UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO_______
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 TRANSACTION PERIOD FORM ____________ TO __________
COMMISSION FILE NUMBER 1-15138
---------------
[GRAPHIC OMITTED]
CHINA PETROLEUM & CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
---------------
The People's Republic of China
(Jurisdiction of incorporation or organization)
---------------
A6, Huixingdong Street
Chaoyang District, Beijing, 100029
The People's Republic of China
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12 (b) of the Act.
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
American Depositary Shares, each representing
100 H Shares of par value RMB 1.00 per share ... New York Stock Exchange, Inc.
H Shares of par value RMB 1.00 per share........ New York Stock Exchange, Inc.*
* Not for trading, but only in connection with the registration of
American Depository Shares. 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.
State-owned domestic shares, par value RMB 1.00 per share.... 67,121,951,000
H Shares, par value RMB 1.00 per share....................... 16,780,488,000
A Shares, par value RMB 1.00 per share....................... 2,800,000,000
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes X No__
If this report 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 X 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) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No__
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer X Accelerated filer __ Non-accelerated filer __
Indicate by check mark which financial statement item the Registrant
has elected to follow.
Item 17 ___ Item 18 X
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 X No__
Table of Contents
Page
PART I .................................................................4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS............4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..........................4
ITEM 3 KEY INFORMATION.................................................4
A. SELECTED FINANCIAL DATA......................................4
B. CAPITALIZATION AND INDEBTEDNESS..............................7
C. REASONS FOR THE OFFER AND USE OF PROCEEDS....................7
D. RISK FACTORS.................................................7
ITEM 4. INFORMATION ON THE COMPANY......................................13
A. HISTORY AND DEVELOPMENT OF THE COMPANY......................13
B. BUSINESS OVERVIEW...........................................14
C. ORGANIZATIONAL STRUCTURE....................................29
D. PROPERTY, PLANT AND EQUIPMENT...............................29
ITEM 4A UNRESOLVED STAFF COMMENTS........................................30
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................30
A. GENERAL.......................................................
B. CONSOLIDATED RESULTS OF OPERATIONS..........................34
C. DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS................42
D. LIQUIDITY AND CAPITAL RESOURCES.............................51
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................56
A. DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT................56
B. COMPENSATION................................................63
C. BOARD PRACTICE..............................................64
D. EMPLOYEES...................................................65
E. SHARE OWNERSHIP.............................................66
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...............66
A. MAJOR SHAREHOLDERS..........................................66
B. RELATED PARTY TRANSACTIONS..................................66
C. INTERESTS OF EXPERTS AND COUNSEL............................67
ITEM 8. FINANCIAL INFORMATION...........................................67
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.....67
B. SIGNIFICANT CHANGES.........................................68
ITEM 9. THE OFFER AND LISTING...........................................68
A. OFFER AND LISTING DETAILS...................................68
ITEM 10. ADDITIONAL INFORMATION..........................................69
A. SHARE CAPITAL...............................................69
B. MEMORANDUM AND ARTICLES OF ASSOCIATION......................69
C. MATERIAL CONTRACTS..........................................76
D. EXCHANGE CONTROLS...........................................76
E. TAXATION....................................................77
F. DIVIDENDS AND PAYING AGENTS.................................80
G. STATEMENT BY EXPERTS........................................80
H. DOCUMENTS ON DISPLAY........................................80
I. SUBSIDIARY INFORMATION......................................80
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK......80
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..........87
PART II .................................................................87
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................87
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.............................................87
A. MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES
HOLDERS.....................................................87
B. USE OF PROCEEDS.............................................87
ITEM 15. CONTROLS AND PROCEDURES.........................................87
ITEM 16. RESERVED........................................................88
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.................................88
ITEM 16B. CODE OF ETHICS...................................................88
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................88
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDITS COMMITTEES......88
ITEM 16E. PURCHASERS OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.......................................................88
PART III .................................................................88
ITEM 17. FINANCIAL STATEMENTS............................................88
ITEM 18. FINANCIAL STATEMENTS............................................88
ITEM 19. EXHIBITS........................................................89
CERTAIN TERMS AND CONVENTIONS
Definitions
Unless the context otherwise requires, references in this annual report to:
o "Sinopec Corp.", "we", "our" and "us" are to China Petroleum &
Chemical Corporation, a PRC joint stock limited company, and
its subsidiaries;
o "Sinopec Group Company" are to our controlling shareholder,
China Petrochemical Corporation, a PRC limited liability
company;
o "Sinopec Group" are to the Sinopec Group Company and its
subsidiaries other than Sinopec Corp. and its subsidiaries;
o "China" or the "PRC" are to the People's Republic of China,
excluding for purposes of this annual report Hong Kong, Macau
and Taiwan;
o "provinces" are to provinces and to provincial-level
autonomous regions and municipalities in China which are
directly under the supervision of the central PRC government;
o "RMB" are to Renminbi, the currency of the PRC;
o "HK$" are to Hong Kong dollar, the currency of the Hong Kong
Special Administrative Region of the PRC; and
o "US$" are to US dollars, the currency of the United States of
America.
Conversion Conventions
Conversions of crude oil from tonnes to barrels are made at a rate of
one tonne to 7.35 barrels for crude oil we purchase from external sources and
one tonne to 7.1 barrels for crude oil we produce, representing the typical
specific gravity of the respective source of crude oil. Conversions of natural
gas from cubic meters to cubic feet are made at a rate of one cubic meter to
35.31 cubic feet.
Glossary of Technical Terms
Unless otherwise indicated in the context, references to:
o "billion" are to a thousand million.
o "BOE" are to barrels-of-oil equivalent; natural gas is
converted at a ratio of 6,000 cubic feet of natural gas to one
BOE.
o "primary distillation capacity" are to the crude oil
throughput capacity of a refinery's basic distillation units,
calculated by estimating the number of days in a year that
such basic distillation units are expected to operate,
excluding downtime for regular maintenance, and multiplying
that number by the amount equal to the units' optimal daily
crude oil throughput.
o "rated capacity" are to the output capacity of a given
production unit or, where appropriate, the throughput
capacity, calculated by estimating the number of days in a
year that such production unit is expected to operate,
excluding downtime for regular maintenance, and multiplying
that number by an amount equal to the unit's optimal daily
output or throughput, as the case may be.
CURRENCIES AND EXCHANGE RATES
We publish our financial statements in Renminbi. Unless otherwise
indicated, all translations from Renminbi to US dollars have been made at a rate
of RMB 8.0702 to US$1.00, the noon buying rate as certified for customs purposes
by the Federal Reserve Bank of New York on December 30, 2005. We do not
represent that Renminbi or US dollar amounts could be converted into US dollars
or Renminbi, as the case may be, at any particular rate, the rates below or at
all.
The following table sets forth noon buying rate for US dollars in New
York City for cable transfers in Renminbi as certified for customs purposes by
the Federal Reserve Bank of New York for the periods indicated:
Noon Buying Rate
Period End Average(1) High Low
(RMB per US$1.00)
2001.................................................... 8.2766 8.2770 8.2786 8.2676
2002.................................................... 8.2800 8.2772 8.2800 8.2759
2003.................................................... 8.2767 8.2772 8.2800 8.2769
2004.................................................... 8.2765 8.2767 8.2774 8.2764
2005.................................................... 8.0702 8.1826 8.2765 8.0702
November 2005 8.0804 8.0804 8.0877 8.0796
December 2005........................................... 8.0702 8.0702 8.0808 8.0702
January 2006............................................ 8.0608 8.0608 8.0702 8.0596
February 2006........................................... 8.0415 8.0415 8.0616 8.0415
March 2006 ............................................. 8.0167 8.0167 8.0505 8.0167
April 2006.............................................. 8.0165 8.0165 8.0248 8.0040
May 2006 (up to May 19, 2006)........................... 8.0175 8.0175 8.0175 8.0005
----------------------
(1) Determined by averaging the rates on the last business day of each month
during the relevant period.
FORWARD-LOOKING STATEMENTS
This annual report includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements,
other than statements of historical facts, included in this annual report that
address activities, events or developments which we expect or anticipate will or
may occur in the future are hereby identified as forward-looking statements for
the purpose of the safe harbor provided by Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. The words such as
believe, intend, expect, anticipate, project, estimate, predict, plan and
similar expressions are also intended to identify forward-looking statements.
These forward-looking statements address, among others, such issues as:
o amount and nature of future exploration and development,
o future prices of and demand for our products,
o future earnings and cash flow,
o development projects and drilling prospects,
o future plans and capital expenditures,
o estimates of proved oil and gas reserves,
o exploration prospects and reserves potential,
o expansion and other development trends of the petroleum and
petrochemical industry,
o production forecasts of oil and gas,
o expected production or processing capacities, including
expected rated capacities and primary distillation capacities,
of units or facilities not yet in operation,
o expansion and growth of our business and operations, and
o our prospective operational and financial information.
These statements are based on assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we believe
are appropriate in particular circumstances. However, whether actual results and
developments will meet our expectations and predictions depends on a number of
risks and uncertainties which could cause actual results to differ materially
from our expectations, including the risks set forth in "Item 3. Key Information
-- Risk Factors" and the following:
o fluctuations in crude oil prices,
o fluctuations in prices of our products,
o failures or delays in achieving production from development
projects, o potential acquisitions and other business
opportunities,
o general economic, market and business conditions, and
o other risks and factors beyond our control.
Consequently, all of the forward-looking statements made in this annual
report are qualified by these cautionary statements and readers are cautioned
not to place undue reliance on these forward-looking statements. These
forward-looking statements should be considered in light of the various
important factors set forth above and elsewhere in this Form 20-F. In addition,
we cannot assure you that the actual results or developments anticipated by us
will be realized or, even if substantially realized, that they will have the
expected effect on us or our business or operations.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3 KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected income statement data and cash flow data for the years
ended December 31, 2003, 2004 and 2005, and the selected balance sheet data as
of December 31, 2004 and 2005 have been derived from, and should be read in
conjunction with, the audited consolidated financial statements included
elsewhere in this annual report. The selected income statement data and cash
flow data for the years ended December 31, 2001 and 2002 and the selected
balance sheet data as of December 31, 2001, 2002 and 2003 are derived from our
audited consolidated financial statements which are not included elsewhere in
this annual report and financial statements of the acquired businesses described
below.
We acquired from Sinopec Group Company the equity interests of Sinopec
National Star Petroleum Company (Sinopec National Star) in 2001, the operations
of Sinopec Group Maoming Petrochemical Company (Sinopec Maoming), Xi'an
Petrochemical Main Factory (Xi'an Petrochemical) and Tahe Oilfield Petrochemical
Factory (Tahe Petrochemical) in 2003, and the operations of Sinopec Group
Tianjin Petrochemical Company, Sinopec Group Luoyang Petrochemical General
Plant, Zhongyuan Petrochemical Company Limited, Sinopec Group Guangzhou
Petrochemical General Plant and certain catalyst plants (collectively,
Petrochemical and Catalyst Assets) in 2004. As we and these companies are under
the common control of Sinopec Group Company, our acquisitions are considered as
"combination of entities under common control" which are accounted for in a
manner similar to a pooling-of-interests. Accordingly, the acquired assets and
related liabilities have been accounted for at historical cost and our
consolidated financial statements for periods prior to the combinations have
been restated to include the financial position and the results of operations of
these companies on a combined basis.
Moreover, the selected financial data should be read in conjunction
with our consolidated financial statements together with accompanying notes and
"Item 5. Operating and Financial Review and Prospects " included elsewhere in
this annual report. Unless otherwise indicated, our consolidated financial
statements are prepared and presented in accordance with International Financial
Reporting Standards, or IFRS. IFRS vary in certain significant respects from
accounting principles generally accepted in the United States of America, or US
GAAP. Information relating to the nature and effect of such differences is
presented in Note 39 to the consolidated financial statements.
Years Ended December 31,
----------------------------------------------------------------------
2001(6) 2002(6) 2003(6) 2004(6) 2005 2005
----------------------------------------------------------------------
RMB RMB RMB RMB RMB US$(5)
(in millions, except per share and per ADS data)
Income Statement Data(1):
IFRS
Consolidated results
Operating revenues..................... 326,424 350,078 449,001 619,783 823,117 101,994
Other income........................... - - - - 9,415 1,167
Purchased crude oil, products and
operating supplies and expenses...... (222,700) (239,088) (313,238) (443,590) (653,056) (80,923)
Selling, general and administrative
expenses............................. (18,986) (22,367) (27,228) (31,843) (33,709) (4,177)
Depreciation, depletion and
amortization......................... (24,343) (26,492) (27,951) (32,342) (31,413) (3,892)
Exploration expenses, including dry
holes................................ (3,775) (4,363) (6,133) (6,396) (6,411) (794)
Personnel expenses..................... (14,307) (15,024) (16,972) (18,634) (18,483) (2,290)
Employee reduction expenses............ (2,546) (244) (1,040) (919) (369) (46)
Taxes other than income tax............ (12,033) (12,015) (13,581) (16,324) (17,152) (2,125)
Other operating expenses, net.......... (423) (1,184) (3,975) (6,666) (5,125) (635)
----------------------------------------------------------------------
Operating income....................... 27,311 29,301 38,883 63,069 66,814 8,279
Interest expense, net of interest
income and net foreign exchange
gains (losses)....................... (3,884) (4,948) (4,463) (4,371) (4,621) (573)
Gains from issuance of shares by a
subsidiary........................... - - 136 - - -
Other income .......................... 503 563 485 908 1,035 129
----------------------------------------------------------------------
Income before income tax............... 23,930 24,916 35,041 59,606 63,228 7,835
Income tax............................. (7,819) (7,491) (10,645) (17,815) (19,388) (2,403)
----------------------------------------------------------------------
Net income............................. 16,111 17,425 24,396 41,791 43,840 5,432
======================================================================
Attributable to:
Equity shareholders of the Company... 15,503 16,296 22,424 36,019 40,920 5,071
Minority interests................... 608 1,129 1,972 5,772 2,920 361
----------------------------------------------------------------------
Net income............................. 16,111 17,425 24,396 41,791 43,840 5,432
======================================================================
Basic earnings per share(2)............ 0.18 0.19 0.26 0.42 0.47 0.06
Basic earnings per ADS(2).............. 18.20 18.80 25.86 41.54 47.20 5.85
Cash dividends declared per share...... 0.08 0.10 0.09 0.10 0.12 0.01
Segment results
Exploration and production........... 23,185 14,787 19,160 25,614 46,871 5,808
Refining............................. 2,151 6,024 6,073 5,943 (3,505) (434)
Marketing and distribution........... 2,443 8,401 11,943 14,716 10,350 1,282
Chemicals............................ (693) 1,088 3,543 18,721 14,296 1,771
Corporate and others................. 225 (999) (1,836) (1,925) (1,198) (148)
----------------------------------------------------------------------
Operating income..................... 27,311 29,301 38,883 63,069 66,814 8,279
======================================================================
US GAAP
Depreciation, depletion and
amortization......................... (18,815) (21,046) (22,585) (26,998) (25,098) (3,110)
Income tax............................. (8,084) (8,825) (12,143) (19,614) (20,969) (2,598)
Net income............................. 16,793 19,731 26,408 39,975 44,612 5,529
Basic earnings per share (2)........... 0.20 0.23 0.30 0.46 0.51 0.06
Basic earnings per ADS(2).............. 19.72 22.76 30.46 46.11 51.45 6.38
Cash dividends declared per share...... 0.08 0.10 0.09 0.10 0.12 0.01
As of December 31,
----------------------------------------------------------------------
2001(6) 2002(6) 2003(6) 2004(6) 2005 2005
----------------------------------------------------------------------
RMB RMB RMB RMB RMB US$(5)
(in millions, except per share and per ADS data)
Balance Sheet Data(1):
IFRS
Cash and cash equivalents............... 22,345 19,324 16,263 16,381 13,745 1,703
Total current assets.................... 114,885 106,666 103,039 120,271 145,291 18,003
Total non-current assets(3)............. 286,093 301,614 317,145 354,323 392,030 48,578
Total assets(3)......................... 400,978 408,280 420,184 474,594 537,321 66,581
Short-term debts and loans from Sinopec
Group Company and its affiliates
(including current portion of
long-term debts)...................... 52,306 39,710 34,046 41,021 41,243 5,110
Long-term debts and loans from Sinopec
Group Company and its affiliates
(excluding current portion of
long-term debts)...................... 82,298 86,884 87,296 97,587 106,992 13,258
Equity attributable to equity
shareholders of the Company(3)........ 159,558 166,777 171,515 193,040 223,556 27,701
Capital employed(4)..................... 295,469 298,198 302,645 346,313 387,486 48,014
US GAAP
Total non-current assets................ 260,566 279,552 297,308 337,784 375,895 46,578
Total assets............................ 370,895 381,049 395,361 450,971 512,164 63,464
Long-term debts and loans from Sinopec
Group Company and its affiliates
(excluding current portion of
long-term debts)...................... 81,798 86,569 85,496 92,884 96,649 11,976
Shareholders' equity.................... 142,260 153,121 161,832 187,850 222,058 27,514
Years Ended December 31,
----------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
----------------------------------------------------------------------
RMB RMB RMB RMB RMB US$(5)
(in millions)
Other Financial Data(1):
IFRS
Net cash from operating activities...... 57,460 56,749 62,097 69,081 76,497 9,479
Net cash (used in)/generated from
financing activities.................. (17,092) (16,681) (14,473) 5,028 (8,060) (999)
Net cash used in investing activities... (39,010) (43,096) (50,690) (73,992) (71,051) (8,804)
Capital expenditure
Exploration and production............ 20,276 20,228 20,628 21,234 23,095 2,862
Refining.............................. 9,152 6,698 9,788 14,272 14,127 1,751
Marketing and distribution............ 17,256 6,982 6,826 16,678 10,954 1,357
Chemicals............................. 12,622 7,769 7,680 11,025 9,386 1,163
Corporate and others.................. 528 816 518 1,550 1,164 144
----------------------------------------------------------------------
Total................................. 59,834 42,493 45,440 64,759 58,726 7,277
======================================================================
Capital expenditure of jointly controlled
entities
Exploration and production............ - - 1,200 1,323 772 95
Chemicals............................. - - 2,993 5,178 1,830 227
----------------------------------------------------------------------
Total................................. - - 4,193 6,501 2,602 322
======================================================================
------------------------
(1) The acquisition of Sinopec National Star in 2001, the acquisitions of
Sinopec Maoming, Xi'an Petrochemical and Tahe Petrochemical in 2003, and
the acquisitions of Petrochemical and Catalyst Assets in 2004 from
Sinopec Group Company are considered as "combination of entities under
common control" which are accounted in a manner similar to a
pooling-of-interests (as-if pooling-of-interests accounting).
Accordingly, the acquired assets and liabilities have been accounted for
at historical cost and the consolidated financial statements for periods
prior to the combinations have been restated to include the financial
position and results of operations of these acquired companies on a
combined basis. The considerations for these acquisitions were treated as
equity transactions.
(2) Basic earnings per share and per ADS have been computed by dividing net
income attributable to equity shareholders of the Company by the weighted
average number of shares in issue.
(3) Includes the effect of the revaluation of property, plant and equipment
as of September 30, 1999. In addition, property, plant and equipment of
Sinopec Maoming, Xi'an Petrochemical, Tahe Petrochemical, and
Petrochemical and Catalyst Assets were revalued as of June 30, 2003,
October 31, 2003, October 31, 2003 and June 30, 2004, respectively, in
connection with the acquisitions by Sinopec Corp.
(4) Equals the sum of short-term debts, long-term debts, loans from Sinopec
Group Company and its affiliates and total equity less cash and cash
equivalents.
(5) Translated solely for the convenience of the readers into US dollars at
the rate prevailing on December 31, 2005 of US$1.00 to RMB 8.0702.
(6) As described in Note 38 to the consolidated financial statements, certain
reclassifications to periods prior to 2005 have been made to comply with
certain new IFRS's adopted in 2005.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Risks Relating to Sinopec Corp.
Our development plans have significant capital expenditure and
financing requirements, which are subject to a number of risks and
uncertainties.
Our current capital expenditures plan contemplates approximately RMB 70
billion in 2006. Our actual capital expenditures may vary significantly from
these planned amounts due to various factors.
Our ability to obtain external financing in the future is subject to a
variety of uncertainties including:
o our future results of operations, financial condition and cash flows;
o the economic condition in China and the market environment for our
products;
o the cost of financing and the condition of financial markets; and
o the issuance of relevant government approvals and other project
risks associated with the development of infrastructure in China.
Our failure to obtain sufficient funding for our operations or
development plans could adversely affect our business, results of operations and
financial condition.
We face strong competition from domestic and foreign competitors.
Among our competitors, some are major integrated petroleum and
petrochemical companies within and outside the PRC, which have recently become
more significant participants in the petroleum and petrochemical industry in
China. We believe such trend will continue. Increased competition may have a
material adverse effect on our financial condition and results of operations.
We may not be able to pass on all increases in our crude oil costs.
In 2005, approximately 80% of the crude oil required for our refinery
business was sourced from outside suppliers. In addition, our development will
leave us no choice but to source an increasing amount of crude oil from outside
suppliers. While we try to match price increases with corresponding crude oil
price increases, our ability to pass on cost increases to our customers is
dependent on international and domestic market conditions as well as the PRC
government price control over refined petroleum products. In 2004 and 2005,
crude oil price increased significantly, but we were not able to pass the
increased material cost to our customers due to the government's tight control
over prices of certain refined petroleum products including gasoline, diesel and
jet fuel. Although it was reported that new petroleum products price-setting
mechanism had been formulated by the relevant government authority, we cannot
predict when the revised price-setting mechanism will be fully implemented, and
if implemented, to what extent the new price-setting mechanism will allow us to
pass our increased crude oil costs to our refined petroleum products customers.
Related party transactions; non-competition; conflicts of interest.
We have engaged from time to time and will continue to engage in a
variety of transactions with Sinopec Group Company, which provides to us a
number of services, including, but not limited to, ancillary supply,
engineering, maintenance, transport, educational and community services. The
nature of our transactions with Sinopec Group Company is governed by a number of
service and other contracts between Sinopec Group Company and us. In addition,
Sinopec Group Company has interests in businesses which compete or are likely to
compete, either directly or indirectly, with our businesses. We and Sinopec
Group Company have entered into a non-competition agreement whereby Sinopec
Group Company has agreed to refrain from operating businesses which compete or
could compete with us in any of our domestic or international markets; grant us
an option to purchase Sinopec Group Company's operations that compete or could
compete with our businesses; operate its sales enterprises and service stations
in a manner uniform to our sales and service operations; and appoint us as sales
agent for certain of its products which compete or could compete with our
products. Notwithstanding the foregoing contractual arrangements, because
Sinopec Group Company is our dominant shareholder and the interests of the
Sinopec Group Company may conflict with our own interests, Sinopec Group Company
or any of its member may take actions that favor its interests or other
subsidiaries' interests over ours.
In addition, while we and Sinopec Group Company have entered into
agreements which generally provide that these services provided by Sinopec Group
Company will be priced on terms at least as favorable to us as ordinary
commercial terms, we have limited or no practical alternative source of supply
for some of these services, utilities, materials and equipment at reasonable
cost. As a result, in the future we may have limited ability to negotiate with
Sinopec Group Company over the terms of our agreements with respect to these
services, utilities, materials and equipment.
The oil and natural gas reserves data in this annual report are only
estimates, and our actual production, revenues and expenditures with
respect to our reserves may differ materially from these estimates.
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves, and in the timing of development
expenditures and the projection of future rates of production. The reserve data
set forth in this annual report represent estimates only. Adverse changes in
economic conditions may render it uneconomical to develop certain reserves. Our
actual production, revenues, taxes and fees payable and development and
operating expenditures with respect to our reserves may likely vary from these
estimates.
The reliability of reserves estimates depends on:
o the quality and quantity of technical and economic data;
o the prevailing oil and gas prices applicable to our production;
o the production performance of the reservoirs;
o extensive engineering judgments; and
o consistency in the PRC government's oil policies.
In addition, new drilling, testing and production following the
estimates may cause substantial upward or downward revisions in the estimates.
Furthermore, the discounted future cash flow calculated by applying the 10%
discount rate, which was included in "Consolidated Financial
Statements-Supplemental Information on Oil and Gas Producing Activities
(Unaudited)" following Item 19, may not represent the actual net present value
of the relevant cash flow.
Our continued business success depends in part on our ability to
replace reserves and develop newly discovered reserves.
Our ability to achieve our growth objectives is dependent in part on
our level of success in discovering or acquiring additional oil and natural gas
reserves and further exploring our current reserve base. Our exploration and
development activities for additional reserves expose us to inherent risks
associated with drilling, including the risk that no economically productive oil
or natural gas reservoirs will be encountered. Without reserve additions through
further exploration and development or acquisition activities, our reserves and
production will decline over time as our reserves will be depleted.
We are in the process of improving our internal controls and management
systems to enable us to certify the effectiveness of our internal
controls over financial reporting under the Sarbanes-Oxley Act of 2002.
Our failure to timely and successfully upgrade these controls and
systems could subject us to regulatory actions and harm the price of
our stock.
The United States Securities and Exchange Commission, as required by
Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every
public company in the United States to include a management report on such
company's internal controls over financial reporting in its annual report, which
contains management's assessment of the effectiveness of the company's internal
controls over financial reporting. In addition, an independent registered public
accounting firm must attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting. These
requirements will first apply to our annual report on Form 20-F for the fiscal
year ending December 31, 2006. Our management may conclude that our internal
controls over our financial reporting are not effective. Moreover, even if our
management concludes that our internal controls over financial reporting are
effective, our independent registered public accounting firm may still be unable
to attest to our management's assessment or may issue a report that concludes
that our internal controls over financial reporting are not effective. In
preparation for the implementation of the requirements of Section 404, we are
undertaking company-wide documentation of internal controls, performing the
system and process evaluation and testing required. During the course of our
evaluation, documentation and attestation, we have identified certain
deficiencies that could adversely affect our ability to record, process,
summarize and report financial data consistent with our management's assertions
in our financial statements. Although we have commenced planning for remedial
measures to make necessary improvements, we cannot assure you that we will be
able to remedy those identified deficiencies in time to meet the deadline
imposed by the Sarbanes-Oxley Act for compliance with the requirements of
Section 404. We are also in the process of conducting further evaluation of our
internal control over financial reporting and may identify other deficiencies
that we may not be able to remedy in time by the deadline for compliance with
Section 404. If we fail to achieve and maintain the adequacy of our internal
controls, we may not be able to conclude that we have effective internal
controls, on an ongoing basis, over financial reporting in accordance with the
Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to help prevent fraud. As a result, our
failure to achieve and maintain effective internal controls 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 or H shares. Furthermore, we have already
incurred considerable costs and spent significant management time and other
resources in an effort to comply with Section 404 and other requirements of the
Sarbanes-Oxley Act. We anticipate that we will continue to incur considerable
costs and use significant resources for compliance with Section 404.
Risks Relating to the Petroleum and Petrochemical Industry
Our business operations may be adversely affected by present or future
environmental regulations.
As an integrated petroleum and petrochemical company, we are subject to
extensive environmental protection laws and regulations in China. These laws and
regulations permit:
o the imposition of fees for the discharge of waste substances;
o the levy of fines and payments for damages for serious environmental
offenses; and
o the government, at its discretion, to close any facility which fails
to comply with orders and require it to correct or stop operations
causing environmental damage.
Our production operations produce substantial amounts of waste water,
gas and solid waste materials. In addition, our production facilities require
operating permits that are subject to renewal, modification and revocation. We
have established a system to treat waste materials to prevent and reduce
pollution and believe that our operations substantially comply with all
applicable PRC environmental laws and regulations as they have been previously
interpreted and enforced.
The PRC government has moved, and may move further, toward more
rigorous enforcement of applicable laws, and toward the adoption of more
stringent environmental standards, which, in turn, would require us to incur
additional expenditures on environmental matters.
Our operations may be adversely affected by the cyclical nature of the
market.
Most of our revenues are attributable to sales of refined petroleum
products and petrochemical products, and certain businesses and related products
have historically been cyclical and sensitive to the availability and prices of
feedstock and general economic conditions, such as changes in industry capacity
and output levels, cyclical changes in regional and global economic conditions,
prices and availability of substitute products and changes in consumer demand.
With the further reduction of tariffs and other import restrictions in the PRC,
many of our products have become increasingly subject to the cyclicality of
global markets. While we are a company integrated with upstream, midstream and
downstream operations, it can help us reduce the effects of industry cycles only
to a certain extent.
Our business faces operation risks and natural disasters that may cause
significant property damages, personal injuries and interruption of
operations, and we may not have sufficient insurance coverage for all
the financial losses incurred by us.
Exploring for, producing and transporting crude oil and natural gas and
producing and transporting refined and petrochemical products involve a number
of hazards. For example, we handle many highly flammable, explosive, poisonous
and harmful materials and operate many facilities under high pressure and high
temperatures. As with many other companies in the world which conduct similar
businesses, we have experienced accidents that have caused property damage and
personal injuries and we cannot assure you that these industry-related accidents
will not occur in the future. In addition, significant operating hazards and
natural disasters may cause interruption to our operations and property and
environmental damages that could have a material adverse impact on our financial
condition and results of operations.
Our insurance coverage may not be sufficient to cover all the financial
losses caused by the operation risks and natural disasters. We maintain
insurance coverage with Sinopec Group Company on our property, plant, equipment
and inventory. The amount of coverage is determined on the basis of the
historical value of the covered fixed assets and, with respect to inventory,
twice each year on the basis of the average month-end inventory value of the
most recent six months. The amount of our insurance coverage may be less than
the replacement cost of the covered properties and plants and may not be
sufficient to cover all our financial losses. Furthermore, we do not carry any
business interruption insurance or third party liability insurance to cover
claims in respect of personal injury, property or environmental damage arising
from accidents on our property or relating to our operations other than third
party liability insurance with respect to certain transportation vehicles.
Losses incurred or payments required to be made by us, which are not fully
insured, may have a material adverse effect on our results of operations.
Risks Relating to the PRC
Government regulations may limit our activities and affect our business
operations.
The PRC government, though gradually liberalizing its regulation of oil
and petrochemical industry, continues to exercise a certain degree of control
over the petroleum and petrochemical industry in China by, among others:
o licensing the right to explore and produce crude oil and natural
gas;
o publishing from time to time guidance prices for gasoline, diesel
and jet fuel;
o allocating and pricing of certain resources and services;
o assessing taxes and fees payable, such as the recently imposed
special levy on revenues generated from sales of domestically
produced crude oil when the realized price exceeds US$40 per barrel;
o setting import and export quotas and procedures; and
o setting safety, environmental and quality standards.
As a result, we may face certain constraints on our flexibility and
ability to expand our business operations or to maximize our profitability. Also
see "-- Risks Relating to Sinopec Corp -- we may not be able to pass on all
increases in our crude oil costs."
Some of our development plans require compliance with state policies
and regulatory confirmation and registration.
We are currently engaged in a number of construction, renovation and
expansion projects. Some of our large construction, renovation and expansion
projects are subject to governmental confirmation and registration. The timing
and cost of completion of these projects will depend on numerous factors,
including such confirmation and registration from relevant PRC government
authorities and general economic conditions in China. If any of our important
projects required for our future growth are not confirmed or registered, or not
confirmed or registered in a timely manner, our results of operations and
financial condition could be adversely impacted.
Entry by China into the World Trade Organization significantly
increases competition from foreign companies in our lines of business.
China became a member of the World Trade Organization ("WTO") in
December 2001. In entering the WTO, China has agreed to significantly reduce the
trade barriers over time for imports that have historically existed and that
currently exist in China such as:
o granting foreign-owned companies the right to import into China
crude oil and refined petroleum products through companies
authorized by the PRC government;
o permitting foreign companies to distribute and market refined
petroleum products in both retail and wholesale markets in China;
and
o significantly reducing tariffs on refined petroleum products and
petrochemical products.
As the refined petroleum product wholesale market is expected to open
to foreign producers in 2006, we will face more competition in refined petroleum
products market. Such increased foreign competition may have an adverse effect
on our results of operations.
Government control of currency conversion and exchange rate fluctuation
may adversely affect our operations and financial results.
We receive substantially all of our revenues in Renminbi. A portion of
such revenues will need to be converted into other currencies to meet our
foreign currency needs, including but not limited to:
o import of crude oil and other materials;
o debt service on foreign currency-denominated debt;
o purchases of imported equipment; and
o payment of any cash dividends declared in respect of the H shares
(including ADS) .
The existing foreign exchange regulations have significantly reduced
government foreign exchange controls for transactions under the current account,
including trade and service related foreign exchange transactions and payment of
dividends. Foreign exchange transactions under the capital account, including
principal payments in respect of foreign currency-denominated obligations,
continue to be subject to significant foreign exchange controls and require the
approval of the State Administration of Foreign Exchange. These limitations
could affect our ability to obtain foreign exchange through debt or equity
financing, or to obtain foreign exchange for capital expenditures. The PRC
government has stated publicly that it intends to make the Renminbi freely
convertible in the future. However, we cannot predict whether the PRC government
will continue its existing foreign exchange policy and when the PRC government
will allow free conversion of Renminbi.
The value of the Renminbi against the US dollar and other currencies
may fluctuate and is affected by, among other things, changes in China's
political and economic conditions. The conversion of Renminbi into foreign
currencies, including US dollars, has historically been set by the People's Bank
of China. On July 21, 2005, the PRC government changed its policy of pegging the
value of the Renminbi to the US dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a band against a basket of certain foreign
currencies. This change in policy resulted initially in an approximately 2.0%
appreciation in the value of the Renminbi against the US dollar. Since the
adoption of this new policy, the value of Renminbi against the US dollar has
fluctuated on a daily basis within narrow ranges, but overall has further
strengthened against the US dollar. There remains significant international
pressure on the PRC government to further liberalize its currency policy, which
could result in a further and more significant appreciation in the value of the
Renminbi against the US dollar. As we outsource a significant portion of our
crude oil requirement which are benchmarked to US dollar-denominated
international prices, fluctuations in the value of the Renminbi against the US
dollars and certain other foreign currencies may affect our crude oil costs. In
addition, any significant revaluation of the Renminbi may have a material effect
on our revenues and financial conditions, and the value of, and any dividends
payable on, our ADSs in foreign currency terms.
Enforcement of shareholder rights; mandatory arbitration.
Currently, the primary sources of shareholder rights are our articles
of association, the PRC Company Law and the Listing Rules of the Hong Kong Stock
Exchange, which, among other things, impose certain standards of conduct,
fairness and disclosure on us, our directors and our controlling shareholder. In
general, their provisions for protection of shareholder's rights and access to
information are different from those applicable to companies incorporated in the
United States, the United Kingdom and other Western countries. In addition, the
mechanism for enforcement of rights under the corporate framework to which we
are subject may also be relatively undeveloped and untested. To our knowledge,
there has not been any published report of judicial enforcement in the PRC by H
share shareholders of their rights under constituent documents of joint stock
limited companies or the PRC Company Law or in the application or interpretation
of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock
limited companies. We cannot assure you that our shareholders will enjoy
protections that they may be entitled in other jurisdictions.
China does not have treaties providing for the reciprocal recognition
and enforcement of judgments of courts with the United States, the United
Kingdom or most other Western countries, and therefore recognition and
enforcement in China of judgments of a court in any of these jurisdictions in
relation to any matter not subject to a binding arbitration provision may not be
assured. Our articles of association as well as the Listing Rules of the Hong
Kong Stock Exchange provide that most disputes between holders of H shares and
us, our directors, supervisors, officers or holders of domestic shares, arising
out of the articles of association or the PRC Company Law concerning the affairs
of our company or with respect to the transfer of our shares, are to be resolved
through arbitration by arbitration organizations in Hong Kong or China, rather
than through a court of law. On June 18, 1999, an arrangement was made between
Hong Kong and the PRC for the mutual enforcement of arbitral awards. This new
arrangement was approved by the Supreme People's Court of the PRC and the Hong
Kong Legislative Council, and became effective on February 1, 2000. So far as we
are aware, no action has been brought in China by any shareholder to enforce an
arbitral award, and we are uncertain as to the outcome of any action brought in
China to enforce an arbitral award granted to shareholders.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our legal and commercial name is China Petroleum & Chemical
Corporation. Our head office is located at A6, Huixindong Street, Chaoyang
District, Beijing 100029, the People's Republic of China and our telephone
number is (8610) 6499-0060 and our fax number is (8610) 6499-0022. We have
appointed SINOPEC USA Inc., 150 E. 52nd St., 28th Fl., New York, NY 10022, USA
(telephone number: (212) 759-5085) as our agent for service of processes for
actions brought under the U.S. securities laws.
We were established as a joint stock limited company on February 25,
2000 under the Company Law of the PRC with Sinopec Group Company as the sole
shareholder. Our principal businesses consist of petroleum and petrochemical
businesses transferred to us by Sinopec Group Company pursuant to a
reorganization agreement. Such businesses include:
o exploration for, development, production and marketing of crude oil
and natural gas;
o refining of crude oil and marketing and distribution of refined
petroleum products, including transportation, storage, trading,
import and export of petroleum products; and
o production and sales of petrochemical products.
Sinopec Group Company's continuing activities consist, among other
things, of:
o operating certain petrochemical facilities, small capacity
refineries and retail service stations retained by Sinopec Group
Company;
o providing physical geography exploration, and well drilling, survey,
logging and downhole operational services;
o manufacturing production equipment and providing equipment
maintenance services;
o providing construction services;
o providing utilities, such as electricity and water; and
o providing other operational services including transportation
services.
Sinopec Group Company transferred the businesses to us either by
transferring its equity holdings in subsidiaries or by transferring their assets
and liabilities. Sinopec Group Company also agreed in the reorganization
agreement to transfer to us its exploration and production licenses and all
rights and obligations under the agreements in connection with its core
businesses transferred to us. The employees relating to these assets were also
transferred to us.
In order to expand our core businesses, prevent competition among
members of the same group and reduce related party transactions, since 2001 we
have acquired consecutively from Sinopec Group Company Sinopec National Star,
Sinopec Maoming, Tahe Petrochemical and Xi'an Petrochemical, Petrochemical and
Catalyst Assets, certain refining facilities and petrol stations. We have also
sold and disposed of certain auxiliary assets.
We privatized Sinopec Beijing Yanhua Petrochemical Company Limited
(Beijing Yanhua) by way of merger by absorption through Beijing Feitian
Petrochemical Co., Ltd. (Beijing Feitian), a wholly owned subsidiary of ours
established for the purpose of such merger. In accordance with the Agreement of
Merger by Absorption between Beijing Feitian and Beijing Yanhua dated December
29, 2004, during the year ended December 31, 2005, Beijing Feitian completed the
purchase of the publicly-held shares of Beijing Yanhua from the public
shareholders at HK$3.80 per share in cash, and the aggregate consideration for
such merger is approximately HK$3.846 million (RMB 4.076 billion). The merger
became effective in June 2005.
We privatized Sinopec Zhenhai Refinery and Chemicals Co., Ltd. (ZRCC)
by way of merger by absorption through Ningbo Yonglian Co., Ltd. (Ningbo
Yonglian), a wholly owned subsidiary of ours established for the purpose of such
merger. In accordance with the Agreement of Merger by Absorption between ZRCC
and Ningbao Yonglian signed on November 12, 2005, Ningbo Yonglian purchased the
listed H shares of ZRCC from its shareholders at HK$ 10.60 per share in cash,
the total consideration being HK$ 7.672 billion. The proposed merger was
approved on January 12, 2006 at the general meeting of shareholders and the
general meeting of independent shareholders of ZRCC and has been approved by the
shareholders of Ningbo Yonglian. ZRCC was delisted from the Hong Kong Stock
Exchange on March 24, 2006.
On February 25, 2006, our board of directors approved voluntary
all-cash tender offers to acquire all the publicly-held shares of Sinopec Qilu
Petrochemical Co., Ltd. at a price of RMB 10.18 per share, all the publicly-held
shares of Sinopec Yangzi Petrochemical Co., at a price of RMB 13.95 per share,
all the publicly-held shares of Sinopec Zhongyuan oil & Gas Hi-tech Co., Ltd. at
a price of RMB 12.12 per share, all the publicly-held shares of Sinopec Shengli
Oil Field Dynamic (Group) Co., Ltd. at a price of RMB 10.30 per share and all
the non-tradable shares of Sinopec Shengli Oil Field Dynamic (Group) Co., Ltd.
held by other investors at a price of RMB 5.60 per share. Our tender offers
became effective on April 6, 2006. Consequently, shares of each of Sinopec
Yangzi Petrochemical Co., Sinopec Zhongyuan Oil & Gas Hi-tech Co., Ltd. and
Sinopec Shengli Oil Field Dynamic (Group) Co., Ltd. have been delisted from
Shenzhen stock exchange as of April 21, 2006, and shares of Sinopec Qilu
Petrochemical Co., Ltd. has been delisted from Shanghai Stock Exchange as of
April 24, 2006. We expect to pay an aggregate of RMB 14.3 billion to the holders
of the above shares if all of their shares are tendered to us.
B. BUSINESS OVERVIEW
Exploration and Production
Overview
We currently explore for, develop and produce crude oil and natural gas
in a number of areas across China. As of December 31, 2005, we held 204
production licenses with terms ranging from 7 to 55 years. Our production
licenses are renewable upon our application 30 days prior to expiration. During
the term of our production license, we pay an annual production license fee of
RMB 1,000 per square kilometers.
As of December 31, 2005, we held 356 exploration licenses for various
blocks in which we engaged in exploration activities. The maximum term of our
exploration licenses is 7 years. Our exploration licenses may be renewed upon
our application 30 days prior to expiration of the original term with each
renewal for a two-year term. We are obligated to make an annual minimum
exploration investment relating to the exploration blocks in respect of which
the exploration licenses are issued. In addition, we are also obligated to pay
an annual exploration license fee starting from RMB 100 per square kilometer up
to RMB 500 per square kilometer. We are entitled under state laws and
regulations to apply for reduction and exemption of exploration license fee for
exploration in the western region, ocean and northeast region of the PRC.
Properties
We currently operate 16 oil and gas producing fields, each of which
consists of many oil and gas producing blocks and all of which are located in
China.
Shengli oilfield is our most important producing oil field and the
second largest producing oil field in China. It consists of 68 producing blocks
of various sizes extending over an area of 61,000 square kilometers in northern
Shandong province. Most of blocks are located in the Jiyang trough with various
oil producing levels.In 2005, Shengli field produced 191 million barrels of
crude oil and 31.08 billion cubic feet of natural gas, with an average daily
production of 538 thousand barrels-of-oil equivalent, accounting for
approximately 62.2% of our total crude oil and natural gas production for the
year.
We discovered Puguang gas field in northeast Sichuan Province, which is
estimated to be the largest and most abundant marine facies natural gas field in
China. We have prepared a phase I development plan, which plans to achieve
commercial production of more than 4 billion cubic meters per annum of natural
gas by 2008 and 8 billion cubic meters per annum by 2010. In connection with the
contemplated project, we plan to build a natural gas pipeline from northeast
Sichuan Province to Jinan, Shandong Province. The government has approved us to
proceed with preparatory work for the project.
Oil and Natural Gas Reserves
Our estimated proved reserves of crude oil and natural gas as of
December 31, 2005 were 3,786 million barrels-of-oil equivalent, (including 3,294
million barrels of crude oil and 2,952 billion cubic feet of natural gas). Our
estimated proved reserves do not include additional quantities recoverable
beyond the term of the relevant production licenses, or that may result from
extensions of currently proved areas, or from application of improved recovery
processes not yet tested and determined to be economical.
The following tables set forth our proved oil and gas reserves as of
and for the years ended December 31, 2003, 2004 and 2005.
As of and For the Years
Ended December 31,
---------------------------------------
2003 2004 2005
Proved developed and undeveloped reserves (crude oil) (in million barrels)
Beginning of year................................................. 3,320 3,257 3,267
Revisions of previous estimates................................... (81) 23 26
Improved recovery................................................. 143 127 142
Extensions and discoveries........................................ 146 134 138
---------------------------------------
Production........................................................ (271) (274) (279)
---------------------------------------
End of year....................................................... 3,257 3,267 3,294
Proved developed reserves (crude oil) (in million barrels)
Beginning of year................................................. 2,732 2,786 2,808
---------------------------------------
End of year....................................................... 2,786 2,808 2,870
=======================================
Proved developed and undeveloped reserves
(in billion cubic feet)
Beginning of year................................................. 3,329 2,888 3,033
Revisions of previous estimates................................... (649) (95) (42)
Extensions and discoveries........................................ 396 447 183
Production........................................................ (188) (207) (222)
---------------------------------------
End of year....................................................... 2,888 3,033 2,952
=======================================
Proved developed reserves (natural gas) (in billion cubic feet)
Beginning of year................................................. 1,056 1,249 1,398
=======================================
End of year....................................................... 1,249 1,398 1,557
=======================================
The following tables set forth proved developed and undeveloped crude
oil and natural gas reserves of our primary oil and gas producing fields as of
December 31, 2003, 2004 and 2005.
As of December 31,
---------------------------------------
2003 2004 2005
---------------------------------------
(in million barrels)
Proved developed and undeveloped crude oil reserves
Shengli........................................................... 2,271 2,307 2,362
Zhongyuan......................................................... 427 346 314
Xibei............................................................. 167 218 238
Henan............................................................. 184 173 154
Jiangsu........................................................... 108 112 112
Others............................................................ 100 112 114
---------------------------------------
Total............................................................. 3,257 3,267 3,294
=======================================
As of December 31,
---------------------------------------
2003 2004 2005
---------------------------------------
(in billion cubic feet)
Proved developed and undeveloped natural gas reserves
Shengli........................................................... 309 357 322
Zhongyuan......................................................... 567 512 383
Xibei............................................................. 77 67 95
Jiangsu........................................................... 7 9 9
Others(1)......................................................... 1,928 2,088 2,143
---------------------------------------
Total............................................................. 2,888 3,033 2,952
=======================================
Note: (1) indicates proved developed and undeveloped natural gas
reserves primarily from Xinan and Huabei gas fields.
Oil and Natural Gas Production
In 2005, we produced an average of 865,000 barrels-of-oil equivalent
per day, of which approximately 88.29% was crude oil and 11.71% was natural gas.
The following tables set forth the average daily production of crude oil and
natural gas for the years ended December 31, 2003, 2004 and 2005.
For the Years Ended December 31,
---------------------------------------
2003 2004 2005
---------------------------------------
(in thousand barrels)
Average daily crude oil production
Shengli.......................................................... 518 519 524
Zhongyuan........................................................ 70 65 62
Xibei............................................................ 59 69 82
Henan............................................................ 36 37 36
Jiangsu.......................................................... 31 31 32
Others........................................................... 28 28 28
---------------------------------------
Total Production................................................. 742 749 764
=======================================
For the Years Ended December 31,
---------------------------------------
2003 2004 2005
---------------------------------------
(in million cubic feet)
Average daily natural gas production
Shengli.......................................................... 78 87 85
Zhongyuan........................................................ 165 169 161
Xibei............................................................ 44 47 50
Henan............................................................ 10 11 10
Jiangsu.......................................................... 9 5 6
Xinan............................................................ 165 185 203
Others........................................................... 43 63 94
---------------------------------------
Total Production................................................. 514 567 608
=======================================
Lifting Cost & Realized Prices
The following table sets forth our average lifting costs per
barrel-of-oil equivalent of crude oil and natural gas produced, average sales
prices per barrel of crude oil and average sales prices per thousand cubic
meters of natural gas for the years ended December 31, 2003, 2004 and 2005.
Total Shengli Others
-------------------------------------------
(RMB) (RMB) (RMB)
For the year ended December 31, 2005
Average petroleum lifting cost per BOE.......................... 66.44 66.35 66.58
Average realized sales price....................................
Per barrel of crude oil...................................... 375.30 379.01 366.98
Per thousand cubic meters of natural gas..................... 673.01 880.91 656.56
For the year ended December 31, 2004
Average petroleum lifting cost per BOE........................... 55.64 55.14 56.55
Average realized sales price.....................................
Per barrel of crude oil....................................... 275.56 279.37 266.78
Per thousand cubic meters of natural gas...................... 615.53 718.21 606.01
For the year ended December 31, 2003
Average petroleum lifting cost per BOE........................... 53.57 53.49 53.65
Average realized sales price.....................................
Per barrel of crude oil....................................... 228.20 230.76 222.15
Per thousand cubic meters of natural gas...................... 595.75 584.90 596.66
Exploration and Development Activities
The following table sets forth the numbers of our exploration and
development wells, including a breakdown of successful or productive wells and
dry holes we drilled during the years ended December 31, 2003, 2004 and 2005.
Total Shengli Xibei Others
-------------------------------------------------------
For the year ended December 31, 2005
Exploration
-- Successful.................................... 256 109 14 133
-- Dry holes..................................... 289 91 16 182
Development
-- Productive.................................... 2,327 970 82 1,275
-- Dry holes..................................... 21 1 12 8
For the year ended December 31, 2004
Exploration
-- Successful.................................... 300 149 10 141
-- Dry holes..................................... 290 51 15 224
Development
-- Productive.................................... 2,365 999 56 1,310
-- Dry holes..................................... 17 - 17 -
For the year ended December 31, 2003
Exploration
-- Successful.................................... 295 151 8 136
-- Dry holes..................................... 265 88 8 169
Development
-- Productive.................................... 1,880 909 99 872
-- Dry holes..................................... 10 4 3 3
The following table sets forth the numbers of our development crude oil
and natural gas wells as of December 31, 2005.
As of December 31, 2005
---------------------------------------
Total Shengli Others
---------------------------------------
Crude oil development wells
-- Total......................................... 29,072 17,558 11,514
-- Productive.................................... 23,614 13,751 9,863
Natural gas development wells
-- Total......................................... 2,094 341 1,753
-- Productive.................................... 1,667 124 1,543
Refining
Overview
We processed approximately 139.9 million tonnes of crude oil in 2005,
representing approximately 47.5% of China's total crude oil throughput. We
produce a full range of refined petroleum products. The following table sets
forth our production of our principal refined petroleum products for the years
ended December 31, 2003, 2004 and 2005.
For the Years Ended December 31,
-------------------------------------------------
2003 2004 2005
(in million tonnes)
Gasoline....................................... 21.7 23.6 23.0
Diesel......................................... 41.7 50.9 54.9
Kerosene including jet fuel.................... 5.3 6.4 6.6
Light chemical feedstock....................... 16.5 17.7 21.1
Lubricant...................................... 1.0 1.3 1.3
Liquefied petroleum gas........................ 6.2 7.1 7.4
Fuel oil....................................... 7.3 7.8 6.9
Gasoline and diesel are our largest revenue producing products, and are
sold mostly through our marketing and distribution segment through both
wholesale and retail channels. We use most of our production of chemical
feedstock as feedstock for our own chemical operations. Most of our production
of other refined petroleum products are sold domestically to a wide variety of
industrial and agricultural customers, and a small amount are exported.
Refining Facilities
We operate 26 refineries in China, all of which are located in our
principal market. As of December 31, 2005, our consolidated primary distillation
capacity was 160 million tonnes per annum. The following table sets forth our
total primary distillation capacity per annum and crude oil throughputs as of
and for the years ended December 31, 2003, 2004 and 2005.
As of and for the Years Ended December 31,
----------------------------------------------
2003 2004 2005
----------------------------------------------
Primary distillation capacity (million tonnes per annum)....... 142.3 155.2 160.1
Crude oil throughputs (million tonnes)......................... 116.3 132.9 139.9
In 2005, measured by the total output from our refineries, our overall
gasoline yield was 16.4%, overall diesel yield was 39.2%, overall kerosene yield
was 4.71% and overall light chemical feedstock yield was 15.1%. Other products
include lubricant, liquefied petroleum gas, solvent, asphalt, petroleum coke,
paraffin and fuel oil. "Yields" represents the number of tonnes of a refined
petroleum product expressed as a percentage of the number of tonnes of our crude
oil throughput. For the years ended December 31, 2003, 2004 and 2005, our
overall yield for all refined petroleum products at our refineries was 92.63%,
93.09% and 93.24%, respectively.
The following table sets forth the primary distillation capacity per
annum and crude oil throughput as of and for the years ended December 31, 2003,
2004 and 2005 of each of our 13 large refineries.
As of and for the Years Ended December 31,
-----------------------------------------------------------------------------------------
2003 2004 2005
-----------------------------------------------------------------------------------------
Primary Primary Primary
Distillation Crude Oil Distillation Crude Oil Distillation Crude Oil
Refinery Capacity Throughput Capacity Throughput Capacity Throughput
------------------------------------------------------------------------------------------------------------
(in million tonnes)
Maoming....... 13.5 11.09 13.5 13.22 13.5 12.7
Zhenhai....... 17.0 13.63 20.0 15.95 20.0 17.1
Qilu.......... 10.5 7.95 10.5 8.76 10.5 10.0
Yanshan....... 8.0 7.01 8.0 7.83 8.0 8.0
Guangzhou..... 7.7 6.85 7.7 7.38 7.7 6.7
Gaoqiao....... 10.0 8.42 11.0 9.05 11.0 10.1
Jinling....... 10.5 7.15 13.0 8.22 13.0 10.7
Tianjin....... 5.0 4.68 5.0 4.94 5.0 4.7
Yangzi........ 8.0 6.26 8.0 6.38 8.0 7.8
Shanghai...... 8.8 8.61 8.8 9.11 14.0 9.5
Changling..... 5.0 3.52 5.0 4.30 5.0 4.1
Luoyang....... 5.0 4.57 5.0 5.21 6.5 4.6
Jinmen........ 5.0 3.18 5.0 3.67 5.0 3.9
In 2005, we revamped and put on stream 18 sets of refining units to
increase our refining capacity and to improve our refined petroleum product
quality. Our hydro-refining capacity and coking capacity increased by 3.73
million tonnes per annum and by 2.8 million tonnes per annum, respectively, as
of the end of 2005 over that at the end of 2004. In addition, we have completed
the construction of the Ningbo-Shanghai-Nanjing pipeline for imported crude oil
and have put it into commercial operation in 2005.
