In 2010, we produced 611.1 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-East Gas Pipeline. See “— Natural Gas and Pipeline — Nature Gas Transmission Infrastructure” for a discussion of our West-East Gas Pipeline.


26


Table of Contents

(MAP)


27


Table of Contents

 
Refining and Chemicals
 
We now operate 30 enterprises located in nine provinces, four autonomous regions and three municipalities to engage in refining of crude oil and petroleum products, as well as the production and marketing of basic petrochemical products, derivative chemical products and other chemical products.
 
The following table sets forth the financial and operating data of our refining and chemicals segment for each of the years ended December 31, 2008, 2009 and 2010:
 
                         
    Year Ended December 31,
    2008   2009   2010
 
Revenue (RMB in millions)
    560,729       501,300       664,773  
Income/(loss) from operations (RMB in millions)
    (93,830 )     17,308       7,847  
Crude oil processed (million barrels)
    849.8       828.6       903.9  
Crude oil primary distillation capacity (million barrels/year)
    941.7       975       1,082.9  
Production of refined oil products (thousand tons)
    73,968       73,195       79,448  
 
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, 2008, 2009 and 2010.
 
                         
    Year Ended December 31,
Principal Product
  2008   2009   2010
    (Thousand tons)
 
Diesel
    48,294       48,828       53,745  
Gasoline
    23,465       22,114       23,308  
Kerosene
    2,209       2,253       2,395  
Lubricants
    1,768       1,401       1,607  
Fuel oil
    4,077       3,057       4,131  
Naphtha
    7,226       8,041       10,016  
 
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 ended December 31, 2008, 2009 and 2010, our exploration and production operations supplied approximately 77%, 75.4% and 69.1%, respectively, of the crude oil processed in our refineries.


28


Table of Contents

The table below sets forth certain operating statistics regarding our refineries as of December 31, 2008, 2009 and 2010.
 
                         
    As of December 31,
    2008   2009   2010
 
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       236.9       236.9  
Dushanzi Petrochemical
    121.5       202.4       202.4  
Other refineries
    1,644.8       1,604.3       1,899.8  
                         
Total
    2,580.1       2,671.2       2,966.7  
                         
Refining throughput (thousand barrels per day)
                       
Lanzhou Petrochemical
    202.3       211.6       209.3  
Dalian Petrochemical
    267.2       281.5       331.1  
Fushun Petrochemical
    193.1       187.9       181.9  
Dushanzi Petrochemical
    90.0       120.9       176.8  
Other refineries
    1,569.4       1,468.3       1,577.3  
                         
Total
    2,322.0       2,270.2       2,476.4  
                         
 
 
(1) Represents the primary distillation capacity of crude oil and condensate.
 
In each of the years ended December 31, 2008, 2009 and 2010, the average utilization rate of the primary distillation capacity at our refineries was 94.9%, 87.7% and 91.3%, respectively. The average yield for our four principal refined products (gasoline, kerosene, diesel and lubricants) at our refineries was 65.8%, 65.4% and 66.3%, respectively, in the same periods. “Yield” represents the number of tons of a refined product expressed as a percentage of the number of tons of crude oil from which that product is processed. In each of the years ended December 31, 2008, 2009 and 2010, the yield for all refined products at our refineries was 92.7%, 93.1% and 93.5%, respectively.
 
Dalian Petrochemical, Fushun Petrochemical, Lanzhou Petrochemical and Dushanzi Petrochemical were our leading refineries in terms of both primary distillation capacity and refining throughput in 2010.
 
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 2010, 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 was 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.


29


Table of Contents

Our Chemical Products
 
The table below sets forth the production volumes of our principal chemical products for each of the years ended December 31, 2008, 2009 and 2010.
 
                         
    Year Ended December 31,
    2008   2009   2010
    (Thousand tons)
 
Basic petrochemicals
                       
Propylene
    3,152       3,278       3,491  
Ethylene
    2,676       2,989       3,615  
Benzene
    944       1,022       1,247  
Derivative petrochemicals
                       
Synthetic resin
    4,100       4,480       5,550  
Other synthetic fiber raw materials and polymer
    1,637       1,471       1,985  
Synthetic rubber
    344       420       619  
Other chemicals
                       
Urea
    3,824       3,973       3,764  
 
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, 2010, our annual ethylene production capacity was 3,710 thousand tons. Our production volume of ethylene increased by 20.9% from 2,989 thousand tons in 2009 to 3,615 thousand tons in 2010. 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.
 
We produce a number of synthetic resin products, including polyethylene, polypropylene and ABS. As of December 31, 2010, our production capacities for polyethylene, polypropylene and ABS were 3,112 thousand tons, 2,899 thousand tons and 330 thousand tons, respectively. 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 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.


30


Table of Contents

The following table sets forth the sales volumes of our chemical products by principal product category for each of the years ended December 31, 2008, 2009 and 2010.
 
                         
    Year Ended December 31,
Product
  2008   2009   2010
    (Thousand tons)
 
Derivative petrochemicals
                       
Synthetic resin
    4,114.7       4,458.3       5,431.4  
Synthetic fiber
    118.4       135.2       140.5  
Synthetic rubber
    371.4       492.0       628.6  
Intermediates
    6,154.6       4,933.6       5,109.7  
Other chemicals
                       
Urea
    4,393.2       4,054.1       3,445.0  
 
In each of the years ended December 31, 2008, 2009 and 2010, our capital expenditures for our refining and chemicals segment were RMB30,619 million, RMB42,558 million and RMB44,242 million, respectively. These capital expenditures were incurred primarily in connection with the expansion of our refining facilities, the upgrading of our product quality and the construction of large ethylene projects. 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.


31


Table of Contents

(MAP)


32


Table of Contents

 
Marketing
 
We engage in the marketing of refined products through 32 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. In addition, we have been actively developing international trade to enhance our influence in international oil market.
 
The following table sets forth the financial and operating data of our marketing segment for each of the years ended December 31, 2008, 2009 and 2010:
 
                         
    Year Ended December 31,
    2008   2009   2010
 
Revenue (RMB in millions)
    778,141       768,295       1,134,534  
Income from operations (RMB in millions)
    7,982       13,265       15,956  
External sales volume of refined oil products (thousand tons)
    90,278       101,253       120,833  
 
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, 2010, 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
 
  •  17,996 service stations, consisting of 17,394 service stations owned and operated by us and 602 franchise service stations owned and operated by third parties.
 
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.
 
The following table sets forth our refined product sales volumes for each of the years ended December 31, 2008, 2009 and 2010.
 
                         
    Year Ended December 31,
Product
  2008   2009   2010
    (Thousand tons)
 
Diesel
    56,081       64,659       77,789  
Gasoline
    29,399       30,777       36,328  
Kerosene
    4,798       5,817       6,716  
Lubricants
    2,003       1,796       1,703  
 
Wholesale Marketing
 
We sell refined products both directly and through independent distributors into various wholesale markets, as well as to utility, commercial, petrochemical, aviation, agricultural, fishery and transportation companies in China. Our gasoline and diesel sales also include the amount we transferred to our retail operations.
 
Retail Marketing
 
The weighted average sales volume of gasoline and diesel per business day at our service station network was 9.6 tons per service station in 2008, 10.1 tons per service station in 2009 and 11.0 tons per service station in 2010.
 
Capital expenditures for the marketing segment for the year ended December 31, 2010 amounted to RMB15,793 million, which were used mainly for the construction of sales network facilities including service stations and oil storage tanks.


33


Table of Contents

(MAP)


34


Table of Contents

 
Natural Gas and Pipeline
 
We are China’s largest natural gas transporter and seller in terms of sales volume. We sell natural gas primarily to 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 financial and operating data of our natural gas and pipeline segment for each of the years ended December 31, 2008, 2009 and 2010:
 
                         
    As of December 31 or Year
    Ended December 31,
    2008   2009   2010
 
Revenue (RMB in millions)
    63,315       77,658       117,043  
Income from operations (RMB in millions)
    16,057       19,046       20,415  
Total length of natural gas pipelines (km)
    24,037       28,595       32,801  
Total length of crude oil pipeline (km)
    11,028       13,164       14,782  
Total length of refined oil products pipeline (km)
    2,656       8,868       9,257  
Total volume of natural gas sold(1) (Bcf)
    1,802.8       2,105.1       2,225.2  
 
 
(1) Represents the natural gas sold to third parties
 
Our Principal Markets for Natural Gas
 
In 2010, in addition to satisfying the demand of the northwestern, southwestern and northeastern regions of China where our gas fields are located, we sold our natural gas mainly to the northern, eastern and central regions of the PRC.
 
