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 d369285dex411.htm
EX-8.1 d369285dex81.htm
EX-12.1 d369285dex121.htm
EX-12.2 d369285dex122.htm
EX-13.1 d369285dex131.htm
EX-13.2 d369285dex132.htm
EX-15.1 d369285dex151.htm
EX-15.2 d369285dex152.htm
EX-15.3 d369285dex153.htm
EX-15.4 d369285dex154.htm
EX-15.5 d369285dex155.htm

PetroChina Earnings 2016-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d369285d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F

 

(Mark One)

 

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

or

 

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

  

For the fiscal year ended December 31, 2016.

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 157,409,693,528 A Shares held by CNPC and 4,512,384,290 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  ☒    No  ☐

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) or the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

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

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

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

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

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

 

            ☐  U.S. GAAP

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

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

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

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

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

 

*

  

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

**

  

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

***

  

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

****

  

Includes 786,564,700 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  
     Average Noon Buying Rates      7  
     Selected Financial Data      8  
     Risk Factors      10  

Item 4

     Information on the Company      16  
     Introduction      16  
     Exploration and Production      20  
     Refining and Chemicals      30  
     Marketing      34  
     Natural Gas and Pipeline      37  
     Competition      39  
     Environmental Matters      41  
     Legal Proceedings      42  
     Properties      42  
     Intellectual Property      42  
     Regulatory Matters      43  

Item 4A

     Unresolved Staff Comments      49  

Item 5

     Operating and Financial Review and Prospects      50  
     General      50  
     Operating Results      54  
     Liquidity and Capital Resources      63  
     Off-Balance Sheet Arrangements      68  
     Long-Term Contractual Obligations and Other Commercial Commitments and Payment Obligations      68  
     Research and Development      69  
     Trend Information      70  
     Other Information      72  

Item 6

     Directors, Senior Management and Employees      72  
     Directors, Senior Management and Supervisors      72  
     Compensation      82  
     Board Practices      83  
     Employees      85  
     Share Ownership      85  

Item 7

     Major Shareholders and Related Party Transactions      86  
     Major Shareholders      86  
     Related Party Transactions      86  
     Interests of Experts and Counsel      88  

Item 8

     Financial Information      88  
     Financial Statements      88  
     Dividend Policy      88  
     Significant Changes      89  

Item 9

     The Offer and Listing      89  
     Nature of the Trading Market and Market Price Information      89  

Item 10

     Additional Information      90  
     Memorandum and Articles of Association      90  

 

i


Table of Contents
              Page  
     Material Contracts      91  
     Foreign Exchange Controls      91  
     Taxation      91  
     Documents on Display      97  

Item 11

     Quantitative and Qualitative Disclosures about Market Risk      98  

Item 12

     Description of Securities Other Than Equity Securities      102  
     Part II   

Item 13

     Defaults, Dividends Arrearages and Delinquencies      102  

Item 14

     Material Modifications to the Rights to Security Holders and Use of Proceeds      102  

Item 15

     Controls and Procedures      103  

Item 16A

     Audit Committee Financial Expert      104  

Item 16B

     Code of Ethics      104  

Item 16C

     Principal Accountant Fees and Services      105  

Item 16D

     Exemptions from Listing Standards for Audit Committees      106  

Item 16E

     Purchases of Equity Securities by the Issuer and Affiliated Purchasers      106  

Item 16F

     Change in Registrant’s Certifying Accountant      106  

Item 16G

     Corporate Governance      106  

Item 16H

     Mine Safety Disclosure      108  
     Part III   

Item 17

     Financial Statements      108  

Item 18

     Financial Statements      108  

Item 19

     Exhibits      109  

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

     

EX 15.5

     

 

ii


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 its Hong Kong, Macau and Taiwan for purposes of this annual report.

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

Conversion Table

 

1 barrel-of-oil equivalent

   = 1 barrel of crude oil    = 6,000 cubic feet of natural gas

1 cubic meter

   = 35.315 cubic feet   

1 ton of crude oil

   = 1 metric ton of crude oil    = 7.389 barrels of crude oil (assuming an API gravity of 34 degrees)

Certain Oil and Gas Terms

Unless the context indicates otherwise, the following terms have the meanings shown below:

 

“acreage”

The total area, expressed in acres, over which an entity has interests in exploration or production. Net acreage is the entity’s interest, expressed in acres, in the relevant exploration or production area.

 

“condensate”

Light hydrocarbon substances produced with natural gas that condense into liquid at normal temperatures and pressures associated with surface production equipment.

 

“crude oil”

Crude oil, including condensate and natural gas liquids.

 

“developed reserves”

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

 

 

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

 

 

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

 

1


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

 

 

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

 

 

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

 

 

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

 

2


Table of Contents
 

(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 reserves rules, undeveloped reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

 

 

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

 

 

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

 

3


Table of Contents
 

(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.

 

4


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;

 

5


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.

 

6


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 2016

     6.7819        6.6685  

November 2016

     6.9195        6.7534  

December 2016

     6.9580        6.8771  

January 2017

     6.9575        6.8360  

February 2017

     6.8821        6.8517  

March 2017

     6.9132        6.8687  

April 2017 (ending through April 14)

     6.8988        6.8832  

 

(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 2012, 2013, 2014, 2015 and 2016, 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$)  

2012

     6.2990  

2013

     6.1412  

2014

     6.1701  

2015

     6.2869  

2016

     6.6549  

 

(1)

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

 

7


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 consolidated statement of comprehensive income (except for ADS data) and cash flow data for the years ended December 31, 2014, 2015 and 2016 and the selected consolidated statement of financial position data as of December 31, 2015 and 2016 set forth below are derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of comprehensive income data (except for ADS data) and cash flow data for the years ended December 31, 2012 and 2013 and the selected consolidated statement of financial position data as of December 31, 2012, 2013 and 2014 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)  
     2012     2013     2014     2015     2016  
     RMB     RMB     RMB     RMB     RMB  
     (In millions, except for per share and per ADS data)  

Consolidated Statement of Comprehensive Income Data

  

Revenue

     2,195,296       2,258,124       2,282,962       1,725,428       1,616,903  

Total operating expenses

     (2,020,777     (2,069,482     (2,113,129     (1,646,176     (1,556,268

Profit from operations

     174,519       188,642       169,833       79,252       60,635  

Profit before income tax expense

     166,811       178,063       156,759       57,815       45,140  

Income tax expense

     (36,191     (35,789     (37,731     (15,726     (15,768

Profit for the year

     130,620       142,274       119,028       42,089       29,372  

Profit for the year attributable to owners of the Company

     115,326       129,599       107,172       35,517       7,857  

Non-controlling interests

     15,294       12,675       11,856       6,572       21,515  

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

     0.63       0.71       0.59       0.19       0.04  

Basic and diluted net earnings per ADS(2)

     63.01       70.81       58.56       19.41       4.29  

Consolidated Statement of Financial Position Data

          

Total current assets

     392,805       430,953       391,308       349,344       381,665  

Total non-current assets

     1,776,091       1,911,157       2,014,165       2,044,500       2,014,986  

Total assets

     2,168,896       2,342,110       2,405,473       2,393,844       2,396,651  

Total current liabilities

     574,748       645,489       579,829       471,407       499,263  

Total non-current liabilities

     413,400       426,686       507,863       578,403       524,653  

Total liabilities

     988,148       1,072,175       1,087,692       1,049,810       1,023,916  

Equity attributable to owners of the Company

     1,064,010       1,132,735       1,175,894       1,179,716       1,189,024  

Non-controlling interests

     116,738       137,200       141,887       164,318       183,711  

Total equity

     1,180,748       1,269,935       1,317,781       1,344,034       1,372,735  

Other Financial Data

          

Dividend declared and proposed per share

     0.28       0.32       0.26       0.09       0.06  

Dividend declared and proposed per ADS

     28.36       31.87       26.35       8.73       5.93  

Capital expenditures

     352,516       318,696       291,729       202,238       172,386  

Return on net assets (%)(3)

     10.8       11.4       9.1       3.0       0.7  

Consolidated Statement of Cash Flow Data

          

Net cash flows from operating activities

     239,288       288,529       356,477       261,312       265,179  

Net cash flows used for investing activities

     (332,226     (266,510     (290,838     (215,879     (175,887

Net cash flows from/(used for) financing activities

     75,356       (12,239     (44,312     (45,439     (67,007

 

(1)

As of December 31, 2012, 2013, 2014, 2015 and 2016, 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.

 

8


Table of Contents
(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”.

 

9


Table of Contents

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 2016, 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 sales volumes. Inflation may lead to increase in our operating costs. Notwithstanding the measures taken by the PRC government to control inflation, China may experience an increase in inflation in the future and our operating costs may become higher than anticipated. The financial and economic situation may also have a negative impact on third parties with whom we do, 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

 

10


Table of Contents

shareholder, and its affiliates and subsidiaries may choose to undertake, without our involvement, overseas investments, operations and trading in the oil and gas industry, including 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.

 

11


Table of Contents

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, 2016, CNPC beneficially owned approximately 86.166% 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, social services and financial services. The interests of CNPC and its affiliates as providers of these services and products to us may conflict with our interests.

Risks Related to Pricing and Exchange Rate

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

Since the second half of 2014, international prices for crude oil have declined substantially and fluctuated at a low level 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.

 

12


Table of Contents

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

We negotiate the actual settlement price with natural gas users within the 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. The PRC government has implemented a floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of foreign currencies. Because most of our imports of crude oil, equipment and other materials and our outbound investments are settled in foreign currencies, the exchange rates between RMB and U.S. dollars and any other relevant foreign currencies may have an effect on our 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.

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

In 2014, the PRC Environmental Protection Law and the PRC Safety Production Law were amended. The amended laws imposed stricter requirements on the sectors in which we operate or participate and as a result our operation costs have increased. Since 2015, China has promulgated relevant policies to accelerate the process of gasoline and diesel fuel quality upgrading in China. Since January 2017, the China V Standards have been effective across the country for vehicle-use gasoline and diesel; and as of January 2018, ordinary diesel of China V Standards will be generally supplied across the country. China is expected to implement more strict standards for gasoline, diesel and other products in the future. New governmental requirements to improve oil quality will continue to pose challenges to our refining and chemicals segment and could increase our costs for oil refining.

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

 

13


Table of Contents

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.

China is a signatory country to the Paris Agreement which has taken effect since November 2016. China is expected to reach the peak level of carbon emissions by 2030 and plans to roll out 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 reserves data in this annual report are only estimates. The reliability of reserves estimates depends on a number of factors, assumptions and variables, such as the quality and quantity of our technical and economic data and the prevailing oil and gas prices applicable to our production, some of which are beyond our control and may prove to be incorrect over time. Results of drilling, testing and production after the date of estimates may require substantial upward or downward revisions in our reserves data. Our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates because of these revisions.

