UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
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, 2006
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
------------------------------
[CHINESE CHARACTERS 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)
------------------------
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.
Tradable shares with selling restriction,
par value RMB 1.00 per share.................................. 66,337,951,000
H Shares, par value RMB 1.00 per share.......................... 16,780,488,000
A Shares, par value RMB 1.00 per share.......................... 3,584,000,000
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 __ No X
Note - Checking the box above will not relieve any registrant required
to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) 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 __ No X
Table of Contents
Page
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PART I
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..........................................12
A. HISTORY AND DEVELOPMENT OF THE COMPANY..........................12
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.........................................................30
B. CONSOLIDATED RESULTS OF OPERATIONS..............................33
C. DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS....................42
D. LIQUIDITY AND CAPITAL RESOURCES.................................52
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................56
A. DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT....................56
B. COMPENSATION....................................................64
C. BOARD PRACTICE..................................................65
D. EMPLOYEES.......................................................65
E. SHARE OWNERSHIP.................................................66
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...................66
A. MAJOR SHAREHOLDERS..............................................66
B. RELATED PARTY TRANSACTIONS......................................67
C. INTERESTS OF EXPERTS AND COUNSEL................................68
ITEM 8. FINANCIAL INFORMATION...............................................68
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.........68
B. SIGNIFICANT CHANGES.............................................68
ITEM 9. THE OFFER AND LISTING...............................................68
A. OFFER AND LISTING DETAILS.......................................68
ITEM 10. ADDITIONAL INFORMATION..............................................70
A. SHARE CAPITAL...................................................70
B. MEMORANDUM AND ARTICLES OF ASSOCIATION..........................70
i
C. MATERIAL CONTRACTS..............................................77
D. EXCHANGE CONTROLS...............................................77
E. TAXATION........................................................77
F. DIVIDENDS AND PAYING AGENTS.....................................81
G. STATEMENT BY EXPERTS............................................81
H. DOCUMENTS ON DISPLAY..............................................
I. SUBSIDIARY INFORMATION..........................................81
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK..........81
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............................................................89
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT....................................89
ITEM 16B. CODE OF ETHICS......................................................89
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................89
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDITS COMMITTEES.........89
ITEM 16E. PURCHASERS OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS..........................................................89
PART III
ITEM 17. FINANCIAL STATEMENTS................................................89
ITEM 18. FINANCIAL STATEMENTS................................................89
ITEM 19. EXHIBITS............................................................90
ii
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
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 "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 crude oil distillation units, calculated
by estimating the number of days in a year that such crude oil
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.
1
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 7.8041 to US$ 1.00, the noon buying rate as certified for customs
purposes by the Federal Reserve Bank of New York on December 29, 2006. 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)
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
2006 7.8041 7.9723 8.0702 7.9723
October 2006 7.8785 - 7.9168 7.8728
November 2006 7.8340 - 7.8750 7.8303
December 2006 7.8041 - 7.8350 7.8041
January 2007 7.7714 - 7.8127 7.7705
February 2007 7.7410 - 7.7632 7.7410
March 2007 7.7232 - 7.7454 7.7232
April 2007 (up to April 6, 2007) 7.7248 - 7.7345 7.7248
----------
(1) Determined by averaging the rates on the last business day of each month
during the relevant period.
2
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.
3
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, 2004, 2005 and 2006, and the selected balance sheet data as
of December 31, 2005 and 2006, presented in International Financial Reporting
Standards (IFRS) section, 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, 2002 and 2003 and the selected
balance sheet data as of December 31, 2002, 2003 and 2004, presented in IFRS
section, 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 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, 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, and the equity interest in Sinopec Hainan Refining and Chemical
Company Limited (Sinopec Hainan) and certain oil and gas production companies
(Oil Production Plants) in 2006. 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 condition and the results of operation 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 37 to the consolidated financial statements.