Sichuan Province and Chongqing Municipality are two of our principal markets for natural gas in southwest China. We supply natural gas to Sichuan Province and Chongqing Municipality from our exploration and production operations in the Sichuan oil and gas region. Beijing Municipality, Tianjin Municipality, Hebei Province and Shandong Province in northern China have a relatively high energy consumption levels. These areas are important markets for our natural gas transmission and marketing business. We supply natural gas to these areas primarily from the Changqing oil region through the Shaanxi to Beijing natural gas pipeline.
 
Shanghai Municipality, Jiangsu Province, Zhejiang Province and Anhui Province located in Yangtze River Delta of eastern China have become our significant natural gas markets. We supply natural gas to these areas primarily from the Tarim gas region.
 
We have entered into contracts to provide approximately 1,447.9 Bcf of natural gas to certain users in 2011. However, the committed quantity of supply may be adjusted by us and the users in the course of the performance of the contracts in light of the actual situation.
 
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 an increase in natural gas consumption in order to reduce the air pollution level. The PRC government has also adopted a preferential value-added tax rate of 13% for natural gas production as compared to a 17% value-added tax rate for crude oil production.
 
We believe that these policies have had a positive effect on the development and consumption of natural gas in many municipalities that are our existing or potential markets for natural gas. We believe that these favorable policies will continue to benefit our natural gas business.


35


Table of Contents

Natural Gas Transmission Infrastructure
 
As of December 31, 2010, we owned and operated approximately 32,801 kilometers of natural gas pipelines in China. Our natural gas pipelines represent 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.
 
The First West-East Gas Pipeline
 
The construction of the First West-East Gas Pipeline commenced officially in July 2002 and was entirely completed and put into operation on October 1, 2004. The main line of our West-East Gas Pipeline links our natural gas fields in Xinjiang and Changqing with Henan Province, Anhui Province, Jiangsu Province, Shanghai Municipality and other areas in the Yangtze River Delta. It is designed to mainly transmit the natural gas produced at Tarim oil region to Henan, Anhui, Jiangsu, Zhejiang and Shanghai. The First West-East Gas Pipeline includes one main line, three branch lines and three underground storage facilities, with a total length of 6,426 kilometers, of which the main line has a total length of 3,839 kilometers. The First West-East Gas Pipeline has a designed annual throughput capacity of 600.4 billion cubic feet. As of December 31, 2010, we entered into long-term take-or-pay contracts with 111 subscribers and distributors to supply them with natural gas through the first West-East Gas Pipeline.
 
The Second West-East Gas Pipeline
 
In February 2008, we commenced the construction of the Second West-East Gas Pipeline. The west section of the Second West-East Gas Pipeline was put into operation in December 2009. In December 2010, the east section (Zhongwei to Huangpi) was put into operation. The Second West-East Gas Pipeline includes one main line, eight branch lines and three underground storage facilities, with a total length of 8,686 kilometers. The main line of the Second West-East Gas 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 1,059.5 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 988.8 billion cubic feet.
 
In addition, we also operate other natural gas pipelines, such as the Zhong County to Wuhan natural gas pipeline, and the first, the second and the third Shaanxi to Beijing natural gas pipelines.
 
Crude Oil Transportation and Storage Infrastructure
 
We have an extensive network for the transportation, storage and distribution of both crude oil, which covers many regions of China.
 
As of December 31, 2010, our crude oil transportation and storage infrastructure consisted of:
 
  •  14,782 kilometers of crude oil pipelines; and
 
  •  crude oil storage facilities with an aggregate storage capacity of approximately 28.3 million cubic meters.
 
Russia to China Crude Oil Pipeline
 
In May 2009, we commenced the construction of the Russia to China crude oil transmission pipeline (the Mohe to Daqing section) upon the approval of the National Development and Reform Commission. We are the constructor and operator of the section crossing the Heilongjiang River and the section lies in China. This pipeline extends from the Skovorodino off-take station of Russia’s Far East Pipeline, through Galinda at the Russian border, Heilongjiang Province and Inner Mongolia, to Daqing terminal station. With a designed transmission capacity of 15 million tons, this pipeline is 935 kilometers long. This pipeline was entirely completed on September 27, 2010 and was put into commercial operation on January 1, 2011.
 
In addition, we also operate other crude oil pipelines, including the crude oil pipeline for western regions.


36


Table of Contents

Refined Product Transportation and Storage Infrastructure
 
As of December 31, 2010, our refined product transportation and storage infrastructure includes:
 
  •  9,257 kilometers of refined product pipelines; and
 
  •  refined product storage facilities with a total storage capacity of approximately 29.1 million cubic meters.
 
The Lanzhou to Zhengzhou to Changsha Pipeline
 
We commenced the construction of the Lanzhou to Zhengzhou to Changsha refined oil pipeline on August 18, 2007. The pipeline starts from Lanzhou of Gansu Province and terminates at Changsha of Hunan Province, with a total length of 3,114 kilometers, including the length of all the main lines and branch lines. We 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. We expect that we will finish the construction and commence the operation of the whole Lanzhou to Zhengzhou to Changsha pipeline in 2011.
 
In addition, we also operate other refined product pipelines, such as Lanzhou to Chengdu to Chongqing refined product pipeline.
 
During the past three years, we have not experienced any delays in delivering natural gas, crude oil and refined products due to pipeline capacity constraints.
 
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.
 
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,


37


Table of Contents

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 competition with Sinopec, CNOOC and coal-based natural gas producers in the supply of natural gas in Beijing Municipality, Tianjin Municipality, Hebei Province, Shanghai Municipality, Jiangsu Province, Anhui Province, Henan Province, Hubei Province, Hunan Province and the northwestern regions of China, our existing principal markets for natural gas. Currently, Sinopec has natural gas fields in Sichuan Province and Chongqing Municipality and sells natural gas to users in places such as Sichuan, Chongqing, Hunan, Jiangsu, Zhejiang and Shanghai. 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 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
 
  •  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 RMB200 million, RMB301 million and RMB305 million in 2008, 2009 and 2010, respectively.


38


Table of Contents

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 gasoline and diesel fuel;
 
  •  reducing paraffin 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 2008, 2009 and 2010 were approximately RMB1,366 million, RMB1,336 million and RMB1,277 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 several 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.
 
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, 2010, 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. We believe that this will not have any material adverse effect on our results of operations and financial condition.


39


Table of Contents

We hold exploration and production licenses covering all of our interests in developed and undeveloped acreage, oil and natural gas wells and relevant facilities.
 
Intellectual Property
 
Our company logo ‘‘ (LOGO)” is jointly owned by us and CNPC and has been used since December 26, 2004. Together with CNPC, we have applied for trademark registrations of the logo with the State Trademark Bureau of the PRC. To date, several of our applications have been approved and others are either in the process of review or public announcement phase. In addition, together with CNPC, we have applied for international trademark registration for our logo in other jurisdictions. We have received 119 International Trademark Registration Certificates for our logo covering more than 50 jurisdictions.
 
As of December 31, 2010, we owned approximately 5,447 patents in China and other jurisdictions. We were granted 1,018 patents in China in 2010.
 
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:
 
  •  grants the import and export volume quotas for crude oil and refined products in accordance with the market supply and demand in China as well as the WTO requirements for China;
 
  •  issues import and export licenses for crude oil and refined products to oil and gas companies that have obtained import and export quotas; and
 
  •  examines and approves production sharing contracts and Sino-foreign equity and cooperative joint venture contracts.
 
  •  The National Development and Reform Commission:
 
  •  has the authority for industry administration, industry policy and policy coordination 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 highest guidance prices for certain refined products, including gasoline and diesel;
 
  •  formulates the plan for aggregate import and export volume of crude oil and refined products in accordance with the market supply and demand in China;
 
  •  approves significant petroleum, natural gas, oil refinery and chemical projects set forth under the Catalogues of Investment Projects Approved by the Central Government; and
 
  •  approves Sino-foreign equity and cooperative projects exceeding certain capital amounts.


40


Table of Contents

 
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, 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


41


Table of Contents

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 ex-works 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 and appropriate profit margin. The prices of diesel and gasoline continue to follow the government set prices and the government guiding prices. The retail prices of gasoline and diesel 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.
 
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


42


Table of Contents

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 process of crude oil in China 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.
 
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.


43


Table of Contents

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.
 