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 projects construction in response to the growth in our oil and gas reserves,

 

14


Table of Contents

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, 2016 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, 2016, we may discover other deficiencies in the course of our future evaluation of our internal control over our financial reporting and may be unable to remediate such deficiencies in a timely manner. If we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to conclude that we have effective internal control over financial reporting on an ongoing basis, in accordance with the Sarbanes-Oxley Act. Moreover, effective internal control is necessary for us to produce reliable financial reports and is important to prevent fraud. As a result, our failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading prices of our ADSs, H Shares or A Shares.

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

As a company with shares registered with the U.S. Securities and Exchange Commission, or the SEC, and traded publicly in the United States, our independent registered public accounting firm is required under the laws of the United States to be registered with the Public Company Accounting Oversight Board, or the PCAOB, and undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. The PCAOB, however, is currently unable to inspect a registered public accounting firm’s audit work relating to a company’s operations in China where the documentation of such audit work is located in China. Accordingly, our independent registered public accounting firm’s audit of our operations in China is not subject to the PCAOB inspection.

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

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

On January 22, 2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting firms, including our independent registered public accounting firm, from, among other things, practicing before the SEC for six months. In

 

15


Table of Contents

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.

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 financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage another registered public accounting firm to audit and issue an opinion on our financial statements. A delinquency in our filing of the annual report with the SEC may result in the NYSE initiating delisting procedures, which could harm our reputation and have other material adverse effects on our overall growth and prospect.

Risks Related to Employee Misconduct

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

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

Risks Related to Cyber Security

Our activities depend heavily on the reliability and security of our information technology (“IT”) systems. 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.

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.

 

16


Table of Contents

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 2016, we imported approximately 486.1 million barrels of crude oil, compared to 435.6 million barrels and 488.6 million barrels of crude oil in 2014 and 2015, 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, 2016, CNPC beneficially owned 157,701,211,528 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 86.166% 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 Corporate Organization Structure

The following chart illustrates our corporate organization structure as of December 31, 2016.

 

LOGO

 

(1)

Indicates approximate shareholding.

(2)

Indicates approximate shareholding, including the 291,518,000 H Shares indirectly held by CNPC as of December 31, 2016 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.

 

17


Table of Contents

Acquisitions and Divestment

On November 24, 2015, our board of directors approved the sale by CNPC Exploration and Development Co., Ltd., one of our 50%-owned subsidiaries, of its 50% of equity interest in CNPC Trans-Asia Gas Pipeline Co., Ltd. to a wholly-owned subsidiary of Guoxin International Investment Corporation Ltd. for a consideration of US$2.327 billion. This transaction was closed in the second quarter of 2016.

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

 

18


Table of Contents

LOGO

 

19


Table of Contents

Exploration and Production

We engage in crude oil and natural gas exploration, development and production. Substantially all of our total estimated proved crude oil and natural gas reserves are located in China, principally in northeastern, northern, southwestern and northwestern China. 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, 2016, the crude oil and natural gas produced by us at overseas regions accounted for 17.0% and 8.1% 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 340.2 million acres, including the exploration licenses covering a total area of approximately 311.3 million acres and the exploitation licenses covering a total area of approximately 28.9 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, 2014, 2015 and 2016:

 

     Year Ended December 31,  
     2014      2015      2016  

Revenue (RMB in millions)

     777,574        475,412        412,484  

Profit from operations (RMB in millions)

     186,897        33,961        3,148  

Proved developed and undeveloped reserves

        

Crude oil (million barrels)

     10,593.4        8,521.1        7,437.8  

Natural gas (Bcf)

     71,097.5        77,524.7        78,711.8  

Production

        

Crude oil (million barrels)

     945.5        971.9        920.7  

Natural gas for sale (Bcf)

     3,028.8        3,131.0        3,274.5  

Reserves

Our estimated proved reserves as of December 31, 2016 totaled approximately 7,437.8 million barrels of crude oil and approximately 78,711.8 Bcf of natural gas. As of December 31, 2016, proved developed reserves for crude oil and natural gas accounted for 69.6% and 51.7% of our total proved crude oil and natural gas reserves, respectively. Total proved hydrocarbon reserves, including our overseas crude oil reserves of 1,096.7 million BOE and overseas natural gas reserves of 2,467.4 Bcf, totaling 1,507.9 million BOE, decreased by 4.1% from approximately 21,441.9 million BOE as of December 31, 2015 to approximately 20,556.4 million BOE as of December 31, 2016. Natural gas as a percentage of total proved hydrocarbon reserves increased from 60.3% as of December 31, 2015 to 63.8% as of December 31, 2016.

We prepared our reserves estimates as of December 31, 2014, 2015 and 2016 on the basis of reports prepared by independent engineering consultants, namely DeGolyer and MacNaughton, Ryder Scott Company L.P., GLJ Petroleum Consultants and McDaniel & Associates Consultants Ltd. Our reserves estimates include only crude oil and natural gas which we believe can be reasonably produced within the current terms of our production licenses or within the terms of the licenses which we are reasonably certain can be renewed. See “Regulatory Matters — Exploration Licenses and Production Licenses” for a discussion of our production licenses. Also see “Item 3 — Key Information — Risk Factors — Risks Related to Oil and Gas Reserves” for a discussion of the uncertainty inherent in the estimation of proved reserves.

Our reserves data in 2014, 2015 and 2016 were prepared in accordance with the SEC’s final rules on “Modernization of Oil and Gas Reporting”.

 

20


Table of Contents

Internal Controls Over Reserves Estimates

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

In recent years, we have been implementing a practicing professional certification regime to supervise our employees engaged in oil and gas reserves evaluation and auditing functions. We have set up a team of reserves auditors covering our headquarter office and regional companies to perform reserves audits. Meanwhile, we have established a special reserves management department in our exploration and production segment. Each of the officers and employees of that department has over 20 years’ experience in oil industry and over 10 years’ experience in SEC-guided reserves evaluation. Many members of that department have national-level registered qualifications in reserves expertise. Each regional company has established a reserves management committee and a multi-disciplinary reserves research office. Mr. Duan Xiaowen, the head of the Reserves Administration Division of the exploration and production segment, is the person in charge of our reserves estimation. Mr. Duan holds a bachelor’s degree in geology and a master’s degree in business administration. He has over 25 years of work experience in oil and gas exploration and development industry and has been engaged in reserves estimate and management for a long time. Since 2008, Mr. Duan has been involved in the supervision of reserves estimation and management in our company. In 2016, Mr. Duan became the division head primarily responsible for overseeing the preparation of the reserves estimates, estimation technology and management. The reserves research offices of the regional companies are responsible for estimating newly discovered reserves and updating the estimates of existing reserves. The results of our oil and gas reserves assessment are subject to a two-level review by both the regional companies and our exploration and production 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 Reserves 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, 2014, 2015 and 2016. Mr. Thomas C. Pence, a senior vice president of DeGolyer and MacNaughton, is primarily responsible for supervising the preparation of our reserves report. Mr. Pence is a Registered Professional Engineer in Texas, a member of the International Society of Petroleum Engineers, and has 35 years of experience in oil and gas reservoir studies and reserves evaluations.

Ryder Scott Company, L.P. (“Ryder Scott”), an independent petroleum engineering consulting firm based in the United States, carried out an independent assessment of certain of our selected petroleum assets such as in Chad, West Qurna, Kazakhstan and Peru as of December 31, 2014, 2015 and 2016. 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 reserves 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 35 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, 2014, 2015 and 2016. 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.

 

21


Table of Contents

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, 2015 and 2016. Mr. Paul Taylor, the senior vice president of McDaniel &Associates Consultants Ltd., was responsible for supervising the preparation of our reserves 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 reserves 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, 2014, 2015 and 2016.

 

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

Proved developed and undeveloped reserves

      

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  

Revisions of previous estimates

     (810.9     (863.2     (954.7

Extensions and discoveries

     491.7       4,770.3       1,286.8  

Improved recovery

     93.0       —         93.0  

Bought

     63.6       554.5       156.0  

Production for the year

     (920.7     (3,274.5     (1,466.6

Reserves as of December 31, 2016

     7,437.8       78,711.8       20,556.4  

Proved developed reserves

      

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  

As of December 31, 2016

     5,176.3       40,663.8       11,953.5  

Proved undeveloped reserves

      

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  

As of December 31, 2016

     2,261.5       38,048.0       8,602.9  

 

(1)

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

Our proved undeveloped reserves were 8,602.9 million BOE in 2016. The main changes in our proved undeveloped reserves in 2016 included (i) an increase of 1,286.8 million BOE through extensions and discoveries; (ii) an increase of 93.0 million BOE through improved recovery; (iii) a decrease of 146.8 million BOE through revisions due to our adjustment in exploration plans in response to the decline of crude oil price; and (iv) the conversion of 1,141.8 million BOE of proved undeveloped reserves into proved developed reserves. In 2016, we spent RMB82,485 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.

 

22


Table of Contents

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, 2014, 2015 and 2016.

 

     As of December 31,  
     2014      2015      2016  
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
 
     (Million barrels)  

Crude oil reserves

                 

Daqing

     2,267.1        1,710.8        1,804.7        1,483.0        1,504.7        1,226.3  

Changqing

     2,553.5        1,913.6        2,186.0        1,600.6        1,917.8        1,319.1  

Xinjiang

     1,535.1        1,028.9        1,040.0        875.6        795.1        730.5  

Other regions(1)

     4,237.7        2,600.2        3,490.4        2,236.6        3,220.2        1,900.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10,593.4        7,253.5        8,521.1        6,195.8        7,437.8        5,176.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31,  
     2014      2015      2016  
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
     Proved
Developed
and
Undeveloped
     Proved
Developed
 
     (Bcf)  

Natural gas reserves(2)

                 

Changqing

     23,030.1        10,796.6        25,808.0        10,826.0        25,697.9        9,920.8  

Tarim

     22,434.2        12,495.5        24,270.6        14,303.3        24,019.2        14,336.1  

Chuanyu

     12,841.8        3,781.2        13,399.5        5,833.1        13,905.1        6,982.4  

Other regions(1)

     12,791.4        8,750.6        14,046.6        9,443.7        15,089.6        9,424.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     71,097.5        35,823.9        77,524.7        40,406.1        78,711.8        40,663.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

23


Table of Contents

Since the second half of 2014, international prices for crude oil have declined substantially and fluctuated at a low level. We performed an analysis with respect to the sensitivity of our domestic proved oil reserves as of December 31, 2016 to crude oil prices pursuant to relevant SEC reserves rules. For the sensitivity analysis, we used the price scenarios of US$70 per barrel and the 12-month average domestic oil price of the Company in 2016, i.e., US$37.72 per barrel, while the lifting cost and other relevant factors in 2016 remained unchanged. The costs used for the sensitivity analysis were the average domestic costs for 2016, taking into account the differences in the applicable production taxes and the reserves projects eligible to be included into proved reserves under each of the price scenarios.

