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

Part I
Item 1 - Identity of Directors, Senior Management and Advisors
Item 2 - Offer Statistics and Expected Timetable
Item 3 - Key Information
Item 4 - Information on The Company
Item 4A - Unresolved Staff Comments
Item 5 - Operating and Financial Review and Prospects
Item 6 - Directors, Senior Management and Employees
Item 7 - Major Shareholders and Related Party Transactions
Item 8 - Financial Information
Item 9 - The Offer and Listing
Item 10 - Additional Information
Item 11 - Quantitative and Qualitative Disclosures About Market Risk
Item 12 - Description of Securities Other Than Equity Securities
Part II
Item 13 - Defaults, Dividends Arrearages and Delinquencies
Item 14 - Material Modifications To The Rights To Security Holders and Use of Proceeds
Item 15 - Controls and Procedures
Item 16A - Audit Committee Financial Expert
Item 16B - Code of Ethics
Item 16C - Principal Accountant Fees and Services
Item 16D - Exemptions From Listing Standards for Audit Committees
Item 16E - Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F - Change in Registrant's Certifying Accountant
Item 16G - Corporate Governance
Item 16H - Mine Safety Disclosure
Part III
Item 17 - Financial Statements
Item 18 - Financial Statements
Item 19 - Exhibits
EX-4.11 d264935dex411.htm
EX-8.1 d264935dex81.htm
EX-12.1 d264935dex121.htm
EX-12.2 d264935dex122.htm
EX-13.1 d264935dex131.htm
EX-13.2 d264935dex132.htm
EX-15.1 d264935dex151.htm
EX-15.2 d264935dex152.htm
EX-15.3 d264935dex153.htm
EX-15.4 d264935dex154.htm

PetroChina Earnings 2015-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d264935d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F

 

 

(Mark One)

¨

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

or

 

x

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

  

For the fiscal year ended December 31, 2015.

or

 

¨

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

or

 

¨

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

Date of event requiring this shell company report                     

For the transition period from                      to                     

Commission File Number 1-15006

 

 

 

LOGO

(Exact name of Registrant as specified in its charter)

 

 

PetroChina Company Limited

(Translation of Registrant’s name into English)

 

 

The People’s Republic of China

(Jurisdiction of incorporation or organization)

 

 

9 Dongzhimen North Street

Dongcheng District, Beijing 100007

The People’s Republic of China,

(Address of principal executive offices)

 

 

Wu Enlai

Telephone number: 8610 59986270

Facsimile number: 8610 62099557

Email address: jh_dong@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*
H Shares, par value RMB1.00 per share
  New York Stock Exchange, Inc.
New York Stock Exchange, Inc.**

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

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

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

   161,922,077,818(1)

    H Shares, par value RMB1.00 per share

   21,098,900,000****

 

(1)

Includes 158,033,693,528 A Shares held by CNPC and 3,888,384,290 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  x    No  ¨

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

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  x    No  ¨

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  ¨    No  ¨

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  x                Accelerated Filer  ¨                Non-Accelerated Filer  ¨

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

 

            ¨  U.S. GAAP

   x  International Financial Reporting Standards as issued by the International Accounting Standards Board    ¨  Other            

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

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

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

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

 

*

  

PetroChina’s H Shares are listed and traded on The Stock Exchange of Hong Kong Limited.

**

  

Not for trading, but only in connection with the registration of American Depository Shares.

***

  

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

****

  

Includes 840,070,800 H Shares represented by American Depositary Shares.

 

 

 


Table of Contents

Table of Contents

 

              Page  

Certain Terms and Conventions

     1   

Forward-Looking Statements

     5   
     Part I   

Item 1

     Identity of Directors, Senior Management and Advisors      7   

Item 2

     Offer Statistics and Expected Timetable      7   

Item 3

     Key Information      7   
     Exchange Rates      7   
     Selected Financial Data      8   
     Risk Factors      9   

Item 4

     Information on the Company      16   
     Introduction      16   
     Exploration and Production      19   
     Refining and Chemicals      29   
     Marketing      33   
     Natural Gas and Pipeline      36   
     Competition      38   
     Environmental Matters      40   
     Legal Proceedings      41   
     Properties      42   
     Intellectual Property      42   
     Regulatory Matters      42   

Item 4A

     Unresolved Staff Comments      49   

Item 5

     Operating and Financial Review and Prospects      49   
     General      49   
     Operating Results      52   
     Liquidity and Capital Resources      61   
     Off-Balance Sheet Arrangements      66   
     Long-Term Contractual Obligations and Other Commercial Commitments and Payment Obligations      66   
     Research and Development      67   
     Trend Information      68   
     Other Information      69   

Item 6

     Directors, Senior Management and Employees      69   
     Directors, Senior Management and Supervisors      69   
     Compensation      78   
     Board Practices      79   
     Employees      81   
     Share Ownership      81   

Item 7

     Major Shareholders and Related Party Transactions      82   
     Major Shareholders      82   
     Related Party Transactions      82   
     Interests of Experts and Counsel      84   

Item 8

     Financial Information      84   
     Financial Statements      84   
     Dividend Policy      84   
     Significant Changes      85   

Item 9

     The Offer and Listing      85   
     Nature of the Trading Market and Market Price Information      85   

Item 10

     Additional Information      86   
     Memorandum and Articles of Association      86   
     Material Contracts      86   

 

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Table of Contents
              Page  
     Foreign Exchange Controls      87   
     Taxation      87   
     Documents on Display      93   

Item 11

     Quantitative and Qualitative Disclosures About Market Risk      93   

Item 12

     Description of Securities Other Than Equity Securities      98   
     Part II   

Item 13

     Defaults, Dividends Arrearages and Delinquencies      98   

Item 14

     Material Modifications to the Rights to Security Holders and Use of Proceeds      99   

Item 15

     Controls and Procedures      99   

Item 16A

     Audit Committee Financial Expert      100   

Item 16B

     Code of Ethics      101   

Item 16C

     Principal Accountant Fees and Services      101   

Item 16D

     Exemptions from Listing Standards for Audit Committees      101   

Item 16E

     Purchases of Equity Securities by the Issuer and Affiliated Purchasers      102   

Item 16F

     Change in Registrant’s Certifying Accountant      102   

Item 16G

     Corporate Governance      102   

Item 16H

     Mine Safety Disclosure      104   
     Part III   

Item 17

     Financial Statements      104   

Item 18

     Financial Statements      104   

Item 19

     Exhibits      104   

EX 4.11

     

EX 8.1  

     

EX 12.1

     

EX 12.2

     

EX 13.1

     

EX 13.2

     

EX 15.1

     

EX 15.2

     

EX 15.3

     

EX 15.4

     

 

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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” are 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.

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

 

 

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

 

 

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

 

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Table of Contents

“development cost”

For a given period, costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas.

 

“finding cost”

For a given period, costs incurred in identifying areas that may warrant examination and in examining specific areas that are considered to have prospects of containing oil and gas reserves, including costs of drilling exploratory wells and exploratory-type test wells. Finding cost is also known as exploration cost.

 

“lifting cost”

For a given period, costs incurred to operate and maintain wells and related equipment and facilities, including applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. Lifting cost is also known as production cost.

 

“natural gas liquids”

Hydrocarbons that can be extracted in liquid form during natural gas production. Ethane and pentanes are the predominant components, with other heavier hydrocarbons also present in limited quantities.

 

“offshore”

Areas under water with a depth of five meters or greater.

 

“onshore”

Areas of land and areas under water with a depth of less than five meters.

 

“primary distillation capacity”

At a given point in time, the maximum volume of crude oil a refinery is able to process in its basic distilling units.

 

“proved reserves”

Under the SEC 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.

 

 

(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

 

2


Table of Contents
 

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.

 

“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 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.

 

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Table of Contents
 

(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.

 

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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;

 

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Table of Contents
   

general economic, market and business conditions, including volatility in interest rates, changes in foreign exchange rates and volatility in commodity markets;

 

   

liability for remedial actions under environmental regulations;

 

   

the actions of competitors;

 

   

wars and acts of terrorism or sabotage;

 

   

changes in policies, laws or regulations of the PRC, including changes in applicable tax rates;

 

   

the other changes in global economic and political conditions affecting the production, supply and demand and pricing of crude oil, refined products, petrochemical products and natural gas; and

 

   

the other risk factors discussed in this annual report, and other factors beyond our control.

You should not place undue reliance on any forward-looking statements.

 

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Table of Contents

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$)  

October 2015

     6.3591         6.3180   

November 2015

     6.3945         6.3180   

December 2015

     6.4896         6.3883   

January 2016

     6.5932         6.5219   

February 2016

     6.5795         6.5154   

March 2016

     6.5500         6.4480   

April 2016 (ending through April 15)

     6.4810         6.4580   

 

(1) 

The exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board.

Average Noon Buying Rates(1)

The following table sets forth the average noon buying rates between Renminbi and U.S. dollars for each of 2011, 2012, 2013, 2014 and 2015, calculated by averaging the noon buying rates on the last day of each month during the relevant year:

 

     Average Noon
Buying Rate(1)
 
     (RMB per US$)  

2011

     6.4475   

2012

     6.2990   

2013

     6.1412   

2014

     6.1701   

2015

     6.2869   

 

(1)

The exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board.

 

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Table of Contents

Selected Financial Data

Historical Financial Information

You should read the selected historical financial data set forth below in conjunction with our consolidated financial statements and the notes and “Item 5 — Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected historical income statement (except ADS data) and cash flow data for the years ended December 31, 2013, 2014 and 2015 and the selected historical statement of financial position data as of December 31, 2014 and 2015 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, 2011 and 2012 and the selected statement of financial position data as of December 31, 2011, 2012 and 2013 set forth below are derived from our audited financial statements not included in this annual report. Our consolidated financial statements were prepared in accordance with IFRS as issued by the International Accounting Standards Board. The financial information included in this section may not necessarily reflect our results of operations, financial position and cash flows in the future.

 

     As of or for the Year Ended December 31,(1)  
     2011     2012     2013     2014     2015  
     RMB     RMB     RMB     RMB     RMB  
     (In millions, except for per share and per ADS data)  

Revenue

     2,003,843        2,195,296        2,258,124        2,282,962        1,725,428   

Total operating expenses

     (1,821,382     (2,020,777     (2,069,482     (2,113,129     (1,646,176

Profit from operations

     182,461        174,519        188,642        169,833        79,252   

Profit before income tax expense

     184,215        166,811        178,063        156,759        57,815   

Income tax expense

     (38,256     (36,191     (35,789     (37,731     (15,726

Profit for the year

     145,959        130,620        142,274        119,028        42,089   

Profit for the year attributable to owners of the Company

     132,961        115,326        129,599        107,172        35,517   

Non-controlling interests

     12,998        15,294        12,675        11,856        6,572   

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

     0.73        0.63        0.71        0.59        0.19   

Basic and diluted net earnings per ADS(2)

     72.65        63.01        70.81        58.56        19.41   

Total current assets

     361,590        392,805        430,953        391,308        349,344   

Total non-current assets

     1,555,996        1,776,091        1,911,157        2,014,165        2,044,500   

Total assets

     1,917,586        2,168,896        2,342,110        2,405,473        2,393,844   

Total current liabilities

     560,038        574,748        645,489        579,829        471,407   

Total non-current liabilities

     275,002        413,400        426,686        507,863        578,403   

Total liabilities

     835,040        988,148        1,072,175        1,087,692        1,049,810   

Equity attributable to owners of the Company

     1,002,745        1,064,010        1,132,735        1,175,894        1,179,716   

Non-controlling interests

     79,801        116,738        137,200        141, 887        164,318   

Total equity

     1,082,546        1,180,748        1,269,935        1,317, 781        1,344,034   

Other Financial Data

          

Dividend per share

     0.33        0.28        0.32        0.26        0.09   

Dividend per ADS

     32.69        28.36        31.87        26.35        8.73   

Capital expenditures

     284,391        352,516        318,696        291,729        202,238   

Net cash flows from operating activities

     290,155        239,288        288,529        356,477        261,312   

Net cash flows used for investing activities

     (283,638     (332,226     (266,510     (290,838     (215,879

Net cash flows from/(used) for financing activities

     9,259        75,356        (12,239     (44,312     (45,439

Return on net assets (%)(3)

     13.3        10.8        11.4        9.1        3.0   

 

(1)

As of December 31, 2011, 2012, 2013, 2014 and 2015, respectively, basic and diluted earnings per share were calculated by dividing the profit attributable to owners of the Company by 183.021 billion, the total number of shares outstanding in each of these financial years.

(2)

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

(3)

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

 

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Risk Factors

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

Risks Related to Macro Economic Conditions

Our operations may be adversely affected by international and domestic economic conditions. As the oil and gas industry is sensitive to macro-economic trends, oil and gas prices tend to fluctuate along with changes in macro-economic conditions. We may experience pricing pressure on our refined products in recessionary periods, which would have an adverse effect on our profitability. In 2015, a weak domestic economy continued to affect the demand for certain of our products. These factors may also lead to intensified competition for market share, with consequential potential adverse effects on volumes. There has been an uptrend in China’s overall inflation rate in recent years. Notwithstanding the measures taken by the PRC government to control inflation, China may continue to experience inflation in the near term and our operating costs may become higher than anticipated. The financial and economic situation may also have a negative impact on third parties with whom we do, or may do, business. Any of these factors may adversely affect our financial condition, results of operations and liquidity.

Risks Related to Competition

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

The eastern and southern regions of China have a higher demand for refined products and chemical products than the western and northern regions. Although we have strived to increase our refinery capacity in the southern regions of China over recent years, most of our refineries and chemical plants are located in the northeastern and northwestern regions of China. We incur relatively higher transportation costs for delivery of our refined products and chemical products to certain areas of the eastern and southern regions from our refineries and chemical plants in western and northern China. We face strong competition from other traditional domestic oil companies, local independent refineries and other competitors. As a result, we expect that we will continue to encounter difficulty in increasing our sales of refined products and chemical products in these regions.

Risks Related to Outbound Investments and Trading

We are subject to various political, legal and regulatory environments in foreign developing countries where we operate, some of which are known to be unstable and differ in certain significant respects from those prevailing in developed countries. The main factors affecting our outbound investments include unstable political situations, unstable tax policies and unstable regulatory regimes. CNPC, our controlling shareholder, and its affiliates and subsidiaries may choose to undertake, without our involvement, overseas

 

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investments, operations and trading in the oil and gas industry, including exploration and production of oil and gas, refining and transportation, import of crude oil and natural gas, operation of liquefied natural gas, or LNG projects, or other business activities. CNPC’s overseas asset portfolio includes oil and gas development and pipeline projects in certain countries that are subject to U.S. sanctions, including Iran, Sudan, Cuba, Syria, Myanmar and Russia.

Since July 2014, the United States has adopted economic sanctions against certain Russian persons and entities, including various entities operating in the financial, energy and defense sectors, such as Rosneft, Gazprom, OAO Novatek and Yamal LNG. These sanctions prohibit U.S. persons from transacting in, providing financing for or otherwise dealing in debt issuance by certain of these entities, or restrict exports and transfer of technologies to certain of these entities.

CNPC had certain pre-existing trading and investment relationships with some of these sanctioned Russian entities. For example, CNPC entered into a long-term agreement with Rosneft to import crude oil from Russia in June 2013 and a long-term agreement with Gazprom to import natural gas from Russia in May 2014. CNPC has resold, and will for the foreseeable future resell, all or a substantial portion of the imported crude oil from Rosneft under the crude oil agreement to us. CNPC also indirectly holds 20% equity interest in OAO Yamal LNG, which is a subsidiary of OAO Novatek, another sanctioned Russian entity. In May 2014, we entered into a long-term LNG import agreement with a subsidiary of OAO Yamal LNG to import LNG from Russia.

We closely monitor the possible impacts of U.S. sanctions against these Russian entities which have trading or investment relationships with CNPC or us. We do not believe that our activities, nor those of CNPC, with these sanctioned Russian entities are in violation of applicable economic sanctions administered by the United States. However, we cannot assure you that current or future regulations or developments related to economic sanctions will not have a material adverse impact on our business or reputation. Certain U.S. based investors may not wish to invest and have proposed or adopted divestment or similar initiatives regarding investments in companies that do business with countries and entities that are subject to U.S. sanctions. These investors may not wish for CNPC or us to make investments or conduct activities in the countries or with the entities that are the subject of U.S. sanctions and may divest their investment in us because of our relationship with CNPC and its investments and activities in those countries or with those entities that are the subject of U.S. sanctions. As a result, the trading prices of our ADSs may be adversely affected.

In July 2012, the U.S. Treasury Department’s Office of Foreign Assets Control, OFAC, added Bank of Kunlun Co., Ltd., or Kunlun Bank, an affiliate of our company due to common control by CNPC, to its “List of Foreign Financial Institutions Subject to Part 561” pursuant to the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. OFAC reported that Kunlun Bank provided financial services to at least six Iranian banks that were on OFAC’s sanctions list during 2012. These financial services included holding accounts, making transfers and paying letters of credit on behalf of the designated banks. Kunlun Bank has not informed us of the revenue and profit it generated from such activities in relation to Iran or whether it will discontinue such activities. Our company has no involvement in or control over such activities of Kunlun Bank or CNPC and CNPC subsidiaries and affiliates, and we have never received any revenue or profit derived from these activities.

Risks Related to Government Regulation

Our operations, like those of other PRC oil and gas companies, are subject to extensive regulations and control by the PRC government. These regulations and control affect many material aspects of our operations, such as exploration and production licensing, industry-specific and product-specific taxes and fees and environmental and safety standards. As a result, we may face significant constraints on our ability to implement our business strategies, to develop or expand our business operations or to maximize our profitability. Our business may also be affected by future changes in certain policies of the PRC government with respect to the oil and gas industry.

 

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Currently, the PRC government must approve the construction and major renovation of significant refining and petrochemical facilities as well as the construction of significant crude oil, natural gas and refined product pipelines and storage facilities. We presently have several significant projects pending approval from the relevant government authorities and will need approvals from the relevant government authorities in connection with several other significant projects. We do not have control over the timing and outcome of the final project approvals.

Because PRC laws, regulations and legal requirements dealing with economic matters continue to evolve, and because of the limited volume of published judicial interpretations and the non-binding nature of prior court decisions, the interpretation and enforcement of these laws, regulations and legal requirements involve some uncertainty. Because the PRC Company Law is different in certain important aspects from company laws in the United States, Hong Kong and other common law jurisdictions, and because the PRC securities laws and regulations are still at a stage of development, you may not enjoy the shareholders’ protections that you may be entitled to in other jurisdictions.

Risks Related to Controlling Shareholder

As of December 31, 2015, CNPC beneficially owned approximately 86.507% of our share capital. This ownership percentage enables CNPC to elect our entire board of directors without the concurrence of any of our other shareholders. Accordingly, CNPC is in a position to:

 

   

control our policies and management affairs;

 

   

subject to applicable PRC laws and regulations and provisions of our articles of association, affect the timing and amount of dividend payments and adopt amendments to certain of the provisions of our articles of association; and

 

   

otherwise determine the outcome of most corporate actions and, subject to the regulatory requirements of the jurisdictions in which our shares are listed, cause our company to effect corporate transactions without the approval of minority shareholders.

CNPC’s interests may sometimes conflict with those of some or all of our minority shareholders. We cannot assure you that CNPC, as our controlling shareholder, will always vote its shares in a way that benefits our minority shareholders.

In addition to its relationship with us as our controlling shareholder, CNPC by itself or through its affiliates also provides us with certain services and products necessary for our business activities, such as construction and technical services, production services, materials supply services and financial services. The interests of CNPC and its affiliates as providers of these services and products to us may conflict with our interests.

Risks Related to Pricing and Exchange Rate

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

In 2015, international prices for crude oil have declined substantially in response to changes in global and regional economy, politics and supply and demand for crude oil. We do not have, and will not have, control over factors affecting international prices for crude oil. Fluctuations in crude oil prices have a significant impact in our results of operations. A decline in crude oil prices may reduce revenues from, and may result in a loss in, our exploration and production segment. Further, 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 and, if so, the amount of the impairment. An increase in crude oil prices may, however, increase the production costs of refined products reduce demand for our products and affect our operating profits.

 

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Since 2008, the PRC government has further improved its refined oil pricing mechanism. When there is a change in the average crude oil price in the international market during a given time period, the PRC government can adjust refined oil prices. When international crude oil price experiences sustained increases or becomes significantly volatile, the PRC government may increase its control over the refined oil prices. As a result, the regulation on refined product prices by the PRC government may reduce our profit and cause our refining assets to suffer impairment.