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 eight million tons or lower. 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 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 one million tons or above and new gas field development projects with an annual capacity of two 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 Purified Terephthalic Acid (PTA), P-Xylene (PX), diphenylmethane diisocyanate (MDI) and toluene diisocyanate (TDI) projects, and transformation of existing PTA and PX projects which will result in an additional capacity of 100 thousand tons;


44


Table of Contents

(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. As approved by the State Taxation Bureau, PetroChina’s subsidiaries which have the legal person status should report and pay enterprise income tax to the relevant tax authorities based on the applicable laws and regulations.
 
         
Tax Item
 
Tax Base
 
Tax Rate
 
Enterprise income tax
  Taxable income   Effective January 1, 2008, charged at the legal rate of 25%. However, certain of our qualified operations in west regions of the PRC were still entitled to a rate of 15% up to December 31, 2010.
         
Value-added tax
  Turnover   13% for liquified natural gas, natural gas, liquified petroleum gas, agricultural film and fertilizers and 17% for other items.
         
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.
         
      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/Aggregated value sold   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.
         
      Effective 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%. 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. As of December 1, 2010, twelve provinces and regions in western China began to implement these new resource tax provisions.
         
      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.
         


45


Table of Contents

         
Tax Item
 
Tax Base
 
Tax Rate
 
      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.
         
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.
 
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.

46


Table of Contents

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 2010, we produced approximately 857.7 million barrels of crude oil and approximately 2,221.2 billion cubic feet of natural gas for sale. Our refineries also processed approximately 903.9 million barrels of crude oil in 2010. In 2010, we had turnover of RMB1,465,415 million and profit attributable to the owners of our company of RMB139,992 million.
 
Factors Affecting Results of Operations
 
Our results of operations and the period-to-period comparability of our financial results are affected by a number of external factors, including changes in the prices, production and sales volume of our principal products and the regulatory environment.
 
Prices of Principal Products
 
The fluctuations in the prices of crude oil, refined products, chemical products and natural gas have a significant impact on our turnover. See “Item 4 — Information on the Company — Regulatory Matters — Pricing” for a more detailed discussion of current PRC crude oil pricing regulations.
 
The table below sets forth the average realized prices of our principal products in 2008, 2009 and 2010.
 
                         
    2008   2009   2010
 
Crude oil (US$/barrel)
    87.55       53.90       72.93  
Natural gas (US$/thousand cubic feet)
    4.72       4.78       5.54  
Gasoline (US$/barrel)
    99.62       99.25       115.17  
Kerosene (US$/barrel)
    115.83       72.20       91.14  
Diesel (US$/barrel)
    106.09       96.91       116.41  
 
Production and Sales Volume for Oil and Gas Products
 
Our results of operations are also affected by production and sales volumes. Our crude oil and natural gas production volumes depend primarily on the level of the proved developed reserves in the fields in which we have an interest, as well as other factors such as general economic environment and market supply and demand conditions.


47


Table of Contents

Regulatory Environment
 
Our operating activities are subject to extensive regulations and controls by the PRC government, including the issuance of exploration and production licenses, the imposition of industry-specific taxes and levies and the implementation of environmental policies and safety standards. Our results of operations will be affected by any future changes of such regulatory environment.
 
Critical Accounting Policies
 
The preparation of our consolidated financial statements requires our management to select and apply significant accounting policies, the application of which may require management to make judgments and 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.
 
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


48


Table of Contents

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.
 
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
 
Property, plant and equipment, including oil and gas properties, are initially recorded in the consolidated statement of financial position at cost where it is probable that they will generate future economic benefits. 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 cost less accumulated depreciation, depletion and amortization (including any impairment).
 
Depreciation, to write off the cost of each asset, other than oil and gas properties, to their residual values over their estimated useful lives is calculated using the straight-line method.
 
The company uses the following useful lives for depreciation purposes:
 
     
Buildings and plant
  8-40 years
Equipment and machinery
  4-30 years
Motor vehicles
  4-14 years
Other
  5-12 years
 
No depreciation is provided on construction in progress until the assets are completed and ready for use.
 
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
 
Property, plant and equipment, including oil and gas properties , are reviewed for possible impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of a cash generating unit exceeds the higher of its fair value less costs to sell and its value in use, which is the estimated net present value of future cash flows to be derived from the cash generating unit.
 
Gains and losses on disposals of property, plant and equipment are determined by reference to their carrying amounts and are recorded in the consolidated profit or loss.
 
Interest and other costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Costs for


49


Table of Contents

repairs and maintenance activities are expensed as incurred except for costs of components that result in improvements or betterments which are capitalised as part of property, plant and equipment and depreciated over their useful lives.
 
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.
 
Our income statement for each of the years ended December 31, 2008, 2009 and 2010 is summarized in the table below.
 
                         
    Year Ended December 31,
    2008   2009   2010
    (RMB in millions)
 
Turnover
    1,072,604       1,019,275       1,465,415  
Operating expenses
    (913,033 )     (875,831 )     (1,277,638 )
Profit from operations
    159,571       143,444       187,777  
Exchange gain (loss), net
    (1,081 )     (783 )     (1,172 )
Interest expense, net
    (767 )     (3,813 )     (4,338 )
Share of profit of affiliates and jointly controlled entities
    4,290       1,184       7,038  
Profit before income tax expense
    162,013       140,032       189,305  
Income tax expense
    (35,211 )     (33,473 )     (38,513 )
Profit for the year attributable to non-controlling interest
    (12,349 )     (3,172 )     (10,800 )
                         
Profit for the year attributable to owners of the company
    114,453       103,387       139,992  
                         
                         
 
The table below sets forth our turnover by business segment for each of the years ended December 31, 2008, 2009 and 2010 as well as the percentage changes in turnover for the periods shown.
 
                                         
            2009
      2010
            vs.
      vs.
    2008   2009   2008   2010   2009
    (RMB in millions, except percentages)
 
Turnover
                                       
Exploration and production
    626,367       405,326       (35.3 %)     544,884       34.4 %
Refining and chemicals
    560,729       501,300       (10.6 %)     664,773       32.6 %
Marketing
    778,141       768,295       (1.3 %)     1,134,534       47.7 %
Natural gas and pipeline
    63,315       77,658       22.7 %     117,043       50.7 %
Other
    1,418       1,372       (3.2 %)     1,606       17.1 %
Total
    2,029,970       1,753,951       (13.6 %)     2,462,840       40.4 %
                                         
Less intersegment sales
    (957,366 )     (734,676 )     (23.3 %)     (997,425 )     35.8 %
                                         
Consolidated net sales from operations
    1,072,604       1,019,275       (5.0 %)     1,465,415       43.8 %
                                         


50


Table of Contents

The table below sets forth our operating income by business segment for each of the years ended December 31, 2008, 2009 and 2010, 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.
 
                                         
            2009
      2010
            vs.
      vs.
    2008   2009   2008   2010   2009
    (RMB in millions, except percentages)
 
Profit (loss) from operations
                                       
Exploration and production
    240,470       105,019       (56.3 %)     153,703       46.4 %
Refining and chemicals
    (93,830 )     17,308             7,847       (54.7 %)
Marketing
    7,982       13,265       66.2 %     15,956       20.3 %
Natural gas and pipeline
    16,057       19,046       18.6 %     20,415       7.2 %
Other
    (11,108 )     (11,194 )           (10,144 )      
                                         
Total
    159,571       143,444       (10.1 %)     187,777       30.9 %
                                         
                                         
 
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Consolidated Results of Operations
 
Overview
 
Our profit before taxation was RMB189,305 million for the year ended December 31, 2010, representing an increase of 35.2% compared with the previous period. Profit attributable to the owners of the company for the year ended December 31, 2010 was RMB139,992 million, representing an increase of 35.4% compared with the previous period. For the year ended December 31, 2010, the basic and diluted earnings per share attributable to the owners of the company were RMB0.76 while the same for 2009 was RMB0.56.
 
Turnover.  Turnover increased 43.8% from RMB1,019,275 million for the year ended December 31, 2009 to RMB1,465,415 million for the year ended December 31, 2010. This was primarily due to increases in the selling prices and in the sales volume of major products including crude oil, natural gas, gasoline and diesel. The table below sets out the external sales volume and average realized prices for major products sold by the company in 2010 and 2009 and percentage of changes in the sales volume and average realized prices during these two years.
 