The following table sets forth our domestic proved crude oil reserves as of December 31, 2016 under the different price scenarios.

 

     Proved Reserves  

Price Scenario

   Cost        Total Domestic
Proved Reserves
 
     (US$ per barrel)        (million BOE)  

(US$ per barrel)

       

70

     25.20          8,772.2  

37.72 (the 12-month average domestic oil price in 2016)

     19.41          6,341.1  

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.

 

24


Table of Contents

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  
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  
2016                 
  

Net exploratory wells drilled(2)

    148        134        955        550        1,787  
  

Crude oil

    127        87        625        353        1,192  
  

Natural gas

    9        1        125        75        210  
  

Dry(3)

    12        46        205        122        385  
  

Net development wells drilled(2)

    3,150        792        5,135        2,194        11,271  
  

Crude oil

    3,129        777        4,526        1,824        10,256  
  

Natural gas

    15        15        551        354        935  
  

Dry(3)

    6        —          58        16        80  

 

(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 436 wells in the process of being drilled and 7,133 wells with multiple completions as of December 31, 2016.

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, 2016.

 

                   Acreage(1)  
     Productive Wells(1)      Developed      Undeveloped  

Oil Region

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

Daqing

     73,321        302        1,149.97        102.18        766.44        98.48  

Changqing

     58,390        11,496        1,316.04        5,236.28        738.09        2,897.78  

Xinjiang

     33,059        265        388.02        58.10        216.15        17.10  

Other regions(2)

     72,730        5,786        1,593.59        1,054.16        1,078.06        1,476.43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     237,500        17,849        4,447.61        6,450.72        2,798.75        4,489.79  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

 

(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, 2014, 2015 and 2016.

 

     For the Year Ended
December 31,
     % of
2016 Total
 
     2014      2015      2016     

Crude oil production(1)

           

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

           

Daqing

     792.3        755.8        717.2        28.5  

Changqing

     506.8        502.0        482.7        19.2  

Xinjiang

     238.9        238.9        224.7        8.9  

Other(2)

     1,052.3        1,166.1        1,090.9        43.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,590.3        2,662.8        2,515.5        100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Annual production (million barrels)

     945.5        971.9        920.7     

Average sales price (US$ per barrel)

     94.83        48.35        37.99     

Natural gas production(1)(3)

           

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

           

Changqing

     3,186.3        3,181.2        3,103.5        34.7  

Tarim

     2,099.4        2,083.0        2,093.1        23.4  

Chuanyu

     1,252.6        1,412.5        1,696.1        19.0  

Other(4)

     1,759.7        1,901.4        2,054.1        22.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,298.0        8,578.1        8,946.8        100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Annual production (Bcf)

     3,028.8        3,131.0        3,274.5     

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

     6.30        6.23        4.67     

 

(1)

Production volumes for each region include our share of the production from all of our cooperative projects with foreign companies in that region.

(2)

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

(3)

Represents production of natural gas for sale.

(4)

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

(5)

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

In 2016, 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 2017 for the supply of crude oil to each other’s refineries. Under this agreement, we agreed in principle to supply 1.13 million tons of crude oil to Sinopec in 2017.

 

26


Table of Contents

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 2014, 2015 and 2016.

 

     Crude Oil Average
Realized Prices

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

(US$/BOE)
 

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  

2016

        

Overall

     1,865        1,097        11.67  

— China

     1,831        1,146        13.00  

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 2014, 2015 and 2016, our crude oil production volume in the Daqing oil region was 792.3 thousand barrels, 755.8 thousand barrels and 717.2 thousand barrels per day, respectively. As of December 31, 2016, we produced crude oil from 40 fields in the Daqing oil region.

As of December 31, 2016, our proved crude oil reserves in the Daqing oil region were 1,504.7 million barrels, representing 20.2% of our total proved crude oil reserves. As of December 31, 2014 and 2015, the proved crude oil reserves in our Daqing oil region were 2,267.1 million barrels and 1,804.7 million barrels, respectively. In 2016, the crude oil reserve-to-production ratio of the Daqing oil region was 5.6 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, 2016, our proved crude oil reserves in the Changqing oil region were 1,917.8 million barrels, representing 25.8% of our total proved crude oil reserves. In 2016, our crude oil production in the Changqing oil region averaged 482.7 thousand barrels per day, representing approximately 19.2% of our total daily crude oil production. In 2016, the crude oil reserve-to-production ratio at the Changqing oil region was 10.9 years.

In the early 1990s, we discovered the Changqing oil and gas region, which had total proved natural gas reserves of 25,697.9 Bcf as of December 31, 2016, representing 32.6% of our total proved natural gas reserves. In January 2001, we discovered the Sulige gas field in the Changqing oil and gas region, which had total proved natural gas reserves of 14,525.7 Bcf as of December 31, 2016. Sulige gas field is currently the largest gas field in China. In 2016, the Changqing oil and gas region produced 1,135.9 Bcf of natural gas for sale, representing a decrease of 2.2% from 1,161.1 Bcf in 2015.

 

27


Table of Contents

Xinjiang Oil Region

The Xinjiang oil region is one of our four largest crude oil producing properties and is located in the Junggar basin in northwestern China. We commenced our operations in the Xinjiang oil region in 1951. The Xinjiang oil region covers a total area of approximately 900,000 acres.

As of December 31, 2016, our proved crude oil reserves in the Xinjiang oil region were 795.1 million barrels, representing 10.7% of our total proved crude oil reserves. In 2016, our oil fields in the Xinjiang oil region produced an average of 224.7 thousand barrels of crude oil per day, representing approximately 8.9% of our total daily crude oil production. In 2016, the crude oil reserve-to-production ratio at the Xinjiang oil region was 9.7 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, 2016, the proved natural gas reserves in the Tarim oil and gas region reached 24,019.2 Bcf, representing 30.5% of our total proved natural gas reserves.

In 2016, we produced 766.1 Bcf of natural gas for sale in the Tarim oil and gas region. In 2016, we confirmed five natural gas blocks with large-scale mono-block natural gas reserves in our oil and gas regions, mainly 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 22.4 years in 2016. As of December 31, 2016, we had 116 natural gas fields under development in the Chuanyu gas region.

As of December 31, 2016, our proved natural gas reserves in the Chuanyu gas region were 13,905.1 Bcf, representing 17.7% of our total proved natural gas reserves and an increase of 3.8% from 13,399.5 Bcf as of December 31, 2015. In 2016, our natural gas production for sale in the Chuanyu gas region reached 620.8 Bcf, representing 19.0% 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. In 2016, we completed the construction of the production facilities in the Changning — Weiyuan national model shale gas area in the Chuanyu gas region.

 

28


Table of Contents

LOGO

 

29


Table of Contents

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, 2014, 2015 and 2016:

 

     Year Ended December 31,  
     2014     2015      2016  

Revenue (RMB in millions)

     846,082       642,428        582,510  

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

     (23,560     4,883        39,026  

Crude oil processed (million barrels)

     1,010.6       998.1        953.3  

Crude oil primary distillation capacity (million barrels/year)

     1,248.0       1,252.4        1,257.6  

Production of refined oil products (thousand tons)

     92,671       91,933        86,022  

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, 2014, 2015 and 2016.

 

     Year Ended December 31,  

Principal Product

   2014      2015      2016  
     (In thousand tons)  

Diesel

     57,627        54,182        46,689  

Gasoline

     30,688        32,258        33,275  

Kerosene

     4,356        5,493        6,058  

Lubricants

     1,581        1,210        1,164  

Fuel oil

     3,423        2,700        2,222  

Naphtha

     9,966        9,748        9,919  

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 2016, we further optimized our production processes, adjusted our products portfolio and concentrated our resources and production capacity on products with high profit margins. We reduced the diesel-gasoline ratio from 1.68 in 2015 to 1.40 in 2016. In 2016, we completed the construction of the projects on schedule for upgrading our gasoline and diesel quality to ensure compliance with China V standards across China (other than Beijing) and China VI standards in Beijing. In each of the years ended December 31, 2014, 2015 and 2016, our exploration and production operations supplied approximately 68.7%, 69.9% and 71.8%, respectively, of the crude oil processed in our refineries.

 

30


Table of Contents

The table below sets forth certain operating statistics regarding our refineries as of December 31, 2014, 2015 and 2016.

 

     As of December 31,  
     2014      2015      2016  

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        202.4  

Other refineries

     1,763.2        1,775.4        1,789.6  
  

 

 

    

 

 

    

 

 

 

Total

     3,419.2        3,431.3        3,445.5  
  

 

 

    

 

 

    

 

 

 

Refining throughput (thousand barrels per day)

        

Lanzhou Petrochemical

     185.4        195.8        166.6  

Dalian Petrochemical

     259.1        280.7        263.5  

Fushun Petrochemical

     170.5        164.0        170.5  

Dushanzi Petrochemical

     181.2        139.8        151.2  

Guangxi Petrochemical

     143.8        130.3        90.9  

Jilin Petrochemical

     168.7        162.0        184.3  

Sichuan Petrochemical

     125.4        152.0        141.0  

Other refineries

     1,534.6        1,509.9        1,443.9  
  

 

 

    

 

 

    

 

 

 

Total

     2,768.7        2,734.5        2,611.8  
  

 

 

    

 

 

    

 

 

 

 

(1)

Represents the primary distillation capacity of crude oil and condensate.

In each of the years ended December 31, 2014, 2015 and 2016, the average utilization rate of the primary distillation capacity at our refineries was 86.1%, 84.2% and 80.3%, respectively, and the average yield for our four principal refined products (gasoline, kerosene, diesel and lubricants) at our refineries was 68.9%, 69.0% and 67.6%, 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, 2014, 2015 and 2016, the overall refining yield at our refineries was 93.8%, 93.8% and 93.5%, 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 2016.

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 2016, 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 2.27% and 0.03% of our total revenue in 2016, 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.

 

31


Table of Contents

Our Chemical Products

The table below sets forth the production volumes of our principal chemical products for each of the years ended December 31, 2014, 2015 and 2016.

 

     Year Ended December 31,  
       2014          2015          2016    
     (In thousand tons)  

Basic petrochemicals

        

Propylene

     4,600        4,848        5,120  

Ethylene

     4,976        5,032        5,589  

Benzene

     1,771        1,896        1,918  

Derivative petrochemicals

        

Synthetic resin

     7,951        8,215        9,078  

Other synthetic fiber raw materials and polymer

     1,293        1,348        1,410  

Synthetic rubber

     745        713        760  

Other chemicals

        

Urea

     2,663        2,566        1,900  

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, 2016, 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, 2016, our annual production capacities for polyethylene, polypropylene and ABS were 5,060 thousand tons, 4,140 thousand tons and 710 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, 2014, 2015 and 2016.