Sources of Crude Oil
Our most important raw material is crude oil. The following table sets
forth the sources of our crude oil supply for the years ended December 31, 2003,
2004 and 2005.
For the Years Ended December 31,
--------------------------------------------------
2003 2004 2005
--------------------------------------------------
Source of Supply (in million tonnes)
Self-supply..................... 28.2 28.1 28.6
PetroChina Company Ltd.......... 13.1 10.3 8.8
CNOOC Ltd....................... 5.6 6.7 5.1
Import.......................... 71.1 89.0 99.1
--------------------------------------------------
Total........................ 118.0 134.2 141.6
==================================================
Marketing and Sales of Refined Petroleum Products
Overview
We operate the largest sales and distribution system for refined
petroleum products in China. In 2005, we distributed and sold in China
approximately 104.6 million tonnes of gasoline, diesel and kerosene including
jet fuel, representing a market share of approximately 63.6% in China. Of our
total sales volume of gasoline, diesel and kerosene including jet fuel, 63.5
million tonnes were sold through service stations that we wholly or jointly
owned, leased and operated, 20.4 million tonnes were sold through our direct
sales network, and the remaining 20.7 million tonnes were sold through our
wholesale network.
In 2005, we completed and put into operation a refined petroleum
products pipeline in Southwest China, which we expect to reduce our
transportation cost of refined petroleum products sold in that market. To
further strengthen our refined petroleum products retail network and improve our
brand awareness and customer loyalty, in 2005, we added a net of 786 service
stations through construction or acquisition and renovated a number of our
existing service stations.
Most of the refined petroleum products sold by us are produced
internally. In 2005, approximately 76.6% of our gasoline sales volume and
approximately 83.8% of our diesel sales volumes were produced internally.
Retail
All of our retail sales are made through a network of service stations
and petroleum shops which operate under the Sinopec brand. Through this unified
network we are more able to implement consistent pricing policies, maintain both
product and service quality standards and more efficiently deploy our retail
network.
In 2005, we sold approximately 63.5 million tonnes of gasoline and
diesel through our retail network, representing approximately 64.4% of our total
gasoline and diesel sales volume. Our retail market share in 2005 was
approximately 76.7% in our principal market. As of December 31, 2005, our retail
network consists of 27,367 service stations, which are wholly-owned and operated
by us or non-wholly-owned and operated or leased by us, and 2,280 franchised
service stations that are owned and operated by third parties.
Most of our wholly-owned service stations are located in central
commercial districts or relatively heavy traffic areas. They typically have
longer operating histories compared with other service stations and, therefore,
often enjoy better brand name recognition and higher sales volume. The average
gasoline and diesel sales volume of our operated service stations per annum was
1,686 tonnes, 2,003 tonnes and 2,321 tonnes, respectively, for the years ended
December 31, 2003, 2004 and 2005.
Direct Sales
In 2005, we expanded the direct sales market for medium and small
commercial customers and sold approximately 20.4 million tonnes of refined
petroleum products, including 3.1 million tonnes of gasoline and 17.1 million
tonnes of diesel, through direct sales to those commercial customers such as
industrial enterprises, hotels, restaurants and agricultural producers.
Wholesale
In 2005, we sold approximately 20.7 million tonnes of gasoline, diesel,
kerosene including jet fuel through wholesale channels, representing
approximately 19.8% of our total sales volume of gasoline, diesel, and kerosene
including jet fuel. Our wholesale sales include sales to large commercial or
industrial customers and independent distributors as well as sales to certain
special customers designated by the government.
We sold approximately 11.7 million tonnes of gasoline, diesel and
kerosene including jet fuel to certain special customers designated by the
government, representing approximately 56.7% of our aggregate wholesale volume
of these products in 2005. These special customers include the military,
railway, airlines, marine and utility industries and these sales are made at
prices and in volumes directly or indirectly determined by the PRC government.
Among our sales to these special customers, we sold approximately 836,000 tonnes
of gasoline, 5.3 million tonnes of diesel, 5.6 million tonnes of kerosene
including jet fuel, representing, respectively, 2.8%, 7.7% and 93.8% of our
total sales volume of the respective products.
Of our wholesale sales in 2005, we sold approximately 8.9 million
tonnes of gasoline, diesel and kerosene including jet fuel through wholesale
centers located in the 19 provinces in our principal market and our three branch
sales companies outside our principal market, representing 43.3% of our total
wholesale volume of these products. Most sales by the wholesale centers are made
to large commercial or industrial customers and independent distributors from
various industries such as public transportation, tourism and agricultural
industries.
Through our wholesale centers, we operate 495 storage facilities with a
total capacity of approximately 12.8 million cubic meters, substantially all of
which are wholly-owned by us. Our wholesale centers are connected to our
refineries by railway, waterway and, in some cases, by pipelines. We also own
some dedicated railways, oil wharfs, oil barges, rail tankers and oil trucks.
Chemicals
Overview
We are the largest petrochemical producer in China. We produce a full
range of petrochemical products including intermediate petrochemicals, synthetic
resins, synthetic fiber monomers and polymers, synthetic fibers, synthetic
rubber and chemical fertilizers. Synthetic resins, synthetic fibers, synthetic
rubber, chemical fertilizers and some intermediate petrochemicals comprise a
significant majority of our external sales. Synthetic fiber monomers and
polymers and intermediate petrochemicals, on the other hand, are mostly
internally consumed as feedstock for the production of other chemical products.
Our chemical operations are integrated with our refining businesses, which
supply most of our chemical feedstock such as naphtha. Because of strong
domestic demand, most of our petrochemical products are sold in the domestic
market.
The following table sets forth our production of major chemical
products for the years ended December 31, 2003, 2004 and 2005.
For the Years Ended December 31,
-----------------------------------
2003 2004 2005
-----------------------------------
(in thousand tonnes)
Ethylene....................................................... 3,982 4,074 5,319
Synthetic resins............................................... 5,805 6,221 7,605
of which: performance compound resins..................... 2,707 3,034 3,498
Synthetic rubbers.............................................. 553 561 626
Monomers and polymers for synthetic fibers..................... 5,633 6,021 6,725
Synthetic fibers, 1,659 1,654 1,570
of which: differential fibers............................. 623 753 811
Urea........................................................... 2,028 2,630 1,780
Note: (1) The operational data for 2003 and 2004 include the production of
Maoming Ethylene, and that of various chemical assets acquired from
Sinopec Group in 2004.
(2) The operational data for 2005 include the production of the two joint
venture ethylene facilities, Shanghai Secco and BASF-YPC.
Products
Intermediate Petrochemicals
We are the largest ethylene producer in China. In 2005, Shanghai SECCO
Petrochemical Co., Ltd., our ethylene joint venture with BP, and BASF-YPC Co.,
Ltd., our ethylene joint venture with BASF, both commenced production and
significantly increased our ethylene capacity. Our rated ethylene capacity,
including those of our two joint ventures, was 5.395 million tonnes per annum,
which represented 69.4% of the total domestic ethylene capacity, as of December
31, 2005. In 2005, we produced 5.32 million tonnes of ethylene, representing
approximately 70.4% of the total domestic output. Nearly all of our olefins
production is used as feedstock for our petrochemical operations.
We produce aromatics mainly in the forms of benzene and xylene, which
are used primarily as feedstock for purified terephthalic acid, or PTA, the
preferred raw material for polyester. We are the largest aromatics producer in
China.
Organic chemicals extracted mainly from olefins and aromatics are also
intermediate petrochemicals and are essential raw materials for synthetic
resins, synthetic rubber and synthetic fibers. We are the largest producer of
butanol, styrene, paraxylene, vinyl acetate, phenol and acetone in China.
The following table sets forth our rated capacity per annum, production
volume and major plants of production as of or for the year ended December 31,
2005 for our principal intermediate petrochemical products.
Our Rated Our
Capacity Production Major Plants of Production
---------------------------------------------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Ethylene..................... 5,395 5,319 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin and
Zhongyuan
Propylene.................... 4,065 4,688 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin,
Zhongyuan, Gaoqiao, Anqing,
Jinan, Jingmen and Wuhan
Benzene...................... 1,950 1,907 Yanshan, Shanghai, Yangzi, Qilu,
Guangzhou, Zhenhai, Tianjin and
Luoyang
Acetic acid.................. 130 103 Shanghai and Yangzi
Styrene...................... 964 891 Yanshan, Qilu and Guangzhou
Xylene....................... 1,868 1,892 Shanghai, Yangzi, Qilu, Tianjin
and Luoyang
Phenol....................... 350 347 Yanshan and Gaoqiao
Synthetic Resins
Synthetic resins are a core downstream product group. Our principal
synthetic resin products are polyethylene, polypropylene, polyvinyl chloride, or
PVC, and polystyrene. We are the largest producer of polyethylene, polypropylene
and polystyrene in China. Synthetic resins are widely used in various sectors
including agriculture, construction, automobile and consumer products
industries.
The following table sets forth our rated capacity per annum, production
volumes and major plants of production for each of our principal synthetic
resins as of or for the year ended December 31, 2005.
Our Rated Our
Capacity Production Major Plants of Production
---------------------------------------------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Polyethylene..................... 3,493 3,523 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin and
Zhongyuan
Polypropylene.................... 2,915 3,123 Yanshan, Shanghai, Yangzi,
Guangzhou, Wuhan, Jingmen, Qilu,
Maoming, Tianjin, Zhongyuan and
Fujian
Polyvinyl chloride............... 600 586 Qilu
Polystyrene...................... 516 293 Yanshan, Qilu and Guangzhou
Synthetic Fiber Monomers and Polymers
Our principal synthetic fiber monomers and polymers are purified
teraphthalic acid, ethylene glycol, acrylonitrile, caprolactam and polyester.
Based on our 2005 production, we are the largest producer of all of these
synthetic fiber monomers and polymers except for acrylonitrile in China. Most of
our production of synthetic fiber monomers and polymers are used as feedstock
for synthetic fibers.
The following table sets forth our rated capacity per annum, our
production volume and major plants of production as of or for the year ended
December 31, 2005 for each type of our principal synthetic fiber monomers and
polymers.
Our Rated Our
Capacity Production Major Plants of Production
---------------------------------------------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Purified teraphthalic acid....... 2,584 2,655 Shanghai, Yangzi, Yizheng,
Tianjin and Luoyang
Ethylene glycol.................. 1,033 785 Yanshan, Shanghai, Yangzi and
Tianjin
Acrylonitrile.................... 510 418 Shanghai, Gaoqiao, Anqing and
Qilu
Caprolactam...................... 135 160 Shijiazhuang and Baling
Polyester ..................... 2,856 2,602 Yanshan, Shanghai, Yizheng,
Tianjin and Luoyang
Synthetic Fibers
We are the largest producer of polyester and acrylic fibers in China.
Our principal synthetic fiber products are polyester fiber, acrylic fiber,
nylon, vinylon fiber and polypropylene fiber.
The following table sets forth our rated capacity per annum, production
volume and major plants of production for each type of our principal synthetic
fibers as of and for the year ended December 31, 2005.
Our Rated Our
Capacity Production Major Plants of Production
---------------------------------------------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Polyester fiber................ 1,462 1,192 Yizheng, Shanghai, Tianjin and
Luoyang
Acrylic fiber.................. 315 369 Shanghai, Anqing and Qilu
Nylon.......................... 18 3 Baling
Polypropylene fiber............ 17 6 Shanghai
Synthetic Rubbers
Our principal synthetic rubbers are cis-polybutadiene rubber, styrene
butadiene rubber, or SBR, styrene butadiene-styrene thermoplastic elastomer and
isobutadiene isoprene rubber, or IIR. Based on our 2005 production, we are the
largest producer of SBR and cis-polybutadiene rubber and the only producer of
IIR in China.
The following table sets forth our rated capacity per annum, production
volume and major plants of production as of or for the year ended December 31,
2005 for each of our principal synthetic rubbers.
Our Rated Our
Capacity Production Major Plants of Production
---------------------------------------------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Cis-polybutadiene rubber......... 202 281 Yanshan, Qilu, Maoming and Gaoqiao
Styrene butadiene rubber......... 195 161 Yanshan, Qilu, Maoming and Gaoqiao
Styrene-butadiene-styrene 70 145 Yanshan
thermoplastic elastomers ........
Isobulylene isoprene rubber...... 30 39 Yanshan
Chemical Fertilizers
We produce synthetic ammonia and urea. Our synthetic ammonia is used to
manufacture urea, caprolactam and acrylic nitrile.
The following table sets forth our rated capacity per annum, our
production volume and major plants of production for ammonia and urea as of or
for the year ended December 31, 2005.
Our Rated Our
Capacity Production Major Plants of Production
---------------------------------------------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Ammonia...................... 2,135 1,091 Zhenhai, Jinling, Anqing,
Jiujiang, Qilu, Hubei and Baling
Urea......................... 3,610 1,780 Zhenhai, Jinling, Anqing,
Jiujiang, Qilu, Hubei and Baling
Marketing and Sales of Petrochemicals
Price and volume of petrochemical sales are primarily market driven.
The southern and eastern regions in China, where most of our petrochemical
plants are located, constitute the major petrochemical market in China. Our
proximity to the major petrochemical market gives us a competitive geographic
advantage over our competitors.
Our principal sales and distribution channels consist of direct sales
to end-users, most of which are large and medium size manufacturing enterprises,
and sales to distributors in our national sales network. In 2005, we sold
approximately 53.8% of our petrochemical products directly to end-users and
46.2% to our distributors.
In 2005, we established a specialized sales company for chemical
products. Through the chemicals sales company, we intend to integrate our
company-wide chemicals marketing and branding strategies and optimize our
logistical support to and resource allocation in chemicals sales, so as to
better leverage on our leading market position to enhance our overall
profitability in our chemicals segment.
Competition
Exploration and Production
Because our production of crude oil has only constituted approximately
19.8% of our crude oil requirements, we generally do not compete for crude oil
customers. However, we compete with other market participants such as PetroChina
and CNOOC for the acquisition of desirable crude oil and natural gas prospects.
Refining and Marketing of Refined Petroleum Products
Market participants compete primarily on the basis of quality of
products and service, efficiency of operations including proximity to customers
and awareness of brand name. While we constantly face competition from
PetroChina and other market players, we believe that we have a competitive
advantage in our principal market over our competitors in most of these aspects.
We expect competition in the refined petroleum products market to
increase substantially when China fully opens its refined petroleum product
market to foreign companies at the end of 2006. These competitors are likely to
be large, reputable foreign companies producing quality products at competitive
prices. There can be no assurance that such foreign competition will not
adversely affect our existing market position and our results of operations in
our refined petroleum products business.
Chemicals
We compete with domestic and foreign chemicals producers in the
chemicals market. We believe our proximity to customers has given us significant
competitive geographical advantages. Most of our petrochemical production
facilities are located in the eastern and southern regions in China, an area
which has experienced higher economic growth rates in China in the past two
decades. Proximity of our production facilities to our markets has given us an
advantage over our competitors in terms of easy access to our customers,
resulting in lower transportation costs, more reliable delivery of products and
better service to customers.
Patents and Trademarks
In 2005, we applied for 835 patents in China, of which 662 have been
granted patent rights. As of December 31, 2005, we owned a total of 2,582
patents in China. In addition, Sinopec Group Company owned a total of 3,148
patents in China as of December 31, 2005. We may use certain patents of Sinopec
Group Company under royalty-free licenses. These patents expire from time to
time and cover many products, processes and product uses. We also have
royalty-free licenses from Sinopec Group Company to use certain Sinopec Group
Company's trademarks and brands, including the "Sinopec" brand, for our products
and services. Our trademark licenses from Sinopec Group Company are for a term
of ten years commencing on February 25, 2000, and the licenses are renewable at
our option.
Regulatory Matters
Overview
China's petroleum and petrochemical industry has seen significant
liberalization in the past ten years. However, the exploration, production,
marketing and distribution of crude oil and natural gas, as well as the
production, marketing and distribution of certain refined petroleum products are
still subject to regulation of many government agencies including:
National Development and Reform Commission ("NDRC")
The NDRC is responsible for formulating and implementing key policies
in respect of petroleum and petrochemical industry, including:
o Formulating guidance plan for annual production, import and export
amount of crude oil, natural gas and gasoline nationwide based on
its forecast on macro economic conditions in China;
o Publishing guidance prices for certain refined petroleum products,
including gasoline and diesel;
o Approving domestic and overseas resource investment projects whose
capital expenditure is in excess of certain amount; and
o Approving Sino-foreign cooperation projects that are in excess of
certain investment limits.
The Ministry of Commerce ("MOFCOM")
MOFCOM is responsible for examining and approving production sharing
contracts, Sino-foreign equity joint venture contracts and Sino-foreign
cooperation joint venture contracts for oil and gas development within PRC. It
is also responsible to issue quotas and licenses for import and export of crude
oil and refined oil.
Ministry of Land and Resources ("MLR")
The MLR is responsible for issuing the licenses that are required to
explore and produce crude oil and natural gas in China.
Regulation of Exploration and Production
Exploration and Production Rights
The PRC Constitution provides that all mineral and oil resources belong
to the state. In 1986, the standing committee of the National People's Congress
passed the Mineral Resources Law which authorizes the Ministry of Land and
Resources, or the MLR, to exercise administrative authority over the exploration
and production of the mineral and oil resources within the PRC, including its
territorial waters. 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 grant exploration
licenses and production licenses on a competitive bidding or other basis it
considers appropriate. Applicants for these licenses must be companies approved
by the State Council to engage in oil and gas exploration and production
activities. Currently, only we, PetroChina, CNOOC and Yanchang
Petroleum Group Ltd. have received such approval.
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 an annual minimum exploration
investment relating to the exploration blocks in respect of which the license is
issued. Investment ranges from RMB 2,000 per square kilometer for the initial
year to RMB 5,000 for the second year and to RMB 10,000 for the third and
subsequent years. Additionally, the holder has to pay an annual exploration
license fee of RMB 100 per square kilometer for each of the first three years
and increases by an additional RMB 100 per square kilometer per year for
subsequent years up to a maximum of RMB 500 per square kilometer. The maximum
term of an exploration license is 7 years. The exploration license may be
renewed upon application by the holder 30 days prior to expiration of the
original term with each renewal for a two-year term.
At the exploration stage, an applicant can also apply for a progressive
exploration and production license that allows the holder to test and develop
reserves not yet fully proved. The progressive exploration and production
license has a maximum term of 15 years. Upon the reserves becoming proved for a
block, the holder must apply for a full production license in order to undertake
production.
The MLR issues full production licenses to applicants on the basis of
the reserve reports approved by relevant authorities. The maximum term of a full
production license is 30 years unless a special dispensation is given by the
State Council. Due to a special dispensation granted to us by the State Council,
the maximum term of our full production licenses is 55 years. The full
production license is renewable upon application by the holder 30 days prior to
expiration. A holder of the full production license has to pay an annual full
production right usage fee of RMB 1,000 per square kilometer.
All companies approved by the State Council to engage in oil and gas
exploration and production activities may apply for exploration and production
licenses for onshore and off-shore oil and natural gas resources without
geographical restrictions. Among the major PRC oil and gas companies, we have
exploration and production licenses for the exploration and production of both
onshore and offshore crude oil and natural gas resources in China, PetroChina
has the exploration and production licenses for onshore crude oil and natural
gas in China and CNOOC has the exploration and production licenses for offshore
crude oil and natural gas in China.
Exploration and production licenses do not grant the holders the right
to enter upon any land for the purpose of exploration and production. Holders of
exploration and production licenses must separately obtain the right to use the
land covered by the licenses, and current owners of the rights to use such land
may transfer or lease the land to the license holder.
Price of Crude Oil
The PRC government no longer regulates crude oil prices and generally
allows crude oil producers and buyers to negotiate the prices. Any premiums or
discounts in relation to the crude oil prices are subject to the agreements
between the parties.
Volume and Price of Natural Gas
The NDRC formulates the annual natural gas supply guidelines which
require natural gas producers to distribute specified amount of natural gas to
specified fertilizer producers. The actual production level of natural gas
(excluding the amount supplied to the fertilizer producers) is determined by the
natural gas producers themselves.
The price of natural gas has two components:
o ex-factory price; and
o pipeline transportation fee
Prior to December 2005, ex-factory prices vary depending on whether or
not the natural gas sold is within the government-formulated natural gas supply
guidelines. For natural gas sold within the government-formulated supply
guidelines, the NDRC fixes the ex-factory prices according to the nature of the
customers. Most of these customers are fertilizer producers. For sales of
natural gas which is produced in excess of the government-formulated natural gas
supply plan, the NDRC publishes the median guidance ex-factory price and allows
the producers to set the price within +/-10% of this guidance price.
Since December 2005, the NDRC simplified the ex-factory price-setting
mechanism by dividing gas prices into two tiers and publishing a median guidance
ex-factory price for each tier. Producers may negotiate with their customers to
set the price within +/-10% of the guidance price. In addition, the NDRC would
adjust the guidance price by up to 8% annually to reflect the price trends of
crude oil and other alternative energies.
Natural gas producers also submit to the NDRC for examination and
approval any proposed transportation fee for the natural gas transported by
pipelines based on the capital investment made in the pipeline, the depreciation
period for the pipeline and the ability of end users to pay.
Regulation of Refining and Marketing of Refined Petroleum Products
Volume and Price Controls on Gasoline and Diesel
Controls on retail and wholesale sales. Other than as described below
for sales to special customers, there are no state controls on volume
allocations of gasoline and diesel. The PRC government continues to exercise
control over gasoline and diesel prices.
Beginning on October 17, 2001, the NDRC has started determining the
retail guidance prices of gasoline and diesel based on the FOB prices on the
Singapore, Rotterdam and New York markets. Within the limit of the total
adjustable amount, the NDRC may adjust the prices of gasoline and diesel
according to the market conditions in China. In addition, the NDRC would publish
the retail guidance prices whenever it determines that the average price of
these international markets have fluctuated over a certain limit. In the past
few years when international crude oil prices and refined petroleum products
prices both increased significantly, the PRC government implemented tighter
price control over refined petroleum products by adjusting their prices in a
lesser degree than their prevailing international prices, partially resulting in
our inability to fully pass our increased crude oil costs to our refined
petroleum products customers. See "Item 3. Key Information --D. Risk Factors
--Risks Relating to Sinopec Corp. --We may not be able to pass on all increases
in our crude oil costs."
We are permitted to set our own retail prices within +/-8% of the
published guidance prices. There are no government restrictions on how we set
prices for sales among our segments and subsidiaries.
Controls on sales to special customers. The NDRC allocates to us a
quota of minimum supply of gasoline and diesel that must be made available to
meet the requirements of the military, national reserves, railways, airlines and
other similar special customers. Prices to these special customer are
benchmarked against the import parity prices for the relevant products. Except
for sales to the military and national reserve, we are permitted to charge up to
a 8% premium on the special customer prices to these special customers.
Imports and Exports
Other than filing with the government, state-controlled enterprises,
such as our company, are no longer subject to the import quota requirements.
Import and export by non-state-controlled enterprises continue to be subject to
quota and licensing requirements. The MOFCOM is responsible for issuing import
and export licenses. See "Item 3-Key Information-D. Risk Factors-Risks Relating
to the PRC-Entry by China into the World Trade Organization significantly
increases competition from foreign companies in our lines of business."
Investment
Under the State Council's Decision on Investment System Reform,
investments without the use of government funds are only subject to a licensing
system or a registration system, as the case may be. It is the result of
reforming the old system which any investment, regardless of investors, source
of funding and nature, is subject to approval of different levels of governments
and relevant authorities based on investment scale. Under the current system,
only significant projects and the projects of restrictive nature are subject to
approval so as to maintain social and public interests, and all other projects
of any investment scale are only subject to a registration system.
Overseas investment by any Chinese party that is US$ 30 million or
above and falls within the category of resources development shall be verified
and approved by the NDRC. Other projects that involve the use of foreign
exchange by the Chinese party of US$ 10 million or above shall be verified and
approved by the NDRC. Any overseas investment projects other than the foregoing
shall be filed with the NDRC and/or the MOFCOM if the investor is an enterprise
managed by the central government, or approved by its local government according
to law. Domestic enterprise's establishment of overseas enterprise (with the
exception of financial enterprises) shall be approved by the MOFCOM.
Taxation, Fees and Royalty
Companies which operate petroleum and petrochemical businesses in China
are subject to a variety of taxes, fees and royalties.
In 2005, the PRC government increased resources tax of crude oil and
natural gas, respectively, from the range of RMB 8-30 to the range of RMB 14-30
per tonne for crude oil, and from the range of RMB 2-15 to the range of RMB 7-15
per thousand cubic meter for natural gas. The actual applicable rate for each
oil field may differ depending on the volume of the exploration and production
activities and the particular production costs at the oil field.
On March 26, 2006, the PRC government imposed a special crude oil
revenues levy on revenues generated from the sale of domestically produced crude
oil when its realized price exceeds US$ 40 per barrel. The special crude oil
revenues levy has five levels and is calculated and charged according to the
progressive ad valorem rates on the excess amounts. The levy is calculated on a
monthly basis and collected on a quarterly basis. The applicable rate of the
levy is determined based on the weighted average crude oil sale price of the
exploration and production company of a particular month.
The table below sets forth the various taxes, fees and royalties
generally payable by us or by such companies in China.
Tax Item Tax Base Tax Rate
Corporate income tax Taxable income 33%.
Value-added tax Revenue 13% for liquefied petroleum gas, natural gas, and low
density polyethylene for use as agricultural film and
fertilizers and 17% for other items. We generally charge
value-added tax to our customers at the time of
settlement on top of the selling prices of our products
on behalf of the taxation authority. We may directly
claim refund from the value-added tax collected from our
customers of any value-added tax that we paid for (i)
purchasing materials consumed during the production
process; (ii) charges paid for drilling and other
engineering services; and (iii) labor consumed during
the production process.
Sales volume 5% for the Sino-foreign oil and gas exploration and
development cooperative projects. However, input
value-added tax cannot be deducted.
Business tax Revenue from pipeline 3%.
transportation services
Consumption tax Aggregate volume sold or RMB 277.6 per tonne for gasoline and RMB 117.6 per tonne
self-consumed for diesel, payable by producer.
Import tariff CIF China price 5% for gasoline and 6% for diesel.
Resource tax Aggregate volume sold or RMB 14 to RMB 30 per tonne for crude oil. RMB 7 to RMB
self-consumed 15 per thousand cubic meters for natural gas. The actual
applicable rate for
each oil field may
differ depending on
the volume of the
exploration and
production activities
and costs required
for the production at
the particular oil
field.
Compensatory fee for mineral Revenue 1% for crude oil and natural gas.
resources
Exploration license fee Area RMB 100 to 500 per square kilometer per annum.
Production license fee Area RMB 1,000 per square kilometer per annum.
Royalty fee(1) Production volume Progressive rate of 0-12.5% for crude oil and 0-3% for
natural gas.
City construction tax Total amount of 1% to 7%.
value-added tax,
consumption tax and
business tax
Education Surcharge Total amount of 3%.
value-added tax,
consumption tax and
business tax
Special Crude Oil Any revenue derived Progressive rate of 20% to 40% for revenue derived from
Revenue Levy from sale of domestically crude oil with realized price in excess of US$ 40 per
produced crude oil when barrel, i.e. 20% for the portion in excess of US$ 40 per
the realized crude oil barrel up to US$ 45 per barrel (inclusive); 25% for the
price exceeds US$ 40 per portion in excess of US$ 45 per barrel up to US$ 50 per
barrel. barrel (inclusive); 30% for the portion in excess of US$ 50 per barrel to
US$ 55 per barrel (inclusive); 35% for the portion in excess
of US$ 55 per barrel to US$ 60 per barrel (inclusive); and 40%
for the portion in excess of US$ 60 per barrel.
__________
(1) Payable only by Sino-foreign oil and gas exploration and development
cooperative projects, and the project companies of those cooperative
projects are not subject to any other resource taxes or fees.
C. ORGANIZATIONAL STRUCTURE
For a description of our relationship with Sinopec Group Company, see
"Item 4. Information on the Company -- A. History and Development of the
Company" and "Item 7. Major Shareholders and Related Party Transactions." For a
description of our significant subsidiaries, see Note 33 to our consolidated
financial statements.
D. PROPERTY, PLANT AND EQUIPMENT
We own substantially all of our properties, plants and equipment
relating to our business activities. We hold production licenses covering all of
our interests in our developed and undeveloped crude oil and natural gas fields
and productive wells. See "Item 4. Information on the Company -- B. Business
Overview" for description of our property, plant and equipment.
Environmental Matters
We are subject to various national environmental laws and regulations
and also environmental regulations promulgated by the local governments in whose
jurisdictions we have operations. For example, national regulations promulgated
by the central government set discharge standards for emissions into air and
water. They also set forth schedules of discharge fees for various waste
substances. These schedules usually provide for discharge fee increases for each
incremental increase of the amount of discharge up to a certain level. Above a
certain level, the central regulations permit the local government to order any
of our facilities to cure certain behavior causing environmental damage and
subject to the central government's approval, the local government may also
issue orders to close any of our facilities that fail to comply with the
existing regulations.
Each of our production subsidiaries has implemented a system to control
its pollutant emissions and to oversee compliance with the PRC environmental
regulations. We have a central safety and environmental compliance department to
set our internal environmental requirements and procedures, and to manage and
supervise the environmental protection programs at the various production
facilities. Each production subsidiary has an environmental compliance
department which is responsible for supervising environmental matters at the
subsidiary and implementing our environmental requirements and procedures. These
departments report both to the management of the subsidiary and to the central
environmental compliance department.
Our production facilities have their own facilities to treat waste
water, solid waste and waste gases on site. Waste water first goes through
preliminary treatment at our own waste water treatment facilities. Thereafter,
the water is sent to nearby waste water treatment centers operated either by us
or by Sinopec Group for further treatment. All solid waste materials generated
by our production facilities are buried at disposal sites or burned in furnaces
either operated by us or by Sinopec Group. Waste gases are generally treated and
burned in furnaces before dissipation and the ash is disposed in accordance with
our solid waste disposal procedures.
Environmental regulations also require companies to file an
environmental impact report to the environmental bureau for approval before
undertaking any construction of a new production facility or any major expansion
or renovation of an existing production facility. Such an undertaking will not
be permitted to operate until the environmental bureau has performed an
inspection and is satisfied that environmentally sound equipment has been
installed for the facility.
We believe our environmental protection systems and facilities are
adequate for us to comply with current applicable national and local
environmental protection regulations. The PRC government, however, may impose
stricter regulations which require additional expenditure on compliance with
environmental regulations.
We paid pollutant discharge fees of approximately RMB 245 million in
2003, RMB 248 million in 2004 and RMB 493 million in 2005.
To date, we have not incurred any significant expenditure for
environmental remediation, are currently not involved in any environmental
remediation, and have not accrued any amounts for environmental remediation
relating to our operations. Under existing legislation, we believe that there
are no probable liabilities that will have a material adverse effect on our
financial position or operating results nor are we subject to any legally or
contractually mandated asset retirement obligations.
Insurance
In respect of our refining, petrochemical production, and marketing and
sales operations, we currently maintain with Sinopec Group Company, under the
terms of its Safety Production Insurance Fund ("SPI Fund"), approximately RMB
253.5 billion of coverage on our property and plants and approximately RMB 23.5
billion of coverage on our inventory. In 2005, we paid an insurance premium of
approximately RMB 1,097 million to Sinopec Group Company for such coverage.
Transportation vehicles and products in transit are not covered by Sinopec Group
Company and we maintain insurance policies for those assets with insurance
companies in the PRC.
The insurance coverage under SPI Fund applies to all enterprises
controlled by Sinopec Group Company under regulations published by the Ministry
of Finance. We believe that, in the event of a major accident, we will be able
to recover most of our losses from insurance proceeds paid under the SPI Fund or
by insurance companies.
Pursuant to an approval of the Ministry of Finance, on January 29, 2002
Sinopec Group Company entered into an agreement with China People's Insurance
Company to purchase a property and casualty policy which would also cover our
assets. The policy provides for an annual maximum cumulative claim amount of RMB
4.0 billion and a maximum of RMB 2.36 billion per occurrence.
Consistent with what we believe to be customary practice among PRC
enterprises, we do not currently carry any third party liability insurance to
cover claims in respect of personal injury, environmental damage arising from
accidents on our property or relating to our operations other than on our
transportation vehicles. We have not had a third party liability claim filed
against us during the past three years. We also do not carry business
interruption insurance, as such coverage is not customary in the PRC.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. GENERAL
The following discussion and analysis should be read in conjunction
with our audited financial statements and the accompanying notes. Certain
financial information presented in this section is derived from our audited
financial statements that have been prepared in accordance with IFRS. IFRS vary
in certain significant respects from US GAAP. Information relating to the nature
and effect of such differences is presented in Note 39 to the consolidated
financial statements. Unless otherwise indicated, all financial data presented
on a consolidated basis or by segment, are presented net of inter-segment
transactions (i.e., inter-segment and other intercompany transactions have been
eliminated).
We acquired Sinopec National Star Petroleum Company from Sinopec Group
Company in 2001, Sinopec Maoming, Xi'an Petrochemical and Tahe Petrochemical
Factory from Sinopec Group Company in 2003 and certain Petrochemical and
Catalyst Assets from Sinopec Group Company in 2004. As we and these companies
are under the common control of Sinopec Group Company, our acquisitions are
considered as "combination of entities under common control" which are accounted
for in a manner similar to a pooling-of-interests. Accordingly, the acquired
assets and related liabilities have been accounted for at historical cost and
our consolidated financial statements for periods prior to the combinations have
been restated to include the financial position and the results of operations of
these acquired companies on a combined basis.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations contained elsewhere in this annual report are based on our
consolidated financial statements which have been prepared in accordance with
IFRS. Our reported financial condition and results of operations are sensitive
to accounting methods, assumptions and estimates that underlie the preparation
of our financial statements. We base our assumptions and estimates on historical
experience and on various other assumptions that we believe to be reasonable and
which form the basis for making judgments about matters that are not readily
apparent from other sources. On an on-going basis, our management evaluates its
estimates. Actual results may differ from those estimates as facts,
circumstances and conditions change.
The selection of critical accounting policies, the judgments and other
uncertainties affecting application of those policies and the sensitivity of
reported results to changes in conditions and assumptions are factors to be
considered when reviewing our financial statements. Our principal accounting
policies are set forth in Note 2 to the consolidated financial statements. We
believe the following critical accounting policies involve the most significant
judgments and estimates used in the preparation of our financial statements.
Oil and gas properties and reserves
The accounting for our upstream oil and gas activities is subject to
special accounting rules that are unique to the oil and gas business. There are
two methods to account for oil and gas business activities, the successful
efforts method and the full cost method. We have elected to use the successful
efforts method. A description of our policies for oil and gas properties,
impairment, maintenance and repair activities is set forth in Note 2 to our
consolidated financial statements.
The successful efforts method reflects the volatility that is inherent
in exploring for mineral resources in that costs of unsuccessful exploratory
efforts are charged to expense as they are incurred. These costs primarily
include dry hole costs, seismic costs and other exploratory costs. Under the
full cost method, these costs are capitalized and written-off (depreciation)
over time.
Engineering estimates of our oil and gas reserves are inherently
imprecise and represent only approximate amounts because of the subjective
judgments involved in developing such information. There are authoritative
guidelines regarding the engineering criteria that have to be met before
estimated oil and gas reserves can be designated as "proved". Proved and proved
developed reserves estimates are updated at least annually and take into account
recent production and technical information about each field. In addition, as
prices and cost levels change from year to year, the estimate of proved and
proved developed reserves also changes. This change is considered a change in
estimate for accounting purposes and is reflected on a prospective basis in
related depreciation rates.
Despite the inherent imprecision in these engineering estimates, these
estimates are used in determining depreciation expense and impairment expense,
and in disclosing the supplemental standardized measure of discounted future net
cash flows relating to proved oil and gas properties. Depreciation rates are
determined based on estimated proved developed reserve quantities (the
denominator) and capitalized costs of producing properties (the numerator).
Producing properties' capitalized costs are amortized based on the units of oil
or gas produced. Therefore, assuming all other variables are held constant, an
increase in estimated proved developed reserves decreases our depreciation,
depletion and amortization expense. Also, estimated reserves are often used to
calculate future cash flows from our oil and gas operations, which serve as an
indicator of fair value in determining whether a property is impaired or not.
The larger the estimated reserves, the less likely the property is impaired.
There have been no significant changes to the original reserve estimates during
any of the three years ended December 31, 2003, 2004 and 2005.
Impairment for long-lived assets
If circumstances indicate that the net book value of a long-lived
asset, including oil and gas properties, may not be recoverable, this asset may
be considered "impaired", and an impairment loss may be recognized in accordance
with IAS 36 "Impairment of Assets". The carrying amounts of long-lived assets
are reviewed periodically in order to assess whether the recoverable amounts
have declined below the carrying amounts. These assets are tested for impairment
whenever events or changes in circumstances indicate that their recorded
carrying amounts may not be recoverable. When such a decline has occurred, the
carrying amount is reduced to recoverable amount. The recoverable amount is the
greater of the net selling price and the value in use. It is difficult to
precisely estimate selling price because quoted market prices for our assets are
not readily available. In determining the value in use, expected cash flows
generated by the asset are discounted to their present value, which requires
significant judgment relating to level of sale volume, selling price and amount
of operating costs. We use all readily available information in determining an
amount that is a reasonable approximation of recoverable amount, including
estimates based on reasonable and supportable assumptions and projections of
reserve quantities, sales volume, selling price and amount of operating costs.
Impairment losses recognized for each of the three years ended December
31, 2003, 2004 and 2005 in our statement of income and equity are summarized as
follows:
Years ended December 31,
------------------------------------
2003 2004 2005
------------------------------------
RMB RMB RMB
millions millions millions
Impairment losses on long-lived assets recognized in statement of
income
Exploration and production............................................ 310 98 60
Refining.............................................................. 114 14 --
Marketing and distribution............................................ -- 1,769 366
Chemicals............................................................. 453 2,038 1,425
------------------------------------
877 3,919 1,851
====================================
Impairment losses on revaluated long-lived assets recognized in equity
attributable to equity shareholders of the Company
Chemicals............................................................. -- 709 --
====================================
Depreciation
Property, plant and equipment (other than oil and gas properties) are
depreciated on a straight-line basis over the estimated useful lives of the
assets, after taking into account their estimated residual value. We review the
estimated useful lives of the assets regularly in order to determine the amount
of depreciation expense to be recorded during any reporting period. The useful
lives are based on our historical experience with similar assets and taking into
account anticipated technological changes. The depreciation expense for future
periods is adjusted if there are significant changes from previous estimates.
There have been no significant changes to the estimated useful lives and
residual values during each of the three years ended December 31, 2003, 2004 and
2005.
Revaluation
As required by the relevant PRC rules and regulations, our property,
plant and equipment were revalued in connection with our reorganization, and the
property, plant and equipment of the companies that we acquired in 2001, 2003
and 2004 were also revalued in connection with these acquisitions. These
revaluations were carried out for each asset class by independent valuers on a
depreciated replacement cost basis. Subsequent to these revaluations, property,
plant and equipment are carried at the revalued amount, being the fair value as
at the date of the revaluation, less subsequent accumulated depreciation and
impairment losses. Revaluations are performed with sufficient regularity to
ensure that the carrying amount does not differ materially from that which would
be determined using fair value at the balance sheet date. We revalued our
property, plant and equipment based on a depreciated replacement cost basis in
accordance with our IFRS accounting policies as of December 31, 2004. The
results of subsequent revaluations may have an impact on our future results to
the extent the fair values of our property, plant and equipment change
significantly.
Impairment of accounts receivable for bad and doubtful debts
We estimate impairment of accounts receivable for bad and doubtful
debts resulting from the inability of our customers to make the required
payments. We base our estimates on the aging of our accounts receivable balance,
customer credit-worthiness, and historical write-off experience. If the
financial condition of our customers were to deteriorate, actual write-offs
would be higher than estimated. The changes in the impairment losses for bad and
doubtful accounts are as follows:
Years ended December 31,
------------------------------------
2003 2004 2005
------------------------------------
RMB RMB RMB
millions millions millions
At beginning of year................................................ 3,017 3,350 3,671
Impairment losses recognized for the year........................... 939 935 328
Written-off/reversal of impairment losses........................... (429) (454) (859)
Less: Amount distributed to Sinopec Group Company................. (177) (160) --
------------------------------------
At end of year...................................................... 3,350 3,671 3,140
====================================
Recently pronounced International Financial Reporting Standards
Information relating to the recently pronounced IFRS is presented in
Note 37 to the consolidated financial statements.
Overview of Our Operations
We are the largest integrated petroleum and petrochemical company in
China and one of the largest in Asia in terms of operating revenues. We engage
in exploring for, developing and producing crude oil and natural gas, operating
refineries and petrochemical facilities and marketing crude oil, natural gas,
refined petroleum products and petrochemicals. We have reported our consolidated
financial results according to the following four principal business segments
and the corporate and others segment.
o Exploration and Production Segment, which consists of our activities
related to exploring for and developing, producing and selling crude
oil and natural gas;
o Refining Segment, which consists of purchasing crude oil from our
exploration and production segment and from third parties,
processing of crude oil into refined petroleum products, selling
refined petroleum products principally to our marketing and
distribution segment;
o Marketing and Distribution Segment, which consists of purchasing
refined petroleum products from our refining segment and third
parties, and marketing, selling and distributing refined petroleum
products by wholesale to large customers and independent
distributors and retail through our retail network;
o Chemicals Segment, which consists of purchasing chemical feedstock
principally from the refining segment and producing, marketing,
selling and distributing chemical products; and
o Corporate and Others Segment, which consists principally of trading
activities of the import and export subsidiaries and our research
and development activities.
B. CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth certain income and expense items from
our consolidated statements of income for the periods indicated.
Year Ended December 31,
------------------------------------------
2003 2004 2005
------------------------------------------
RMB RMB RMB
(in billions)
Operating revenues
Sales of goods...................................... 429.9 597.2 799.1
Other operating revenues............................ 19.1 22.6 24.0
-----------------------------------------
Total operating revenues.......................... 449.0 619.8 823.1
-----------------------------------------
Other income........................................... -- -- 9.4
-----------------------------------------
Operating expenses
Purchased crude oil, products and
operating supplies and expenses................. (313.2) (443.7) (653.2)
Selling, general and administrative expenses...... (27.2) (31.8) (33.7)
Depreciation, depletion and amortization.......... (28.0) (32.3) (31.4)
Exploration expenses, including dry holes......... (6.1) (6.4) (6.4)
Personnel expenses................................ (17.0) (18.6) (18.4)
Employee reduction expenses....................... (1.0) (0.9) (0.4)
Taxes other than income tax....................... (13.6) (16.3) (17.2)
Other operating expenses, net..................... (4.0) (6.7) (5.1)
----------------------------------------
Total operating expenses.......................... (410.1) (556.7) (765.7)
----------------------------------------
Operating income....................................... 38.9 63.1 66.8
----------------------------------------
Net finance costs...................................... (4.5) (4.4) (4.6)
Gain from issuance of shares by a subsidiary........... 0.1 - -
Other income and gains................................. 0.5 0.9 1.0
----------------------------------------
Income before income tax............................... 35.0 59.6 63.2
Income tax............................................. (10.6) (17.8) (19.4)
----------------------------------------
Net income............................................. 24.4 41.8 43.8
========================================
Attributable to:
Equity shareholders of the Company.................. 22.4 36.0 40.9
Minority interests.................................. 2.0 5.8 2.9
----------------------------------------
24.4 41.8 43.8
========================================
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, our sales of goods and other operating revenues were RMB 799.1
billion and RMB 24 billion, respectively, representing an increase of 33.8% and
6.3%, respectively, from those in the previous year. These results were largely
attributable to the following factors: international crude oil prices continued
to be volatile and remained at a high level; chemical products prices remained
at a high level; the effect of the government's tight price control over refined
petroleum products which was offset by our effort in proactively developing the
market, increasing crude oil and natural gas production, adjusting crude oil
processing and output structure, and increasing chemicals production and sales
of refined petroleum products. In addition, we received a cash government grant
of RMB 9.4 billion from the central government to compensate our inability to
fully pass the increased crude oil costs to the refined petroleum products
customers due to the tight government control over prices of domestic refined
petroleum products, which to some extent relieved the pressure imposed by the
increased crude oil costs. All the above factors contributed to the
comparatively good operating results.
Operating Revenues
Overview
In 2005, our sales of goods and other operating revenues were RMB 823.1
billion, representing an increase of 33% compared with 2004. Our sales of goods
was RMB 799.1 billion, representing an increase of 33.8% compared with 2004.
These results were largely attributable to the increase in international prices
of crude oil and chemical products, and our efforts in expanding the sales
volume of our petroleum and chemical products and further optimizing our sales
and marketing structure. Our other operating revenues increased to RMB 24
billion in 2005, representing an increase of 6.3% compared with 2004. Other
operating revenues primarily consist of revenues generated from our sale of raw
and auxiliary materials to Sinopec Group as well as third parties.
The following table sets forth external sales revenues and percentages
of sales of goods and other operating revenues by product category, as well as
percentage changes from 2004 to 2005.
As a Percentage of Sales of
Goods
Rate of and Other
External Sales Revenues Change from Operating Revenues
----------------------------------------------------------------------------
2004 2005 2004 to 2005 2005
----------------------------------------------------------------------------
(RMB in billion) (%) (%)
Crude oil and natural gas...... 16.0 19.9 24.4 2.4
Refined petroleum products..... 406.2 542.1 33.5 65.1
Chemical products.............. 126.0 160.8 27.6 19.3
The following table sets forth the average external sales prices and
sales volumes by selected products, as well as the respective percentage changes
from 2004 to 2005.
Average External
Average External
Sales Price Rate of Change
--------------------- Rate of Change from Sales Volume from
2004 2005 2004 to 2005 2004 2005 2004 to 2005
-------------------------------------------------------------------------------------------
(RMB) (RMB) (%) (%)
Crude Oil.................... 1,872(1) 2,680(1) 43.2 6.01(2) 5.29(2) (12.0)
Natural Gas.................. 609(3) 673(3) 10.5 3.78(4) 4.36(4) 15.4
Gasoline .................... 3,765(1) 4,432(1) 17.7 27.35(2) 30.19(2) 10.4
Diesel ...................... 3,221(1) 3,772(1) 17.1 60.42(2) 67.25(2) 11.3
Kerosene .................... 2,923(1) 3,710(1) 26.9 5.68(2) 6.00(2) 5.7
Selected Chemical Products:
Basic chemical
feedstock............. 4,429(1) 4,846(1) 9.4 6.66(2) 8.66(2) 29.9
Synthetic Resin .......... 7,986(1) 9,005(1) 12.8 5.40(2) 6.34(2) 17.4
Synthetic Fiber........... 10,818(1) 11,123(1) 2.8 1.74(2) 1.59(2) (9.0)
Synthetic Rubber.......... 10,238(1) 13,040(1) 27.4 0.56(2) 0.68(2) 21.9
Synthetic Fiber Monomer (
and Polymer............. 8,022(1) 8,879(1) 10.7 2.70(2) 2.99(2) 10.7
Chemical fertilizer 1,355(1) 1,539(1) 13.6 2.62(2) 1.82(2) (30.5)
____________
(1) per tonne (2) million tonnes
(3) per thousand cubic meters (4) billion cubic meters
Sales of crude oil and natural gas
Most of crude oil and a small portion of natural gas produced by us
were internally used by our refining and chemical production. The remaining was
sold to the refineries controlled by our controlling shareholder, Sinopec Group
and third party customers.
In 2005, external sales revenues from crude oil and natural gas
amounted to RMB 19.9 billion, or 2.4% of our sales of goods, other operating
revenues and other income, representing an increase of 24.4% compared with RMB
16.0 billion in 2004. Such increase was primarily attributable to the increase
in crude oil prices and our expansion of natural gas business. The average
external sales price of crude oil increased to RMB 2,680 per tonne from RMB
1,872 per tonne in 2004, representing an increase of 43.2%. The effect of
increased price was partially offset by the decrease in the quantity of external
sales from 6.01 million tonnes in 2004 to 5.29 million tonnes in 2005,
representing a decrease of 12.0%. The external sales price of natural gas rose
from RMB 609 per thousand cubic meters in 2004 to RMB 673 per thousand cubic
meters in 2005, representing an increase of 10.5%, and the external sales volume
increased from 3.78 billion cubic meters in 2004 to 4.36 billion cubic meters in
2005, representing an increase by 15.4%.
Sales of refined petroleum products
Both the refining and the marketing and distribution segments make
sales of refined petroleum products, which consist of gasoline, diesel, kerosene
(including jet fuel) and other refined petroleum products, to third parties.
In 2005, the external sales revenue of refined petroleum products
recorded by these two segments amounted to RMB 542.1 billion, or 65.1% of our
sales of goods, other operating revenues and other income, representing an
increase of 33.5% from RMB 406.2 billion in 2004. The increase was mainly due to
the rise of refined petroleum products price and our proactive efforts in
increasing sales volume, further optimizing sales and marketing structure and
expanding the market of other refined petroleum products. The sales revenue of
gasoline, diesel and kerosene was RMB 409.70 billion, comprising 75.6% of the
total sales revenue of our refined petroleum products, representing an increase
of 30.4% from 2004.
The sales revenues of other refined petroleum products were RMB 132.4
billion, representing an increase of 43.9% over 2004, accounting for 24.4% of
the total sales revenues of refined petroleum products.
Sales of chemical products
Our external sales revenues of chemical products were RMB 160.8
billion, representing an increase of 27.6% over 2004, accounting for 19.3% of
our total operating revenues and other income. The increase was mainly due to
the fact that we captured the opportunity of the high level price of chemical
products and increased its sales volume accordingly.
Other income
In 2005, we received a cash government grant of RMB 9.4 billion, as a
compensation of loss incurred due to the distortion of the correlation of
domestic refined petroleum products prices and the crude oil prices. There are
no unfilled conditions and other contingencies attached to the receipt of this
government grant. There is no assurance that we will continue to receive such
grant in the future.
Operating expenses
In 2005, our operating expenses amounted to RMB 765.7 billion,
representing an increase of 37.5% compared with 2004. The operating expenses
mainly consisted of the following:
Purchased crude oil, products, and operating supplies and expenses
In 2005, our purchased crude oil, products and operating supplies and
expenses were RMB 653.1 billion, representing an increase of 47.2% over 2004,
accounting for 85.3% of the total operating expenses, of which:
o purchased crude oil expenses were RMB 338.2 billion, representing an
increase of 45.5% compared with 2004, accounting for 44.2% of the
total operating expenses, up by 2.4 percentage points over 2004. To
meet the increasing market demands in the fast growing Chinese
economy, we increased our throughput of crude oil purchased from
third parties. In 2005, our throughput of crude oil purchased
externally was 107.95 million tonnes (excluding amounts processed
for third parties), representing an increase of 7.3% compared with
2004. Our average cost for crude oil purchased externally in 2005
was RMB 3,133 per tonne (approximately US$ 52.11 per barrel),
representing an increase of 35.5% compared with 2004.
o In 2005, our other purchase expenses were RMB 314.9 billion,
representing an increase of 49.2% compared with 2004, accounting for
41.1% of the total operating expenses. The increase was mainly due
to the increased costs of refined petroleum products and chemical
feedstock purchased externally.
Selling, general and administrative expenses
In 2005, our selling, general and administrative expenses totaled RMB
33.7 billion, representing an increase of 5.9% compared with 2004. The increase
was largely due to:
o An increase of RMB 1.5 billion in the selling expenses, such as
transportation costs, compared with 2004, resulted from the increase
in the total sales volume of refined petroleum products and chemical
products, and increased sales volume through retail and direct
distribution; and
o An increase of RMB 1.2 billion in operating lease expenses compared
with 2004 mainly due to the increased lease of operating facilities
to increase sales volume.
It was partially offset by a decrease in repairing and maintenance
expenses by RMB 800 million, mainly as a result of the increased maintenance
carried out in 2004 for petrol stations.
Depreciation, depletion and amortization
In 2005, our depreciation, depletion and amortization amounted to RMB
31.4 billion, down by 2.9% compared with 2004. The decrease was mainly due to
disposal of, and impairment loss on less efficient assets in the previous years.
Exploration expenses
In 2005, our exploration expenses were RMB 6.4 billion, remaining at
the same level as in 2004 since our level of exploration activities for
unsuccessful wells in 2005 remained at the similar level as in 2004.