                                                 
    Sales Volume (thousand tons)   Average Realized Price (RMB per ton)
            Percentage of
          Percentage of
    2010   2009   Change (%)   2010   2009   Change (%)
 
Crude oil*
    61,629       53,768       14.6       3,623       2,750       31.7  
Natural gas (million cubic meter, RMB/’000 cubic meter)
    63,011       59,614       5.7       955       814       17.3  
Gasoline
    36,328       30,777       18.0       6,627       5,763       15.0  
Diesel
    77,789       64,659       20.3       5,910       4,965       19.0  
Kerosene
    6,716       5,817       15.5       4,874       3,896       25.1  
Heavy oil
    9,603       8,472       13.3       3,800       2,903       30.9  
Polyethylene
    3,012       2,349       28.2       8,958       8,430       6.3  
Lubricant
    1,703       1,796       (5.2 )     8,215       7,204       14.0  
 
 
* represents all the external sales volume of crude oil of the company.


51


Table of Contents

 
Operating Expenses.  Operating expenses increased 45.9% from RMB875,831 million for the year ended December 31, 2009 to RMB1,277,638 million for the year ended December 31, 2010, of which:
 
Purchases, Services and Others.  Purchases, services and others increased 61.5% from RMB492,472 million for the year ended December 31, 2009 to RMB795,525 million for the year ended December 31, 2010. This was primarily due to an increase in both the purchase prices and volume of crude oil, refined products and feedstock oil from external suppliers that resulted in an increase in purchase costs.
 
Employee Compensation Costs.  Employee compensation costs of the company were RMB83,304 million for the year ended December 31, 2010, representing an increase of RMB17,327 million, or 12.1% compared with that of last year at RMB65,977 million. The increase mainly attributable to the lower level of employee compensation maintained by the company in 2009 due to the financial crisis, and that wage levels were adjusted in 2010 in line with changes in the prevailing domestic price levels.
 
Exploration Expenses.  Exploration expenses increased 18.4% from RMB19,398 million for the year ended December 31, 2009 to RMB22,963 million for the year ended December 31, 2010. This was primarily due to the fact that the company continued to put more efforts into oil and gas exploration to further strengthen its foundation in terms of oil and gas resources.
 
Depreciation, Depletion and Amortization.  Depreciation, depletion and amortization increased 22.7% from RMB92,259 million for the year ended December 31, 2009 to RMB113,209 million for the year ended December 31, 2010. This was primarily due to the fact that (i) both the average carrying amount of fixed assets and the average net value of oil and gas properties increased as a result of ongoing increase in capital expenditure, causing an increase in depreciation and depletion provisions; (ii) acquisition of refinery assets in late 2009 resulted in an increase in depreciation during the reporting period; and (iii) a higher amount of impairment charges were recorded by the company against its oil and gas properties and refinery equipment during the reporting period.
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased 13.5% from RMB65,423 million for the year ended December 31, 2009 to RMB74,239 million for the year ended December 31, 2010. This was primarily due to the fact that (i) increases in both the freight volume of products and the unit freight cost resulted in an increase in freight expenses; (ii) completion of the company’s acquisitions of refinery equipment during the second half of 2009 resulted in an increase in maintenance expenses; and (iii) storage and leasing costs increased as a result of business expansion.
 
Taxes other than Income Taxes.  Taxes other than income taxes increased 36.0% from RMB135,465 million for the year ended December 31, 2009 to RMB184,209 million for the year ended December 31, 2010. The increase was primarily due to (i) a significant increase in the payment of the special levies on domestic sales of crude oil by the company during 2010 when the international oil prices increased, from RMB20,020 million for the year ended December 31, 2009 to RMB52,172 million for the year ended December 31, 2010; (ii) an increase in consumption tax borne by the company amidst an increase in the sales volume of refined products during the reporting period, from RMB82,429 million for the year ended December 31, 2009 to RMB89,670 million for the year ended December 31, 2010; and (iii) an increase in resources tax payment compared with that of last year, as a result of the reform towards resource tax policy; and (iv) an increase in the city maintenance and construction tax and educational surcharge compared with that of last year.
 
Other Expenses, net.  Other expenses, net, decreased by RMB648 million, from RMB4,837 million for the year ended December 31, 2009 to RMB4,189 million for the year ended December 31, 2010.
 
Profit from Operations.  The profit from operations of the company for the year ended December 31, 2010 was RMB187,777 million, representing an increase of 30.9% from RMB143,444 million for the preceding year.
 
Net Exchange Loss.  Net exchange loss increased from RMB783 million for the year ended December 31, 2009 to RMB1,172 million for the year ended December 31, 2010. The increase in the net exchange loss was primarily due to the appreciation of the Canadian Dollar against the United States Dollar in 2010, which led to an exchange loss with respect to loans of certain subsidiaries which are denominated in foreign currencies.
 
Net Interest Expenses.  Net interest expenses increased by RMB525 million, from RMB3,813 million for the year ended December 31, 2009 to RMB4,338 million for the year ended December 31, 2010. The increase in net


52


Table of Contents

interest expenses was primarily attributable to an increase in interest expenses compared with the previous year, due to an increase in the monthly average balance of interest-bearing debts prompted by the need to secure required funding for production, operation and capital investment.
 
Profit Before Taxation.  Profit before taxation increased 35.2% from RMB140,032 million for the year ended December 31, 2009 to RMB189,305 million for the year ended December 31, 2010.
 
Income Tax Expenses.  Income tax expenses increased 15.1% from RMB33,473 million for the year ended December 31, 2009 to RMB38,513 million for the year ended December 31, 2010. The increase was primarily due to an increase in the taxable income for the year.
 
Profit for the year.  Profit for the year increased 41.5% from RMB106,559 million for the year ended December 31, 2009 to RMB150,792 million for the year ended December 31, 2010.
 
Profit attributable to non-controlling interest of the company.  As international oil prices in 2010 increased significantly compared with that of last year, certain subsidiaries of the company recorded material increases in profits. This resulted in an increase in the profit attributable to minority interest, from RMB3,172 million for the year ended December 31, 2009 to RMB10,800 million for the year ended December 31, 2010.
 
Net profit attributable to owners of the company.  Due to the combined effect of the factors described above, net profit attributable to the owners of the company increased 35.4% from RMB103,387 million for the year ended December 31, 2009 to RMB139,992 million for the year ended December 31, 2010.
 
Exploration and Production
 
Turnover.  Turnover increased 34.4% from RMB405,326 million for the year ended December 31, 2009 to RMB544,884 million for the year ended December 31, 2010. The increase was primarily due to an increase in crude oil and natural gas prices and their sales volumes. The average realized crude oil price of the company in 2010 was US$72.93 per barrel, representing an increase of 35.3% from US$53.90 per barrel in 2009.
 
Operating Expenses.  Operating expenses increased 30.3% from RMB300,307 million for the year ended December 31, 2009 to RMB391,181 million for the year ended December 31, 2010. The increase was primarily due to (i) an increase in the expenses on crude oil imports during the year; and (ii) a sharp increase in the payment of special levies on domestic sales of crude oil during the year.
 
Profit from Operations.  The profit from operations for the year ended December 31, 2010 was RMB153,703 million, representing an increase of 46.4% from RMB105,019 million for the preceding year. The exploration and production segment remains the most important contributor to the profit of the company.
 
Refining and Chemicals
 
Turnover.  Turnover increased 32.6% from RMB501,300 million for the year ended December 31, 2009 to RMB664,773 million for the year ended December 31, 2010. The increase was primarily due to an increase in both the selling prices and sales volumes of key refined products.
 
Operating Expenses.  Operating expenses increased 35.7% from RMB483,992 million for the year ended December 31, 2009 to RMB656,926 million for the year ended December 31, 2010. The increase was primarily due to an increase in the purchase costs of crude oil and feedstock oil from external suppliers.
 
Profit/loss from Operations.  The profit margin of refining and chemicals operations narrowed as a result of the rising crude oil prices and the fact that such rise was not fully reflected in the prices of refined products. The profit from operations amounted to RMB7,847 million for the year ended December 31, 2010, representing a decrease of 54.7% from the profit of RMB17,308 million for the year ended December 31, 2009.
 
Marketing
 
Turnover.  Turnover increased 47.7% from RMB768,295 million for the year ended December 31, 2009 to RMB1,134,534 million for the year ended December 31, 2010. The increase was primarily due to an increase in


53


Table of Contents

both the selling prices and the sales volumes of refined products and an increase in revenue from the oil products trading business.
 
Operating Expenses.  Operating expenses increased 48.2% from RMB755,030 million for the year ended December 31, 2009 to RMB1,118,578 million for the year ended December 31, 2010. The increase was primarily due to an increase in the purchase costs of refined products from external suppliers, together with an increase in expenses relating to the oil products trading business.
 
Profit from Operations.  Profit from operations was RMB15,956 million for the year ended December 31, 2010, representing an increase of 20.3% from RMB13,265 million for the last year. The marketing segment is an important contributor to the company’s improvements on competitiveness and overall efficiency.
 