 

     Year Ended December 31,  

Product

   2014      2015      2016  
     (In thousand tons)  

Derivative petrochemicals

  

Synthetic resin

     7,718.9        8,222.3        8,998.4  

Synthetic fiber

     86.4        83.7        83.6  

Synthetic rubber

     793.7        764.5        793.7  

Intermediates

     8,149.6        8,838.3        9,262.4  

Other chemicals

        

Urea

     2,681.8        2,106.1        2,181.8  

In each of the years ended December 31, 2014, 2015 and 2016, our capital expenditures for our refining and chemicals segment were approximately RMB30,965 million, RMB15,725 million and RMB12,847 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.

 

32


Table of Contents

LOGO

 

33


Table of Contents

Marketing

We engage in the marketing of refined products through 36 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, focused on synergies, actively expanded into the high-end markets, and maintained 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, 2014, 2015 and 2016:

 

     Year Ended December 31,  
     2014      2015     2016  

Revenue (RMB in millions)

     1,938,501        1,383,426       1,301,616  

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

     5,421        (500     11,048  

External sales volume of refined oil products (thousand tons)

     160,878        160,097       159,107  

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, 2016, 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

 

   

20,895 service stations, consisting of 20,101 service stations owned and operated by us and 794 franchised service stations owned and operated by third parties.

We took active steps to adapt to changes in market condition and customer demand, including enhanced integrated marketing of refined products, fuel cards, non-oil business and lubricants, and carrying out various promotion activities. We launched an application called Zhong You Hao Ke E station for mobile phones to promote mobile payments and enhance our marketing of non-oil businesses.

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, 2014, 2015 and 2016.

 

     Year Ended December 31,  

Product

   2014      2015      2016  
     (In thousand tons)  

Diesel

     87,041        84,763        80,168  

Gasoline

     59,821        60,651        62,406  

Kerosene

     14,016        14,683        16,533  

Lubricants

     1,498        1,150        1,122  

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.

 

34


Table of Contents

Retail Marketing

The weighted average sales volume of gasoline and diesel per business day at our service station network was 10.8 tons, 10.6 tons and 10.5 tons per service station in 2014, 2015 and 2016, respectively.

Capital expenditures for the marketing segment for the years ended December 31, 2014, 2015 and 2016 amounted to RMB5,616 million, RMB7,061 million and RMB7,983 million, respectively, which were used mainly for the construction of sales network facilities including service stations and oil storage tanks.

 

35


Table of Contents

LOGO

 

36


Table of Contents

Natural Gas and Pipeline

We are China’s largest natural gas transporter and seller in terms of sales volume. We sell natural gas primarily to 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, 2014, 2015 and 2016:

 

     As of December 31 or Year
Ended December 31,
 
     2014      2015      2016  

Revenue (RMB in millions)

     284,262        281,778        247,477  

Profit from operations (RMB in millions)

     13,126        51,231        17,885  

Total length of natural gas pipelines (km)

     48,602        48,629        49,420  

Total length of crude oil pipeline (km)

     18,107        18,892        18,872  

Total length of refined oil products pipeline (km)

     10,086        10,091        10,560  

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

     4,424.2        5,583.6        6,469.8  

 

(1)

Represents the natural gas sold to third parties

Our Principal Markets for Natural Gas

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

The natural gas sales to the Bohai Rim account for the highest sales volume in our total natural gas sales, which makes Bohai Rim one of our principal markets for natural gas. The natural gas supplied to Bohai Rim is primarily sourced from the Changqing oil and gas region and transmitted through the Shaanxi to Beijing natural gas pipeline system.

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

In addition to the above, provinces such as Henan, Hubei, Anhui and Hunan, consume more and more natural gas and have become another significant natural gas market of us.

We committed to provide approximately 4,944 Bcf of natural gas in 2017. 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. The PRC government has adopted a number of laws and regulations to require local governments to increase the use of clean energy, such as natural gas and liquefied petroleum gas, to replace the use of raw coal. Several local governments 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.

 

37


Table of Contents

Natural Gas Transmission Infrastructure

As of December 31, 2016, we owned and operated approximately 49,420 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 8,601 kilometers. The main line of the Second West-East Gas Pipeline has a length of 4,845 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 2,520 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 the Yining-Horgos Line, three main branch lines connecting Changsha, Xinye and Dengzhou, the Zhongwei-Jinbian 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 2,445 kilometers. The eastern section which extends from Ji’an to Fuzhou is 817 kilometers long and was completed and put into operation in 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. The construction of the fourth Shaanxi-Beijing Natural Gas Pipeline commenced in 2016 and is scheduled to be completed in October 2017.

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, 2016, we had crude oil pipelines of 18,872 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

 

38


Table of Contents

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 commenced in July 2016 and is expected to be completed by October 2017 with a length of 941 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, 2016, we had refined product pipelines of 10,560 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 3,027 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

 

39


Table of Contents

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. 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 governments 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”.

 

40


Table of Contents

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 RMB385 million, RMB347 million and RMB388 million in 2014, 2015 and 2016, 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 olefins 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 2014, 2015 and 2016 were approximately RMB4.00 billion, RMB4.14 billion and RMB3.10 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.

 

41


Table of Contents

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

In September 2013, two 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 on the grounds of PRC authorities’ investigation into certain of our former directors and senior management. The two suits were subsequently consolidated into one as ordered by the District Court. In June 2014, the plaintiff submitted a revised complaint whereby the plaintiff removed the current senior management from the individual defendants initially named and only included certain of our former directors and senior management. In August 2015, the District Court made a judgment directing termination of the motion of the plaintiff and the closing of the case. In response to that, the plaintiff filed an appeal to the United States Court of Appeals for the Second Circuit (the “Second Circuit”). In March 2016, the Second Circuit ruled to affirm the judgment of the District Court, thus supporting the dismissal by the District Court of the plaintiff’s complaint. After that, the plaintiff did not continue to pursue the appeal within the time limit allowed for appeal and thus, pursuant to the U.S. federal court procedure rules, all the allegations submitted to the District Court and the Second Circuit have been fully dismissed.

Our normal course of business had not been affected by the complaints. We have proactively and vigorously contested the complaints 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, 2016, we owned approximately 11,500 patents in China and other jurisdictions. We were granted 2,315 patents in China in 2016.

 

42


Table of Contents

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.

 

   

The National Development and Reform Commission, or the NDRC:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

approves Sino-foreign equity and cooperative projects 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

 

43


Table of Contents

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 reserves reports approved by the relevant authorities. Production license holders are required to pay an annual production right usage fee of RMB1,000 per square kilometer. Administrative rules issued by the State Council provide that the maximum term of a production license is 30 years, 20 years, or 10 years as applicable to large, medium and small mineral blocks, respectively. In accordance with a special approval from the State Council, the 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.

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

 

44


Table of Contents

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

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

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

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 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.

 

45


Table of Contents

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.

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

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

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

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.

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

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

 

46


Table of Contents

companies, including Sino-foreign joint venture companies, were permitted to engage in retail of gasoline and diesel. Since December 11, 2004, wholly foreign-owned enterprises are permitted to conduct refined oil retail business. Since January 1, 2007, when the Measures on the Administration of the Refined Products Market became effective, all entities meeting certain requirements are allowed to submit applications to the MOFCOM to conduct refined oil products wholesale, retail and storage businesses.

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 lifted the restrictions on foreign investment in refineries with a production capacity of below 10 million tons per annum. Furthermore, when appropriate, projects must receive necessary approvals from relevant PRC government agencies. See “Item 3 — Key Information — Risk Factors — Risks Related to Government Regulation.”

Import and Export

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

 

47


Table of Contents

Capital Investment and Financing

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

 

   

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

 

   

facilities for taking delivery of, storing or transporting imported liquefied natural gas (excluding accessory projects of oil or gas fields or refineries);

 

   

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

 

   

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

 

   

new refineries, expansion of existing primary processing refineries; and

 

   

new coal-to-olefins projects, new coal to p-Xylene projects, and new coal-to-methanol projects with a capacity of 1 million tons per annum or more.

Taxes, Fees and Royalties

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

 

Tax Item

  

Tax
Base

  

Tax
Rate

Enterprise income tax

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

Value-added tax

   Revenue   

13% for liquefied natural gas, natural gas, liquefied petroleum gas, agricultural film and fertilizers and 17% for other products.

 

Since May 1, 2016, as a result of the reform of value-added tax in lieu of business tax, certain sectors such as real estate, engineering construction, financial and other sectors, which previously were subject to business tax, have been subject to value-added tax instead. The value added tax rates are 17%, 13%, 11% and 6%, as applicable.

Business tax

      Since May 1, 2016, business tax has been replaced by value-added tax nationwide on a trial basis.

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.

 

Collection of taxes on aviation kerosene continues to be suspended.

 

48


Table of Contents

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.

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.

Item 4A — UNRESOLVED STAFF COMMENTS

We do not have any unresolved staff comment.

 

49


Table of Contents

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 2016, we produced approximately 920.7 million barrels of crude oil and approximately 3,274.5 Bcf of natural gas for sale. Our refineries processed approximately 953.3 million barrels of crude oil in 2016. In 2016, we had revenue of RMB1,616,903 million and profit attributable to owners of the Company of RMB7,857 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 2014, 2015 and 2016.

 

     2014      2015      2016  

Crude oil (US$/barrel)

     94.83        48.35        37.99  

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

     7.84        7.42        5.68  

Gasoline (US$/barrel)

     140.85        112.80        101.41  

Kerosene (US$/barrel)

     116.45        67.77        54.67  

Diesel (US$/barrel)

     139.72        96.39        82.84  

 

  (1)

Natural gas citygate price

 

50


Table of Contents

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

 

51


Table of Contents

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

Despite the inherent imprecision in these engineering estimates, estimated proved oil and gas reserves quantity has a direct impact on certain amounts reported in the financial statements. In addition to the capitalization of costs related to oil and gas properties on the balance sheet discussed earlier, estimated proved reserves also impact the calculation of depreciation, depletion and amortization expenses of oil and gas properties. The cost of oil and gas properties is amortized at the field level on the unit of production method. Unit of production rates are based on the total oil and gas reserves estimated to be recoverable from existing facilities based on the current terms of our production licenses. Our reserves estimates include only crude oil and natural gas which 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 reserves estimates are revised downward, earnings could be affected by higher depreciation expense or an immediate write-down of the property’s book value had the downward revisions been significant See “— Property, Plant and Equipment” below. Given our large number of producing properties in our portfolio, and the estimated proved reserves, it is unlikely that any changes in reserves estimates will have a significant effect on prospective charges for depreciation, depletion and amortization expenses.

In addition, due to the importance of these estimates in understanding the perceived value and future cash flows of a company’s oil and gas operations, we have also provided supplemental disclosures of “proved” oil and gas reserves estimates prepared in accordance with authoritative guidelines elsewhere in this annual report.