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

We receive most of our revenues in Renminbi. A portion of our Renminbi revenues must be converted into other currencies to meet our foreign currency obligations. The existing foreign exchange limitations under the PRC laws and regulations could affect our ability to obtain foreign exchange through debt financing, or to obtain foreign exchange for capital expenditures. The value of Renminbi against U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. 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. Because most of our imports of equipment and other materials and our outbound investments are settled in foreign currencies, the exchange rates between RMB and U.S. dollars and any other relevant foreign currencies may have an effect on our crude oil purchase costs and our investment costs.

Risks Related to Environmental Protection and Safety

Compliance with changes in laws, regulations and obligations relating to climate change or environmental protection could result in substantial expenditures and reduced profitability from increases in operating costs.

A number of provinces 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 in response to the issuance of these provincial regulations. We have included under our asset retirement obligations the costs for these abandonment activities and this asset retirement obligation is based on our best estimate of future abandonment expenditures. In addition, PRC central government or other provincial governments may enact similar regulations or stricter environmental protection regulations. For example, the revised PRC Environmental Protection Law has been effective starting from January 1, 2015 and the revised PRC Safety Production Law has been effective since December 1, 2014. Any new or potential regulations could impose stricter requirements on us and thus increase our operation costs.

The process of gasoline and diesel fuel quality upgrade is gradually accelerating in China. On May 5, 2015, China promulgated the Work Plan regarding Accelerating Quality Upgrading of Refined Oil Products, which announced that as of January 1, 2016, the China V Standards shall be implemented for auto-use gasoline (inclusive of E10 ethanol-containing gasoline) and auto-use diesel (inclusive of B5 biodiesel) in eleven provinces and municipalities in eastern China; as of January 1, 2017 the China V Standards will be applied across the country for auto-use gasoline and diesel; and as of January 1, 2018, China V Standards will apply to the sulfur-content of ordinary diesel across the country. New governmental requirements to improve oil quality impose challenges to our refining and chemicals segment and could increase our costs in oil refining.

 

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Exploring for, producing and transporting crude oil and natural gas and producing and transporting refined products and chemical products involve many hazards. These hazards may result in:

 

   

fires;

 

   

explosions;

 

   

spills;

 

   

blow-outs; and

 

   

other unexpected or dangerous conditions causing personal injuries or death, property damage, environmental damage and interruption of operations.

Some of our oil and natural gas fields are surrounded by residential areas or located in areas where natural disasters, such as earthquakes, floods and sandstorms, tend to occur more frequently than in other areas. As with many other companies around the world that conduct similar businesses, we have experienced accidents that have caused property damage and personal injuries and death.

Significant operating hazards and natural disasters such as earthquake, tsunami and health epidemics may cause partial interruptions to our operations and property and environmental damage that could have an adverse impact on our financial condition.

Risks Related to Climate Change

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

In November 2014, China and the United States made a joint announcement against the threat of climate change, whereunder China undertook to reach the peak level of carbon emissions by 2030. In December 2015, China re-affirmed this target at the United Nations climate change conference held in Paris. On January 11, 2016, the National Development and Reform Commission of China, or the NDRC, promulgated the Circular regarding Key Work for Initializing the National Carbon Emission Quota Exchange, which announced that China would initiate the national carbon quota trading system in 2017. As a result, a majority of our subsidiaries operating in China may be subject to mandatory requirement with respect to carbon emission quota and trading, which could adversely affect our business and results of operations.

Risks Related to Insurance

Due to the fact that oil industry is susceptible to high and industry-specific risks in nature, the current ordinary commercial insurance cannot cover all the business areas in which we operate. We maintain insurance coverage against 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

 

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technical and economic data and the prevailing oil and gas prices applicable to our production, some of which are beyond our control and may prove to be incorrect over time. Results of drilling, testing and production after the date of estimates may require substantial upward or downward revisions in our 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 improve our international operations. We cannot assure you, however, that we can successfully locate sufficient, if any, alternative sources of crude oil supply due to the complexity of the international political, economic and other conditions. If we fail to obtain sufficient alternative sources of crude oil supply, our results of operations and financial condition may be materially and adversely affected.

Risks Related to Liquidity

We have made best endeavors to ensure an appropriate level of liquidity and financing ability. However, as we are currently undergoing constructions in response to a peak in our oil and gas reserves, strengthening capacity building in key areas, constructing new, and expanding some existing, refinery and petrochemical facilities and constructing several natural gas and oil pipelines, we may have to make substantial capital expenditures and investments. We cannot assure you that the cash generated by our operations will be sufficient to fund these development plans or that our actual future capital expenditures and investments will not significantly exceed our current planned amounts. If either of these conditions arises, we may have to seek external financing to satisfy our capital needs. Our inability to obtain sufficient funding for our development plans could adversely affect our business, financial condition and results of operations.

Risks Related to Effectiveness of Internal Control over Financial Reporting

The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring every public company in the United States to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Although our management concluded that our internal control over our financial reporting for the fiscal year ended December 31, 2015 was effective, and our independent registered public accounting firm has issued an attestation report, which concluded that our internal control over financial reporting was effective in all material aspects as of December 31, 2015, we may discover other deficiencies in the course of our future evaluation of our internal control over our financial reporting and may be unable to remediate such deficiencies in a timely manner. If we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to conclude that we have effective internal control over financial reporting on an ongoing basis, in accordance with the Sarbanes-Oxley Act. Moreover, effective internal control is necessary for us to produce reliable financial reports and is important to prevent fraud. As a result, our failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading prices of our ADSs, H Shares or A Shares.

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

Auditors of companies that are registered with the SEC and publicly traded in the United States, including our independent registered public accounting firm, must be registered with the United States Public Company Accounting Oversight Board, or the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Our independent registered public accounting firm currently relies on the Chinese

 

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member firm of the KPMG network for assistance in completing the audit work associated with our operation in China. The Chinese member firm of our independent registered public accounting firm is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, and the Chinese member firm of our independent registered public accounting firm is not currently inspected by the PCAOB. As a result, investors do not have the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in the PRC makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside the PRC that are subject to PCAOB inspections.

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

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

Our independent registered public accounting firm currently relies on the Chinese member firm of the KPMG network for assistance in completing the audit work associated with our operations in China. If the settlement terms are not adhered to, the Chinese member firms of “Big Four” accounting firms may be suspended from practicing before the SEC, which could in turn delay the timely filing of our annual report including our financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another qualified independent auditor to replace KPMG. A delinquency in our filing of the annual report with the SEC may result in the NYSE’s initiating delisting procedures, which could adversely harm our reputation and have other material adverse effects on our overall growth and prospect.

Risks Related to Employee Misconduct

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

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

Risks Related to Cyber Security

Our activities depend heavily on the reliability and security of our information technology (“IT”) systems. If the integrity of our IT systems were compromised due to technical failure, cyber attack, computer intrusions and viruses, power or network outages or natural disasters, our activities and assets could sustain serious damage, material intellectual property could be divulged and, in some cases, personal injury, environmental harm and regulatory violations could occur, potentially having a material adverse effect on our business and financial conditions.

 

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Item 4 INFORMATION ON THE COMPANY

Introduction

History and Development of Our Company

Our legal name is “ 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 marketing of crude oil and natural gas; the refining of crude oil and petroleum products, as well as the production and marketing of basic petrochemical products, derivative chemical products and other chemical products; the marketing of refined oil products and trading; and the transmission of natural gas, crude oil and refined oil products as well as the sale of natural gas.

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

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

We have increased our efforts to pursue attractive business opportunities outside China as part of our business growth strategy to utilize both domestic and international resources to strengthen our competitiveness. Since 2005, we have acquired interests in various oil and natural gas assets in several countries, which significantly expanded our overseas operations and effectively increased our oil and gas reserves and production volumes. We are currently assessing the feasibility of making further investments in international oil and gas markets. At the same time, we have been maintaining certain proportion of imported crude oil and natural gas in accordance with our needs. In 2015, we imported approximately 488.6 million barrels of crude oil, compared to 435.6 million barrels and 476.5 million barrels of crude oil in 2014 and 2013, 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, 2015, CNPC beneficially owned 158,325,211,528 shares in us, which included 291,518,000 H Shares indirectly held by CNPC through Fairy King Investments Limited, an overseas wholly owned subsidiary of CNPC, representing approximately 86.507% of the share capital of us.

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

Our headquarters are located at 9 Dongzhimen North Street, Dongcheng District, Beijing, China, 100007, and our telephone number at this address is (86-10) 5998-6223. 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 in connection with securities actions is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

 

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Our Corporate Organization Structure

The following chart illustrates our corporate organization structure as of December 31, 2015.

 

LOGO

 

(1)

Indicates approximate shareholding.

(2)

Indicates approximate shareholding, including the 291,518,000 H Shares indirectly held by CNPC as of December 31, 2015 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 and Divestment

On November 24, 2015, our board of directors approved the sale by CNPC Exploration and Development Co., Ltd. (“CNPC E&D”), one of our 50%-owned subsidiaries, of its 50% of equity interest in CNPC Trans-Asia Gas Pipeline Co., Ltd. to Guoxin International Investment Corporation Ltd. (“Guoxin”) for a consideration of US$2.327 billion. We expect that this transaction will close in the second quarter of 2016.

For other material asset disposal, please see “Item 7-Major Shareholders and Related Party Transactions-Related Party Transactions”.

 

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LOGO

 

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Exploration and Production

We engage in crude oil and natural gas exploration, development and production. Substantially all of our total estimated proved crude oil and natural gas reserves are located in China, principally in northeastern, northern, southwestern and northwestern China. Meanwhile, we have enhanced our overseas cooperation and expanded our strategic presence in five major overseas oil and gas cooperation regions by conducting new project development. In the year ended December 31, 2015, the crude oil and natural gas produced by us at overseas regions accounted for 17.0% and 7.3% of our total production of crude oil and natural gas expressed in BOE, respectively.

We currently hold exploration and exploitation licenses for oil and gas (including coal seam gas) covering a total area of approximately 358.1 million acres, including the exploration licenses covering a total area of approximately 329.8 million acres and the exploitation licenses covering a total area of approximately 28.3 million acres.

The following table sets forth the financial and operating data of our exploration and production segment for each of the years ended December 31, 2013, 2014 and 2015:

 

     Year Ended December 31,  
     2013      2014      2015  

Revenue (RMB in millions)

     783,694         777,574         475,412   

Profit from operations (RMB in millions)

     189,698         186,897         33,961   

Proved developed and undeveloped reserves

        

Crude oil (million barrels)

     10,820.3         10,593.4         8,521.1   

Natural gas (Bcf)

     69,322.6         71,097.5         77,524.7   

Production

        

Crude oil (million barrels)

     932.9         945.5         971.9   

Natural gas for sale (Bcf)

     2,801.9         3,028.8         3,131.0   

Reserves

Our estimated proved reserves as of December 31, 2015 totaled approximately 8,521.1 million barrels of crude oil and approximately 77,524.7 Bcf of natural gas. As of December 31, 2015, proved developed reserves for crude oil and natural gas accounted for 72.7% and 52.1% of our total proved crude oil and natural gas reserves, respectively. Total proved hydrocarbon reserves, including our overseas crude oil reserves of 871.3 million BOE and overseas natural gas reserves of 1,666.1 Bcf, totaling 1,149.0 million BOE, decreased by 4.5% from approximately 22,443.0 million BOE as of December 31, 2014 to approximately 21,441.9 million BOE as of December 31, 2015. Natural gas as a percentage of total proved hydrocarbon reserves increased from 52.8% as of December 31, 2014 to 60.3% as of December 31, 2015.

We prepared our reserve estimates as of December 31, 2013, 2014 and 2015 on the basis of reports prepared by independent engineering consultants, namely DeGolyer and MacNaughton, Ryder Scott Company, L.P., GLJ Petroleum Consultants, Gaffney, Cline & Associates (Consultants) Pte Ltd, Gaffney, Cline & Associates, Inc. and McDaniel & Associates Consultants 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 or within the terms of the licenses which we are reasonably certain can be renewed. See “Regulatory Matters — Exploration Licenses and Production Licenses” for a discussion of our production licenses. Also see “Item 3 — Key Information — Risk Factors — Risks Related to Oil and Gas Reserves” for a discussion of the uncertainty inherent in the estimation of proved reserves.

Our reserve data in 2013, 2014 and 2015 were prepared in accordance with the SEC’s final rules on “Modernization of Oil and Gas Reporting”.

 

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Internal Controls Over Reserves Estimates

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

In recent years, we have been implementing a practicing professional certification regime to supervise our employees engaged in oil and gas reserve evaluation and auditing functions. We have set up a team of reserve assessors and auditors covering our headquarter office and regional companies to perform reserve estimates and audits. Meanwhile, we have established a special reserve management department in our exploration and production segment. Each of the officers and employees of that department has over 20 years’ experience in oil industry and over 10 years’ experience in SEC-guided reserve evaluation. 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 research office. Mr. Zhang Junfeng, the Director of the Reserve Administration Department of the exploration and production segment, is in charge of the reserve estimation of our company. Mr. Zhang holds a doctorate degree in geology. He has over 20 years of work experience in oil and gas exploration and development. Since 2009, Mr. Zhang has been the expert primarily responsible for overseeing the preparation of the reserves estimates and oil and gas reserve estimation technology and management. The reserve research offices of the regional companies are responsible for estimating newly discovered reserves and updating the estimates of existing reserves. The results of our oil and gas reserve assessment are subject to a two-level review by both the regional companies and our exploration and production company, with final examination and approval by 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 assessments of independent assessment firms in accordance with the SEC requirements.

Third-Party Reserve Report

DeGolyer and MacNaughton, an independent petroleum engineering consulting firm based in the United States, carried out an independent assessment of our reserves in China and certain other countries as of December 31, 2013, 2014 and 2015. Mr. Thomas C. Pence, a senior vice president of DeGolyer and MacNaughton, is primarily responsible for supervising the preparation of our reserve report. Mr. Pence is a Registered Professional Engineer, a member of the International Society of Petroleum Engineers, and has over 33 years of experience in oil and gas reservoir studies and reserve evaluations.

Ryder Scott Company, L.P. (“Ryder Scott”), an independent petroleum engineering consulting firm based in the United States, carried out an independent assessment of certain of our selected petroleum assets in Chad, West Qurna and Kazakhstan as of December 31, 2014 and in Chad and West Qurna as of December 31, 2015. Mr. Daniel R. Olds, a director and a senior vice president of Ryder Scott, was primarily responsible for overseeing the estimate of the reserves, future production and income as stated in the reserve report. Mr. Olds is a licensed professional engineer in the State of Texas, a member of the Society of Petroleum Evaluation Engineers and a member of the Society of Petroleum Engineers. Mr. Olds has more than 34 years of practical experience in the estimation and evaluation of petroleum reserves.

GLJ Petroleum Consultants (“GLJ”), a petroleum consulting firm based in Canada, carried out an independent assessment of our reserves for certain gas and oil properties in Canada as of December 31, 2013, 2014 and 2015. Ms. Trisha MacDonald was the project manager for the evaluation. She is a senior engineer and has over 10 years of relevant experience. Mr. Jodi L. Anhorn, the executive vice president and chief operation officer of GLJ, was the technical supervisor for the evaluation. He is an internationally recognized oil and gas resource evaluation expert and has over 20 years of working experience.

Gaffney, Cline & Associates (Consultants) Pte Ltd. (“GCA”), an engineering consulting firm based in Singapore, carried out an independent assessment of our reserve estimation and valuation in certain countries such as Algeria and Chad as of December 2013. The reserve report of GCA has been compiled under the

 

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supervision of Mr. David S. Ahye, the firm’s director for the Asia Pacific region. He has over 30 years’ experience in the petroleum industry and holds a bachelor’s degree in chemical engineering.

Gaffney, Cline & Associates, Inc., an engineering consulting firm based in Texas, the United States, carried out an assessment of our reserves in the Halfaya oilfield in Iraq as of December 31, 2013. Mr. Sakowski was the project manager for the reserves evaluation project of our Halfaya oilfield. He is a mechanical engineer and holds a master’s degree in project management. Mr. Sakowski is a member of the Society of Petroleum Engineers and Alberta APGG. He has 36 years of international experience in the oil and gas industry.

McDaniel & Associates Consultants Ltd., a petroleum consulting firm with its headquarters in Canada, carried out an independent assessment of our reserves held through PetroKazakhstan Inc. as of December 31, 2013 and 2015. Mr. Paul Taylor, the senior vice president of McDaniel &Associates Consultants Ltd., was responsible for supervising the preparation of our reserve report. Mr. Paul Taylor is a member of the Society of Petroleum Evaluation Engineers and the Society of Petroleum Engineers. He has over 30 years’ experience in oil and gas reservoir evaluation.

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

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

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, 2013, 2014 and 2015.

 

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

Proved developed and undeveloped reserves

      

Reserves as of December 31, 2012

     11,018.0        67,581.2        22,281.5   

Revisions of previous estimates

     (124.1     (6,415.5     (1,193.2

Extensions and discoveries

     774.8        10,958.7        2,601.3   

Improved recovery

     84.4        —          84.4   

Production for the year

     (932.9     (2,801.9     (1,400.0

Reserves as of December 31, 2013

     10,820.3        69,322.6        22,374.1   

Revisions of previous estimates

     (16.1     (2,707.4     (467.2

Extensions and discoveries

     645.6        7,511.1        1,897.4   

Improved recovery

     94.0        —          94.0   

Sold

     (4.9     —          (4.9

Production for the year

     (945.5     (3,028.8     (1,450.4

Reserves as of December 31, 2014

     10,593.4        71,097.5        22,443.0   

Revisions of previous estimates

     (1,662.9     (206.0     (1,697.1

Extensions and discoveries

     456.9        9,764.2        2,084.3   

Improved recovery

     105.6        —          105.6   

Sold

     —          —          —     

Production for the year

     (971.9     (3,131.0     (1,493.9

Reserves as of December 31, 2015

     8,521.1        77,524.7        21,441.9   

Proved developed reserves

      

As of December 31, 2013

     7,219.6        32,813.1        12,688.5   

As of December 31, 2014

     7,253.5        35,823.9        13,224.2   

As of December 31, 2015

     6,195.8        40,406.1        12,930.2   

Proved undeveloped reserves

      

As of December 31, 2013

     3,600.7        36,509.5        9,685.6   

As of December 31, 2014

     3,339.9        35,273.6        9,218.8   

As of December 31, 2015

     2,325.3        37,118.6        8,511.7   

 

(1)

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

 

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Our proved undeveloped reserves were 8,511.7 million BOE in 2015. The main changes in our proved undeveloped reserves in 2015 included (i) an increase of 2,084.3 million BOE through extensions and discoveries; (ii) an increase of 105.6 million BOE through improved recovery; (iii) a decrease of 1,065.0 million BOE through revisions due to the factors including the drop of crude oil price; and (iv) the conversion of 1,831.9 million BOE of proved undeveloped reserves into proved developed reserves. In 2015, we spent RMB102,790 million on developing proved undeveloped reserves. The overwhelming majority of our proved undeveloped reserves were situated around the oil fields that are currently producing. The majority of our proved undeveloped reserves are already scheduled for development within five years after initial booking.

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

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

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

The following tables set forth our crude oil and natural gas proved reserves and proved developed reserves by region as of December 31, 2013, 2014 and 2015.

 

     As of December 31,  
     2013      2014      2015  
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
 
     (Million barrels)  

Crude oil reserves

                 

Daqing

     2,484.9         1,895.2         2,267.1         1,710.8         1,804.7         1,483.0   

Changqing

     2,383.5         1,745.3         2,553.5         1,913.6         2,186.0         1,600.6   

Xinjiang

     1,548.6         1,024.7         1,535.1         1,028.9         1,040.0         875.6   

Other regions(1)

     4,403.3         2,554.4         4,237.7         2,600.2         3,490.4         2,236.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10,820.3         7,219.6         10,593.4         7,253.5         8,521.1         6,195.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     As of December 31,  
     2013      2014      2015  
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
 
     (Bcf)  

Natural gas reserves(2)

                 

Changqing

     22,610.0         11,275.3         23,030.1         10,796.6         25,808.0         10,826.0   

Tarim

     20,770.7         8,967.2         22,434.2         12,495.5         24,270.6         14,303.3   

Chuanyu

     12,490.3         3,488.4         12,841.8         3,781.2         13,399.5         5,833.1   

Other regions(1)

     13,451.6         9,082.2         12,791.4         8,750.6         14,046.6         9,443.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     69,322.6         32,813.1         71,097.5         35,823.9         77,524.7         40,406.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

(2)

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

Given the significant decline of oil price in 2015, we and our outside reserve consultant performed tests with respect to the sensitivity of our domestic reserves to oil prices pursuant to the industry standards and the SEC reserve rules. We used the price scenarios of US$ 70 per barrel and the 12-month average oil prices in 2014 and 2015 for the tests, respectively, while kept the average gas price, the lifting cost and other relevant factors in 2015 unchanged. The following table sets forth our domestic reserves as of December 31, 2015 under the different price scenarios.