Natural Gas and Pipeline
 
Turnover.  Turnover increased 50.7% from RMB77,658 million for the year ended December 31, 2009 to RMB117,043 million for the year ended December 31, 2010. The increase was primarily due to (i) an increase in the selling price of natural gas, and the increase in sales volume of domestic natural gas and natural gas imported from Central Asia; and (ii) our persistent efforts to promote the company’s city gas and LPG businesses, which led to an increase in sales revenue during the year.
 
Operating Expenses.  Operating expenses increased 64.9% from RMB58,612 million for the year ended December 31, 2009 to RMB96,628 million for the year ended December 31, 2010. The increase was primarily due to an increase in the costs of natural gas imports from Central Asia and LPG imports, and costs on the purchase of domestic natural gas.
 
Profit from Operations.  Profit from operations was RMB20,415 million for the year ended December 31, 2010, representing an increase of 7.2% from RMB19,046 million of the same period in 2009. The natural gas and pipeline segment is an important contributor to the company’s profits.
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Consolidated Results of Operations
 
Overview
 
Our profit before taxation was RMB140,032 million for the year ended December 31, 2009, representing a decrease of 13.6% compared with the previous period. Profit attributable to the owners of the company for the year ended December 31, 2009 was RMB103,387 million, representing a decrease of 9.7% compared with the previous period. For the year ended December 31, 2009, the basic and diluted earnings per share attributable to the owners of the company were RMB0.56 while the same for 2008 was RMB0.63.
 
Turnover.  Turnover decreased 5.0% from RMB1,072,604 million for the year ended December 31, 2008 to RMB1,019,275 million for the year ended December 31, 2009. This was primarily due to decreases in the selling prices and changes in the sales volume of major products including crude oil, gasoline, diesel and kerosene.


54


Table of Contents

The table below sets out the external sales volume and average realized prices for major products sold by us for 2008 and 2009 and percentages of change in the sales volume and average realized prices during these two years.
 
                                                 
    Sales Volume (thousand tons)   Average Realized Price (RMB/ton)
            Percentage of
          Percentage of
    2009   2008   Change (%)   2009   2008   Change (%)
 
Crude oil*
    53,768       38,603       39.3       2,750       4,348       (36.8 )
Natural gas (million cubic metre,
RMB/’000 cubic metre)
    59,614       51,054       16.8       814       813       0.1  
Gasoline
    30,777       29,399       4.7       5,763       5,881       (2.0 )
Diesel
    64,659       56,081       15.3       4,965       5,526       (10.2 )
Kerosene
    5,817       4,798       21.2       3,896       6,355       (38.7 )
Heavy oil
    8,472       7,061       20.0       2,903       3,541       (18.0 )
Polyethylene
    2,349       2,195       7.0       8,430       10,219       (17.5 )
Lubricant
    1,796       2,003       (10.3 )     7,204       7,515       (4.1 )
 
 
* The crude oil listed above represents all the external sales volume of crude oil of the company.
 
Operating Expenses.  Operating expenses decreased 4.1% from RMB913,033 million for the year ended December 31, 2008 to RMB875,831 million for the year ended December 31, 2009, of which:
 
Purchases, Services and Other Expenses.  Purchases, services and other expenses decreased 12.5% from RMB562,851 million for the year ended December 31, 2008 to RMB492,472 million for the year ended December 31, 2009. This was primarily due to (i) a decrease in the purchase prices of crude oil and feedstock oil from external suppliers that resulted in a decrease in purchase costs; and (ii) a decrease in the prices of raw materials, fuel, energy and other production materials as well as changes in inventories that resulted in a decrease in purchase costs.
 
Employee Compensation Costs.  Employee compensation costs of the company were RMB65,977 million for the year ended December 31, 2009, representing an increase of 6.1% compared with that of last year. Taking into account factors including the expansion of business of the company, the level of employee compensation was basically the same as that of last year, which demonstrated that the company has maintained effective control on labor cost.
 
Exploration Expenses.  Exploration expenses decreased 11.3% from RMB21,879 million for the year ended December 31, 2008 to RMB19,398 million for the year ended December 31, 2009. This was primarily due to adjustments made by the company to optimize the structure and workload of exploration and to further strengthen the management of oil and gas exploration as well as control over the process of exploration.
 
Depreciation, Depletion and Amortization.  Depreciation, depletion and amortization decreased 2.6% from RMB94,759 million for the year ended December 31, 2008 to RMB92,259 million for the year ended December 31, 2009. This was primarily due to the impairment charges recorded by the company against its refining assets and oil and gas properties in 2008.
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased 9.7% from RMB59,617 million for the year ended December 31, 2008 to RMB65,423 million for the year ended December 31, 2009. This was primarily due to higher production safety expenses in 2009 as required by the relevant PRC regulations.
 
Taxes Other than Income Taxes.  Taxes other than income taxes increased 9.1% from RMB124,132 million for the year ended December 31, 2008 to RMB135,465 million for the year ended December 31, 2009. The change was primarily due to (i) a significant decrease in the payment of the special levy on the sale of domestic crude oil by the company compared with that of last year, from RMB85,291 million for the year ended December 31, 2008 to RMB20,020 million for the year ended December 31, 2009; (ii) a sharp increase in consumption tax expenses borne by the company as a result of the implementation of a new policy on fuel consumption tax in 2009, from RMB13,570 million for the year ended December 31, 2008 to RMB82,429 million for the year ended December 31,


55


Table of Contents

2009; and (iii) an increase of RMB5,368 million in urban maintenance and construction tax and educational surcharge as a result of the increase in tax payments including fuel consumption tax.
 
Other (Expenses)/Incomes, net.  Other expenses, net was RMB4,837 million for the year ended December 31, 2009, while other incomes, net was RMB12,372 million for the year ended December 31, 2008. This was primarily due to the recognition by the company of government grants for the supply of crude oil and refined products in 2008.
 
Profit from Operations.  Profit from operations of the company for the year ended December 31, 2009 was RMB143,444 million, representing a decrease of 10.1% from RMB159,571 million for the preceding year.
 
Net Exchange Loss.  Net exchange loss decreased from RMB1,081 million for the year ended December 31, 2008 to RMB783 million for the year ended December 31, 2009. The decrease in the net exchange loss was primarily due to the appreciation of the Renminbi against the U.S. dollar and other currencies in 2008 being more significant than the changes in exchange rates in 2009.
 
Net Interest Expenses.  Net interest expenses increased 397.1% from RMB767 million for the year ended December 31, 2008 to RMB3,813 million for the year ended December 31, 2009. The increase in net interest expenses was primarily due to the combined effect of a substantial increase in the outstanding balance of interest-bearing debts and a decrease in interest income resulting from a decrease in the average outstanding balance of deposits.
 
Profit before Income Tax Expense.  Profit before income tax expense decreased 13.6% from RMB162,013 million for the year months ended December 31, 2008 to RMB140,032 million for the year ended December 31, 2009.
 
Income Tax Expense.  Income tax expense decreased 4.9% from RMB35,211 million for the year ended December 31, 2008 to RMB33,473 million for the year ended December 31, 2009. The decrease was primarily due to a reduction in the taxable income for the year and taxation adjustments.
 
Profit for the Year.  Profit for the year decreased 16.0% from RMB126,802 million for the year ended December 31, 2008 to RMB106,559 million for the year ended December 31, 2009.
 
Profit Attributable to Non-controlling Interest of the Company.  As international crude oil prices in 2009 were lower than that during 2008, certain subsidiaries of the company recorded material decreases in profits. This resulted in a significant decrease in the profit attributable to non-controlling interest, from RMB12,349 million for the year ended December 31, 2008 to RMB3,172 million for the year ended December 31, 2009.
 
Profit Attributable to Owners of the Company.  Profit attributable to the owners of the company decreased 9.7% from RMB114,453 million for the year ended December 31, 2008 to RMB103,387 million for the year ended December 31, 2009.
 
Exploration and Production
 
Turnover.  Turnover decreased 35.3% from RMB626,367 million for the year ended December 31, 2008 to RMB405,326 million for the year ended December 31, 2009. The decrease was primarily due to a significant decrease in crude oil prices.
 
Operating Expenses.  Operating expenses decreased 22.2% from RMB385,897 million for the year ended December 31, 2008 to RMB300,307 million for the year ended December 31, 2009. The decrease was primarily due to a decrease in the purchase costs of imported crude oil as international crude oil prices remained low throughout 2009 and a sharp decrease in the payment of special levy on the sale of domestic crude oil by the company.
 