Property, Plant and Equipment

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

 

52


Table of Contents

The company uses the following useful lives for depreciation purposes:

 

Buildings and plant

     8-40 years  

Equipment and machinery

     4-30 years  

Motor vehicles

     4-14 years  

Other

     5-12 years  

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

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

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

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

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

The expected medium-to-long-term future international prices of crude oil utilized by us when estimating the expected future cash flows are determined mainly based upon the forecast of the international prices of crude oil made by principal international investment institutions combined with the judgment and analysis of the future trends of international prices of crude oil made by us. We calculated the expected future cash flows of each oil block according to the estimates of future production volume levels per year stated in the oil and gas reserves reports, the estimates of operation costs of oil and gas made by us, and taking into account its future capital expenditure plan. We refer to the weighted average cost of capital of the oil and gas industry when determining the discount rate and makes relevant adjustments according to specific risks in different countries or regions. In the year ended December 31, 2015, the after-tax discount rates adopted by most of our oil and gas regions were between 7.0% and 10.0%. In the year ended December 31, 2016, the after-tax discount rates adopted by most of our oil and gas regions were between 7.1% and 10.3%.

Given the broad scope of our property, plant and equipment, the impairment test involves numerous assumptions, which are interrelated to each other to a certain extent. For example, the estimates and judgments

 

53


Table of Contents

with respect to the product mix, production costs and oil and gas reserves may vary along with the changes in crude oil prices. The sensitivity analysis performed after taking into account the interrelationship among all of the estimates and judgments would be neither cost efficient nor time efficient. As a result, the management believes that a sensitivity analysis of relevant assumptions on impairment is not practicable. Favorable changes to some assumptions might have avoided the need to impair any assets or make it necessary to reverse an impairment loss recognized in prior periods, whereas unfavorable changes might have caused an additional unknown number of other assets to become impaired, or resulted in larger impacts on impaired assets. For example, when the assumed future price and production volume of crude oil used for the expected future cash flows are different from the actual price and production volume of crude oil respectively experienced in the future, the Company may either over or under recognize the impairment losses for certain assets.

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

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

Interest and other costs on borrowings to finance the 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.

Our statement of comprehensive income for each of the years ended December 31, 2014, 2015 and 2016 is summarized in the table below.

 

     Year Ended December 31,  
     2014     2015     2016  
     (RMB in millions)  

Revenue

     2,282,962       1,725,428       1,616,903  

Operating expenses

     (2,113,129     (1,646,176     (1,556,268

Profit from operations

     169,833       79,252       60,635  

Exchange gain /(loss), net

     (2,313     (632     1,257  

Interest expense, net

     (21,723     (22,309     (20,857

Share of profit of affiliates and joint ventures

     10,962       1,504       4,105  

Profit before income tax expense

     156,759       57,815       45,140  

Income tax expense

     (37,731     (15,726     (15,768

Profit for the year attributable to non-controlling interests

     11,856       6,572       21,515  
  

 

 

   

 

 

   

 

 

 

Profit for the year attributable to owners of the Company

     107,172       35,517       7,857  
  

 

 

   

 

 

   

 

 

 

 

54


Table of Contents

The table below sets forth our revenue by business segment for each of the years ended December 31, 2014, 2015 and 2016 as well as the percentage changes in revenue for the periods shown.

 

     2014     2015     2015
vs.
2014
    2016     2016
vs.
2015
 
     (RMB in millions, except percentages)  

Revenue

          

Exploration and production

     777,574       475,412       (38.9 )%      412,484       (13.2 )% 

Refining and chemicals

     846,082       642,428       (24.1 )%      582,510       (9.3 )% 

Marketing

     1,938,501       1,383,426       (28.6 )%      1,301,616       (5.9 )% 

Natural gas and pipeline

     284,262       281,778       (0.9 )%      247,477       (12.2 )% 

Headquarters and others

     3,027       2,507       (17.2 )%      2,197       (12.4 )% 
  

 

 

   

 

 

     

 

 

   

Total

     3,849,446       2,785,551       (27.6 )%      2,546,284       (8.6 )% 

Less intersegment sales

     (1,566,484     (1,060,123     (32.3 )%      (929,381     (12.3 )% 
  

 

 

   

 

 

     

 

 

   

Consolidated net sales from operations

     2,282,962       1,725,428       (24.4 )%      1,616,903       (6.3 )% 
  

 

 

   

 

 

     

 

 

   

The table below sets forth our operating income by business segment for each of the years ended December 31, 2014, 2015 and 2016, 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.

 

     2014     2015     2015
vs.
2014
    2016     2016
vs.
2015
 
     (RMB in millions, except percentages)  

Profit/(loss) from operations

          

Exploration and production

     186,897       33,961       (81.8 )%      3,148       (90.7 )% 

Refining and chemicals

     (23,560     4,883       —         39,026       699.2

Marketing

     5,421       (500     —         11,048       —    

Natural gas and pipeline

     13,126       51,231       290.3     17,885       (65.1 )% 

Headquarters and others

     (12,051     (10,323     —         (10,472     —    
  

 

 

   

 

 

     

 

 

   

Total

     169,833       79,252       (53.3 )%      60,635       (23.5 )% 
  

 

 

   

 

 

     

 

 

   

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Consolidated Results of Operations

Overview

In 2016, our revenue was RMB1,616,903 million, representing a decrease of 6.3% compared with the preceding year. Profit attributable to our owners was RMB7,857 million, representing a decrease of 77.9% compared with the preceding year. Basic and diluted earnings per share were RMB0.04, representing a decrease of RMB0.15 compared with the preceding year.

Revenue Revenue decreased by 6.3% from RMB1,725,428 million in 2015 to RMB1,616,903 million in 2016. This decrease was primarily due to the combined effects of (i) the decreasing selling prices of oil and gas products, and (ii) the changes in the sales volume of crude oil, natural gas, refined oil and other major products.

 

55


Table of Contents

The table below sets out the external sales volume and average realized prices for major products in 2015 and 2016, respectively:

 

     Sales Volume (‘000 ton)     Average Realized Price
(RMB/ton)
 
     2015      2016      Percentage
of Change
(%)
    2015      2016      Percentage
of Change
(%)
 

Crude oil(1)

     101,620        100,108        (1.5     2,134        1,881        (11.9

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

     1,581.10        1,832.05        15.9       1,371        1,097        (20.0

Gasoline

     60,651        62,406        2.9       5,972        5,725        (4.1

Diesel

     84,763        80,168        (5.4     4,503        4,127        (8.3

Kerosene

     14,683        16,533        12.6       3,334        2,869        (13.9

Heavy oil

     15,635        22,952        46.8       2,439        1,892        (22.4

Polyethylene

     4,270        4,764        11.6       8,202        7,981        (2.7

Lubricant

     1,150        1,122        (2.4     8,234        7,424        (9.8

 

(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 5.5% from RMB1,646,176 million in 2015 to RMB1,556,268 million in 2016.

Purchases, Services and Other Expenses Purchases, services and other expenses decreased by 9.2% from RMB1,056,795 million in 2015 to RMB959,640 million in 2016. This decrease was primarily due to the facts that (i) our expenses for purchasing oil and gas products declined as a result of the decrease in oil and gas prices, and (ii) certain purchase costs decreased as a result of optimization of production and operations.

Employee Compensation Costs Employee compensation costs (including salaries and additional costs such as insurances, housing funds and training fees) were RMB117,662 million in 2016, representing a decrease of 0.4% from RMB118,082 million in 2015. This decrease was primarily due to the fact that we improved our efficiency-based remuneration system and implemented strict control over the total number of employees and labor costs.

Exploration Expenses Exploration expenses amounted to RMB18,576 million and RMB18,380 million in 2016 and 2015, respectively. We continued to optimize our exploration deployment and endeavored to discover quality reserves of large scales.

Depreciation, Depletion and Amortization Expenses Depreciation, depletion and amortization expenses increased by 7.5% from RMB202,875 million in 2015 to RMB218,147 million in 2016. This increase was mainly due to (i) the decrease in proved reserves as a result of low oil and gas prices, and (ii) an increase in the rate of depletion and amortization, which resulted in the increase in depletion and amortization of our oil and gas properties.

Selling, General and Administrative Expenses Selling, general and administrative expenses increased by 4.2% from RMB71,270 million in 2015 to RMB74,255 million in 2016. This increase was primarily due to increased lease expenses as a result of the increase in land-use taxes and the increase in trade volume. We proactively implemented measures for broadening sources of income, reducing expenditure and enhancing efficiency. As a result, our non-production costs and expenses continued to decrease.

Taxes other than Income Taxes Taxes other than income taxes decreased by 7.9% from RMB205,884 million in 2015 to RMB189,608 million in 2016. This decrease was primarily due to (i) a decrease

 

56


Table of Contents

in the consumption tax by RMB9,055 million, from RMB149,323 million in 2015 to RMB140,268 million in 2016, and (ii) a decrease in the resource tax by RMB4,112 million, from RMB18,584 million in 2015 to RMB14,472 million in 2016.

Other Income, net Other net income in 2016 was RMB21,620 million, representing a decrease of RMB5,490 million, from RMB27,110 million in 2015. This decrease was primarily due to the combined effects of the following factors: (i) an investment gain of RMB22,807 million in 2015 derived from the integration of certain pipeline assets and the proceeds we received from the equity disposals of some subsidiaries; (iii) the disposal of certain equity interests in Trans-Asia Gas Pipeline Co., Ltd., with proceeds of RMB24,534 million in 2016; and (iii) the VAT refund relating to the importation of natural gas recognized decreased in 2016 as compared to the preceding year.

Profit from Operations Profit from operations in 2016 was RMB60,635 million, representing a decrease of 23.5% from RMB79,252 million in 2015.

Net Exchange Gain/(Loss) We had a net exchange gain of RMB1,257 million in 2016, while we incurred a net exchange loss of RMB632 million in 2015. This change was primarily due to the appreciation of the US dollar against Renminbi as compared to the preceding year.

Net Interest Expenses Net interest expenses decreased by 6.5% from RMB22,309 million in 2015 to RMB20,857 million in 2016, primarily due to a decrease in the average balance of interest-bearing borrowings as a result of our active measures to control debts and reduce interest.

Profit Before Income Tax Expense Profit before income tax expense decreased by 21.9% from RMB57,815 million in 2015 to RMB45,140 million in 2016.

Income Tax Expense The income tax expense in 2016 was RMB15,768 million, compared to RMB15,726 million in 2015, which was primarily due to the combined effects of (i) the decrease in taxable income as a result of the decrease in oil prices, and (ii) the increase in income tax expense as a result of the increase in profits of certain subsidiaries.

Profit for the Year As a result of the foregoing, our profit for the year decreased by 30.2% from RMB42,089 million in 2015 to RMB29,372 in 2016.

Profit Attributable to Non-controlling Interests Net profit attributable to non-controlling interests increased by RMB14,943 million from RMB6,572 million in 2015 to RMB21,515 million in 2016, primarily due to the increase in the profits of certain subsidiaries.