Personnel expenses
In 2005, our personnel expenses were RMB 18.5 billion, down by 0.8%
compared with 2004. The decrease was mainly due to the reduction of operating
personnel resulting from the disposal of downhole operation assets in 2004.
Employee reduction expenses
In 2005, in accordance with our voluntary employee reduction plan, we
recorded employee reduction expenses of approximately RMB 370 million for
approximately 7,000 employees, representing a decrease of RMB 550 million
compared with that in 2004.
Taxes other than income tax
In 2005, the Company's taxes other than income tax were RMB 17.2
billion, representing an increase of 5.1% compared with 2004. The increase was
largely due to the increased consumption tax and associated surcharges as a
result of the increase in the sales volume of gasoline and diesel.
Other operating expenses, net
In 2005, our other operating expenses, net were RMB 5.1 billion,
representing a decrease of 23.1% compared with 2004. In 2005 and 2004, in order
to allocate our internal resources more efficiently, we revised the production
plans in these years, and accordingly made a provision for impairment loss of
RMB 1.9 billion in 2005 on certain less efficient chemical facilities, petrol
stations and depots on the difference between the estimated recoverable value
and the net book value of these assets, representing a decrease of RMB 2.1
billion compared with 2004. Meanwhile, our net losses on disposals of assets in
2005 were RMB 2.1 billion, representing an increase of RMB 0.4 billion compared
with 2004.
Operating income
In 2005, our operating income was RMB 66.8 billion, representing an
increase of 5.9% compared with 2004.
Net finance costs
In 2005, our net finance costs were RMB 4.6 billion, representing an
increase of 5.7% over 2004. The increase was mainly due to an increase of RMB
1.3 billion in net interest expense as a result of the increase in long term
loans borrowed in accordance with our investment plans, and the increase in
short term debts attributable to the increased working capital requirement, as a
result of the increased crude oil price and the expansion of production and
operation. It was partially offset by an increase of RMB 1.1 billion in net
foreign exchange gains due to fluctuation of the foreign exchange rate.
Income before income tax
In 2005, our income before income tax was RMB 63.2 billion,
representing an increase of 6.1% compared with 2004.
Income tax
In 2005, our income tax was RMB 19.4 billion, representing an increase
of 8.8% compared with 2004. The increase was primarily due to the increase in
operating income. In 2005, our effective tax rate was 30.7%, representing an
increase of 0.8 percentage point compared with 2004. The increase was primarily
due to the decrease in operating income in certain of our subsidiaries which
were taxed at a lower tax rate.
Net income attributable to minority interests
In 2005, our net income attributable to minority interests was RMB 2.9
billion, representing a decrease of 49.4% compared with 2004. The decrease was
largely due to the decreased profit in certain subsidiaries and our
privatization of Beijing Yanhua.
Net income attributable to equity shareholders of the Company
In 2005, our net income attributable to equity shareholders of the
Company was RMB 40.9 billion, up by 13.6% over 2004.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
In 2004, our sales of goods and other operating income were RMB 597.2
billion and RMB 22.6 billion, respectively, representing an increase of 38.9%
and 18.3%, respectively, from those in the previous year. These results are
largely attributable to a number of factors. First, the international crude oil
prices continued to be volatile and remained at a high level, the chemical
industry was on the up trend cycle, and the domestic economy consistently
maintained fast growth, all of which resulted in strong demand for chemical
products and high prices of chemical products, which, in turn, provided
favorable conditions for us to maximize our returns. Second, by taking the
advantage of the favorable opportunities, we proactively developed the market,
increased the sales of refined petroleum products, maintained steady growth in
oil and gas production and increased the throughput of crude oil and production
of chemical products. In addition, we continued to strive for better operating
results through strengthening internal management, furthering corporate reforms
and improving asset structure.
Operating Revenues
Overview
In 2004, our sales of goods and other operating revenues were RMB 619.8
billion, representing an increase of 38.0% compared with 2003. Our sales of
goods was RMB 597.2 billion, representing an increase of 38.9% compared with
2003. In 2004, we captured the opportunity of the increased prices of crude oil
and petrochemical products in the international market, expanded the sales
volume of our major petrochemical products and optimized marketing structure.
Our other operating revenues increased to RMB 22.6 billion in 2004, representing
an increase of 18.3% compared with 2003. Such other operating revenues primarily
consist of revenues generated from our sale of raw and auxiliary materials to
Sinopec Group as well as third parties.
The following table sets forth external sales revenues and percentages
of sales of goods and other operating revenues by product category, as well as
percentage changes from 2003 to 2004.
As a Percentage of Sales of
Goods
Rate of and Other
External Sales Revenues Change from Operating Revenues
----------------------------------------------------------------------------
2003 2004 2003 to 2004 2004
----------------------------------------------------------------------------
(RMB in billion) (%) (%)
Crude oil and natural gas...... 14.9 16.0 6.9 2.6
Refined petroleum products..... 289.7 406.2 40.2 65.5
Chemical products.............. 92.0 126.0 37.0 20.3
The following table sets forth the average external sales prices and
sales volumes by selected products, as well as the respective percentage changes
from 2003 to 2004.
Average External Rate of
Sales Price Change from Sales Volume Rate of Change
--------------------- ------------- -------------------- ---------------
2003 2004 2003 to 2004 2003 2004 2003 to 2004
------------------------------------------------------------------------------
(RMB) (RMB) (%) (%)
Crude Oil.................... 1,493(1) 1,872(1) 25.4 7.22(2) 6.01(2) (16.7)
Natural Gas.................. 591(3) 609(3) 3.0 3.41(4) 3.78(4) 10.9
Gasoline .................... 3,298(1) 3,765(1) 14.2 23.36(2) 27.35(2) 17.1
Diesel ...................... 2,794(1) 3,221(1) 15.3 47.29(2) 60.42(2) 27.8
Kerosene .................... 2,361(1) 2,923(1) 23.8 4.81(2) 5.68(2) 18.1
Selected Chemical Products:
Synthetic Resin .......... 6,017(1) 7,986(1) 32.7 5.10(2) 5.40(2) 6.0
Synthetic Fiber........... 9,300(1) 10,818(1) 16.3 1.72(2) 1.74(2) 1.2
Synthetic Rubber.......... 8,513(1) 10,238(1) 20.3 0.55(2) 0.56(2) 0.2
Synthetic Fiber Monomer
and Polymer............. 5,791(1) 8,022(1) 38.5 2.62(2) 2.70(2) 3.1
____________
(1) per tonne
(2) million tonnes
(3) per thousand cubic meters
(4) billion cubic meters
Sales of crude oil and natural gas
Most of crude oil and a small portion of natural gas produced by us
were internally used by our refining and chemical production. The remaining was
sold to the refineries controlled by our controlling shareholder, Sinopec Group
and third party customers.
In 2004, sales revenues from crude oil and natural gas amounted to RMB
16.0 billion, or 2.6% of our sales of goods and other operating revenues,
representing an increase of 6.9% compared with RMB 14.9 billion in 2003. Such
increase was primarily attributable to the increase in price of crude oil and
expansion of natural gas business. The external sales price of crude oil
increased to RMB 1,872 per tonne from RMB 1,493 per tonne in 2003, representing
an increase of 25.4% from 2003. The effect of increased price was partially
offset by the decrease in the quantity of external sales from 7.22 million
tonnes in 2003 to 6.01 million tonnes in 2004, representing a decrease of 16.7%.
The external sales price of natural gas rose from RMB 591 per thousand cubic
meters in 2003 to RMB 609 per thousand cubic meters in 2004, representing an
increase of 3.0%, and the external sales volume increased from 3.4 billion cubic
meters in 2003 to 3.8 billion cubic meters in 2004, representing an increase by
10.5%.
Sales of refined petroleum products
Both the refining and the marketing and distribution segments make
sales of refined petroleum products, which consist primarily of gasoline,
diesel, kerosene (including jet fuel) and other refined petroleum products to
third parties.
In 2004, the external sales revenue of petroleum products recorded by
these two segments were RMB 406.2 billion, accounting for 65.5% of our sales of
goods and other operating revenues, representing an increase of 40.2% from RMB
289.7 billion in 2003. Such increase was primarily attributable to the increase
in prices and sales volume of gasoline, diesel and kerosene and also to our
proactive efforts in increasing sales volume, optimizing marketing structure and
expanding the market of other petroleum products. The sales revenue of gasoline,
diesel and kerosene was RMB 314.2 billion, comprising 77.4% of the total sales
revenue of petroleum products, representing an increase of 42.5% from RMB 220.5
billion in 2003. The increase of sales revenue of gasoline, diesel and kerosene
was due to the rise of prices and our active efforts in increasing the sales
volume of these products. In 2004, the average external sales price of gasoline
was RMB 3,765 per tonne, representing an increase of 14.2% compared with 2003,
the average external sales price of diesel was RMB 3,221 per tonne, representing
an increase of 15.3% compared with that in 2003 and the average sales price of
kerosene was RMB 2,923 per tonne, representing an increase of 23.8% compared
with that in 2003. The sales volume of gasoline was 27.4 million tonnes,
representing an increase of 17.1% compared with that in 2003, and the sales
volume of diesel was 60.4 million tonnes, representing an increase of 27.8%
compared with that in 2003. The combined sales volume of gasoline, diesel and
kerosene was 23.8% higher than that of 2003.
Sales of chemical products
In 2004, our external sales revenue of chemical products was RMB 126.0
billion, accounting for 20.3% of our sales of goods and other operating
revenues, representing an increase of 37.0% compared with that of RMB 92.0
billion in 2003. The increase was mainly due to the significant increase in both
chemical products prices and sales volumes of major chemical products. In 2004,
the external sales volumes of synthetic resin, synthetic fiber, synthetic
rubber, synthetic fiber monomer and polymer were respectively 5.4 million
tonnes, 1.7 million tonnes, 556,000 tonnes, 2.7 million tonnes, representing
increases of 6.0%, 1.2%, 0.2% and 3.1% respectively compared with 2003. The
external sales prices of such products were, respectively, RMB 7,986 per tonne,
RMB 10,818 per tonne, RMB 10,238 per tonne and RMB 8,022 per tonne, representing
increases of 32.7%, 16.3%, 20.3% and 38.5% respectively, compared with 2003.
Operating expenses
In 2004, our operating expenses were RMB 556.7 billion, representing an
increase of 35.7% compared with 2003. The operating expenses mainly consisted of
the following:
Purchased crude oil, products, and operating supplies and expenses
Our purchased crude oil, products and operating supplies and expenses
were RMB 443.6 billion, accounting for 79.7% of the operating expenses,
representing an increase of 41.6% compared with 2003. Among others,
o Purchased crude oil expenses were RMB 232.6 billion, accounting for
41.8% of the total operating expenses, representing an increase of
41.5% compared with 2003. To meet the increasing demands in the
market associated with the rapid growth of the Chinese economy, we
increased our throughput of crude oil purchased externally. In 2004,
our throughput of crude oil purchased externally was 101 million
tonnes (excluding amounts processed for third parties), representing
an increase of 13.6% compared with 2003. Our average cost for crude
oil purchased from third parties in 2004 was RMB 2,312 per tonne,
representing an increase of 24.6% compared with 2003.
o In 2004, our other purchase expenses were RMB 211.0 billion,
accounting for 37.9% of the total operating expenses, representing
an increase of 41.7% compared with 2003. This increase was mainly
due to the increased costs of refined petroleum products and
chemical feedstock purchased externally.
Selling, general and administrative expenses
In 2004, our selling, general and administrative expenses were RMB 31.8
billion, representing an increase of 16.9% compared with 2003. The increase was
largely due to:
o Sales volume of refined petroleum products and sales through retail
and direct distribution increased. As a result, the selling
expenses, such as transportation costs, increased by RMB 1.9 billion
from 2003;
o An increase in repairing and maintenance expenses by RMB 1.1 billion
compared with 2003 due to the additions of property, plant and
equipment and the increase in maintenance activities related to
petrol stations;
o Operating lease rentals increased by RMB 0.7 billion from 2003. The
increase was mainly due to the increase in rental of operating
facilities such as petrol stations from third parties and rental of
land and buildings from related parties; and
o Our advertising expenses increased by RMB 0.7 billion as a result of
our enhanced efforts to promote our image.
Depreciation, depletion and amortization
In 2004, our depreciation, depletion and amortization amounted to RMB
32.3 billion, representing an increase of 15.7% over 2003. This increase was
mainly due to the addition of property, plant and equipment as a result of
capital expenditure.
Exploration expenses
In 2004, our exploration expenses were RMB 6.4 billion, representing an
increase of 4.3% from 2003. The increase was principally due to our further
increase of investment in the exploration activities, especially in the major
new blocks in the western and southern parts of China.
Personnel expenses
In 2004, our personnel expenses were RMB 18.6 billion, representing an
increase of 9.8% over 2003. The increase was largely due to our introduction of
a market rate based compensation system reform. As a result, wage, salary and
welfare expenses increased by RMB 1.3 billion.
Employee reduction expenses
In 2004, as part of our voluntary staff reduction plan, and in
connection with the acquisition of petrochemical and catalyst assets from and
the disposal of downhole operation assets to Sinopec Group Company, we incurred
approximately RMB 0.9 billion as employee reduction expenses for approximately
24,000 employees, down by RMB 0.1 billion compared with that in 2003.
Taxes other than income tax
In 2004, our taxes other than income tax were RMB 16.3 billion,
representing an increase of 20.2% over 2003. The increase was largely due to the
increase of consumption tax and associated city construction taxes and education
surcharges as a result of the increased sales volume of gasoline and diesel.
Other operating expenses, net
In 2004, our other operating expenses, net were RMB 6.7 billion,
representing an increase of 67.7% from 2003. The increase was largely due to the
following reason: In order to allocate our internal resources more efficiently,
we revised the production plans in 2004, and accordingly made a provision for
impairment loss of RMB 3.9 billion on certain less efficient chemical
facilities, petrol stations and depots on the difference between the estimated
recoverable value and the net book value of these assets, representing an
increase of RMB 3.0 billion compared with 2003. Meanwhile, disposals of assets
decreased in 2004.
Operating income
In 2004, our operating income was RMB 63.1 billion, representing an
increase of 62.2% from 2003.
Net finance costs
In 2004, our net finance costs were RMB 4.4 billion, representing a
decrease of 2.1% from 2003. The decrease was primarily due to a decrease in
foreign exchange losses in 2004.
Income before income tax
In 2004, our income before income tax was RMB 59.6 billion,
representing an increase of 70.1% from 2003.
Income tax
In 2004, our income tax was RMB 17.8 billion, representing an increase
of 67.4% over 2003. The increase was primarily due to the increase in operating
income. In 2004, our effective tax rate was 29.9%, representing a decrease of
0.5 percentage point compared with 2003. The decrease was primarily due to the
increase in operating income in certain of our subsidiaries which were taxed at
a lower tax rate.
Net income attributable to minority interests
In 2004, our net income attributable to minority interests was RMB 5.8
billion, representing an increase of 192.7% over 2003. The increase was
primarily due to the increase in the profits of our subsidiaries as compared
with 2003.
Net income attributable to equity shareholders of the Company
In 2004, our net income attributable to equity shareholders of the
Company was RMB 36.0 billion, representing an increase of 60.6% compared with
2003.
C. DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS
We divide our operations into four business segments (exploration and
production segment, refining segment, marketing and distribution segment and
chemicals segment) and corporate and others. Unless otherwise specified, the
inter-segment transactions have not been eliminated in the financial data
discussed in this section. In addition, the operating revenue data of each
segment have included the "other operating revenues" and "other income" of the
segment.
The following table sets forth the operating revenues by each segment,
the contribution of external sales and inter-segment sales as a percentage of
operating revenues before elimination of inter-segment sales, and the
contribution of external sales as a percentage of consolidated operating
revenues (i.e. after elimination of inter-segment sales) for the periods
indicated.
As a Percentage of
Consolidated
Operating As a Percentage of
Revenues Before Consolidated
Elimination Operating Revenues
of Inter-segment After Elimination of
Years Ended December 31, Sales Inter-segment Sales
-------------------------------------------------------------------------
2003 2004 2005 2004 2005 2004 2005
-------------------------------------------------------------------------
RMB RMB RMB (%) (%) (%) (%)
(in billions)
Exploration and Production
External sales(1)...... 23.0 25.2 30.6 2.5 2.3 4.1 3.7
Inter-segment sales...... 47.3 60.1 84.4 5.9 6.2
-------------------------------------------------------------------------
Total operating revenue. 70.3 85.3 115.0 8.4 8.5
=========================================================================
Refining
External sales(1)........ 56.0 68.6 88.2 6.7 6.5 11.1 10.7
Inter-segment sales...... 217.7 289.7 386.5 28.5 28.6
-------------------------------------------------------------------------
Total operating revenue. 273.7 358.3 474.7 35.2 35.1
=========================================================================
Marketing and distribution
External sales(1)........ 238.8 343.6 460.6 33.8 34.0 55.4 56.0
Inter-segment sales...... 2.6 2.8 3.2 0.3 0.2
-------------------------------------------------------------------------
Total operating revenue. 241.4 346.4 463.8 34.1 34.2
=========================================================================
Chemicals
External sales(1)........ 96.4 132.2 166.6 13.0 12.3 21.3 20.2
Inter-segment sales...... 7.4 12.5 12.2 1.2 0.9
-------------------------------------------------------------------------
Total operating revenue. 103.8 144.7 178.8 14.2 13.2
=========================================================================
Corporate and others
External sales(1)........ 34.8 50.2 77.0 4.9 5.7 8.1 9.4
Inter-segment sales...... 30.4 32.0 44.9 3.2 3.3
-------------------------------------------------------------------------
Total operating revenue. 65.2 82.2 121.9 8.1 9.0
=========================================================================
Total operating revenue
before inter-segment
eliminations......... 754.4 1,016.9 1,354.2 100.0 100.0
==================
Elimination of inter-segment
sales............... (305.4) (397.1) (531.1)
-----------------------------
Consolidated operating
revenues............ 449.0 619.8 823.1 100.0 100.0
============================= ====================
__________
(1) include other operating revenues. See Note 32 to the consolidated financial
statements for other operating revenues of each of our operating segments.
The following table sets forth the operating revenues, other income,
operating expenses and operating income by each segment before elimination of
the inter-segment transactions for the periods indicated, and the rate of
changes from 2004 to 2005.
Rate of
Change
from 2004
Years Ended December 31, to 2005
--------------------------------------------------
2003 2004 2005
------------------------------------
(RMB in billions) (%)
Exploration and Production
Total operating revenues.............. 70.3 85.3 115.0 34.8
Total operating expenses.............. (51.1) (59.7) (68.2) 14.2
--------------------------------------------------
Total operating income.............. 19.2 25.6 46.8 83.0
==================================================
Refining
Total operating revenues.............. 273.7 358.3 474.7 32.5
Other income.......................... - - 9.4 N. A.
Total operating expenses.............. (267.7) (352.4) (487.6) 38.4
--------------------------------------------------
Total operating income.............. 6.0 5.9 (3.5) (159.0)
==================================================
Marketing and distribution
Total operating revenues.............. 241.4 346.4 463.8 33.9
Total operating expenses.............. (229.5) (331.7) (453.4) 36.7
--------------------------------------------------
Total operating income.............. 11.9 14.7 10.4 (29.7)
==================================================
Chemicals
Total operating revenues.............. 103.8 144.7 178.8 23.6
Total operating expenses.............. (100.3) (126.0) (164.5) 30.6
--------------------------------------------------
Total operating income.............. 3.5 18.7 14.3 (23.6)
==================================================
Corporate and others
Total operating revenues.............. 65.2 82.2 121.9 48.3
Total operating expenses.............. (67.0) (84.1) (123.1) 46.3
--------------------------------------------------
Total operating loss................ (1.8) (1.9) (1.2) (37.8)
==================================================
Exploration and Production Segment
The business activities of the exploration and production segment
consist of exploration, development, production, and sale of crude oil and
natural gas.
Most of the crude oil and a small portion of the natural gas produced
by the exploration and production segment were used for our refining and
chemicals production. Most of the natural gas and a small portion of crude oil
produced were sold to refineries owned by Sinopec Group Company and other
customers.
Year Ended December 31, 2005 compared with Year Ended December 31, 2004
In 2005, the operating revenues of this segment were RMB 115 billion,
representing an increase of 34.8% over 2004, largely due to the increase in the
sales price and sales volume of crude oil and natural gas compared with those in
2004.
In 2005, this segment sold 36.86 million tonnes of crude oil and 4.44
billion cubic meters of natural gas, representing an increase of 1.7% and 14.7%
respectively compared with those in 2004. The average realized price of crude
oil was RMB 2,665 per tonne (approximately US$ 45.9 per barrel), representing an
increase of 36.2% over 2004. The average realized price of natural gas was RMB
673 per thousand cubic meters, representing an increase of 9.3% compared with
2004.
In 2005, the operating expenses of this segment were RMB 68.2 billion,
representing an increase of 14.2% compared with 2004. The increase was mainly
due to:
o The rise of raw materials and utilities costs accounting for the
increase of approximately RMB 2.2 billion in operating expenses
compared with 2004;
o The increase of approximately RMB 1.6 billion in other operating
expenses including expenses related to the sales of materials
compared with 2004;
o The increase of RMB 1.5 billion resulted from the increased
production activities in this segment to take advantage of the high
crude oil price environment;
o The increase of approximately RMB 700 million in resources tax due
to the change of tax rate, and the increased construction tax,
education surcharges as well as mineral resources compensation fees
associated with the increased sales revenues of crude oil.
In 2005, this segment's operating income was RMB 46.9 billion,
representing an increase of 83.0% compared with 2004.
Year Ended December 31, 2004 compared with Year Ended December 31, 2003
Operating revenues from the exploration and production segment in 2004
were RMB 85.3 billion, representing an increase of 21.4% from RMB 70.3 billion
in 2003. The increase in operating revenues was primarily due to an increase in
the sales volume and sales price of crude oil compared with those in 2003.
In 2004, average realized price of crude oil by this segment was RMB
1,956 per tonne, representing an increase of 20.7% over 2003. Average realized
price of natural gas was RMB 616 per thousand cubic meters, representing an
increase of 3.3% over 2003.
Sales volume of crude oil was 36.3 million tonnes, representing an
increase of 1.4% compared with 2003. Sales volume of natural gas was 3.9 billion
cubic meters, representing an increase of 11.6% over that in 2003.
In 2004, the segment's operating expenses were RMB 59.7 billion, an
increase of 16.8%, compared with 2003. The increase was primarily because:
o The depreciation, depletion and amortization of the segment
increased by RMB 2.6 billion compared with 2003. This change was
caused by the additions of oil and gas properties as a result of an
increase in capital expenditure incurred in this segment.
o The rise of fuel cost as a result of the increase in oil and gas
production and fuel prices, resulting in an increase of the
operating expenses by approximately RMB 1 billion compared with
2003.
o Other operating expenses including expenses related to the sales of
materials were up by RMB 1.3 billion compared with 2003.
o Exploration expenses (including dry holes) were up by RMB 0.3 billion compared
with 2003.
o Due to the increase of sales revenues of crude oil, the natural
resources compensation fee increased accordingly. Land and building
rental increased due to the increase of leased land and buildings.
In addition, safety insurance funding also increased. The total of
these items was up by RMB 0.5 billion compared with 2003.
In 2004, operating income of the exploration and production segment was
approximately RMB 25.6 billion, which was 33.7% higher than that in 2003.
Refining Segment
The business activities of the refining segment consist of purchasing
crude oil from the exploration and production segment and third parties,
processing crude oil into refined petroleum products, selling gasoline, diesel
and kerosene to marketing and distribution segment, selling a portion of
chemical feedstock to chemicals segment and selling other refined petroleum
products to domestic and foreign customers.
Year Ended December 31, 2005 compared with Year Ended December 31, 2004
In 2005, this segment's operating revenues were approximately RMB
474.7 billion, representing an increase of 32.5% compared with 2004. The
increase was mainly due to the increased sales prices and sales volume of
various refined petroleum products.
The following table sets forth sales revenue and the percentage of
total operating revenue for the segment by product category for 2004 and 2005,
as well as the percentage changes in sales revenue from 2004 to 2005.
As a Percentage of
Rate of Change Refining Segment's Total
Year Ended December 31, from Operating Revenue
-------------------------------------------------------------------------
2004 2005 2004 to 2005 2004 2005
-------------------------------------------------------------------------
(RMB) (RMB) (%) (%) (%)
in billion
Refining Segments, operating
revenues
Gasoline....................... 63.8 81.0 27.0 17.8 17.1
Diesel ........................ 145.3 187.4 29.0 40.5 39.5
Light Chemical feedstock ...... 62.1 98.8 59.1 17.3 20.8
Other refined petroleum
products.................... 81.9 102.1 24.7 22.8 21.5
Other operating revenues....... 5.2 5.4 3.8 1.6 1.1
-------------------------------------------------------------------------
Total............................. 358.3 474.7 32.5 100.0 100.0
=========================================================================
In 2005, the sales revenues of gasoline by the segment were RMB 81
billion, representing an increase of 27.0% compared with 2004, accounting for
17.1% of this segment's operating revenues.
In 2005, the sales revenues of diesel by the segment were RMB 187.4
billion, representing an increase of 29.0% compared with 2004, accounting for
39.5% of this segment's operating revenues.
In 2005, the sales revenues of chemical feedstock by the segment were
RMB 98.8 billion, representing an increase of 58.9% compared with 2004,
accounting for 20.8% of this segment's operating revenues. The increase in the
sales revenues of chemical feedstock was more than that in the sales revenues of
gasoline and diesel, which was primarily due to the smaller increase in gasoline
and diesel prices as compared with chemical feedstock prices as a result of
tight government control over domestic gasoline and diesel prices. In addition,
the segment also increased the sales volume of chemical feedstock.
In 2005, the sales revenues of refined petroleum products other than
gasoline, diesel and chemical feedstock were RMB 102.1 billion, representing an
increase of 24.7% compared with 2004, accounting for 21.5% of this segment's
operating revenues.
In 2005, we received a cash government grant of RMB 9.4 billion, as a
compensation of loss incurred due to the distortion of the correlation of
domestic refined petroleum products prices and the crude oil prices.
The table below sets forth sales volume and average realized prices by
product for 2004 and 2005, as well as the percentage changes in sales volume and
average realized prices for the periods shown.
Rate of change Average Rate of change
Sales volume from realized prices from
--------------------------------------------------------------------------
2004 2005 2004 to 2005 2004 2005 2004 to 2005
--------------------------------------------------------------------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline................................ 21.42 21.52 0.5 2,977 3,763 26.4
Diesel.................................. 50.27 54.13 7.7 2,890 3,462 19.8
Light Chemical feedstock ............... 23.17 26.45 14.2 2,682 3,734 39.2
Other refined petroleum products........ 31.71 32.72 3.2 2,583 3,121 20.8
In 2005, the operating expenses of the segment were RMB 487.6 billion,
representing an increase of 38.4% compared with 2004. The increase was primarily
due to the increase in crude oil price and throughput.
In 2005, the average crude oil cost was RMB 3,064 per tonne
(approximately US$ 50.96 per barrel), representing an increase of 35.5% compared
with 2004. Refining throughput was 136.08 million tonnes (excluding amounts
processed for third parties) in 2005, representing an increase of 5.6% compared
with 2004. The total crude oil costs in 2005 were RMB 416.9 billion,
representing an increase of 43.1% compared with 2004, accounting for 85.5% of
the total operating expenses of the segment, up by 2.8 percentage points over
2004.
In 2005, although crude oil prices remained at a high level; the
Chinese government implemented tight control over domestic prices of refined
petroleum products, as a result, our refining segment incurred significant loss.
To ensure our refining segment's normal operation, we strived to lower our
production cost and adjusted the internal transfer prices between the different
segments.
In 2005, the operating losses of the segment, after the receipt of the
one-time cash government grant of RMB 9.4 billion, were RMB 3.5 billion,
representing a decrease in operating income of RMB 9.4 billion compared with
2004.
Year Ended December 31, 2004 compared with Year Ended December 31, 2003
In 2004, the refining segment's operating revenues were RMB 358.3
billion, representing an increase of 30.9% over 2003. The increase was mainly
due to the increase in the sales prices and sales volumes of various major
refined petroleum products.
The table below sets forth sales revenue and the percentage of total
operating revenue for the segment by product category for 2003 and 2004, and as
well as the percentage changes in sales revenue from 2003 to 2004.
As a Percentage of
Refining Segment's
Rate of Change Total Operating
Year Ended December 31, from Revenue
-------------------------------------------------------------------
2003 2004 2003 to 2004 2003 2004
-------------------------------------------------------------------
(RMB in billion) (%) (%) (%)
Refining Segments, operating
revenues
Gasoline....................... 55.8 63.8 14.4 20.4 17.8
Diesel ........................ 99.7 145.3 45.7 36.5 40.5
Light Chemical feedstock ...... 49.9 62.1 24.5 18.2 17.3
Other refined petroleum
products.................... 63.8 81.9 28.3 23.3 22.8
Other operating revenues 4.5 5.2 15.6 1.6 1.6
-------------------------------------------------------------------
Total............................. 273.7 358.3 30.9 100.0 100.0
===================================================================
In 2004, the sales revenues of gasoline realized by the segment was RMB
63.8 billion, accounting for 17.8% (which was 2.6 percentage points lower than
that of 2003) of this segment's operating revenues, representing an increase of
14.4% from 2003.
In 2004, the sales revenues of diesel realized by the segment was RMB
145.3 billion, accounting for 40.5% (which was 4.0 percentage points higher than
that of 2003) of this segment's operating revenues, representing an increase of
45.7% from 2003.
In 2004, the sales revenues of chemical feedstock realized by the
segment was RMB 62.1 billion, accounting for 17.3% (which was 0.9 percentage
points lower than that in 2003) of this segment's operating revenues,
representing an increase of 24.5% from 2003.
In 2004, the sales revenues of refined petroleum products other than
gasoline, diesel and chemical feedstock were RMB 81.9 billion, accounting for
22.8% (which was 0.5 percentage point lower than that of 2003) of this segment's
operating revenues, representing an increase of 28.3% from 2003.
The table below sets forth sales volume and average realized prices by
product for 2003 and 2004, and as well as the percentage changes in sales volume
and average realized prices for the periods shown.
Rate of change Average Rate of change
Sales volume from realized prices from
------------------------------------------------------------------------------
2003 2004 2003 to 2004 2003 2004 2003 to 2004
------------------------------------------------------------------------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline................................ 21.25 21.42 0.8 2,624 2,977 13.5
Diesel.................................. 41.46 50.27 21.2 2,404 2,890 20.2
Light Chemical feedstock ............... 21.91 23.17 5.7 2,277 2,682 17.8
Other refined petroleum products........ 29.64 31.71 7.0 2,155 2,583 19.9
In 2004, the operating expenses of the segment were RMB 352.3 billion,
representing an increase of 31.6% from 2003. This increase was largely due to
the increase of processing volume and price crude oil.
In 2004, the average crude oil cost was RMB 2,261 per tonne,
representing an increase of 24.0% from 2003. Refining throughput was 128.8
million tonnes (excluding amounts processed for third parties), representing an
increase of 10.4% over 2003. In 2004, the total crude oil costs were RMB 291.3
billion, accounting for 82.7% of the segment's operating expenses, representing
an increase of 36.9% over 2003. In addition, the proportion accounted for by the
total crude oil costs in the refining segment's operating expenses in 2004
increased by 3.2 percentage points compared with 2003.
In 2004, with oil prices remaining at a high level, we strived to
minimize purchase cost of crude oil and transportation cost and increase the
revenue of refined petroleum products, and expanded the sales market of refined
petroleum products other than gasoline, diesel and kerosene. However, the
increase of refined oil price was less than that of crude oil.
In 2004, operating profit of the refining segment was RMB 5.9 billion
(US$0.7 billion), similar to that in 2003.
Marketing and Distribution Segment
The business activities of marketing and distribution segment include
purchasing refined petroleum products from the refining segment and third
parities, and wholesale selling of refined petroleum products to domestic
customers, directly selling and retail distributing the refined petroleum
products through the retail network owned by this segment and provision of
related services.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, the operating revenues of this segment were RMB 463.8 billion,
representing an increase of 33.9% compared with 2004. The increase was primarily
due to the increases in sales volume and prices of gasoline, diesel and kerosene
including jet fuel, the continuous optimization of marketing structure to
further increase the percentage of retail sales in the total sales volume of
gasoline and diesel.
In 2005, the operating revenues from sales of gasoline and diesel were
RMB 390.2 billion, accounting for 84.1% of the operating revenues of this
segment. The percentage of retail sales in the total sales volume of gasoline
and diesel increased from 54.6% in 2004 to 59.5% in 2005, up by 5.0 percentage
points. The percentage of sales of gasoline and diesel by direct sales in the
total sales volume decreased from 20.3% in 2004 to 19.1% in 2005, down by 1.2
percentage points. The percentage of wholesale sales in the total sales volume
of gasoline and diesel decreased from 25.1% in 2004 to 21.3% in 2005, down by
3.8 percentage points.
The following table sets forth the sales volumes, average realized
prices and the respective rate of changes of the four major product categories
in 2004 and 2005 in different forms of sales channels for gasoline and diesel.
Rate of Change Average Rate of Change
Sales Volume from Realized Prices from
------------------
2004 2005 2004 to 2005 2004 2005 2004 to 2005
-------------------------------------------------------------------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline.................................... 27.51 30.32 10.2 3,762 4,430 17.8
Retail sale.............................. 18.42 21.63 17.4 3,911 4,562 16.6
Direct sale.............................. 2.89 2.84 (1.8) 3,536 4,206 18.9
Wholesale................................ 6.20 5.85 (5.7) 3,426 4,050 18.2
Diesel ..................................... 61.10 67.93 11.2 3,215 3,767 17.2
Retail sale.............................. 30.00 36.90 23.0 3,351 3,885 15.9
Direct sale.............................. 15.12 15.91 5.2 3,211 3,786 17.9
Wholesale................................ 15.98 15.12 (5.4) 2,963 3,458 16.7
Kerosene including jet fuel................. 5.62 5.96 5.9 2,923 3,710 26.9
Fuel Oil.................................... 9.69 13.33 37.7 1,793 2,374 32.4
In 2005, the segment's operating expenses were RMB 453.5 billion,
representing an increase of 36.7% compared with 2004. The increase was mainly
due to the increase in purchase expenses, of which, purchase expenses for
gasoline and diesel were RMB 355.5 billion, up by 36.3% over 2004, accounting
for 78.4% of the segment's operating expenses. In 2005, average purchase prices
of gasoline and diesel increased by 27.3% and 20.9%, respectively, to RMB 3,844
per tonne and RMB 3,518 per tonne compared with 2004. The purchase volume of
gasoline and diesel increased by 10.2% and 11.2%, respectively, compared with
2004 to 30.32 million tonnes and 67.93 million tonnes.
In 2005, the segment's operating profit was RMB 10.4 billion,
representing a decrease of 29.7% compared with 2004.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
In 2004, the segment's operating revenues of our marketing and
distribution segment were RMB 346.4 billion, representing an increase of 43.5%
over 2003. The increase was primarily due to the increase in the total sales
volume and sales prices of petroleum products and the sustained optimization of
marketing structure, which further increased the retail and direct sale ratios
at gasoline and diesel.
In 2004, the operating revenues from retail of gasoline and diesel were
RMB 299.9 billion, accounting for 86.6% of the operating revenues of this
segment. The percentage of retail and the distribution sales in the total sales
volume of the segment increased further. The percentage of retail sales of
gasoline and diesel in the segment's sales volume increased from 48.9% in 2003
to 54.6% in 2004, up by 5.7 percentage points. The percentage of direct sales of
gasoline and diesel in the segment's sales volume increased from 13.3% in 2003
to 20.3% in 2004, up by 7 percentage points. The percentage of wholesale sales
in the total sales volume of gasoline and diesel decreased from 37.8% in 2003 to
25.1 in 2004, down by 12.7 percentage points.
The following table shows the sales volumes, average realized prices
and respective percentages of change of four product categories in 2003 and
2004, including the break-down information of different sales channels for
gasoline and diesel.
Rate of Change Average Rate of Change
Sales Volume from Realized Prices from
------------------
2003 2004 2003 to 2004 2003 2004 2003 to 2004
-------------------------------------------------------------------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline.................................... 23.53 27.51 16.9 3,295 3,762 14.2
Retail sale.............................. 14.68 18.42 25.5 3,450 3,911 13.4
Distribution............................. 1.62 2.89 78.3 3,152 3,536 12.2
Wholesale................................ 7.24 6.20 (14.3) 3,011 3,426 13.8
Diesel ..................................... 47.92 61.10 27.5 2,789 3,215 15.3
Retail sale.............................. 20.29 30.00 47.8 2,954 3,351 13.4
Distribution............................. 7.88 15.12 91.9 2,772 3,211 15.8
Wholesale................................ 19.75 15.98 (19.1) 2,626 2,963 12.8
Kerosene including jet fuel................. 4.57 5.62 23.0 2,350 2,923 24.4
Fuel Oil .................................. 6.37 9.69 52.0 1,670 1,793 7.4
In 2004, this segment's operating expenses were RMB 331.7 billion,
representing an increase of 44.6% compared with 2003. Among others, purchasing
costs of gasoline and diesel were RMB 260.9 billion, constituting 78.7% of the
segment's operating expenses. Average purchased prices of gasoline and diesel
increased by 12.1% and 18.8%, respectively, compared with 2003, to RMB 3,019 per
tonne and RMB 2,910 per tonne respectively. The purchasing volume of gasoline
and diesel increased by 16.9% and 27.5% from 2003, to 27.51 million tonnes and
61.10 million tonnes respectively.
In 2004, the segment's operating income was RMB 14.7 billion, or an
increase of 23.2% compared with 2003.
Chemicals Segment
Our chemicals segment consists of operations related to purchasing
chemical feedstock from our refining segment, producing, marketing and
distribution of petrochemical products and inorganic chemical products.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, the segment's operating revenues were RMB 178.8 billion,
representing an increase of 23.6% compared with 2004, which was primarily due to
the increases in prices and sales volume of major chemical products.
In 2005, the sales revenues of the Company's six major categories of
chemical products (i.e. basic organic chemicals, monomers and polymers for
synthetic fiber, synthetic resin, synthetic fiber, synthetic rubber and chemical
fertilizer) totaled approximately RMB 159.5 billion, representing an increase of
27.9% compared with 2004, accounting for 89.2% of the total operating revenues
of this segment.
The following table sets forth the sales volume, average realized price
and the respective rate of changes for each of these six categories of chemical
products of this segment from 2004 to 2005.
Rate of Change Average Rate of Change
Sales Volumes from 2004 to 2005 Realized Prices from 2004 to 2005
--------------- -----------------
2004 2005 2004 2005
---------------------------------------------------------------------------
(million tonnes) (%) (RMB per tonne) (%)
Basic organic chemicals............... 7.38 9.51 28.8 4,292 4,828 12.5
Synthetic resins...................... 5.40 6.37 18.0 7,986 9,007 12.8
Synthetic rubber...................... 0.56 0.70 24.9 10,247 13,000 26.9
Synthetic fiber....................... 1.74 1.59 (8.6) 10,818 11,123 2.8
Synthetic fiber monomers
and polymers.................... 2.70 3.00 11.1 8,022 8,872 10.6
Chemical fertilizer................... 2.66 1.82 (31.4) 1,355 1,539 13.6
In 2005, the operating expenses of the segment were RMB 164.5 billion,
representing an increase of 30.6% compared with 2004. The increase was primarily
due to the price increases of various raw materials, the increased consumption
of various raw materials and auxiliary materials, the increased utilities
expenses and other variable expenses and fixed costs, all associated with the
increased production of the chemical products.
Among others:
o Affected by the increase in the consumption of raw materials and
their unit prices, the costs for raw materials increased by RMB 37.6
billion compared with 2004. Consumption of naphata and other
cracking materials increased by 2.43 million tonnes over 2004, and
unit price of raw materials was RMB 3,704 per tonne, up by RMB 1,160
per tonne over 2004.
o Due to increased sales volume of chemical products, selling
expenses, such as transportation costs, increased by RMB 700 million
compared with 2004.
In 2005, the segment's operating profit was RMB 14.3 billion,
representing a decrease of RMB 4.4 billion compared with 2004.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
In 2004, the chemicals segment's operating revenue were RMB 144.7
billion, representing an increase of 39.3% compared with 2003. This increase was
mainly due to an increase in sales volumes and sales prices of major chemical
products.
The sales revenues of the six major product categories of this segment,
namely, basic organic chemicals, synthetic resin, synthetic rubber, synthetic
fiber, synthetic fiber monomer and polymer, and chemical fertilizer, were
approximately RMB 124.7 billion, accounting for 86.2% of the segment's operating
revenues, representing an increase of 33.7% compared with 2003.
The following table sets forth the sales volume, average realized
prices and respective percentages changes of these six major categories of
chemical products of the segment in 2003 and 2004.
Rate of Change Average Rate of Change
Sales Volumes from 2003 to 2004 Realized Prices from 2003 to 2004
---------------------------------------------------------------------------
2003 2004 2003 2004
---------------------------------------------------------------------------
(million tonnes) (%) (RMB per tonne) (%)
Basic organic chemicals............... 7.21 7.38 2.4 3,377 4,292 27.1
Synthetic resins...................... 5.10 5.40 6.0 6,017 7,986 32.7
Synthetic rubber...................... 0.55 0.56 1.4 8,513 10,247 20.4
Synthetic fiber....................... 1.72 1.74 1.2 9,300 10,818 16.3
Synthetic fiber monomers
and polymers.................... 2.62 2.70 3.1 5,791 8,022 38.5
Chemical fertilizer................... 2.03 2.66 30.7 1,165 1,355 16.3
In 2004, the chemicals segment's operating expenses were RMB 126.0
billion, representing an increase of 25.6% compared with that of 2003. This
change was primarily caused by the price increase of various raw materials, the
increased consumption of various raw materials and auxiliary materials with the
increase in the production of this segment, as well as the increased variable
expenses and fixed costs. More specifically, the increase was due to the
following reasons:
o Affected by the increase in the consumption of raw materials and
auxiliary materials and the increase in their unit prices, the
purchasing costs for raw materials, operating supplies and other
related expenses increased by approximately RMB 21.9 billion
compared with 2003.
o Materials sales and other business expenses were up by RMB 1.8
billion compared with 2003.
o Provision for impairment losses on low efficient facilities for
fertilizer and caprolactam was RMB 2.0 billion, representing an
increase of RMB 1.6 billion.
In 2004, the segment's operating income was RMB 18.7 billion,
representing an increase of approximately RMB 15.2 billion from 2003. The
percentage of operating profit of the chemicals segment in our total operating
profit increased from 9% in 2003 to 29.6% in 2004, representing an increase of
20.6 percentage pints.
Corporate and others
The business activities of corporate and others mainly consist of the
import and export businesses of the subsidiaries, research and development
activities of us and managerial activities of our headquarters.
Year Ended December 31, 2005 compared with Year Ended December 31, 2004
In 2005, the operating revenues of corporate and others were RMB 121.9
billion, representing an increase of 48.3% compared with 2004. The increase was
due to the fact that China Petrochemical International Co., Ltd. and its
subsidiaries increased their trading volume in importing and exporting crude oil
and petrochemical products and other business transactions.
In 2005, the segment's operating expenses were RMB 123.1 billion,
representing an increase of 46.3% compared with 2004. The increase was primarily
due to the increased purchase expenses of China Petrochemical International Co.,
Ltd. and its subsidiaries associated with the increase in their revenues.
The segment's operating losses were RMB 1.2 billion, representing a
decrease of RMB 0.7 billion in operating losses as compared with 2004.
Year Ended December 31, 2004 compared with Year Ended December 31, 2003
In 2004, the operating revenues of corporate and others segment were
approximately RMB 82.2 billion, representing an increase of 26.1% from 2003.
Such operating revenues mainly consisted of the consolidated operating revenues
of China Petrochemical International Co., Ltd. and its subsidiaries. The
increase was largely because we increased our import and export trading volume
and other business transactions to capture the opportunities presented by the
high prices of crude oil and petroleum products.
In 2004, the operating expenses of corporate and others were
approximately RMB 84.1 billion, representing an increase of 25.5% from 2003. The
increase was largely because the purchasing costs of China Petrochemical
International Co., Ltd. and its subsidiaries increased concurrently with its
increased operating revenues.
In 2004, the operating losses of the corporate and others segment were
approximately RMB 1.9 billion, representing an increase of RMB 0.1 billion over
2003.
D. LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funding have been cash provided by operating
activities and short-term and long-term borrowings and our primary uses of funds
have been for working capital, capital expenditures and repayment of short-term
and long-term borrowings.
As of December 31, 2005, our short-term debts (including short-term
loans from Sinopec Group Company and its affiliates) were RMB 41.2 billion and
accounted for 27.8% of our total short-term and long-term debts (long-term debts
include interest free subordinated loan from Sinopec Group Company in the amount
of RMB 35.6 billion due in 2020). As of December 31, 2005, cash and cash
equivalents were RMB 13.7 billion as compared to RMB 16.4 billion as of December
31, 2004.
Our future debt level is dependent primarily on results of operations,
the capital expenditure plan and cash that may be generated from assets
disposals. We believe that we have substantial borrowing capacity to meet
unanticipated cash requirements.
The following table sets forth a condensed summary of the statements of
cash flows for the periods indicated and selected balance sheet items at the end
of the periods indicated.
For the Years Ended December 31,
---------------------------------
2003 2004 2005
---------------------------------
RMB RMB RMB
(in billion)
Net cash from operating activities:
Net cash provided by operations(1).............................. 72.6 104.0 105.2
Changes in working capital and other
assets and liabilities(2)..................................... 3.6 (13.3) (1.8)
Net interest and tax paid(3).................................... (14.1) (21.6) (26.9)
---------------------------------
Total.................................................... 62.1 69.1 76.5
---------------------------------
Cash flows from investing activities:
Capital expenditure including capital expenditure of jointly
controlled entities......................................... (48.5) (73.6) (65.6)
Purchase of investments net of proceeds from disposal of
investments................................................... (1.4) (1.0) (2.5)
Net (purchase) redemption of in time deposits less maturity of
time deposits................................................. (1.2) 0.3 0.9
Acquisition of minority interests in subsidiaries.............. - - (4.3)
Proceeds from disposal of property, plant and equipment ........ 0.4 0.3 0.5
---------------------------------
Total.................................................... (50.7) (74.0) (71.0)
---------------------------------
Cash flows from financing activities:
Proceeds from bank and other loans including those of jointly
controlled entities, net of repayments........................ (6.8) 13.7 (2.9)
Proceeds from issuance of corporate bonds, net of issuing
expenses - 3.5 9.8
Contribution from minority interest, net of distributions to
minority interests............................................ 0.2 0.2 (1.5)
Dividend paid................................................... (7.8) (8.7) (10.4)
Distributions to Sinopec Group Company.......................... - (3.7) (3.1)
---------------------------------
Total.................................................... (14.4) 5.0 (8.1)
---------------------------------
Net increase/(decrease) in cash and cash equivalents............... (3.0) 0.1 (2.6)
---------------------------------
Cash and cash equivalents at end of year........................... 16.3 16.4 13.7
=================================
____________
(1) Represents income/ before income tax as adjusted for depreciation,
depletion and amortization, dry hole cost, income from associates,
investment income, interest income, interest expense, gain from issuance of
shares by a subsidiary, unrealized foreign exchange (gains)/losses, loss on
disposal of property, plant and equipment, and impairment losses on
long-lived assets.
(2) Represents decreases/(increases) in current assets, increases/(decreases)
in current liabilities and increases in other assets, net of other
liabilities.
(3) Represents interest received, interest paid, investment income received,
and income tax paid.
Net Cash from Operating Activities
Net cash provided by operations increased from RMB 104.0 billion in
2004 to RMB 105.2 billion in 2005. The increase was primarily due to the
increased income before income tax reflecting our better operating results in
2005.
Cash Flows from Investing Activities
Our cash outflows for capital expenditure projects amounted to RMB 44.4
billion, RMB 67.6 billion and RMB 63.1 billion in 2003, 2004 and 2005,
respectively. In addition, we had RMB 4.1 billion, RMB 6.0 billion and RMB 2.5
billion in 2003, 2004 and 2005, respectively, of capital expenditure in our
jointly controlled entities.
In addition, we paid RMB 4.3 billion for acquisition of minority
interests in Beijing Yanhua and other subsidiaries in 2005.
Cash Flows from Financing Activities
Net cash used in financing activities was RMB 8.1 billion in 2005,
primarily because our repayment of bank and other loans (including loans of
jointly controlled entities) exceeded our proceeds from bank and other loans by
RMB 2.9 billion. The net cash outflow was further increased by the dividend paid
in 2005 of RMB 10.4 billion and a distribution of RMB 3.1 billion to Sinopec
Group Company for acquisition of petrochemical assets and catalyst assets. The
cash outflow was partially offset by the net proceeds from the issuance of
corporate bonds of RMB 9.9 billion.
Contractual Obligations and Commercial Commitments
The following table sets forth our obligations and commitments to make
future payments under contracts and under contingent commitments as of December
31, 2005.
As of December 31, 2005
------------------------------------------------------
Payment due by period
------------------------------------------------------
less than After 5
Total 1 year 1-3 years 4-5 years years
----- ------------------------------------------------------
(RMB millions)
Contractual obligations(1)
Short-term debts......................... 26,522 26,522 - - -
Long-term debts.......................... 136,094 19,267 49,631 15,409 51,787
--------------------------------------------------------------
Total contractual obligations............ 162,616 45,789 49,631 15,409 51,787
==============================================================
Other commercial commitments(2)
Operating lease commitment............... 112,309 3,593 6,830 6,710 95,176
Capital commitment....................... 73,826 64,117 9,709 - -
Exploration and production licenses...... 640 107 171 123 239
Guarantees(3)............................ 79 79 - - -
--------------------------------------------------------------
Total commercial commitments............. 186,854 67,896 16,710 6,833 95,415
==============================================================
_________
(1) Contractual obligations include the contractual obligations relating to
interest payments. See Note 30 to our audited consolidated financial
statements for the contractual obligations relating to post employment
benefit plans.
(2) Other commercial commitments represent off-balance sheet contingent
liabilities, and other potential cash outflows (as of the balance sheet
date) which may result from contingent events.
(3) Guarantee is not limited by time, therefore specific payment due period
is not applicable. As of December 31, 2005, we have not entered into
any off-balance sheet arrangements other than guarantees given to banks
in respect of banking facilities granted to certain parties. As of
December 31, 2005, the maximum amount of potential future payments
under the guarantees was RMB 79 million. We monitor the conditions that
are subject to the guarantees to identify whether a loss is probable,
and will recognize any such loss under guarantees when those losses are
estimable. As of December 31, 2005, it was not probable that we would
be required to make payments under these guarantees. See Note 28 to the
consolidated financial statements for further information of the
guarantees.
Historical and Planned Capital Expenditure
The following table sets forth our capital expenditure by segment for
each of the years ended December 31, 2003, 2004 and 2005 and the capital
expenditure in each segment as a percentage of our total capital expenditure for
such year.
2003 2004 2005 Total
---------------- ------------------ ------------------ ------------------
RMB Percent RMB Percent RMB Percent RMB Percent
(in billions, except percentage data)
Exploration and production . 20.6 45 21.2 33 23.1 39 64.9 38
Refining..................... 9.8 22 14.3 22 14.1 24 38.2 23
Marketing and distribution... 6.8 15 16.7 26 11.0 19 34.4 20
Chemicals.................... 7.7 17 11.0 17 9.4 16 28.1 17
Corporate.................... 0.5 1 1.6 2 1.1 2 3.3 2
-------------------------------------------------------------------------------
Total................... 45.4 100 64.8 100 58.7 100 168.9 100
===============================================================================
In 2005, we adjusted our investment allocation in line with our
development strategy and core business based on market conditions, and worked
for better organization and implementation of major projects. The total capital
expenditure in 2005 was RMB 58.7 billion.
o The capital expenditure for our exploration and production segment
was RMB 23.1 billion. With the investment, new crude oil and natural
gas reserves were discovered in some major exploratory areas,
including Jiyang Depression, Tahe and northeast Sichuan. Newly built
crude oil and natural gas production capacity increased by 5.79
million tonnes per annum and 2.1 billion cubic meters per annum,
respectively.
o The capital expenditure for our refining segment was RMB 14.1
billion. With the investment, newly added primary refining capacity,
hydro-refining capacity and coking capacity increased by 6.7 million
tonnes per annum, 3.73 million tonnes per annum and 2.8 million
tonnes per annum, respectively; the revamping of facilities for
upgrading refined oil product quality was completed on schedule and
Ningbo-Shanghai-Nanjing pipeline for imported crude oil was
completed and put into operation.
o The capital expenditure for our marketing and distribution segment
was RMB 11.0 billion. With the investment, the Southwest refined oil
pipeline was fully completed and put into operation, the refined
petroleum products sales network further improved by way of
construction and acquisition of new service stations and renovation
of existing service stations. Our leading position in our principal
market was further solidified, with a net increase of 786
self-operated service stations.
o The capital expenditure for our chemicals segment was RMB 9.4
billion. With the investment, Maoming's Ethylene expansion project
and the PTA revamping project at Shanghai Petrochemical and Yangzi
Petrochemical progressed smoothly, and the coal gasification
projects for fertilizer production progressed on schedule.
o The capital expenditure for corporate and others was RMB 1.1
billion. With the investment, our information technology systems
were further improved.