Profit from Operations.  Impacted by factors such as the sharp decrease in crude oil prices, the profit from operations for the year ended December 31, 2009 was RMB105,019 million, representing a decrease of 56.3% from RMB240,470 million for the preceding year. However, the exploration and production segment remains the most important contributor to the profit of the company.


56


Table of Contents

Refining and Chemicals
 
Turnover.  Turnover decreased 10.6% from RMB560,729 million for the year ended December 31, 2008 to RMB501,300 million for the year ended December 31, 2009. The decrease was primarily due to decrease in the selling prices of key refining and chemical products.
 
Operating Expenses.  Operating expenses decreased 26.1% from RMB654,559 million for the year ended December 31, 2008 to RMB483,992 million for the year ended December 31, 2009. The decrease was primarily due to the international crude oil price being lower than last year, which resulted in a decrease in the purchase costs of crude oil and feedstock oil from external suppliers.
 
Profit/Loss from Operations.  The profit from operations amounted to RMB17,308 million for the year ended December 31, 2009, compared with a loss of RMB93,830 million for the year ended December 31, 2008.
 
Marketing
 
Turnover.  Turnover decreased 1.3% from RMB778,141 million for the year ended December 31, 2008 to RMB768,295 million for the year ended December 31, 2009. The decrease in turnover was primarily due to a decrease in the selling prices of refined products and reductions in sales revenues from the oil products trading business.
 
Operating Expenses.  Operating expenses decreased 2.0% from RMB770,159 million for the year ended December 31, 2008 to RMB755,030 million for the year ended December 31, 2009. The decrease was primarily due to a decrease in the purchase costs of refined products from external suppliers, together with a decrease in expenses relating to the oil products trading business.
 
Profit from Operations.  Profit from operations was RMB13,265 million for the year ended December 31, 2009, representing an increase of 66.2% from RMB7,982 million for the proceeding year.
 
Natural Gas and Pipeline
 
Turnover.  Turnover increased 22.7% from RMB63,315 million for the year ended December 31, 2008 to RMB77,658 million for the year ended December 31, 2009. The increase was primarily due to an increase in the natural gas sales volume and the volume of natural gas from pipeline transmission.
 
Operating Expenses.  Operating expenses increased 24.0% from RMB47,258 million for the year ended December 31, 2008 to RMB58,612 million for the year ended December 31, 2009. The increase was primarily due to an increase in the purchase costs of natural gas.
 
Profit from Operations.  Profit from the natural gas and pipeline segment to the company continue to grow. Profit from operations of the natural gas and pipeline segment was RMB19,046 million for the year ended December 31, 2009, representing an increase of 18.6% from RMB16,057 million for the year ended December 31, 2008.
 
Liquidity and Capital Resources
 
Our primary sources of funding include cash generated by operating activities and short-term and long-term borrowings. Our primary uses of funds were for operating activities, acquisitions, capital expenditures, repayment of short-term and long-term borrowings and distributions of dividends to shareholders. Our payments to CNPC are limited to dividends and payments for services provided to us by CNPC. In the year ended December 31, 2010, we distributed as dividends 45% of our reported income for the year attributable to our shareholders. See “Item 8 — Financial Information — Dividend Policy” for a discussion of factors which may affect the determination by our board of directors of the appropriate level of dividends.
 
Our financing ability may be limited by our financial condition, our results of operations and the international and domestic capital markets. Prior to accessing the international and domestic capital markets, we must obtain approval from the relevant PRC government authorities. In general, we must obtain PRC government approval for any project involving significant capital investment for our refining and chemicals, marketing and natural gas and


57


Table of Contents

pipeline segments. For a more detailed discussion of factors which may affect our ability to satisfy our financing requirements, see “Item 3 — Key Information — Risk Factors”.
 
We plan to fund the capital and related expenditures described in this annual report principally through cash from operating activities, short-term and long-term borrowings and cash and cash equivalents. Net cash flows from operating activities in the year ended December 31, 2010 was RMB310,686 million. As of December 31, 2010, we had cash and cash equivalents of RMB45,709 million. While each of the projects described in this annual report for which significant capital expenditures will be required is important to our future development, we do not believe that failure to implement any one of these projects would have a material adverse effect on our financial condition or results of operations. If the price of crude oil undergoes a steep decline in the future, it is likely that we would delay or reduce the scale of the capital expenditures for our exploration and production segment.
 
In October 2007, we issued 4 billion A Shares, which have been listed and traded on the Shanghai Stock Exchange since November 5, 2007. The total proceeds and net proceeds from such issuance were RMB66,800 million and RMB66,243 million, respectively. Of the net proceeds, approximately RMB6,840 million were used for the project to increase the crude oil production capacity of Changqing Oilfield; approximately RMB5,930 million were used for the project to increase the crude oil production capacity of Daqing Oilfield; approximately RMB1,500 million were used for the project to increase the crude oil production capacity of Jidong Oilfield; approximately RMB17,500 million were used for the project to process and refine sulphur-bearing crude oil imported from Kazakhstan and the ethylene technology development project of Dushanzi Petrochemical, and approximately RMB6,000 million were used for the 1.2 million tons/year ethylene redevelopment and expansion project of Daqing Petrochemical. The balance of the net proceeds will be used as additional working capital and for general commercial purpose. A total of RMB63,988 million were used by the end of 2010, and the unused amount currently is deposited a special bank account of our company.
 
We currently do not have any outstanding options, warrants or other rights for any persons to require us to issue any common stock at a price below its market value. We do not currently intend to issue any such rights or to otherwise issue any common stock for a price below its market value.
 
In addition, we did not have for the year ended December 31, 2010, and do not currently have, any transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect the liquidity or availability of or requirements for our capital resources.
 
The table below sets forth our cash flows for each of the years ended December 31, 2008, 2009 and 2010 and our cash equivalents at the end of each period.
 
                         
    Year Ended December 31,
    2008   2009   2010
    (RMB in millions)
 
Net cash flows from operating activities
    172,465       261,972       310,686  
Net cash flows used for investing activities
    (211,797 )     (261,453 )     (291,192 )
Net cash flows from/(used) financing activities
    3,777       53,077       (60,944 )
Currency translation difference
    (112 )     179       234  
Cash and cash equivalents at year end
    33,150       86,925       45,709  
 
Our cash and cash equivalents decreased by 47.4% from RMB86,925 million as of December 31, 2009 to RMB45,709 million as of December 31, 2010.
 
Net Cash Flows from Operating Activities
 
Our net cash flows from operating activities for the year ended December 31, 2010 was RMB310,686 million, representing an increase of 18.6% compared with RMB261,972 million generated for the year ended December 31, 2009. This was mainly due to the increase in net profit in 2010 compared with that of last year. As at December 31, 2010, the company had cash and cash equivalents of RMB45,709 million. The cash and cash equivalents were mainly denominated in Renminbi (approximately 75.2% were denominated in Renminbi, approximately 17.8% were denominated in US Dollars, approximately 0.8% were denominated in HK Dollars and approximately 6.2% were denominated in other currencies).


58


Table of Contents

Our net cash flows from operating activities for the year ended December 31, 2009 was RMB261,972 million, representing an increase of 51.9% compared with RMB172,465 million generated for the year ended December 31, 2008. This was mainly due to the decrease in cash outflow arising from the strengthened working capital management by the company in response to the global financial crisis, and the reduction of value-added taxes as a result of the new pricing mechanism for refined products implemented by the PRC government. As at December 31, 2009, the company had cash and cash equivalents of RMB86,925 million. The cash and cash equivalents were mainly denominated in Renminbi (approximately 77.2% were denominated in Renminbi, approximately 17.2% were denominated in U.S. dollar, approximately 4.5% were denominated in HK dollar and approximately 1.1% were denominated in other currencies).
 
Net Cash Flows Used for Investing Activities
 
Our net cash flows used for investing activities for the year ended December 31, 2010 was RMB291,192 million, representing an increase of 11.4% compared with RMB261,453 million used for investing activities for the year ended December 31, 2009. The net increase was primarily due to an increase in expenditures for the acquisition of associated companies and joint venture companies.
 
Our net cash flows used for investing activities for the year ended December 31, 2009 was RMB261,453 million, representing an increase of 23.4% compared with RMB211,797 million used for investing activities for the year ended December 31, 2008. The net increase was primarily due to an increase in capital expenditures paid in cash during the year as a result of the construction of the strategic projects (including the Second West-East Gas Pipeline) and major programs by the company.
 