Profit Attributable to Owners of the Company The net profit attributable to owners of the Company decreased by 77.9% from RMB35,517 million in 2015 to RMB7,857 million in 2016.

Segment Results

Exploration and Production Segment

Revenue The realized revenue of the exploration and production segment was RMB412,484 million in 2016, representing a decrease of 13.2% from RMB475,412 million in 2015, primarily due to the combined effects of (i) the decrease in the prices of crude oil and gas, and (ii) the decrease in the sales volume of crude oil. The average realized crude oil price was US$37.99 per barrel in 2016, representing a decrease of 21.4% from US$48.35 per barrel in 2015.

Operating Expenses Operating expenses of the exploration and production segment decreased by 7.3% from RMB441,451 million in 2015 to RMB409,336 million in 2016, primarily due to the combined effects of the

 

57


Table of Contents

following factors: (i) realized proceeds derived from the disposal of certain equity interests in the Trans-Asia Pipeline; (ii) a provision made in 2015 for impairment of oil and gas properties; and (iii) an increase in depletion of oil and gas assets as a result of a decrease in proved reserves and an increase in depletion rate due to the oil price drop; and (iv) a decrease in purchase expenses for imported crude oil.

We enhanced our control over costs and expenses continuously. The oil and gas lifting cost was US$11.67 per barrel in 2016, representing a decrease of 10.1% from US$12.98 per barrel in 2015.

Profit from Operations In 2016, in our exploration and production segment, we adhered to the low-cost strategy in our domestic operations, optimized our development plans, strengthened the dynamic adjustment of output, focused on the management and control of key elements of production, continued to save energy and tap the potential synergies. In our overseas operations, we devoted our efforts to broadening sources of income, reducing expenditure, as well as enhancing efficiency by various means such as expanding sales, increasing prices and optimizing investments. In an adverse situation where the prices of crude oil and gas dropped, the exploration and production segment realized an operating profit of RMB3,148 million, representing a decrease of 90.7% from RMB33,961 million in 2015.

Refining and Chemicals Segment

Revenue Revenue of the refining and chemicals segment decreased by 9.3% from RMB642,428 million in 2015 to RMB582,510 million in 2016, primarily due to the combined effects of (i) the drop in refined and chemicals products prices such as diesel, and (ii) the changes in the sales volume as affected by the market.

Operating Expenses Operating expenses of the refining and chemicals segment decreased by 14.8% from RMB637,545 million in 2015 to RMB543,484 million in 2016, primarily due to (i) a decrease in the expenses associated with the purchase of crude oil and feedstock oil from external suppliers, and (ii) the decrease in consumption tax.

In 2016, we optimized our production and operations under the cost pressure of the upgrading of oil quality in the refining and chemicals segment and prudently reduced the processing volume of crude oil based on market condition. The cash processing cost of refineries was RMB179.93 per ton in 2016, representing an increase of RMB2.13 per ton from RMB177.80 per ton in 2015.

Profit from Operations In 2016, in our refining and chemicals segment, we emphasized the principle of market orientation and benefit, optimized the allocation of resources and the structure of products, enhanced new technology development to improve the efficiency of facilities, increased the production of highly valued-added market-favorable products, and took the initiative to increase profit. We also intensified control over costs and expenses, which led to the improvement in major economic indicators and contributed to our profit under low oil prices. In 2016, in the refining and chemicals segment, we realized operating profits of RMB39,026 million, representing an increase of RMB34,143 million, as compared with RMB4,883 million in 2015. Among this, the refining operations recorded an operating profit of RMB27,565 million, representing an increase of RMB22,875 million in profit as compared with RMB4,690 million in 2015, due to the optimization of operation and increase in gross profit. Taking the opportunity of favorable changes in the chemical market, we optimized our chemical operations by enhancing the structure of products and increasing the sales of high-profitability products. We recorded an operating profit of RMB11,461 million, representing an increase of RMB11,268 million, as compared with RMB193 million in 2015.

Marketing Segment

Revenue Revenue of the marketing segment decreased by 5.9% from RMB1,383,426 million in 2015 to RMB1,301,616 million in 2016. This decrease was primarily due to the combined effects of (i) the decrease in the sales volume and price of diesel, partially offset by the decrease in the prices and the increase in the sales volume of gasoline and kerosene; and (ii) the decrease in revenue derived from trade of oil products.

 

58


Table of Contents

Operating Expenses Operating expenses of the marketing segment decreased by 6.7% from RMB1,383,926 million in 2015 to RMB1,290,568 million in 2016, primarily due to the decrease in the expenses in purchase of refined oil from external suppliers.

Profit from Operations In 2016, facing such adverse factors as the slow-down in domestic demand for refined products and the fierce competition in the market, we aimed to maximize the whole value of the Company and continuously improved the quality of marketing and trade and profitability. In domestic operations, we strengthened connection between production and sales and inventory management, optimized logistics and allocation of resources, intensified cost and expense control and increased the profit from non-oil businesses. In international trade, we intensified the coordination and cooperation with domestic upstream, middle-stream and downstream businesses, optimized the importation of oil and gas resources and expanded exports of products processed with importing materials. In 2016, we realized an operating profit of RMB11,048 million in our marketing segment, representing an increase of RMB11,548 million, as compared with an operating loss of RMB500 million in 2015.

Natural Gas and Pipeline Segment

Revenue Revenue of the natural gas and pipeline segment amounted to RMB247,477 million in 2016, representing a decrease of 12.2% as compared to RMB281,778 million in 2015. This decrease was primarily due to a decrease in the price of nature gas, partially offset by the increase in the revenue derived from pipeline transportation.

Operating Expenses Operating expenses of the natural gas and pipeline segment amounted to RMB229,592 million in 2016, compared with RMB230,547 million in 2015. This slight decrease was primarily due to the decrease in the expenses of purchasing natural gas.

Profit from Operations In 2016, in the natural gas and pipeline segment, we achieved an increase in sales and stability in profitability by optimizing the allocation of resources, reducing purchase costs, utilizing price leverage to adjust demand and supply and strengthening marketing efforts in high-profitability markets. We realized an operating profit of RMB17,885 million in this segment, which, after excluding the effect of the income of RMB22,807 million generated from the integration of certain pipeline assets in 2015, represented a decrease of RMB10,539 million in operating profit as compared with RMB51,231 million in 2015. In 2016, we recorded a net loss of RMB14,884 million in the natural gas and pipeline segment from sales of imported gas, representing a decrease of loss of RMB1,415 million as compared with 2015. The net loss consisted of a loss of RMB4,063 million for the sales of 34.173 billion cubic meters of natural gas imported from Central Asia, a loss of RMB7,340 million for the sales of 6.757 billion cubic meters of imported LNG, and a loss of RMB5,591 million for the sales of 4.175 billion cubic meters of natural gas imported from Myanmar.

In 2016, we generated a revenue of RMB515,848 million from our international operations, representing 31.9% of our total revenue. Profit before income tax expense amounted to RMB32,265 million, including an income of RMB24,534 million derived from disposal of certain equity interest in the Trans-Asia Pipeline. We maintained a healthy development with further improved operating ability in our international operations.

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.

 

59


Table of Contents

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.

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

 

60


Table of Contents

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, cutting costs 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.

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

 

61


Table of Contents

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.

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.

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.

 

62


Table of Contents

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 operations 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.

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

Liquidity and Capital Resources

Our primary sources of funding include cash generated by operating activities and short-term and long-term borrowings. 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, 2016, we distributed as dividends 45% of our reported income for the year attributable to our shareholders and additional interim and final special dividends in return to our shareholders. See “Item 8 — Financial Information — Dividend Policy” for a discussion of factors which may affect the determination by our board of directors of the appropriate level of dividends.

Our financing ability may be limited by our financial condition, our results of operations and the international and domestic capital markets. Prior to accessing the international and domestic capital markets, we must obtain approval from the relevant PRC government authorities. In general, we must obtain PRC government approval for any project involving significant capital investment for our refining and chemicals, marketing and natural gas and pipeline segments. For a more detailed discussion of factors which may affect our ability to

 

63


Table of Contents

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, 2016 was RMB265,179 million. As of December 31, 2016, we had cash and cash equivalents of RMB97,931 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 person to require us to issue any common stock at a price below its market value. We do not currently intend to issue any such rights or to otherwise issue any common stock for a price below its market value.

In addition, as of December 31, 2016, 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, 2014, 2015 and 2016 and our cash equivalents at the end of each year.

 

     Year Ended December 31,  
     2014     2015     2016  
     (RMB in millions)  

Net cash flows from operating activities

     356,477       261,312       265,179  

Net cash flows used for investing activities

     (290,838     (215,879     (175,887

Net cash flows used for financing activities

     (44,312     (45,439     (67,007

Currency translation difference

     1,044       (999     2,873  

Cash and cash equivalents at year end

     73,778       72,773       97,931  

Our cash and cash equivalents increased by 34.6% from RMB72,773 million as of December 31, 2015 to RMB97,931 million as of December 31, 2016.

Net Cash Flows from Operating Activities

Our net cash flows from operating activities amounted to RMB265,179 million for the year ended December 31, 2016, representing an increase of 1.5% from RMB261,312 million for the year ended December 31, 2015. This was mainly due to a combined effect of a decrease in profit and the decrease in tax expenses during the reporting period. As of December 31, 2016, we had cash and cash equivalents of RMB97,931 million. Our cash and cash equivalents were mainly denominated in US Dollars (approximately 52.6% were denominated in US Dollars, approximately 44.3% were denominated in Renminbi, approximately 1.7% were denominated in HK Dollars and approximately 1.4% were denominated in other currencies).

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 reporting 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).

 

64


Table of Contents

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).

Net Cash Flows Used for Investing Activities

Our net cash flows used for investing activities in 2016 amounted to RMB175,887 million, representing a decrease of 18.5% from RMB215,879 million in 2015. The decrease was primarily due to a combined effect of the adjustment of our investment plans based on the oil price trend and market change, a decrease in capital expenditures during the current reporting period and payment of considerations for integration of certain pipelines assets in 2015.

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 the adjustment of our investment plans based on the oil price trend and market change, a decrease in capital expenditures during the reporting 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.

Net Cash Flows Used for Financing Activities

Our net cash flows used for financing activities in 2016 was RMB67,007 million, representing an increase of 47.5% from RMB45,439 million in 2015. This was primarily due to a combined effect of (i) our efforts in optimizing financial arrangement and debt structure, and strengthening the management of our interest-bearing borrowings, (ii) the decrease in financing cost, (iii) the decrease in long-term borrowings in 2016, and (iv) the increase in balance of short-term borrowings as of December 31, 2016.

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.