In addition, we incurred a total of RMB 2.6 billion in capital
expenditure in 2005 on our two petrochemical joint ventures, Shanghai Secco and
BASF-YPC, both of which have been successfully put into commercial operation.
In 2006, our planned capital expenditure is RMB 70 billion. The
projected expenditure for exploration and production segment is RMB 29.8
billion, for refining segment is RMB 14.6 billion, for chemical segment is RMB
12.5 billion, for marketing and distribution segment is RMB 11 billion.
The capital expenditure will be primarily invested in the following
activities:
o In the exploration and production segment, we will continue to
pursue the principle of "coordination of reserves, production,
investment and returns", construction of crude oil and natural gas
production capacity in western China. In addition, development of
Puguang Gas Field in northeastern Sichuan will be accelerated. We
will also endeavor to enhance overall deployment of our production
capacity in marginal reserves and maintain a positive balance
between the production and newly found reserves.
o In the refining segment, we will accelerate construction of crude
oil pipeline and related receiving and unloading facilities, ensure
the smooth progress of the revamping efforts at refining facilities
in Guangzhou, Yanshan and other areas aimed at upgrading oil product
quality, and push forward Qingdao oil refining project and Fujian
integrated project.
o In the chemical segment, we will focus on the successful
commencement of operation of the revamped facilities at Maoming, the
PX and PTA facilities at Yangzi and three fertilizer facilities and
the orderly commencement of construction of the ethylene facilities
at Fujian, Tianjin and Zhenhai.
o In the marketing and distribution segment, we will continue to
optimize and adjust the sales network, accelerate construction of
refined petroleum product pipelines and construct more service
stations in central cities, new urban districts and along
expressways.
We plan to fund our capital expenditures and working capital
requirements principally through cash provided by operating activities and
short- and long-term debts from domestic as well as overseas sources. We believe
our working capital is sufficient for our present requirements. Our capital
expenditure plans are subject to a number of risks and uncertainties, and our
actual capital expenditures may vary significantly from these planned amounts
due to various factors. See "Item 3. --Key Information -- Risk Factors -- Our
development plans have significant capital expenditure and financing
requirements, which are subject to a number of risks and uncertainties".
Consumer Price Index
According to the data provided by the National Bureau of Statistics,
the consumer price index in the PRC increased by 1.8% in 2005, compared with
3.9% in 2004 and 1.2% in 2003. Inflation in the PRC has not had a significant
impact on our results of operations in recent years.
US GAAP Reconciliation
Our consolidated financial statements are prepared in accordance with
IFRS which differs in certain material respects from US GAAP. These differences,
as they apply to our consolidated financial statements, relate primarily to:
o the US GAAP requirement that investments accounted for by the equity
method while the investee has activities in progress necessary to
commence its planned operations are considered as qualifying assets
for which interest is capitalized, whereas under IFRS, such
investments are not considered as qualifying assets for which
interest is capitalized;
o the US GAAP requirement that foreign exchange differences on funds
borrowed for property, plant and equipment be expensed, rather than
capitalized as is allowed under IFRS;
o the US GAAP requirement that property, plant and equipment be
carried at historical costs less accumulated depreciation
(depreciation expense is based on the historical costs), whereas
under IFRS revalued property, plant and equipment can be carried in
the consolidated financial statements at the revalued amount less
accumulated depreciation (depreciation expense is based on the
revalued amount); and
o the US GAAP requirement that an impairment loss be recognized on an
asset when the sum of the expected undiscounted future cash flows
resulting from the use of the asset and its eventual disposition is
less than the carrying amount of the asset and the requirement that
such impairment loss cannot be reversed, rather than the IFRS
standard which involves the asset's discounted future expected cash
flows and which permits, in some circumstances, the reversal of
amounts previously written down.
o the US GAAP requirement that minority interests at the balance sheet
date be presented in the consolidated balance sheet either as
liabilities or separately from liabilities and equity, whereas under
IFRS, minority interest at the balance sheet date be presented in
the consolidated balance sheet within equity, separately from the
equity attributable to the equity shareholders of the Company.
o the US GAAP requirement that minority interests in the results of
the Group for the period be separately presented in the consolidated
statement of income as deduction before arriving at the net income,
whereas under IFRS, minority interests in the results of the Group
for the period be presented on the face of the consolidated
statement of income as an allocation of the total net income for the
period between the minority interests and the equity shareholders of
the Company.
See Note 39 to the consolidated financial statements for further
information.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Directors
The table and discussion below set forth certain information concerning
our directors. The current term for all our directors is three years, which will
expire in May 2006.
Name Age Positions with Sinopec Corp.
---- --- -----------------------------------
Chen Tonghai 57 Chairman of the Board of Directors
Wang Jiming 63 Vice Chairman
Mou Shuling 61 Director
Zhang Jiaren 61 Director and Chief Financial Officer
Cao Xianghong 60 Director
Liu Genyuan 60 Director
Gao Jian 56 Director
Fan Yifei 42 Director
Chen Qingtai 68 Independent Non-executive Director
Ho Tsu Kwok Charles 56 Independent Non-executive Director
Shi Wanpeng 68 Independent Non-executive Director
Zhang Youcai 64 Independent Non-executive Director
Cao Yaofeng 52 Employee Representative Director
Chen Tonghai, 57, Chairman of the Board of Directors of Sinopec Corp.
and Mr. Chen is also President of Sinopec Group Company. Mr. Chen graduated from
Northeast Petroleum Institute in September 1976 specialising in petroleum
production engineering. Mr. Chen is a professor level senior economist. He has
extensive experience in petrochemical industry administration and macro-economic
management. From July 1983 to December 1986, Mr. Chen was Vice Party Secretary
and then Party Secretary of Zhenhai Petroleum and Petrochemical Plant under the
former Sinopec Group Company. From December 1986 to July 1989, Mr. Chen served
as Managing Deputy Mayor of Ningbo City, Zhejiang Province. From July 1989 to
June 1991, Mr. Chen served as Managing Deputy Director of the Planning and
Economic Committee of Zhejiang Province. From June 1991 to February 1992, Mr.
Chen served as Acting Mayor of Ningbo City. From February 1992 to January 1994,
Mr. Chen served as Mayor of Ningbo City. From January 1994 to April 1998, Mr.
Chen served as Vice Minister of the State Planning Commission. Mr. Chen served
as Vice President of Sinopec Group Company from April 1998 to March 2003. Mr.
Chen has been President of Sinopec Group Company since March 2003. Mr. Chen
served as Director and Vice Chairman of the First Session of the Board of
Directors of Sinopec Corp. from February 2000 to April 2003. Mr. Chen was
elected as Director and Chairman of the Second Session of the Board of Directors
of Sinopec Corp. in April 2003.
Wang Jiming, 63, Vice Chairman of the Board of Directors. Mr. Wang
graduated from East China Chemical Institute in September 1964 specialising in
petroleum refining. Mr. Wang is a professor level senior engineer with over 30
years' management experience in China's petroleum and petrochemical industry.
From November 1984 to June 1993, Mr. Wang served as Vice President, Acting
President and President of Shanghai Petrochemical Plant under the former Sinopec
Group Company. Mr. Wang served as Chairman and President of Shanghai
Petrochemical Company Limited from June 1993 to February 1994. He served as Vice
President of Sinopec Group Company (before its reorganisation) and Chairman of
Shanghai Petrochemical Company from February 1994 to April 1998. Mr. Wang served
as Vice President of Sinopec Group Company from April 1998 to February 2000. Mr.
Wang has also served as Chairman of Shanghai SECCO Petrochemical Company Limited
from December 2001 to July 2003. Mr. Wang served as Director of the First
Session of the Board of Directors and President of Sinopec Corp. from February
2000 to April 2003. From April 2003 to March 2005, Mr. Wang served as President
of Sinopec Corp. In April 2003, Mr. Wang was elected as Director and Vice
Chairman of the Second Session of the Board of Directors of Sinopec Corp.
Mou Shuling, 61, Director of Sinopec Corp. Mr. Mou graduated from
Beijing Petroleum Institute in July 1968 specialising in petroleum production
engineering. Mr. Mou is a professor level senior engineer and has over 30 years'
management experience in China's petroleum industry. From February 1990 to April
1997, Mr. Mou served as Deputy Director and Director of Jiangsu Petroleum
Exploration Bureau. From April 1997 to April 1998, Mr. Mou served as Director of
Shengli Petroleum Administration Bureau. Mr. Mou served as Vice President of
Sinopec Group Company from April 1998 to February 2000. Mr. Mou served as
Director of the First Session of the Board of Directors and Vice President of
Sinopec Corp. from February 2000 to April 2003. From April 2003 to March 2005,
Mr. Mou served as Senior Vice President of Sinopec Corp. In April 2003, Mr. Mou
was elected as Director of the Second Session of the Board of Directors of
Sinopec Corp.
Zhang Jiaren, 61, Director and Chief Financial Officer of Sinopec Corp.
Mr. Zhang graduated from Hefei Industrial University in July 1966 specialising
in electrical engineering. Mr. Zhang is a professor level senior economist with
over 30 years' management experience in China's petrochemical industry. From
August 1987 to July 1994, Mr. Zhang served as Vice President and President of
Zhenhai Petroleum and Petrochemical Plant under the former Sinopec Group
Company. From July 1994 to April 1998, Mr. Zhang served as Chairman and
President of Zhenhai Refining and Chemical Company. Mr. Zhang served as Vice
President of Sinopec Group Company from April 1998 to February 2000. Mr. Zhang
served as Director of the First Session of the Board of Directors and Vice
President of Sinopec Corp. from February 2000 to April 2003. Mr. Zhang has been
Chief Financial Officer of Sinopec Corp. since March 2000. In April 2003, Mr.
Zhang was elected as Director of the Second Session of the Board of Directors of
Sinopec Corp. From April 2003 to November 2005, Mr. Zhang served as Senior Vice
President and Chief Financial Officer of Sinopec Corp. In November 2005, Mr.
Zhang was appointed as Chief Financial Officer of Sinopec Corp.
Cao Xianghong, 60, Director of Sinopec Corp. Mr. Cao graduated from
Nanjing Chemical Institute in July 1967 specialising in macro molecular
chemistry. Mr. Cao is an academician of the China Academy of Engineering and a
professor level senior engineer. Mr. Cao has over 30 years' management
experience in China's petrochemical industry. From July 1984 to August 1997, Mr.
Cao served as Deputy General Manager and Chief Engineer of Beijing Yanshan
Petrochemical Company under the former Sinopec Group Company. From August 1997
to February 2000, Mr. Cao served as President, Vice Chairman and Chairman of
Beijing Yanshan Petrochemical Company Limited and Chairman of Beijing Yanhua
Petrochemical Company Limited. Mr. Cao served as Director of the First Session
of the Board of Directors and Vice President of Sinopec Corp. from February 2000
to April 2003. From April 2003 to November 2005, Mr. Cao served as Senior Vice
President of Sinopec Corp. In November 2005, Mr. Cao was appointed as Chief
Engineer of Sinopec Corp. In April 2003, Mr. Cao was elected as Director of the
Second Session of the Board of Directors of Sinopec Corp.
Liu Genyuan, 60, Director of Sinopec Corp. Mr. Liu graduated from
Shanghai Science and Technology University in July 1968 specialising in
radiation chemistry. He is a professor level senior economist and has over 30
years' extensive management experience in China's petrochemical industry. From
May 1995 to July 2001, he served as President of Shanghai Gaoqiao Petrochemical
Company under the former Sinopec Group Company. Mr. Liu served as Vice President
of Sinopec Group Company from July 2001 to November 2005. Mr. Liu has been
Chairman and President of Sinopec Assets Management Company Limited since
September 2005. Mr. Liu was elected as Director of the Second Session of the
Board of Directors of Sinopec Corp. in June 2003.
Gao Jian, 56, Director of Sinopec Corp. In September 1982, Mr. Gao
graduated from the Beijing Institute of Politics and Law as a postgraduate
specialising in political economics. In July 1992, he graduated from the Finance
Science Research Institute of the Ministry of Finance with a Ph.D. degree
specialising in finance. From November 1997 to June 1998, he conducted
postdoctoral research at the Faculty of Economics at Harvard University, USA. He
is a Senior Economist. Mr. Gao has been engaged in research in economic theories
and financial management for a long period of time and has extensive experience
in economics and financial management. From January 1989 to April 1994, he was
Deputy Head of the Department of Treaty and Law of the Ministry of Finance and
the Deputy Head of the National Debts Management Department. From April 1994 to
October 1998, he was the Head of the National Debts Department and the Head of
the Department of Treaty and Law of the Ministry of Finance. From October 1998
to April 2001, he was the Chief Economist, the Head of the Funds Bureau and,
concurrently, the Chief Representative of the Hong Kong Representative Office of
the China Development Bank. From April 2001 to July 2003, he was the Assistant
to the Governor, Head of the Funds Bureau and, concurrently, the Chief
Representative of the Hong Kong Representative Office of the China Development
Bank. Since July 2003, he is the Deputy Governor of the China Development Bank.
He was elected as Director of the Second Session of the Board of Directors of
Sinopec Corp. in May 2004.
Fan Yifei, 42, Director of Sinopec Corp. Mr. Fan graduated from the
treasury and finance department of Renmin University of China in July 1993 and
obtained a doctoral degree in economics; He obtained a master degree in
international economics from the Columbia University in 2002. He is a senior
accountant. From June 1993 to September 1994, he was the Assistant to the
General Manager and Manager of the Planning and Finance Department of the Trust
Investment Company of China Construction Bank successively. From September 1994
to July 1996, he served as Vice General Manager of the Capital Planning
Department of China Construction Bank. He was the General Manager of the Finance
and Accounting Department of China Construction Bank from July 1996 to January
1998. He was the General Manager of the Planning and Finance Department of China
Construction Bank from January 1998 to February 2000. Mr. Fan served as the
Assistant to the Governor of China Construction Bank from February 2000 to June
2005, during which he enriched his experience by participating in the Three
Gorges project, and also acted as the Assistant to the General Manager of China
Changjiang Power Co., Ltd. In June 2005, Mr. Fan was appointed as Deputy
Governor of China Construction Bank. Mr. Fan was elected as Director of the
Second Session of the Board of Directors of Sinopec Corp. in April 2003.
Chen Qingtai, 68, Independent Non-executive Director of Sinopec Corp.
Mr. Chen graduated from Tsinghua University in February 1964 specialising in
power and dynamics engineering. Mr. Chen is a researcher and professor. Mr. Chen
was engaged in business administration and macro-economic management over a long
period of time, and has accumulated extensive experience in business
administration and macro-economic management. From October 1982 to July 1992,
Mr. Chen was Chief Engineer, President and Chairman of China No. 2 Automobile
Works and Chairman of Dongfeng Peugeot Citroen Automobile Limited, Ltd. From
July 1992 to April 1993, Mr. Chen served as Deputy Director of the State Council
Economic and Trade Office. From April 1993 to March 1998, Mr. Chen served as
Deputy Director of State Economic and Trade Commission. From March 1998 to
November 2004, Mr. Chen served as Vice Minister of the Development Research
Center of the State Council (DRC) of PRC. Since July 2000, he has been Director
of the Public Policy and Management School of Tsinghua University. Mr. Chen has
been a member of the Standing Committee of the Tenth session of Chinese People's
Political Consultative Conference since March, 2003. From November 2004, Mr.
Chen has been a senior researcher of the DRC. Since March 2005, he has been Vice
chairman of the Economic Committee of the Tenth Session of Chinese People's
Political Consultative Conference. Mr. Chen served as Independent Non-executive
Director of the First session of the Board of Directors of Sinopec Corp. from
February 2000 to April 2003. In April 2003, Mr. Cao was elected as Independent
Non-executive Director of the Second Session of the Board of Directors of
Sinopec Corp.
Ho Tsu Kwok Charles, 56, Independent Non-executive Director of Sinopec
Corp. Mr. Ho is Chairman of Hong Kong Tobacco Company Limited, a cigarette
manufacturer and distributor in Asia Pacific region. Mr. Ho is also Chairman and
Director of Global China Investments Limited, a joint venture between a Canadian
provincial government pension fund and the Ontario Municipal Employees
Retirement System. He is responsible for devising investment and management
strategies for Global China Investments Limited. Mr. Ho is Chairman of Global
China Investments Holdings Limited and Non-executive Director of China National
Aviation Company Limited, each of which is listed on the Hong Kong Stock
Exchange. Mr. Ho is also a member of the Standing Committee of the Chinese
People's Political Consultative Conference and an economic consultant to
Shandong provincial government. He is a member of the Board of Trustees of the
University of International Business and Economics of China and an honorary
member of the Board of Trustees of Peking University. Mr. Ho served as
Independent Non-executive Director of the First session of the Board of
Directors of Sinopec Corp. from June 2000 to April 2003. In April 2003, Mr. Ho
was elected as Independent Non-executive Director of the Second Session of the
Board of Directors of Sinopec Corp.
Shi Wanpeng, 68, Independent Non-executive Director of Sinopec Corp.
Mr. Shi graduated from Northern Jiaotong University in August 1960 specialising
in railway transportation administration. He is a professor level senior
engineer. He has long been engaged in economic management work, and has
extensive experience in macro-economic management. From January 1983 to January
1987, he served as a Deputy Director of the Transport Bureau of the State
Economic Commission. From January 1987 to May 1988, he was the Director of the
Economic and Technical Co-operation Bureau of the State Economic Commission.
From May 1988 to July 1991, he was the Director of the Production and Dispatch
Bureau of the State Planning Commission. From July 1991 to July 1992, he served
as Deputy Secretary General of the Production Office of the State Council. From
July 1992 to April 1993, he served as a Deputy Director of the Economic and
Trade Office of the State Council. From April 1993 to July 1997, he was a Vice
Minister of the State Economic and Trade Commission. From July 1997 to March
1998, he was the Chairman (minister level) of the China Textiles Association.
From March 1998 to February 2002, he served as a Vice Minister of the State
Economic and Trade Commission. Since January 2003, he has been Chairman of China
Packaging Federation. He has been a member of the Standing Committee of the
National Committee of the Tenth session of the Chinese People's Political
Consultative Conference and Deputy Director of its Economic Committee since
March 2003. Mr. Shi was elected as Independent Non-executive Director of the
Second Session of the Board of Directors of Sinopec Corp. in April 2003.
Zhang Youcai, 64, Independent Non-executive Director of Sinopec Corp.
Mr. Zhang graduated from Nanjing Industrial University in August 1965
specialising in inorganic chemistry. He is a professor. He has long been engaged
in business administration, financial management and government work, and has
extensive experience in industrial, economic, financial and accounting
management. From January 1968 to August 1980, he served as a technician, Vice
President, Deputy Secretary of the Party Committee and President, respectively,
of Nantong Chemical Fertiliser Plant. From August 1980 to January 1982, he was a
Deputy Director and a member of the Leading Party Group of the Industrial Bureau
of Nantong Region. From January 1982 to February 1983, he served as a Deputy
Director of the Planning Commission of Nantong Region. From February 1983 to
November 1989, he served as a Deputy Mayor, Deputy Secretary of the Party
Committee and Mayor of Nantong City. He was a Vice Minister of the Ministry of
Finance and a member of the Leading Party Group of the Ministry of Finance from
December 1989 to July 2002 (from May 1994 to March 1998 of this period, he
served concurrently as the Director of the State-owned Assets Administration
Bureau). He has been the Chairman of The Chinese Institute of Chief Accountants
since November 2002. He has also been the member of the standing committee of
the Tenth Session of the National People's Congress and Deputy Director of its
Financial and Economic Committee since March 2003. Mr. Zhang was elected as
Independent Non-executive Director of the Second Session of the Board of
Directors of Sinopec Corp. in April 2003.
Cao Yaofeng, 52, Employee Representative Director of Sinopec Corp. Mr.
Cao graduated from the General Section of East China Petroleum Institute in
September 1977 specialising in mining machinery. He obtained a master's degree
in mechanical design and theories from the Petroleum University (East China) in
June 2001. He is a professor level senior engineer. From April 1997 to December
2001, he was a Deputy Director of Shengli Petroleum Administration Bureau under
Sinopec Group Company. He acted concurrently as a ViceChairman of the Board of
Directors of Sinopec Shengli Oilfield Company Limited from May 2000 to December
2001. From December 2001 to December 2002, he was a Director and the General
Manager of Sinopec Shengli Oilfield Company Limited. Mr. Cao served as the
Chairman of the Board of Directors of Sinopec Shengli Oilfield Company Limited
from December 2002 to December 2005. From October 2004 to November 2005, Mr. Cao
served as Assistant to the President of the Sinopec Group Company. In November
2005, Mr. Cao was appointed as Vice President of Sinopec Group Company. Mr. Cao
was elected as Employee Representative Director of the Second Session of the
Board of Directors of Sinopec Corp. in April 2003.
Supervisors
The table and discussion below set forth certain information concerning
our supervisors. The current term of our supervisors is three years, which will
expire in May 2006.
Name Age Position with the Company
---- --- -------------------------
Wang Zuoran 55 Chairman of the Board of Supervisors
Zhang Chongqing 61 Supervisor
Wang Peijun 60 Supervisor
Wang Xianwen 61 Supervisor
Zhang Baojian 61 Supervisor
Kang Xianzhang 57 Supervisor
Cui Jianmin 73 Independent Supervisor
Li Yonggui 65 Independent Supervisor
Su Wensheng 49 Employee Representative Supervisor
Cui Guoqi 52 Employee Representative Supervisor
Zhang Xianglin 59 Employee Representative Supervisor
Zhang Haichao 48 Employee Representative Supervisor
Wang Zuoran, 55, Chairman of the Supervisory Committee of Sinopec Corp.
Mr. Wang graduated from Shandong Economic Administration Institute in September
1994 specialising in economic administration. Mr. Wang is a professor level
senior economist and he has extensive experience in the management of petroleum
industry. From October 1994 to February 2000, Mr. Wang served as Deputy Director
and Party Secretary of Shengli Petroleum Administration Bureau. From February
2000 to July 2001, Mr. Wang was the Assistant to President of Sinopec Group
Company. Mr. Wang has been Director of Disciplinary Supervision Committee of
Sinopec Group Company since July 2001. Mr. Wang served as Supervisor of the
First Session of the Supervisory Committee of Sinopec Corp. from February 2000
to April 2003. In April 2003, Mr. Wang was elected as Supervisor and Chairman of
the Second Session of the Supervisory Committee of Sinopec Corp..
Zhang Chongqing, 61, Supervisor of Sinopec Corp. Mr. Zhang graduated
from China University of Science and Technology in July 1967 specialising in
macro molecular chemistry. He is a professor level senior economist. From May
1991 to February 1993, Mr. Zhang served as Vice President of Planning Institute
of former Sinopec Group Company. From February 1993 to December 1998, Mr. Zhang
served as Deputy Director and Director of General Administrative Office of
former Sinopec Group Company. Mr. Zhang has been Director of General
Administrative Office of Sinopec Group Company from December 1998 to February
2005. Mr. Zhang served as Supervisor of the First Session of the Supervisory
Committee of Sinopec Corp. from February 2000 to April 2003. In April 2003, Mr.
Zhang was elected as Supervisor of the Second Session of the Supervisory
Committee of Sinopec Corp.
Wang Peijun, 60, Supervisor of Sinopec Corp. Mr. Wang graduated from
Northeast Petroleum Institute in July 1970 specialising in oil and gas field
engineering. He is a professor level senior economist. From June 1989 to August
1991, Mr. Wang was Vice Party Secretary of Qilu Petroleum and Petrochemical
Company under former Sinopec Group Company. From August 1991 to December 1998,
he served as Deputy Director and Director of Human Resources Department of
former Sinopec Group Company. From December 1998 to September 2005, Mr. Wang has
been Director of Human Resources Department of Sinopec Group Company. Mr. Wang
served as Supervisor of the First Session of the Supervisory Committee of
Sinopec Corp. from February 2000 to April 2003. In April 2003, Mr. Wang was
elected as Supervisor of the Second Session of the Supervisory Committee of
Sinopec Corp.
Wang Xianwen, 61, Supervisor of Sinopec Corp. Mr. Wang graduated from
Jilin University in July 1968 specialising in chemistry. He is a professor level
senior economist. From April 1984 to March 1990, Mr. Wang served as Deputy
Manager of Jinzhou Petrochemical Company under the former Sinopec Group Company.
From March 1990 to December 1998, Mr. Wang served as Deputy Director and
Director of Auditing Bureau of the former Sinopec Group Company. Mr. Wang served
as Director General of Auditing Bureau of Sinopec Group Company from December
1998 to January 2005. Mr. Wang served as the Director of Sinopec Corp.'s
Auditing Bureau from February 2000 to January 2005. Mr. Wang served as
Supervisor of the First Session of the Supervisory Committee of Sinopec Corp.
from February 2000 to April 2003. In April 2003, Mr. Wang was elected as
Supervisor of the Second Session of the Supervisory Committee of Sinopec Corp.
Zhang Baojian, 61, Supervisor of Sinopec Corp. Mr. Zhang graduated from
Shandong Institute of Finance and Economics in July 1968 specialising in
industrial accounting. He is a professor level senior accountant. From October
1985 to April 1989, he was the Chief Accountant of Yueyang Petrochemical General
Plant. From April 1989 to October 1995, he served as the chief accountant and
Deputy Director of the Finance Department of the former Sinopec Group Company.
He acted concurrently as the Vice Chairman of Sinopec Finance Company Limited
from May 1993 to October 1995. From October 1995 to February 2000, he served as
the Director of the Finance Department of former Sinopec Group Company and
Sinopec Group Company, and concurrently served as Chairman of Sinopec Finance
Company Limited. From February 2000 to March 2003, Mr. Zhang served as Director
of the Finance & Planning Department of Sinopec Group Company and concurrently
as Vice Chairman of the Board of Directors of Sinopec Finance Company Limited.
From March 2003 to October 2004, he served as Deputy Chief Accountant and
concurrently the Director of the Finance & Planning Department of Sinopec Group
Company as well as Vice Chairman of the Board of Directors of Sinopec Finance
Company Limited. He served as Vice Chairman of the Board of Directors of Sinopec
Finance Company Limited from October 2004 to July 2005. Mr. Zhang was elected as
Supervisor of the Second Session of the Supervisory Committee of Sinopec Corp.
in April 2003.
Kang Xianzhang, 57, Supervisor of Sinopec Corp. Mr. Kang graduated from
the Correspondence Teaching Department of the Party School of the Beijing
Municipal Party Committee in March 1988 specialising in ideology politics
(undergraduate course). He also graduated from the Correspondence Teaching
College of the Party School of the Central Committee of the Communist Party of
China in December 1992 specialising in party and political affairs management
(bachelor course). He is a senior political worker. From June 1995 to August
1996, he was the Deputy Director of the Organisation Department of the Communist
Party Committee of the Tibet Autonomous Region. From August 1996 to May 1997, he
was a senior researcher of the deputy director level in the Cadre Allocation
Bureau of the Organisation Department of the Central Committee of the Communist
Party of China. He acted as the Deputy Secretary of the Communist Party
Committee of the Coal Scientific Research Institute of the Ministry of Coal
Industry from May 1997 to October 1998. From October 1998 to May 1999, he was a
Supervisor of the deputy director level in the Discipline Inspection Group and
the Supervisory Bureau of Sinopec Group Company, and acted as a Deputy Director
of the Supervisory Bureau of the same company from May 1999 to March 2001. He
was the Deputy Director of the Supervisory Department of Sinopec Corp. from
February 2000 to March 2001. He has been a Deputy Head of the Discipline
Inspection Group of the Leading Party Group and Director of the Supervisory
Bureau of Sinopec Group Company, as well as Director of the Supervisory
Department of Sinopec Corp. since March 2001. Mr. Kang was elected as Supervisor
of the Second Session of the Supervisory Committee of Sinopec Corp. in April
2003.
Cui Jianmin, 73, Independent Supervisor of Sinopec Corp. Mr. Cui
graduated from the Renmin University of China in October 1962 specialising in
planning. Mr. Cui is a senior auditor, certified accountant and has extensive
management experience in the fields of auditing and finance. From June 1983 to
January 1985, Mr. Cui served as Director of Industry and Transportation Bureau
of National Audit Office of PRC. From January 1985 to April 1995, Mr. Cui was
Deputy Auditor-General and Managing Deputy Auditor-General of National Audit
Office of PRC. From December 1995 to November 2004, Mr. Cui was Chairman of the
Chinese Certified Public Accountants Association. Since October 2004, he has
been the consultant for the Chinese Certified Tax Agents Association. Mr. Cui
served as Independent Supervisor in the first session of Supervisory Committee
of Sinopec Corp. from April 2000 to April 2003 and was elected Independent
Supervisor of the Second Session of Supervisory Committee of Sinopec Corp. in
April 2003.
Li Yonggui, 65, Independent Supervisor of Sinopec Corp. Mr. Li
graduated from Shandong Institute of Finance and Economics in July 1965
specialising in finance. He is a senior economist and a certified public
accountant. He has long been engaged in tax management work and has extensive
management experience in the field of taxation. From February 1985 to December
1988, he was Deputy Director of the Taxation Bureau of the Ministry of Finance.
He served as Chief Economist of the State Administration of Taxation from
December 1988 to April 1991. From April 1991 to February 1995, he served as
Deputy Director of the State Administration of Taxation. He was Chief Economist
of the State Administration of Taxation of China from February 1995 to September
2001. Mr. Li has been Chairman of the Chinese Certified Tax Agents Association
since April 2000. Mr. Li was elected as Independent Supervisor of the Second
Session of the Supervisory Committee of Sinopec Corp. in April 2003.
Su Wensheng, 49, Employee Representative Supervisor of Sinopec Corp.
Mr. Su graduated from Tsinghua University in December 1980 specialising in
environmental engineering. He obtained a master's degree in management science
and engineering from Petroleum University (Beijing) in June 2000. He is a senior
engineer. From September 1986 to November 1996, he was a Deputy Secretary of the
Party Committee of the Beijing Designing Institute under the former Sinopec
Group Company, and acted concurrently as the Secretary of the Disciplinary
Committee of the same Institute. From November 1996 to December 1998, he was the
Secretary of the Party Committee of Beijing Designing Institute of the former
Sinopec Group Company. Mr. Su has been the Director of the Ideology & Politics
Department and a Deputy Secretary of the Affiliated Party Committee of Sinopec
Group Company since December 1998. He has acted concurrently as the Managing
Deputy Secretary of the Party Working Committee of the Western New Region
Exploration Headquarter of Sinopec Corp. since December 2001. Mr. Su was elected
as Employee Representative Supervisor of the Second Session of the Supervisory
Committee of Sinopec Corp. in April 2003.
Cui Guoqi, 52, Employee Representative Supervisor of Sinopec Corp. Mr.
Cui graduated from the Correspondence Teaching College of Renmin University of
China in December 1985 specialising in industrial business management. In
January 1997, he obtained a master's degree in business management from the
Business Management School of Renmin University of China. He is a senior
political worker. Mr. Cui has served as Director of Sinopec Beijing Yanhua
Petrochemical Company Limited and has served concurrently as Chairman of the
Trade Union of Sinopec Beijing Yanshan Company since February 2000. Mr. Cui has
been a member of the Executive Committee of the All China Federation of Trade
Unions since December 2000, and a member of the Standing Committee of the
National Committee of the Union of Chinese Energy and Chemical Industries since
December 2001. In August 2005, Mr. Cui was elected as Deputy Secretary of the
CPC Committee of Sinopec Yansan Petrochemical Co. Mr. Cui was elected Employee
Representative Supervisor of the Second Session of the Supervisory Committee of
Sinopec Corp. in April 2003.
Zhang Xianglin, 59, Employee Representative Supervisor of Sinopec Corp.
Mr. Zhang graduated from Beijing Machinery College in July 1970 specialising in
precision machine tools. He is a professor level senior political worker. From
January 2000 to March 2004, he served as Director and Chairman of the Trade
Union of Sinopec Yangzi Petrochemical Company Limited. He has been Deputy
Secretary of the Communist Party Committee of Sinopec Yangzi Petrochemical
Company Limited since July 2002. Since March 2004, he has been secretary of the
Commission for Discipline Inspection and concurrently the convener of the
Supervisory Committee of Sinopec Yangzi Petrochemical Company Limited. Mr. Zhang
was elected Employee Representative Supervisor of the Second Session of the
Supervisory Committee of Sinopec Corp. in April 2003.
Zhang Haichao, 48, Vice President of Sinopec Corp. Mr. Zhang graduated
from Zhoushan Commercial and Technical School in December 1979, specialising in
oil storage and transportation. He also graduated from Jilin Petrochemical
Institute in July 1985 specialising in recycling of lubricating oil. From
January 2001 to June 2002, he participated in the business administration
programme at Macau Science & Technology University. He is an economist. He
served as a Deputy General Manager of Zhejiang Petroleum Company from March 1998
to September 1999. He served as the General Manager of Zhejiang Petroleum
Company from September 1999 to February 2000, and has served as the Manager of
Sinopec Zhejiang Petroleum Company from February 2000 to September 2005. He has
been Chairman of Sinopec-BP Zhejiang Petroleum Co., Ltd. since April 2004. He
was Secretary of the CPC Party Committee and Vice Chairman and Deputy General
Manager of Sinopec Oil Products Sales Company from October 2004 to November
2005. He served as an employee representative supervisor of the second session
of the Supervisory Committee of Sinopec Corp. from April 2003 to November 2005.
He has been Secretary of the CPC Party Committee, Chairman and General Manager
of Sinopec Oil Products Sales Company since November 2005. Mr. Zhang has been
Vice President of Sinopec Corp. since November 2005.
Other Executive Officers
Name Age Positions with Sinopec Corp.
---- --- ----------------------------
Wang Tianpu 43 President
Zhang Jianhua 41 Senior Vice President
Wang Zhigang 48 Senior Vice President
Cao Xiyou 44 Senior Vice President
Dai Houliang 42 Vice President
Chen Ge 43 Secretary of the Board of Directors
Wang Tianpu, 43, President of Sinopec Corp. Mr. Wang graduated from
Qingdao Chemical Institute in July 1985 majoring in basic organics chemistry. He
obtained his MBA degree in Dalian Polytechnic University in July 1996 and Ph.D.
degree in Zhejiang University in August 2003 majoring in chemical engineering.
He is a professor level senior engineer and well-experienced in the production
and management in petrochemical industry. From March 1999 to February 2000, Mr.
Wang was Vice President of Qilu Petrochemical Company of Sinopec Group. From
February 2000 to September 2000, he was Vice President of Sinopec Corp. Qilu
Company. From September 2000 to August 2001, he was President of Sinopec Corp.
Qilu Company. Mr. Wang was Vice President of Sinopec Corp. from August 2001 to
April 2003 and was Senior Vice President of Sinopec Corp. from April 2003 to
March 2005. Mr. Wang has been President of Sinopec Corp. since March 2005.
Zhang Jianhua, 41, Senior Vice President of Sinopec Corp. Mr. Zhang
graduated from East China Chemical Institute in July 1986 majoring in petroleum
refining, and obtained a masters degree from East China University of Science
and Technology in December 2000 majoring in chemical engineering. He is a
professor level senior engineer. From April 1999 to February 2000, Mr. Zhang was
Vice President of Shanghai Gaoqiao Petrochemical Company of Sinopec Group. From
February to September 2000, he was Vice President of Sinopec Corp. Shanghai
Gaoqiao Company. He was President of Sinopec Corp. Shanghai Gaoqiao Company from
September 2000 to June 2003. Mr. Zhang served as Vice President of Sinopec Corp.
from April 2003 to March 2005. He was also the Director General of Sinopec
Production Management Dept. from November 2003 to November 2005. He has been
Senior Vice President of Sinopec Corp. since March 2005.
Wang Zhigang, 48, Senior Vice President of Sinopec Corp. Mr. Wang
graduated from East China Petroleum Institute in January 1982 majoring in oil
production, and then obtained a masters degree from University of Petroleum in
June 2000 majoring in oil and gas development engineering. He obtained a Ph.D
degree from Geology and Geo-physics Research Institute of the China Academy of
Sciences in September 2003 majoring in geology. He is a professor level senior
engineer. From February to June 2000, he was Vice President of Sinopec Shengli
Oilfield Company Limited. From June 2000 to December 2001, Mr. Wang served as
Director and President of Sinopec Shengli Oilfield Company Limited. He was
appointed honorary Deputy Director-General of the Economic and Trade Committee
of Ningxia Hui Autonomous Region from November 2001 to May 2003. He was Vice
President of Sinopec Corp. from April 2003 to March 2005. He was also the
Director General of Sinopec Exploration and Production Dept. since June 2003 to
November 2005. He has been Senior Vice President of Sinopec Corp. since March
2005.
Cai Xiyou, 44, Senior Vice President. Mr. Cai graduated from Fushun
Petroleum Institute in August 1982 majoring in petroleum refining automation,
and obtained a MBA degree from China Industry and Science Dalian Training center
in October 1990. He is a senior economist. From June 1995 to May 1996, he was
the Deputy General Manager of Jinzhou Petrochemical Company of the former
Sinopec Group Company. From May 1996 to December 1998, he was the Deputy General
Manager of Dalian Western Pacific Petrochemical Co., Ltd (WEPEC). From December
1998 to June 2001, he was the Deputy General Manager of Sinopec Sales Company,
and from June 2001 to December 2001, he was the Executive Deputy Manager of
Sinopec Sales Company. He has been a Director of China International United
Petrochemical Company Limited (UNIPEC) since December 2001 and has been the
General Manager of UNIPEC from December 2001 to December 2005. He was Vice
President of Sinopec Corp. from April 2003 to November 2005. Mr. Cai has been
Senior Vice President of Sinopec Corp. since November 2005.
Dai Houliang, 42, Vice President of Sinopec Corp. Mr. Dai graduated
from Jiangsu Chemical Institute in July 1985, specialising in Organic Chemical
Engineering. From September 1997 to July 1999, he participated in the MBA
training program in Nanjing University. He is a professor level senior engineer.
He was Deputy Manager of Sinopec Yangzi Petrochemical Company from December 1997
to April 1998. He served as a Director and Deputy General Manager of Sinopec
Yangzi Petrochemical Co., Ltd. from April 1998 to July 2002. He was Vice
Chairman and President of Sinopec Yangzi Petrochemical Co., Ltd. and Director of
Sinopec Yangzi Petrochemical Company from July 2002 to December 2003. He was
Chairman and President of Sinopec Yangzi Petrochemical Co., Ltd. and Chairman of
Sinopec Yangzi Petrochemical Company from December 2003 to September 2005. He
also served as the Chairman of BASF-YPC Company Limited since December 2004. He
has been the Deputy Chief Finance Officer of Sinopec Corp. since September 2005.
Mr. Dai has been Vice President of Sinopec Corp. since November 2005.
Chen Ge, 43, Secretary to the Board of Directors of Sinopec Corp. Mr.
Chen graduated from Daqing Petroleum Institute in July 1983 majoring in
petroleum refining, and then obtained an MBA degree from Dalian University of
Science and Technology in July 1996. He is a senior economist. From July 1983 to
February 2000, he worked in Beijing Yanshan Petrochemical Company. From February
2000 to December 2001, he was Deputy Director-General of Board Secretariat of
Sinopec Corp. Mr. Chen has been the Director General of the Board Secretariat
since December 2001. Mr. Chen has been the Secretary to the Board of Directors
of Sinopec Corp. since April 2003.
B. COMPENSATION
Salaries of Directors, Supervisors and Members of the Senior Management
Our directors and supervisors who hold working posts with us and other
senior management members receive their remuneration in the form of basic salary
and performance rewards. We have adopted initiative policies approved by the
first extraordinary shareholders' meeting on September 7, 2000 including the
performance evaluation and remunerations incentive scheme for the senior
management, the share appreciation rights scheme, and the conditions for the
implementation of the initial granting of share appreciation rights scheme.
The following table sets forth the compensation on individual basis for
our directors, supervisors and executive officers who receive compensation from
us in 2005.
Remuneration paid by the
Name Position with the Company Company in 2005
---- ------------------------- ------------------------
(RMB thousand)
Directors
---------
Chen Tonghai Chairman 0
Wang Jiming Vice Chairman 480
Mou Shuling Director 442
Zhang Jiaren Director and Chief
Financial Officer 455
Cao Xianghong Director 455
Liu Genyuan Director 0
Gao Jian Director 0
Fan Yifei Director 0
Chen Qingtai Independent
Non-executive Director 27(Fees)
Ho Tsu Kwok Charles Independent
Non-executive Director 21(Fees)
Shi Wanpeng Independent
Non-executive Director 24(Fees)
Zhang Youcai Independent
Non-executive Director 21(Fees)
Cao Yaofeng Employee 279
Supervisors
-----------
Wang Zuoran Chairman of the
Supervisory Committee 0
Zhang Chongqing Supervisor 0
Wang Peijun Supervisor 0
Wang Xianwen Supervisor 0
Zhang Baojian Supervisor 0
Kang Xianzhang Supervisor 0
Cui Jianmin Independent Supervisor 24 (Fees)
Li Yonggui Independent Supervisor 24 (Fees)
Su Wensheng Employee Representative
Supervisor 202
Cui Guoqi Employee Representative
Supervisor 154
Zhang Xianglin Employee Representative
Supervisor 181
Zhang Haichao Employee Representative
Supervisor 194
Executive officers
------------------
Wang Tianpu President 462
Zhang Jianhua Senior Vice President 261
Wang Zhigang Senior Vice President 261
Cai Xiyou Senior Vice President 260
Dai Houliang Vice President 219
Zhang Haichao Vice President 194
Chen Ge Secretary to the Board of
Directors 202
We do not have any service contract with any director that provides for
benefits upon termination of service.
C. BOARD PRACTICE
We have three special board committees, namely, an audit committee, a
strategy committee and a remuneration and evaluation committee. The majority of
the members of the strategy committee and the remuneration and evaluation
committee, and all members of the audit committee, are independent directors. In
addition, the audit committee shall have at least one independent director who
is a financial expert.
The main responsibilities of the audit committee include:
o to propose the appointment or replacement of the external auditor;
o to oversee the internal auditing system and its implementation;
o to coordinate the communication between the internal auditing
department and the external auditor;
o to examine and approve financial information and it disclosure; and
o to examine the internal control system.
The main responsibilities of the strategy committee are to conduct
research and put forward proposals on the long-term development strategy and
significant investments.
The main responsibilities of the remuneration and evaluation committee
include:
o to research on evaluation criteria for directors and the president,
to conduct their evaluations and make necessary suggestions; and
o to research on and review the policies and proposals in respect of
the remuneration of directors, supervisors, president,
vice-president, Chief Financial Officer and secretary of the board
of directors.
The members of audit committee are Chen Qingtai, Shi Wanpeng, Zhang
Youcai and Ho Tsu Kwok Charles. The members of strategy committee are Wang
Jiming, Shi Wanpeng, Ho Tsu Kwok Charles, Mou Shuling, Zhang Jiaren, Cao
Xianghong and Fan Yifei. The members of remuneration and evaluation committee
are Shi Wanpeng, Chen Qingtai, Zhang Youcai, Mou Shuling and Liu Genyuan.
D. EMPLOYEES
As of December 31, 2003, 2004 and 2005, we had approximately 400,513,
389,451 and 364,528 employees. The following table sets forth the number of our
employees by our business segments, their scope of work and their education as
of December 31, 2005.
Percentage of Total Number of
By Segment Number of Employees Employees (%)
------------------- ------------------------------
Exploration and Production ........ 119,282 32.7
Refining .......................... 76,332 21.0
Marketing and Distribution ........ 66,839 18.3
Chemicals ......................... 93,990 25.8
Corporate and Others .............. 8,085 2.2
Total.............................. 364,528 100.0
Percentage of Total Number of
By Employee's Scope of Work Number of Employees Employees (%)
------------------- ------------------------------
Production.............................. 181,332 49.7
Sales................................... 65,615 18.0
Technical............................... 45,026 12.4
Finance................................. 9,697 2.7
Administration.......................... 29,891 8.2
Others.................................. 32,967 9.0
Total................................... 364,528 100.0
Percentage of Total Number of
By Education Number of Employees Employees (%)
------------------- ------------------------------
Master's degree and above............... 3,958 1.1
University ............................. 52,796 14.5
Tertiary education...................... 74,173 20.3
Technical/polytechnic school............ 37,743 10.4
Secondary, technical/polytechnic school
or below................................ 195,858 53.7
Total................................... 364,528 100.0
We have trade unions that protect employee rights, organize educational
programs, assist in the fulfillment of economic objectives, encourage employee
participation in management decisions, and assist in mediating disputes between
us and individual employees. We have not been subject to any strikes or other
labor disturbances that have interfered with our operation, and we believe that
our relations with our employees are good.
The total remuneration of our employees includes salary, performance
bonuses and allowances. Employees also receive certain subsidies in housing,
health services, education and other miscellaneous items.
We have planned to reduce the number of employees by 100,000 persons by
means of retirement, voluntary resignation and/or redundancy within the period
of 5 years from 2001 to 2005, so as to enhance our efficiency and operating
profit. The aggregate employee reduction in the five years ended December 31,
2005 amounted to 126,000 persons. In 2005, we recorded employee reduction
expenses of approximately RMB 370 million relating to the reduction of
approximately 7,000 employees.
E. SHARE OWNERSHIP
Our directors, supervisors and senior officers do not have share
ownership in us.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information regarding our major
shareholders as of May 19, 2006.
Number of Percentage of
Shares Owned Ownership (%)
Shareholder (in millions) --------------
----------- -------------
Sinopec Group Company...................... 61,757.325 71.23
As of May 19, 2006, we had 67,121,951,000 state-owned shares,
16,780,488,000 H shares and 2,800,000,000 A shares outstanding. As of May 19,
2006, 1,634,743,700 H shares were registered in the name of a nominee of
Citibank, N.A., the depositary under our ADS deposit agreement. Citibank, N.A.
has advised us that, as of May 19, 2005, 16,327,937 ADSs, representing
1,632,793,700 H shares, were held of record by Cede & Co. and 63 other
registered shareholders domiciled in and outside of the United States. We have
no further information as to common shares held, or beneficially owned, by U.S.
persons.
B. RELATED PARTY TRANSACTIONS
Sinopec Group Company owns 71.23% of our outstanding equity as of May
19, 2006. Sinopec Group Company will be able to exercise all the rights of a
controlling shareholder, including the election of directors and voting in
respect of amendments to our articles of association. Sinopec Group Company, as
our controlling shareholder, will be subject to certain minority shareholder
protection provisions under our articles of association.
We have engaged from time to time and will continue to engage in a
variety of transactions with Sinopec Group Company, which provide a number of
services to us, including ancillary supply, transport, educational and community
services. The nature of our transactions with Sinopec Group Company are governed
by a number of service and other contracts between Sinopec Group Company and us.
A discussion of these agreements and arrangements is set forth under the heading
"Item 7 - Major Shareholders and Related Party Transactions-Related Party
Transactions" in our annual report on Form 20-F filed with the Securities and
Exchange Commission on April 17, 2001.
At the third meeting of our Second Session of the Board of Directors,
the Board approved the Proposal Regarding the New Lease of Land Use Rights from
Sinopec Group Company, and approved the lease of the land use rights by us of an
area of 51.71 million square meters from Sinopec Group Company. The parties
entered into an Agreement on Lease of Land Use Rights in August 2003. The amount
of rent under the lease agreement incurred in this reporting period was
approximately RMB 300 million.
The proposals of the acquisition of petrochemical assets, catalyst
assets and petrol station assets from Sinopec Group and disposal of downhole
operation assets were approved by our shareholders at the extraordinary general
meeting held on December 21, 2004. The total consideration payable for these
acquisitions was RMB 5.3 billion and the consideration receivable for the
disposal was RMB 1.7 billion, resulting in a net cash consideration of RMB 3.6
billion payable to Sinopec Group Company.
Our aggregate amount of connected transactions actually occurred during
2005 was RMB 179.296 billion, of which, incoming trade amounted to RMB 84.073
billion, and outgoing trade amounted to RMB 95.223 billion (including, RMB
95.123 billion of sales of products and services, RMB 52 million of interest
earned, RMB 48 million of income from agency fee). All of these transactions
satisfied the conditions of waiver granted by the Hong Kong Stock Exchange. In
2005, the products and services provided by Sinopec Group Company (procurement,
storage, transportation, exploration and production services, production-related
services) to us were RMB 75.486 billion, representing 9.86% of our operating
expenses for 2005, a decrease of 1.33 percentage points compared with those in
2004, which were within the cap of 18% for waiver. The auxiliary and community
services provided by Sinopec Group Company to us were RMB 1.79 billion,
representing 0.23% of the operating expenses, with a slight decrease compared
with 0.31% in the preceding year, which were within the cap of 2% for waiver. In
2005, the product sales from us to Sinopec Group Company amounted to RMB 58.579
billion, representing 7.12% of our operating revenue, which were within the cap
of 14% for waiver. With regard to the Leasing Agreement for Land Use Rights, the
amount of rent paid by us as of December 31, 2005 was approximately RMB 2.557
billion.
Please also see Note 30 to our consolidated financial statements
included elsewhere in this annual report.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See F-pages following Item 19.
Legal Proceedings
We are involved in certain judicial and arbitral proceedings before
Chinese courts or arbitral bodies concerning matters arising in connection with
the conduct of our businesses. We believe, based on currently available
information, that the results of such proceedings, in the aggregate, will not
have a material adverse effect on our financial condition or results of
operations.
Dividend Distribution Policy
Our board of directors will determine the payment of dividends, if any,
with respect to our shares on a per share basis. Any final dividend for a
financial year shall be subject to shareholders' approval. The board may declare
interim and special dividends at any time under general authorization by a
shareholders' ordinary resolution. A decision to declare or to pay any dividends
in the future, and the amount of any dividends, will depend on our results of
operations, cash flows, financial condition, the payment by our subsidiaries of
cash dividends to us, future prospects and other factors which our directors may
determine are important.
For holders of our H shares, cash dividend payments, if any, shall be
declared by our board of directors in Renminbi and paid in HK dollars. The
depositary will convert the HK dollar dividend payments and distribute them to
holders of ADSs in US dollars, less expenses of conversion.
In addition to cash, dividends may be distributed in the form of
shares. Any distribution of shares, however, must be approved by special
resolution of the shareholders. Dividends in the form of shares will be
distributed to the depositary and, except as otherwise described in the Deposit
Agreement, will be distributed by the depositary in the form of additional ADSs,
to holders of ADSs.
Dividends may be paid only out of our distributable profits (less
allocations to the statutory funds which generally range from 15% to 20% of our
net income determined in accordance with the PRC Accounting Rules and
Regulations) and may be subject to PRC withholding tax. Our articles of
association limit our distributable profits to the lower of the amount
determined in accordance with the PRC Accounting Rules and Regulations and IFRS.
Subject to the above, we currently expect that we will distribute as dividends
up to 40% of our distributable profits.
Our board has proposed a final dividend of RMB 0.13 per ordinary share
for the year ended December 31, 2005, which is equivalent to RMB 13.0 per ADS.
After deducting the interim dividends distribution of RMB 0.04 per ordinary
share, the year end dividend is RMB 0.09 per ordinary share, which is equivalent
to RMB 9.0 per ADS. The total dividend to be paid amounted to approximately RMB
7,803 million.
B. SIGNIFICANT CHANGES
None.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Not applicable, except for Item 9A (4) and Item 9C.
Our H Shares have been listed on the Hong Kong Stock Exchange (Code:
0386), and our ADSs, each representing 100 H Shares, have been listed on the New
York Stock Exchange and the London Stock Exchange under the symbol "SNP", since
we completed our initial public offering on October 19, 2000. Prior to that
time, there was no public market for our H Shares. The Hong Kong Stock Exchange
is the principal non-U.S. trading market for our H Shares. Our publicly traded
domestic shares, or A shares, are listed on the Stock Exchange of Shanghai since
August 8, 2001 (Code: 600028).
The following table sets forth, for the periods indicated, the high and
low closing prices per H Share, as reported on the Stock Exchange of Hong Kong,
per ADS, as reported on the New York Stock Exchange and per A share, as reported
on the Stock Exchange of Shanghai.
The Stock Exchange of The New York Stock The Shanghai Stock
Hong Kong Exchange Exchange
-----------------------------------------------------------------------
Period High Low High Low High Low
Past 6 months (HK dollar per H share) (US dollar per ADS) (RMB per A share)
2006 May (up to 5.35 4.80 68.60 60.71 7.24 6.43
May 19)
April 5.50 4.60 71.94 60.08 6.07 5.09
March 4.80 4.275 62.0 55.51 5.31 4.79
February 5.15 4.55 63.73 58.25 5.4 4.98
January 4.725 3.875 62.10 50.29 5.18 4.53
2005 December 3.9 3.52 50.58 45.72 4.75 4.10
Quarterly Data
2006 First Quarter 5.00 3.875 63.73 50.29 5.39 4.58
2005 Fourth Quarter 3.90 3.075 50.58 39.80 4.66 3.78
Third Quarter 3.75 3.00 47.48 38.47 4.62 3.41
Second Quarter 3.225 2.75 41.08 35.55 4.38 3.25
First Quarter 3.575 2.950 45.42 38.26 4.52 3.89
2004 Fourth Quarter 3.325 2.925 42.31 37.95 4.67 4.30
Third Quarter 3.175 2.75 41.05 35.35 5.13 4.26
Second Quarter 3.125 2.475 40.15 32.08 5.55 4.56
First Quarter 3.85 2.75 49.90 36.05 5.77 4.82
Annual Data
2005 3.90 2.75 50.58 35.55 4.66 3.25
2004 3.85 2.475 49.90 32.08 5.77 4.26
2003 3.475 1.24 44.41 17.30 5.06 2.94
2002 1.44 1.05 18.33 13.50 3.90 3.01
2001 1.65 1.00 21.00 12.80 4.36 3.29
___________
Source: Bloomberg
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The following is a summary of certain provisions of our articles of
association, as amended, the Company Law of the PRC (2006) and certain other
applicable laws and regulations of the PRC. You and your advisors should refer
to the text of our articles of association, as amended, and to the texts of
applicable laws and regulations for further information.