Net Cash Flows From/(Used) Financing Activities
 
Our net cash outflow used for financing activities for the year ended December 31, 2010 was RMB60,944 million, while our net cash inflow from financing activities for the year ended December 31, 2009 was RMB53,077 million. This was primarily due to the amount of repayment of borrowings exceeding new loans borrowed during 2010.
 
Our net cash flows from financing activities for year ended December 31, 2009 was RMB53,077 million, while our net cash flows from financing activities for the year ended December 31, 2008 was RMB3,777 million. This increase was primarily because we increased our financing activities in response to the financial crisis.
 
Our net borrowings as of December 31, 2008, 2009 and 2010 were as follows:
 
                         
    December 31,
    2008   2009   2010
    (RMB in millions)
 
Short-term debt (including current portion of long-term debt)
    93,670       148,851       102,268  
Long-term debt
    32,852       85,471       131,352  
                         
Total debt
    126,522       234,322       233,620  
                         
Less:
                       
Cash and cash equivalents
    33,150       86,925       45,709  
                         
Net debt
    93,372       147,397       187,911  
                         
 
Of our total borrowings as at December 31, 2010, approximately 79.9% were fixed-rate loans and approximately 20.1% were floating-rate loans. Of our borrowings as at December 31, 2010, approximately 86.2% were denominated in Renminbi, approximately 12.1% were denominated in United States Dollars, approximately 1.3% were denominated in Canadian Dollars and approximately 0.4% were denominated in other currencies.
 
Of our total borrowings as at December 31, 2009, approximately 69.7% were fixed-rate loans and approximately 30.3% were floating-rate loans. Of our borrowings as at December 31, 2009, approximately 83.2% were denominated in Renminbi, approximately 16.7% were denominated in U.S. dollar, and approximately 0.1% were denominated in other currencies.


59


Table of Contents

Our debt to capital ratio (calculated by dividing interest-bearing debts by the aggregate of interest-bearing debts and shareholder’s equity) as of December 31, 2010 was 18.8%, as compared to 20.5% as of December 31, 2009.
 
Capital Expenditures and Investments
 
For the year ended December 31, 2010, our capital expenditures increased 3.5% to RMB276,212 million from RMB266,836 million for the year ended December 31, 2009. The increase in capital expenditures was primarily due to an increase in input for constructions in sizeable oil and gas zones in China and overseas, as part of our strategy to continue focusing on oil and gas exploration and development. On the other hand, we reasonably timed our investment decisions and focused more on strengthening control of the process of projects. This served to reduce costs and control the growth in capital expenditures.
 
The table below sets forth our capital expenditures and investments by business segment for each of the years ended December 31, 2008, 2009 and 2010 as well as those anticipated for the year ending December 31, 2011. Actual capital expenditures and investments for periods after January 1, 2011 may differ from the amounts indicated below.
 
                                                                 
                            2011
    2008   2009   2010   Anticipated
    (RMB in
      (RMB in
      (RMB in
      (RMB in
   
    millions)   %   millions)   %   millions)   %   millions)   %
 
Exploration and production(1)
    157,194       67.6       129,017       48.4       160,893       58.3       171,800       53.7  
Refining and chemicals
    30,619       13.2       42,558       15.9       44,242       16.0       48,000       15.0  
Marketing
    4,974       2.1       18,174       6.8       15,793       5.7       19,900       6.2  
Natural gas and pipeline
    36,848       15.9       74,754       28.0       53,648       19.4       77,300       24.2  
Others
    2,742       1.2       2,333       0.9       1,636       0.6       3,000       0.9  
                                                                 
Total
    232,377       100.0       266,836 (2)     100.0       276,212       100.0       320,000       100.0  
                                                                 
 
 
(1) If investments related to geological and geophysical exploration costs are included, the capital expenditures and investments for the exploration and production segment for 2009 and 2010, and the estimates for the same in 2011 would be RMB138,396 million, RMB173,142 million and RMB184,800 million, respectively.
 
(2) The capital expenditure for 2009 has excluded the consideration for the acquisition of Singapore Petroleum Company Limited in the amount of Singapore dollars (“S$”)3,239 million (approximately RMB15,296 million).
 
As of December 31, 2010, the capital expenditures contracted for at the balance sheet date but not recognized in our consolidated financial statements were approximately RMB49,495 million.
 
Exploration and Production
 
A majority of our capital expenditures and investments relate to our exploration and production segment. For each of the three years ended December 31, 2008, 2009 and 2010 capital expenditures in relation to the exploration and production segment amounted to 157,194 million, 129,017 million and RMB160,893 million, respectively. In 2010, the capital expenditures and investments in the exploration and production segment were primarily used for large oil and gas exploration projects and for the construction of key production capacities for various oil and gas fields such as in the oil and gas fields located in Changqing, Daqing, Tarim and Southwestern oil and gas fields in China and for the development of large-sized overseas oil and gas fields such as Aktyubinsk and Rumaila oil and gas fields.
 
We anticipate that capital expenditures for the exploration and production segment for the year ended December 31, 2011 will amount to approximately RMB171,800 million, of which approximately RMB30,000 million will be mainly used for oil and gas exploration activities, and approximately RMB141,800 million will be used for the oil and gas development activities. Domestic exploration activities will be mainly focused on the overall development of regions in Songliao Basin, Bohai Basin, Erdos Basin, Sichuan Basin, Tarim Basin and other key oil and gas regions.


60


Table of Contents

Development activities will be focused on the construction of new proved oil and gas fields, while the steady and increasing production of Daqing, Changqing, Liaohe, Tarim and Southwestern oil and gas fields will also be emphasized; oil and gas exploration and development in Central Asia, the Middle East, America, and Asia Pacific regions will be the focus of our overseas development efforts.
 
Refining and Chemicals
 
Our capital expenditures for our refining and chemicals segment for each of the years ended December 31, 2008, 2009 and 2010 were RMB30,619 million, RMB42,558 million, RMB44,242 million, respectively. Among the capital expenditure made in 2010, RMB15,452 million was used on the construction of refinery facilities and RMB28,790 million was used on the construction of chemicals facilities. Capital expenditures for the Refining and Chemicals segment were mainly used for the construction of refining facilities with refining capacities of over 10 million tons of crude oil per year and large scale ethylene projects, such as the Guangxi Petrochemical, Sichuan Petrochemical, Fushun Petrochemical and Daqing Petrochemical projects.
 
We anticipate that our capital expenditures for our refining and chemicals segment for 2011 will amount to RMB48,000 million, approximately RMB28,000 million of which will be used for the construction and expansion of refinery facilities, mainly for large scale refining projects at Sichuan Petrochemical, Huhhot Petrochemical and Ningxia Petrochemical, and approximately RMB20,000 million will be used for the construction and expansion of chemicals facilities, mainly the large scale ethylene projects at Sichuan Petrochemical, Fushun Petrochemical and Daqing Petrochemical.
 
Marketing
 
Our capital expenditures for our marketing segment for each of the years ended December 31, 2008, 2009 and 2010 were RMB4,974 million, RMB18,174 million and RMB15,793 million, respectively. Our capital expenditures for the marketing segment in 2010 were mainly used for the construction of service stations, storage facilities and other facilities for our sales network.
 
Our anticipated capital expenditures for our marketing segment for the year ending December 31, 2011 amount to RMB19,900 million, which are expected to be used primarily for the construction and expansion of high-efficiency sales networks.
 
Natural Gas and Pipeline
 
Our capital expenditures for the natural gas and pipeline segment for each of the three years ended December 31, 2008, 2009 and 2010 were RMB36,848 million, RMB74,754 and RMB53,648 million, respectively. Our capital expenditures for the natural gas and pipeline segment in 2010 were mainly used for the construction of the Second West-East Gas Pipeline, the Russia to China crude oil transmission pipeline and the Lanzhou-Zhengzhou-Changsha Refined Products Pipeline.
 
Our anticipated capital expenditures for our natural gas and pipeline segment for the year ending December 31, 2011 amount to approximately RMB77,300 million, which are expected to be used primarily for the construction of major oil and gas transmission projects such as the Second West-East Gas Pipeline, Zhongwei to Guiyang Natural Gas Pipeline and the Lanzhou to Chengdu Crude Oil Pipeline and associated liquefied natural gas and city gas facilities.
 
Others
 
Our non-segment-specific capital expenditures and investments for each of the years ended December 31, 2008, 2009 and 2010 were RMB2,742 million, RMB2,333 million and RMB1,636 million, respectively.
 