 

     Proved Reserve  

Price Scenario

   Crude Oil      Natural Gas      Total  
     (million barrels)      (Bcf)      (million BOE)  

US$70/barrel

     9,322.4         76,122.9         22,009.5   

12-month average oil price in 2014

     9,950.8         76,203.9         22,651.4   

12-month average oil price in 2015

     7,714.1         75,864.6         20,358.2   

By comparing the result using the 12-month average oil price in 2014 and that using the 12-month average price in 2015, our domestic proved reserve decreased by 2,293.2 million BOE as of December 31, 2015. Under the US$70 scenario, our total domestic proved reserve was 22,009.5 million BOE as of December 31, 2015; and the domestic replacement ratio was 141% and the reserve-to-production ratio was 16.98 years. We believe that we will continue to have a positive domestic reserve base on an ongoing basis.

Exploration and Development

We are currently conducting exploration and development efforts in 12 provinces, two municipalities under the direct administration of the central government and three autonomous regions in China as well as in certain regions in other countries. We believe that we have more extensive experience in the exploration and development of crude oil and natural gas than any of our principal competitors in China.

 

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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  
2013                  
  

Net exploratory wells drilled(2)

     182         128         1,072         636         2,018   
  

Crude oil

     164         89         638         298         1,189   
  

Natural gas

     8         —           150         179         337   
  

Dry(3)

     10         39         284         159         492   
  

Net development wells drilled(2)

     4,909         1,716         5,981         4,181         16,787   
  

Crude oil

     4,893         1,700         4,899         2,804         14,296   
  

Natural gas

     9         16         994         1,336         2,355   
  

Dry(3)

     7         —           88         41         136   
2014                  
  

Net exploratory wells drilled(2)

     98         132         995         557         1,782   
  

Crude oil

     76         68         615         309         1,068   
  

Natural gas

     14         1         137         97         249   
  

Dry(3)

     8         63         243         151         465   
  

Net development wells drilled(2)

     5,134         1,559         5,611         3,832         16,136   
  

Crude oil

     5,106         1,537         4,983         3,076         14,702   
  

Natural gas

     16         22         525         731         1,294   
  

Dry(3)

     12         —           103         25         140   
2015                  
  

Net exploratory wells drilled(2)

     136         123         790         549         1,598   
  

Crude oil

     118         79         414         303         914   
  

Natural gas

     5         6         103         76         190   
  

Dry(3)

     13         38         273         170         494   
  

Net development wells drilled(2)

     3,674         1,359         4,967         3,385         13,385   
  

Crude oil

     3,645         1,339         4,098         2,957         12,039   
  

Natural gas

     22         20         841         392         1,275   
  

Dry(3)

     7         —           28         36         71   

 

(1)

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

(2)

“Net” wells refer to the wells after deducting interests of others. No third parties own any interests in any of our wells.

(3)

“Dry” wells are wells with insufficient reserves to sustain commercial production.

We had 380 wells in the process of being drilled and 8,036 wells with multiple completions as of December 31, 2015.

 

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Oil-and-Gas Properties

The following table sets forth our interests in developed and undeveloped acreage by oil region and in productive crude oil and natural gas wells as of December 31, 2015.

 

                   Acreage(1)  
     Productive Wells (1)      Developed      Undeveloped  

Oil Region

   Crude
Oil
     Natural
Gas
     Crude Oil      Natural
Gas
     Crude Oil      Natural
Gas
 
     (Thousand acres)  

Daqing

     71,456         305         1,064.21         95.88         766.59         103.01   

Changqing

     56,482         10,450         1,253.86         5,073.18         612.59         2,362.65   

Xinjiang

     32,683         271         382.50         58.10         184.46         17.10   

Other regions(2)

     71,827         5,513         1,568.33         1,038.21         1,047.98         1,395.64   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     232,448         16,539         4,268.90         6,265.37         2,611.62         3,878.40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes all wells and acreage in which we have an interest. No third parties own any interests in any of our wells or acreage.

(2)

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

Production

The following table sets forth our historical average net daily crude oil and natural gas production by region and our average sales price for the years ended December 31, 2013, 2014 and 2015.

 

     For the Year Ended
December 31,
     % of
2015 Total
 
     2013      2014      2015     

Crude oil production(1)

           

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

           

Daqing

     797.5         792.3         755.8         28.4   

Changqing

     492.0         506.8         502.0         18.9   

Xinjiang

     234.8         238.9         238.9         9.0   

Other(2)

     1,031.4         1,052.3         1,166.1         43.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,555.8         2,590.3         2,662.8         100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Annual production (million barrels)

     932.9         945.5         971.9      

Average sales price (US$ per barrel)

     100.42         94.83         48.35      

Natural gas production(1)(3)

           

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

           

Changqing

     2,865.9         3,186.3         3,181.2         37.1   

Tarim

     1,995.3         2,099.4         2,083.0         24.3   

Chuanyu

     1,148.9         1,252.6         1,412.5         16.5   

Other(4)

     1,666.2         1,759.7         1,901.4         22.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,676.3         8,298.0         8,578.1         100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Annual production (Bcf)

     2,801.9         3,028.8         3,131.0      

Average realized price (US$ per Mcf)(5)

     5.61         6.30         6.23      

 

(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.

 

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(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.

(5)

For natural gas citygate price, please refer to “Item 5 — Operating and Financial Review and Prospects — Overview”.

In 2015, we supplied a substantial majority of our total crude oil sales to our refineries. In addition, we entered into a crude oil mutual supply framework agreement with Sinopec in January 2016 for the supply of crude oil to each other’s refineries. Under this agreement, we agreed in principle to supply 1.85 million tons of crude oil to Sinopec in 2016.

The following table sets forth our average sales prices and average lifting costs of crude oil and natural gas of our company on an overall basis and those in China in 2013, 2014 and 2015.

 

     Crude Oil Average
Realized Prices

(RMB/ton)
     Natural Gas
Average Realized Prices
(RMB/m3)
     Average Lifting
Cost

(US$/BOE)
 

2013

        

Overall

     4,596         1,226         13.23   

— China

     4,525         1,255         13.82   

2014

        

Overall

     4,304         1,366         13.76   

— China

     4,282         1,407         14.51   

2015

        

Overall

     2,225         1,371         12.98   

— China

     2,237         1,468         14.26   

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 2013, 2014 and 2015, our crude oil production volume in the Daqing oil region was 797.5 thousand barrels, 792.3 thousand barrels and 755.8 thousand barrels per day, respectively. As of December 31, 2015, we produced crude oil from 40 fields in the Daqing oil region.

As of December 31, 2015, our proved crude oil reserves in the Daqing oil region were 1,804.7 million barrels, representing 21.2% of our total proved crude oil reserves. As of December 31, 2013 and 2014, the proved crude oil reserves in our Daqing oil region were 2,484.9 million barrels and 2,267.1 million barrels, respectively. In 2015, the crude oil reserve-to-production ratio of the Daqing oil region was 6.4 years.

Daqing’s crude oil has low sulfur and high paraffin content. As many refineries in China, particularly those in northeastern China, are configured to refine Daqing crude oil, we have a stable market for the crude oil we produce in the Daqing oil region.

Changqing Oil and Gas Region

The Changqing oil and gas region covers parts of Shaanxi Province, Gansu Province, Ningxia, Inner Mongolia and Shanxi Province. As of December 31, 2015, our proved crude oil reserves in the Changqing oil region were 2,186.0 million barrels, representing 25.7% of our total proved crude oil reserves. In 2015, our crude oil production in the Changqing oil region averaged 502.0 thousand barrels per day, representing approximately 18.9% of our total daily crude oil production. In 2015, the crude oil reserve-to-production ratio at the Changqing oil region was 11.9 years.

 

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In the early 1990s, we discovered the Changqing oil and gas region, which had total proved natural gas reserves of 25,808.0 Bcf as of December 31, 2015, representing 33.3% of our total proved natural gas reserves. In January 2001, we discovered the Sulige gas field in the Changqing oil and gas region, which had total proved natural gas reserves of 14,185.2 Bcf as of December 31, 2015. Sulige gas field is currently the largest gas field in China. In 2015, the Changqing oil and gas region produced 1,161.1 Bcf of natural gas for sale, representing a decrease of 0.2% from 1,163.0 Bcf in 2014.

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, 2015, our proved crude oil reserves in the Xinjiang oil region were 1,040.0 million barrels, representing 12.2% of our total proved crude oil reserves. In 2015, our oil fields in the Xinjiang oil region produced an average of 238.9 thousand barrels of crude oil per day, representing approximately 9.0% of our total daily crude oil production. In 2015, the crude oil reserve-to-production ratio at the Xinjiang oil region was 11.9 years.

Tarim Oil and Gas Region

The Tarim oil and gas region is located in the Tarim basin in northwestern China with a total area of approximately 590,000 acres. In 1998, we discovered the Kela 2 natural gas field in the Tarim oil and gas region. As of December 31, 2015, the proved natural gas reserves in the Tarim oil and gas region reached 24,270.6 Bcf, representing 31.3% of our total proved natural gas reserves.

In 2015, we produced 760.3 Bcf of natural gas for sale in the Tarim oil and gas region. We have completed the construction of the pipelines to deliver natural gas in the Tarim oil and gas region to the central and eastern regions of China where there is strong demand for natural gas transmitted through our West-East Gas Pipelines. See “— Natural Gas and Pipeline — Natural Gas Transmission Infrastructure” for a discussion of our West-East Gas Pipeline.

Chuanyu Gas Region

We began natural gas exploration and production in the Chuanyu gas region in the 1950s. The Chuanyu gas region covers a total area of approximately 2.3 million acres. The natural gas reserve-to-production ratio in the Chuanyu gas region was approximately 26.0 years in 2015. As of December 31, 2015, we had 116 natural gas fields under development in the Chuanyu gas region.

As of December 31, 2015, our proved natural gas reserves in the Chuanyu gas region were 13,399.5 Bcf, representing 17.3% of our total proved natural gas reserves and an increase of 4.3% from 12,841.8 Bcf as of December 31, 2014. In 2015, our natural gas production for sale in the Chuanyu gas region reached 515.6 Bcf, representing 16.5% of our total natural gas production for sale. In October 2015, the gas facility with an annual production capacity of 11 billion cubic meters became operational in the Anyue monomer marine uncompartmentalized carbonate gas reservoir in Chuanyu gas region.

 

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Refining and Chemicals

We now operate 28 enterprises located in eight 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, 2013, 2014 and 2015:

 

     Year Ended December 31,  
     2013     2014     2015  

Revenue (RMB in millions)

     871,815        846,082        642,428   

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

     (24,392     (23,560     4,883   

Crude oil processed (million barrels)

     992.3        1,010.6        998.1   

Crude oil primary distillation capacity (million barrels/year)

     1,174.1        1,248.0        1,252.4   

Production of refined oil products (thousand tons)

     90,282        92,671        91,933   

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, 2013, 2014 and 2015.

 

     Year Ended December 31,  

Principal Product

   2013      2014      2015  
     (In thousand tons)  

Diesel

     56,876         57,627         54,182   

Gasoline

     29,294         30,688         32,258   

Kerosene

     4,112         4,356         5,493   

Lubricants

     1,886         1,581         1,210   

Fuel oil

     3,802         3,423         2,700   

Naphtha

     9,056         9,966         9,748   

Our Refineries

Most of our refineries are strategically located close to our crude oil production and storage bases along our crude oil and refined product transmission pipelines and railways, which provide our refineries with secure supplies of crude oil and facilitate our distribution of refined products to the domestic markets. In 2015, we further optimized our production processes, adjusted our products portfolio and concentrated our resources and production capacity on products with high profit margins. The major facility of Yunnan petrochemical project with a capacity for processing crude oil of over 10 million tons per year was completed. In 2015, we also completed ahead of schedule the upgrading of auto-use gasoline and diesel quality to ensure compliance with China V standards in 11 provinces and municipalities in eastern China. China V standards for auto-use gasoline and diesel will be implemented across the country in 2017. In each of the years ended December 31, 2013, 2014, and 2015, our exploration and production operations supplied approximately 68.8%, 68.7% and 69.9%, respectively, of the crude oil processed in our refineries.

 

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The table below sets forth certain operating statistics regarding our refineries as of December 31, 2013, 2014 and 2015.

 

     As of December 31,  
     2013      2014      2015  

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

     222.7         222.7         222.7   

Dushanzi Petrochemical

     202.4         202.4         202.4   

Guangxi Petrochemical

     202.4         202.4         202.4   

Jilin Petrochemical

     198.4         198.4         198.4   

Sichuan Petrochemical

     —           202.4         202.4   

Other refineries

     1,763.2         1,763.2         1,775.4   
  

 

 

    

 

 

    

 

 

 

Total

     3,216.7         3,419.2         3,431.3   
  

 

 

    

 

 

    

 

 

 

Refining throughput (thousand barrels per day)

        

Lanzhou Petrochemical

     212.6         185.4         195.8   

Dalian Petrochemical

     281.9         259.1         280.7   

Fushun Petrochemical

     167.8         170.5         164.0   

Dushanzi Petrochemical

     183.4         181.2         139.8   

Guangxi Petrochemical

     137.3         143.8         130.3   

Jilin Petrochemical

     173.5         168.7         162.0   

Sichuan Petrochemical

     —           125.4         152.0   

Other refineries

     1,562.0         1,534.6         1,509.9   
  

 

 

    

 

 

    

 

 

 

Total

     2,718.5         2,768.7         2,734.5   
  

 

 

    

 

 

    

 

 

 

 

(1)

Represents the primary distillation capacity of crude oil and condensate.

In each of the years ended December 31, 2013, 2014 and 2015, the average utilization rate of the primary distillation capacity at our refineries was 87.3%, 86.1% and 84.2%, respectively, and the average yield for our four principal refined products (gasoline, kerosene, diesel and lubricants) at our refineries was 68.6%, 68.9% and 69.0%, respectively. “Yield” represents the number of tons of a refined product expressed as a percentage of the number of tons of crude oil from which that product is processed. In each of the years ended December 31, 2013, 2014 and 2015, the yield for all refined products at our refineries was 93.4%, 93.8% and 93.8%, respectively.

Dalian Petrochemical, Lanzhou Petrochemical, Dushanzi Petrochemical, Guangxi Petrochemical, Sichuan Petrochemical, Fushun Petrochemical and Jilin Petrochemical were our leading refineries in terms of both primary distillation capacity and refining throughput in 2015.

To maintain efficient operations of our facilities and lower production costs, we have endeavored to achieve the most cost-efficient proportions of various types of crude oil in our refining process. We purchase a portion of our crude oil requirements from third-party international suppliers located in different countries and regions. In 2015, we purchased crude oil sourced from Rosneft, a Russian company which is subject to U.S. economic sanctions, and from Sudan, which is on the U.S. sanction list, for use in our refining operations. The revenue generated from our refinery from the crude oil sourced from Rosneft and Sudan accounted for 2.45% and 0.04% of our total revenue in 2015, respectively. See “Item 3 — Key Information — Risk Factors — Risks Related to Outbound Investments and Trading”

Chemicals

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

 

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Our Chemical Products

The table below sets forth the production volumes of our principal chemical products for each of the years ended December 31, 2013, 2014 and 2015.

 

     Year Ended December 31,  
     2013      2014      2015  
     (In thousand tons)  

Basic petrochemicals

        

Propylene

     4,257         4,600         4,848   

Ethylene

     3,982         4,976         5,032   

Benzene

     1,689         1,771         1,896   

Derivative petrochemicals

        

Synthetic resin

     6,537         7,951         8,215   

Other synthetic fiber raw materials and polymer

     1,218         1,293         1,348   

Synthetic rubber

     665         745         713   

Other chemicals

        

Urea

     3,771         2,663         2,566   

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, 2015, our annual ethylene production capacity was 5,910 thousand tons. We produce a number of synthetic resin products, including polyethylene, polypropylene and ABS. As of December 31, 2015, our production capacities for polyethylene, polypropylene and ABS were 5,060 thousand tons, 4,140 thousand tons and 705 thousand tons, respectively.

Marketing of Chemicals

Our chemical products are distributed to a number of industries including the automotive, construction, electronics, medical manufacturing, printing, electrical appliances, household products, insulation, packaging, paper, textile, paint, footwear, agriculture and furniture industries.

The following table sets forth the sales volumes of our chemical products by principal product category for each of the years ended December 31, 2013, 2014 and 2015.

 

     Year Ended December 31,  

Product

   2013      2014      2015  
     (In thousand tons)  

Derivative petrochemicals

  

Synthetic resin

     6,540.8         7,718.9         8,222.3   

Synthetic fiber

     101.8         86.4         83.7   

Synthetic rubber

     804.6         793.7         764.5   

Intermediates

     9,312.7         8,149.6         8,838.3   

Other chemicals

        

Urea

     3,943.7         2,681.8         2,106.1   

In each of the years ended December 31, 2013, 2014 and 2015, our capital expenditures for our refining and chemicals segment were approximately RMB26,671 million, RMB30,965 million and RMB15,725 million, respectively. These capital expenditures were incurred primarily in connection with the construction and expansion of our refining and chemical facilities and the upgrading of our product quality. We believe that our refined products are capable of meeting the product specification and environmental protection requirements as set by the PRC government.

 

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Marketing

We engage in the marketing of refined products through 37 regional sales companies including 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, asphalt and other refined products. In addition, with respect to our international trading sector, we have optimized the import and export resources, actively expanded into the high-end markets, and maintained a rapid development with growing trading volume and improved operation results.

The following table sets forth the financial and operating data of our marketing segment for each of the years ended December 31, 2013, 2014 and 2015:

 

     Year Ended December 31,  
     2013      2014      2015  

Revenue (RMB in millions)

     1,946,806         1,938,501         1,383,426   

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

     7,562         5,421         (500

External sales volume of refined oil products (thousand tons)

     159,133         160,878         160,097   

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, 2015, our marketing network consisted of:

 

   

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

 

   

20,714 service stations, consisting of 19,982 service stations owned and operated by us and 732 franchised service stations owned and operated by third parties.

The PRC government and other institutional customers, including railway, transportation and fishery operators, are long-term purchasers of the gasoline and diesel that we produce. We sell gasoline and diesel to these customers 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 sales volumes of diesel, gasoline, kerosene and lubricants for each of the years ended December 31, 2013, 2014 and 2015.

 

     Year Ended December 31,  

Product

   2013      2014      2015  
     (In thousand tons)  

Diesel

     93,301         87,041         84,763   

Gasoline

     52,350         59,821         60,651   

Kerosene

     13,482         14,016         14,683   

Lubricants

     1,740         1,498         1,150   

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.

 

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Retail Marketing

The weighted average sales volume of gasoline and diesel per business day at our service station network was 11.0 tons per service station in 2013, 10.8 tons per service station in 2014 and 10.6 tons per service station in 2015.

Capital expenditures for the marketing segment for the years ended December 31, 2013, 2014 and 2015 amounted to RMB 7,101 million, RMB 5,616 million and RMB 7,061 million, respectively, which were used mainly for the construction of sales network facilities including service stations and oil storage tanks.

 

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Natural Gas and Pipeline

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

The following table sets forth the financial and operating data of our natural gas and pipeline segment for each of the years ended December 31, 2013, 2014 and 2015:

 

     As of December 31 or Year
Ended December 31,
 
     2013      2014      2015  

Revenue (RMB in millions)

     232,751         284,262         281,778   

Profit from operations (RMB in millions)

     28,888         13,126         51,231   

Total length of natural gas pipelines (km)

     43,872         48,602         48,629   

Total length of crude oil pipeline (km)

     17,614         18,107         18,892   

Total length of refined oil products pipeline (km)

     9,534         10,086         10,091   

Total volume of natural gas sold(1) (Bcf)

     3,480.0         4,424.2         5,583.6   

 

(1)

Represents the natural gas sold to third parties

Our Principal Markets for Natural Gas

We sell our natural gas in the whole country of China and our principal markets are the northern, eastern and southwestern regions of China and the Pearl River Delta area.