Objects and Purposes
We are a joint stock limited company established in accordance with the
Company Law and certain other laws and regulations of the PRC. We are registered
with the PRC State Administration of Industry and Commerce with business license
number 1000001003298. Article 12 of our articles of association provides that
our scope of businesses includes, among other things, exploration, development
and sales of petroleum and natural gas; pipeline transportation of petroleum and
natural gas; petroleum refining; production, sales and storage of refined
petroleum products, petrochemical products, chemical fiber products and other
chemical products; wholesale, retailing and storage of refined petroleum
products and other petroleum products; operation of convenience stores; power
generation; manufacturing and installation of machinery; purchase and sales of
raw materials, charcoal, equipment and its components; research, development,
application of technology and information; import and export; and provision of
technology services and labor services.
Directors
Our directors shall be elected at our shareholders' general meeting.
Cumulative voting shall be adopted for the election of directors if a
controlling shareholder controls 30% or more of our shares. Details of the
cumulative voting mechanism are set forth in Article 57 of the Rules and
Procedures for the Shareholders' General Meetings that is an appendix to, and
forms an integral part of, our articles of association. Our directors shall be
elected for a term of three years and may serve consecutive terms upon
re-election, except that independent directors may only serve a maximum of two
terms. Our directors are not required to hold any shares in us, and there is no
age limit requirement for the retirement or non-retirement of our directors.
Where a director is materially interested, directly or indirectly, in a
contract, transaction or arrangement (including any proposed contract,
transaction or arrangement) with us, he or she shall declare the nature and
extent of his or her interests to the board of directors at the earliest
opportunity, whether or not such contract, transaction or arrangement is
otherwise subject to the approval of the board. A director shall not vote, and
shall not be counted in the quorum of the meeting, on any resolution concerning
any contract, transaction or arrangement where the director owns material rights
or interests therein. A director is deemed to be interested in a contract,
transaction or arrangement in which his associate (as defined by the Listing
Rule of the Hong Kong Stock Exchange) is interested.
Unless the interested director discloses his interests to the board and
the contract, transaction or arrangement in which the director is materially
interested is approved by the board at a meeting in which the director neither
votes nor is not counted in the quorum, such contract, transaction or
arrangement shall be voidable by us except with respect to a bona fide party
thereto who does not have notice of the director's interests.
We are prohibited from making loans or providing guarantees to our
directors and their associates except where such loan or guarantee is to meet
expenditure requirement incurred or to be incurred by the director for the
purposes of the company or for the purpose of enabling the director to perform
his or her duties properly.
The board of directors shall examine and approve the amount of the
long-term loans for the current year in accordance with the annual investment
plan as approved by the shareholders' general meeting. The chairman of the board
may make adjustments of not more than 10% of the total amount of the long-term
loans for the current year as approved by the board of directors. The board of
directors shall also approve the total amount of the working capital loans for
the current year. Within the total amount of the long-term or working capital
loans as approved by the board of directors, the chairman of the board is
authorized to approve and sign on behalf of the company any such loan contract
with loan amount over RMB 1.0 billion, and the president of the company is
authorized to approve and sign on behalf of the company any such loan contract
with loan amount not exceeding RMB 1.0 billion.
Matters relating to the remuneration and liability insurance of our
directors shall be determined by the shareholders' general meeting.
Dividends
A distribution of final dividends for any financial year is subject to
shareholders' approval. Except otherwise decided by Shareholders' meeting, the
board of directors may make decision on the distribution of interim dividends.
Except otherwise provided by law and regulation, the sum of interim dividends
shall not exceed 50 percents of the distributive profit as set out in the table
for semi-year profit. Dividends may be distributed in the form of cash or
shares. A distribution of shares, however, must be approved by special
resolution of the shareholders.
Dividends may only be distributed after allowance has been made for:
o recovery of losses, if any;
o allocations to the statutory common reserve fund;
o allocations to the statutory common welfare fund; and
o allocations to a discretionary common reserve fund if approved by
the shareholders.
The minimum and maximum aggregate allocations to the statutory funds
are 15% and 20%, respectively, of our net income determined in accordance with
PRC accounting rules.
The articles of association require us to appoint on behalf of the
holders of H shares a receiving agent which is registered as a trust corporation
under the Trustee Ordinance of Hong Kong to receive dividends declared by us in
respect of the H shares on behalf of such shareholders. The articles of
association require that cash dividends in respect of H shares be declared in
Renminbi and paid by us in HK dollars. The depositary of our ADSs will convert
such proceeds into U.S. dollars and will remit such converted proceeds to our
holders of ADSs. If we record no profit for the year, we may not normally
distribute dividends for the year.
Dividend payments may be subject to PRC withholding tax.
Voting Rights and Shareholders' Meetings
Our board of directors shall convene a shareholders' annual general
meeting once every year and within six months from the end of the preceding
financial year. Our board shall convene an extraordinary general meeting within
two months of the occurrence of any one of the following events:
o where the number of directors is less than the number stipulated in
the PRC Company Law or two-thirds of the number specified in our
articles of association;
o where our unrecovered losses reach one-third of the total amount of
our share capital;
o where shareholder(s) holding 10% or more of our issued and
outstanding voting shares request(s) in writing the convening of an
extraordinary general meeting;
o whenever our board deems necessary or our board of supervisors so
requests; or
o circumstances provided in the articles of association.
Meetings of a special class of shareholders must be called in certain
enumerated situations when the rights of the holders of such class of shares may
be modified or adversely affected as discussed below. Resolutions proposed by
the board of supervisors or shareholder(s) holding 5% or more of the total
number of voting shares shall be included in the agenda for the relevant annual
general meeting if they are matters which fall within the scope of the functions
and powers of shareholders in general meeting.
All shareholders' meetings must be convened by our board by written
notice given to shareholders not less than 45 days before the meeting. Based on
the written replies received by us 20 days before a shareholders' meeting, we
shall calculate the number of voting shares represented by shareholders who have
indicated that they intend to attend the meeting. Where the number of voting
shares represented by those shareholders amount to more than one-half of our
total voting shares, we may convene the shareholders' general meeting
(regardless of the number of shareholders who actually attend). Otherwise, we
shall, within five days, inform the shareholders again of the motions to be
considered and the date and venue of the meeting by way of public announcement.
After the announcement is made, the shareholders' meeting may be convened. The
accidental omission by us to give notice of a meeting to, or the non-receipt of
notice of a meeting by, a shareholder will not invalidate the proceedings at
that shareholders' meeting.
Shareholders at meetings have the power, among other things, to approve
or reject our profit distribution plans, annual budget, financial statements,
increase or decrease in share capital, issuance of debentures, merger or
liquidation and any amendment to our articles of association. In addition, the
rights of a class of shareholders may not be modified or abrogated, unless
approved by a special resolution of all shareholders at a general shareholders'
meeting and by a special resolution of shareholders of that class of shares at a
separate meeting. Our articles of association enumerate, without limitation,
certain amendments which would be deemed to be a modification or abrogation of
the rights of a class of shareholders, including increasing or decreasing the
number of shares of a class disproportionate to increases or decreases of other
classes of shares, removing or reducing rights to receive dividends in a
particular currency or creating shares with voting or equity rights superior to
shares of such class.
Cumulative voting is adopted for the election of directors. For all
other matters, each share is entitled to one vote on all such matters submitted
to a vote of our shareholders at all shareholders' meetings, except for meetings
of a special class of shareholders where only holders of shares of the affected
class are entitled to vote on the basis of one vote per share of the affected
class.
Shareholders are entitled to attend and vote at meetings either in
person or by proxy. Proxies must be in writing and deposited at our legal
address, or such other place as is specified in the meeting notice, not less
than 24 hours before the time for holding the meeting at which the proxy
proposes to vote or the time appointed for the passing of the relevant
resolution(s). When the instrument appointing a proxy is executed by the
shareholder's attorney-in-fact, such proxy when deposited must be accompanied by
a notary certified copy of the relevant power of attorney or other authority
under which the proxy was executed.
Except for those actions discussed below which require supermajority
votes ("special resolutions"), resolutions of the shareholders are passed by a
simple majority of the voting shares held by shareholders who are present in
person or by proxy. Special resolutions must be passed by or more than
two-thirds of the voting rights represented held by shareholders who are present
in person or by proxy.
The following decisions must be adopted by special resolution:
o an increase or reduction of our share capital or the issue of
shares, including stock distributions, of any class, warrants and
other similar securities;
o issuance of debentures;
o our division, merger, dissolution and liquidation; (Shareholders who
object to a proposed division or merger are entitled to demand that
either we or the shareholders who approved the merger purchase their
shares at a fair price.)
o repurchase of shares;
o amendments to our articles of association; and
o any other matters considered by the shareholders in a general
meeting and which they have resolved by way of an ordinary
resolution to be of a nature which may have a material impact on us
and should be adopted by special resolution.
All other actions taken by the shareholders, including the appointment
and removal of our directors and supervisors and the declaration of cash
dividend payments, will be decided by an ordinary resolution of the
shareholders. The listing agreement between us and the Hong Kong Stock Exchange
(the "Listing Agreement") provided that we may not permit amendments to
certain sections of the articles of association which have been mandated by the
Hong Kong Stock Exchange. These sections include provisions relating to:
o varying the rights of existing classes of shares;
o voting rights;
o our power to purchase our own shares;
o rights of minority shareholders; and
o procedure on liquidation.
In addition, certain amendments to the articles of association require
the approval and consent of the relevant PRC authorities.
Any shareholder resolution which is in violation of any laws or
regulations of the PRC or the articles of association will be null and void.
Liquidation Rights
In the event of our liquidation, the H shares will rank pari passu with
the domestic ordinary shares, and payment of debts out of our remaining assets
shall be made in the order of priority prescribed by applicable laws and
regulations or, if no such standards exist, in accordance with such procedure as
the liquidation committee which has been appointed either by us or the People's
Court of the PRC may consider to be fair and reasonable. After payment of debts,
we shall distribute the remaining property to shareholders according to the
class and proportion of their shareholders.
Further Capital Call
Shareholders are not liable to make any further contribution to the
share capital other than according to the terms, which were agreed by the
subscriber of the relevant shares at the time of subscription.
Increases in Share Capital and Preemptive Rights
The articles of association require the approval by a special
resolution of the shareholders and by special resolution of holders of domestic
ordinary shares and H shares at separate shareholder class meetings be obtained
prior to authorizing, allotting, issuing or granting shares, securities
convertible into shares or options, warrants or similar rights to subscribe for
any shares or such convertible securities. No such approval is required if, but
only to the extent that:
o we issue domestic ordinary shares and/or H shares, either
separately or concurrently, in numbers not exceeding 20% of the
number of domestic ordinary shares and H shares then in issue,
respectively, in any 12-month period, as approved by a special
resolution of the shareholders; or
o if our plans for issuing domestic ordinary shares and H shares
upon its establishment are implemented within fifteen months of
the date of approval by the China Securities Regulatory
Commission.
New issues of shares must also be approved by the relevant PRC
authorities.
Reduction of Share Capital and Purchase by Us of Our Shares and General Mandate
to Repurchase Shares
We may reduce our registered share capital only upon obtaining the
approval of the shareholders by a special resolution and, in certain
circumstances, of relevant PRC authorities. The number of H shares, which may be
purchased is subject to the Hong Kong Takeovers and Share Repurchase Codes.
Restrictions on Large or Controlling Shareholders
Our articles of association provide that, in addition to any obligation
imposed by laws and administration regulations or required by the listing rules
of the stock exchanges on which our H shares are listed, a controlling
shareholder shall not exercise his voting rights in a manner prejudicial to the
interests of the shareholders generally or of some part of the shareholders:
o to relieve a director or supervisor from his or her duty to act
honestly in our best interests;
o to approve the expropriation by a director or supervisor (for his or
her own benefit or for the benefit of another person) of our assets
in any way, including, without limitation, opportunities which may
benefit us; or
o to approve the expropriation by a director or supervisor (for his or
her own benefit or for the benefit of another person) of the
individual rights of other shareholders, including, without
limitation, rights to distributions and voting rights (save
according to a restructuring of our company which has been submitted
for approval by the shareholders in a general meeting in accordance
with our articles of association).
A controlling shareholder, however, will not be precluded by our
articles of association or any laws and administrative regulations or the
listing rules of the stock exchanges on which our H shares are listed from
voting on these matters.
When a controlling shareholder intends to put forward a new motion on
profit distribution at an annual general meeting, the controlling shareholder
shall, at not less than ten days before the date of the annual general meeting,
submit the motion to the board of directors to enable it to make an
announcement, failing which the shareholder is not entitled to put forward the
motion at the annual general meeting.
A controlling shareholder is defined by our articles of association as
any person who acting alone or in concert with others:
o is in a position to elect more than one-half of the board of
directors;
o has the power to exercise, or to control the exercise of, 30% or
more of our voting rights;
o holds 30% or more of our issued and outstanding shares; or
o has de facto control of us in any other way.
As of the date of this annual report, Sinopec Group Company is and will
be our only controlling shareholder.
Disclosure
The Listing Agreement imposes a requirement on us to keep the Hong Kong
Stock Exchange, our shareholders and other holders of our listed securities
informed as soon as reasonably practicable of any information relating to us and
our subsidiaries, including information on any major new developments which are
not public knowledge, which:
o is necessary to enable them and the public to appraise the position
of us and our subsidiaries;
o is necessary to avoid the establishment of a false market in its
securities; and
o might be reasonably expected materially to affect market activity in
and the price of its securities.
There are also requirements under the Listing Rules for us to obtain prior
shareholders' approval and/or to disclose to shareholders details of certain
acquisitions or disposals of assets and other transactions (including
transactions with controlling shareholders).
Sources of Shareholders' Rights
The PRC's legal system is based on written statutes and is a system in
which decided legal cases have little precedent value. The PRC's legal system is
similar to civil law systems in this regard. In 1979, the PRC began the process
of developing its legal system by undertaking to promulgate a comprehensive
system of laws. In December 1993, the Standing Committee of the 8th National
People's Congress adopted the PRC Company Law. On October 27, 2005, the PRC
Company law was amended by the Standing Committee of the 10th National People's
Congress, and came into force on January 1, 2006. The amended PRC Company Law
enhanced the protection of shareholders' rights primarily in the following
regards:
o Shareholders holding more than 10 percent of the shares of the
company are entitled to petition the court to dissolve the company
if (i) the company is in serious operational difficulties; (ii) its
continuing existence will seriously prejudice the interests of the
shareholders; and (iii) such difficulties cannot be resolved through
any other means;
o Shareholders holding more than 1 percent of the shares of the
company for more than 180 consecutive days are entitled to request
the board of supervisors (in terms of directors and senior
management) or the board of directors (in terms of supervisors) to
bring legal proceedings, or bring legal proceedings in their own
name on behalf of the company where it is in emergency and the
company will be subject to irreparable loss if not to do so, against
directors, supervisors or senior management who fail to comply with
the laws and regulations or the company's articles of association in
the course of performing their duties and cause loss to the company;
o Shareholders who oppose the company's decision on merger or
separation are entitled to request the company to repurchase their
shares; and
o Shareholders holding more than 10 percent of the voting rights of
the company are entitled to convene a shareholders' meeting.
Currently, the primary sources of shareholder rights are our articles
of association, as amended, the PRC Company Law and the Listing Rules of the
Hong Kong Stock Exchange, which, among other things, impose certain standards of
conduct, fairness and disclosure on us, our directors and our controlling
shareholder, i.e., Sinopec Group Company. To facilitate the offering and listing
of shares of PRC companies overseas, and to regulate the behavior of companies
whose shares are listed overseas, the State Council Securities Committee and the
State Commission for Restructuring the Economic System issued on August 27, 1994
the Mandatory Provisions for articles of association of Company Listing Overseas
(the "Mandatory Provisions"). These Mandatory Provisions become entrenched in
that, once they are incorporated into the articles of association of a PRC
company, any amendment to those provisions will only become effective after
approval by the State-owned Assets Supervision and Administration Commission of
the State Council. The Listing Rules require a number of additional provisions
to the Mandatory Provisions to be included in the articles of association of PRC
companies listing H shares on the Hong Kong Stock Exchange (the "Additional
Provisions"). The Mandatory Provisions and the Additional Provisions have been
incorporated into our articles of association.
In addition, upon the listing of and for so long as the H shares are
listed on the Hong Kong Stock Exchange, we will be subject to those relevant
ordinances, rules and regulations applicable to companies listed on the Hong
Kong Stock Exchange, including the Listing Rules of the Hong Kong Stock
Exchange, the Securities (Disclosure of Interests) Ordinance (the "SDI
Ordinance"), the Securities (Insider Dealing) Ordinance and the Hong Kong Codes
on Takeovers and Mergers and Share Repurchases (the "Hong Kong Takeovers and
Repurchase Codes").
Unless otherwise specified, all rights, obligations and protections
discussed below derive from our articles of association and/or the PRC Company
Law.
Enforceability of Shareholders' Rights
There has not been any public disclosure in relation to the enforcement
by holders of H shares of their rights under constitutive documents of joint
stock limited companies or the PRC Company Law or in the application or
interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC
joint stock limited companies.
In most states of the United States, shareholders may sue a corporation
"derivatively". A derivative suit involves the commencement by a shareholder
of a corporate cause of action against persons (including corporate officers,
directors or controlling shareholders) who have allegedly wronged the
corporation, where the corporation itself has failed to enforce such claim
against such persons directly. Such action is brought based upon a primary right
of the corporation, but is asserted by a shareholder on behalf of the
corporation. The PRC company law as amended in October 2005 and effective in
January 2006 has also granted shareholders with the rights to bring such
derivative suits.
Our articles of association provide that all differences or claims:
o between a holder of H shares and us;
o between a holder of H shares and any of our directors, supervisors,
general managers, deputy general managers or other senior officers;
or
o between a holder of H shares and a holder of domestic ordinary
shares, arising from any provision of our articles of association,
any right or obligation conferred or imposed by the PRC Company Law
or any other relevant law or administrative regulation which
concerns our affairs
must, with certain exceptions, be referred to arbitration at either the China
International Economic and Trade Arbitration Commission in the PRC or the Hong
Kong International Arbitration Center. Our articles of association provide that
such arbitration will be final and conclusive. In June 1999, an arrangement was
made between the People's Courts of the PRC and the courts of Hong Kong to
mutually enforce arbitration rewards rendered in the PRC and Hong Kong according
to their respective laws. This new arrangement was approved by the Supreme Court
of the PRC and the Hong Kong Legislative Council and became effective on
February 1, 2000. We have provided an undertaking to the United States
Securities and Exchange Commission that, at such time, if any, as all applicable
laws and regulations of the PRC and (unless our H shares are no longer listed on
the Hong Kong Stock Exchange) all applicable regulations of the Stock Exchange
of Hong Kong Ltd. shall not prohibit, and to the extent Section 14 under the
United States Securities Act of 1933, as amended, so requires, our board of
directors shall propose an amendment to the articles of association which would
permit shareholders to adjudicate disputes arising between our shareholders and
us, our directors, supervisors or officers by means of judicial proceedings.
The holders of H shares will not be able to bring actions on the basis
of violations of the Listing Rules and must rely on the Hong Kong Stock Exchange
to enforce its rules. The SDI Ordinance establishes certain obligations in
relation to disclosure of shareholder interests in Hong Kong listed companies,
the violation of which is subject to prosecution by the Securities and Futures
Commission of Hong Kong. The Hong Kong Takeovers and Repurchase Codes do not
have the force of law and are only standards of commercial conduct considered
acceptable for takeover and merger transactions and share repurchases in Hong
Kong as established by the Securities and Futures Commission and the securities
and futures industry in Hong Kong.
We have appointed our subsidiary in the U.S., SINOPEC-USA Co., Ltd.,
150 E. 52nd Street, 28th Floor, New York, NY 10022, USA, as our agent to receive
service of process with respect to any action brought against us in certain
courts in New York under the United States federal and New York State's
securities laws. However, as the PRC does not have treaties providing for the
reciprocal recognition and enforcement of judgments of courts within the United
States, the United Kingdom, Japan or most other the Organization for Economic
Cooperation and Development countries, administrative actions brought by
regulatory authorities, such as the Commission, and other actions which result
in foreign court judgments, could (assuming such actions are not required by PRC
law and the articles of association to be arbitrated) only be enforced in the
PRC on a reciprocal basis or according to relevant international treaty to which
China is a party if such judgments or rulings do not violate the basic
principles of the law of the PRC or the sovereignty, security and public
interest of the society of the PRC, as determined by a People's Court of the PRC
which has the jurisdiction for recognition and enforcement of judgments. We have
been advised by our PRC counsel, Haiwen & Partners, that there is certain doubt
as to the enforceability in the PRC of actions to enforce judgments of United
States courts arising out of or based on the ownership of H shares or ADSs,
including judgments arising out of or based on the civil liability provisions of
United States federal or state securities laws.
Restrictions on Transferability and the Share Register
According to PRC Company Law, our domestic ordinary shares held by
Sinopec Group Company may not be transferred within three years of our
establishment on February 25, 2000, except as permitted under the March 23, 2000
debt to equity swap agreement executed on March 23, 2000 between Sinopec Group
Company and our other shareholders, whereby Sinopec Group Company may transfer
our domestic ordinary shares to such other shareholders. H shares may be traded
only among investors who are not PRC persons, and may not be sold to PRC
investors. There are no restrictions on the ability of investors who are not PRC
residents to hold H shares.
As provided in the articles of associations we may refuse to register a
transfer of H shares unless:
o any relevant transfer fee is paid;
o the instrument of transfer is only related to H shares listed in
Hong Kong;
o the instrument of transfer is accompanied by the share certificates
to which it relates, or such other evidence is given as may be
reasonably necessary to show the right of the transferor to make the
transfer;
o the stamp duty which is chargeable on the instrument of transfer has
already been paid;
o if it is intended that the shares be transferred to joint owners,
the maximum number of joint owners shall not be more than four (4);
and
o the Company does not have any lien on the relevant shares.
We are required to keep a register of our shareholders which shall be
comprised of various parts, including one part which is to be maintained in Hong
Kong in relation to H shares to be listed on the Hong Kong Stock Exchange.
Shareholders have the right to inspect and, for a nominal charge, to copy the
share register. No transfers of ordinary shares shall be recorded in our share
register within 30 days prior to the date of a shareholders' general meeting or
within 5 days prior to the record date established for the purpose of
distributing a dividend.
We have appointed HKSCC Registrars Limited to act as the registrar of
our H shares. This registrar maintains our register of holders of H shares at
our offices in Hong Kong and enters transfers of shares in such register upon
the presentation of the documents described above.
C. MATERIAL CONTRACTS
We have not entered into any material contracts other than in the
ordinary course of business and other than those described in Item 4.
Information on the Company, Item 7. Major Shareholders and Related Party
Transactions - Related Party Transactions or elsewhere in this Form 20-F.
D. EXCHANGE CONTROLS
The existing foreign exchange regulations have significantly reduced
government foreign exchange controls for transactions under the current account,
including trade and service related foreign exchange transactions and payment of
dividends. We may undertake current account foreign exchange transactions
without prior approval from the State Administration of Foreign Exchange by
producing commercial documents evidencing such transactions, provided that they
are processed through Chinese banks licensed to engage in foreign exchange
transactions. The PRC government has stated publicly that it intends to make the
Renminbi freely convertible in the future. However, we cannot predict whether
the PRC government will continue its existing foreign exchange policy and when
the PRC government will allow free conversion of Renminbi to foreign currency.
Foreign exchange transactions under the capital account, including
principal payments in respect of foreign currency-denominated obligations,
continue to be subject to significant foreign exchange controls and require the
approval of the State Administration of Foreign Exchange. These limitations
could affect our ability to obtain foreign exchange through debt or equity
financing, or to obtain foreign exchange for capital expenditures.
The value of the Renminbi against the U.S. dollar and other currencies
may fluctuate and is affected by, among other things, changes in China's
political and economic conditions. The conversion of Renminbi into foreign
currencies, including U.S. dollars, has historically been set by the People's
Bank of China. On July 21, 2005, the PRC government changed its policy of
pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the
Renminbi is permitted to fluctuate within a band against a basket of certain
foreign currencies. This change in policy resulted initially in an approximately
2.0% appreciation in the value of the Renminbi against the U.S. dollar. Since
the adoption of this new policy, the value of Renminbi against the U.S. dollar
has fluctuated on a daily basis within narrow ranges, but overall has further
strengthened against the U.S. dollar. There remains significant international
pressure on the PRC government to further liberalize its currency policy, which
could result in a further and more significant appreciation in the value of the
Renminbi against the U.S. dollar. As we import a significant portion of our
crude oil requirement from the international market, fluctuations in the value
of the Renminbi against the U.S. dollars and certain other foreign currencies
may increase our crude oil costs. In addition, any significant revaluation of
the Renminbi may have a material adverse effect on our revenues and financial
condition, and the value of, and any dividends payable on, our ADSs in foreign
currency terms.
E. TAXATION
PRC Taxation
The following discussion addresses the principal PRC tax consequences
of investing in the H shares or ADSs.
Taxation of Dividends
Individual Investors
According to the current PRC tax regulations, dividends paid by PRC
companies are ordinarily subject to a PRC withholding tax levied at a flat rate
of 10%. However, such withholding tax is not applicable with respect to those
PRC companies which have their shares listed on an overseas stock exchange, such
as H shares and ADSs, because of an exemption issued first in 1993 and then
confirmed in 1994. The relevant tax authority has not collected withholding tax
on dividend payments on H shares or ADSs.
In the event that the exemption is no longer available or is withdrawn,
a 10% tax may be withheld on dividends in accordance with the PRC individual
income tax law. Such withholding tax may be reduced under an applicable treaty
on the avoidance of double taxation.
Foreign Enterprises
According to the current PRC tax regulations, dividends paid by PRC
companies to foreign enterprises are ordinarily subject to a PRC withholding tax
levied at a flat rate of 10%. However, foreign enterprises with no permanent
establishment in China receiving dividends paid with respect to a PRC company's
H shares or ADSs have been temporarily exempted from the 10% withholding tax. If
such withholding tax becomes applicable in the future, the rate could be reduced
under an applicable treaty on the avoidance of double taxation.
Tax Treaties
Holders resident in countries which have entered into avoidance of
double taxation treaties with the PRC may be entitled to a reduction of the
withholding tax imposed on the payment of dividends. The PRC currently has
avoidance of double taxation treaties with a number of other countries, which
include Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands,
Singapore, the United Kingdom and the United States.
Under a tax treaty between United States and China, China may tax
dividends paid by Sinopec Corp. to eligible US Holders up to a maximum of 10% of
the gross amount of such dividend. Under the tax treaty, an eligible US Holder
is a person who, by reason of domicile, residence, place of head office, place
of incorporation or any other criterion of similar nature is liable to tax in
the United States, subject to a detailed "treaty shopping" provision.
Taxation of Capital Gains
A PRC tax regulation provides that gains realized upon the sale of
overseas shares by foreign enterprises and individuals are not subject to tax on
capital gains. However, the Provision for Implementing of the Individual Income
Tax Law of the PRC (the "Detailed Implementing Rules"), promulgated on January
28, 1994, imposes income tax of 20% on gains derived from the sale of equity
shares by an individual. A notice issued in 1998 by the Ministry of Finance and
State Administration of Tax states that no capital gains tax will be imposed on
gains from the sale of shares by individuals from 1997. If such tax exemption
relief is no longer available, individual holders of H shares or ADSs may be
subject to a 10% capital gains tax unless such tax is reduced or eliminated by
an applicable double taxation treaty. As the Amendments and the Detailed
Implementing Rules only relate to individual income tax, the tax exemption for
foreign enterprises under the PRC tax regulation should still be valid.
PRC Stamp Tax Considerations
Under the current PRC tax regulation, the PRC stamp tax is not imposed
on the transfer of H shares and ADSs of PRC companies publicly listed outside
China.
United States Federal Income Tax Considerations
The following is a summary of United States federal income tax
considerations that are anticipated to be material for US Holders (as defined
below) who hold H shares or ADSs. This summary is based upon existing United
States federal income tax law, which is subject to change, possibly with
retroactive effect. This summary does not discuss all aspects of United States
federal income taxation which may be important to particular investors in light
of their individual investment circumstances, such as investors subject to
special tax rules including: financial institutions, insurance companies,
broker-dealers, tax-exempt organizations, non-US Holders, investors who own
(directly, indirectly, or constructively) 10% or more of our voting stock,
investors that will hold H shares or ADSs as part of a straddle, hedge,
conversion, constructive sale, or other integrated transaction for United States
federal income tax purposes, or US Holders that have a functional currency other
than the United States dollar, all of whom may be subject to tax rules that
differ significantly from those summarized below. In addition, this summary does
not discuss any foreign, state, local or alternative minimum tax considerations.
This summary only addresses investors that will hold their H shares or ADSs as
"capital assets" (generally, property held for investment) under the United
States Internal Revenue Code (the "Code"). Each holder is urged to consult its
tax advisor regarding the United States federal, state, local, and foreign
income and other tax considerations of the purchase, ownership, and disposition
of H shares or ADSs.
For purposes of this summary, a US Holder is a beneficial owner of H
shares or ADSs that is for United States federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation created in or organized under the laws of, the United
States or any State or political subdivision thereof;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its source;
o a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust; or
o a trust that has elected to be treated as a United States person
under the Code.
If a partnership (including any entity treated as a partnership for
United States federal income tax purposes) holds H shares or ADSs, the tax
treatment of a partner in such partnership will depend upon the status of the
partner and the activities of the partnership. Partners in a partnership holding
our H shares or ADSs are urged to consult their tax advisors as to the
particular United States federal income tax consequences applicable to them.
A beneficial owner of the H shares or ADSs that is not a US Holder is
referred to herein as a "Non-US Holder."
A foreign corporation will be treated as a "passive foreign investment
company" (a "PFIC"), for United States federal income tax purposes, if 75% or
more of its gross income consists of certain types of "passive" income or 50% or
more of its assets are passive. Sinopec Corp. presently does not believe that it
is a PFIC and does not anticipate becoming a PFIC. This is, however, a factual
determination made on an annual basis and is subject to change. The following
discussion is based on the belief that Sinopec Corp. will not be classified as a
PFIC for United States federal income tax purposes. See the discussion below
under the heading "PFIC Considerations" for a brief summary of the PFIC rules.
US Holders
For United States federal income tax purposes, a US Holder of an ADS
will be treated as the owner of the proportionate interest of the H shares held
by the depositary that is represented by an ADS and evidenced by such ADS.
Accordingly, no gain or loss will be recognized upon the exchange of an ADS for
the holder's proportionate interest in the H shares. A US Holder's tax basis in
the withdrawn H shares will be the same as the tax basis in the ADS surrendered
therefor, and the holding period in the withdrawn H shares will include the
period during which the holder held the surrendered ADS.
Dividends
Any cash distributions paid by Sinopec Corp. out of earnings and
profits, as determined under United States federal income tax principles, will
be subject to tax as dividend income and will be includible in the gross income
of a US Holder upon receipt. A non-corporate recipient of dividend income will
generally be subject to tax on dividend income from a "qualified foreign
corporation" at a maximum U.S. federal tax rate of 15% rather than the marginal
tax rates generally applicable to ordinary income so long as certain holding
period requirements are met. A non-U.S. corporation (other than a passive
foreign investment company) generally will be considered to be a qualified
foreign corporation (i) if it is eligible for the benefits of a comprehensive
tax treaty with the United States which the Secretary of Treasury of the United
States determines is satisfactory for purposes of this provision and which
includes an exchange of information program or (ii) with respect to any dividend
it pays on stock which is readily tradable on an established securities market
in the United States. There is currently a tax treaty in effect between the
United States and the People's Republic of China which the Secretary of Treasury
of the United States determined is satisfactory for these purposes and Sinopec
Group, presently believes that it is eligible for the benefits of such treaty.
Additionally, our ADSs trade on the New York Stock Exchange, an established
securities market in the United States. Cash distributions paid by Sinopec Corp.
in excess of its earnings and profits will be treated as a tax-free return of
capital to the extent of the US Holder's adjusted tax basis in its shares or
ADSs, and after that as gain from the sale or exchange of a capital asset.
Dividends paid in Hong Kong dollar will be includible in income in a United
States dollar amount based on the United States dollar - Hong Kong dollar
exchange rate prevailing at the time of receipt of such dividends by the
depositary, in the case of ADSs, or by the US Holder, in the case of H shares
held directly by such US Holder. Gain or loss, if any, recognized on a
subsequent sale, conversion or other disposition of Hong Kong dollars generally
will be U.S. source income or loss. Dividends received on H shares or ADSs will
not be eligible for the dividends received deduction allowed to corporations.
Dividends received on H shares or ADSs will be treated, for United
States federal income tax purposes, as foreign source income. A US Holder may be
eligible, subject to a number of complex limitations, to claim a foreign tax
credit in respect of any foreign withholding taxes imposed on dividends received
on H shares or ADSs. US Holders who do not elect to claim a foreign tax credit
for foreign income tax withheld may instead claim a deduction, for United States
federal income tax purposes, in respect of such withholdings, but only for a
year in which the US Holder elects to do so for all creditable foreign income
taxes.
A distribution of additional shares of Sinopec Corp.'s stock to US
Holders with respect to their H shares or ADSs that is pro rata to all Sinopec
Corp.'s shareholders may not be subject to United States federal income tax. The
tax basis of such additional shares will be determined by allocating the US
Holders' adjusted tax basis in the H shares or ADSs between the H shares or ADSs
and the additional shares, based on their relative fair market values on the
date of distribution.
Sale or Other Disposition of H shares or ADSs
A US Holder will recognize capital gain or loss upon the sale or other
disposition of H shares or ADSs in an amount equal to the difference between the
amount realized upon the disposition and the US Holder's adjusted tax basis in
such H shares or ADSs, as each is determined in US dollars. Any capital gain or
loss will be long-term if the H shares or ADSs have been held for more than one
year and may be, under the income tax treaty between the People's Republic of
China and the United States, foreign source gain or loss. The claim of a
deduction in respect of a capital loss, for United States federal income tax
purposes, may be subject to limitations.
PFIC Considerations
If Sinopec Corp. were to be classified as a PFIC in any taxable year, a
U.S. Holder would be subject to special rules generally intended to reduce or
eliminate any benefits from the deferral of United States federal income tax
that a U.S. Holder could derive from investing in a foreign company that does
not distribute all of its earnings on a current basis. In such event, a U.S.
Holder of the H shares or ADSs may be subject to tax at ordinary income tax
rates on (i) any gain recognized on the sale of the H shares or ADSs and (ii)
any "excess distribution" paid on the H shares or ADSs (generally, a
distribution in excess of 125% of the average annual distributions paid by
Sinopec Corp. in the three preceding taxable years). In addition, a U.S. Holder
may be subject to an interest charge on such gain or excess distribution.
The above results may be eliminated if a "mark-to-market" election is
available and a US Holder validly makes such an election. If the election is
made, such holder generally will be required to take into account the
difference, if any, between the fair market value and its adjusted tax basis in
H shares or ADSs at the end of each taxable year as ordinary income or ordinary
loss (to the extent of any net mark-to-market gain previously included in
income). In addition, any gain from a sale or other disposition of H shares or
ADSs will be treated as ordinary income, and any loss will be treated as
ordinary loss (to the extent of any net mark-to-market gain previously included
in income).
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We filed with the Securities and Exchange Commission in Washington,
D.C. a Registration Statement on Form F-1 (Registration No. 333-12502) under the
Securities Act in connection with the ADSs offered in the global offering. The
Registration Statement contains exhibits and schedules. Any statement in this
annual report about any of our contracts or other documents is not necessarily
complete. If the contract or document is filed as an exhibit to the Registration
Statement, the contract or document is deemed to modify the description
contained in this annual report. You must review the exhibits themselves for a
complete description of the contract or documents.
You may inspect and copy our registration statements, including their
exhibits and schedules, and the reports and other information we file with the
Securities and Exchange Commission in accordance with the Exchange Act at the
public reference facilities maintained by the Securities and Exchange Commission
at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549
and at the regional offices of the Securities and Exchange Commission located at
233 Broadway, New York, NY 10279 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may also inspect the
registration statements, including their exhibits and schedules, at the office
of the New York Stock Exchange, Wall Street, New York, New York 10005. Copies of
such material may also be obtained from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You may obtain information regarding the Washington
D.C. Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the
internet at its website at http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are to fluctuations in oil and gas
prices, exchange rates and interest rates.
Commodity Price Risk
We are exposed to fluctuations in prices of crude oil, refined products
and petrochemicals whose prices are volatile. We purchase substantial volumes of
crude oil from domestic and international suppliers and sell substantial volumes
of refined products and petrochemicals to domestic buyers. We do not enter into
commodity derivative instruments or futures to hedge the potential price
fluctuations of these products or for other purposes. Therefore, fluctuations of
prices of crude oil, refined products and petrochemicals have a significant
effect on our operating expenses and net profits.
Foreign Exchange Rate Risk
A portion of our Renminbi revenues are converted into other currencies
to meet foreign currency financial instrument obligations and to pay for
imported materials and equipment. Foreign currency payments for imported
equipment represented 5.6%, 7.5% and 7.5% of our total capital expenditure in
2003, 2004 and 2005, respectively. Foreign currency payments for other imports,
principally crude oil, represented 40.5%, 42.9% and 46.5% of our purchased crude
oil, products and operating supplies and expenses in 2003, 2004 and 2005,
respectively.
The Renminbi is not a freely convertible currency. With the
authorization from the PRC government, the People's Bank of China announced that
the PRC government reformed the exchange rate regime by moving into a managed
floating exchange rate regime based on market supply and demand with reference
to a basket of currencies on July 21, 2005. Actions taken by the PRC government
could cause future exchange rates to vary significantly from current or
historical exchange rates. Fluctuations in exchange rates may adversely affect
the value, translated or converted into US dollars or Hong Kong dollars, of our
net assets, earnings and any declared dividends. We cannot give any assurance
that any future movements in the exchange rate of the Renminbi against the US
dollar and other foreign currencies will not adversely affect our results of
operations and financial condition. However, we believe that significant
depreciation in the Renminbi against major foreign currencies may have a
material adverse impact on our capital expenditure program.
The following presents various market risk information regarding
market-sensitive financial instruments that we held or issued as of December 31,
2005 and 2004. We conduct our business primarily in Renminbi, which is also our
functional and reporting currency.
The following tables provide information regarding instruments that are
sensitive to foreign exchange rates as of December 31, 2005 and 2004. For debt
obligations, the table presents cash flows and related weighted average rates by
expected maturity dates.
As of December 31, 2005:
Expected maturity
-----------------------------------------------------------------
2006 2007 2008 2009 2010 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In United States dollar 617 - - - - - 617 617
In Hong Kong dollar 66 - - - - - 66 66
In Japanese yen 19 - - - - - 19 19
In Euro 21 - - - - - 21 21
Liabilities
Debts in United States dollar
Fixed rate 2,471 304 250 203 192 616 4,036 3,982
Average interest rate 4.4% 3.6% 3.2% 2.9% 2.3% 1.4%
Variable rate 8,506 1,521 354 356 356 2,930 14,023 14,023
Average interest rate (1) 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%
Debts in Japanese yen
Fixed rate 246 172 101 101 94 883 1,597 1,888
Average interest rate 3.0% 2.8% 2.6% 2.6% 2.6% 2.6%
Variable rate 370 355 262 269 178 363 1,797 1,797
Average interest rate (1) 2.6% 2.6% 2.8% 2.8% 3.0% 3.0%
Debts in Hong Kong dollar
Fixed rate 788 - - - - - 788 788
Average interest rate 4.1% - - - - -
Variable rate 196 12 - - - - 208 208
Average interest rate (1) 4.9% 4.8% - - - -
Debts in Euro
Fixed rate 24 23 23 24 23 - 117 125
Average interest rate 6.7% 6.7% 6.7% 6.7% 6.7% -
(1) The average interest rates for variable rate loans are calculated based on the rates reported as of December 31,
2005.
As of December 31, 2004:
Expected maturity
----------------------------------------------------------------
2005 2006 2007 2008 2009 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In United States dollar 786 - - - - - 786 786
In Hong Kong dollar 50 - - - - - 50 50
In Japanese yen 18 - - - - - 18 18
In Euro 10 - - - - - 10 10
Time deposits with financial institutions
In United States dollar 23 - - - - - 23 23
Liabilities
Debts in United States dollar
Fixed rate 1,441 278 289 192 194 870 3,264 3,284
Average interest rate 4.2% 3.9% 3.6% 3.3% 2.9% 2.5%
Variable rate 12,894 1,970 1,256 307 306 1,351 18,084 18,084
Average interest rate (1) 3.2% 3.4% 3.3% 3.5% 3.5% 3.5%
Debts in Japanese yen
Fixed rate 294 281 198 116 116 1,138 2,143 2,355
Average interest rate 3.2% 3.0% 2.8% 2.6% 2.6% 2.6%
Variable rate 511 405 387 279 291 546 2,419 2,419
Average interest rate (1) 4.4% 4.1% 4.2% 4.3% 5.2% 5.1%
Debts in Hong Kong dollar
Fixed rate 417 - - - - - 417 417
Average interest rate 1.5% - - - - -
Variable rate 781 1 - - - - 782 782
Average interest rate (1) 3.4% 5.3% - - - -
Debts in Euro
Fixed rate 28 28 28 28 28 25 165 165
Average interest rate 6.7% 6.7% 6.7% 6.7% 6.7% 6.7%
(1) The average interest rates for variable rate loans are calculated based on the rates reported as of December 31,
2004.
Interest Rate Risk
We are exposed to interest rate risk resulting from fluctuations in
interest rates on our short- and long-term debts. Upward fluctuations in
interest rates increase the cost of new debt and the interest cost of
outstanding floating rate borrowings.
Our debts consist of fixed and variable rate debt obligations with
original maturities ranging from 1 to 26 years. Fluctuations in interest rates
can lead to significant fluctuations in the fair values of our debt obligations.
The following tables present principal cash flows and related weighted
average interest rates by expected maturity dates of our interest rate sensitive
financial instruments as of December 31, 2005 and 2004.
As of December 31, 2005:
Expected maturity
-------------------------------------------------------------
2006 2007 2008 2009 2010 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In Renminbi 13,022 - - - - - 13,022 13,022
In United States dollar 617 - - - - - 617 617
In Hong Kong dollar 66 - - - - - 66 66
In Japanese yen 19 - - - - - 19 19
In Euro 21 - - - - - 21 21
Time deposits with financial institutions
In Renminbi 1,002 - - - - - 1,002 1,002
Liabilities
Debts in Renminbi
Fixed rate 27,225 16,233 24,508 5,787 5,517 41,586 120,856 120,615 (1)
Average interest rate 4.6% 5.1% 5.1% 5.0% 5.0% 0.7%
Variable rate 1,418 167 220 158 165 2,685 4,813 4,813
Average interest rate (2) 5.3% 5.5% 5.5% 5.5% 5.5% 5.5%
Debts in United States dollar
Fixed rate 2,471 304 250 203 192 616 4,036 3,982
Average interest rate 4.4% 3.6% 3.2% 2.9% 2.3% 1.4%
Variable rate 8,506 1,521 354 356 356 2,930 14,023 14,023
Average interest rate (2) 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%
Debts in Japanese yen
Fixed rate 246 172 101 101 94 883 1,597 1,888
Average interest rate 3.0% 2.8% 2.6% 2.6% 2.6% 2.6%
Variable rate 370 355 262 269 178 363 1,797 1,797
Average interest rate (2) 2.6% 2.6% 2.8% 2.8% 3.0% 3.0%
Debts in Hong Kong dollar
Fixed rate 788 - - - - - 788 788
Average interest rate 4.1% - - - - -
Variable rate 196 12 - - - - 208 208
Average interest rate (2) 4.9% 4.8% - - - -
Debts in Euro
Fixed rate 24 23 23 24 23 - 117 125
Average interest rate 6.7% 6.7% 6.7% 6.7% 6.7% -
(1) Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to
estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings
would be excessive.
(2) The average interest rates for variable rate loans are calculated based on the rates reported as of December 31,
2005.
As of December 31, 2004:
Expected maturity
------------------------------------------------------------
2005 2006 2007 2008 2009 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
Assets
Cash and cash equivalents
In Renminbi 15,517 - - - - - 15,517 15,517
In United States dollar 786 - - - - - 786 786
In Hong Kong dollar 50 - - - - - 50 50
In Japanese yen 18 - - - - - 18 18
In Euro 10 - - - - - 10 10
Time deposits with financial institutions
In Renminbi 1,876 - - - - - 1,876 1,876
In United States dollar 23 - - - - - 23 23
Liabilities
Debts in Renminbi
Fixed rate 24,105 12,523 18,973 6,741 5,888 39,699 107,929 107,840 (1)
Average interest rate 4.9% 4.9% 4.9% 4.9% 4.8% 0.5%
Variable rate 550 400 102 169 153 2,031 3,405 3,405
Average interest rate (2) 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Debts in United States dollar
Fixed rate 1,441 278 289 192 194 870 3,264 3,284
Average interest rate 4.2% 3.9% 3.6% 3.3% 2.9% 2.5%
Variable rate 12,894 1,970 1,256 307 306 1,351 18,084 18,084
Average interest rate (2) 3.2% 3.4% 3.3% 3.5% 3.5% 3.5%
Debts in Japanese yen
Fixed rate 294 281 198 116 116 1,138 2,143 2,355
Average interest rate 3.2% 3.0% 2.8% 2.6% 2.6% 2.6%
Variable rate 511 405 387 279 291 546 2,419 2,419
Average interest rate (2) 4.4% 4.1% 4.2% 4.3% 5.2% 5.1%
Debts in Hong Kong dollar
Fixed rate 417 - - - - - 417 417
Average interest rate 1.5% - - - - -
Variable rate 781 1 - - - - 782 782
Average interest rate (2) 3.4% 5.3% - - - -
Debts in Euro
Fixed rate 28 28 28 28 28 25 165 165
Average interest rate 6.7% 6.7% 6.7% 6.7% 6.7% 6.7%
(1) Carrying amounts are used for loans from Sinopec Group Company and its affiliates as it is not practicable to
estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings
would be excessive.
(2) The average interest rates for variable rate loans are calculated based on the rates reported as of December 31,
2004.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
A. MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS
None.
B. USE OF PROCEEDS
The following use of proceeds information relates to the registration
statement on Form F-1 (Registration No. 333-12502) filed by us in connection
with the global offering of American depositary shares underlying our H shares,
which went effective on October 11, 2000.
The use of offering proceeds is described in Section 4, Item 8 -
Disclosure of Significant Events, in our 2005 annual report.
ITEM 15. CONTROLS AND PROCEDURES
Our management, with the participation of our Chairman, President and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) of the Securities
Exchange Act of 1934) as of the end of the fiscal year covered by this annual
report. Based on this evaluation, our Chairman, President and Chief Financial
Officer have concluded that, as of the end of the fiscal year covered by this
annual report, our disclosure controls and procedures were adequate and
effective to ensure that material information relating to our company, including
our consolidated subsidiaries, was made know to them by others within our
company and our consolidated subsidiaries.
In 2005, we continued to make effort to improve and strengthen our
corporate governance.
o The Audit Committee Rules was amended and refined in accordance with
the requirements of domestic and foreign regulators and the
composition of the Audit Committee of the Board of Directors was
adjusted in a timely manner.
o Review was carried out over the implementation of internal controls
at our branches and subsidiaries and the Internal Control Manual
complementary rules and regulations were further refined. The
amended Internal Control Manual was approved by the Board of
Director at the end of 2005 and came into effect from January 2006.
o Our director, supervisor and senior management have carefully
studied the Code on Corporate Governance Practices issued by the
Hong Kong Stock Exchange. We drafted and the Board of Directors
approved the "Rules for Securities Dealing by Company Employees", in
accordance with the requirements under the Code on Corporate
Governance Practices.
o We have worked through various effective methods and approaches to
further optimize our rules and procedures for information disclosure
and investor relations and endeavored to strengthen our
communication with domestic and foreign investors and to continually
improve corporate transparency.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors has determined that Mr. Zhang Youcai qualifies
as an audit committee financial expert in accordance with the terms of Item 16.A
of Form 20-F. For Mr. Zhang's biographical information, see "Item 6 Directors,
Senior Management and Employees - A. Directors, members of the supervisory
committee and senior management."
ITEM 16B. CODE OF ETHICS
As of the date of this annual report, we do not have, in form, a code
of ethics that applies to our principal executive officer, principal financial
officer and principal accounting officer. Our principal executive officers, Mr.
Chen Tonghai (Chairman) and Mr. Wang Jiming (President(1)), and our principal
financial officer, Mr. Zhang Jiaren (CFO), currently also serve as our directors
and are thus subject to the director service contracts that they have with us.
Under the director service contracts, each of them agrees that he owes a
fiduciary and diligence obligation to our company and that he shall not engage
in any activities in competition with our business or carry any activities
detrimental to the interests of our company. Each of them also agrees to perform
his respective duties as a director and senior officer in accordance with the
Company Law of the PRC, relevant rules and regulations promulgated by China
Securities Regulatory Commission and the Mandatory Provisions of Articles of
Association of Overseas Listed Companies.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate audit fees, audit-related
fees, tax fees of our principal accountants and all other fees billed for
products and services provided by our principal accountants other than the audit
fees, audit-related fees and tax fees for each of the fiscal years 2004 and
2005:
Audit Fees Audit-Related Fees Tax Fees Other Fees
---------- ------------------ -------- ----------
2004 RMB 76 million -- -- --
2005 RMB 72 million -- -- --
Before our principal accountants were engaged by our company or our
subsidiaries to render audit or non-audit services, the engagement has been
approved by our audit committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASERS OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
None.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See F-pages following Item 19.
---------------------------
(1) Mr. Wang Jiming served as President of Sinopec Corp. until March 2005. Mr.
Wang Tianpu was appointed as President of Sinopec Corp. in March 2005.
ITEM 19. EXHIBITS
1** Articles of Association of the Registrant, amended and adopted by the
shareholders' meeting on April 22, 2004 (English version), incorporated
by reference to Exhibit 1 to our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on June 18, 2004.
4.1** Director Service Contracts, incorporated by reference to Exhibit 4.1 to
our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on June 18, 2003.
4.2** Supervisor Service Contract, incorporated by reference to Exhibit 4.2
to our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 18, 2003.
4.3** Reorganization Agreement between China Petrochemical Corporation and
China Petroleum & Chemical Corporation dated June 3, 2000 (including
English translation), incorporated by reference to Exhibit 10.1 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.4** Agreement for Mutual Provision of Products and Ancillary Services
between China Petrochemical Corporation and China Petroleum & Chemical
Corporation dated June 3, 2000 (including English translation),
incorporated by reference to Exhibit 10.3 to our Registration Statement
on Form F-1 filed with the Securities and Exchange Commission on
October 10, 2000 (File Number: 333-12502).
4.5** Agreement for Provision of Cultural, Educational, Hygiene and Community
Services between China Petrochemical Corporation and China Petroleum &
Chemical Corporation dated June 3, 2000 (including English
translation), incorporated by reference to Exhibit 10.4 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.6** Trademark License Agreement between China Petrochemical Corporation and
China Petroleum & Chemical Corporation dated June 3, 2000 (including
English translation), incorporated by reference to Exhibit 10.6 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.7** Patents and Proprietary Technology License Contract between China
Petrochemical Corporation and China Petroleum & Chemical Corporation
dated June 3, 2000 (including English translation), incorporated by
reference to Exhibit 10.7 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission on October 10, 2000
(File Number: 333-12502).
4.8** Computer Software License Contract between China Petrochemical
Corporation and China Petroleum & Chemical Corporation dated June 3,
2000 (including English translation), incorporated by reference to
Exhibit 10.8 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
4.9** Assets Swap Contract between China Petrochemical Corporation and China
Petroleum & Chemical Corporation dated June 3, 2000 (including English
translation), incorporated by reference to Exhibit 10.9 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.10** Land Use Rights Leasing Contract between China Petrochemical
Corporation and China Petroleum & Chemical Corporation dated June 3,
2000 (including English translation), incorporated by reference to
Exhibit 10.10 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
4.12** Property Leasing Contract between China Petrochemical Corporation and
China Petroleum & Chemical Corporation dated June 3, 2000 (including
English translation), incorporated by reference to Exhibit 10.11 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission on October 10, 2000 (File Number: 333-12502).