Our anticipated non-segment-specific capital expenditures for the year ending December 31, 2011 amount to RMB3,000 million. These planned capital expenditures and investments mainly include capital expenditures for scientific research activities and the construction of the information system.


61


Table of Contents

 
Off-Balance Sheet Arrangements
 
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
Long-Term Contractual Obligations and Other Commercial
Commitments and Payment Obligations
 
All information that is not historical in nature disclosed under “Item 5 — Operating and Financial Review and Prospects — Long-Term Contractual Obligations and Other Commercial Commitments and Payment Obligations” is deemed to be a forward looking statement. See “Forward-Looking Statements” for additional information.
 
The tables below set forth our long-term contractual obligations outstanding as of December 31, 2010.
 
                                         
    Payment Due by Period
        Less Than
          After
Contractual Obligations
  Total   1 Year   1-3 Years   3-5 Years   5 Years
    (RMB in millions)
 
Long-term debt
    136,445       5,093       48,084       62,644       20,624  
Capital lease obligations
                             
Operating leases
    94,842       4,118       6,765       6,407       77,552  
Capital commitments
    49,495       42,774       6,721              
Unconditional purchase obligations
    2,631       1,328       1,212       42       49  
Other long-term obligations
                             
Debt-related interest
    24,068       4,605       7,924       5,521       6,018  
Total contractual cash obligations
    307,481       57,918       70,706       74,614       104,243  
 
We are obligated to make annual payment with respect to our exploration and production licenses to the Ministry of Land and Resources. The table below sets forth the estimated amount of the annual payments in the next five years:
 
         
Year
  Annual Payment
    (RMB in millions)
 
2011
    1,000  
2012
    1,000  
2013
    1,000  
2014
    1,000  
2015
    1,000  
 
Assets Retirement Obligation
 
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. An additional obligation of RMB13,736 million was recorded in 2010.
 
Research and Development
 
We have a research and development management department, directly under which there are three research institutions. Except for our branch companies which are engaged in marketing activities, each of our branch companies has its own research and development management department. Most of our branch companies have their own research institutions. Our research and development management departments are mainly responsible for


62


Table of Contents

managing and coordinating the research and development activities conducted by each of the research institutions. As of December 31, 2010, we had 26,512 employees engaged in research and development functions.
 
In each of the years ended December 31, 2008, 2009 and 2010, our total expenditures for research and development were approximately RMB7,760 million, RMB9,887 million and RMB11,840 million, respectively.
 
Exploration and Production
 
Most of China’s major oil and gas fields are characterized by a broad range of geological conditions, and a majority of China’s oil and gas fields are in continental sedimentary basins with complex structures. Our research and development efforts with respect to our exploration and production business focus on:
 
  •  theories and technologies of crude oil and natural gas exploration;
 
  •  oil and gas development and surface engineering technology;
 
  •  oil and gas production and pipeline transportation; and
 
  •  security, energy conservation and environment protection.
 
Refining and Chemicals
 
Currently, our research and development efforts in the refining and chemicals segment are focusing on the following areas:
 
  •  technology for clean refined oil products;
 
  •  core technology for heavy oil processing;
 
  •  technology for developing high quality and high value synthetic resin products;
 
  •  high performance synthetic rubber products;
 
  •  production technology for low cost chemical raw materials; and
 
  •  integration of the informationization technology and refinery business.
 
Trend Information
 
The world economic situation and energy industry are developing and changing rapidly. China may encounter unexpected challenges and obstacles in maintaining a stable economic development. The increase in China’s domestic demand for refined oil products is still subject to many uncertainties. The competition on China’s domestic petroleum and petrochemical market will be more intense.
 
Other than as disclosed above and elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the periods from January 1, 2008 to December 31, 2010 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
 
Other Information
 
Inflation
 
Inflation or deflation has not had a significant impact on our results of operations for the year ended December 31, 2010.


63


Table of Contents

Related Party Transactions
 
For a discussion of related party transactions, see “Item 7 — Major Shareholders and Related Party Transactions — Related Party Transactions” and Note 37 to our consolidated financial statements included elsewhere in this annual report.
 
Recent Developments in IFRS
 
For a detailed discussion of recent developments in IFRS, see Note 3 to our consolidated financial statements.
 
ITEM 6 — DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
Directors, Senior Management and Supervisors
 
As of the end of the current reporting period, our board of directors consisted of fourteen directors, five of whom were independent non-executive directors. The directors are elected at a meeting of our shareholders for a term of three years. The directors may be re-elected and re-appointed upon the expiration of his/her term of office. The functions and duties conferred on the board of directors include:
 
  •  convening shareholders’ meetings and reporting its work to the shareholders’ meetings;
 
  •  implementing the resolutions of the shareholders’ meetings;
 
  •  determining our business plans and investment plans;
 
  •  formulating our annual budget and final accounts;
 
  •  formulating our profit distribution proposal and loss recovery proposals;
 
  •  formulating proposals for the increase or reduction of our registered capital and the issuance of our debentures or other securities and listings;
 
  •  formulating proposals for any amendment of our articles of association;
 
  •  deciding on our internal management structure and formulate our basic management system;
 
  •  Managing the information disclosures of our company and other matters relating to communications with the shareholders; and
 
  •  exercising any other powers and duties conferred by the shareholders at general meetings and set forth in our articles of association.
 
Eight of the directors are affiliated with CNPC or an affiliate of CNPC.
 
The PRC Company Law requires a joint stock company with limited liability to establish a supervisory board. This requirement is reflected in our articles of association. The supervisory board is responsible for monitoring our financial matters and overseeing the corporate actions of our board of directors and our management personnel. The supervisory board consists of nine supervisors, six of whom are elected, including four shareholders representatives and two independent supervisors, and may be removed, by the shareholders in a general meeting and three of whom are employees’ representatives who are elected by our staff, and may be removed, by our staff. Four of our supervisors are affiliated with CNPC. The term of office of our supervisors is three years. The supervisors may be re-elected and re-appointed upon the expiration of his/her term of office. An elected supervisor cannot concurrently hold the position of a director, manager or financial controller.
 
The supervisory board shall be responsible to the shareholders’ meeting and shall exercise the following functions and powers in accordance with law:
 
  •  to review the periodic reports prepared by the board of directors and issue written opinions in connection with such review;
 
  •  to review the company’s financial position;


64


Table of Contents

 
  •  to oversee the performance of duties by the directors, the president, senior vice presidents, vice presidents, the chief financial officer and other senior officers of the company and to propose the removal of any of the foregoing persons who acts in contravention of any law, regulation, the company’s articles of association or any resolutions of the shareholders’ meeting;
 
  •  to demand any director, the president, senior vice president, vice president, the chief financial officer or any other senior officer who acts in a manner which is harmful to the company’s interest to rectify such behavior;
 
  •  to check the financial information such as the financial report, business report and plans for distribution of profits to be submitted by the board of directors to the shareholders’ meetings and to authorize, in the company’s name, publicly certified and practicing auditors to assist in the re-examination of such information should any doubt arise in respect thereof;
 
  •  to propose the convening of an extraordinary shareholders’ meeting, and convene and preside over a shareholders’ meeting when the board fails to perform its duties to do so as set forth in the PRC Company Law;
 
  •  to submit proposals to the shareholders’ meetings;
 
  •  to confer with any director, or initiate legal proceedings on behalf of the company against any director, the president, senior vice president, vice president, the chief financial officer or any other senior officer in accordance with Article 152 of the PRC Company Law
 
  •  to initiate investigations upon being aware of any extraordinary development in the operational conditions of the company;
 
  •  together with the audit committee of the board, reviewing and supervising the engagement and work of external auditors, including evaluating the performance of external auditors annually and raising proposals to the shareholders’ meetings with respect to the engagement, re-engagement and dismissal of external auditors and the compensation of such external auditors;
 
  •  to supervise the legal compliance of the related-party transactions; and
 
  •  other functions and powers as set forth in the articles of association of the company.
 
Supervisors shall attend meetings of the board of directors as observers.
 
In the event that any action of our directors adversely affects our interests, supervisors shall confer with or initiate legal proceedings against such directors on our behalf. A resolution proposed at any meeting of the supervisory board shall be adopted only if it is approved by two-thirds or more of our supervisors.
 
Our senior management is appointed by and serves at the supervision of our board of directors. The board of directors will review, evaluate and supervise the performance of the executive team and reward or punish the members of the executive team in accordance with relevant rules and regulations.


65


Table of Contents

The following table sets forth certain information concerning our directors, supervisors and executive officers as of December 31, 2010.
 
                 
Name
 
Age
 
Position
 
Date of Election(1)
 
Jiang Jiemin