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 Chuanyu oil and gas region. Beijing Municipality, Tianjin Municipality, Hebei Province and Shandong Province in northern China have 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, and Henan Province and Hubei Province located in the central China have become our significant natural gas markets.

We committed to provide approximately 4,590.9 Bcf of natural gas in 2016. However, the committed quantity of supply may be adjusted by the buyers in light of the actual situation.

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 local 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.

 

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Natural Gas Transmission Infrastructure

As of December 31, 2015, we owned and operated approximately 48,629 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 a national trunk network for natural gas supply and the regional natural gas supply networks in northwestern, southwestern, northern and central China as well as the Yangtze River Delta.

The First West-East Gas Pipeline

The construction of the First West-East Gas Pipeline commenced officially in July 2002 and was 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 main branch lines and numerous accessory branch lines, and two underground storage facilities, with a total length of 5,778 kilometers, of which the main line has a total length of 3,833 kilometers. The First West-East Gas Pipeline has a designed annual throughput capacity of 600.4 Bcf.

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 June 2011, the east section was put into operation. By the end of 2012, the main line and branch lines as well as the Hong Kong branch line of the Second West-East Gas Pipeline were all completed and put into operation. The Second West-East Gas Pipeline includes one main line, eight main branch lines and numerous accessory branch lines and three underground storage facilities, with a total length of 8,218 kilometers. The main line of the Second West-East Gas Pipeline has a length of 4,877 kilometers. The western section of the main line extends from Horgos to Zhongwei with a length of 2,325 kilometers and a designed annual throughput capacity of 1,059.5 Bcf. The eastern section of the main line extends from Zhongwei to Guangzhou with a length of 2,552 kilometers and a designed annual throughput capacity of 988.8 Bcf.

The Third West-East Gas Pipeline

The main line of the Third West-East Gas Pipeline extends from Horgos to Fuzhou via Zhongwei. It consists of five main branch lines, including the Yining-Horgos Line, and numerous accessory branch lines, with a total length of 6,840 kilometers and a designed annual throughput capacity of 1,059.4 Bcf. By the end of 2014, the western section of the Third West-East Gas Pipeline that extends from Horgos to Zhongwei was completed, with a length of 2,459 kilometers. The eastern section which extends from Ji’an to Fuzhou is 829 kilometers long and is scheduled to be completed and put into operation by second half of 2016.

In addition, we also operate other natural gas pipelines, such as the Zhong County-to-Wuhan natural gas pipeline, the first, the second and the third Shaanxi-to-Beijing natural gas pipelines and Sebei-to-Lanzhou natural gas pipelines.

Crude Oil Transportation Infrastructure

We have an extensive network for the transportation, storage and distribution of crude oil, which covers many regions of China. As of December 31, 2015, we had crude oil pipelines of 18,892 kilometers.

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, or NDRC. In

 

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September 2010, we completed construction of the entire line and put it into commercial production in January 2011. We were the builder and operator of the section crossing the Heilongjiang River and the section which 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. This pipeline is 935 kilometers long and has a designed annual transmission capacity of 15 million tons. In February 2016, the second Russia-to-China oil pipeline from Mohe to Daqing was approved by the NDRC, the construction of which is expected to be completed by 2017 with a length of 955 kilometers and a designed annual transmission capacity of 15 million tons.

In addition, we also operate other crude oil pipelines, including the western crude oil pipeline, the northeastern crude oil pipeline network and the Lancheng crude oil pipeline.

Refined Product Transportation Infrastructure

As of December 31, 2015, we had refined product pipelines of 10,091 kilometers.

The Lanzhou-to-Zhengzhou-to-Changsha Pipeline

We received approval from the NDRC for and commenced construction of the Lanzhou-to-Zhengzhou-to-Changsha refined oil pipeline in December 2007. The pipeline starts from Lanzhou of Gansu Province and terminates at Changsha of Hunan Province, with a total length of 3,142 kilometers, including the length of all the main lines and branch lines. We finished 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. The construction of all the main line and branch lines was completed by October 2013.

In addition, we also operate other refined product pipelines, such as the refined product pipelines for western regions and 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 China Petroleum and Chemical Corporation, or Sinopec, 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 other domestic oil and gas companies for the acquisition of desirable crude oil and natural gas prospects. Similarly, we face some competition in the development of offshore oil and gas resources. In addition, the gradual development of the low-cost shale gas and shale oil in the United States has had a material effect on our business. 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

 

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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. We expect that we will continue to face competition in our refined products and chemical products sales in these regions.

As a result of China’s recent policies towards diversification of market participants, we also face competition from new market participants. Over the recent years, large state-owned enterprises, such as Sinochem Group and China North Industries Group Corporation, have entered the refinery sector and local independent refineries have been growing rapidly. The refinery sector in China, which had long been dominated by us and Sinopec, has been more competitive.

We also face competition from imported refined products and chemical products in terms of price and quality. In recent years, competition from foreign producers of refined products and chemical products has increased and the retail and wholesale markets in China for refined products and chemical products have been 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 had increased rapidly in China in recent years. In response, we have to reduce our production costs, improve the quality of our products and optimize our product mix.

In addition, we also face competition from alternative energies. For example, electric car, as a clean means of transport with “zero pollution and zero emission” has won the favor of the government. The central and local governments have imposed restrictions on oil-powered cars, while encouraged electricity-powered cars. The alternative energy-powered cars, especially electric cars, will continue to grow at a high rate in 2016. Despite the issues such as immature technologies, short range and limited infrastructure with respect to electric cars, with the importance attached by the central government to the development of electric car batteries and electric car technologies and the focus given by the local government to the construction of electric car charging infrastructure, the advantages of electric cars will be fully demonstrated in the future. As a result, the impact of the innovation of electric cars on us will become increasingly obvious.

Natural Gas and Pipeline Operations

We are the largest natural gas supplier in the PRC in terms of sales volume. Currently, we face competition from Sinopec, CNOOC, coal-based natural gas producers and other companies in the supply of natural gas to Beijing, Tianjin, Hebei Province, Shanghai, Jiangsu Province, Anhui Province, Henan Province, Hubei Province, Hunan Province and the northwestern regions of China, our existing principal markets for natural gas. Currently, Sinopec has natural gas fields in Sichuan Province and Chongqing Municipality and sells natural gas to users in places such as Sichuan, Chongqing, Hunan, Jiangsu, Zhejiang and Shanghai. We have also expanded 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 our skills in managing long distance pipelines will enable us to continue to be a dominant player in the natural gas markets in China.

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

 

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Environmental Matters

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

 

   

require an environmental evaluation report to be submitted and approved prior to the commencement of exploration, production, refining and chemical projects;

 

   

restrict the type, quantities, and concentration of various substances that can be released into the environment in connection with drilling and production activities;

 

   

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

 

   

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

These laws and regulations may also restrict air emissions and discharges to surface and subsurface water resulting from the operation of natural gas processing plants, chemical plants, refineries, pipeline systems and other facilities that we own. In addition, our operations are subject to laws and regulations relating to the generation, handling, storage, transportation, disposal and treatment of solid waste materials.

We anticipate that the environmental laws and regulations to which we are subject will become increasingly strict and are therefore likely to have an increasing impact on our operations. It is difficult, however, to predict accurately the effect of future developments in such laws and regulations on our future earnings and operations. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses. We cannot assure you that material costs and liabilities will not be incurred. However, we do not currently expect any material adverse effect on our financial condition or results of operations as a result of compliance with such laws and regulations. We paid pollutant discharge fees of approximately RMB378 million, RMB385 million and RMB347 million, in 2013, 2014 and 2015, respectively.

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

 

   

building environment-friendly projects;

 

   

reducing sulfur 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 2013, 2014 and 2015 were approximately RMB2.55 billion, RMB4.00 billion and RMB4.14 billion, respectively.

Because a number of our production facilities are located in populated areas, we have established a series of preventative measures to improve the safety of our employees and surrounding residents and minimize disruptions or other adverse effects on our business. These measures include:

 

   

providing each household in areas surrounding our production facilities with printed materials to explain and illustrate safety and protection knowledge and skills; and

 

   

enhancing the implementation of various effective safety production measures we have adopted previously.

 

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We believe that these preventative measures have helped reduce the possibility of incidents that may result in serious casualties and environmental consequences. In addition, the adoption of these preventative measures has not required significant capital expenditures to date, and therefore, will not have a material adverse effect on our results of operations and financial condition.

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

Legal Proceedings

On September 3 and 6, 2013, two respective class action complaints were filed with the United States District Court for the Southern District of New York (the “District Court”) against us and certain of our former and current directors and senior management for alleged violations of the securities laws of the United States. These complaints were filed in light of PRC authorities’ investigation into certain of our former directors and senior management.

On April 4, 2014, the District Court entered an order to consolidate the related actions and appointed a lead plaintiff and lead counsel.

On June 6, 2014, the lead plaintiff submitted a revised complaint whereby our current directors and senior management were removed from the complaint and the individual defendants only include the former directors and senior management. The relevant charges set out in the complaint were basically the same as those in the previous complaint.

On August 5, 2014, in view of the revised complaint, we filed a motion to dismiss.

On November 24, 2014, upon approval by the court, the U.S. plaintiff further submitted a revised complaint.

In view of the complaint, we filed another motion to dismiss on February 13, 2015.

On April 10, 2015, the District Court held a pre-motion conference to discuss the plaintiff’s request for submission of supplemental pleadings, and the District Court dismissed the plaintiff’s request.

On May 22, 2015, we filed a Reply Memorandum of Law in Support of Motion with the District Court in response to the plaintiff’s filing of a Memorandum of Law in Opposition to Motion.

On August 3, 2015, the District Court issued an Opinion and Order, granting our motion to dismiss, and directing termination of the motion and the closing of the case.

On August 10, 2015, pursuant to the U.S. federal court procedure rules, the plaintiff filed notice of appeal to the United States Court of Appeals for the Second Circuit (the “Second Circuit”) from the judgment entered by the Court.

On November 19, 2015, we filed Opposition Brief in response to the plaintiffs’ Appeal Brief.

On December 3, 2015, the plaintiffs filed a Reply Memorandum of Law with the Second Circuit.

On March 16, 2016, an oral examination session was conducted at the Second Circuit.

On March 21, 2016, the Panel of the Court of Appeals for the Second Circuit issued a Summary Order and Judgment affirming the judgment of the District Court, thus supporting the dismissal by the District Court of the

 

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plaintiff’s complaint. The plaintiff has right within 90 days from the date of the said court order to request for certiorari by the Supreme Court of the United States with regard to the decision by the Second Circuit.

Our normal course of business has not been affected by these complaints. We will proactively and vigorously contest the complaint with our best efforts to protect our legitimate rights and interests.

In addition to the foregoing, 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

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

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 121 International Trademark Registration Certificates for our logo covering more than 50 jurisdictions.

As of December 31, 2015, we owned approximately 9,400 patents in China and other jurisdictions. We were granted 2,505 patents in China in 2015.

Regulatory Matters

Overview

China’s oil and gas industry is subject to extensive regulation by the PRC government with respect to exploration, production, transmission and marketing of crude oil and natural gas as well as production, transportation and marketing of refined products and chemical products. The following central government authorities exercise control over China’s oil and gas industry:

 

   

The Ministry of Land and Resources, or the MLR, has the authority to grant, examine and approve oil and gas exploration and production licenses, and to oversee the registration and transfer of exploration and production licenses;

 

   

The Ministry of Commerce, or the MOFCOM,

 

   

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

 

   

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 in relation to oil and coal seam gas and Sino-foreign equity and cooperative joint venture contracts.

 

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The National Development and Reform Commission, or the NDRC:

 

   

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

 

   

determines mandatory minimum volumes and applicable prices of natural gas to be supplied to certain fertilizer producers;

 

   

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

 

   

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

 

   

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

 

   

approves Sino-foreign equity and cooperative projects exceeding certain capital amounts.

Exploration Licenses and Production Licenses

The Mineral Resources Law authorizes the MLR 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 MLR 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 MLR blocks in which they intend to engage in exploration activities. The holder of an exploration license is obligated to make a progressively increasing annual minimum exploration investment in each corresponding block. Investments range from RMB2,000 per square kilometer for the initial year to RMB5,000 per square kilometer for the second year, and to RMB10,000 per square kilometer for the third and subsequent years. Additionally, the holder has to pay an annual 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 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 MLR 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 MLR has issued production licenses with terms coextensive with the projected productive life of the assessed proven reserves as discussed above. Each of our production licenses is renewable upon our application 30 days prior to expiration. If oil and gas prices increase, the productive life of our crude oil and natural gas reservoirs may be extended beyond the current terms of the relevant production licenses.

Among the major PRC oil and gas companies, the exploration licenses and production licenses held by us, Sinopec and CNOOC account for the majority of mining rights in China. Among those companies, we and Sinopec primarily engage in onshore exploration and production, while CNOOC primarily engages in offshore exploration and production.

 

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Pricing

Crude Oil

We and Sinopec set the crude oil median prices each month based on the average international market FOB prices for crude oil of different grades in the previous month. In addition, PetroChina and Sinopec negotiate a premium or discount to reflect transportation costs, the differences in oil quality and the supply and demand.

Refined Products

The prices of our gasoline and diesel products are set by the government.

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

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

In order to promote the oil product quality upgrading, on September 16, 2013, the NDRC issued the Circular regarding Relevant Opinions on the Pricing Policy for Oil Product Quality Upgrading, pursuant to which the price increase standard for the auto-use gasoline and diesel upgraded to China IV Standard shall be set as RMB290 per ton and RMB370 per ton, respectively, and the price increase standard for the auto-use gasoline and diesel upgraded from China IV to China V Standard shall be set at RMB170 per ton and RMB160 per ton, respectively.

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

Chemical Products

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

Natural Gas

On June 28, 2013, the NDRC announced the initiation of a program for adjustment of natural gas prices from July 10, 2013. The program consists of (i) changing pricing mechanism of natural gas from ex-factory price

 

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to citygate price, and no longer differentiating the prices payable by the users in different provinces; (ii) establishment of the mechanism linking the citygate price of natural gas to the price of alternative energy with a view to gradually shift to a market-driven pricing mechanism for natural gas; (iii) adopting differential pricing approaches towards the existing usage and the incremental usage so as to establish as soon as practicable a new pricing mechanism for natural gas while reducing the impact that the pricing reform will have on existing gas users.

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

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

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

Pipeline Transmission Tariff

Pipeline transmission tariffs for crude oil, refined oil and natural gas are set by NDRC. For those pipelines constructed by the state prior to 1984, the transmission tariff is uniform flat tariff determined based on the principle of minimum profit margin. For those constructed after 1984, the proposed tariffs must be submitted to NDRC for examination and approval based on the capital investment made in the pipeline, the depreciation period for the pipeline and reasonable profit margin.

Production and Marketing

Crude Oil

Each year, the NDRC publishes the projected target for the production and process of crude oil in China based on the domestic consumption estimates submitted by domestic producers, including but not limited to us, Sinopec and CNOOC, the production of these companies as well as the forecast of international crude oil prices. The actual production 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 MOFCOM became effective, qualified domestic producers are permitted to engage in the sale and storage of crude oil. Foreign companies with the required qualifications are also allowed to establish and invest in enterprises to conduct crude oil business.

Refined Products

Previously, only we, 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

 

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business. Since January 1, 2007, when the Measures on the Administration of the Refined Products Market became effective, all entities meeting certain requirements are allowed to submit applications to the MOFCOM to conduct refined oil products wholesale, retail and storage businesses.

Natural Gas

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

Foreign Investments

Cooperation in Exploration and Production with Foreign Companies

Currently, CNPC is one of the few Chinese companies that have the right to cooperate with foreign companies in onshore crude oil and natural gas exploration and production in China. CNOOC has the right to cooperate with foreign companies in offshore crude oil and natural gas exploration and production in China.

Sino-foreign cooperation projects and foreign parties in onshore oil and gas exploration and production in China are generally selected through open bids and bilateral negotiations. Those projects are generally conducted through production sharing contracts. The MOFCOM must approve those contracts.

As authorized by the Regulations of the PRC on Exploration of Onshore Petroleum Resources in Cooperation with Foreign Enterprises, CNPC has the right to enter into joint cooperation arrangements with foreign oil and gas companies for onshore crude oil and natural gas exploration and production. We do not have the capacity to enter into production sharing contracts directly with foreign oil and gas companies under existing PRC law. Accordingly, CNPC will continue to enter into production sharing contracts. After signing a production sharing contract, CNPC will, subject to approval of the MOFCOM, assign to us most of its commercial and operational rights and obligations under the production sharing contract as required by the Non-competition Agreement between CNPC and us.

Transportation and Refining

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

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 MOFCOM has granted us the right to conduct crude oil and refined product import and export business.

 

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Capital Investment and Financing

Capital investments in exploration and production of crude oil and natural gas made by Chinese oil and gas companies are subject to approval by or filing with relevant government authorities. The following projects are subject to approval by the NDRC:

 

   

overall development plans for oil and gas development projects in China to be conducted in cooperation with foreign parties;

 

   

facilities for taking delivery of, storing or transporting imported liquefied natural gas and major cross-province (region or municipality) oil transmission pipeline facilities;

 

   

cross-province (region or municipality) trunk network for gas transmission;

 

   

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;

 

   

coal-to-methanol-to-olefins project with a capacity of 0.5 million tons per annum or more and coal-to-methanol project with a capacity of 1 million tons per annum or more;

Taxes, Fees and Royalties

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

 

Tax Item

  

Tax
Base

  

Tax
Rate

Enterprise income tax

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

Value-added tax

   Revenue   

13% for liquified natural gas, natural gas, liquified petroleum gas, agricultural film and fertilizers and 17% for other items.

 

Effective from August 1, 2013, as a result of the reform of value-added tax in lieu of business tax, certain pipeline transmission services and research and development technical services of our company have been subject to value-added-tax at the rates of 11% and 6%, respectively.

Business tax

      Collected at rates prescribed by the state based on the actual types of the services.

Consumption tax

   Aggregate volume sold or self-consumed   

Effective from January 13, 2015, consumption tax was increased from RMB1.4 to RMB1.52 per liter for gasoline, naphtha, solvent naphtha and lubricant and from RMB1.1 to RMB1.2 per liter for diesel, aviation kerosene and fuel oil.

 

Effective from December 13, 2014, consumption tax was increased from RMB1.12 to RMB1.4 per liter for gasoline, naphtha, solvent naphtha and lubricant from RMB0.94 to RMB1.1 per liter for diesel oil, aviation kerosene and fuel oil.

 

Collection of taxes on aviation kerosene continues to be suspended.

 

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Tax Item

  

Tax
Base

  

Tax
Rate

Resource tax

   Value sold    Effective from December 1, 2014, for production of crude oil and natural gas in China, the resource tax rate was increased from 5% to 6%. Exemption or deduction may apply if qualified.

Compensatory fee for mineral resources

   Revenue    None, since December 1, 2014.

Crude oil special gain levy

   Sales amount above specific threshold    Five-level progressive tax rates from 20% to 40%, taxable if the crude oil price reach the threshold of US$ 65 per barrel. Since November 1, 2011 to January 1, 2015, the threshold was US$55 per barrel.

Exploration license fee

   Area    RMB100 to RMB500 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)

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

Environmental Regulations

We are subject to various PRC national environmental laws and regulations and also environmental regulations promulgated by the local governments in whose jurisdictions we have operations. 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 authority for approval before it undertakes any construction of a new production facility or any major expansion or renovation of an existing production facility. The new facility or the expanded or renovated facility will not be permitted to operate unless the relevant environmental authority has inspected the environmental equipment installed at the facility and decides it satisfies the environmental protection requirements. 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 authority 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 authority 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.

 

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Item 4A UNRESOLVED STAFF COMMENTS

We do not have any unresolved staff comment.

Item 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS

General

You should read the following discussion together with our consolidated financial statements and their notes included elsewhere in this annual report. Our consolidated financial statements have been prepared in accordance with IFRS.

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 of refined oil products and trading; and

 

   

the transmission of natural gas, crude oil and refined oil products as well as the sale of natural gas.

We are China’s largest producer of crude oil and natural gas and are one of the largest companies in China in terms of revenue. In 2015, we produced approximately 971.9 million barrels of crude oil and approximately 3,131.0 Bcf of natural gas for sale. Our refineries also processed approximately 998.1 million barrels of crude oil in 2015. In 2015, we had revenue of RMB1,725,428 million and profit attributable to owners of the Company of RMB 35,517 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 revenue. See “Item 4 — Information on the Company — Regulatory Matters — Pricing” for a more detailed discussion of current PRC pricing regulations and “Item 3 — Risk Factors — Risks Related to Pricing and Exchange Rate”.