4.13** Accounts Collectable Contract between China Petrochemical Corporation
and China Petroleum & Chemical Corporation dated August 16, 2000
(including English translation), incorporated by reference to Exhibit
10.17 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
4.14** Loan Transfer and Adjustment Contract between China Petrochemical
Corporation and China Petroleum & Chemical Corporation dated August 16,
2000 (including English translation), incorporated by reference to
Exhibit 10.18 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on October 10, 2000 (File Number:
333-12502).
8* A list of the Registrant's subsidiaries.
12.1* Certification of Chairman pursuant to Rule 13a-14(a).
12.2* Certification of President pursuant to Rule 13a-14(a).
12.3* Certification of CFO pursuant to Rule 13a-14(a).
13* Certification of CEO and CFO pursuant to 18 U.S.C. ss.1350, and Rule
13a-14(b).
* Filed as part of this annual report
** Incorporated by reference.
SIGNATURE
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
China Petroleum & Chemical Corporation
By /s/ Chen Ge
--------------
Name: Chen Ge
Title: Secretary to the Board of Directors
Date: May 23, 2006
Exhibit 8
List of Subsidiaries
A list of China Petroleum & Chemical Corporation's principal
subsidiaries is provided in Note 33 to the consolidated financial statements
included in this annual report following Item 19.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of independent registered public accounting firm ................... F-2
Consolidated statements of income for the years ended December 31,
2003, 2004 and 2005 ....................................................... F-3
Consolidated balance sheets as of December 31, 2004 and 2005 .............. F-4
Consolidated statements of cash flows for the years ended December 31,
2003, 2004 and 2005........................................................ F-5
Consolidated statements of equity for the years ended December 31,
2003, 2004 and 2005........................................................ F-7
Notes to consolidated financial statements................................. F-8
Supplemental information on oil and gas producing activities (unaudited)... F-67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
China Petroleum & Chemical Corporation:
We have audited the accompanying consolidated balance sheets of China
Petroleum & Chemical Corporation and subsidiaries (the "Group") as of December
31, 2004 and 2005, and the related consolidated statements of income, cash flows
and equity for each of the years in the three-year period ended December 31,
2005, all expressed in Renminbi. These consolidated financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of China
Petroleum & Chemical Corporation and subsidiaries as of December 31, 2004 and
2005, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2005, in conformity with
International Financial Reporting Standards promulgated by the International
Accounting Standards Board.
As described in Note 38 to the consolidated financial statements, the Group
changed the manner in which it presents minority interests in the consolidated
balance sheets, the consolidated statements of income and the consolidated
statements of equity in order to comply with IAS 1, "Presentation of financial
statements" and IAS 27, "Consolidated and separate financial statements."
International Financial Reporting Standards vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 39 to the consolidated financial statements.
The accompanying consolidated financial statements as of and for the year
ended December 31, 2005 have been translated into United States dollars solely
for the convenience of the reader. We have audited the translation and, in our
opinion, the consolidated financial statements expressed in Renminbi have been
translated into United States dollars on the basis set forth in Note 1 to the
consolidated financial statements.
KPMG
Hong Kong, China
March 31, 2006
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Amounts in millions, except per share data)
Years ended December 31,
------------------------------------------
Note 2003 2004 2005 2005
--------- --------- --------- --------
RMB RMB RMB US$
Operating revenues
Sales of goods....................................... 429,949 597,197 799,115 99,020
Other operating revenues............................. 3 19,052 22,586 24,002 2,974
--------- --------- --------- --------
449,001 619,783 823,117 101,994
Other income 4 - - 9,415 1,167
Operating expenses
Purchased crude oil, products and operating supplies
and expenses...................................... (313,238) (443,590) (653,056) (80,923)
Selling, general and administrative expenses......... (27,228) (31,843) (33,709) (4,177)
Depreciation, depletion and amortization............. (27,951) (32,342) (31,413) (3,892)
Exploration expenses, including dry holes............ (6,133) (6,396) (6,411) (794)
Personnel expenses................................... 5 (16,972) (18,634) (18,483) (2,290)
Employee reduction expenses.......................... 6 (1,040) (919) (369) (46)
Taxes other than income tax.......................... 7 (13,581) (16,324) (17,152) (2,125)
Other operating expenses, net........................ 8 (3,975) (6,666) (5,125) (635)
--------- --------- --------- --------
Total operating expenses........................ (410,118) (556,714) (765,718) (94,882)
--------- --------- --------- --------
Operating income.......................................... 38,883 63,069 66,814 8,279
--------- --------- --------- --------
Finance costs
Interest expense..................................... 9 (4,365) (4,583) (5,920) (733)
Interest income...................................... 322 374 382 47
Foreign exchange losses.............................. (450) (223) (79) (10)
123
Foreign exchange gains............................... 30 61 996
--------- --------- --------- --------
Net finance costs............................... (4,463) (4,371) (4,621) (573)
Gain from issuance of shares by a subsidiary.............. 10 136 - - -
Investment income......................................... 89 111 178 22
Income from associates.................................... 396 797 857 107
--------- --------- --------- --------
Income before income tax.................................. 35,041 59,606 63,228 7,835
Income tax................................................ 11 (10,645) (17,815) (19,388) (2,403)
--------- --------- --------- --------
Net income ............................................. 24,396 41,791 43,840 5,432
========= ========= ========= ========
Attributable to:
Equity shareholders of the Company............... 22,424 36,019 40,920 5,071
Minority interests............................... 38 1,972 5,772 2,920 361
Net income ............................................. 24,396 41,791 43,840 5,432
========= ========= ========= ========
Basic earnings per share.................................. 12 0.26 0.42 0.47 0.06
========= ========= ========= ========
Weighted average number of shares......................... 12 86,702 86,702 86,702 86,702
========= ========= ========= ========
See accompanying notes to consolidated financial statements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2005
(Amounts in millions)
December 31,
-----------------------------------
Note 2004 2005 2005
--------- ---------- ---------
RMB RMB US$
ASSETS
Current assets
Cash and cash equivalents................................. 16,381 13,745 1,703
Time deposits with financial institutions................. 1,899 1,002 124
Trade accounts receivable, net............................ 13 9,756 14,532 1,801
Bills receivable.......................................... 7,812 7,143 885
Inventories............................................... 14 64,329 89,474 11,087
Prepaid expenses and other current assets................. 15 20,094 19,395 2,403
--------- ---------- ---------
Total current assets................................. 120,271 145,291 18,003
Non-current assets
Property, plant and equipment, net........................ 16 284,123 314,573 38,980
Construction in progress.................................. 17 46,185 48,267 5,981
Investments............................................... 18 2,538 2,926 363
Interest in associates.................................... 19 10,222 9,217 1,142
Deferred tax assets....................................... 21 4,558 6,072 752
Lease prepayments......................................... 750 1,908 236
Long-term prepayments and other assets.................... 22 5,947 9,067 1,124
--------- ---------- ---------
Total non-current assets............................. 354,323 392,030 48,578
--------- ---------- ---------
Total assets......................................... 474,594 537,321 66,581
========= ========== =========
LIABILITIES AND EQUITY
Current liabilities
Short-term debts.......................................... 23 32,307 40,411 5,007
Loans from Sinopec Group Company and its affiliates....... 23 8,714 832 103
Trade accounts payable.................................... 24 23,792 52,967 6,564
Bills payable............................................. 30,797 23,243 2,880
Accrued expenses and other payables....................... 25 45,276 48,167 5,969
Income tax payable........................................ 5,391 5,029 623
--------- ---------- ---------
Total current liabilities............................ 146,277 170,649 21,146
Non-current liabilities
Long-term debts........................................... 23 60,822 67,059 8,310
Loans from Sinopec Group Company and its affiliates....... 23 36,765 39,933 4,948
Deferred tax liabilities.................................. 21 5,636 5,902 731
Other liabilities......................................... 1,008 782 97
--------- ---------- ---------
Total non-current liabilities........................ 104,231 113,676 14,086
--------- ---------- ---------
Total liabilities.................................... 250,508 284,325 35,232
Equity
Share capital............................................. 26 86,702 86,702 10,743
Reserves.................................................. 27 106,338 136,854 16,958
--------- ---------- ---------
Total equity attributable to equity shareholders of the
Company 193,040 223,556 27,701
Minority interests........................................ 38 31,046 29,440 3,648
--------- ---------- ---------
Total equity......................................... 224,086 252,996 31,349
--------- ---------- ---------
Total liabilities and equity......................... 474,594 537,321 66,581
========= ========== =========
See accompanying notes to consolidated financial statements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Amounts in millions)
Years ended December 31,
-------------------------------------------
Note 2003 2004 2005 2005
--------- --------- --------- --------
RMB RMB RMB US$
Net cash generated from operating activities...................... (a) 62,097 69,081 76,497 9,479
--------- --------- --------- --------
Cash flows from investing activities
Capital expenditure.......................................... (44,434) (67,583) (63,135) (7,823)
Capital expenditure of jointly controlled entities........... (4,107) (6,035) (2,474) (307)
Purchase of investments and investments in associates........ (1,519) (1,162) (2,942) (365)
Proceeds from disposal of investments and investments in
associates................................................ 141 186 417 53
Proceeds from disposal of property, plant and equipment...... 400 317 510 63
Acquisition of minority interests in subsidiaries............ -- -- (4,324) (536)
Purchase of time deposits with financial institutions........ (2,871) (1,932) (565) (70)
Maturity of time deposits with financial institutions........ 1,700 2,217 1,462 181
--------- --------- --------- --------
Net cash used in investing activities................... (50,690) (73,992) (71,051) (8,804)
--------- --------- --------- --------
Cash flows from financing activities
Proceeds from bank and other loans........................... 235,163 399,440 550,557 68,221
Proceeds from bank and other loans of jointly controlled
entities.................................................. 1,450 3,014 3,954 490
Proceeds from issuance of corporate bonds, net of issuing
expenses.................................................. -- 3,472 9,875 1,224
Repayments of bank and other loans........................... (243,503) (388,809) (557,432) (69,073)
Distributions to minority interests.......................... (360) (775) (1,611) (200)
Contributions from minority interests........................ 580 1,008 129 16
Dividend paid............................................... (7,803) (8,670) (10,404) (1,289)
Distributions to Sinopec Group Company....................... -- (3,652) (3,128) (388)
--------- --------- --------- --------
Net cash (used in)/generated from financing activities (14,473) 5,028 (8,060) (999)
--------- --------- --------- --------
Net (decrease)/increase in cash and cash equivalents.............. (3,066) 117 (2,614) (324)
Effect of foreign exchange rate changes........................... 5 1 (22) (3)
Cash and cash equivalents at January 1............................ 19,324 16,263 16,381 2,030
--------- --------- --------- --------
Cash and cash equivalents at December 31.......................... 16,263 16,381 13,745 1,703
========= ========= ========= ========
See accompanying notes to consolidated financial statements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
(Amounts in millions)
(a) Reconciliation of income before income tax to net cash generated from
operating activities
The reconciliation of income before income tax to net cash generated from
operating activities is as follows:
Years ended December 31,
------------------------------------------
2003 2004 2005 2005
-------- --------- --------- ---------
RMB RMB RMB US$
Operating activities
Income before income tax................................................. 35,041 59,606 63,228 7,835
Adjustment for:
Depreciation, depletion and amortization............................ 27,951 32,342 31,413 3,892
Dry hole costs...................................................... 2,789 2,976 2,992 372
Income from associates.............................................. (396) (797) (857) (107)
Investment income................................................... (89) (111) (178) (22)
Interest income..................................................... (322) (374) (382) (47)
Interest expense.................................................... 4,365 4,583 5,920 733
Gain from issuance of shares by a subsidiary........................ (136) -- -- --
Unrealized foreign exchange losses/(gains).......................... 289 150 (852) (106)
Loss on disposal of property, plant and equipment, net.............. 2,238 1,686 2,095 260
Impairment losses on long-lived assets.............................. 877 3,919 1,851 229
-------- --------- --------- ---------
Operating income before changes in working capital....................... 72,607 103,980 105,230 13,039
Decrease/(increase) in trade accounts receivable.................... 1,487 (494) (4,773) (591)
(Increase)/decrease in bills receivable............................. (1,031) (1,529) 669 83
Decrease/(increase) in inventories.................................. 449 (16,526) (24,998) (3,098)
Decrease in prepaid expenses and other current assets............... 981 3,022 1,647 204
Decrease/(increase) in lease prepayments............................ 19 60 (715) (89)
Increase in long-term prepayments and other assets.................. (781) (4,199) (2,628) (325)
Increase in trade accounts payable.................................. 3,283 599 28,799 3,569
(Decrease)/increase in bills payable................................ (6,544) 6,530 (7,554) (936)
Increase/(decrease) in accrued expenses and other payables.......... 5,715 (391) 7,952 985
Increase/(decrease) in other liabilities............................ 38 (334) (227) (28)
-------- --------- --------- ---------
Cash generated from operations .......................................... 76,223 90,718 103,402 12,813
Interest received................................................... 313 374 386 48
Interest paid....................................................... (5,392) (5,450) (6,961) (863)
Investment and dividend income received............................. 449 322 668 83
Income tax paid..................................................... (9,496) (16,883) (20,998) (2,602)
-------- --------- --------- ---------
Net cash generated from operating activities............................. 62,097 69,081 76,497 9,479
======== ========= ========= =========
See accompanying notes to consolidated financial statements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in millions)
Total
equity
attributable
to equity
shareholders
Share Capital Share Revaluation Other Retained of the Minority Total
capital reserve premium reserve reserves earnings Company interests* equity
------------------------------------------------------------------------------------------
RMB RMB RMB RMB RMB RMB RMB RMB RMB
Balance at January 1, 2003............ 86,702 (18,878) 18,072 31,641 28,391 20,849 166,777 24,122 190,899
Net gain recognized directly in equity:
Deferred tax effect of surplus
on land use rights............... -- -- -- -- 16 -- 16 -- 16
Revaluation surplus of Refining
Assets........................... -- (82) -- 16 82 -- 16 -- 16
-------- -------- ------- -------- -------- -------- --------- --------- ---------
-- (82) -- 16 98 -- 32 -- 32
Net income............................ -- -- -- -- -- 22,424 22,424 1,972 24,396
Total recognized income for the year.. -- (82) -- 16 98 22,424 22,456 1,972 24,428
Final dividend for 2002............... -- -- -- -- -- (5,202) (5,202) -- (5,202)
Interim dividend for 2003............. -- -- -- -- -- (2,601) (2,601) -- (2,601)
Appropriations (Note 27 (c) and (d)).. -- -- -- -- 3,802 (3,802) -- -- --
Revaluation surplus realized.......... -- -- -- (1,316) -- 1,316 -- -- --
Realization of deferred tax on land
use rights....................... -- -- -- -- (5) 5 -- -- --
Transfer from retained earnings to
other reserves................... -- -- -- -- 1,157 (1,157) -- -- --
Net assets distributed to Sinopec
Group Company (Note 27).......... -- -- -- -- (6,263) -- (6,263) -- (6,263)
Consideration for Acquisitions of
Ethylene Assets and Refining
assets (Note 1).................. -- -- -- -- (3,652) -- (3,652) -- (3,652)
Distributions to minority interests
net of contribution.............. -- -- -- -- -- -- -- (43) (43)
-------- -------- ------- -------- -------- -------- --------- --------- ---------
Balance at December 31, 2003.......... 86,702 (18,960) 18,072 30,341 23,528 31,832 171,515 26,051 197,566
Net loss recognized directly in equity:
Revaluation surplus of
Petrochemical and Catalyst Assets -- (257) -- 257 257 -- 257 -- 257
Impairment losses on revalued
assets (Note 8) ................. -- -- -- (709) -- -- (709) -- (709)
-------- -------- ------- -------- -------- -------- --------- --------- ---------
-- (257) -- (452) 257 -- (452) -- (452)
Net income............................ -- -- -- -- -- 36,019 36,019 5,772 41,791
-------- -------- ------- -------- -------- -------- --------- --------- ---------
Total recognized income for the year.. -- (257) -- (452) 257 36,019 35,567 5,772 41,791
Final dividend for 2003 .............. -- -- -- -- -- (5,202) (5,202) -- 41,339
Interim dividend for 2004............. -- -- -- -- -- (3,468) (3,468) -- (3,468)
Appropriations (Note 27 (c) and (d)).. -- -- -- -- 6,456 (6,456) -- -- --
Revaluation surplus realized.......... -- -- -- (1,891) -- 1,891 -- -- --
Realization of deferred tax on land
use rights....................... -- -- -- -- (5) 5 -- -- --
Transfer from retained earnings to
other reserves................... -- -- -- -- 1,499 (1,499) -- -- --
Net assets distributed to Sinopec
Group Company (Note 27).......... -- -- -- -- (2,244) -- (2,244) -- (2,244)
Consideration for Acquisition of
Petrochemical and Catalyst
Assets (Note 1).................. -- -- -- -- (3,128) -- (3,128) -- (3,128)
Distributions to minority interests
net of contribution.............. -- -- -- -- -- -- -- (777) (777)
-------- -------- ------- -------- -------- -------- --------- --------- ---------
Balance at December 31, 2004.......... 86,702 (19,217) 18,072 27,998 26,363 53,122 193,040 31,046 224,086
Net income............................ -- -- -- -- -- 40,920 40,920 2,920 43,840
Final dividend for 2004 .............. -- -- -- -- -- (6,936) (6,936) -- (6,936)
Interim dividend for 2005............. -- -- -- -- -- (3,468) (3,468) -- (3,468)
Appropriations (Note 27 (c) and (d)). -- -- -- -- 7,912 (7,912) -- -- --
Revaluation surplus realized.......... -- -- -- (1,656) -- 1,656 -- -- --
Realization of deferred tax on land
use rights....................... -- -- -- -- (5) 5 -- -- --
Acquisition of minority interests in
subsidiaries .................... -- -- -- -- -- -- -- (2,957) (2,957)
Distributions to minority interests
net of contribution.............. -- -- -- -- -- -- -- (1,569) (1,569)
-------- -------- ------- -------- -------- -------- --------- --------- ---------
Balance at December 31, 2005.......... 86,702 (19,217) 18,072 26,342 34,270 77,387 223,556 29,440 252,996
======== ======== ======= ======== ======== ======== ========= ========= =========
US Dollars equivalent................. 10,743 (2,381) 2,239 3,264 4,246 9,590 27,701 3,648 31,349
======== ======== ======= ======== ======== ======== ========= ========= =========
*See Note 38.
See accompanying notes to consolidated financial statements.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data and except otherwise stated)
1 PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION
Principal activities
China Petroleum & Chemical Corporation (the "Company") is an energy and
chemical company that, through its subsidiaries (hereinafter collectively
referred to as the "Group"), engages in fully integrated oil and gas and
chemical operations in the People's Republic of China (the "PRC"). Oil and gas
operations consist of exploring for, developing and producing crude oil and
natural gas; transporting crude oil, natural gas and products by pipelines;
refining crude oil into finished petroleum products; and marketing crude oil,
natural gas and refined petroleum products. Chemical operations include the
manufacture and marketing of a wide range of chemicals for industrial uses.
Organization
The Company was established in the PRC on February 25, 2000 as a joint
stock limited company as part of the reorganization (the "Reorganization") of
China Petrochemical Corporation ("Sinopec Group Company"), the ultimate
holding company of the Group and a ministry-level enterprise under the direct
supervision of the State Council of the PRC. Prior to the incorporation of the
Company, the oil and gas and chemical operations of the Group were carried on by
oil administration bureau, petrochemical and refining production enterprises and
sales and marketing companies of Sinopec Group Company.
On February 25, 2000, in connection with the Reorganization, certain of
Sinopec Group Company's core oil and gas and chemical operations and businesses
together with the related assets and liabilities were transferred to the
Company. In consideration for Sinopec Group Company transferring such oil and
gas and chemical operations and businesses and the related assets and
liabilities to the Company, the Company issued 68.8 billion domestic state-owned
ordinary shares with a par value of RMB 1.00 each to Sinopec Group Company. The
shares issued to Sinopec Group Company on February 25, 2000 represented the
entire registered and issued share capital of the Company at that date. The oil
and gas and chemical operations and businesses transferred to the Company
related to (i) the exploration, development and production of crude oil and
natural gas, (ii) the refining, transportation, storage and marketing of crude
oil and petroleum products, and (iii) the production and sale of chemicals
(collectively the "Predecessor Operations").
Pursuant to the resolution passed at the Extraordinary General Meeting
held on August 24, 2001, the Company acquired the entire equity interest of
Sinopec National Star Petroleum Company ("Sinopec National Star") from Sinopec
Group Company for a consideration of RMB 6.45 billion (hereinafter referred to
as the "Acquisition of Sinopec National Star").
Pursuant to the resolution passed at the Directors' meeting on October 28,
2003, the Group acquired the equity interest of Sinopec Group Maoming
Petrochemical Company ("Sinopec Maoming") from Sinopec Group Company, for a
consideration of RMB 3.3 billion which was paid in 2004 (hereinafter referred to
as the "Acquisition of Ethylene Assets").
Pursuant to the resolution passed at the Directors' meeting on December
29, 2003, the Group acquired the equity interest of Xi'an Petrochemical Main
Factory ("Xi'an Petrochemical") and Tahe Oilfield Petrochemical Factory ("Tahe
Petrochemical") from Sinopec Group Company, for considerations of RMB 221 and
RMB 135, respectively which were paid in 2004 (hereinafter referred to as the
"Acquisition of Refining Assets").
Pursuant to the resolutions passed at the Extraordinary General Meeting
held on December 21, 2004, the Group acquired the equity interest of Sinopec
Group Tianjin Petrochemical Company ("Tianjin Petrochemical"), Sinopec Group
Luoyang Petrochemical General Plant ("Luoyang Petrochemical"), Zhongyuan
Petrochemical Company Limited ("Zhongyuan Petrochemical"), Sinopec Group
Guangzhou Petrochemical General Plant ("Guangzhou Petrochemical") and certain
catalyst plants ("Catalyst Plants") from Sinopec Group Company for a total
consideration of RMB 3,128 which was fully paid in 2005 (hereinafter referred to
as the "Acquisition of Petrochemical and Catalyst Assets").
Basis of presentation
As the Group, Sinopec National Star, Sinopec Maoming, Xi'an Petrochemical,
Tahe Petrochemical, Tianjin Petrochemical, Luoyang Petrochemical, Zhongyuan
Petrochemical, Guangzhou Petrochemical and Catalyst Plants are under the common
control of Sinopec Group Company, these acquisitions are considered as
"combination of entities under common control" and accounted for in a manner
similar to a pooling-of-interests ("as-if pooling-of-interests accounting").
Accordingly, the assets and liabilities acquired from Sinopec National Star,
Sinopec Maoming, Xi'an Petrochemical, Tahe Petrochemical, Tianjin Petrochemical,
Luoyang Petrochemical, Zhongyuan Petrochemical, Guangzhou Petrochemical and
Catalyst Plants have been accounted for at historical cost and the financial
statements of the Group for periods prior to the combination have been restated
to include the results of operations of Sinopec National Star, Sinopec Maoming,
Xi'an Petrochemical, Tahe Petrochemical, Tianjin Petrochemical, Luoyang
Petrochemical, Zhongyuan Petrochemical, Guangzhou Petrochemical and Catalyst
Plants on a combined basis. In connection with these acquisitions, certain
assets, primarily property, plant and equipment and construction in progress,
were retained by Sinopec Group Company. The assets retained by Sinopec Group
Company were reflected as a distribution in the equity attributable to equity
shareholders of the Company. The considerations for these acquisitions were
treated as equity transactions.
The accompanying consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards ("IFRS") promulgated
by the International Accounting Standards Board ("IASB"). IFRS includes
International Accounting Standards ("IAS") and related interpretations. A
summary of the principal accounting policies adopted by the Group is set out in
Note 2. These accounting policies have been consistently applied by the Group,
except those disclosed in Note 38. Information relating to the nature and effect
of the significant differences between IFRS and accounting principles generally
accepted in the United States of America ("US GAAP") are set forth in Note 39.
The IASB has issued a number of new and revised IFRS that are effective or
available for early adoption for accounting periods beginning on or after
January 1, 2005. Information on the changes in accounting policies resulting
from initial application of these new and revised IFRS for the current and prior
accounting periods reflected in these financial statements is provided in Note
38.
The accompanying consolidated financial statements are prepared on the
historical cost basis as modified by the revaluation of certain property, plant
and equipment (Note 16).
The preparation of the financial statements requires management to make
judgements, estimates and assumptions that affect the application of policies
and reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the year. The estimates and associated
assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which form
the basis of making the judgements about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods.
Key assumptions and estimation made by management in the application of
IFRS that have significant effect on the consolidated financial statements and
have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities in the next year are disclosed in Note 36.
The accompanying consolidated financial statements are expressed in
Renminbi ("RMB"), the national currency of the PRC. Solely for the convenience
of the reader, the December 31, 2005 consolidated financial statements have been
translated into United States dollars at the noon buying rate in New York City
on December 31, 2005 for cable transfers in Renminbi as certified for customs
purposes by the Federal Reserve Bank of New York of US$ 1.00 = RMB 8.0702. No
representation is made that the Renminbi could have been, or could be, converted
into United States dollars at that rate or at any other certain rate on December
31, 2005, or at any other certain date.
2. PRINCIPAL ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated financial statements comprise the Company and its
subsidiaries, and the Group's interest in associates and jointly controlled
entities.
(i) Subsidiaries
Subsidiaries are those entities controlled by the Company. Control exists
when the Company has the power, directly or indirectly, to govern the financial
and operating policies of an entity so as to obtain benefits from its
activities.
The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control effectively commences until the
date that control effectively ceases.
Minority interests at the balance sheet date, being the portion of the net
assets of subsidiaries attributable to equity interests that are not owned by
the Company, whether directly or indirectly through subsidiaries, are presented
in the consolidated balance sheet and consolidated statements of equity within
equity, separately from equity attributable to the equity shareholders of the
Company. Minority interests in the results of the Group are presented on the
face of the consolidated statements of income as an allocation of the total
income or loss for the year between minority interests and the equity
shareholders of the Company.
The particulars of the Group's principal subsidiaries are set out in Note
33.
(ii) Interests in associates
An associate is an entity, not being a subsidiary, in which the Group
exercises significant influence over its management. Significant influence is
the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control over those policies.
Investments in associates are accounted for in the consolidated financial
statements using the equity method from the date that significant influence
commences until the date that significant influence ceases.
(iii) Jointly controlled entities
A jointly controlled entity is an entity over which the Group can exercise
joint control with other venturers. Joint control is the contractually agreed
sharing of control over an economic activity.
Investments in jointly controlled entities are accounted for in the
consolidated financial statements on a proportionate consolidation basis. Under
this method, the Group combines its proportionate share of the jointly
controlled entity's turnover and expenses with each major turnover and expense
caption of the Group's consolidated statements of income and combines its
proportionate share of the jointly controlled entity's assets and liabilities
with each major asset and liability caption of the Group's consolidated balance
sheet, from the date that joint control commences until the date that joint
control ceases.
(iv) Transactions eliminated on consolidation
Inter-company balances and transactions and any unrealized gains arising
from inter-company transactions are eliminated on consolidation. Unrealized
gains arising from transactions with associates and jointly controlled entities
are eliminated to the extent of the Group's interest in the entity. Unrealized
losses are eliminated in the same way as unrealized gains, but only to the
extent that there is no evidence of impairment.
(b) Translation of foreign currencies
The presentation currency of the Group is Renminbi. Foreign currency
transactions during the year are translated into Renminbi at the applicable
rates of exchange quoted by the People's Bank of China ("PBOC rates")
prevailing on the transaction dates. Foreign currency monetary assets and
liabilities are translated into Renminbi at the PBOC rates at the balance sheet
date.
Exchange differences, other than those capitalized as construction in
progress, are recognized as income or expenses in the consolidated statements of
income. There were no exchange differences capitalized for the years ended
December 31, 2003, 2004 and 2005.
(c) Cash and cash equivalents
Cash equivalents consist of time deposits with financial institutions with
an initial term of less than three months when purchased. Cash equivalents are
stated at cost, which approximates fair value.
(d) Trade accounts and other receivables
Trade accounts and other receivables are initially recognized at fair
value and thereafter stated at amortized cost less impairment losses for bad and
doubtful debts (Note 2(k)).
(e) Inventories
Inventories, other than spare parts and consumables, are stated at the
lower of cost and net realizable value. Cost includes the cost of purchase
computed using the weighted average method and, in the case of work in progress
and finished goods, direct labor and an appropriate proportion of production
overheads. Net realizable value is the estimated selling price in the ordinary
course of business, less the estimated costs of completion and the estimated
costs necessary to make the sale.
Spare parts and consumables are stated at cost less any provision for
obsolescence.
(f) Property, plant and equipment
An item of property, plant and equipment is initially recorded at cost,
less accumulated depreciation and impairment losses (Note 2(k)). The cost of an
asset comprises its purchase price, any directly attributable costs of bringing
the asset to working condition and location for its intended use. Subsequent to
the revaluation (Note 16), which was based on depreciated replacement costs,
property, plant and equipment are carried at revalued amount, being the fair
value at the date of the revaluation less any subsequent accumulated
depreciation and impairment losses. Revaluations are performed periodically to
ensure that the carrying amount does not differ materially from that which would
be determined using fair value at the balance sheet date. The Group recognizes
in the carrying amount of an item of property, plant and equipment the cost of
replacing part of such an item when that cost is incurred if it is probable that
the future economic benefits embodied with the item will flow to the Group and
the cost of the item can be measured reliably. All other expenditure is
recognized as an expense in the consolidated statements of income in the year in
which it is incurred.
Gains or losses arising from the retirement or disposal of an item of
property, plant and equipment, other than oil and gas properties, are determined
as the difference between the net disposal proceeds and the carrying amount of
the item and are recognized as income or expense in the consolidated statements
of income on the date of retirement or disposal. On disposal of a revalued
asset, the related revaluation surplus is transferred from the revaluation
reserve to retained earnings.
Depreciation is provided to write off the cost/revalued amount of items of
property, plant and equipment, other than oil and gas properties, over its
estimated useful life on a straight-line basis, after taking into account its
estimated residual value, as follows:
Buildings 15 to 45 years
Plant, machinery, equipment, oil depots,
storage tanks and others 4 to 18 years
Service stations 25 years
Where parts of an item of property, plant and equipment have different
useful lives, the cost or valuation of the item is allocated on a reasonable
basis between the parts and each part is depreciated separately. Both the useful
life of an asset and its residual value, if any, are reassessed annually.
(g) Oil and gas properties
The Group uses the successful efforts method of accounting for its oil and
gas producing activities. Under this method, costs of development wells and the
related support equipment are capitalized. The cost of exploratory wells is
initially capitalized as construction in progress pending determination of
whether the well has found proved reserves. The impairment of exploratory well
costs occurs upon the determination that the well has not found proved reserves.
Exploratory wells that find oil and gas reserves in any area requiring major
capital expenditure are expensed unless the well has found a sufficient quantity
of reserves to justify its completion as a producing well if the required
capital expenditure is made, and drilling of the additional exploratory wells is
under way or firmly planned for the near future. However, in the absence of a
determination of the discovery of proved reserves, exploratory well costs are
not carried as an asset for more than one year following completion of drilling.
If, after one year has passed, a determination of the discovery of proved
reserves cannot be made, the exploratory well costs are impaired and charged to
expense. All other exploration costs, including geological and geophysical
costs, other dry hole costs and annual lease rentals, are expensed as incurred.
Capitalized costs relating to proved properties are amortized at the field level
on a unit-of-production method. The amortization rates are determined based on
oil and gas reserves estimated to be recoverable from existing facilities over
the shorter of the economic lives of crude oil and natural gas reservoirs and
the terms of the relevant production licenses.
Gains and losses on the disposal of proved oil and gas properties are not
recognized unless the disposal encompasses an entire property. The proceeds on
such disposals are credited to the carrying amounts of oil and gas properties.
(h) Lease prepayments
Lease prepayments represent land use rights paid to the relevant
government authorities. Land use rights are carried at cost less accumulated
amortization and impairment losses (Note 2(k)). Amortization is provided to
write off the cost of lease prepayments on a straight-line basis over the
respective periods of the rights.
(i) Construction in progress
Construction in progress represents buildings, oil and gas properties,
various plant and equipment under construction and pending installation, and is
stated at cost less impairment losses (Note 2(k)). Cost comprises direct costs
of construction as well as interest charges, and foreign exchange differences on
related borrowed funds to the extent that they are regarded as an adjustment to
interest charges, during the periods of construction.
Construction in progress is transferred to property, plant and equipment
when the asset is substantially ready for its intended use.
No depreciation is provided in respect of construction in progress.
(j) Investments
Investments in equity securities, other than investments in subsidiaries,
associates and jointly controlled entities, that do not have a quoted market
price in an active market and whose fair value cannot be reliably measured are
recognized in the balance sheet at cost less impairment losses (Note 2(k)).
(k) Impairment of assets
(i) Impairment of trade accounts receivable, other receivables and investment
in equity securities, other than investments in subsidiaries, associates
and jointly controlled entities are accounted as follows:
Trade accounts receivable, other receivables and investment in equity
securities, other than investments in subsidiaries, associates and jointly
controlled entities that are stated at cost or amortized cost are reviewed at
each balance sheet date to determine whether there is objective evidence of
impairment. If any such evidence exists, an impairment loss is determined and
recognized. The impairment loss is measured as the difference between the
carrying amount of the financial asset and the estimated future cash flows,
discounted at the current market rate of return for a similar financial asset
where the effect of discounting is material. Impairment losses for trade
accounts and other receivables are reversed if in a subsequent period the amount
of the impairment loss decreases. Impairment losses for investment in equity
securities are not reversed.
(ii) Impairment of other long-lived assets is accounted as follows:
The carrying amounts of other long-lived assets, including property, plant
and equipment, construction in progress, lease prepayment, investments in
subsidiaries, associates and jointly controlled entities, are reviewed
periodically in order to assess whether the recoverable amounts have declined
below the carrying amounts. These assets are tested for impairment whenever
events or changes in circumstances indicate that their recorded carrying amounts
may not be recoverable. When such a decline has occurred, the carrying amount is
reduced to the recoverable amount. For goodwill, the recoverable amount is
estimated at each balance sheet date.
The recoverable amount is the greater of the fair value less costs to sell
and the value in use. In determining the value in use, expected future cash
flows generated by the asset are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of time value of
money and the risks specific to the asset. Where an asset does not generate cash
inflows largely independent of those from other assets, the recoverable amount
is determined for the smallest group of assets that generates cash inflows
independently (i.e. a cash-generating unit).
The amount of the reduction is recognized as an expense in the
consolidated statements of income unless the asset is carried at revalued amount
for which an impairment loss is recognized directly against any related
revaluation reserve to the extent that the impairment loss does not exceed the
amount held in the revaluation reserve for that same asset. Impairment losses
recognized in respect of cash-generating units are allocated first to reduce the
carrying amount of any goodwill allocated to the cash-generating unit and then,
to reduce the carrying amount of the other assets in the unit on a pro rata
basis, except that the carrying value of an asset will not be reduced below its
individual fair value less costs to sell, or value in use, if determinable.
The Group assesses at each balance sheet date whether there is any
indication that an impairment loss recognized for an asset, except in the case
of goodwill, in prior years may no longer exist. An impairment loss is reversed
if there has been a favourable change in the estimates used to determine the
recoverable amount. A subsequent increase in the recoverable amount of an asset,
when the circumstances and events that led to the write-down or write-off cease
to exist, is recognized as an income unless the asset is carried at revalued
amount. Reversal of an impairment loss on a revalued asset is credited to the
revaluation reserve except for impairment loss which was previously recognized
as an expense in the consolidated statements of income; a reversal of such
impairment loss is recognized as an income. The reversal is reduced by the
amount that would have been recognized as depreciation had the write-down or
write-off not occurred. An impairment loss in respect of goodwill is not
reversed.
(l) Trade accounts and other payables
Trade accounts and other payables are initially recognized at fair value
and thereafter stated at amortized cost unless the effect of discounting would
be immaterial, in which case they are stated at cost.
(m) Interest-bearing borrowings
Interest bearing borrowings are recognized initially at fair value less
attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortized cost with any difference
between cost and redemption value being recognized in income or loss over the
period of borrowings using the effective interest method.
(n) Provisions and contingent liability
A provision is recognized for liability of uncertain timing or amount when
the Group has a legal or constructive obligation arising as a result of a past
event, it is probable that an outflow of economic benefits will be required to
settle the obligation and a reliable estimate can be made.
When it is not probable that an outflow of economic benefits will be
required, or the amount cannot be estimated reliably, the obligation is
disclosed as a contingent liability, unless the probability of outflow of
economic benefits is remote. Possible obligations, whose existence will only be
confirmed by the occurrence or non-occurrence of one or more future events are
also disclosed as contingent liabilities unless the probability of outflow of
economic benefits is remote.
(o) Revenue recognition
Revenues associated with the sale of crude oil, natural gas, petroleum and
chemical products and ancillary materials are recorded when the customer accepts
the goods and the significant risks and rewards of ownership and title have been
transferred to the buyer. Revenue from the rendering of services is recognized
in the consolidated statements of income upon performance of the services. No
revenue is recognized if there are significant uncertainties regarding recovery
of the consideration due, the possible return of goods, or when the amount of
revenue and the costs incurred or to be incurred in respect of the transaction
cannot be measured reliably.
Interest income is recognized on a time apportioned basis that takes into
account the effective yield on the asset.
Gains arising from the issuance of shares by subsidiaries are recognized
in the consolidated statements of income. Further information is set out in Note
10.
Government grants relating to the purchase of assets used for technology
improvements are initially recorded as long-term liabilities when there is
reasonable assurance that they will be received and will offset against the cost
of the related assets upon the transfer of these assets to property, plant and
equipment. The grants are recognized as an income over the useful life of these
property, plant and equipment by way of reduced depreciation.
A government grant that becomes receivable as compensation for expenses or
losses already incurred with no future related costs shall be recognized as
income of the period in which it becomes receivable.
(p) Borrowing costs
Borrowing costs are expensed in the consolidated statements of income in
the year in which they are incurred, except to the extent that they are
capitalized as being attributable to the construction of an asset which
necessarily takes a period of time to get ready for its intended use.
(q) Repairs and maintenance expenditure
Repairs and maintenance expenditure is expensed as incurred.
(r) Environmental expenditures
Environmental expenditures that relate to current ongoing operations or to
conditions caused by past operations are expensed as incurred.
Liabilities related to future remediation costs are recorded when
environmental assessments and/or cleanups are probable and the costs can be
reasonably estimated. As facts concerning environmental contingencies become
known to the Group, the Group reassesses its position both with respect to
accrued liabilities and other potential exposures.
(s) Research and development costs
Research and development costs are recognized as expenses in the year in
which they are incurred. Research and development costs amounted to RMB 2,122,
RMB 1,518 and RMB 2,243 for the years ended December 31, 2003, 2004 and 2005,
respectively.
(t) Operating leases
Operating lease payments are charged to the consolidated statements of
income on a straight-line basis over the period of the respective leases.
Operating lease charges amounted to RMB 3,601, RMB 4,288 and RMB 5,514 for the
years ended December 31, 2003, 2004 and 2005, respectively.
(u) Retirement benefits
The contributions payable under the Group's retirement plans are
recognized as expenses in the consolidated statements of income as incurred and
according to the contribution determined by the plans. Further information is
set out in Note 31.
(v) Income tax
Income tax comprises current and deferred tax. Current tax is calculated
on taxable income by applying the applicable tax rates. Deferred tax is provided
using the balance sheet liability method on all temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes. Deferred tax is calculated on the
basis of the enacted tax rates that are expected to apply in the period when the
asset is realized or the liability is settled.
The tax value of losses expected to be available for utilization against
future taxable income is set off against the deferred tax liability within the
same legal tax unit and jurisdiction to the extent appropriate, and is not
available for set-off against the taxable profit of another legal tax unit.
Deferred tax assets are reduced to the extent that it is no longer probable that
the related tax benefit will be realized.
(w) Dividends
Dividends are recognized as a liability in the period in which they are
declared.
(x) Segmental reporting
A business segment is a distinguishable component of the Group that is
engaged in providing products or services and is subject to risks and rewards
that are different from those of other segments.
(y) Goodwill
Goodwill represents amounts arising on acquisition of subsidiaries,
associates or jointly controlled entities. Goodwill represents the difference
between the cost of acquisition and the fair value of the net identifiable
assets acquired.
Goodwill is stated at cost less impairment losses. Goodwill is allocated
to cash-generating units and is tested annually for impairment (Note 2(k)). In
respect of associates, the carrying amount of goodwill is included in the
carrying amount of the interest in associates.
3. OTHER OPERATING REVENUES
Other operating revenues represent:
Years ended December 31,
-----------------------------
2003 2004 2005
-------- --------- --------
RMB RMB RMB
Sale of materials, service and others........ 18,653 22,213 23,615
Rental income................................ 399 373 387
-------- --------- --------
19,052 22,586 24,002
======== ========= ========
4. OTHER INCOME
The Group received a cash government grant from the Ministry of Finance of
the PRC of RMB 9,415, as a compensation of loss incurred due to the distortion
of the correlation of domestic refined petroleum product prices and the crude
oil prices during the year ended December 31, 2005. There are no unfilled
conditions and other contingencies attached to the receipt of this government
grant. There is no assurance that the Group will continue to receive such grant
in the future.
5. PERSONNEL EXPENSES
Personnel expenses represent:
Years ended December 31,
-----------------------------
2003 2004 2005
-------- --------- --------
RMB RMB RMB
Wages and salaries......................... 12,468 13,589 13,601
Staff welfare.............................. 1,624 1,772 1,788
Contributions to retirement schemes........ 1,882 2,242 2,269
Social security contributions.............. 998 1,031 825
-------- --------- --------
16,972 18,634 18,483
======== ========= ========
6. EMPLOYEE REDUCTION EXPENSES
During the year ended December 31, 2003, in accordance with the Group's
voluntary employee reduction plan, the Group recorded employee reduction
expenses of RMB 1,040 relating to the reduction of approximately 21,500
employees.
During the year ended December 31, 2004, in accordance with the Group's
voluntary employee reduction plan, and in connection with the Acquisition of
Petrochemical and Catalyst Assets from and Disposal of Downhole Assets to
Sinopec Group Company, the Group recorded employee reduction expenses of RMB 919
relating to the reduction of approximately 24,000 employees.
During the year ended December 31, 2005, in accordance with the Group's
voluntary employee reduction plan, the Group recorded employee reduction
expenses of RMB 369 in respect of the voluntary termination of approximately
7,000 employees.
7. TAXES OTHER THAN INCOME TAX
Taxes other than income tax represent:
Years ended December 31,
-----------------------------
2003 2004 2005
-------- --------- --------
RMB RMB RMB
Consumption tax.............................. 9,898 11,920 12,430
City construction tax........................ 2,078 2,533 2,575
Education surcharge.......................... 995 1,255 1,305
Resources tax................................ 434 452 634
Business tax................................. 176 164 208
-------- --------- --------
13,581 16,324 17,152
======== ========= ========
Consumption tax is levied on producers of gasoline and diesel based on a
tariff rate applied to the volume of sales. City construction tax is levied on
an entity based on its total amount of value-added tax, consumption tax and
business tax.
8. OTHER OPERATING EXPENSES, NET
Other operating expenses, net represent:
Years ended December 31,
-----------------------------
2003 2004 2005
-------- --------- --------
RMB RMB RMB
Fines, penalties and compensations........... 165 277 155
Donations.................................... 152 290 203
Loss on disposal of property, plant and
equipment, net............................. 2,238 1,686 2,095
Impairment losses on long-lived assets....... 877 3,919 1,851
Others....................................... 543 494 821
-------- --------- --------
3,975 6,666 5,125
======== ========= ========
Long-lived assets impairment
Impairment losses recognized on long-lived assets of the refining segment
were RMB 114, RMB 14 and RMB nil for the years ended December 31, 2003, 2004 and
2005, respectively. Impairment losses recognized on long-lived assets of the
chemicals segment were RMB 453, RMB 2,747 and RMB 1,425 for the years ended
December 31, 2003, 2004 and 2005, respectively. These impairment losses relate
to certain refining and chemical production facilities that are held for use.
The carrying values of these facilities were written down to their recoverable
amount that were determined based either on the asset held for use model using
the present value of estimated future cash flows or on the appraised values of
the production facilities. Amounts of RMB 567, RMB 2,052 and RMB 1,425 for the
years ended December 31, 2003, 2004 and 2005, respectively, were charged to the
consolidated statements of income. An amount of RMB 709 for the year ended
December 31, 2004 was charged directly against the related revaluation reserve
in respect of those assets that were carried at revalued amount. The primary
factor resulting in the impairment losses on long-lived assets of the refining
and chemicals segments was due to higher operating and production costs caused
by the increase in the prices of raw materials that are not expected to be
recovered through an increase in selling price.
Impairment losses recognized on long-lived assets of the marketing and
distribution segment of RMB nil, RMB 1,769 and RMB 366, respectively, for the
years ended December 31, 2003, 2004 and 2005 primarily relate to certain service
stations that were closed during the year. In measuring the amounts of
impairment charges, the carrying amounts of these assets were compared to the
present value of the expected future cash flows of the assets, as well as
information about sales and purchases of similar properties in the same
geographic area.
The factors resulting in the exploration and production ("E&P") segment
impairment losses of RMB 310, RMB 98 and RMB 60 for the years ended December 31,
2003, 2004 and 2005, respectively, were unsuccessful development drilling and
high operating and development costs for certain small oil fields. The carrying
values of these E&P properties were written down to a recoverable amount which
was determined based on the present values of the expected future cash flows of
the assets. The oil and gas pricing was a factor used in the determination of
the present values of the expected future cash flows of the assets and had an
impact on the recognition of the asset impairment.
9. INTEREST EXPENSE
Interest expense represents:
Years ended December 31,
--------------------------------------------------
2003 2004 2005
-------------- --------------- ---------------
RMB RMB RMB
Interest expense incurred...................................... 5,316 5,491 7,166
Less: Interest expense capitalized*............................ (951) (908) (1,246)
-------------- --------------- ---------------
4,365 4,583 5,920
============== =============== ===============
* Interest rates per annum at which borrowing costs were
capitalized for construction in progress.................... 3.1% to 6.1% 3.1% to 6.0% 3.3% to 6.6%
============== =============== ===============
10. GAIN FROM ISSUANCE OF SHARES BY A SUBSIDIARY
The gain for the year ended December 31, 2003 represents the increase in
the Company's share of net assets of a subsidiary after the sale of additional
shares by the subsidiary.
Percentage of
ownership
No. of Price Amount --------------------
Principal Type of shares per of gross before After
Nature of company activities transactions issued share proceeds issuance issuance Gains
--------------------------------------------------------------------------------------------------------------------
RMB RMB RMB
Exploration
and
Sinopec Zhongyuan production of
Petroleum Company crude oil and Placement of
Limited natural gas A shares 58,650,000 9.10 534 75.00% 70.85% 136
11. INCOME TAX
Income tax in the consolidated statements of income represents:
Years ended December 31,
-------------------------------
2003 2004 2005
--------- --------- ---------
RMB RMB RMB
Current tax
- Provision for the year............................................ 10,937 18,441 20,159
- Under-provision in prior year..................................... 79 94 477
Deferred taxation (Note 21).............................................. (371) (720) (1,248)
--------- --------- ---------
10,645 17,815 19,388
========= ========= =========
A reconciliation between actual tax expense and accounting profit at
applicable tax rates is as follows:
Years ended December 31,
-------------------------------
2003 2004 2005
--------- --------- ---------
RMB RMB RMB
Income before income tax................................................. 35,041 59,606 63,228
========= ========= =========
Expected PRC income tax expense at a statutory tax rate of 33%........... 11,564 19,670 20,865
Tax effect of non-deductible expenses.................................... 639 812 450
Tax effect of non-taxable income......................................... (231) (216) (567)
Tax effect of differential tax rate on subsidiaries' income (Note)....... (1,232) (2,408) (2,010)
Tax effect of tax losses not recognized for deferred tax................. 248 409 381
Under-provision in prior years........................................... 79 94 477
Tax credit for domestic equipment purchases.............................. (422) (546) (208)
--------- --------- ---------
Actual tax expense ...................................................... 10,645 17,815 19,388
========= ========= =========
Substantially all income before income tax and related tax expense is from
PRC sources.
Note: The provision for PRC current income tax is based on a statutory rate
of 33% of the assessable income of the Group as determined in
accordance with the relevant income tax rules and regulations of the
PRC, except for certain subsidiaries of the Company which are taxed at
a preferential rate of 15%.
12. BASIC EARNINGS PER SHARE
The calculation of basic earnings per share is based on the net income
attributable to the equity shareholder of the Company of RMB 22,424, RMB 36,019
and RMB 40,920 divided by the weighted average number of shares in issue during
the year of 86,702,439,000 for each of the years in the three-year period ended
December 31, 2005.
The amount of diluted earnings per share is not presented as there were no
dilutive potential ordinary shares in existence for each of the years in the
three-year period ended December 31, 2005.
13. TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable are analyzed as follows:
December 31,
---------------------
2004 2005
---------- ---------
RMB RMB
Amounts due from third parties..................................................... 10,989 13,546
Amounts due from Sinopec Group Company and its affiliates.......................... 2,349 3,049
Amounts due from associates........................................................ 89 572
Amounts due from jointly controlled entities....................................... -- 505
---------- ---------
13,427 17,672
Less: Impairment losses for bad and doubtful debts................................. (3,671) (3,140)
---------- ---------
9,756 14,532
========== =========
The impairment losses for bad and doubtful debts are analyzed as follows:
Years ended December 31,
--------------------------------
2003 2004 2005
--------- --------- ----------
RMB RMB RMB
At beginning of year................................................... 3,017 3,350 3,671
Impairment losses recognized for the year.............................. 939 935 328
Written-off/reversal of impairment losses.............................. (429) (454) (859)
Less: Amount distributed to Sinopec Group Company in connection with
the Acquisition of Ethylene Assets............................. (177) -- --
Less: Amount distributed to Sinopec Group Company in connection with
the Acquisition of Petrochemical and Catalyst Assets...........
-- (160) --
--------- --------- ----------
At end of year......................................................... 3,350 3,671 3,140
========= ========= ==========
Sales are generally on a cash term. Credit is generally only available for
major customers with well-established trading records. Amounts due from Sinopec
Group Company and its affiliates are repayable under the same terms.
14. INVENTORIES
Inventories represent:
December 31,
---------------------
2004 2005
---------- ---------
RMB RMB
Crude oil and other raw materials.................................................. 32,562 53,333
Work in progress................................................................... 8,341 9,422
Finished goods..................................................................... 20,804 23,163
Spare parts and consumables........................................................ 3,528 4,448
---------- ---------
65,235 90,366
Less: Allowance for diminution in value of inventories............................. (906) (892)
---------- ---------
64,329 89,474
========== =========
The allowance for diminution in value of inventories is analyzed as
follows:
Years ended December 31,
----------------------------------
2003 2004 2005
--------- --------- ---------
RMB RMB RMB
At beginning of year................................................... 568 601 906
Provision for the year................................................. 196 648 262
Written back on sales.................................................. (163) (261) (276)
Less: Amount distributed to Sinopec Group Company in connection with
the Acquisition of Petrochemical and Catalyst Assets............ -- (82) --
--------- --------- ---------
At end of year......................................................... 601 906 892
========= ========= =========
The cost of inventories recognized as an expense in the consolidated
statements of income amounted to RMB 341,115, RMB 474,961 and RMB 683,902 for
the years ended December 31, 2003, 2004 and 2005, respectively.
15. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets represent:
December 31,
---------------------
2004 2005
---------- ---------
RMB RMB
Advances to third parties.......................................................... 1,600 1,754
Amounts due from Sinopec Group Company and its affiliates.......................... 5,585 2,954
Other receivables.................................................................. 2,161 1,781
Purchase deposits.................................................................. 2,547 2,496
Prepayments in connection with construction work and equipment purchases........... 4,727 5,583
Prepaid value-added tax and customs duty........................................... 3,166 4,288
Amounts due from associates........................................................ 308 539
---------- ---------
20,094 19,395
========== =========
16. PROPERTY, PLANT AND EQUIPMENT, NET
By segment:
Exploration Marketing Corporate
and and and
production Refining distribution Chemicals others Total
---------- -------- ------------ --------- -------- -------
RMB RMB RMB RMB RMB RMB
Cost/valuation:
Balance at January 1, 2004.......................... 177,962 105,237 54,482 160,289 3,788 501,758
Additions........................................... 1,402 793 1,555 314 169 4,233
Transferred from construction in progress........... 17,428 13,489 9,283 9,460 304 49,964
Acquired from Sinopec Group Company (Note 30) ...... -- 805 1,536 -- -- 2,341
Revaluation in connection with the Acquisition of
Petrochemical and Catalyst Assets............ -- 35 -- 206 16 257
Disposals........................................... (1,085) (3,354) (1,511) (4,253) (179) (10,382)
Disposals to Sinopec Group Company (Note 30) ....... (3,631) -- -- -- -- (3,631)
Less: Amount distributed to
Sinopec Group Company in connection
with the Acquisition of
Petrochemical and Catalyst Assets............ -- (95) -- (2,794) (6) (2,895)
---------- -------- ------------ --------- -------- -------
Balance at December 31, 2004........................ 192,076 116,910 65,345 163,222 4,092 541,645
---------- -------- ------------ --------- -------- -------
Balance at January 1, 2005.......................... 192,076 116,910 65,345 163,222 4,092 541,645
Additions........................................... 151 126 382 271 150 1,080
Transferred from construction in progress........... 22,094 8,121 14,017 18,457 381 63,070
Proportionate share of a jointly controlled entity.. -- -- -- 1,028 -- 1,028
Reclassification.................................... (157) (432) 204 289 96 --
Disposals........................................... (3,052) (2,859) (2,927) (3,164) (245) (12,247)
---------- -------- ------------ --------- -------- -------
Balance at December 31, 2005........................ 211,112 121,866 77,021 180,103 4,474 594,576
---------- -------- ------------ --------- -------- -------
Accumulated depreciation:
Balance at January 1, 2004.......................... 84,604 50,901 10,014 84,285 1,223 231,027
Depreciation charge for the year.................... 12,042 7,594 2,624 9,156 289 31,705
Impairment losses for the year...................... 98 14 1,769 2,747 -- 4,628
Acquired from Sinopec Group Company (Note 30) ...... -- 458 -- -- -- 458
Written back on disposals........................... (942) (2,323) (942) (3,157) (103) (7,467)
Disposals to Sinopec Group Company (Note 30) ....... (1,774) -- -- -- -- (1,774)
Less: Amount distributed to
Sinopec Group Company in connection
with the Acquisition of
Petrochemical and Catalyst Assets......... -- (64) -- (989) (2) (1,055)
---------- -------- ------------ --------- -------- -------
Balance at December 31, 2004........................ 94,028 56,580 13,465 92,042 1,407 257,522
---------- -------- ------------ --------- -------- -------
Balance at January 1, 2005.......................... 94,028 56,580 13,465 92,042 1,407 257,522
Depreciation charge for the year.................... 10,887 6,972 3,013 9,392 282 30,546
Impairment losses for the year...................... 60 -- 366 1,425 -- 1,851
Reclassification.................................... (78) (214) 78 160 54 --
Written back on disposals........................... (2,687) (2,206) (2,110) (2,719) (194) (9,916)
---------- -------- ------------ --------- -------- -------
Balance at December 31, 2005........................ 102,210 61,132 14,812 100,300 1,549 280,003
---------- -------- ------------ --------- -------- -------
Net book value:
At December 31, 2005................................ 108,902 60,734 62,209 79,803 2,925 314,573
========== ======== ============ ========= ======== =======
At December 31, 2004................................ 98,048 60,330 51,880 71,180 2,685 284,123
========== ======== ============ ========= ======== =======
At January 1, 2004.................................. 93,358 54,336 44,468 76,004 2,565 270,731
========== ======== ============ ========= ======== =======
By asset class:
Oil depots, Plant,
storage tanks machinery,
Oil and gas and service equipment
Buildings properties stations and others Total
--------- ---------- ------------ ----------- --------
RMB RMB RMB RMB RMB
Cost/valuation:
Balance at January 1, 2004.......................... 44,728 158,634 46,337 252,059 501,758
Additions........................................... 342 450 1,301 2,140 4,233
Transferred from construction in progress........... 2,357 17,428 12,461 17,718 49,964
Acquired from Sinopec Group Company (Note 30) ...... -- -- 1,533 808 2,341
Revaluation in connection with the Acquisition of 1 -- -- 256 257
Petrochemical and Catalyst Assets.............
Disposals........................................... (927) (586) (1,099) (7,770) (10,382)
Disposals to Sinopec Group Company (Note 30) ....... (97) (2,362) -- (1,172) (3,631)
Less: Amount distributed to Sinopec Group Company in
connection with the Acquisition of
Petrochemical and Catalyst Assets............. (1,550) -- -- (1,345) (2,895)
--------- ---------- ------------ ----------- --------
Balance at December 31, 2004........................ 44,854 173,564 60,533 262,694 541,645
--------- ---------- ------------ ----------- --------
Balance at January 1, 2005.......................... 44,854 173,564 60,533 262,694 541,645
Additions........................................... 96 64 228 692 1,080
Transferred from construction in progress........... 2,462 20,985 13,851 25,772 63,070
Proportionate share of a jointly controlled entity.. 182 -- -- 846 1,028
Reclassification.................................... (406) (802) 650 558 --
Disposals........................................... (1,034) (1,884) (2,145) (7,184) (12,247)
--------- ---------- ------------ ----------- --------
Balance at December 31, 2005........................ 46,154 191,927 73,117 283,378 594,576
--------- ---------- ------------ ----------- --------
Accumulated depreciation:
Balance at January 1, 2004.......................... 18,975 77,582 8,785 125,685 231,027
Depreciation charge for the year.................... 1,768 9,211 2,332 18,394 31,705
Impairment losses for the year...................... 325 98 1,249 2,956 4,628
Acquired from Sinopec Group Company (Note 30) ...... -- -- -- 458 458
Written back on disposals........................... (428) (541) (585) (5,913) (7,467)
Disposals to Sinopec Group Company (Note 30) ....... (22) (1,207) -- (545) (1,774)
Less: Amount distributed to Sinopec Group Company in
connection with the Acquisition of
Petrochemical and Catalyst Assets............. (310) -- -- (745) (1,055)
--------- ---------- ------------ ----------- --------
Balance at December 31, 2004........................ 20,308 85,143 11,781 140,290 257,522
--------- ---------- ------------ ----------- --------
Balance at January 1, 2005.......................... 20,308 85,143 11,781 140,290 257,522
Depreciation charge for the year.................... 1,712 10,263 2,914 15,657 30,546
Impairment losses for the year...................... 79 60 261 1,451 1,851
Reclassification.................................... (98) (430) 153 375 --
Written back on disposals........................... (597) (1,672) (1,379) (6,268) (9,916)
--------- ---------- ------------ ----------- --------
Balance at December 31, 2005........................ 21,404 93,364 13,730 151,505 280,003
--------- ---------- ------------ ----------- --------
Net book value:
At December 31, 2005................................ 24,750 98,563 59,387 131,873 314,573
========= ========== ============ =========== ========
At December 31, 2004................................ 24,546 88,421 48,752 122,404 284,123
========= ========== ============ =========== ========
At January 1, 2004.................................. 25,753 81,052 37,552 126,374 270,731
========= ========== ============ =========== ========
As required by the relevant PRC regulations with respect to the
Reorganization, the property, plant and equipment of the Group as of September
30, 1999 were valued for each asset class by China United Assets Appraisal
Corporation, Beijing Zhong Zheng Appraisal Company, CIECC Assets Appraisal
Corporation and Zhong Fa International Properties Valuation Corporation,
independent valuers registered in the PRC, on a depreciated replacement cost
basis. The value of property, plant and equipment was determined at RMB 159,788.
The surplus on revaluation of RMB 32,320, net of amounts allocated to minority
interests, was incorporated in the financial statements of the Group at December
31, 1999.
In connection with the Acquisition of Sinopec National Star, the property,
plant and equipment of Sinopec National Star were revalued at December 31, 2000,
by a firm of independent valuers and approved by the Ministry of Finance. The
value of property, plant and equipment of Sinopec National Star pursuant to the
valuation, based on a depreciated replacement cost basis, was determined at RMB
4,373, resulting in a surplus on revaluation of RMB 1,136, net of amounts
allocated to minority interest.
In connection with the Acquisition of Ethylene Assets, the property, plant
and equipment of Sinopec Maoming were revalued at June 30, 2003, by a firm of
independent valuers in accordance with the relevant rules and regulations. The
value of property, plant and equipment of Sinopec Maoming pursuant to the
valuation, based on a depreciated replacement cost basis, was determined at RMB
5,100, which approximated the net historical carrying value of the assets.
In connection with the Acquisition of Refining Assets, the property, plant
and equipment of the Refining Assets were revalued at October 31, 2003, by a
firm of independent valuers in accordance with the relevant rules and
regulations. The value of property, plant and equipment of the Refining Assets
pursuant to the valuation, based on a depreciated replacement cost basis, was
determined at RMB 461, which approximated the net historical carrying value of
the assets.
In connection with the Acquisition of Petrochemical and Catalyst Assets,
the property, plant and equipment of the Petrochemical and Catalyst Assets were
revalued at June 30, 2004, by a firm of independent valuers in accordance with
the relevant rules and regulations. The value of property, plant and equipment
of the Petrochemical and Catalyst Assets pursuant to the valuation, based on a
depreciated replacement cost basis, was determined at RMB 11,895, which
approximated the net historical carrying value of the assets.
In accordance with IAS 16, subsequent to these revaluations, which was
based on depreciated replacement costs, property, plant and equipment are
carried at revalued amount, being the fair value at the date of the revaluation
less any subsequent accumulated depreciation and impairment losses. Revaluation
is performed periodically to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the balance
sheet date. Based on a revaluation performed as of December 31, 2004, which was
based on depreciated replacement costs, the carrying value of property, plant
and equipment did not differ materially from their fair value.
17. CONSTRUCTION IN PROGRESS
Exploration Marketing Corporate
and and and
production Refining distribution Chemicals others Total
----------- -------- ------------ --------- --------- --------
RMB RMB RMB RMB RMB RMB
Balance at January 1, 2004..................... 5,535 8,470 7,941 6,957 451 29,354
Additions...................................... 22,808 13,479 15,123 10,711 1,381 63,502
Additions by jointly controlled entities....... 1,323 -- -- 5,178 -- 6,501
Less: Amount distributed to Sinopec Group
Company in connection with Acquisition
of Petrochemical and Catalyst Assets..... -- (1) -- (216) (15) (232)
Dry hole costs written off..................... (2,976) -- -- -- -- (2,976)
Transferred to property, plant and equipment... (17,428) (13,489) (9,283) (9,460) (304) (49,964)
----------- -------- ------------ --------- --------- --------
Balance at December 31, 2004................... 9,262 8,459 13,781 13,170 1,513 46,185
=========== ======== ============ ========= ========= ========
Balance at January 1, 2005..................... 9,262 8,459 13,781 13,170 1,513 46,185
Additions...................................... 25,894 14,001 10,572 9,115 1,014 60,596
Additions of jointly controlled entities....... 814 -- -- 1,830 -- 2,644
Proportionate share of a jointly controlled
entity -- -- -- 5,461 -- 5,461
Dry hole costs written off..................... (2,992) -- -- -- -- (2,992)
Transferred to property, plant and equipment
and other assets....... .................. (22,094) (8,121) (14,017) (19,014) (381) (63,627)
----------- -------- ------------ --------- --------- --------
Balance at December 31, 2005................... 10,884 14,339 10,336 10,562 2,146 48,267
=========== ======== ============ ========= ========= ========
The Group's proportionate share of the jointly controlled entities'
construction in progress in the E&P and the chemicals segments reflected in the
above table were RMB 2,053 and RMB 8,171, respectively, as of December 31, 2004,
and RMB 2,888 and RMB 504, respectively, as of December 31, 2005.
Net changes in capitalized cost of exploratory wells included in the
Group's construction in progress in the E&P segment are analyzed as follows:
Years ended December 31,
-----------------------------------
2003 2004 2005
--------- --------- ---------
RMB RMB RMB
At beginning of year................................................... 2,395 2,438 2,898
Additions, net of amount that were capitalized and subsequently
expensed in the same year, pending the determination of proved 1,830 2,031 2,554
reserves..........................................................
Transferred to oil and gas properties based on the determination of
proved reserves................................................... (770) (382) (671)
Dry hole costs written off............................................. (1,017) (1,189) (1,208)
--------- --------- ---------
At end of year......................................................... 2,438 2,898 3,573
========= ========= =========
Aging of capitalized exploratory well costs based on the date the drilling
was completed are analyzed as follows:
December 31,
2003 2004 2005
--------- --------- ---------
RMB RMB RMB
One year or less....................................................... 2,357 2,711 3,277
Over one year.......................................................... 81 187 296
--------- --------- ---------
2,438 2,898 3,573
========= ========= =========
Capitalized exploratory wells costs aged over one year are related to
wells for which the drilling results are being further evaluated or the
development plans are being formulated.
18. INVESTMENTS
December 31,
-------------------
2004 2005
-------- -------
RMB RMB
Unlisted investments, at cost.......................... 2,891 3,253
Less: Impairment losses................................ (353) (327)
-------- -------
2,538 2,926
======== =======
Unlisted investments represent the Group's interests in PRC domiciled
enterprises which are mainly engaged in non-oil and gas activities and
operations. The Group has no significant investments in marketable securities.
The impairment losses relating to investments for the years ended December
31, 2003, 2004 and 2005 were RMB 131, RMB 96 and RMB 77 million, respectively.
19. INTEREST IN ASSOCIATES
December 31,
-------------------------
2004 2005
---------- ----------
RMB RMB
Share of net assets............................. 10,222 9,217
The Group's investments in associates are with companies primarily engaged
in the oil and gas and chemical operations in the PRC. These investments are
individually and in the aggregate not material to the Group's financial
condition or results of operations for all periods presented. The share of
associates' taxation amounted to RMB 148, RMB 340 and RMB 420 for the years
ended December 31, 2003, 2004 and 2005, respectively. The principal investments
in associates, all of which are incorporated in the PRC, are as follows:
Percentage Percentage
of equity of equity
Form of Particulars of held by held by the
business issued the Company's
Name of company structure and paid up capital Company subsidiaries Principal activities
--------------- --------- ------------------- ---------- ------------ --------------------
% %
Shengli Oil Field Dynamic Company Incorporated 364,027,608 ordinary 26.33 -- Exploration of crude oil and
Limited ("Dynamic")* shares of RMB 1.00 distribution of petrochemical
each products
Sinopec Shandong Taishan Incorporated 480,793,320 ordinary 38.68 -- Trading of petroleum products
Petroleum Company Limited shares of RMB 1.00 and decoration of service gas
("Taishan")* each stations
Sinopec Finance Company Limited Incorporated Registered capital 38.22 2.00 Provision of non-banking
RMB 2,500,000,000 financial services
Shanghai Petroleum National Gas Incorporated Registered capital 30.00 -- Exploration and production of
Corporation RMB 900,000,000 crude oil and natural gas
Shanghai Chemical Industry Park Incorporated Registered capital -- 38.26 Planning, development and
Development Company Limited RMB 2,372,439,000 operation of the Chemical
Industry Park in Shanghai, the
PRC
China Shipping & Sinopec Suppliers Incorporated Registered capital -- 50.00 Transportation of petroleum
Company Limited RMB 876,660,000 products
China Aviation Oil Supply Limited Incorporated Registered capital -- 29.00 Marketing and distribution of
Company RMB 3,800,000,000 refined petroleum products
* Shares of Dynamic and Taishan are listed on the Shenzhen Stock Exchange.
Shares held by the Company are domestic state-owned A shares which are not
admitted for trading in any stock exchange in the PRC. The market value of the
investments in Dynamic based on the quoted market price are RMB 479 and RMB 772
as of December 31, 2004 and 2005, respectively. The market value of the
investments in Taishan based on the quoted market price are RMB 1,516 and RMB
547 as of December 31, 2004 and 2005, respectively.
20. INTEREST IN JOINTLY CONTROLLED ENTITIES
The Group's investments in jointly controlled entities are primarily
engaged in the oil and gas and chemical operations in the PRC. Principal
interests in jointly controlled entities are as follows:
Percentage
Percentage of equity
of equity held by
Form of Particulars of held by the
business issued and paid up the Company's
Name of company structure capital Company subsidiaries Principal activities
--------------- --------- ------------------ ---------- ------------ --------------------
% %
Shanghai Secco Petrochemical Incorporated Registered capital 30.00 20.00 Manufacturing and distribution
Company Limited USD 901,440,964 of petrochemical products
BASF-YPC Company Limited Incorporated Registered capital 30.00 10.00 Manufacturing and distribution
RMB 8,793,000,000 of petrochemical products
Yueyang Sinopec and Shell Coal Incorporated Registered capital 50.00 -- Manufacturing and distribution
Gasification Company Limited USD 45,588,700 of industrial gas
Block A Oil Field in the Unincorporated -- -- 43.00 Exploration and production of
Western Area Chengdao in crude oil and natural gas
Bohai Bay
Included in the consolidated financial statements are the following items
that represent the Group's proportionate share of the jointly controlled
entities' financial condition, results of operations and cash flows.
Years ended December 31,
--------------------------------
2003 2004 2005
--------- ----------- ---------
RMB RMB RMB
Results of operations:
Operating revenue............................ 247 313 10,082
Expenses..................................... 267 450 9,773
Net (loss) / profit ......................... (20) (137) 309
December 31,
---------------------
2004 2005
--------- ---------
RMB RMB
Financial condition:
Current assets.......................................... 520 2,631
Non-current assets...................................... 10,913 19,522
Current liabilities..................................... 1,699 2,543
Non-current liabilities................................. 4,463 10,177
Net assets.............................................. 5,271 9,433
Years ended December 31,
----------------------------
2003 2004 2005
-------- -------- --------
RMB RMB RMB
Cash flows:
Net cash generated from / (used in) operating
activities................................. 1,071 233 (1,434)
Net cash used in investing activities........... (4,107) (6,035) (2,474)
Net cash generated from financing activities.... 2,987 5,909 4,011
21. DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and deferred tax liabilities are attributable to the
items detailed in the table below:
Assets Liabilities Net balance
------ ----------- -----------
December 31, December 31, December 31,
---------------- ----------------- -----------------
2004 2005 2004 2005 2004 2005
------ ------ ------ ------ ------ ------
RMB RMB RMB RMB RMB RMB
Current
Receivables and inventories......................... 2,528 3,904 -- -- 2,528 3,904
Non-current
Property, plant and equipment....................... 1,566 1,642 (1,704) (1,619) (138) 23
Accelerated depreciation............................ -- -- (3,932) (4,217) (3,932) (4,217)
Tax value of losses carried forward, net of
valuation allowance............................. 66 128 -- -- 66 128
Lease prepayment (Note i) .......................... 366 359 -- -- 366 359
Others.............................................. 32 39 -- (66) 32 (27)
------ ------ ------ ------ ------ ------
Deferred tax assets/(liabilities) .................. 4,558 6,072 (5,636) (5,902) (1,078) 170
====== ====== ====== ====== ====== ======
A valuation allowance on deferred tax assets is recorded if it is probable
that some portion or all of the deferred tax assets will not be realized through
the recovery of taxes previously paid and/or future taxable income. The
allowance is subject to ongoing adjustments based on changes in circumstances
that affect the Group's assessment on the realizability of the deferred tax
assets. The Group has reviewed its deferred tax assets as of December 31, 2003,
2004 and 2005. Based on this review, valuation allowances of RMB 248, RMB 409
and RMB 381 were provided for the years ended December 31, 2003, 2004 and 2005,
respectively. The Group determined the valuation allowance based on management's
assessment of the probability that taxable profits will be available over the
period which the deferred tax assets can be realized or utilized. In assessing
the probability, both positive and negative evidence was considered, including
whether it is probable that the operations will have future taxable profits over
the periods which the deferred tax assets are deductible or utilized and whether
the tax losses result from identifiable causes which are unlikely to recur.
Based on this assessment, a valuation allowance was provided to reduce the
deferred tax asset to the amount that is probable to be realized.
The valuation allowance is analyzed as follows:
Years ended December 31,
-------------------------------
2003 2004 2005
------- ------- -------
RMB RMB RMB
At beginning of year................................................... 943 641 1,050
Allowance during the year.............................................. 248 409 381
Less: Amount distributed to Sinopec Group Company in connection with
the Acquisition of Ethylene Assets.............................. (550) -- --
Written-off............................................................ -- -- (87)
------- ------- -------
At end of year ........................................................ 641 1,050 1,344
======= ======= =======
As of December 31, 2005, certain subsidiaries of the Company had tax value
of losses carried forward for PRC income tax purpose, provided for valuation
allowance, of RMB 4,072 which were available to offset future PRC taxable income
of respective subsidiaries, if any. RMB 503, RMB 425, RMB 751, RMB 1,239 and RMB
1,154 expire in 2006, 2007, 2008, 2009, and 2010, respectively.
Movements in temporary differences between calculations of certain items
for accounting and for taxation purposes can be specified as follows:
Recognized in
Balance at consolidated Recognized Balance at
January 1, statements of in other December 31,
2003 income reserves 2003
---------- ------------- ---------- ------------
RMB RMB RMB RMB
Current
Receivables and inventories............................ 275 1,171 -- 1,446
Non-current
Property, plant and equipment.......................... (580) (129) -- (709)
Accelerated depreciation............................... (2,958) (660) -- (3,618)
Tax value of losses carried forward, net of valuation
allowance.......................................... 978 (55) -- 923
Lease prepayments (Note i)............................. 364 (7) 16 373
Others.................................................
2 51 -- 53
---------- ------------- ---------- ------------
Net deferred tax (liabilities)/assets.................. (1,919) 371 16 (1,532)
========== ============= ========== ============
(Note 11)
Recognized in
Balance at consolidated Recognized Balance at
January 1, statements of in other December 31,
2004 income reserves 2004
---------- ------------- ---------- ------------
RMB RMB RMB RMB
Current
Receivables and inventories........................... 1,446 1,082 -- 2,528
Non-current
Property, plant and equipment.......................... (709) 571 -- (138)
Accelerated depreciation............................... (3,618) (314) -- (3,932)
Tax value of losses carried forward, net of valuation
allowance (Note ii)................................ 923 (591) (266) 66
Lease prepayments (Note i)............................. 373 (7) -- 366
Others................................................. 53 (21) -- 32
---------- ------------- ---------- ------------
Net deferred tax (liabilities)/assets.................. (1,532) 720 (266) (1,078)
========== ============= ========== ============
(Note 11)
Recognized in
Balance at consolidated Recognized Balance at
January 1, statements of in other December 31,
2005 income reserves 2005
---------- ------------- ---------- ------------
RMB RMB RMB RMB
Current
Receivables and inventories........................... 2,528 1,376 -- 3,904
Non-current
Property, plant and equipment.......................... (138) 161 -- 23
Accelerated depreciation............................... (3,932) (285) -- (4,217)
Tax value of losses carried forward, net of valuation
allowance.......................................... 66 62 -- 128
Lease prepayments ..................................... 366 (7) -- 359
Others................................................. 32 (59) -- (27)
---------- ------------- ---------- ------------
Net deferred tax (liabilities)/assets.................. (1,078) 1,248 -- 170
========== ============= ========== ============
(Note 11)
Note:
(i) During the year ended December 31, 2003, in connection with the
Acquisition of Refining Assets, the land use rights of the Refining
Assets were revalued resulting in a surplus of RMB 66 as required by
the relevant PRC rules and regulations but were not revalued for
financial reporting purposes and, accordingly, deferred tax assets of
RMB 16 were created with corresponding increase in other reserves.
(ii) As of December 31, 2004, deferred tax assets of RMB 266 were
distributed to Sinopec Group Company in connection with the
Acquisition of Petrochemical and Catalyst Assets.
22. LONG-TERM PREPAYMENTS AND OTHER ASSETS
Long-term prepayments and other assets primarily represent prepaid rental
expenses over one year, computer software, goodwill and catalysts.
23. SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND
ITS AFFILIATES
Short-term debts represent:
December 31,
----------------------
2004 2005
---------- ----------
RMB RMB
Third parties' debts
Short-term bank loans............................................................. 20,009 15,392
---------- ----------
Current portion of long-term bank loans........................................... 12,177 14,879
Current portion of long-term other loans.......................................... 121 26
Current portion of long-term bank loans of jointly controlled entities ........... - 193
---------- ----------
12,298 15,098
---------- ----------
Corporate bonds (a)............................................................... - 9,921
---------- ----------
32,307 40,411
---------- ----------
Loans from Sinopec Group Company and its affiliates
Short-term loans.................................................................. 6,714 732
Current portion of long-term loans................................................ 2,000 100
---------- ----------
8,714 832
---------- ----------
41,021 41,243
========== ==========
The Group's weighted average interest rates on short-term loans were 3.9%
and 4.0% as of December 31, 2004 and 2005, respectively.
As of December 31, 2004, the Company had standby credit facilities with
several PRC financial institutions which allowed the Company to borrow up to RMB
107,000 on an unsecured basis, at rates ranging from 2.95% to 4.54%. As of
December 31, 2004, the Company's outstanding borrowings under these facilities
were RMB 6,203 and were included in short-term bank loans. These facilities
expired at various dates in 2005 and contained no financial covenants.
As of December 31, 2005, the Company had standby credit facilities with
several PRC financial institutions which allowed the Company to borrow up to RMB
130,000 on an unsecured basis, at 4.698%. As of December 31, 2005, the Company's
outstanding borrowings under these facilities were RMB 2,000 and were included
in short-term bank loans. These facilities expire at various dates in 2006 and
contain no financial covenants.
Long-term debts comprise:
Interest rate and final maturity December 31,
---------------------------------------------- -----------------------
2004 2005
---------- -----------
RMB RMB
Third parties' debts
Long-term bank loans
Renminbi denominated Interest rates ranging from interest free to
5.8% per annum as of December 31, 2005 with
maturities through 2013 52,227 59,769
Japanese Yen denominated Interest rates ranging
from 2.6% to 5.8% per annum as of
December 31, 2005 with maturities
through 2024 4,562 3,394
US Dollar denominated Interest rates ranging
from interest free to 7.4% per annum as
of December 31, 2005 with
maturities through 2031 7,729 5,056
Euro denominated Fixed interest rate at 6.7% per annum as of
December 31, 2005 with maturities through 2010 165 117
Hong Kong Dollar denominated Floating rate at
Hong Kong Prime Rate plus 0.8% to 1.1%
per annum as of December 31, 2005
with maturities through 2007 5 94
---------- -----------
64,688 68,430
========== ===========
Long-term other loans
Renminbi denominated Interest rates ranging from interest free to
5.0% per annum as of December 31, 2005 with
maturities through 2008 359 170
US Dollar denominated Interest rates ranging
from interest free to 2.0% per annum as
of December 31, 2005 with
maturities through 2015 110 51
---------- -----------
469 221
========== ===========
Total long-term banks and other loans carried forward 65,157 68,651
Interest rate and final maturity December 31,
---------------------------------------------- -----------------------
2004 2005
---------- -----------
RMB RMB
Total long-term banks and other loans carried forward 65,157 68,651
Corporate bonds
Renminbi denominated Fixed interest rate at 4.61% per annum as of December
31, 2005 with maturity in February 2014 (b) 3,500 3,500
========== ===========
Long-term bank loans of jointly controlled entities
Renminbi denominated Floating rate at 90% of PBOC's
base lending rate per annum as of December
31, 2005 with maturities
through 2021 2,415 5,710
US Dollar denominated Floating rate at London
Interbank Offer Rate plus 0.4% to 0.7% per
annum as of December 31, 2005
with maturities through 2021 2,048 4,296
---------- -----------
4,463 10,006
========== ===========
Total third parties' long-term debts 73,120 82,157
Less: Current portion (12,298) (15,098)
---------- -----------
60,822 67,059
========== ===========
Long-term loans from Sinopec Group Company and its affiliates
Renminbi denominated Interest free with maturity in 2020 35,561 35,561
Renminbi denominated Interest rates ranging from 5.0% to 5.2% per annum
as of December 31, 2005 with maturities through
2009 3,204 4,401
---------- -----------
38,765 39,962
Long-term loans of jointly controlled entities from Sinopec Group
Company and its affiliates
Renminbi denominated Floating rate at 90% of PBOC's base lending rate
applicable to three-year tenor loan per annum as of
December 31, 2005 with maturities through 2021 -- 71
Less: Current portion (2,000) (100)
---------- -----------
36,765 39,933
========== ===========
97,587 106,992
========== ===========
(a) The Company issued six-month corporate bonds of face value at RMB 10,000
to corporate investors in PRC debenture market on October 24, 2005, at a
discounted value of RMB 98.75 per RMB 100 par value, with an effective
yield at 2.54% per annum with maturity in April 2006.
(b) The Company issued ten years corporate bonds of RMB 3,500 to PRC citizens
as well as PRC legal and non-legal persons on February 24, 2004, with a
fixed interest rate at 4.61% per annum.
Third parties' loans of RMB 40 and RMB 35 as of December 31, 2004 and
2005, respectively, were secured by certain of the Group's property, plant and
equipment. The net book value of property, plant and equipment of the Group
pledged as security amounted to RMB 123 and RMB 83 as of December 31, 2004 and
2005, respectively.
The aggregate maturities of long-term debts and loans from Sinopec Group
Company and its affiliates subsequent to December 31, 2005 are as follows:
RMB
2006............................................................... 15,198
2007............................................................... 18,787
2008............................................................... 25,718
2009............................................................... 6,898
2010............................................................... 6,526
Thereafter......................................................... 49,063
-----------
122,190
===========
Included in short-term and long-term debts and loans from Sinopec Group
Company and its affiliates of the Group are the following amounts denominated in
a currency other than the functional currency of the entity to which they
relate:
December 31,
------------
2004 2005
millions millions
US Dollar............................. USD 2,494 USD 2,158
Japanese Yen.......................... JPY 60,889 JPY 50,507
Euro ................................ EUR 15 EUR 12
Hong Kong Dollar...................... HKD 732 HKD 128
=================== =================
24. TRADE ACCOUNTS PAYABLE
Trade accounts payable are analyzed as follows:
December 31,
-----------------
2004 2005
------- --------
RMB RMB
Amounts due to third parties............................... 22,265 49,962
Amounts due to Sinopec Group Company and its affiliates.... 1,527 2,304
Amounts due to jointly controlled entities................. -- 650
Amounts due to associates.................................. -- 51
23,792 52,967
Amounts due to Sinopec Group Company and its affiliates are repayable in
accordance with normal commercial terms.
25. ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables represent:
December 31,
-----------------------
2004 2005
---------- ---------
RMB RMB
Amounts due to Sinopec Group Company and its affiliates......................... 10,897 7,144
Accrued expenditures............................................................ 17,213 19,566
Taxes other than income tax..................................................... 3,717 3,090
Receipts in advance............................................................. 7,387 12,368
Advances from third parties..................................................... 1,009 1,226
Others.......................................................................... 5,053 4,773
---------- ---------
45,276 48,167
========== =========
26. SHARE CAPITAL
December 31,
-----------------------
2004 2005
---------- ---------
RMB RMB
Registered, issued and fully paid
67,121,951,000 domestic state-owned A shares of RMB 1.00 each...................... 67,122 67,122
16,780,488,000 overseas listed H shares of RMB 1.00 each........................... 16,780 16,780
2,800,000,000 domestic listed A shares of RMB 1.00 each............................ 2,800 2,800
---------- ---------
86,702 86,702
========== =========
The Company was established on February 25, 2000 with a registered capital
of 68.8 billion domestic state-owned shares with a par value of RMB 1.00 each.
Such shares were issued to Sinopec Group Company in consideration for the assets
and liabilities of the Predecessor Operations transferred to the Company (Note
1).
Pursuant to the resolutions passed at an Extraordinary General Meeting
held on July 25, 2000 and approvals from relevant government authorities, the
Company is authorized to increase its share capital to a maximum of 88.3 billion
shares with a par value of RMB 1.00 each and offer not more than 19.5 billion
shares with a par value of RMB 1.00 each to investors outside the PRC. Sinopec
Group Company is authorized to offer not more than 3.5 billion shares of its
shareholdings in the Company to investors outside the PRC. The shares sold by
Sinopec Group Company to investors outside the PRC would be converted into H
shares.
In October 2000, the Company issued 15,102,439,000 H shares with a par
value of RMB 1.00 each, representing 12,521,864,000 H shares and 25,805,750
American Depositary Shares ("ADSs", each representing 100 H shares), at prices
of HK$ 1.59 per H share and US$ 20.645 per ADS, respectively, by way of a global
initial public offering to Hong Kong and overseas investors. As part of the
global initial public offering, 1,678,049,000 domestic state-owned ordinary
shares of RMB 1.00 each owned by Sinopec Group Company were converted into H
shares and sold to Hong Kong and overseas investors.
In July 2001, the Company issued 2.8 billion domestic listed A shares with
a par value of RMB 1.00 each at RMB 4.22 by way of a public offering to natural
persons and institutional investors in the PRC.
All A shares and H shares rank pari passu in all material aspects.
27. RESERVES
December 31,
-----------------------
2004 2005
---------- ---------
RMB RMB
Capital reserve (Note (a))
At January 1................................................................ (18,960) (19,217)
Transfer from other reserves................................................ (257) --
---------- ---------
December 31................................................................. (19,217) (19,217)
---------- ---------
Share premium (Note (b))
At January 1 and December 31................................................ 18,072 18,072
---------- ---------
Revaluation reserve
At January 1................................................................ 30,341 27,998
Revaluation surplus of Petrochemical and Catalyst Assets.................... 257 --
Impairment losses on revalued assets (Note 8)............................... (709) --
Revaluation surplus realized................................................ (1,891) (1,656)
---------- ---------
At December 31.............................................................. 27,998 26,342
---------- ---------
Statutory surplus reserve (Note (c))
At January 1................................................................ 6,330 9,558
Appropriation............................................................... 3,228 3,956
---------- ---------
At December 31.............................................................. 9,558 13,514
---------- ---------
Statutory public welfare fund (Note (d))
At January 1................................................................ 6,330 9,558
Appropriation............................................................... 3,228 3,956
---------- ---------
At December 31.............................................................. 9,558 13,514
---------- ---------
Discretionary surplus reserve (Note (e))
At January 1 and at December 31............................................. 7,000 7,000
---------- ---------
Other reserves
At January 1................................................................ 3,868 247
Revaluation surplus of Petrochemical and Catalyst Assets.................... 257 --
Realization of deferred tax on land use rights (Note (f))................... (5) (5)
Transfer from retained earnings to other reserves........................... 1,499 --
Net assets distributed to Sinopec Group Company (Note (g)).................. (2,244) --
Consideration for Acquisition of Petrochemical and Catalyst Assets (Note 1). (3,128) --
---------- ---------
At December 31.............................................................. 247 242
---------- ---------
December 31,
-----------------------
2004 2005
---------- ---------
RMB RMB
Retained earnings (Note (h))
At January 1............................................................... 31,832 53,122
Net income................................................................. 36,019 40,920
Final dividend in respect of the previous financial years, approved
and paid during the year (Note (i))..................................... (5,202) (6,936)
Interim dividend (Note (j))................................................ (3,468) (3,468)
Transfer to statutory surplus reserve...................................... (3,228) (3,956)
Proposed transfer to statutory public welfare fund......................... (3,228) (3,956)
Revaluation surplus realized............................................... 1,891 1,656
Realization of deferred tax on land use rights............................. 5 5
Transfer from retained earnings to other reserves.......................... (1,499) --
---------- ---------
At December 31............................................................. 53,122 77,387
---------- ---------
106,338 136,854
========== =========
Notes:
(a) The capital reserve represents (i) the difference between the total amount
of the par value of shares issued and the amount of the net assets
transferred from Sinopec Group Company in connection with the
Reorganization and (ii) the difference between the considerations paid
over the amount of the net assets acquired from Sinopec National Star,
Sinopec Maoming, Xi'an Petrochemical, Tahe Petrochemical, Tianjin
Petrochemical, Luoyang Petrochemical, Zhongyuan Petrochemical, Guangzhou
Petrochemical and Catalyst Plants.
(b) The application of the share premium account is governed by Sections 178
and 179 of the PRC Company Law.
(c) According to the Company's Articles of Association, the Company is
required to transfer 10% of its net income, as determined in accordance
with the PRC Accounting Rules and Regulations, to statutory surplus
reserve until the reserve balance reaches 50% of the registered capital.
The transfer to this reserve must be made before distribution of a
dividend to shareholders.
Statutory surplus reserve can be used to make good previous years' losses,
if any, and may be converted into share capital by the issue of new shares
to shareholders in proportion to their existing shareholdings or by
increasing the par value of the shares currently held by them, provided
that the balance after such issue is not less than 25% of the registered
capital. During the years ended December 31, 2004 and 2005, the Company
transferred RMB 3,228 and RMB 3,956, respectively, being 10% of the
current year's net income determined in accordance with the PRC Accounting
Rules and Regulations, to this reserve.
(d) According to the Company's Articles of Association, the Company is
required to transfer 5% to 10% of its net income, as determined in
accordance with the PRC Accounting Rules and Regulations, to the statutory
public welfare fund. This fund can only be utilized on capital items for
the collective benefits of the Company's employees such as the
construction of dormitories, canteen and other staff welfare facilities.
This fund is non-distributable other than on liquidation. The transfer to
this fund must be made before distribution of a dividend to shareholders.
Pursuant to the Company's Articles of Associations and a resolution passed
at the Directors' meeting on August 26, 2005, the directors authorized to
transfer RMB 1,804 for the six-month period ended June 30, 2005, being 10%
of the net profit for the six-month period ended June 30, 2005 determined
in accordance with the PRC Accounting Rules and Regulations, to this fund.
The directors authorized the transfer of RMB 2,152, subject to the
shareholders' approval, being 10% of the net profit for the six-month
period ended December 31, 2005, determined in accordance with the PRC
Accounting Rules and Regulations, to this fund. The transfer to this fund
for the years ended December 31, 2004 and 2005 were RMB 3,228 and RMB
3,956, respectively.
(e) The usage of the discretionary surplus reserve is similar to that of
statutory surplus reserve.
(f) Effective January 1, 2002, land use rights which are included in lease
prepayments are carried at historical cost. Accordingly, the surplus on
the revaluation of land use rights credited to revaluation reserve
previously, net of minority interests, was eliminated during the year. The
effect of this change did not have a material impact on the Group's
financial condition and results of operations in the periods prior to the
change. As a result of the tax deductibility of the revaluation surplus, a
deferred tax asset, net of minority interests, is created with a
corresponding increase in other reserves.
(g) The net assets distributed to Sinopec Group Company during the year ended
December 31, 2003 represent certain net assets retained, including certain
property, plant and equipment with net book value of RMB 4,840 and certain
construction in progress with net book value of RMB 2,789, by Sinopec
Group Company in connection with the Acquisition of Ethylene Assets and
the Acquisition of Refining Assets. The net assets distributed to Sinopec
Group Company during the year ended December 31, 2004 represent certain
net assets retained, including certain property, plant and equipment with
net book value of RMB 1,840 and certain construction in progress with net
book value of RMB 232, by Sinopec Group Company in connection with the
Acquisition of Petrochemical and Catalyst Assets. These transactions were
recorded at historical cost and were reflected as changes in other
reserves in the year the transaction occurred.
(h) According to the Company's Articles of Association, the amount of retained
earnings available for distribution to equity shareholders of the Company
is the lower of the amount determined in accordance with the PRC
Accounting Rules and Regulations and the amount determined in accordance
with IFRS. As of December 31, 2004 and 2005, the amounts of retained
earnings available for distribution were RMB (4,211) (as restated) and RMB
20,591, respectively, being the amount determined in accordance with IFRS.
Pursuant to a resolution passed at the Directors' meeting on March 31,
2006, a final dividend in respect of the year ended December 31, 2005 of
RMB 0.09 per share totaling RMB 7,803 was proposed for shareholders'
approval at the Annual General Meeting. Final dividend of RMB 7,803 in
respect of the year ended December 31, 2005 has not been recognized as a
liability as of the balance sheet date.
Subject to the relevant provisions of the PRC Company Law and the
Company's Articles of Association, Sinopec Group Company may seek to
influence the Company's determination of dividends with a view to
satisfying Sinopec Group Company's cash flow requirements.
(i) Pursuant to the shareholders' approval at the Annual General Meeting on
May 18, 2004, a final dividend of RMB 0.06 per share totaling RMB 5,202 in
respect of the year ended December 31, 2003 was declared and paid on June
28, 2004.
Pursuant to the shareholders' approval at the Annual General Meeting on
May 18, 2005, a final dividend of RMB 0.08 per share totaling RMB 6,936 in
respect of the year ended December 31, 2004 was declared and paid on June
27, 2005.
(j) Pursuant to the shareholders' approval at the Annual General Meeting on
May 18, 2004, the Board of Directors was authorized to declare the interim
dividends for the year ended December 31, 2004. According to the
resolution passed at the Directors' meeting on August 27, 2004, an interim
dividend of RMB 0.04 per share totaling RMB 3,468 was declared which was
paid on September 30, 2004.
Pursuant to the Company's Articles of Association and a resolution passed
at the Director's meeting on August 26, 2005, the directors authorized to
declare an interim dividend for the year ended December 31, 2005 of RMB
0.04 per share totaling RMB 3,468, which was paid on September 30, 2005.
28. COMMITMENTS AND CONTINGENT LIABILITIES
Operating lease commitments
The Group leases service stations and other equipment through
non-cancellable operating leases. These operating leases do not contain
provisions for contingent lease rentals. None of the rental agreements contain
escalation provisions that may require higher future rental payments.
As of December 31, 2005, the future minimum lease payments under operating
leases are as follows:
RMB
2006............................................ 3,593
2007............................................ 3,442
2008............................................ 3,388
2009............................................ 3,357
2010............................................ 3,353
Thereafter...................................... 95,176
-------
Total minimum lease payments.................... 112,309
=======
The Group's leasing arrangement impose no restrictions on dividends,
additional debt and/or further leasing.
Capital commitments
As of December 31, 2005, the Group had capital commitments as follows:
RMB
The Group
Authorized and contracted for................... 71,666
Authorized but not contracted for............... 84,213
-------
155,879
Jointly controlled entities
Authorized and contracted for................... 2,160
Authorized but not contracted for............... 60
-------
2,220
=======
These capital commitments relate to oil and gas exploration and
development, refining and petrochemical production capacity expansion projects,
the construction of service stations and oil depots, and capital contributions
to the Group's investments and interests in associates.
Exploration and production licenses
Exploration licenses for exploration activities are registered with the
Ministry of Land and Resources. The maximum term of the Group's exploration
licenses is 7 years, and may be renewed twice within 30 days prior to expiration
of the original term with each renewal being for a two-year term. The Group is
obligated to make progressive annual minimum exploration investment relating to
the exploration blocks in respect of which the license is issued. The Ministry
of Land and Resources also issues production licenses to the Group on the basis
of the reserve reports approved by relevant authorities. The maximum term of a
full production license is 30 years unless a special dispensation was given by
the State Council. The maximum term of production licenses issued to the Group
is 55 years as a special dispensation was given to the Group by the State
Council. The Group's production license is renewable upon application by the
Group 30 days prior to expiration.
The Group is required to make payments of exploration license fees and
production right usage fees to the Ministry of Land and Resources annually which
are expensed as incurred. Payments incurred were approximately RMB 97, RMB 189
and RMB 208 for the years ended December 31, 2003, 2004 and 2005, respectively.
Estimated future annual payments as of December 31, 2005 are as follows:
RMB
2006........................................... 107
2007........................................... 112
2008........................................... 59
2009........................................... 67
2010........................................... 56
Thereafter..................................... 239
----
Total payments................................. 640
====
Contingent liabilities
(a) The Company has been advised by its PRC lawyers that, except for
liabilities constituting or arising out of or relating to the business assumed
by the Company in the Reorganization, no other liabilities were assumed by the
Company, and the Company is not jointly and severally liable for other debts and
obligations incurred by Sinopec Group Company prior to the Reorganization.
(b) As of December 31, 2005, guarantees given to banks in respect of
banking facilities granted to the parties below were as follows:
RMB
Associates...................................... 79
====
The Group monitors the conditions that are subject to the guarantees to
identify whether it is probable that a loss has occurred, and recognize any such
losses under guarantees when those losses are estimable. As of December 31,
2005, it is not probable that the Group will be required to make payments under
the guarantee. Thus no liability has been accrued for a loss related to the
Group's obligation under this guarantee arrangement.
Environmental contingencies
To date, the Group has not incurred any significant expenditures for
environmental remediation, is currently not involved in any environmental
remediation, and has not accrued any amounts for environmental remediation
relating to its operations. Under existing legislation, management believes that
there are no probable liabilities that will have a material adverse effect on
the financial position or operating results of the Group. The PRC government,
however, has moved, and may move further towards more rigorous enforcement of
applicable laws, and towards the adoption of more stringent environmental
standards. Environmental liabilities are subject to considerable uncertainties
which affect the Group's ability to estimate the ultimate cost of remediation
efforts. These uncertainties include i) the exact nature and extent of the
contamination at various sites including, but not limited to refineries, oil
fields, service stations, terminals and land development areas, whether
operating, closed or sold, ii) the extent of required cleanup efforts, iii)
varying costs of alternative remediation strategies, iv) changes in
environmental remediation requirements, and v) the identification of new
remediation sites. The amount of such future cost is indeterminable due to such
factors as the unknown magnitude of possible contamination and the unknown
timing and extent of the corrective actions that may be required. Accordingly,
the outcome of environmental liabilities under proposed or future environmental
legislation cannot reasonably be estimated at present, and could be material.
The Group paid normal routine pollutant discharge fees of approximately RMB 245,
RMB 248 and RMB 493 for the years ended December 31, 2003, 2004 and 2005,
respectively.
Legal contingencies
The Group is a defendant in certain lawsuits as well as the named party in
other proceedings arising in the ordinary course of business. While the outcomes
of such contingencies, lawsuits or other proceedings cannot be determined at
present, management believes that any resulting liabilities will not have a
material adverse effect on the financial position or operating results of the
Group.
29. CONCENTRATION OF RISKS
Credit risk
The carrying amounts of cash and cash equivalents, time deposits with
financial institutions, trade accounts and bills receivables, and other current
assets, except for prepayments and deposits, represent the Group's maximum
exposure to credit risk in relation to financial assets.
The majority of the Group's trade accounts receivable relate to sales of
petroleum and chemical products to related parties and third parties operating
in the petroleum and chemical industries. The Group performs ongoing credit
evaluations of its customers' financial condition and generally does not require
collateral on trade accounts receivable. The Group maintains an impairment loss
for bad and doubtful debts and actual losses have been within management's
expectations. No single customer accounted for greater than 10% of total
revenues during the years ended December 31, 2003, 2004 and 2005.
No other financial assets carry a significant exposure to credit risk.
Concentration of economic risk
The Group's operations may be adversely affected by significant political,
economic, and social uncertainties in the PRC. In addition, the ability to
negotiate and implement specific projects in a timely and favorable manner may
be impacted by political considerations unrelated to or beyond the control of
the Group. Although the PRC government has been pursuing economic reform
policies for the past two decades, no assurance can be given that the PRC
government will continue to pursue such policies or that such policies may not
be significantly altered. There is also no guarantee that the PRC government's
pursuit of economic reforms will be consistent or effective and as a result,
changes in the rate or method of taxation, reduction in tariff protection and
other import restrictions, and changes in state policies affecting the
industries to which the Group sells its products, may have a negative effect on
its operating results and financial conditions.
Currency risk
Substantially all of the revenue-generating operations of the Group are
transacted in Renminbi, which is not fully convertible into foreign currencies.
On January 1, 1994, the PRC government abolished the dual rate system and
introduced a single rate of exchange as quoted by the People's Bank of China.
However, the unification of the exchange rate does not imply convertibility of
Renminbi into United States dollars or other foreign currencies. All foreign
exchange transactions continue to take place either through the People's Bank of
China or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the People's Bank of China. Approval of foreign
currency payments by the People's Bank of China or other institutions requires
submitting a payment application form together with suppliers' invoices,
shipping documents and signed contracts.
With the authorization from the PRC government, the People's Bank of China
announced that the PRC government reformed the exchange rate regime by moving
into a managed floating exchange rate regime based on market supply and demand
with reference to a basket of currencies on July 21, 2005. The exchange rate of
US dollars against RMB was adjusted to 8.11 yuan per US dollar with effect from
the time of 19:00 hours on July 21, 2005.
Other than the amounts as disclosed in Note 23, the amounts of other
financial assets and liabilities of the Group are substantially denominated in
the functional currency of respective entity of the Group.
Business risk
The Group conducts its principal operations in China and accordingly is
subject to special considerations and significant risks not typically associated
with investments in equity securities of the United States and Western European
companies. These include risks associated with, among others, the political,
economic and legal environment, influence of the State Council over
substantially all aspects of its operations and competition in the oil and gas
industry.
Interest rate risk
The interest rates and terms of repayment of short-term and long-term
debts of the Group are disclosed in Note 23.
30. RELATED PARTY TRANSACTIONS
Parties are considered to be related to the Group if the Group has the
ability, directly or indirectly, to control or jointly control the party or
exercise significant influence over the party in making financial and operating
decisions, or vice versa, or where the Group and the party are subject to common
control or common significant influence. Related parties may be individuals
(being members of key management personnel, significant shareholders and/or
their close family members) or other entities and include entities which are
under the significant influence of related parties of the Group where those
parties are individuals, and post-employment benefit plans which are for the
benefit of employees of the group or of any entity that is a related party of
the Group.
(a) Transactions with Sinopec Group Company and its affiliates, associates and
jointly controlled entities
The Group is part of a larger group of companies under Sinopec Group
Company, which is owned by the PRC government, and has significant transactions
and relationships with Sinopec Group Company and its affiliates. Because of
these relationships, it is possible that the terms of these transactions are not
the same as those that would result from transactions among unrelated parties.
The principal related party transactions with Sinopec Group Company and
its affiliates, associates and jointly controlled entities, which were carried
out in the ordinary course of business, are as follows:
Years ended December 31,
-----------------------------
Note 2003 2004 2005
------- ------- -------
RMB RMB RMB
Sales of goods........................................................... (i) 32,134 63,507 95,123
Purchases................................................................ (ii) 31,964 36,828 48,454
Transportation and storage............................................... (iii) 1,572 2,003 1,959
Exploration and development services..................................... (iv) 13,699 14,446 17,001
Production related services.............................................. (v) 8,421 9,036 10,653
Ancillary and social services............................................ (vi) 1,783 1,740 1,790
Operating lease charges.................................................. (vii) 2,924 3,297 3,213
Agency commission income................................................. (viii) 41 41 48
Intellectual property licence fee paid................................... (ix) 10 10 9
Interest received........................................................ (x) 114 59 52
Interest paid............................................................ (xi) 583 622 994
Net deposits (withdrawn from)/placed with related parties................ (xii) (1,634) 340 (82)
Net loans (repaid to)/obtained from related parties...................... (xiii) (24) 1,575 (4,714)
The amounts set out in the table above in respect of each of the years in
the three-year period ended December 31, 2005 represent the relevant costs to
the Group as determined by the corresponding contracts with the related parties.
There were no guarantees given to banks by the Group in respect of banking
facilities to Sinopec Group Company and its affiliates as of December 31, 2004
and 2005. Guarantees given to banks by the Group in respect of banking
facilities to associates are disclosed in Note 28.
The directors of the Company are of the opinion that the above
transactions with related parties were conducted in the ordinary course of
business and on normal commercial terms or in accordance with the agreements
governing such transactions, and this has been confirmed by the independent
non-executive directors.
Notes:
(i) Sales of goods represent the sale of crude oil, intermediate
petrochemical products, petroleum products and ancillary materials.
(ii) Purchases represent the purchase of material and utility supplies
directly related to the Group's operations such as the procurement of raw
and ancillary materials and related services, supply of water,
electricity and gas.
(iii) Transportation and storage represent the cost for the use of railway,
road and marine transportation services, pipelines, loading, unloading
and storage facilities.
(iv) Exploration and development services comprise direct costs incurred in
the exploration and development such as geophysical, drilling, well
testing and well measurement services.
(v) Production related services represent ancillary services rendered in
relation to the Group's operations such as equipment repair and general
maintenance, insurance premium, technical research, communications, fire
fighting, security, product quality testing and analysis, information
technology, design and engineering, construction which includes the
construction of oilfield ground facilities, refineries and chemical
plants, manufacture of replacement parts and machinery, installation,
project management and environmental protection.
(vi) Ancillary and social services represent expenditures for social welfare
and support services such as educational facilities, media communication
services, sanitation, accommodation, canteens, property maintenance and
management services.
(vii) Operating lease charges represent the rental paid to Sinopec Group
Company for operating leases in respect of land, buildings and
equipments.
(viii) Agency commission income represents commission earned for acting as an
agent in respect of sales of products of and purchase of materials for
certain entities owned by Sinopec Group Company.
(ix) Intellectual property license fee represents reimbursement paid to
Sinopec Group Company for fees required to maintain the validity of
licenses, trademarks, patents, technology and computer software.
(x) Interest received represents interest received from deposits placed with
Sinopec Finance Company Limited, a finance company controlled by Sinopec
Group Company. The applicable interest rate is determined in accordance
with the prevailing saving deposit rate. The balance of deposits as of
December 31, 2004 and 2005 were RMB 4,671 and RMB 4,589, respectively.
(xi) Interest paid represents interest charges on the loans and advances
obtained from Sinopec Group Company and Sinopec Finance Company Limited.
(xii) Deposits were withdrawn from / placed with Sinopec Finance Company
Limited.
(xiii) The Group repaid loans to / obtained loans from Sinopec Group Company and
Sinopec Finance Company Limited.