 

65


Table of Contents

Our net borrowings as of December 31, 2014, 2015 and 2016 were as follows:

 

     As of December 31,  
     2014      2015      2016  
     (RMB in millions)  

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

     169,128        106,226        143,384  

Long-term borrowings

     370,301        434,475        372,887  
  

 

 

    

 

 

    

 

 

 

Total borrowings

     539,429        540,701        516,271  
  

 

 

    

 

 

    

 

 

 

Less:

        

Cash and cash equivalents

     73,778        72,773        97,931  
  

 

 

    

 

 

    

 

 

 

Net borrowings

     465,651        467,928        418,340  
  

 

 

    

 

 

    

 

 

 

Our total borrowings as of December 31, 2016 consisted of approximately 54.8% of fixed-rate loans and approximately 45.2% of floating-rate loans. Of our borrowings as of December 31, 2016, approximately 72.1% were denominated in Renminbi, approximately 26.5% were denominated in US Dollars and approximately 1.4% were denominated in other currencies.

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.

Our total borrowings 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 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, 2014, 2015 and 2016 was 29.0%, 28.7% and 27.3%.

As of December 31, 2016, the outstanding amount of our debts secured by CNPC and its subsidiaries and other third parties was RMB65,692 million.

Capital Expenditures and Investments

In 2016, we focused on the principles of quality and profitability for capital expenditures, continued to optimize our investment structure, controlled our overall capital expenditures, while continued to increase the investment in upstream oil and gas projects in order to enhance our sustainable development capability. In 2016, our capital expenditures were RMB172,386 million, representing a decrease of 14.8% from RMB202,238 million in 2015.

 

66


Table of Contents

The table below sets forth our capital expenditures and investments by business segment for each of the years ended December 31, 2014, 2015 and 2016 as well as those anticipated for the year ending December 31, 2017. Actual capital expenditures and investments for periods after January 1, 2017 may differ from the amounts indicated below.

 

     2014      2015      2016      2017
Anticipated
 
     (RMB in
millions)
     %      (RMB in
millions)
     %      (RMB in
millions)
     %      (RMB in
millions)
     %  

Exploration and production(1)

     221,479        75.92        157,822        78.04        130,248        75.56        143,600        75.07  

Refining and chemicals

     30,965        10.61        15,725        7.78        12,847        7.45        13,600        7.11  

Marketing

     5,616        1.93        7,061        3.49        7,983        4.63        10,800        5.65  

Natural gas and pipeline

     32,919        11.28        20,360        10.07        20,340        11.80        22,200        11.60  

Headquarters and others

     750        0.26        1,270        0.62        968        0.56        1,100        0.57  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     291,729        100.00        202,238        100.00        172,386        100.00        191,300        100.00  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

If investments related to geological and geophysical exploration costs are included, the capital expenditures and investments for the exploration and production segment in 2014, 2015, 2016 and the estimates for the same in 2017 would be RMB231,480 million, RMB166,594 million, RMB139,135 million and RMB153,100 million, respectively.

As of December 31, 2016, the capital commitments contracted but not provided for were approximately RMB59,664 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, 2014, 2015 and 2016, capital expenditures in relation to the exploration and production segment amounted to RMB221,479 million, RMB157,822 million and RMB130,248 million, respectively. In 2016, our capital expenditures were primarily used for the exploration projects in our 16 domestic oil and gas fields, construction of production facilities in our oil and gas fields, and the exploration and development projects in our five major overseas oil and gas cooperation regions.

We anticipate that the capital expenditures for our exploration and production segment for 2017 would amount to RMB143,600 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, 2014, 2015 and 2016 were RMB30,965 million, RMB15,725 million and RMB12,847 million, respectively. In 2016, our capital expenditures were mainly spent on the construction of large-scale refining and 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 2017 would amount to RMB13,600 million, which are expected to be used primarily for construction of large-scale refining and

 

67


Table of Contents

chemical projects, such as the Yunnan petrochemical project, the optimization project of the Liaoyang petrochemical refinery, the quality, safety and environmental upgrading project of the Huabei petrochemical refinery, and other refined oil quality upgrading projects.

Marketing

Our capital expenditures for our marketing segment for each of the years ended December 31, 2014, 2015 and 2016 were RMB5,616 million, RMB7,061 million and RMB7,983 million, respectively. Our capital expenditures for the marketing segment in 2016 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 2017 will amount to RMB10,800 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, 2014, 2015 and 2016 were RMB32,919 million, RMB20,360 million and RMB20,340 million, respectively. Our capital expenditures for the natural gas and pipeline segment in 2016 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 2017 will amount to approximately RMB22,200 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 branch lines and sales terminals.

Headquarters and Others

Our non-segment-specific capital expenditures and investments for each of the years ended December 31, 2014, 2015 and 2016 were RMB750 million, RMB1,270 million and RMB968 million, respectively, which were primarily used for research activities and development of the IT system.

Our anticipated capital expenditures for the headquarters and others for 2017 amount to RMB1,100 million. These planned capital expenditures and investments mainly include capital expenditures for scientific research activities and the construction of the IT system.

Off-Balance Sheet Arrangements

As of December 31, 2016, 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.

 

68


Table of Contents

The tables below set forth our long-term contractual obligations outstanding as of December 31, 2016.

 

     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

     444,302        71,415        152,183        127,621        93,083  

Capital lease obligations

     2,048        258        493        233        1,064  

Operating leases

     189,826        10,108        16,506        14,251        148,961  

Capital commitments

     59,664        20,822        38,693        114        35  

Other long-term obligations

     —          —          —          —          —    

Debt-related interest

     61,334        15,593        20,575        11,370        13,796  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     757,174        118,196        228,450        153,589        256,939  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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)  

2017

     800  

2018

     800  

2019

     800  

2020

     800  

2021

     800  

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, 2016, the balance of assets retirement obligation was RMB125,392 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, 2016, we had 40,262 employees in our research and development departments and institutions.

In each of the years ended December 31, 2014, 2015 and 2016, our total expenditures for research and development were approximately RMB19,807 million, RMB19,300 million and RMB17,565 million, respectively.

 

69


Table of Contents

Exploration and Production

Most of China’s major oil and gas fields are characterized by a broad range of geological conditions, and a majority of China’s oil and gas fields are in continental sedimentary basins with complex structures. Our research and development efforts with respect to our exploration and production business focus on:

 

   

theories and technologies of crude oil and natural gas exploration;

 

   

oil and gas development theories and technologies;

 

   

engineering technologies and equipment;

 

   

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

 

   

technologies for security, energy conservation and 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 production of olefin aromatics;

 

   

technologies for new products of synthetic resin and synthetic rubber;

 

   

new catalyst and catalytic materials; and

 

   

technologies for safety, energy saving and environment protection.

Trend Information

In 2017, the global economy is expected to continue to recover moderately. As the global oil market gradually tends to reach a balance, the international oil price is likely to rebound although still subject to great uncertainty. China’s economy is expected to keep growing in a moderately stable manner. The consumption demand for oil and gas in China remains a growth momentum as a whole. Profound changes have taken place in the oil and gas market. Growth drivers are generated from the expedient implementation of such major strategies as the “Belt and Road” initiative, reforms in energy pricing and the reorganization in the oil and gas industry. All these will pose opportunities for us to optimize production, develop market and create a good environment for our long-term business development. We will continue to adhere to our guidelines of steady development and endeavor to implement our four major strategies with respect to resources, markets, globalization and innovation. We will continue to focus on the development of oil and gas business and further optimize our business deployment and asset structure so as to improve operation efficiency and profitability of our oil and gas business chains. We will vigorously broaden our sources of income, reduce expenditures and improve efficiency in an effort to maintain a steady and positive improvement of our production and operations, and continuously improve our market competitiveness.

With respect to the exploration and production segment, we will continue to prioritize the resource-oriented strategy and make efforts to increase reserves and maintain stable production. With respect to oil and gas exploration, we will focus on major basins, key blocks and areas, make efforts to raise the exploration investment efficiency, confirm large-scale high-quality reserves, and thus solidify our resource base. With respect to oil and gas production, we will optimize our plan and organization of production and operations, cut down resource acquisition costs, and continue to enhance the cost-effectiveness of our production. We will further the

 

70


Table of Contents

development of the unconventional oil and gas business such as coalbed methane and shale gas, in an orderly manner and continue to maintain the stability of production and profit. In 2017, we expect that our crude oil output would reach 879.0 million barrels and gas output would reach 3,276.2 Bcf, equivalent to 1,425.2 million barrels in total.

With respect to the refining and chemicals segment, we will orchestrate our activities to achieve a consistency between profitability, market condition and resources. To that end, we will make arrangements for processing load, effectively optimize the structuring of raw materials, facility operation and product mix, reasonably reduce the diesel-gasoline ratio, and increase the output of products with high profitability and high added-value. We will pay close attention to the chemical product market trend, promote integration of production, marketing, research and application, and enhance market cultivation and development so as to increase sales and boost profit. We will implement the construction of key projects in a well-paced and orderly way, improve oil product quality upgrade, and continuously improve our sustainable development capability and profitability. In 2017, we expect our crude oil processing output to be 1,016.7 million barrels.

With respect to the marketing segment, we will focus on market conditions, strengthen the interaction between production and marketing, and enhance overall profitability. We will deepen the integrated marketing of refined oil, fuel cards, non-oil business, lubricating oil and natural gas, emphasize high-profitability and high-end markets, promote the use of fuel cards, stimulate the non-oil business development by developing value-added services based on convenient stores, increase revenue and profit from such high-added-value products as lubricating oil, and develop natural gas filling terminals in an orderly manner. We will accelerate the construction of our sales networks in a multi-channel and diversified manner, promote quality upgrade of service stations, realize targeted sales through improvement in our information technology, and continuously enhance our profitability and market competitiveness.

With respect to the natural gas and pipeline segment, we will devote efforts to creating a strategic and value-oriented natural gas business chain, continue to optimize the pipeline operation management, carry out integrated operations of production, import, storage, transportation and marketing links, effectively develop the business of consignment storage and sale, and develop a pipeline network system featuring effective operations, flexible scheduling and constant safety. We will optimize our resource structure and customer structure, develop customer-oriented and flexible marketing strategies and commercialization modes, make advance preparation for the development of markets along the newly-built pipelines, and reinforce the interaction between resources and market. We will continue to implement the construction of key pipelines, make more efforts to the construction of gas transmission branch pipelines and terminal facilities, and actively participate in the online trading via Shanghai Oil and Gas Exchange as a way to further diversification of natural gas trading modes.

With respect to the international operations, we will continue to improve the strategic deployment of the five major overseas oil and gas cooperation zones, the four major strategic oil and gas channels and the three major oil and gas operation hubs by further integrating their resources and adjusting their structures and increasing their scale, strength and profit contribution. We will streamline our selection of cooperation projects, innovate assets and capital operation modes, maintain our efforts to exploration and development of existing key projects and high-profitability projects, and endeavor to increase reserves, output and profit. We will leverage the synergy and coordination between international trading and production, make overall arrangements for import and export activities as well as domestic and foreign resources, optimize the trading structure and networking deployment, and improve the business operation expertise and profit creation capability.