The table below sets forth the average realized prices of our principal products in 2013, 2014 and 2015.

 

     2013      2014      2015  

Crude oil (US$/barrel)

     100.42         94.83         48.35   

Natural gas (US$/thousand cubic feet)(1)

     7.35         7.84         7.42   

Gasoline (US$/barrel)

     149.42         140.85         112.80   

Kerosene (US$/barrel)

     122.94         116.45         67.77   

Diesel (US$/barrel)

     146.61         139.72         96.39   

 

  (1)

Natural gas citygate price

 

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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.

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 revenue and expenses during the reporting period. Notwithstanding the presentation of our principal accounting policies in Note 3 to our consolidated financial statements included elsewhere in this annual report, we have identified the accounting policies below as most critical to our business operations and the understanding of our financial condition and results of operations presented in accordance with IFRS. Although these estimates are based on our management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates.

Accounting for Oil and Gas Exploration and Production Activities

We use the successful efforts method of accounting, with specialized accounting rules that are unique to the oil and gas industry, for oil and gas exploration and production activities. Under this method, geological and geophysical costs incurred are expensed when incurred. However, all costs for developmental wells, support equipment and facilities, and proved mineral interests in oil and gas properties are capitalized. Costs of exploratory wells are capitalized as construction in progress pending determination of whether the wells find proved reserves. For exploratory wells located in regions that do not require substantial capital expenditures before the commencement of production, the evaluation of the economic benefits of the reserves in such wells will be completed within one year following the completion of the exploration drilling. Where such evaluation indicates that no economic benefits can be obtained, the relevant costs of exploratory wells will be converted to dry hole exploration expenses. The relevant costs will be classified as oil and gas assets and go through impairment review if the evaluation indicates that economic benefits can be obtained. For wells with economically viable reserves in areas where a major capital expenditure would be required before production can begin, the related well costs remain capitalized only if additional drilling is under way or firmly planned. Otherwise the well costs are expensed as dry holes. We have no material costs of unproved properties capitalized in oil and gas properties.

Oil and Gas Reserves

The estimation of the quantities of recoverable oil and gas reserves in oil and gas fields is integral to effective management of our exploration and production operations. Because of the subjective judgments involved in developing and assessing such information, engineering estimates of the quantities of recoverable oil and gas reserves in oil and gas fields are inherently imprecise and represent only approximate amounts.

Before estimated oil and gas reserves are designated as “proved”, certain engineering criteria must be met in accordance with industry standards and the regulations of the SEC. Proved oil and gas reserves are the estimated

 

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quantities of crude oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether the estimate is a deterministic estimate or probabilistic estimate. Therefore, these estimates do not include probable or possible reserves. Our proved reserve estimates are updated annually by independent, qualified and experienced oil and gas reserve engineering firms in the United States, Singapore and Canada. 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 required by authoritative guidelines, this estimation takes into account recent information about each field, including production and seismic information, estimated recoverable reserves of each well, and oil and gas prices and operating costs as of the date the estimate is made. The price shall be the average price during the 12-month period before the ending date of the period covered by this report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. The costs shall be that prevailing at the end of the period.

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 financial statements. In addition to the capitalization of costs related to oil and gas properties on the balance sheet discussed earlier, estimated proved reserves also impact the calculation of depreciation, depletion and amortization expenses of oil and gas properties. The cost of oil and gas properties is amortized at the field level on the unit of production method. Unit of production rates are based on the total oil and gas reserves estimated to be recoverable from existing facilities based on the current terms of our production licenses. Our 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 in understanding the perceived value and future cash flows of a company’s oil and gas operations, we have also provided supplemental disclosures of “proved” oil and gas reserve estimates prepared in accordance with authoritative guidelines elsewhere in this annual report.

Property, Plant and Equipment

Where it is probable that property, plant and equipment, including oil and gas properties, will generate future economic benefits, their costs are initially recorded in the consolidated statement of financial position as assets. Cost represents the purchase price of the asset and other costs incurred to bring the asset into 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.

 

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

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.

 

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Our income statement for each of the years ended December 31, 2013, 2014 and 2015 is summarized in the table below.

 

     Year Ended December 31,  
     2013     2014     2015  
     (RMB in millions)  

Revenue

     2,258,124        2,282,962        1,725,428   

Operating expenses

     (2,069,482     (2,113,129     (1,646,176

Profit from operations

     188,642        169,833        79,252   

Exchange gain /(loss), net

     52        (2,313     (632

Interest expense, net

     (20,859     (21,723     (22,309

Share of profit of affiliates and joint ventures

     10,228        10,962        1,504   

Profit before income tax expense

     178,063        156,759        57,815   

Income tax expense

     (35,789     (37,731     (15,726

Profit for the year attributable to non-controlling interests

     12,675        11,856        6,572   
  

 

 

   

 

 

   

 

 

 

Profit for the year attributable to owners of the company

     129,599        107,172        35,517   
  

 

 

   

 

 

   

 

 

 

The table below sets forth our revenue by business segment for each of the years ended December 31, 2013, 2014 and 2015 as well as the percentage changes in revenue for the periods shown.

 

     2013     2014     2014
vs.
2013
    2015     2015
vs.
2014
 
     (RMB in millions, except percentages)  

Revenue

          

Exploration and production

     783,694        777,574        (0.8 %)      475,412        (38.9 %) 

Refining and chemicals

     871,815        846,082        (3.0 %)      642,428        (24.1 %) 

Marketing

     1,946,806        1,938,501        (0.4 %)      1,383,426        (28.6 %) 

Natural gas and pipeline

     232,751        284,262        22.1     281,778        (0.9 %) 

Headquarters and others

     2,687        3,027        12.7     2,507        (17.2 %) 
  

 

 

   

 

 

     

 

 

   

Total

     3,837,753        3,849,446        0.3     2,785,551        (27.6 %) 

Less intersegment sales

     (1,579,629     (1,566,484     (0.8 %)      (1,060,123     (32.3 %) 
  

 

 

   

 

 

     

 

 

   

Consolidated net sales from operations

     2,258,124        2,282,962        1.1     1,725,428        (24.4 %) 
  

 

 

   

 

 

     

 

 

   

The table below sets forth our operating income by business segment for each of the years ended December 31, 2013, 2014 and 2015, 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.

 

     2013     2014     2014
vs.
2013
    2015     2015
vs.
2014
 
     (RMB in millions, except percentages)  

Profit/(loss) from operations

          

Exploration and production

     189,698        186,897        (1.5 %)      33,961        (81.8 %) 

Refining and chemicals

     (24,392     (23,560     (3.4 %)      4,883        —     

Marketing

     7,562        5,421        (28.3 %)      (500     —     

Natural gas and pipeline

     28,888        13,126        (54.6 %)      51,231        290.3

Headquarters and others

     (13,114     (12,051     (8.1 %)      (10,323     —     
  

 

 

   

 

 

     

 

 

   

Total

     188,642        169,833        (10.0 %)      79,252        (53.3 %) 
  

 

 

   

 

 

     

 

 

   

 

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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Consolidated Results of Operations

Overview

In 2015, our revenue was RMB1,725,428 million, representing a decrease of 24.4% compared with the preceding year. Profit attributable to our owners was RMB35,517 million, representing a decrease of 66.9% compared with the preceding year. Basic and diluted earnings per share were RMB0.19, representing a decrease of RMB0.40 compared with the preceding year.

Revenue Revenue decreased by 24.4% from RMB2,282,962 million in 2014 to RMB1,725,428 million in 2015. This decrease was primarily due to a combined effect of the decreasing selling prices of crude oil and refined oil, and the changes in the sales volume of crude oil, natural gas, refined oil and other major products. The table below sets out the external sales volume and average realized prices for major products in 2015 and 2014, respectively:

 

     Sales Volume (‘000 ton)     Average Realized Price
(RMB/ton)
 
         2014              2015          Percentage
of Change
(%)
    2014      2015      Percentage
of Change
(%)
 

Crude oil(1)

     91,772         101,620         10.7        3,939         2,134         (45.8

Natural gas (hundred million cubic meter, RMB/‘000 cubic meter)

     1,252.78         1,581.10         26.2        1,366         1,371         0.4   

Gasoline

     59,821         60,651         1.4        7,354         5,972         (18.8

Diesel

     87,041         84,763         (2.6     6,437         4,503         (30.0

Kerosene

     14,016         14,683         4.8        5,651         3,334         (41.0

Heavy oil

     14,003         15,635         11.7        4,316         2,439         (43.5

Polyethylene

     4,159         4,270         2.7        9,724         8,202         (15.7

Lubricant

     1,498         1,150         (23.2     9,202         8,234         (10.5

 

(1)

The sales volume of crude oil listed in the table above represents all of our external sales volume of crude oil.

Operating Expenses Operating expenses decreased by 22.1% from RMB2,113,129 million in 2014 to RMB1,646,176 million in 2015, of which:

Purchases, Services and Other Expenses Purchases, services and other expenses decreased by 28.9% from RMB1,486,225 million in 2014 to RMB1,056,795 million in 2015. This decrease was primarily due to the facts that (i) our expenses for purchasing oil products reduced as a result of the decrease in oil prices, (ii) our expenses for imported gas reduced because the quantity and price of imported LNG were both reduced, and (iii) the optimization of production and operation resulted in the reduction of certain purchase costs.

Employee Compensation Costs Employee compensation costs (including salaries and additional costs such as insurances, housing funds and training fees) were RMB118,082 million in 2015, representing a decrease of 2.3% from RMB120,822 million in 2014. This decrease was primarily due to the fact that we improved our efficiency-based remuneration system and implemented stricter control over the total number of employees and labor costs.

Exploration Expenses Exploration expenses amounted to RMB18,380 million in 2015, representing a decrease of 16.7% from RMB22,064 million in 2014. This decrease was primarily due to the fact that we optimized our exploration deployment, reduced exploration workload and costs appropriately.

 

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Depreciation, Depletion and Amortization Expenses Depreciation, depletion and amortization expenses increased by 14.3% from RMB177,463 million in 2014 to RMB202,875 million in 2015, mainly due to the assets impairment provision of RMB25,022 million in accordance with the accounting standards, which increased by 2.3% compared with 2014. We strictly controlled capital investment and devoted major efforts to optimize our assets structure, thus effectively restrained the trend of substantial increase in depreciation, depletion and amortization expenses.

Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by 2.9% from RMB73,413 million in 2014 to RMB71,270 million in 2015. This decrease was primarily due to the fact that we proactively implemented measures for broadening sources of income, reducing expenditures, and enhancing efficiency to strengthen control over costs and expenses.

Taxes other than Income Taxes Taxes other than income taxes decreased by 13.5% from RMB237,997 million in 2014 to RMB205,884 million in 2015. As a result of the decline in the price of crude oil and the rise in the threshold for the special oil gain levy, no special oil gain levy applied to us in 2015, while we paid such levy in an amount of RMB64,376 million in 2014. The resource tax decreased by RMB7,721 million from RMB26,305 million in 2014 to RMB18,584 million in 2015. As a result of the adjustment to the refined products consumption tax policy, our consumption tax increased by RMB45,061 million from RMB104,262 million in 2014 to RMB149,323 million in 2015.

Other Income, Net Other net income in 2015 was RMB27,110 million, representing an increase by RMB22,255 million from RMB4,855 million in 2014. This increase was primarily because we recognized an investment gain of RMB22,807 million in 2015 derived from the integration of certain pipeline assets.

Profit from Operations The profit from operations in 2015 was RMB79,252 million, representing a decrease of 53.3% from RMB169,833 million in 2014.

Net Exchange Loss Net exchange loss in 2015 was RMB632 million, representing a decrease of 72.7% as compared with RMB2,313 million in 2014. This decrease was primarily due to the appreciation of the US dollar.

Net Interest Expenses Net interest expenses increased by 2.7% from RMB21,723 million in 2014 to RMB22,309 million in 2015, primarily due to a slight increase in the average balance of interest-bearing debts to finance our production, operation and capital expenditures.

Profit Before Income Tax Expense Profit before income tax expense decreased by 63.1% from RMB156,759 million in 2014 to RMB57,815 million in 2015.

Income Tax Expense Income tax expense decreased by 58.3% from RMB37,731 million in 2014 to RMB15,726 million in 2015, which was primarily due to the decrease in taxable income.

Profit for the Year As a result of the foregoing, our profit for the year decreased by 64.6% from RMB119,028 million in 2014 to RMB 42,089 million in 2015.

Profit Attributable to Non-controlling Interests Net profit attributable to non-controlling interests decreased by 44.6%, from RMB11,856 million in 2014 to RMB6,572 million in 2015, primarily due to the decrease in the profits of certain overseas subsidiaries as a result of the crude oil price drop.

Profit Attributable to Owners of the Company The net profit attributable to owners of the company decreased by 66.9% from RMB107,172 million in 2014 to RMB35,517 million in 2015.

 

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Segment Results

Exploration and Production Segment

Revenue The realized revenue of the exploration and production segment was RMB 475,412 million in 2015, representing a decrease of 38.9% from RMB 777,574 million in 2014, primarily due to a combined effect of the drop in the crude oil and condensate oil price and an increase in the sales volume of crude oil. The average realized crude oil price was US$48.35 per barrel in 2015, representing a decrease of 49.0% from US$94.83 per barrel in 2014.

Operating Expenses Operating expenses of the exploration and production segment decreased by 25.3% from RMB590,677 million in 2014 to RMB441,451 million in 2015, primarily due to a combined effect of the decrease in the crude oil special gain levy, resource tax and other relevant taxes and levies and the provisions for impairment of oil and gas assets in 2015.

We enhanced our control over costs and expenses continuously. The oil and gas lifting cost was US$12.98 per barrel in 2015, representing a decrease of 5.7% from US$13.76 per barrel in 2014.

Profit from Operations We adhered to the low-cost strategy, optimized the production and continued to save energy and tap the potential synergies through innovation and refined management in the exploration and production segment, but as a result of the substantial drop in the crude oil price, our realized profit from operations of the exploration and production segment was RMB33,961 million in 2015, representing a decrease of 81.8% from RMB186,897 million in 2014.

Refining and Chemicals Segment

Revenue Revenue of the refining and chemicals segment decreased by 24.1% from RMB846,082 million in 2014 to RMB642,428 million in 2015, primarily due to a combined effect of the drop in refined and chemicals products price and optimization of the allocation of resources and structure of products as well as the increase in the sales volume of primary products in the refining and chemicals segment.

Operating Expenses Operating expenses of the refining and chemicals segment decreased by 26.7% from RMB869,642 million in 2014 to RMB637,545 million in 2015, primarily due to a decrease in the expenses associated with the purchase of crude oil and feedstock oil from external suppliers, partially offset by the increase in consumption tax.

In 2015, we enhanced both quality and efficiency under the cost pressure of the upgrading of oil quality in the refining and chemicals segment. The cash processing cost of refineries was RMB177.80 per ton in 2015, representing a decrease of RMB0.05 per ton from RMB177.85 per ton in 2014.

Profit from Operations In 2015, we adjusted our production and operation arrangements in a timely manner, strengthened benchmarking and compliance, and enhanced cost controls in the refining and chemical segment, and thus realized an overall operation profit for the first time since 2011. In 2015, we realized profit from operation of RMB 4,883 million in the refining and chemicals segment, as compared with the operating loss of RMB23,560 million in 2014. Within this segment, our refining operations recorded operating profit of RMB4,690 million in 2015, as compared with the operating loss of RMB7,155 million in 2014, primarily due to the optimization of operation and an increase in gross profit. Despite the downward trend of the chemical market demands, we optimized the structure of products and controlled costs, and realized an operation profit of RMB193 million from our chemicals business, compared with the operating loss of RMB16,405 million in 2014.

Marketing Segment

Revenue Revenue of the marketing segment decreased by 28.6% from RMB1,938,501 million in 2014 to RMB1,383,426 million in 2015, primarily due to continuous downward adjustments in the refined oil price and a decrease in the sales volume of diesel.

 

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Operating Expenses Operating expenses of the marketing segment decreased by 28.4% from RMB1,933,080 million in 2014 to RMB1,383,926 million in 2015, primarily due to the decrease in the expenses in purchase of refined oil from external suppliers.

Loss from Operations In 2015, we optimized production and sales and inventory management, strengthened cost and expense control and increased the profit from non-oil businesses. However, due to the slowdown of domestic economy growth and the mild demand from the market, the marketing segment recorded an operating loss of RMB500 million in 2015, as compared to the operation profit of RMB 5,421 million in 2014.

Natural Gas and Pipeline Segment

Revenue Revenue of the natural gas and pipeline segment amounted to RMB281,778 million in 2015, compared to RMB284,262 million in 2014, primarily due to a combined effect of the increase in the sales volume of natural gas and the decrease in the sales income of city gas and liquefied petroleum gas.

Operating Expenses Operating expenses of the natural gas and pipeline segment amounted to RMB230,547 million in 2015, representing a decrease of 15.0% compared to RMB271,136 million in 2014, primarily due to the decrease in the expenses of imported natural gas.

Profit from Operations In 2015, we strengthened the development of high-profitability market, continued to improve the marketing capability and profitability, realized an increase in both volume and profit of sales of natural gas, and achieved an operation profit of RMB51,231 million in the natural gas and pipeline segment in 2015, representing an increase of RMB38,105 million as compared to RMB13,126 million in 2014. Excluding the effect of the investment income of RMB22,807 million generated from the integration of certain pipeline assets in 2015, the profit from operations increased by RMB15,298 million as compared with 2014. In 2015, the natural gas and pipeline segment recorded a net loss of RMB16,299 million from sales of imported gas, representing a decrease of loss of RMB18,721 million as compared with 2014. The net loss consisted of a loss of RMB6,216 million from the sales of 30.552 billion cubic meters of natural gas imported from Central Asia, a loss of RMB8,519 million from the sales of 5.702 billion cubic meters of imported LNG, and a loss from RMB4,073 million for the sales of 4.623 billion cubic meters of natural gas imported from Myanmar.

In 2015, our international operationsnote realized a revenue of RMB540,239 million, representing 31.3% of our total revenue. Loss before income tax expense amounted to RMB8,349 million, primarily due to the provision for impairment for oil and gas assets of certain overseas subsidiaries in 2015.

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

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Consolidated Results of Operations

Overview

Our revenue was RMB2,282,962 million in 2014, representing an increase of 1.1% compared to the preceding year. Profit attributable to owners of the company in 2014 was RMB107,172 million, representing a decrease of 17.3% compared to the preceding year. The basic and diluted earnings per share attributable to owners of the company were RMB0.59 in 2014, representing a decrease of RMB0.12 compared to the preceding year.

Revenue Revenue increased by 1.1% from RMB2,258,124 million in 2013 to RMB 2,282,962 million in 2014. This increase was primarily due to a combined effect of an increase in selling prices of natural gas coupled

 

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with an increase in the sales volume of crude oil, natural gas, gasoline and other products. The table below sets out the external sales volume and average realized prices for major products sold by us and the percentage change in 2013 and 2014, respectively.

 

     Sales Volume (‘000 ton)     Average Realized Price
(RMB/ton)
 
         2013              2014          Percentage
of Change
(%)
    2013      2014      Percentage
of Change
(%)
 

Crude oil(1)

     75,482         91,772         21.6        4,533         3,939         (13.1

Natural gas (hundred million cubic meter, RMB/‘000 cubic meter)

     985.41         1,252.78         27.1        1,226         1,366         11.4   

Gasoline

     52,350         59,821         14.3        7,866         7,354         (6.5

Diesel

     93,301         87,041         (6.7     6,810         6,437         (5.5

Kerosene

     13,482         14,016         4.0        6,015         5,651         (6.1

Heavy oil

     14,788         14,003         (5.3     4,443         4,316         (2.9

Polyethylene

     3,391         4,159         22.6        9,665         9,724         0.6   

Lubricant

     1,740         1,498         (13.9     9,319         9,202         (1.3

 

(1)

The sales volume of crude oil listed in the table above represents all of our external sales volume of crude oil.

Operating Expenses Operating expenses increased by 2.1% from RMB2,069,482 million in 2013 to RMB2,113,129 million in 2014, of which:

Purchases, Services and Other Purchases, services and other operating expenses increased by 1.5% from RMB1,464,805 million in 2013 to RMB1,486,225 million in 2014. This was primarily due to our expansion of our trading capacity.