In connection with the Reorganization, the Company and Sinopec Group
Company entered into a number of agreements under which 1) Sinopec Group Company
will provide goods and products and a range of ancillary, social and supporting
services to the Group and 2) the Group will sell certain goods to Sinopec Group
Company. The terms of these agreements are summarized as follows:
(a) The Company has entered into a non-exclusive Agreement for Mutual
Provision of Products and Ancillary Services ("Mutual Provision
Agreement") with Sinopec Group Company effective from January 1, 2000 in
which Sinopec Group Company has agreed to provide the Group with certain
ancillary production services, construction services, information advisory
services, supply services and other services and products. While each of
Sinopec Group Company and the Company is permitted to terminate the Mutual
Provision Agreement upon at least six months notice, Sinopec Group Company
has agreed not to terminate the agreement if the Group is unable to obtain
comparable services from a third party. The pricing policy for these
services and products provided by Sinopec Group Company to the Group is as
follows:
o the government-prescribed price;
o where there is no government-prescribed price, the government-guidance
price;
o where there is neither a government-prescribed price nor a government-
guidance price, the market price; or
o where none of the above is applicable, the price to be agreed between
the parties, which shall be based on a reasonable cost incurred in
providing such services plus a profit margin not exceeding 6%.
(b) The Company has entered into a non-exclusive Agreement for Provision of
Cultural and Educational, Health Care and Community Services with Sinopec
Group Company effective from January 1, 2000 in which Sinopec Group
Company has agreed to provide the Group with certain cultural,
educational, health care and community services on the same pricing terms
and termination conditions as agreed to in the above Mutual Provision
Agreement.
(c) The Company has entered into a series of lease agreements with Sinopec
Group Company to lease certain land and buildings at a rental of
approximately RMB 2,557 and RMB 568, respectively, per annum. The Company
and Sinopec Group Company can renegotiate the rental amount every three
years for land and every year for buildings, such amount not to exceed the
market price as determined by an independent third party. The Group has
the option to terminate these leases upon six months notice to Sinopec
Group Company.
(d) The Company has entered into agreements with Sinopec Group Company
effective from January 1, 2000 under which the Group has been granted the
right to use certain trademarks, patents, technology and computer software
developed by Sinopec Group Company. The Group will reimburse Sinopec Group
Company for fees required to maintain the validity of these licenses.
(e) The Company has entered into a service stations franchise agreement with
Sinopec Group Company effective from January 1, 2000 under which its
service stations and retail stores would exclusively sell the refined
products supplied by the Group.
As discussed in Note 1, the Group acquired the equity interest of Sinopec
Maoming from Sinopec Group Company for a consideration of RMB 3,300 during the
year ended December 31, 2003. As of the valuation date, the carrying amount of
the net asset acquired approximated the net appraised amount of RMB 3,300.
As discussed in Note 1, the Group acquired the equity interest of Tahe
Petrochemical and Xi'an Petrochemical from Sinopec Group Company for a
consideration of RMB 356 during the year ended December 31, 2003. As of the
valuation date, the carrying amount of the net asset acquired approximated the
net appraised amount of RMB 356.
In December 2003, Sinopec Group Company repaid a bank loan of RMB 962 on
behalf of a subsidiary of the Group in exchange for a receivable from that
subsidiary.
As discussed in Note 1, pursuant to the resolutions passed at the
Extraordinary General Meeting held on December 21, 2004, the Group acquired the
equity interests of Tianjin Petrochemical, Luoyang Petrochemical, Zhongyuan
Petrochemical, Guangzhou Petrochemical and Catalyst Plants from Sinopec Group
Company for a total consideration payable of RMB 3,128. In addition, the Group
acquired certain individual assets and liabilities from Sinopec Group Company,
including certain property, plant and equipment with net book value of RMB
1,883, for a total consideration payable of RMB 2,232. In connection with these
acquisitions, the Group disposed of certain property, plant and equipment, with
net book value of RMB 1,857, and certain other assets and liabilities, related
to its oilfield downhole operation (the "Downhole Assets") to Sinopec Group
Company for a consideration receivable of RMB 1,712, which approximated the net
carrying value of the assets and liabilities, resulting in a net cash
consideration of RMB 3,648 payable to Sinopec Group Company. This consideration
was fully paid during the year ended December 31, 2005.
Amounts due from / to Sinopec Group Company and its affiliates, associates
and jointly controlled entities included in respective accounts caption are
summarized as follows:
December 31,
----------------------
2004 2005
--------- ---------
RMB RMB
Trade accounts receivable............................................... 2,438 4,126
Prepaid expenses and other current assets............................... 5,893 3,493
--------- ---------
Total amounts due from Sinopec Group Company and its affiliates,
associates and jointly controlled entities............................ 8,331 7,619
========= =========
Trade accounts payable.................................................. 1,527 3,005
Accrued expenses and other payables..................................... 10,897 7,144
Short-term loans and current portion of long-term loans from Sinopec
Group Company and its affiliates...................................... 8,714 832
Long-term loans excluding current portion from Sinopec Group Company
and its affiliates.................................................... 36,765 39,933
--------- ---------
Total amounts due to Sinopec Group Company and its affiliates,
associates and jointly controlled entities............................ 57,903 50,914
========= =========
Amounts due from / to Sinopec Group Company and its affiliates, associates
and jointly controlled entities, other than short-term loans and long-term
loans, bear no interest, are unsecured and are repayable in accordance with
normal commercial terms. The terms and conditions associated with short-term
loans and long-term loans payable to Sinopec Group Company and its affiliates
are set out in Note 23.
As at and for the year ended December 31, 2005, no impairment losses for
bad and doubtful debts were recorded in respect of amounts due from Sinopec
Group Company and its affiliates, associates and jointly controlled entities.
(b) Key management personnel emoluments
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the
Group, directly or indirectly, including directors and supervisors of the Group.
The key management personnel compensations are as follows:
Years ended December 31,
-----------------------------------
2003 2004 2005
---- ---- ----
RMB'000 RMB'000 RMB'000
Short-term employee benefits.............. 3,040 3,997 2,868
Retirement scheme contributions........... 178 202 115
------- ------ -------
3,218 4,199 2,983
======= ====== =======
Total emoluments are included in "personnel expenses" as disclosed in
Note 5.
Key management personnel also participate in the Group's share
appreciation rights plan (Note 31).
(c) Contributions to defined contribution retirement plans
The Group participates in various defined contribution retirement plans
organized by municipal and provincial governments for its staff. The details of
the Group's employee benefits plan are disclosed in Note 31. As at December 31,
2005, there was no material outstanding contribution to post-employment benefit
plans.
(d) Transactions with other state-owned entities in the PRC
The Group is a state-owned entity and operates in an economic regime
currently predominated by state-owned entities. Apart from transactions with
Sinopec Group Company and its affiliates, the Group conducts a majority of its
business activities with entities directly or indirectly owned or controlled by
the PRC government and numerous government authorities and agencies
(collectively referred to as "state-owned entities") in the ordinary course of
business. These transactions, which include sales and purchase of goods and
ancillary materials, rendering and receiving services, lease of assets, purchase
of property, plant and equipment and obtaining finance, are carried out at terms
similar to those that would be entered into with non-state-owned entities and
have been reflected in the financial statements. The Group believes that it has
provided meaningful disclosure of related party transactions as summarized
above.
31. EMPLOYEE BENEFITS PLAN
As stipulated by the regulations of the PRC, the Group participates in
various defined contribution retirement plans organized by municipal and
provincial governments for its staff. The Group is required to make
contributions to the retirement plans at rates ranging from 17.0% to 30.0% of
the salaries, bonuses and certain allowances of its staff. A member of the plan
is entitled to a pension equal to a fixed proportion of the salary prevailing at
his or her retirement date. The Group has no other material obligation for the
payment of pension benefits associated with these plans beyond the annual
contributions described above. The Group's contributions for the years ended
December 31, 2003, 2004 and 2005 were RMB 1,882, RMB 2,242 and RMB 2,269,
respectively.
The Company implemented a share appreciation rights plan for members of
its management, including the key management personnel, in order to provide
further incentives to these employees. Under this plan, share appreciation
rights were granted in units with each unit representing one H share. No shares
will be issued under the share appreciation rights plan.
Under the plan, all share appreciation rights have an exercise period of
five years. A recipient of share appreciation rights may not exercise the rights
in the first three years after the date of grant. As of each of the third,
fourth and fifth anniversary of the date of grant, the total number of share
appreciation rights exercisable may not in aggregate exceed 30%, 70% and 100%,
respectively, of the total share appreciation rights granted to such person.
During 2003, the Company granted 258.6 million share appreciation right
units to eligible employees accordingly. No share appreciation rights were
granted during the years ended December 31, 2004 and 2005.
The exercise price of share appreciation rights initially granted is the
initial public offering price of the Company's H shares. Upon exercise of the
share appreciation rights, a recipient will receive, subject to any applicable
withholding tax, a cash payment in RMB, translated from the Hong Kong dollar
amount equal to the product of the number of share appreciation rights exercised
and the difference between the exercise price and average market price of the
Company's H shares for the exercise period based on the applicable exchange rate
between RMB and Hong Kong dollar at the date of the exercise.
The Company recognizes compensation expense of the share appreciation
rights over the applicable vesting period. For the years ended December 31,
2003, 2004, 2005, compensation expense recognized was RMB 120, RMB 150 and RMB
19, respectively. As of December 31, 2004 and 2005, the carrying amounts of
liability arising from share appreciation rights were RMB 270 and RMB 289,
respectively.
32. SEGMENTAL REPORTING
The Group has five operating segments as follows:
(i) Exploration and production, which explores and develops oil fields,
produces crude oil and natural gas and sells such products to the
refining segment of the Group and external customers.
(ii) Refining, which processes and purifies crude oil, which is sourced
from the exploration and production segment of the Group and external
suppliers, and manufactures and sells petroleum products to the
chemicals and marketing and distribution segments of the Group and
external customers.
(iii) Marketing and distribution, which owns and operates oil depots and
service stations in the PRC, and distributes and sells refined
petroleum products (mainly gasoline and diesel) in the PRC through
wholesale and retail sales networks.
(iv) Chemicals, which manufactures and sells petrochemical products,
derivative petrochemical products and other chemical products mainly
to external customers.
(v) Corporate and others, which largely comprise the trading activities of
the import and export companies of the Group and research and
development undertaken by other subsidiaries.
The segments were determined primarily because the Group manages its
exploration and production; refining; marketing and distribution; chemicals; and
corporate and others businesses separately. The reportable segments are each
managed separately because they manufacture and/or distribute distinct products
with different production processes and due to their distinct operating and
gross margin characteristics. In view of the fact that the Company and its
subsidiaries operate mainly in the PRC, no geographical segment information is
presented.
The Group evaluates the performance and allocates resources to its
operating segments on an operating income basis, without considering the effects
of finance costs or investment income. The accounting policies of the Group's
segments are the same as those described in the principal accounting policies
(see Note 2). Corporate administrative costs and assets are not allocated to the
operating segments; instead, operating segments are charged for direct corporate
services. Inter-segment transfer pricing is based on cost plus an appropriate
margin, as specified by the Group's policy.
Reportable information on the Group's business segments is as follows:
Years ended December 31,
------------------------------------
2003 2004 2005
------------------------------------
RMB RMB RMB
Sales of goods
Exploration and production
External sales.................... 14,936 15,970 19,862
Inter-segment sales............... 47,287 60,053 84,423
------------------------------------
62,223 76,023 104,285
------------------------------------
Refining
External sales.................... 51,445 63,388 82,810
Inter-segment sales............... 217,755 289,699 386,456
------------------------------------
269,200 353,087 469,266
------------------------------------
Marketing and distribution
External sales.................... 238,210 342,840 459,292
Inter-segment sales............... 2,602 2,831 3,172
------------------------------------
240,812 345,671 462,464
------------------------------------
Chemicals
External sales.................... 91,964 126,013 160,783
Inter-segment sales............... 7,415 12,510 12,199
------------------------------------
99,379 138,523 172,982
------------------------------------
Corporate and others
External sales.................... 33,394 48,986 76,368
Inter-segment sales............... 30,371 32,046 44,897
------------------------------------
63,765 81,032 121,265
------------------------------------
Elimination of inter-segment sales..... (305,430) (397,139) (531,147)
------------------------------------
Total sales of goods................... 429,949 597,197 799,115
------------------------------------
Other operating revenues
Exploration and production............. 8,039 9,283 10,745
Refining............................... 4,573 5,186 5,421
Marketing and distribution............. 548 755 1,358
Chemicals.............................. 4,461 6,170 5,841
Corporate and others................... 1,431 1,192 637
------------------------------------
Total other operating revenues......... 19,052 22,586 24,002
------------------------------------
Other income
Refining............................... -- -- 9,415
------------------------------------
Total other income..................... -- -- 9,415
------------------------------------
449,001 619,783 832,532
====================================
Years ended December 31,
-----------------------------------
2003 2004 2005
-----------------------------------
RMB RMB RMB
Operating income by segment
- Exploration and production............ 19,160 25,614 46,871
- Refining.............................. 6,073 5,943 (3,505)
- Marketing and distribution............ 11,943 14,716 10,350
- Chemicals............................. 3,543 18,721 14,296
- Corporate and others.................. (1,836) (1,925) (1,198)
----------------------------------
Total operating income.................... 38,883 63,069 66,814
----------------------------------
Income/(loss) from associates
- Exploration and production............ 293 447 326
- Refining.............................. (1) 58 23
- Marketing and distribution............ 43 302 241
- Chemicals............................. (41) (164) 1
- Corporate and others.................. 102 154 266
----------------------------------
Aggregate income from associates .......... 396 797 857
----------------------------------
Finance costs
Interest expense...................... (4,365) (4,583) (5,920)
Interest income....................... 322 374 382
Foreign exchange losses............... (450) (223) (79)
Foreign exchange gains............... 30 61 996
----------------------------------
Net finance costs.......................... (4,463) (4,371) (4,621)
Gain from issuance of shares by
a subsidiary............................ 136 -- --
Investment income.......................... 89 111 178
----------------------------------
Income before income tax................... 35,041 59,606 63,228
Income tax................................. (10,645) (17,815) (19,388)
----------------------------------
Net income................................. 24,396 41,791 43,840
==================================
Assets and liabilities dedicated to a particular segment's operations are
included in that segment's total assets and liabilities. Assets which benefit
more than one segment or are considered to be corporate assets are not
allocated. "Unallocated assets" consists primarily of cash and cash
equivalents, time deposits with financial institutions, investments and deferred
tax assets. "Unallocated liabilities" consists primarily of short-term and
long-term debts, loans from Sinopec Group Company and its affiliates, income tax
payable, deferred tax liabilities and other liabilities.
Interest in and income from associates are included in the segments in
which the associates operate. Information on associates is included in Note 19.
Additions to long-lived assets by operating segment are included in Notes 16
and 17.
December 31,
----------------------------------
2003 2004 2005
----------------------------------
RMB RMB RMB
Assets
Segment assets
- Exploration and production............ 101,303 110,509 123,631
- Refining.............................. 96,839 111,878 135,731
- Marketing and distribution............ 73,942 93,722 102,935
- Chemicals............................. 101,130 105,032 115,942
- Corporate and others.................. 14,445 17,574 20,570
----------------------------------
Total segment assets....................... 387,659 438,715 498,809
----------------------------------
Interests in associates
- Exploration and production............ 1,233 1,396 1,494
- Refining.............................. 136 314 521
- Marketing and distribution............ 1,815 2,410 4,298
- Chemicals............................. 3,517 4,315 1,092
- Corporate and others.................. 1,420 1,787 1,812
----------------------------------
Aggregate interests in associates.......... 8,121 10,222 9,217
----------------------------------
Unallocated assets......................... 24,404 25,657 29,295
----------------------------------
Total assets............................... 420,184 474,594 537,321
==================================
Liabilities
Segment liabilities
- Exploration and production............ 15,733 16,241 18,882
- Refining.............................. 25,729 28,130 26,486
- Marketing and distribution............ 21,091 23,419 23,713
- Chemicals............................. 18,951 16,528 19,442
- Corporate and others.................. 10,022 15,547 35,855
----------------------------------
Total segment liabilities.................. 91,526 99,865 124,378
Unallocated liabilities.................... 131,092 150,643 159,947
----------------------------------
Total liabilities.......................... 222,618 250,508 284,325
==================================
Segment capital expenditure is the total cost incurred during the year to
acquire segment assets that are expected to be used for more than one year.
Years ended December 31,
-------------------------------
2003 2004 2005
-------------------------------
RMB RMB RMB
Capital expenditure
Exploration and production..................... 20,628 21,234 23,095
Refining....................................... 9,788 14,272 14,127
Marketing and distribution..................... 6,826 16,678 10,954
Chemicals...................................... 7,680 11,025 9,386
Corporate and others........................... 518 1,550 1,164
-------------------------------
45,440 64,759 58,726
===============================
Capital expenditure of jointly
controlled entities
Exploration and production..................... 1,200 1,323 772
Chemicals...................................... 2,993 5,178 1,830
-------------------------------
4,193 6,501 2,602
===============================
Depreciation, depletion and amortization
Exploration and production..................... 9,413 12,066 10,915
Refining....................................... 6,434 7,730 7,053
Marketing and distribution..................... 2,431 2,759 3,026
Chemicals...................................... 9,149 9,325 9,697
Corporate and others........................... 524 462 722
-------------------------------
27,951 32,342 31,413
===============================
Impairment losses on long-lived assets
recognized in consolidated
statements of income
Exploration and production..................... 310 98 60
Refining....................................... 114 14 --
Marketing and distribution..................... -- 1,769 366
Chemicals...................................... 453 2,038 1,425
-------------------------------
877 3,919 1,851
===============================
Impairment losses on revalued
long-lived assets recognized
in equity attributable to
equity shareholders of the
Company Chemicals......................... -- 709 --
===============================
33. PRINCIPAL SUBSIDIARIES
Details of the Group's principle subsidiaries are as follows:
Percentage of equity
--------------------
held by
Particulars Type of held by the
of issued legal the Company's
Name of Company capital entity Company subsidiary Principal activities
----------------------------------- ----------- ------- ------- ----------- -----------------------------------------
% %
China Petrochemical International RMB 1,704 Limited 100.00 __ Trading of crude oil and petrochemical
Company Limited company products
Sinopec Beijing Yanhua Petrochemical RMB 3,404 Limited 100.00 __ Manufacturing of chemical products
Company Limited ("Beijing company
Yanhua")(i)
Sinopec Sales Company Limited RMB 1,700 Limited 100.00 __ Marketing and distribution of refined
company petroleum products
Sinopec Shengli Oilfield Company RMB 29,000 Limited 100.00 __ Exploration and production of crude
Limited company oil and natural gas
Sinopec Fujian Petrochemical RMB 2,253 Limited 50.00 __ Manufacturing of plastics,
Company Limited (ii) company intermediate petrochemical products
and petroleum products
Sinopec Qilu Petrochemical Company RMB 1,950 Limited 82.05 __ Manufacturing of intermediate
Limited company petrochemical products and petroleum
products
Sinopec Shanghai Petrochemical RMB 7,200 Limited 55.56 __ Manufacturing of synthetic fibers,
Company Limited company resin and plastics, intermediate
petrochemical products and petroleum
products
Sinopec Shijiazhuang Refining- RMB 1,154 Limited 79.73 __ Manufacturing of intermediate
Chemical Company Limited company petrochemical products and petroleum
products
Sinopec Kantons Holdings Limited HK$ 104 Limited __ 72.40 Trading of crude oil and petroleum
company products
Sinopec Wuhan Petroleum Group RMB 147 Limited 46.25 __ Marketing and distribution of refined
Company Limited (ii) company petroleum products
Sinopec Wuhan Phoenix Company RMB 519 Limited 40.72 __ Manufacturing of petrochemical
Limited (ii) company products and petroleum products
Sinopec Yangzi Petrochemical RMB 2,330 Limited 84.98 __ Manufacturing of intermediate
Company Limited company petrochemical products and petroleum
products
Sinopec Yizheng Chemical Fiber RMB 4,000 Limited 42.00 __ Production and sale of polyester chips
Company Limited (ii) company and polyester fibers
Sinopec Zhenhai Refining and RMB 2,524 Limited 71.32 __ Manufacturing of intermediate
Chemical Company Limited company petrochemical products and petroleum
products
Sinopec Zhongyuan Petroleum Company RMB 875 Limited 70.85 __ Exploration and production of crude
Limited company oil and natural gas
Sinopec Zhongyuan Petrochemical RMB 2,400 Limited 93.51 __ Manufacturing of chemical products
Company Limited company
Sinopec Shell (Jiangsu) Petroleum RMB 830 Limited 60.00 __ Marketing and distribution of refined
Marketing Company Limited company petroleum products
BP Sinopec (Zhejiang) Petroleum RMB 800 Limited 60.00 __ Marketing and distribution of refined
Company Limited company petroleum products
Sinopec Qingdao Refining and RMB 800 Limited 85.00 __ Manufacturing of intermediate
Chemical Company Limited company petrochemical products and petroleum
products
Except for Sinopec Kantons Holdings Limited, which is incorporated in
Bermuda, all of the above principal subsidiaries are incorporated in the PRC.
(i) During the year ended December 31, 2005, the Group acquired the entire
1,012,000,000 H shares, representing approximately 29.99% of the issued
share capital of Beijing Yanhua from minority interests at HK$ 3.80 per
share. The total consideration paid by the Group was approximately RMB
4,088 which was settled in cash. The excess of the cost of purchase over
the fair value of the underlying assets and liabilities (on a
proportionate share) was recorded as goodwill, amounting to RMB 1,157,
which is included in long-term prepayments and other assets.
(ii) The Group consolidated the results of the entity because the Group
controlled the board of this entity and had the power to govern its
financial and operating policies.
34. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial assets of the Group include cash and cash equivalents, time
deposits with financial institutions, investments, trade accounts receivable,
bills receivable, amounts due from Sinopec Group Company and its affiliates,
advances to third parties, amounts due from associates, and other receivables.
Financial liabilities of the Group include bank and other loans, loans from
Sinopec Group Company and its affiliates, trade accounts payable, bills payable,
amounts due to Sinopec Group Company and its affiliates, receipts in advance,
and advances from third parties. The Group has no derivative instruments that
are designated and qualified as hedging instruments as of December 31, 2004 and
2005.
The disclosures of the fair value estimates, methods and assumptions, set
forth below for the Group's financial instruments, are made to comply with the
requirements of IAS 32 and IAS 39 and should be read in conjunction with the
Group's consolidated financial statements and related notes. The estimated fair
value amounts have been determined by the Group using market information and
valuation methodologies considered appropriate. However, considerable judgment
is required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Group could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The Group has not developed an internal valuation model necessary to make
the estimate of the fair value of loans from Sinopec Group Company and its
affiliates as it is not considered practicable to estimate their fair value
because the cost of obtaining discount and borrowing rates for comparable
borrowings would be excessive based on the Reorganization of the Group, its
existing capital structure, and the terms of the borrowings.
The following table presents the carrying amount and fair value of the
Group's long-term indebtedness other than loans from Sinopec Group Company and
its affiliates as of December 31, 2004 and 2005:
December 31,
-----------------------
2004 2005
-----------------------
RMB RMB
Carrying amount................................ 73,120 82,157
Fair value..................................... 73,263 82,161
The fair value of long-term indebtedness is estimated by discounting future
cash flows thereon using current market interest rates offered to the Group for
debts with substantially the same characteristics and maturities.
Investments are unquoted equity interests, and are individually and in the
aggregate not material to the Group's financial condition or results of
operations for all periods presented. There are no quoted market prices for such
interests in the PRC and, accordingly, a reasonable estimate of fair value could
not be made without incurring excessive costs.
The fair values of all other financial instruments approximate their
carrying amounts due to the nature or short-term maturity of these instruments.
35. MAJOR DOMESTIC SUPPLIERS
The Group's major domestic suppliers of crude oil and refined petroleum
products are China National Petroleum Corporation and its subsidiaries ("CNPC
Group") and China National Offshore Oil Corporation and its subsidiaries ("CNOOC
Group"). Failure in negotiating another contract with another key supplier at
similar terms and costs could have a severe and significant impact on the
Group's results of operations.
The following table presents the aggregate amount of crude oil purchased by
refining segment and refined petroleum products purchased by marketing and
distribution segment from CNPC Group and the amount of crude oil purchased by
refining segment from CNOOC Group during the years ended December 31, 2003, 2004
and 2005:
Years ended December 31,
-------------------------------------
2003 2004 2005
RMB RMB RMB
CNPC Group........................... 31,960 30,214 44,814
CNOOC Group.......................... 9,263 11,438 14,143
36. ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group's financial condition and results of operations are sensitive to
accounting methods, assumptions and estimates that underlie the preparation of
the financial statements. The Group bases the assumptions and estimates on
historical experience and on various other assumptions that the Group believes
to be reasonable and which form the basis for making judgements about matters
that are not readily apparent from other sources. On an on-going basis,
management evaluates its estimates. Actual results may differ from those
estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgements and other
uncertainties affecting application of those policies and the sensitivity of
reported results to changes in conditions and assumptions are factors to be
considered when reviewing the financial statements. The principal accounting
policies are set forth in Note 2. The Group believes the following critical
accounting policies involve the most significant judgements and estimates used
in the preparation of the financial statements.
Oil and gas properties and reserves
The accounting for the exploration and production's oil and gas activities
is subject to accounting rules that are unique to the oil and gas business.
There are two methods to account for oil and gas business activities, the
successful efforts method and the full cost method. The Group has elected to use
the successful efforts method. The successful efforts method reflects the
volatility that is inherent in exploring for mineral resources in that costs of
unsuccessful exploratory efforts are charged to expense as they are incurred.
These costs primarily include dry hole costs, seismic costs and other
exploratory costs. Under the full cost method, these costs are capitalized and
written-off or depreciated over time.
Engineering estimates of the Group's oil and gas reserves are inherently
imprecise and represent only approximate amounts because of the subjective
judgements involved in developing such information. There are authoritative
guidelines regarding the engineering criteria that have to be met before
estimated oil and gas reserves can be designated as "proved". Proved and proved
developed reserves estimates are updated at least annually and take into account
recent production and technical information about each field. In addition, as
prices and cost levels change from year to year, the estimate of proved and
proved developed reserves also changes. This change is considered a change in
estimate for accounting purposes and is reflected on a prospective basis in
related depreciation rates.
Despite the inherent imprecision in these engineering estimates, these
estimates are used in determining depreciation expense and impairment expense.
Depreciation rates are determined based on estimated proved developed reserve
quantities (the denominator) and capitalized costs of producing properties (the
numerator). Producing properties' capitalized costs are amortized based on the
units of oil or gas produced.
Impairment for long lived assets
If circumstances indicate that the net book value of a long-lived asset may
not be recoverable, the asset may be considered "impaired", and an impairment
loss may be recognized in accordance with IAS 36 "Impairment of Assets". The
carrying amounts of long-lived assets are reviewed periodically in order to
assess whether the recoverable amounts have declined below the carrying amounts.
These assets are tested for impairment whenever events or changes in
circumstances indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount is reduced to
recoverable amount. The recoverable amount is the greater of the net selling
price and the value in use. It is difficult to precisely estimate selling price
because quoted market prices for the Group's assets are not readily available.
In determining the value in use, expected cash flows generated by the asset are
discounted to their present value, which requires significant judgement relating
to level of sale volume, selling price and amount of operating costs. The Group
uses all readily available information in determining an amount that is a
reasonable approximation of recoverable amount, including estimates based on
reasonable and supportable assumptions and projections of sale volume, selling
price and amount of operating costs.
Depreciation
Property, plant and equipment, other than oil and gas properties, are
depreciated on a straight-line basis over the estimated useful lives of the
assets, after taking into account the estimated residual value. The Group
reviews the estimated useful lives of the assets regularly in order to determine
the amount of depreciation expense to be recorded during any reporting period.
The useful lives are based on the Group's historical experience with similar
assets and taking into account anticipated technological changes. The
depreciation expense for future periods is adjusted if there are significant
changes from previous estimates.
Impairment for bad and doubtful debts
The Group estimates impairment losses for bad and doubtful debts resulting
from the inability of the customers to make the required payments. The Group
bases the estimates on the aging of the accounts receivable balance, customer
credit-worthiness, and historical write-off experience. If the financial
condition of the customers were to deteriorate, actual write-offs would be
higher than estimated.
37. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED
BUT NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDED DECEMBER 31,
2005
Up to the date of issue of these financial statements, the IASB has issued
the following amendments, new standards and interpretations which are not yet
effective for the annual accounting period ended December 31, 2005 and which
have not been adopted in these financial statements:
Effective for accounting period
beginning on or after
--------------------------------
IFRS 6, Exploration for and evaluation of mineral resources January 1, 2006
IFRS 7, Financial instruments: disclosures January 1, 2007
IFRIC 4, Determining whether an arrangement contains a lease January 1, 2006
IFRIC 5, Rights to interests arising from decommissioning, restoration
environmental rehabilitation funds January 1, 2006
IFRIC 6, Liabilities arising from participating in a specific market - Waste
electrical and electronic equipment December 1, 2005
IFRIC 7, Applying the restatement approach under IAS 29, Financial reporting
in hyperinflationary economies March 1, 2006
IFRIC 8, Scope of IFRS 2 May 1, 2006
IFRIC 9, Reassessment of Embedded Derivatives June 1, 2006
Amendment to IAS 1, Presentation of financial statements: capital disclosures January 1, 2007
Amendment to IAS 19, Employee benefits - Actuarial Gains and Losses, Group
Plans and Disclosures January 1, 2006
Amendment to IAS 21, Net investment in a foreign operation January 1, 2006
Amendments to IAS 39, Financial instruments: Recognition and measurement:
- Cash flow hedge accounting of forecast intragroup transactions January 1, 2006
- The fair value option January 1, 2006
- Financial guarantee contracts January 1, 2006
Amendments to IFRS 1, First-time Adoption of International January 1, 2006
Financial Reporting Standards
The Group is in the process of making an assessment of what the impact of
these amendments, new standards and new interpretations is expected to be in the
period of initial application. Up to the date of issuance of these financial
statements, the Group believes that the adoption of IFRIC 4, IFRIC 5, IFRIC6,
IFRIC 7, IFRIC 8, IFRIC 9 and the amendments to IAS 19, IAS 21 and IFRS 1 are
not applicable to any of the Group's operations and that the adoption of the
remainder of the above amendments, new standards and new interpretations is
unlikely to have a significant impact on the Group's results of operations and
financial position.
38. CHANGES IN PRINCIPAL ACCOUNTING POLICIES
The IASB has issued a number of new and revised IFRS that are effective
for accounting periods beginning on or after January 1, 2005.
The accounting policies of the Group after the adoption of these new and
revised IFRS have been summarized in Note 2. The following sets out information
on the significant changes in accounting policies for the current and prior
accounting periods reflected in these financial statements.
(a) Minority interests (IAS 1 "Presentation of financial statements" and IAS
27 "Consolidated and separate financial statements")
In prior years, minority interests at the balance sheet date were
presented in the consolidated balance sheet separately from liabilities and as
deduction from net assets. Minority interests in the results of the Group for
the year were also separately presented in the consolidated statements of income
as a deduction before arriving at net income.
With effect from January 1, 2005, in order to comply with IAS 1 and IAS 27,
the Group has changed its accounting policy relating to presentation of minority
interests. Under the new accounting policy, minority interests are presented in
the consolidated balance sheet within equity, separately from the equity
attributable to equity shareholders of the Company, and minority interests in
the results of the Group for the year are presented in the consolidated
statements of income as an allocation of the total income or loss for the year
between the minority interests and equity shareholders of the Company. The
presentations of minority interests in the consolidated balance sheet,
consolidated statements of income and consolidated statement of equity for
comparative periods have been restated accordingly.
(b) Related party disclosures (IAS 24 "Related party disclosures")
The definition of related parties under IAS 24 as disclosed in Note 30 has
been expanded to clarify that related parties include entities that are under
the significant influence of a related party that is an individual (i.e. key
management personnel, significant shareholders and/or their close family
members) and post-employment benefit plans which are for the benefit of
employees of the Group or of any entity that is a related party of the Group.
With effect from January 1, 2005, in order to comply with IAS 24, the
Group has made further disclosure of key management personnel compensation and
contributions to post-retirement benefit plans.
(c) Property, Plant and Equipment (IAS 16 "Property, Plant and Equipment")
With effect from January 1, 2005, IAS 16 requires an entity to determine
cost, useful life and depreciation charge separately for each significant part
of an item of property, plant and equipment, and derecognize the carrying amount
of a part of an item of property, plant and equipment if that part has been
replaced. IAS 16 also requires an entity to include the costs of dismantlement,
removal or restoration, the obligation for which an entity incurs as a
consequence of installing the item in the cost of that item of property, plant
and equipment. The change in accounting policy relating to these new
requirements of IAS 16 did not have a material impact on the Group's financial
statements.
39. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP
The Group's accounting policies conform with IFRS which differ in certain
significant respects from accounting principles generally accepted in the United
States of America ("US GAAP"). Information relating to the nature and effect of
such differences are set out below.
(a) Foreign exchange gains and losses
In accordance with IFRS, foreign exchange differences on funds borrowed for
construction are capitalized as property, plant and equipment to the extent that
they are regarded as an adjustment to interest costs during the construction
period. Under US GAAP, all foreign exchange gains and losses on foreign currency
debt are included in current earnings. For the years presented herein, the US
GAAP adjustments represent the amortization effect of such originating
adjustments described above. Accordingly, the carrying amount of property, plant
and equipment under IFRS was higher than the amount under US GAAP by RMB 295 and
RMB 241 as of December 31, 2004 and 2005.
(b) Capitalization of property, plant and equipment
In the years prior to those presented herein, certain adjustments arose
between IFRS and US GAAP with regard to the capitalization of interest and
pre-production results under IFRS that were expensed as incurred under US GAAP.
For the years presented herein, there were no further additions related to the
capitalization of interest and pre-production results under IFRS and the US GAAP
adjustments represent the amortization effect of such originating adjustments
described above. The amounts were fully amortized as of December 31, 2004.
Accordingly, there was no difference in the carrying amount of property, plant
and equipment under IFRS and US GAAP as of December 31, 2004 and 2005.
(c) Revaluation of property, plant and equipment
As required by the relevant PRC regulations with respect to the
Reorganization, the property, plant and equipment of the Group were revalued at
September 30, 1999. In addition, the property, plant and equipment of Sinopec
National Star, Sinopec Maoming, Refining Assets, and Petrochemical and Catalyst
Assets were revalued at December 31, 2000, June 30, 2003, October 31, 2003 and
June 30, 2004, respectively, in connection with the acquisitions of Sinopec
National Star, Sinopec Maoming, Refining Assets, and Petrochemical and Catalyst
Assets. Under IFRS, such revaluations result in an increase in equity with
respect to the increase in carrying amount of certain property, plant and
equipment above their historical cost bases and a charge to income with respect
to the reduction in carrying amount of certain property, plant and equipment
below their historical cost bases.
Under US GAAP, property, plant and equipment are stated at their historical
cost less accumulated depreciation. However, as a result of the tax
deductibility of the net revaluation surplus, a deferred tax asset related to
the reversal of the revaluation surplus is created under US GAAP with a
corresponding increase in equity.
In addition, under IFRS, on disposal of a revalued asset, the related
revaluation surplus is transferred from the revaluation reserve to retained
earnings. Under US GAAP, the gain and loss on disposal of an asset is determined
with reference to the asset's historical carrying amount and included in current
earnings.
Accordingly, the carrying amount of property, plant and equipment under
IFRS was higher than the amount under US GAAP by RMB 7,692 and RMB 1,838 as of
December 31, 2004 and 2005, respectively.
(d) Exchange of assets
During 2002, the Company and Sinopec Group Company entered into an asset
swap transaction. Under IFRS, the cost of property, plant and equipment acquired
in an exchange for a dissimilar item of property, plant and equipment is
measured at fair value. Under US GAAP, as the exchange of assets was between
entities under common control, the assets received from Sinopec Group Company
are measured at historical cost. The difference between the historical cost of
the net assets transferred and the net assets received is accounted for as an
equity transaction. For the years presented herein, the US GAAP adjustments
represent the amortization effect of such originating adjustments described
above. Accordingly, the carrying amount of property, plant and equipment under
IFRS was higher than the amount under US GAAP by RMB 532 and RMB 509 as of
December 31, 2004 and 2005.
(e) Reversal of impairment of long-lived assets
Under IFRS, impairment charges are recognized when a long-lived asset's
carrying amount exceeds the higher of an asset's fair value less costs to sell
and value in use, which incorporates discounting the asset's estimated future
cash flows.
Under US GAAP, determination of the recoverability of a long-lived asset
held for use is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss for a
long-lived asset is based on the difference between the assets carrying value
and the fair value of the asset.
In addition, under IFRS, a subsequent increase in the recoverable amount of
an asset is reversed to the consolidated statements of income to the extent that
an impairment loss on the same asset was previously recognized as an expense
when the circumstances and events that led to the write-down or write-off cease
to exist. The reversal is reduced by the amount that would have been recognized
as depreciation had the write-off not occurred. Under US GAAP, an impairment
loss establishes a new cost basis for the impaired asset and the new cost basis
should not be adjusted subsequently other than for further impairment losses.
For the years presented herein, the US GAAP adjustment represents the
effect of reversing the recovery of previous impairment charges recorded under
IFRS. Accordingly, the carrying amount of property, plant and equipment under
IFRS was higher than the amount under US GAAP by RMB 532 and RMB 456 as of
December 31, 2004 and 2005.
(f) Capitalized interest on investment in associates
Under IFRS, an investment accounted for by the equity method is not
considered a qualifying asset for which interest is capitalized. Under US GAAP,
an investment accounted for by the equity method while the investee has
activities in progress necessary to commence its planned principal operations,
provided that the investee's activities include the use of funds to acquire
qualifying assets for its operations, is a qualifying asset for which interest
is initially capitalized and subsequently amortized when the operation of the
qualifying assets begin. Accordingly, the carrying amount of the investment in
associates under IFRS was lower than the amount under US GAAP by RMB 526 and RMB
486 as of December 31, 2004 and 2005.
(g) Goodwill
Under IFRS, with reference to IFRS 3, "Business Combination", goodwill
arising from a business combination for which the purchase agreement date is on
or after March 31, 2004 is not amortized, or goodwill arising from a business
combination for which the purchase agreement date was before March 31, 2004 is
no longer amortized from the first annual reporting period beginning on or after
March 31, 2004. Instead, goodwill is tested for impairment annually.
Under US GAAP, with reference to Statement of Financial Accounting
Standards No.142, "Goodwill and Other Intangible Assets" ("SFAS No.142"),
goodwill is no longer amortized beginning January 1, 2002. Instead, goodwill is
reviewed for impairment at least annually.
As a result, there is no difference in respect of goodwill amortization
effective January 1, 2005. Accordingly, the carrying amount of the goodwill
under IFRS was lower than the amount under US GAAP by RMB 43 and RMB 43 as of
December 31, 2004 and 2005 due to the continued amortization of goodwill under
IFRS until the end of 2004.
(h) Presentation of minority interests
Under IFRS, minority interests at the balance sheet date are presented in
the consolidated balance sheet within equity, separately from the equity
attributable to the equity shareholders of the Company, and minority interests
in the results of the Group for the year are presented in the consolidated
statement of income as an allocation of the total net income for the year
between the minority interests and the equity shareholders of the Company. Under
US GAAP, minority interests at the balance sheet date are presented in the
consolidated balance sheet either as liabilities or separately from liabilities
and equity. Minority interests in the results of the Group for the year are also
separately presented in the consolidated statement of income as a component of
net income.
(i) Companies included in consolidation
Under IFRS, the Group consolidates less than majority owned entities in
which the Group has the power, directly or indirectly, to govern the financial
and operating policies of an entity so as to obtain benefits from its
activities, and proportionately consolidates jointly controlled entities in
which the Group has joint control with other venturers. However, US GAAP
requires that any entity of which the Group does not have a controlling
financial interest not be consolidated nor proportionately consolidated, but
rather be accounted for under the equity method. Accordingly, certain of the
Group's subsidiaries, of which the Group owns between 40.72% to 50% of the
outstanding voting stock, and the Group's jointly controlled entities are not
consolidated nor proportionately consolidated under US GAAP and instead
accounted for under the equity method. This exclusion does not affect the profit
attributable to equity shareholders of the Company or the total equity
attributable to the equity shareholders of the Company reconciliations between
IFRS and US GAAP.
Presented below is summarized financial information prepared in accordance
with US GAAP of such subsidiaries and jointly controlled entities.
Years ended December 31,
-------------------------------
2003 2004 2005
RMB RMB RMB
Revenues.................................... 21,735 28,004 53,768
Profit before taxation...................... 1,329 1,373 286
Net profit / (loss) ........................ 1,090 969 (204)
At December 31,
-------------------------------
2004 2005
---- ----
RMB RMB
Current assets............................. 7,084 12,101
Total assets............................... 41,213 64,560
Current liabilities........................ 7,222 8,901
Total liabilities.......................... 16,452 31,727
Total equity............................... 24,761 32,833
Reconciliation to US GAAP
The effect on net income attributable to equity shareholders of the Company
of significant differences between IFRS and US GAAP is as follows:
Reference Years ended December 31,
in note ------------------------
above 2003 2004 2005 2005
--------- ---- ---- ---- ----
RMB RMB RMB US$
Net income attributable to equity shareholders of the
Company under IFRS.................................... 22,424 36,019 20,920 5,071
US GAAP adjustments:
Foreign exchange gains and losses..................... (a) 94 60 54 7
Capitalization of property, plant and equipment....... (b) 22 22 - -
Depreciation on revalued property, plant and equipment. (c) 4,713 4,301 4,016 498
Disposal of property, plant and equipment............. (c) 1,316 2,099 1,838 228
Exchange of assets.................................... (d) 23 23 23 3
Depreciation effect of reversal of impairment of
long-lived assets................................. (e) 47 29 76 9
Capitalized interest on investments in associates, net
of amortization effect............................ (f) 141 205 (40) (5)
Goodwill amortization for the year.................... (g) - 13 - -
Deferred tax effect of US GAAP adjustments............ (1,889) (2,277) (1,786) (221)
Minority interests.................................... (h) (483) (519) (489) (61)
-------------------------------------------
Net income attributable to equity shareholders of the
Company under US GAAP................................. 26,408 39,975 44,612 5,529
===========================================
Basic and diluted earnings per share under US GAAP......... 0.30 0.46 0.51 0.06
===========================================
Basic and diluted earnings per ADS under US GAAP*.......... 30.46 46.11 51.45 6.38
===========================================
* Basic and diluted earnings per ADS is calculated on the basis that one ADS
is equivalent to 100 shares.
The effect on the total equity attributable to equity shareholders of the
Company of significant differences between IFRS and US GAAP is as follows:
Reference At December 31,
in note ---------------
above 2004 2005 2005
------- ------- -------- ---------
RMB RMB US$
Total equity attributable to equity shareholders of the
Company under IFRS...................................... 193,040 223,556 27,701
US GAAP adjustments:
Foreign exchange gains and losses....................... (a) (295) (241) (30)
Revaluation of property, plant and equipment............ (c) (7,692) (1,838) (228)
Exchange of assets...................................... (d) (532) (509) (63)
Reversal of impairment of long-lived assets............. (e) (532) (456) (57)
Capitalized interest on investments in associates....... (f) 526 486 60
Goodwill................................................ (g) 43 43 5
Effect of US GAAP adjustments on deferred tax assets.... 2,720 921 115
Effect of US GAAP adjustments on deferred tax (134)
liabilities......................................... (147) (17)
Minority interests...................................... (h) 719 230 28
------- ------- --------
Total equity attributable to equity shareholders of the
Company under US GAAP................................... 187,850 222,058 27,514
======= ======= ========
40. SUBSEQUENT EVENT
On November 12, 2005, the Group announced its proposal to acquire all of
the equity interests which the Group does not own of Sinopec Zhenhai Refining &
Chemical Company Limited ("Zhenhai"), a non-wholly owned subsidiary in which the
Group holds approximately 71.3% of the equity interests. According to the
proposal, the Group will acquire the entire 723,754,468 H shares, representing
approximately 28.7% of the issued share capital of Zhenhai at HK$ 10.60 per
share. The total consideration required to be paid by the Group is approximately
HK$ 7,762 million which will be settled in cash. Pursuant to the resolution
passed in the Special General Meeting of Zhenhai on January 12, 2006, the
shareholders of H shares in Zhenhai agreed to dispose of and sell their shares
in Zhenhai to the Group at the above mentioned price.
On February 15, 2006, the Group announced its proposals to acquire all of
the equity interests which the Group does not own of Sinopec Qilu Petrochemical
Company Limited, Sinopec Yangzi Petrochemical Company Limited, Sinopec Zhongyuan
Petroleum Company Limited and Sinopec Shengli Oilfield Dynamic Company Limited,
being non-wholly owned subsidiaries and an associate in which the Group holds
approximately 82%, 85%, 71% and 26% of the equity interests, respectively.
According to the proposals, the Group will acquire the entire shares not held by
the Group in Sinopec Qilu Petrochemical Company Limited, Sinopec Yangzi
Petrochemical Company Limited, Sinopec Zhongyuan Petroleum Company Limited and
Sinopec Shengli Oilfield Dynamic Company Limited. The total consideration
required to be paid by the Group is approximately RMB 14,247 which will be
settled in cash. On March 6, 2006, these proposals were approved by the relevant
PRC governmental and regulatory body.
41. PARENT AND ULTIMATE HOLDING COMPANY
The directors consider the parent and ultimate holding company of the Group
as at December 31, 2005 is Sinopec Group Company, a state-owned enterprise
established in the PRC. This entity does not produce financial statements
available for public use.
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(All currency amounts in millions Renminbi)
In accordance with the United States Statement of Financial Accounting
Standards No. 69, "Disclosures about Oil and Gas Producing Activities" ("SFAS
No. 69"), this section provides supplemental information on oil and gas
exploration and producing activities of the Group as of December 31, 2003, 2004
and 2005, and for each of the years in the three-year period ended December 31,
2005 in the following six separate tables. Tables I through III provide
historical cost information under US GAAP pertaining to capitalized costs
related to oil and gas producing activities; costs incurred in exploration and
development; and results of operations related to oil and gas producing
activities. Tables IV through VI present information on the Group's estimated
net proved reserve quantities; standardized measure of discounted future net
cash flows; and changes in the standardized measure of discounted future net
cash flows.
Table I: Capitalized costs related to oil and gas producing activities
Years ended December 31,
---------------------------------
2003 2004 2005
--------- -------- ---------
RMB RMB RMB
Property cost............................... -- -- --
Wells and related equipment
and facilities............................ 143,492 158,422 176,785
Supporting equipment and facilities......... 13,140 12,324 12,997
Uncompleted wells, equipment
and facilities............................ 5,535 9,262 10,884
--------- -------- ---------
Total capitalized costs..................... 162,167 180,008 200,666
Accumulated depreciation, depletion,
amortization and impairment
allowances............................... (70,726) (79,541) (87,140)
--------- -------- ---------
Net capitalized costs....................... 91,441 100,467 113,526
========= ======== =========
Table II: Cost incurred in exploration and development
Years ended December 31,
----------------------------------
2003 2004 2005
-------- -------- ---------
RMB RMB RMB
Exploration............................... 8,109 8,272 9,086
Development............................... 19,852 20,681 21,192
Total cost incurred....................... 27,961 28,953 30,278
Table III: Results of operations for oil and gas producing activities
Years ended December 31,
---------------------------------
2003 2004 2005
--------- --------- ---------
RMB RMB RMB
Revenues
Sales................................ 11,850 11,833 14,121
Transfers............................ 47,287 60,053 84,423
--------- --------- ---------
59,137 71,886 98,544
Production costs excluding taxes.......... (16,187) (17,182) (20,982)
Exploration expenses...................... (6,133) (6,396) (6,411)
Depreciation, depletion, amortization
and impairment provisions............. (8,684) (11,457) (10,332)
Taxes other than income tax............... (970) (1,144) (1,654)
--------- --------- ---------
Income before income tax.................. 27,163 35,707 59,165
Income tax expense........................ (8,964) (11,783) (19,525)
--------- --------- ---------
Results of operations from
producing activities.................... 18,199 23,924 39,640
========= ========= =========
The results of operations for producing activities for the years ended
December 31, 2003, 2004 and 2005 are shown above. Revenues include sales to
unaffiliated parties and transfers (essentially at third-party sales prices) to
other segments of the Group. All revenues reported in this table do not include
royalties to others as there were none. In accordance with SFAS No. 69, income
taxes are based on statutory tax rates, reflecting allowable deductions and tax
credits. General corporate overhead and interest income and expense are excluded
from the results of operations.
Table IV: Reserve quantities information
The Group's estimated net proved underground oil and gas reserves and
changes thereto for the years ended December 31, 2003, 2004 and 2005 are shown
in the following table.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions, i.e., prices
and costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions. Due to the inherent uncertainties and
the limited nature of reservoir data, estimates of underground reserves are
subject to change as additional information becomes available.
Proved reserves do not include additional quantities recoverable beyond the
term of the relevant production licenses, or that may result from extensions of
currently proved areas, or from application of improved recovery processes not
yet tested and determined to be economical. The Group's estimated proved
reserves do not include any quantities that are recoverable through application
of tertiary recovery techniques.
Proved developed reserves are the quantities expected to be recovered
through existing wells with existing equipment and operating methods.
"Net" reserves exclude royalties and interests owned by others and reflect
contractual arrangements in effect at the time of the estimate.
Years ended December 31,
----------------------------
2003 2004 2005
------- -------- -------
Proved developed and undeveloped
reserves (oil) (million barrels)
Beginning of year............................... 3,320 3,257 3,267
Revisions of previous estimates................. (81) 23 26
Improved recovery............................... 143 127 142
Extensions and discoveries...................... 146 134 138
Production...................................... (271) (274) (279)
------- -------- -------
End of year..................................... 3,257 3,267 3,294
------- -------- -------
Proved developed reserves
Beginning of year............................... 2,732 2,786 2,808
======= ======== =======
End of year..................................... 2,786 2,808 2,870
======= ======== =======
Proved developed and undeveloped
reserves (gas) (billion cubic feet)
Beginning of year............................... 3,329 2,888 3,033
Revisions of previous estimates................. (649) (95) (42)
Extensions and discoveries...................... 396 447 183
Production...................................... (188) (207) (222)
------- -------- -------
End of year..................................... 2,888 3,033 2,952
======= ======== =======
Proved developed reserves
Beginning of year............................... 1,056 1,249 1,398
------- -------- -------
End of year..................................... 1,249 1,398 1,557
======= ======== =======
Table V: Standardized measure of discounted future net cash flows
The standardized measure of discounted future net cash flows, related to
the above proved oil and gas reserves, is calculated in accordance with the
requirements of SFAS No. 69. Estimated future cash inflows from production are
computed by applying year-end prices for oil and gas to year-end quantities of
estimated net proved reserves. Future price changes are limited to those
provided by contractual arrangements in existence at the end of each reporting
year. Future development and production costs are those estimated future
expenditures necessary to develop and produce year-end estimated proved reserves
based on year-end cost indices, assuming continuation of year-end economic
conditions. Estimated future income taxes are calculated by applying appropriate
year-end statutory tax rates to estimated future pre-tax net cash flows, less
the tax basis of related assets. Discounted future net cash flows are calculated
using 10% midperiod discount factors. This discounting requires a year-by-year
estimate of when the future expenditure will be incurred and when the reserves
will be produced.
The information provided does not represent management's estimate of the
Group's expected future cash flows or value of proved oil and gas reserves.
Estimates of proved reserve quantities are imprecise and change over time as new
information becomes available. Moreover, probable and possible reserves, which
may become proved in the future, are excluded from the calculations. The
arbitrary valuation prescribed under SFAS No. 69 requires assumptions as to the
timing and amount of future development and production costs. The calculations
are made for the years ended December 31, 2002, 2003 and 2004 and should not be
relied upon as an indication of the Group's future cash flows or value of its
oil and gas reserves.
Years ended December 31,
---------------------------------
2003 2004 2005
---------- ---------- ----------
RMB RMB RMB
Future cash flows........................... 799,658 1,003,511 1,401,283
Future production costs..................... (311,568) (350,012) (440,743)
Future development costs.................... (23,838) (25,577) (26,994)
Future income tax expenses.................. (130,224) (174,060) (270,607)
---------- ---------- ----------
Undiscounted future net cash flows.......... 334,028 453,862 662,939
10% annual discount for estimated
timing of cash flows..................... (146,726) (204,183) (304,893)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows.................... 187,302 249,679 358,046
========== ========== ==========
Table VI: Changes in the standardized measure of discounted future net
cash flows
Years ended December 31,
---------------------------------
2003 2004 2005
---------- ---------- ----------
RMB RMB RMB
Sales and transfers of oil and gas
produced, net of production costs......... (41,802) (46,145) (61,346)
Net changes in prices and production costs... 11,923 69,305 130,221
Net change due to extensions, discoveries
and improved recoveries................. 27,721 36,209 56,131
Revisions of previous quantity estimates... (5,951) 2,204 3,964
Previously estimated development
costs incurred during the year......... 6,865 7,148 8,134
Accretion of discount...................... 15,242 16,176 21,352
Net change in income taxes................. (2,992) (22,733) (50,397)
Others..................................... (543) 213 308
---------- ---------- ---------
Net change for the year.................... 10,463 62,377 108,367
========== ========== =========