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

 

71


Table of Contents

Other Information

Inflation

Inflation or deflation did not have a significant impact on our results of operations for the year ended December 31, 2016.

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 13 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;

 

   

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.

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

 

72


Table of Contents

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 senior management personnel. At the end of this reporting period, the supervisory board consisted of nine supervisors, five of whom were elected, and may be removed, by the shareholders in a general meeting, and four of whom are employees representatives who were elected by our staff, and may be removed, by our staff. 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;

 

   

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.

 

73


Table of Contents

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

   Time of
Election(2)

Wang Yilin

     60      Chairman of the Board of Directors    June 2015

Zhang Jianhua

     52      Vice-Chairman and Non-executive Director    October 2016

Wang Dongjin

     54      Vice-Chairman, Executive Director and President    May 2011

Xu Wenrong

     55      Non-executive Director    May 2016

Yu Baocai

     51      Non-executive Director    May 2011

Shen Diancheng

     57      Non-executive Director    May 2014

Liu Yuezhen

     55      Non-executive Director    May 2014

Liu Hongbin

     53      Non-executive Director    May 2014

Zhao Zhengzhang

     60      Executive Director and Vice President    June 2015

Chen Zhiwu

     54      Independent Non-executive Director    May 2011

Richard H. Matzke

     79      Independent Non-executive Director    May 2014

Lin Boqiang

     59      Independent Non-executive Director    May 2014

Zhang Biyi

     63      Independent Non-executive Director    October 2014

Guo Jinping

     59      Chairman of the Board of Supervisors   

Zhang Fengshan

     54      Supervisor   

Li Qingyi

     56      Supervisor   

Jia Yimin

     56      Supervisor   

Jiang Lifu

     53      Supervisor   

Yang Hua

     53      Supervisor appointed by employees’ representatives   

Li Jiamin

     53      Supervisor appointed by employees’ representatives   

Li Wendong

     52      Supervisor appointed by employees’ representatives   

Liu Xianhua

     53      Supervisor appointed by employees’ representatives   

Sun Longde

     54      Vice President   

Huang Weihe

     59      Vice President   

Xu Fugui

     59      Vice President   

Lin Aiguo

     58      Chief Engineer   

Wang Lihua

     60      Vice President   

Wu Enlai

     56      Secretary to the Board of Directors   

Lv Gongxun

     59      Vice President   

Tian Jinghui

     54      Vice President   

Chai Shouping

     55      Chief Financial Officer   

 

(1)

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

In May 2016, Mr. Xu Wenrong was appointed a director of our company;

In October 2016, Mr. Zhang Jianhua was appointed a director and the vice chairman of the board of directors of our company;

 

74


Table of Contents

In October 2016, Mr. Liu Hongbin resigned from the position of vice president and became a non-executive director;

In May 2016, Mr. Yao Wei resigned from the position of a supervisor appointed by the employees’ representatives due to age;

In May 2016, Mr. Liu Hehe resigned from the position of a supervisor appointed by the employees’ representatives due to change of work;

In May 2016, Mr. Li Wendong and Mr. Liu Xianhua were elected supervisors by the employee representatives of our company;

In December 2016, Mr. Zhao Dong resigned from the position of chief financial officer due to change of work;

In January 2017, Mr. Chai Shouping was appointed chief financial officer of our company.

 

(2)

For directors only.

Directors

Wang, Yilin, age 60, is the chairman of our board of directors and the chairman of CNPC. Mr. Wang is a professor-level senior engineer and holds a doctorate degree. He has nearly 35 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, 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.

Zhang, Jianhua, age 52, is the vice chairman of our board of directors and a director and the general manager of CNPC. Mr. Zhang is a professor-level senior engineer and holds a doctorate degree. He has over 30 years of work experience in China’s petroleum and chemical industry. He was appointed a deputy manager of Shanghai Gaoqiao Petrochemical Company of Sinopec Group in April 1999, a deputy manager of Sinopec Shanghai Gaoqiao Company in February 2000, and the general manager of Sinopec Shanghai Gaoqiao Company in September 2000. He was appointed a vice president of China Petroleum & Chemical Corporation, or Sinopec Corp., in April 2003, and concurrently served as the general director of the Production and Operation Management Department of Sinopec Corp. from November 2003. He was appointed a senior vice president of Sinopec Corp in March 2005. He was appointed a director of the board of directors of Sinopec Corp in May 2006, and concurrently served as the chairman of the board of Sinopec (Hong Kong) Limited from June 2007, and concurrently served as the chairman of the board of directors of Sinopec Engineering (Group) Co., Ltd. from October 2014. He was appointed a director of the board and the general manager of CNPC in July 2016. In October 2016, Mr. Zhang was appointed a director and the vice chairman of our company.

Wang, Dongjin, age 54, 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

 

75


Table of Contents

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.

Xu, Wenrong, age 55, is a non-executive director of our board of directors and a deputy general manager of CNPC. Mr. Xu is a professor-level senior engineer and holds a doctorate degree. Mr. Xu has nearly 30 years of work experience in China’s oil and gas industry. Mr. Xu served as a deputy director of Bureau of Geophysical Prospecting of CNPC from November 1997, the director of Bureau of Geophysical Prospecting of CNPC from December 1999, and the vice chairman and general manager of BGP Inc., from December 2002. He was appointed an assistant president of CNPC in January 2004, and from September 2005 Mr. Xu concurrently served as the director general of development and research department of CNPC, and the chairman of CNPC Services & Engineering Ltd from July 2006. He served as a director of the board, the chief of discipline & inspection group and the chairman of the labor union of China Shipping (Group) Company, and the president of China Shipping Management Cadre College from June 2011. He was appointed a deputy general manager and the chief of discipline & inspection group of China Shipping (Group) Company in February 2014, and the chief of discipline & inspection group of China Shipping (Group) Company in July 2015. He has been served as a deputy general manager of CNPC since January 2016. Mr. Xu was appointed a non-executive director of our board of directors in May 2016.

Yu, Baocai, age 51, 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 in 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 57, 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, 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 serves as safety director of CNPC since February 2012. Mr. Shen was elected director of our company in May 2014.

Liu, Yuezhen, age 55, 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 over 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 53, is a director of our company and deputy general manager of CNPC. Mr. Liu is a senior engineer, holds a bachelor’s degree and has nearly 35 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

 

76


Table of Contents

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 60, 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. In June 2015, Mr. Zhao Zhengzhang was appointed an executive director of our company.

Independent Non-executive Directors

Chen, Zhiwu, age 54, is an independent non-executive director of our company. Mr. Chen is a tenured professor of financial economics 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 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.

Richard H. Matzke, age 79, 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 elected 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. 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 been 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.

 

77


Table of Contents

Lin, Boqiang, age 59, 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 63, 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 59, 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 an executive 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 November 2007, he 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 54, is a supervisor and the chief safety officer of our company and the general manager of our Quality, Security and Environmental Protection Department. In addition, he is the vice chief safety officer of CNPC, the general manager of Quality, Security and Environmental Protection 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 over 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. In December 2016, Mr. Zhang was appointed the general manager of our Quality, Security and Environmental Protection Department and the general manger of the Quality, Security and Environmental Protection Department of CNPC.

Li, Qingyi, age 56, 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

 

78


Table of Contents

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 56, 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 in China’s oil and gas industry. 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 appointed a supervisor of our company in May 2014.

Jiang, Lifu, age 53, 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.

Yang, Hua, age 53, is a supervisor of our company appointed 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 appointed director of the Changqing Oil Exploration Bureau in July 2014. He was appointed a supervisor of our company in October 2014.

Li, Jiamin, age 53, is a supervisor of our company appointed 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 appointed a supervisor of our company in May 2014.

Li, Wendong, age 52, is a supervisor of our company appointed by the employees’ representatives. He is also the general manager of PetroChina West-East Natural Gas Transmission Pipelines Company and general manager of PetroChina West-East Natural Gas Sales Company. Mr. Li is a professor-level senior engineer and holds a master’s degree. He has over 35 years of work experience in China’s oil and gas industry. In

 

79


Table of Contents

January 2006, he was appointed deputy director of China Petroleum Pipeline Bureau. In August 2011, he was appointed head of PetroChina West Pipelines Company. In November 2013, he was appointed general manager of PetroChina West Pipeline Company. In March 2016, he was appointed general manager of PetroChina West-East Natural Gas Transmission Pipelines Company and general manager of PetroChina West-East Natural Gas Sales Company. Mr. Li was appointed a supervisor of our company in May 2016.

Liu, Xianhua, age 53, is a supervisor of our company appointed by the employees’ representatives. He is also the general manager of PetroChina Liaoning Marketing Company and the general manager of Liaoning Petroleum Corporation. Mr. Liu is a professor-level senior economist and holds a master’s degree. He has over 30 years of work experience in China’s oil and petrochemical industry. In May 2005, he was appointed general manager of PetroChina Shandong Marketing Company. In March 2012, he was appointed general manager of PetroChina Northeast Marketing Company. In December 2015, he was appointed general manager of PetroChina Liaoning Marketing Company and general manager of Liaoning Petroleum Corporation. Mr. Liu was appointed a supervisor of our company in May 2016.

Other Senior Management

Sun, Longde, age 54, is a vice president of our company. He is also an executive director of the board and the general manager of Daqing Oilfield Company Ltd. and the director of Daqing Petroleum Administration Bureau. Mr. Sun 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. He was appointed 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 as an academician 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 general manager of our Science and Technology Management Company and the general manager of the Science and Technology Department of CNPC. He was appointed an executive director of the board and the general manager of Daqing Oilfield Company Ltd. and the director of Daqing Petroleum Administration Bureau in March 2016.

Huang, Weihe, age 59, is a vice president of our company and the general manager of PetroChina Natural Gas and Pipelines Company. He is also an executive director and the chairman of the board of Kunlun Energy Co., Ltd., and the chairman of the board of PetroChina Pipelines Co., Ltd. Mr. Huang is a professor-level senior engineer, holding a doctorate degree and has over 35 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 the Petroleum and Pipelines Bureau and concurrently the chief engineer. Mr. Huang was 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. In December 2002, Mr. Huang became the general manager of PetroChina Natural Gas and Pipelines Company and concurrently the general manager of PetroChina West-East Natural Gas Transmission Pipeline Company. In May 2008, he was appointed chief engineer of our company and in October 2011, he became a vice president of our company. In December 2013, Mr. Huang was elected to the Chinese Academy of Engineering. Since February 2016, he has concurrently served as an executive director of the board and the general manager of CNPC Hong Kong (Holding) Ltd. and a director and the chairman of the board of Kunlun Energy Co., Ltd. He was appointed chairman of the board of PetroChina Pipelines Co., Ltd. in September 2016.

Xu, Fugui