Employee Compensation Cost Employee compensation costs (including salaries and such additional costs as various insurances, provident funds and training fees for the 534,652 employees of us and the 319,346 temporary and seasonal staff recruited from the market) increased by 3.8% from RMB116,422 million in 2013 to RMB 120,822 million in 2014. This increase was primarily due to our initiative to increase the compensation of our front-line employees to reflect the expansion of our operations and the consequent increase in business volumes, and rises in the domestic consumer price index, wage inflation and social security contributions in line with changes to local government policies.

Exploration Expense Exploration expenses decreased by 12.8% from RMB25,301 million in 2013 to RMB22,064 million in 2014. This was primarily due to the fact that some overseas projects have entered into the production phase.

Depreciation, Depletion and Amortization Depreciation, depletion and amortization increased by 8.6% from RMB163,365 million in 2013 to RMB 177,463 million in 2014. This increase was primarily due to the increased average carrying value of fixed assets and the increased average net value of oil and gas properties of the company.

Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by 7.1% from RMB79,021 million in 2013 to RMB73,413 million in 2014. This decrease was primarily due to the fact that the company proactively implemented measures for broadening sources of income, reducing expenditures, cutting costs and enhancing efficiency to strengthen control over costs and expenses.

Taxes other than Income Taxes Taxes other than income taxes decreased by 4.1% from RMB248,086 million in 2013 to RMB237,997 million in 2014. This decrease was primarily due to the drop in the price of crude oil in 2014, leading to a decrease in the crude oil special gain levy from RMB72,726 million in 2013 to RMB64,376 million in 2014.

 

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Other Income, Net Other income, net in 2014 was RMB4,855 million, representing a decrease of 82.4% from RMB27,518 million in 2013. This decrease was primarily because the company recognized the gain on investment of certain pipeline net assets and operations in 2013.

Profit from Operations The profit from operations in 2014 was RMB169,833 million, representing a decrease of 9.97% from RMB188,642 million in 2013.

Net Exchange Gain/Loss Net exchange loss in 2014 was RMB2,313 million, while net exchange gain in 2013 was RMB52 million. This was primarily due to the fact that the depreciation of Kazakhstani Tenge (KZT) caused an increase of exchange loss during the reporting period.

Net Interest Expenses Net interest expenses increased by 4.1% from RMB20,859 million in 2013 to RMB21,723 million in 2014. This increase was primarily due to an increase in the principal amount of the interest-bearing debt of the company to finance production, operation, investment and construction.

Profit Before Income Tax Expense Profit before income tax expense decreased by 12.0% from RMB178,063 million in 2013 to RMB156,759 million in 2014.

Income Tax Expense Income tax expense increased by 5.4% from RMB35,789 million in 2013 to RMB37,731 million in 2014. This increase was primarily due to a combined effect of the increase in income tax expense arising from adjustments to the policy for crude oil special gain levy deduction before income tax and the decrease in profit before income tax expense for the current period.

Profit for the Year Profit for the year decreased by 16.3% from RMB142,274 million in 2013 to RMB119,028 million in 2014.

Profit Attributable to Non-controlling Interests of the Company Profit attributable to non-controlling interests decreased by 6.5% from RMB12,675 million in 2013 to RMB11,856 million in 2014, which was primarily due to the decrease in profits of certain overseas subsidiaries of the company.

Profit Attributable to Owners of the Company Profit attributable to owners of the company decreased by 17.3% from RMB129,599 million in 2013 to RMB107,172 million in 2014. This decrease was primarily due to a decrease in the prices of crude oil and refined oil products, and a decrease in the income generated from the pipeline assets and operations.

Segment Information

Exploration and Production Segment

Revenue Realized revenue of the exploration and production segment decreased by 0.8% from RMB783,694 million in 2013 to RMB777,574 million in 2014. This decrease was primarily due to a combined effect of the drop in the crude oil price, partially offset by the increase in the natural gas price as well as the increase in sales volume. The average realized crude oil price of the company decreased by 5.6% from US$100.42 per barrel in 2013 to US$94.83 per barrel in 2014.

Operating Expenses Operating expenses of the exploration and production segment decreased by 0.6% from RMB593,996 million in 2013 to RMB590,677 million in 2014, which was primarily due to a decrease in the crude oil special gain levy paid for the sales of domestic crude oil during the current period and an increase in depreciation, depletion and amortization expenses.

The oil and gas lifting cost of the company increased by 4.0% from US$13.23 per barrel in 2013 to US$13.76 per barrel in 2014. Excluding the effect of exchange rate movements, the oil and gas lifting cost

 

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increased by 3.2% compared to the preceding year. The growth of lifting cost has been effectively controlled as a result of the active implementation of measures for broadening sources of income and reducing expenditure, as well as cutting costs and improving efficiency.

Profit from Operations Profit from operations of the exploration and production segment decreased by 1.5% from RMB189,698 million in 2013 to RMB186,897 million in 2014. Nevertheless, the exploration and production segment remained the most important profit contributing segment of the company.

Refining and Chemicals Segment

Revenue Revenue of the refining and chemicals segment decreased by 3.0% from RMB871,815 million in 2013 to RMB846,082 million in 2014. This decrease was primarily due to a decrease in the price of refined and chemicals products.

Operating Expenses Operating expenses of the refining and chemicals segment decreased by 3.0% from RMB896,207 million in 2013 to RMB869,642 million in 2014. This decrease was primarily due to a reduction in the expenses in relation to the purchase of crude oil and feedstock oil from external suppliers.

The cash processing cost of the refineries of the company increased by 10.8% from RMB160.55 per ton in 2013 to RMB177.85 per ton in 2014, primarily due to an increase in fuel and power cost.

Loss from Operations The refining and chemicals segment recorded a loss of RMB23,560 million in 2014, which represented a decrease in loss of RMB832 million as compared to RMB24,392 million in 2013. The operating losses of the refining operations increased by RMB2,447 million as compared to that of 2013, resulting in a loss of RMB7,155 million in 2014. The operating losses of the chemicals operations decreased by RMB3,279 million as compared to RMB19,684 million in 2013, resulting in a loss of RMB16,405 million in 2014. This decrease in losses was primarily due to the company’s initiatives in optimizing resource allocation and cost control.

Marketing Segment

Revenue Revenue of the marketing segment decreased by 0.4% from RMB1,946,806 million in 2013 to RMB1,938,501 million in 2014, which was primarily due to continuous downward adjustments in the refined oil prices and a decrease in the sales volume of diesel.

Operating Expenses Operating expenses of the marketing segment decreased by 0.3% from RMB1,939,244 million in 2013 to RMB1,933,080 million in 2014, which was primarily due to a decrease in the expenses arising from the purchase of refined oil from external suppliers.

Profit from Operations The marketing segment recorded a profit from operations of RMB5,421 million in 2014, representing a decrease of 28.3% from RMB7,562 million in 2013. This decrease was primarily attributable to the weaker domestic economy and lower demand for refined oil products in 2014.

Natural Gas and Pipeline Segment

Revenue Revenue of the natural gas and pipeline segment increased by 22.1% from RMB232,751 million in 2013 to RMB284,262 million in 2014. This increase was primarily due to an increase in both the sales volume and the selling price of natural gas.

Operating Expenses Operating expenses of the natural gas and pipeline segment amounted to RMB271,136 million in 2014, representing an increase of 18.6% as compared to 2013, excluding the effect of the contribution of certain pipeline net assets and business in 2013.

 

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Profit from Operations Operating profit of the natural gas and pipeline segment decreased by 54.6% from RMB28,888 million in 2013 to RMB13,126 million in 2014. Excluding the effect brought about by the income generated from the contribution of certain pipeline net assets and business in 2013, the profit from operations increased by RMB9,060 million as compared with the preceding year. In 2014, the natural gas and pipeline segment recorded a net loss of RMB35,020 million from sales of imported gas, representing a decrease of loss of RMB6,852 million as compared with the preceding year consisting of a loss of RMB17,683 million for the sale of 29.270 billion cubic meters of natural gas imported from Central Asia, a loss of RMB20,450 million for the sale of 7.258 billion cubic meters of imported LNG, and a loss of RMB3,465 million for the sale of 3.226 billion cubic meters of natural gas imported from Myanmar.

In 2014, the company’s overseas operations note realized a revenue of RMB803,779 million, representing 35.2% of the company’s total revenue. Profit before income tax expense amounted to RMB19,242 million, representing 12.3% of the company’s total profit before income tax expense.

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

Liquidity and Capital Resources

Our primary sources of funding include cash generated by operating activities and short-term and long-term borrowings. Our primary uses of funds were for operating activities, capital expenditures, repayment of short-term and long-term borrowings and distributions of dividends to shareholders. Our payments to CNPC are limited to dividends and payments for services provided to us by CNPC. For the year ended December 31, 2015, 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 pipeline segments. For a more detailed discussion of factors which may affect our ability to satisfy our financing requirements, see “Item 3 — Key Information — Risk Factors — Risks Related to Liquidity”.

We plan to fund the capital and related expenditures described in this annual report principally through cash from operating activities, short-term and long-term borrowings and cash and cash equivalents. Net cash flows from operating activities in the year ended December 31, 2015 was RMB261,312 million. As of December 31, 2015, we had cash and cash equivalents of RMB72,773 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 continues to decline sharply in the future, it is likely that we would delay or reduce the scale of the capital expenditures for our exploration and production segment.

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.

 

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In addition, as of December 31, 2015, we did not have any transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect the liquidity or availability of or requirements for our capital resources.

The table below sets forth our cash flows for each of the years ended December 31, 2013, 2014 and 2015 and our cash equivalents at the end of each year.

 

     Year Ended December 31,  
     2013     2014     2015  
     (RMB in millions)  

Net cash flows from operating activities

     288,529        356,477        261,312   

Net cash flows used for investing activities

     (266,510     (290,838     (215,879

Net cash flows used for financing activities

     (12,239     (44,312     (45,439

Currency translation difference

     (1,768     1,044        (999

Cash and cash equivalents at year end

     51,407        73,778        72,773   

Our cash and cash equivalents decreased by 1.4% from RMB73,778 million as of December 31, 2014 to RMB72,773 million as of December 31, 2015.

Net Cash Flows from Operating Activities

Our net cash flows from operating activities amounted to RMB261,312 million for the year ended December 31, 2015, representing a decrease of 26.7% from RMB356,477 million for the year ended December 31, 2014. This was mainly due to a combined effect of a decrease in profit and the change of working capital during the report period. As of December 31, 2015, we had cash and cash equivalents of RMB72,773 million. Our cash and cash equivalents were mainly denominated in Renminbi (approximately 52.9% were denominated in Renminbi, approximately 43.3% were denominated in US Dollars, approximately 2.2% were denominated in HK Dollars and approximately 1.6% were denominated in other currencies).

Our net cash flows from operating activities for the year ended December 31, 2014 was RMB356,477 million, representing an increase of 23.5% from RMB288,529 million for the year ended December 31, 2013. This increase was mainly due to our efforts to enhance the management of the use of funds and inventory and an increase in operating funds. As of December 31, 2014, we had cash and cash equivalents of RMB73,778 million. The cash and cash equivalents were mainly denominated in Renminbi (approximately 73.9% were denominated in Renminbi, approximately 20.0% were denominated in US dollars, approximately 4.8% were denominated in HK dollars and approximately 1.3% were denominated in other currencies).

Our net cash flows from operating activities for the year ended December 31, 2013 was RMB288,529 million, representing an increase of 20.6% from RMB239,288 million for the year ended December 31, 2012. This was mainly due to a combined effect of the increase in profits during the reporting period as compared with the preceding year and changes in inventory and other account payables, as a result of the strengthening of our management and optimization of production and operation. As of December 31, 2013, we had cash and cash equivalents of RMB51,407 million. The cash and cash equivalents were mainly denominated in Renminbi (approximately 77.8% were denominated in Renminbi, approximately 8.8% were denominated in US dollars, approximately 7.3% were denominated in HK dollars and approximately 6.1% were denominated in other currencies).

Net Cash Flows Used for Investing Activities

Our net cash flows used for investing activities in 2015 amounted to RMB215,879 million, representing a decrease of 25.8% from RMB290,838 million in 2014. The decrease was primarily due to a combined effect of

 

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the adjustment of our investment plans based on the oil price trend and market change, a decrease in capital expenditures during the current report period and payment of considerations for integration of certain pipelines assets.

Our net cash flows used for investing activities for the year ended December 31, 2014 amounted to RMB290,838 million, representing an increase of 9.1% from RMB266,510 million for the year ended December 31, 2013. The increase was primarily due to the increase of capital from our investment in a joint venture with certain pipeline assets and operations in 2013.

Our net cash flows used for investing activities for the year ended December 31, 2013 amounted to RMB266,510 million, representing a decrease of 19.8% from RMB332,226 million for the year ended December 31, 2012. The decrease was primarily due to a combined effect of the cash inflow resulting from our investment in a joint venture with certain pipeline assets and operations as well as the enhancement of our external cooperation and introduction of strategic investors, the strengthening of our investment management and the decrease in our cash payment of capital expenditures.

Net Cash Flows Used for Financing Activities

Our net cash flows used for financing activities in 2015 was RMB45,439 million, representing an increase of 2.5% from RMB44,312 million in 2014. This was primarily due to a combined effect of our efforts in optimizing financial arrangement, strengthening the management of our interest-bearing borrowings, overall arrangement and optimization of our debt structure and the increase of repayments of borrowings in 2015, and the decrease of balance of short-term borrowings as of December 31, 2015.

Our net cash used for financing activities was RMB44,312 million for the year ended December 31, 2014, representing an increase of RMB32,073 million compared to the net cash outflows of RMB12,239 million used for financing activities for the year ended December 31, 2013. This was primarily due to our efforts to strengthen the management of our interest-bearing borrowings and to optimize our debt structure.

Our net cash used for financing activities was RMB12,239 million for the year ended December 31, 2013, representing a decrease of RMB87,595 million as compared with the net cash inflows of RMB75,356 million from financing activities for the year ended December 31, 2012. This was primarily due to our efforts to strengthen the management of our interest-bearing borrowings and to optimize our debt structure, resulting in a decrease in the net new borrowings during the reporting period as compared with the preceding year.

Our net borrowings as of December 31, 2013, 2014 and 2015 were as follows:

 

     As of December 31,  
     2013      2014      2015  
     (RMB in millions)  

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

     192,767         169,128         106,226   

Long-term borrowings

     302,862         370,301         434,475   
  

 

 

    

 

 

    

 

 

 

Total borrowings

     495,629         539,429         540,701   
  

 

 

    

 

 

    

 

 

 

Less:

        

Cash and cash equivalents

     51,407         73,778         72,773   
  

 

 

    

 

 

    

 

 

 

Net borrowings

     444,222         465,651         467,928   
  

 

 

    

 

 

    

 

 

 

Our total borrowings as of December 31, 2015 consisted of approximately 66.3% of fixed-rate loans and approximately 33.7% of floating-rate loans. Of our borrowings as of December 31, 2015, approximately 76.4% were denominated in Renminbi, approximately 22.2% were denominated in US Dollars and approximately 1.4% were denominated in other currencies.

 

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Our total borrowing as of December 31, 2014 consisted of approximately 63.2% fixed-rate loans and approximately 36.8% floating-rate loans. Of our borrowing as of December 31, 2014, approximately 74.6% were denominated in Renminbi, approximately 24.8% were denominated in US Dollars and approximately 0.6% were denominated in other currencies.

Our total borrowings as of December 31, 2013 consisted of 67.8% fixed-rate loans and approximately 32.2% floating-rate loans. Of our borrowings as of December 31, 2013, approximately 75.9% were denominated in Renminbi, approximately 23.3% were denominated in US Dollars and approximately 0.8% were denominated in other currencies.

Our debt to capital ratio (calculated by dividing interest-bearing debts by the aggregate of interest-bearing debts and shareholder’s equity) as of December 31, 2013, 2014 and 2015 was 28.1%, 29.0% and 28.7%.

As of December 31, 2015, the outstanding amount of our debts secured by CNPC and its subsidiaries and other third parties was RMB72,625 million.

Capital Expenditures and Investments

In 2015, we focused on the principles of quality and profitability for capital expenditures, continued to optimize our investment structure, and increased investment in upstream oil and gas projects in order to enhance our sustainable development capability. In 2015, our capital expenditures were RMB202,238 million, representing a decrease of 30.7% from RMB291,729 million in 2014.

The table below sets forth our capital expenditures and investments by business segment for each of the years ended December 31, 2013, 2014 and 2015 as well as those anticipated for the year ending December 31, 2016. Actual capital expenditures and investments for periods after January 1, 2016 may differ from the amounts indicated below.

 

     2013      2014      2015      2016
Anticipated
 
     (RMB in
millions)
     %      (RMB in
millions)
     %      (RMB in
millions)
     %      (RMB in
millions)
     %  

Exploration and production(1)

     226,376         71.03         221,479         75.92         157,822         78.04         142,900         74.43   

Refining and chemicals

     26,671         8.37         30,965         10.61         15,725         7.78         18,700         9.74   

Marketing

     7,101         2.23         5,616         1.93         7,061         3.49         10,200         5.31   

Natural gas and pipeline

     57,439         18.02         32,919         11.28         20,360         10.07         19,100         9.95   

Headquarters and others

     1,109         0.35         750         0.26         1,270         0.62         1,100         0.57   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     318,696         100.0         291,729         100.0         202,238         100.0         192,000         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 in 2013, 2014, 2015 and the estimates for the same in 2016 would be RMB239,641 million, RMB231,480 million, RMB166,594 million and RMB151,600 million, respectively.

As of December 31, 2015, the capital commitments contracted but not provided for were approximately RMB56,310 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, 2013, 2014 and 2015, capital expenditures in relation to the exploration and production segment amounted to RMB226,376 million, RMB221,479 million and

 

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RMB157,822 million, respectively. In 2015, our capital expenditures were primarily used for domestic oil and gas exploration projects such as those in Changqing, Daqing, Southwestern, Tarim and Liaohe, and construction of production capacities for various oil and gas fields, and five large overseas oil and gas development projects.

We anticipate that the capital expenditures for our exploration and production segment for 2016 would amount to RMB142,900 million. Domestic exploration activities will be focused on the key basins such as Songliao Basin, Erdos Basin, Tarim Basin, Sichuan Basin and Bohai Bay Basin. Domestic development activities will be focused on maintaining a stable production of crude oil and growth in the output of natural gas by developing oil and gas fields in Daqing, Changqing, Liaohe, Xinjiang, Tarim and the Southwest region and continue to develop unconventional resources such as coalbed methane and shale gas. Overseas operations will be aimed at continued cooperation with our current partners in oil and gas exploration and development projects in the Middle East, Central Asia, the Americas and the Asia-Pacific regions to ensure an effective growth of our reserves and production.

Refining and Chemicals

Our capital expenditures for our refining and chemicals segment for each of the years ended December 31, 2013, 2014 and 2015 were RMB26,671 million, RMB30,965 million and RMB15,725 million, respectively. In 2015, RMB12,913 million was spent on the construction of refinery facilities and RMB2,774 million was spent on the construction of chemicals facilities, including the Yunnan petrochemical project and other oil product quality upgrading projects.

We anticipate that capital expenditures for the refining and chemicals segment in 2016 would amount to RMB18,700 million, which are expected to be used primarily for construction of large-scale refining and chemical projects, such as the refinery project in Liaoyang for processing the crude oil imported from Russia, the refinery project in Yunnan and the product quality upgrading projects.

Marketing

Our capital expenditures for our marketing segment for each of the years ended December 31, 2013, 2014 and 2015 were RMB7,101 million, RMB5,616 million and RMB7,061 million, respectively. Our capital expenditures for the marketing segment in 2015 were mainly used for the construction of service stations, storage facilities and other facilities for our sales network.

We anticipate that capital expenditures for our marketing segment for the year of 2016 will amount to RMB10,200 million, which are expected to be used primarily for the construction and expansion of high-efficiency sales networks in China as well as the construction of oil and gas operating centers abroad.

Natural Gas and Pipeline

Our capital expenditures for the natural gas and pipeline segment for each of the three years ended December 31, 2013, 2014 and 2015 were RMB57,439 million, RMB32,919 million and RMB20,360 million, respectively. Our capital expenditures for the natural gas and pipeline segment in 2015 were mainly used for construction projects including the Third West-East Gas Pipeline and the Jinzhou-Zhengzhou Refined Oil Pipeline.

We anticipate that our capital expenditures for the natural gas and pipeline segment in 2016 will amount to approximately RMB19,100 million, which are expected to be used primarily for the construction of key oil and gas transmission projects such as the Fourth Shaanxi-Beijing Gas Pipeline, the East section of Sino-Russia Natural Gas Pipeline, and the second Sino-Russia Crude Oil Pipeline, as well as the construction of natural gas branches and sales terminals.

 

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Headquarters and Others

Our non-segment-specific capital expenditures and investments for each of the years ended December 31, 2013, 2014 and 2015 were RMB1,109 million, RMB750 million and RMB1,270 million, respectively, which were primarily used for research activities and development of the IT system.

Our anticipated capital expenditures for the headquarters and other segments for 2016 amount to RMB1,100 million. These planned capital expenditures and investments mainly include capital expenditures for scientific research activities and the construction of the information system.

Off-Balance Sheet Arrangements

As of December 31, 2015, there were no off-balance sheet arrangements that had or were reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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, 2015.

 

     Payment Due by Period  

Contractual Obligations

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

Long-term debt

     470,642         36,167         212,587         131,703         90,185   

Capital lease obligations

     1,957         244         462         346         905   

Operating leases

     192,337         9,859         16,328         14,097         152,053   

Capital commitments

     56,310         17,662         38,648         —           —     

Other long-term obligations

     —           —           —           —           —     

Debt-related interest

     72,686         17,390         25,530         12,512         17,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     793,932         81,332         293,555         158,658         260,397   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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)  

2016

     800   

2017

     800   

2018

     800   

2019

     800   

2020

     800   

 

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Assets Retirement Obligation

A number of provinces and regions in which our oil and gas exploration and production activities are located have promulgated environmental protection regulations, which set forth specific abandonment and disposal processes for oil and gas exploration and production activities. We have established standard abandonment procedures, including plugging all retired wells, dismantling all retired metering stations and other related facilities and performing site restoration, in response to the issuance of these provincial and regional regulations. As of December 31, 2015, the balance of assets retirement obligation was RMB117,996 million.

Research and Development

We have a research and development management department, directly under which there are three research institutions. Except for our branch companies which are engaged in marketing activities, each of our branch companies has its own research and development management department. Most of our branch companies have their own research institutions. Our research and development management departments are mainly responsible for managing and coordinating the research and development activities conducted by each of the research institutions. As of December 31, 2015, we had 25,118 employees engaged in research and development functions.

In each of the years ended December 31, 2013, 2014 and 2015, our total expenditures for research and development were approximately RMB14,157 million, RMB13,088 million and RMB11,856 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 theory and technologies;

 

   

engineering technologies and equipment;

 

   

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

 

   

technologies for 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:

 

   

technologies for clean refined oil products;

 

   

technologies for unqualified heavy oil processing;

 

   

refining-chemical integration technologies;

 

   

technologies for new products of synthetic resin and synthetic rubber;

 

   

new catalyst and catalytic materials; and

 

   

technologies for safety, energy saving and environment protection.

 

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Trend Information

In 2016, the recovery of global economy is expected to be weak. With general surplus of global oil supply, the international oil price maintains volatility at low levels. China’s economy is expected to keep growing in a moderately stable manner. The demand for oil and gas in China will remain growing as a whole, and the growth trend driven by strategies, such as the “Belt and Road” initiative and reforms in energy pricing and the oil and gas systems, will benefit our long-term business development. We will adhere to our steady development guidelines, fully implement our four major strategies, namely, resources, markets, internationalization and innovation, focus on the development of oil and gas business, continue to optimize our business layout and asset structure, improve our capability of market interaction along the whole industry chain including production, transportation, sales, storage and trade, and actively broaden our source of income, reduce expenditures and improve efficiency in an effort to maintain a steady and positive improvement of our production and operation and continuously improve our market competitiveness.

With respect to the exploration and production segment, we will continue to prioritize our resources and improve our oil and gas exploration and development level. With regards to exploration, we will attach equal importance to gas and oil, focus on the major basins and key series and strata, make efforts to increase the exploration investment efficiency, and strive to achieve economically recoverable reserves. We will organize our oil and gas production in a prudent manner, further optimize the development plan and output structure, strengthen precise oil reserves description and normalized fine water injection, and endeavor to obtain economically recoverable reserves. We will steadily advance the unconventional oil and gas business and continue to keep stable output and profit. We expect that our crude oil and natural gas outputs in 2016 will reach 924.7 million barrels and 3,172.0 Bcf, respectively, totaling 1,453.6 million BOE.

With respect to the refining and chemicals segment, we will take account of profit, market and resource situation, adhere to optimized structure, advanced technology, high-quality and low-cost development, optimize our geographical layout and resource allocation, increase the output of high-profitability and high-value-added products, enhance the research and development of new products and new materials and market cultivation, and organize production in a safe, stable and flexible manner. We will push forward the construction of key projects in a well-paced and orderly manner, improve the construction of oil product quality upgrade projects, and continuously improve our sustainable development ability and profitability. We expect that we will process 1,008.6 million barrels of crude oil in 2016.

With respect to marketing segment, we will pay close attention to the emerging features of the market, strengthen the connection between production and sales, and formulate flexible marketing strategies. We will accelerate the construction of our marketing network in a multi-channel and diversified manner, focus on high-profitability and high-end markets, actively explore joint venture, cooperation, franchising and other relevant modes, build certain high-end terminals, and continuously enhance our profitability and market competitiveness. We will push forward the integrated marketing of refined oil, prepaid fuel cards, non-oil business and lubricating oil, promote integration of Internet technology and traditional retail business, innovate the mode of marketing, develop business extension, and cultivate new profit growth points.

With respect to natural gas and pipeline segment, we will carry out overall management over the production, import, storage, transportation and marketing links, improve operating efficiency and overall results of the industry chain, strengthen supply-side management, reinforce the connection between resources and market, intensify demand-side study, exert efforts to develop high-end and high-profitability markets, and strive to expand sales and improve profits. We will continue to push forward the construction of key pipelines, continue to construct and extend gas branches, optimize the operation of storage and transportation facilities and continuously enhance our capabilities of pipeline transportation and emergency peak shaving.

With respect to international operations, we will further expand international cooperation in the field of oil and gas, consolidate and develop the five major oil and gas cooperation areas, the four major strategic oil and gas

 

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channels and the three major gas and oil operation hubs, and continue to optimize the layout of existing projects and assets. We will emphasize the exploration and development of key projects and high-profitability projects, and endeavor to increase reserve, output and profit. We will leverage on the synergy and cooperation between international trading and production, optimize resource channels and trading pace, enhance our capacity of allocation of resources and international operation level, and push forward the globalization of the our gas and oil product markets.

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, 2013 to December 31, 2015 that are reasonably likely to have a material adverse effect on our net revenue, profit, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

Other Information

Inflation

Inflation or deflation did not have a significant impact on our results of operations for the year ended December 31, 2015.

Related Party Transactions

For a discussion of related party transactions, see “Item 7 — Major Shareholders and Related Party Transactions — Related Party Transactions” and Note 36 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 date of this report, our board of directors consisted of 11 directors, four of whom were independent non-executive directors. Directors are elected at shareholder meetings for three-year term. The directors may be re-elected and re-appointed upon the expiration of his/her term of office. The functions and duties conferred on the board of directors include:

 

   

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

 

   

implementing the resolutions of the shareholders’ meeting;

 

   

determining our business plans and investment programs;

 

   

formulating our annual budget and final accounts;

 

   

formulating our profit distribution and loss recovery proposals;

 

   

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

 

   

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

 

   

deciding on our internal management structure;

 

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

 

   

formulating our basic management system;

 

   

preparing amendments to our articles of association;

 

   

managing the information disclosures of our company; and

 

   

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

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

The PRC Company Law requires a joint stock company with limited liability to establish a supervisory 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. At the end of this reporting period, the supervisory board consisted of nine supervisors, five of whom are elected, and may be removed, by the shareholders in a general meeting, and four of whom are employees’ representatives who are elected by our staff, and may be removed, by our staff. Five 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 our financial condition;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

to submit proposals at the shareholders’ meetings;

 

   

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

 

   

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

 

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

 

   

to oversee the compliance of related party transactions; and

 

   

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

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

In the event that any action of our directors adversely affects our interests, supervisors shall confer with or initiate legal proceedings against such directors on our behalf. A resolution proposed at any meeting of the supervisory 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 management and reward or punish the members of the management in accordance with relevant rules and regulations.

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

 

Name(1)

   Age     

Position

   Date of
Election(2)

Wang Yilin

     59       Chairman of the Board of Directors    June 23, 2015

Wang Dongjin

     53       Vice-Chairman and President    May 22, 2014

Yu Baocai

     50       Non-executive Director    May 22, 2014

Shen Diancheng

     56       Non-executive Director    May 22, 2014

Liu Yuezhen

     54       Non-executive Director    May 22, 2014

Liu Hongbin

     52       Executive Director and Vice President    May 22, 2014

Zhao Zhengzhang

     59       Executive Director and Vice President    June 23, 2015

Chen Zhiwu

     53       Independent Non-executive Director    May 22, 2014

Richard H. Matzke

     78       Independent Non-executive Director    May 22, 2014

Lin Boqiang

     58       Independent Non-executive Director    May 22, 2014

Zhang Biyi

     62       Independent Non-executive Director    October 29, 2014

Guo Jinping

     58       Chairman of the Board of Supervisors   

Zhang Fengshan

     53       Supervisor   

Li Qingyi

     55       Supervisor   

Jia Yimin

     55       Supervisor   

Jiang Lifu

     52       Supervisor   

Yang Hua

     52       Supervisor   

Yao Wei

     59       Supervisor   

Li Jiamin

     52       Supervisor   

Liu Hehe

     52       Supervisor   

Sun Longde

     53       Vice President   

Huang Weihe

     58       Vice President   

Xu Fugui

     58       Vice President   

Lin Aiguo

     57       Chief Engineer   

Wang Lihua

     59       Vice President   

Wu Enlai

     56       Secretary to the Board of Directors   

Lv Gongxun

     58       Vice President   

Tian Jinghui

     53       Vice President   

Zhao Dong

     45       Chief Financial Officer   

 

(1)

The following changes have taken place to our board and senior management since our last annual report:

 

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On March 17, 2015, Mr. Liao Yongyuan resigned from the position of vice chairman of the board of directors due to personal reason;

On June 23, 2015, Mr. Zhou Jiping resigned from the position of chairman of the board of directors due to age and Mr. Wang Yilin was appointed the chairman of the board of director;

On June 23, 2015, Mr. Zhao Zhengzhang was appointed an executive director of the Company;

On November 24, 2015, Mr. Tian Jinghui was appointed a vice president of the Company;

On November 24, 2015, Mr. Yu Yibo resigned from the position of our chief financial officer and Mr. Zhao Dong was appointed the chief financial officer.

 

(2)

For directors only.

Directors

Wang, Yilin, age 59, is the chairman of our board of directors and the chairman of CNPC. Mr. Wang is a professor-level senior engineer and holds a doctoral degree. He has over 30 years of working experience in China’s oil and gas industry. Mr. Wang was appointed the deputy director and chief exploration geologist of Xinjiang Petroleum Administration Bureau in June 1996, and the general manager of our Xinjiang Oilfield Company in September 1999. He served as the assistant general manager of CNPC since July 2003. Mr. Wang was appointed a deputy general manager of CNPC in December 2003. From July 2004, he worked concurrently as the chief safety officer of CNPC. He was a director of our company from November 2005 to April 2011. From April 2011 to April 2015, Mr. Wang was the chairman of CNOOC and CNOOC Limited.    He was appointed chairman of CNPC in April 2015 and chairman of the board of directors of our company in June 2015.

Wang, Dongjin, age 53, is the vice-chairman of the board of directors and president of our company and the deputy general manager of CNPC. Mr. Wang is a professor-level senior engineer, holds a doctorate degree and has over 30 years of work experience in China’s oil and gas industry. In July 1995, he was appointed deputy director of the Jiangsu Oil Exploration Bureau, and in December 1997, he was appointed deputy general manager of China National Oil & Gas Exploration and Development Corporation. From December 2000, Mr. Wang was concurrently the general manager of CNPC International (Kazakhstan) Ltd. and Aktobe Oil and Gas Co., Ltd. In October 2002, Mr. Wang was appointed general manager of China National Oil and Gas Exploration and Development Corporation, and in January 2004, he became the assistant to the general manager of CNPC and deputy chairman and general manager of China National Oil & Gas Exploration and Development Corporation. In September 2008, he was appointed deputy general manager of CNPC. He was elected director of our company in May 2011, and in July 2013, he was appointed the president of our company. In May 2014, he was appointed vice-chairman of our board of directors.

Yu, Baocai, age 50, is a director of our company and deputy general manager of CNPC. Mr. Yu is a senior engineer, holds a master’s degree and has nearly 30 years of work experience in China’s oil and petrochemical industry. He was appointed deputy general manager of PetroChina Daqing Petrochemical Company in September 1999 and was promoted to general manager in December 2001. In September 2003, Mr. Yu was appointed general manager of PetroChina Lanzhou Petrochemical Company, and September 2008, he was appointed the deputy general manager of CNPC. Mr. Yu was elected a representative of the 10th National People’s Congress of PRC in February 2003 and a representative of the 11th National People’s Congress of PRC in February 2008. In May 2011, Mr. Yu was elected as a director of our company.

Shen, Diancheng, age 56, is a director of our company and a deputy general manager and safety director of CNPC. Mr. Shen is a professor-level senior engineer, holds a doctorate degree, and has over 30 years of work experience in China’s oil and petrochemical industry. Mr. Shen was appointed standing deputy general manager of Daqing Refining & Chemical Company in October 2000, general manager of Liaoyang Petrochemical Company in April 2002 and general manager of Jilin Petrochemical Company in November 2005. In June 2007,

 

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he was appointed vice president of our company, concurrently serving as general manager of PetroChina Refining & Marketing Company. Mr. Shen served as general manager of PetroChina Refining & Chemical Company from November 2007, and he was appointed deputy general manager of CNPC in April 2011. Mr. Shen stepped down as vice president of our company and general manager of PetroChina Refining & Chemical Company in October 2011, but he has continued to serve as safety director of CNPC since February 2012. Mr. Shen was elected director of our company in May 2014.

Liu, Yuezhen, age 54, is a director of our company and the chief accountant of CNPC. Mr. Liu is a researcher-level senior accountant, holds a master’s degree and has nearly 35 years of work experience in the financial and accounting industries. He served as deputy general manager and chief accountant of AVIC Jianghan Aviation Life-saving Appliance Corporation since March 1996. In February 2000, he was promoted to general manager of Jianghan Aviation Life-saving Appliance Corporation and concurrently served as director of 610 Research Institute. Mr. Liu served as chairman of the board and general manager of AVIC Beijing Qingyun Aviation Instruments Co., Ltd. since May 2003 and as chief accountant of CASIC (Group) Company since November 2006. He has served as the chief accountant of CNPC since December 2013. He was elected a director of our board of directors in May 2014.

Liu, Hongbin, age 52, is a director and vice president of our company and deputy general manager of CNPC. Mr. Liu is a senior engineer, holds a bachelor’s degree and has over 30 years of work experience in China’s oil and gas industry. He was appointed chief engineer of Tuha Petroleum Exploration & Development Headquarters in June 1995, deputy general manager of PetroChina Tuha Oilfield Company in July 1999, commander of Tuha Petroleum Exploration & Development Headquarters in July 2000, the general manager of the planning department of our company in March 2002 and director of the planning department of CNPC in September 2005. Mr. Liu was appointed vice president of our company in June 2007 and general manager of PetroChina Marketing Company in November 2007. In July 2013, he was appointed deputy general manager of CNPC. Mr. Liu was appointed executive director and general manager of Daqing Oilfield Company Ltd. in August 2013, and he was elected to our board of directors in May 2014.

Zhao, Zhengzhang, age 59, is an executive director and vice president of our company, the general manager of our Exploration and Production Company and a deputy general manager of CNPC. Mr. Zhao is a professor-level senior engineer, holds a master’s degree and has nearly 30 years of work experience in China’s oil and gas industry. He was appointed deputy director of the New Zone Exploration Department of CNPC in June 1996, and in November 1996, deputy director of the Exploration Bureau of CNPC and director of the New Zone Exploration Department. In October 1998, Mr. Zhao was appointed deputy director of the CNPC Exploration and Production Company. Mr. Zhao was appointed a member of the Preparatory Group of CNPC Exploration and Production Company in September 1999 and deputy general manager of CNPC Exploration and Production Company in December 1999. He was appointed senior executive and deputy general manager of CNPC Exploration and Production Company in January 2005 and general manager of CNPC Exploration and Production Company in January 2006. In May 2008, he was appointed vice president of our company and general manager of our Exploration and Production Company. In August 2013, Mr. Zhao was appointed general manager of Changqing Oilfield Company and director of the Changqing Petroleum Exploration Bureau. He has also served as deputy general manager of CNPC since July 2014. On June 23, 2015, Mr. Zhao Zhengzhang was appointed an executive director of our company.

Independent Non-executive Directors

Chen, Zhiwu, age 53, is an independent non-executive director of our company. Mr. Chen is a tenured professor of economic finance at Yale University School of Management and a distinguished professor of the Chang Jiang Scholar Program at Tsinghua University School of Humanities and Social Sciences. He received a bachelor’s degree in science from Central South University of Technology in China (now named Central South University), a master’s degree in engineering from National University of Defense Technology in China and a doctorate degree in finance from Yale University. Starting his teaching career in June 1990, Mr. Chen taught at University of Wisconsin, Madison. Since July 1995, he worked at Ohio State University, where he was promoted

 

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to associate professor of finance in 1997. Since July 1999, he has been a tenured professor of finance at Yale University School of Management. Mr. Chen was elected as an independent non-executive director of our company in May 2011.

Matzke, Richard H., age 78, is an independent non-executive director of our company. He is concurrently a member of the human resources and compensation committee to the board of directors of OAO Lukoil and a director on the board of PHI Inc. in the United States. Mr. Matzke has a bachelor’s degree from Iowa State University, a master’s degree in geology from Pennsylvania State University and a master’s degree in business administration from St. Mary’s College. Since 1961, he worked in the exploration, planning, economic analysis and research departments of Chevron Oil Company. Mr. Matzke was made vice president of Chevron Chemical Company in 1979, director of Caltex Pacific Indonesia in 1982, president of Chevron Canada Resources Ltd. in 1986, president of Chevron Overseas Petroleum Inc. in 1997 and he was also elected to the board of directors of Chevron Chemical Company in 1997. Since his retirement from the board of directors of Chevron Oil Company in 2002, Mr. Matzke has served a director and chairman of the Strategy and Investment Committee of Lukoil, chairman of the US-Kazakhstan Business Association, chairman of the US-Azerbaijan Business Association, member of the Council on Foreign Relations and US-Russia Business Council, board member of the National Committee on US-China Relations, board member of the African-America Institute, member of the Advisory Board of the Center for Strategic and International Studies and counsel for the US International Commerce Chamber. Mr. Matzke was elected as an independent non-executive director of our company in May 2014.

Lin, Boqiang, age 58, is an independent non-executive director of our company. Mr. Lin holds a doctorate degree in economics from the University of California. He was a senior energy economist at the Asian Development Bank, and he currently serves as a vice principal of New Huadu Business School, director of Research Institute for China’s Energy Policy at Xiamen University, director of 2011 Collaborative Innovation Centre for Energy Economics and Energy Policy and director of China Centre for Energy Economics Research. He is a doctoral tutor at Xiamen University. He was awarded a “Changjiang Scholar” distinguished professor by the Ministry of Education in 2008. Mr. Lin is vice-chairman of China Energy Society, a member of the National Energy Consultation Committee under the National Energy Commission, member of the Energy Price Consultation Committee under the National Development and Reform Commission, member of the Energy Advisory Council and vice-chairman of the Global Agenda Council on Energy Security of the World Economic Forum based in Davos, Switzerland. Mr. Lin was elected as an independent non-executive director of our company in May 2014.

Zhang, Biyi, age 62, is an independent non-executive director of our company. Mr. Zhang is a senior accountant and holds a bachelor’s degree in finance and banking from Xiamen University. He served as head of the Enterprise Division, assistant to the director, and deputy director of the Finance Bureau at China Ship Industry Corporation. In July 1999, Mr. Zhang was appointed deputy general manager of China Shipbuilding Industry Corporation, and he served as deputy general manager and chief accountant of China Shipbuilding Industry Corporation from December 2004 to February 2014. From March 2008 to January 2010, he also served concurrently as the general manager of China Shipbuilding Industry Company Ltd. Mr. Zhang was elected an independent non-executive director of our company in October 2014.

Supervisors

Guo, Jinping, age 58, is the chairman of our board of supervisors, general manager of our Legal Department, the assistant to the general manager of CNPC and general counsel and director of the Legal Department of CNPC. Mr. Guo is a professor-level senior economist, holds post-graduate qualification and has over 30 years of work experience in China’s oil and gas industry. In November 1996, he was appointed chief economist of the Bureau of Policy and Regulations of CNPC, and in October 1998, deputy director of the Development and Research Department of CNPC. Mr. Guo was appointed general manager of our Legal Department in September 1999 and director of the Legal Department of CNPC in September 2005. In 2007, he

 

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was appointed the general counsel of CNPC. Mr. Guo was elected as a supervisor of our company in May 2011, and he’s also been serving as the assistant to the general manager of CNPC since April 2014. In May 2014, Mr. Guo was appointed chairman of our board of supervisors.

Zhang, Fengshan, age 53, is a supervisor and the chief safety officer of our company and the general manager of our Security, Environmental Protection, and Energy Conservation Department. In addition, he is the vice chief safety officer of CNPC, the general manager of Security, Environmental Protection, and Energy Conservation Department of CNPC and the director of the Security, Environmental Protection Supervision Center of CNPC. Mr. Zhang is a professor-level senior engineer, holds a master’s degree and has nearly 35 years of experience in China’s oil and gas industry. He was appointed deputy director of Liaohe Oil Exploration Bureau in July 2000, safety director of Liaohe Oil Exploration Bureau in May 2002, director of Liaohe Petroleum Exploration Bureau in August 2004 and in February 2008, general manager of Great Wall Drilling and Exploration Company Ltd., where he also served as executive director since July 2008. Mr. Zhang has been the general manager of the Security, Environment, and Energy Conservation Department of our company and of CNPC since June 2012. He was elected to our board of supervisors in May 2014. In July 2014, Mr. Zhang was appointed the chief safety officer of our company and the vice chief safety officer of CNPC. In December 2015, Mr. Zhang was appointed the director of the Security, Environmental Protection Supervision Center of CNPC.

Li, Qingyi, age 55, is a supervisor and general manager of the Audit Department of our company. He is also the general manager of the Audit Department and director of the Auditing Services Centre of CNPC. Mr. Li is a professor-level senior accountant, holds a master’s degree in economics and has nearly 35 years of work experience in China’s oil and gas industry. Mr. Li was appointed chief accountant of Jinxi Oil Refinery in June 1999, deputy general manager and chief accountant of Jinxi Petrochemical in October 1999, director of the Capital Operation Department of CNPC in November 2000, general manager of Equipment & Supplies (Group) Company in April 2007 and general manager of CNPC Equipment Manufacturing Branch Company in December 2007. He was appointed director of CNPC Auditing Services Centre in September 2010 and appointed deputy general manager of our Audit Department and the director of the CNPC Auditing Services Centre in August 2011. In September 2012, Mr. Li was promoted to general manager of our Audit Department, the general manager of the Audit Department of CNPC and the director of CNPC Auditing Services Centre. In May 2013, Mr. Li was elected a supervisor of our company.

Jia, Yimin, age 55, is a supervisor and general manager of the Capital Operation Department of our company. He is also serving as general manager of the Capital Operation Department of CNPC. Mr. Jia is a professor-level senior accountant, holds a master’s degree, and has over 35 years of work experience. He was appointed the deputy general manager of the Finance Department of our company in February 2000, director of the Budget Planning Offices of our company and of CNPC in July 2007 and general manager of the Budget Planning Offices of our company and of CNPC in May 2011. He became the general manager of the Capital Operation Departments of our company and of CNPC in November 2013. Mr. Jia was elected a supervisor of our company in May 2014.

Jiang, Lifu, age 52, is a supervisor of our company, the general manager of our Reform and Enterprise Management Department and the general manager of the Reform and Enterprise Management Department of CNPC. Mr. Jiang is a professor-level senior economist, holds a doctorate degree and has over 20 years of work experience in China’s oil and gas industry. He was appointed deputy general manager of our Capital Operation Department in August 2003, deputy director of CNPC’s Planning Department in May 2005, deputy general manager of our Planning Department in June 2007 and deputy director of CNPC’s Planning Department. Since April 2014, Mr. Jiang has been the general manager of the Enterprise Management Department of our company and the general manager of the Enterprise Management Department of CNPC. He was elected a supervisor of our company in October 2014. In April 2015, Mr. Jiang was appointed the general manager of our Reform and Enterprise Management Department and the general manager of the Reform and Enterprise Management Department of CNPC.

 

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Yang, Hua, age 52, is a supervisor of our company nominated by the employees’ representatives. He is also serving as general manager of PetroChina Changqing Oilfield Company as well as director of the Changqing Petroleum Exploration Bureau. Mr. Yang is a professor-level senior engineer, holds a doctorate degree, and has over 30 years of work experience in China’s oil and gas industry. He was appointed deputy general manager of Changqing Oilfield Company in October 2002, standing deputy general manager in February 2008, principal in January 2014, and general manager in July 2014. Mr. Yang was also appointed director of the Changqing Oil Exploration Bureau in July 2014. He was elected as a supervisor of our company in October 2014.

Yao, Wei, age 59, is a supervisor of our company nominated by the employees’ representatives. He has also been a senior executive of Trans-Asia Gas Pipeline Company Ltd. since October 2014. Mr. Yao is a professor-level senior engineer, holds a master’s degree and has nearly 40 years of work experience in China’s oil and gas industry. Mr. Yao was appointed deputy manager of Beijing Natural Gas Transport Company in July 1995, deputy general manager of Beijing Huayou Gas Corporation Ltd. in April 2001 and general manager of PetroChina Pipeline Company in April 2007. Mr. Yao was elected as a supervisor of our company in May 2011.

Li, Jiamin, age 52, is a supervisor of our company nominated by the employees’ representatives. He is also the general manager of PetroChina Lanzhou Petrochemical Company and the general manager of Lanzhou Petroleum & Chemical Company. Mr. Li is a professor-level senior engineer, holds a master’s degree and has nearly 30 years of work experience in China’s oil and petrochemical industry. He was appointed deputy general manager and chief security officer of PetroChina Lanzhou Petrochemical Company in August 2004. He was promoted to general manager of PetroChina Lanzhou Petrochemical Company and Lanzhou Petroleum & Chemical Company in March 2012. Mr. Li was elected a supervisor of our company in May 2014.

Liu, Hehe, age 52, is a supervisor of our company nominated by the employees’ representatives. He is also a senior executive of PetroChina Inner Mongolia Fuel Oil Company since December 2015. Mr. Liu is a professor-level senior economist, holds a bachelor’s degree and has nearly 30 years of work experience in China’s oil and petrochemical industry. He was appointed general manager of PetroChina East China Marketing Company in April 2004 and became general manager of PetroChina East China (Shanghai) in December 2008. From November 2009 to December 2015, he was the general manager of the PetroChina Inner Mongolia Sales Company. Mr. Liu was elected a supervisor of our company in May 2011.

Other Senior Management

Sun, Longde, age 53, is a vice president of our company, the general manager of our Science and Technology Management Company, the general manager of the Science and Technology Department of CNPC and the director of the consultancy center of CNPC. He is a professor-level senior engineer, holding a doctorate degree and has over 30 years of work experience in China’s oil and geological industry. Mr. Sun was appointed deputy chief geologist of Xianhe Oil Extraction Plant and deputy manager of Dongxin Oil Extraction Plant of the Shengli Petroleum Administration Bureau in January 1994, chief deputy director-general of the Exploration Business Department of Shengli Petroleum Administration Bureau in April 1997, manager of Exploration & Development Company of the Shengli Petroleum Administration Bureau in September 1997, chief geologist of Tarim Petroleum Exploration & Development Headquarters in November 1997, deputy general manager of PetroChina Tarim Oilfield Company in September 1999, and general manager of PetroChina Tarim Oilfield Company in July 2002. He has been a vice president of our company since June 2007 and was elected to the Chinese Academy of Engineering in December 2011. In April 2014, Mr. Sun was appointed director of the consultancy center of CNPC. In July 2015, Mr. Sun was appointed the general manager of our Science and Technology Management Company and the general manager of the Science and Technology Department of CNPC.

Huang, Weihe, age 58, is a vice president of our company. He is also general manager of PetroChina Natural Gas and Pipelines Company. Mr. Huang is a professor-level senior engineer, holds a doctorate degree and has over 30 years of work experience in China’s oil and gas industry. He was appointed deputy director of the Petroleum and Pipelines Bureau in December 1998. In November 1999, he was appointed deputy director of

 

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the Petroleum and Pipelines Bureau and concurrently the chief engineer. Mr. Huang was then appointed general manager of PetroChina Pipelines Company in October 2000 and concurrently held the position of general manager of PetroChina West-East Natural Gas Transmission Pipelines Company beginning in May 2002, a post he held until February 2006. In December 2002, Mr. Huang became general manager of PetroChina Natural Gas and Pipelines Company. In May 2008, he was appointed chief engineer of our company and in October 2011, he became a vice president of our company. Since February 2016, he has concurrently served as an executive director and the general manager of CNPC Hong Kong (Holding) Ltd. and the chairman of Kunlun Energy Co., Ltd.

Xu, Fugui, age 58, is a vice president of our company and general manager of PetroChina Refining & Chemical Company. He is a professor-level senior engineer, holds a doctorate degree and has over 30 years of work experience in China’s oil and petrochemical industry. Mr. Xu was appointed deputy manager of Dushanzi Petrochemical Planter of Refining Plant of the Xinjiang Petroleum Administration Bureau in November 1995, general manager of Dushanzi Petrochemical Plant of the Xinjiang Petroleum Administration Bureau in July 1999, and general manager of Dushanzi Petrochemical Company in September 1999. In September 2011, he was appointed general manager of PetroChina Refining & Chemical Company. Mr. Xu was appointed a vice president our company in October 2011.

Lin, Aiguo, age 57, is the chief engineer of our company and the president of the PetroChina Petrochemical Research Institute. He is a professor-level senior engineer, holds a bachelor’s degree and has over 30 years of work experience in China’s oil and petrochemical industry. Mr. Lin was appointed deputy manager and standing deputy manager of the Shengli Refinery of Qilu Petrochemical Company in July 1993, deputy general manager of Dalian West Pacific Petrochemical Co. Ltd. in May 1996, general manager of Dalian West Pacific Petrochemical Co. Ltd. in August 1998, and general manager of our Refining & Marketing Company in December 2002. Mr. Lin has served as our chief engineer since June 2007 and has also been serving as the director of the Petrochemical Research Institute since February 2011.

Wang, Lihua, age 59, is a vice president of our company, an executive director and senior executive of PetroChina International Company Ltd. and the chairman of China National United Oil Corporation. Ms. Wang is a professor-level senior economist, holds a master’s degree and has nearly 35 years of work experience in China’s oil and gas industry. She was appointed deputy general manager of China National United Oil Corporation in September 1997 and general manager in October 1998. She was appointed general manager of PetroChina International Company Ltd. in February 2002 and chief security officer of PetroChina International Company Ltd. (China National United Oil Corporation) in July 2006. Ms. Wang was appointed vice chief economist of CNPC in November 2007. She was the general manager and chief security officer of PetroChina International Company Ltd. (China National United Oil Corporation) from November 2007 to July 2014. Ms. Wang was appointed executive director of PetroChina International Company Ltd. in January 2009, stepping down as chief security officer in June 2009. In June 2014, she was appointed our vice president and stepped down as vice chief economist of CNPC. In July 2014, Ms. Wang appointed an executive director and a senior executive of PetroChina International Company Ltd.

Lv, Gongxun, age 58, is a vice president of our company, general manager of PetroChina International Exploration & Development Company and general manager of China National Oil and Gas Exploration and Development Corporation. He is a professor-level senior engineer with over 35 years of work experience in China’s oil and gas industry. Mr. Lv was appointed deputy general manager and chief security officer of China National Oil and Gas Exploration and Development Corporation in October 2006, general manager of Turkmenistan Amu Darya River Gas Company in September 2007, and general manager of CNPC (Turkmenistan) Amu Darya River Gas Company in December 2008. He has been serving as general manager of PetroChina International (Kazakhstan) Co. Ltd., general manager of Trans-Asia Gas Pipeline Company Ltd., and director of Enterprises Coordination Group (Central Asia) since December 2012. Mr. Lv was appointed general manager of PetroChina International Exploration & Development Company and general manager of China National Oil and Gas Exploration and Development Corporation in May 2014. He was appointed a vice president of our company in June 2014.

 

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Tian, Jinghui, age 53, is a vice president of our company and the general manager of our Marketing Company. Mr. Tian is a professor-level senior economist and holds a master’s degree. He has over 30 years of experience in China’s oil and gas industry. In May 1998, he was appointed leader of the Preparatory Group of PetroChina Northwest Marketing Company. He served as deputy general manager of our Refining & Marketing Company from December 1999, deputy general manager and chief safety officer of our Marketing Company from November 2007. In June 2009, he was appointed principal officer of PetroChina Marketing Company. Since August 2013, he has been the general manager of our Marketing Company. In November 2015, Mr. Tian was appointed vice president of our company.

Zhao, Dong, age 45, is the chief financial officer of our company. Mr. Zhao is a professor-level senior accountant and holds a doctor degree of engineering. He has nearly 25 years of experience in China’s oil and gas industry. He was the chief accountant and the manager of Financial Assets Department of CNPC International (Nile) Ltd. from July 2002, the deputy chief accountant and the executive deputy director of the Financial & Capital Operation Department of China National Oil and Gas Exploration and Development Corporation from January 2005, the deputy chief accountant and the director of the Financial & Capital Operation Department of China National Oil and Gas Exploration and Development Corporation from January 2005. From June 2008, he served as chief accountant of China National Oil and Gas Exploration and Development Corporation. From October 2009, he served as chief financial officer of PetroChina International Investment Company Limited. He was appointed vice president of CNPC Nile Company in September 2012, president of CNPC Nile Company in August 2013. Mr. Zhao was appointed chief financial officer of our company in November 2015.

Secretary to the Board of Directors

Wu, Enlai, age 55, is the secretary to the board of directors of our company and a director of Kunlun Energy Company Ltd. He is a professor-level senior engineer, holds a master’s degree and has over 30 years of work experience in China’s oil and petrochemical industry. Mr. Wu was appointed deputy director general of Tarim Petrochemical Engineering Construction Headquarters in August 1997, deputy director general of the Capital Operation Department of CNPC in August 2002 and deputy general manager of China National Oil and Gas Exploration and Development Corporation in January 2004. He was appointed head of the Preparatory Work Team for PetroChina Guangxi Petrochemical Company in May 2005, general manager in October 2005 and head of the Enterprise Coordination Team of our company in Guangxi in September 2012. Since December 2013 to February 2016, Mr. Wu was an executive director and the general manager of CNPC Hong Kong (Holding) Ltd. and the chairman of the board of directors of Kunlun Energy Company Ltd. He was appointed the secretary to our board of directors in November 2013.

Compensation

The senior management members’ compensation has two components, namely, fixed salaries and variable compensation. The variable component, which accounts for approximately 75% of the total compensation package, is linked to the attainment of specific performance targets, such as our income for the year, return on capital and the individual performance evaluation results. All of our senior management members have entered into performance contracts with us.

Our directors and supervisors, who hold senior management positions or are otherwise employed by us and other senior management of our company receive compensation in the form of salaries, insurance and other benefits in kind, including our contribution to the pension plans for them.

The aggregate amount of salaries, insurance and other benefits in kind paid by us to the five highest paid individuals during the year ended December 31, 2015 was RMB3,634,416. We paid RMB578,937 as our contribution to the pension plans with respect to these individuals in the year ended December 31, 2015.

 

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The aggregate amount of salaries or other compensation, insurance and other benefits in kind paid by us to our directors, who hold senior management positions or are otherwise employed by us, during the year ended December 31, 2015 was RMB1,638,604 which does not include the fees totaling RMB951,274 paid to our independent directors. The aggregate amount of salaries or other compensation, insurance and other benefits in kind paid by us to our supervisors, who hold senior management position or are otherwise employed by us, during the year ended December 31, 2015 was RMB2,741,673. The aggregate amount of salaries or other compensation, insurance and other benefits in kind paid by us to other senior management during the year ended December 31, 2015 was RMB5,924,425.

In 2015, we paid RMB1,915,512 as our contribution to the pension plans for our directors and supervisors, who hold senior management positions or are otherwise employed by us, and other senior management of our company.

Save as disclosed, no other payments have been paid or are payable, with respect to the year ended December 31, 2015, by us or any of our subsidiaries to our directors. In addition, we have no service contracts with our directors that provide for benefits to our directors upon the termination of their employment with us.

For discussions about the compensations of our individual directors and supervisors, please see Note 11 to our consolidated financial statements included elsewhere in this annual report.

Board Practices

Our board of directors has five committees: an audit committee, an investment and development committee, an evaluation and remuneration committee, a nominating committee and a health, safety and environment committee.

Audit Committee

Our audit committee is currently composed of two non-executive independent directors, Mr. Lin Boqiang and Mr. Zhang Biyi, and one non-executive director, Mr. Liu Yuezhen. Mr. Lin Boqiang serves as the chairman of the committee. Under our audit committee charter, the chairman of the committee must be an independent director and all resolutions of the committee must be approved by independent directors. The audit committee’s major responsibilities include:

 

   

reviewing and supervising the engagement of external auditors and their performance;

 

   

reviewing and ensuring the completeness of annual reports, interim reports and quarterly reports, if any, and related financial statements and accounts, and reviewing any material opinion contained in the aforesaid statements and reports with respect to financial reporting;

 

   

reporting to the board of directors in writing on the financial reports of the company and related information, having considered the issues raised by external auditors;

 

   

reviewing and scrutinizing the work conducted by the internal audit department in according with the applicable PRC and international rules;

 

   

monitoring the financial reporting system and internal control procedures of the company, as well as checking and assessing matters relating to, among others, the financial operations, internal control and risk management of the company;

 

   

receiving, keeping and dealing with complaints or anonymous reports regarding accounting, internal accounting control or audit matters and ensuring the confidentiality of such complaints or reports;

 

   

reporting regularly to the board of directors with respect to any significant matters which may affect the financial position of the company and its operations and with respect to the self-evaluation of the committee on the performance of their duties; and

 

   

performing other responsibilities as may be required under relevant laws, regulations and the listing rules of the stock exchanges where the shares of the company are listed (as amended from time to time).

 

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Investment and Development Committee

The current members of our investment and development committee are Mr. Wang Dongjin, the chairman of the committee, Mr. Liu Hongbin and Mr. Chen Zhiwu. The investment and development committee’s major responsibilities include:

 

   

studying the strategies of the company as proposed by our president and making recommendations to the board of directors;

 

   

studying the annual investment budget and the adjustment proposal regarding the investment plan as proposed by our president and making recommendations to the board of directors; and

 

   

reviewing feasibility studies and preliminary feasibility studies for material investment projects subject to the approval of the board of directors and making recommendations to the board of directors.

Evaluation and Remuneration Committee

The current members of our evaluation and remuneration committee are Mr. Richard H. Matzke, the chairman of the committee, Mr. Liu Yuezhen and Mr. Lin Boqiang. The evaluation and remuneration committee’s major responsibilities include:

 

   

studying the evaluation criteria for directors and senior officers, conducting the evaluations and proposing suggestions;

 

   

studying and evaluating the remuneration policies and plans for directors and senior officers (including the compensation in connection with the removal or retirement of the director and senior officers);

 

   

organizing the evaluation of the performance of our president and reporting the evaluation result to the board of directors, supervising the evaluation of the performance of our senior vice presidents, vice presidents, chief financial officer and other senior management members conducted under the leadership of the president;

 

   

studying our incentive plan and compensation plan, supervising and evaluating the implementation of these plans and making recommendations for improvements to and perfection of such plans; and

 

   

studying the relevant laws, regulations and the listing rules of the stock exchanges where the shares of the company are listed (as amended from time to time) and other matters authorized by the board of directors.

Nominating Committee

Our nominating committee was established in 2015. The current members of our nominating committee are Mr. Wang Yilin, the chairman of the committee, Mr. Lin Boqiang and Mr. Zhang Biyi. The nominating committee’s major responsibilities include:

 

   

reviewing and discussing the structure, size and composition (including skills, knowledge and experience) of the board of directors regularly, and making recommendations on changes to the board to follow the company’s corporate strategy;