4
Years Ended December 31,
----------------------------------------------------------------
2002 2003 2004 2005 2006
------------ ------------ ----------- ------------- ------------
RMB RMB RMB RMB RMB
(in millions, except per share and per ADS data)
Income Statement Data(1):
IFRS
Consolidated results
Operating revenues........................ 350,213 449,168 619,915 823,272 1,071,402
Other income.............................. - - - 9,415 5,000
Purchased crude oil, products and
operating supplies and expenses......... (238,603) (312,616) (442,503) (651,201) (861,437)
Selling, general and administrative
expenses................................ (22,455) (27,319) (32,969) (33,880) (37,758)
Depreciation, depletion and amortization.. (26,618) (28,113) (32,493) (31,618) (34,235)
Exploration expenses, including dry holes. (4,420) (6,174) (6,396) (6,411) (7,983)
Personnel expenses........................ (15,080) (17,040) (18,719) (18,649) (19,857)
Employee reduction expenses............... (244) (1,040) (919) (369) (236)
Taxes other than income tax............... (12,028) (13,599) (16,347) (17,185) (28,639)
Other operating expenses, net............. (1,191) (3,981) (6,678) (5,128) (2,437)
------------ ------------ ----------- ------------- ------------
Operating income.......................... 29,574 39,286 62,891 68,246 83,820
Interest expense, net of interest income
and net foreign exchange gains (losses). (4,947) (4,462) (4,367) (4,625) (6,100)
Gains from issuance of shares by a
subsidiary.............................. - 136 - - -
Other income ............................. 569 506 918 1,035 1,203
------------ ------------ ----------- ------------- ------------
Income before income tax.................. 25,196 35,466 59,442 64,656 78,923
Income tax................................ (7,583) (10,789) (18,091) (19,880) (23,515)
------------ ------------ ----------- ------------- ------------
Net income................................ 17,613 24,677 41,351 44,776 55,408
============ ============ =========== ============= ============
Attributable to:
Equity shareholders of the Company...... 16,397 22,558 35,335 41,455 53,912
Minority interests...................... 1,216 2,119 6,016 3,321 1,496
------------ ------------ ----------- ------------- ------------
Net income................................ 17,613 24,677 41,351 44,776 55,408
============ ============ =========== ============= ============
Basic earnings per share(2)............... 0.19 0.26 0.41 0.48 0.62
Basic earnings per ADS(2)................. 18.91 26.02 40.75 47.81 62.18
Cash dividends declared per share......... 0.10 0.09 0.10 0.12 0.13
Segment results
Exploration and production.............. 15,060 19,565 26,397 48,334 63,182
Refining................................ 6,024 6,071 4,982 (3,536) (25,298)
Marketing and distribution.............. 8,401 11,943 14,716 10,350 30,234
Chemicals............................... 1,088 3,543 18,721 14,296 17,234
Corporate and others.................... (999) (1,836) (1,925) (1,198) (1,532)
------------ ------------ ----------- ------------- ------------
Operating income........................ 29,574 39,286 62,891 68,246 83,820
============ ============ =========== ============= ============
US GAAP
Depreciation, depletion and amortization.. (21,172) (22,747) (27,149) (25,303) (30,606)
Income tax................................ (8,917) (12,287) (19,890) (21,461) (23,710)
Net income................................ 19,832 26,542 39,291 45,147 54,862
Basic earnings per share (2).............. 0.23 0.31 0.45 0.52 0.63
Basic earnings per ADS(2)................. 22.87 30.61 45.31 52.07 63.28
Cash dividends declared per share......... 0.10 0.09 0.10 0.12 0.13
5
As of December 31,
-------------------------------------------------------------
2002 2003 2004 2005 2006
------------ ----------- ----------- ----------- ------------
RMB RMB RMB RMB RMB
(in millions)
Balance Sheet Data(1):
IFRS
Cash and cash equivalents............... 19,374 16,478 18,251 14,069 8,088
Total current assets.................... 107,850 103,670 122,685 147,057 145,467
Total non-current assets(3)............. 302,771 319,413 358,152 401,983 466,323
Total assets(3)......................... 410,621 423,083 480,837 549,040 611,790
Short-term debts and loans from Sinopec
Group Company and its affiliates
(including current portion of
long-term debts)...................... 39,710 34,046 42,994 43,216 58,760
Long-term debts and loans from Sinopec
Group Company and its affiliates
(excluding current portion of
long-term debts)...................... 86,884 87,296 99,387 112,292 109,065
Equity attributable to equity
shareholders of the Company(3)........ 167,585 172,499 193,340 224,301 262,845
Capital employed(4)..................... 299,647 304,079 349,425 396,419 444,526
US GAAP
Total non-current assets................ 280,709 299,576 341,613 385,848 455,255
Total assets............................ 383,390 398,260 457,214 523,883 587,126
Long-term debts and loans from Sinopec
Group Company and its affiliates
(excluding current portion of
long-term debts)...................... 86,569 85,496 94,684 101,949 100,222
Shareholders' equity.................... 153,929 162,816 188,150 222,803 262,297
Years Ended December 31
-------------------------------------------------------------
2002 2003 2004 2005 2006
-------------------------------------------------------------
RMB RMB RMB RMB RMB
------------ ----------- ----------- ----------- ------------
(in millions)
Other Financial Data(1):
IFRS
Net cash from operating activities...... 56,350 63,409 68,941 78,214 95,875
Net cash (used in)/generated from
financing activities.................. (16,160) (14,328) 8,650 (4,851) 1,192
Net cash used in investing activities... (43,290) (51,982) (75,819) (77,523) (103,023)
Capital expenditure
Exploration and production............ 20,228 20,628 21,234 23,095 31,734
Refining.............................. 6,698 9,791 15,319 19,100 21,969
Marketing and distribution............ 6,982 6,826 16,678 10,954 11,319
Chemicals............................. 7,769 7,680 11,025 9,386 12,629
Corporate and others.................. 816 518 1,550 1,164 2,170
------------ ----------- ----------- ----------- ------------
Total................................. 42,493 45,443 65,806 63,699 79,821
============ =========== =========== =========== ============
Capital expenditure of Oil Production Plants
Exploration and production............ 120 410 642 1,612 3,362
============ =========== =========== =========== ============
Capital expenditure of jointly controlled entities
Exploration and production............ - 1,200 1,323 772 102
Chemicals............................. - 2,993 5,178 1,830 160
------------ ----------- ----------- ----------- ------------
Total................................. - 4,193 6,501 2,602 262
============ =========== =========== =========== ============
6
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(1) The acquisition of Sinopec Maoming, Xi'an Petrochemical and Tahe
Petrochemical in 2003, the acquisitions of Petrochemical and Catalyst
Assets in 2004, and the acquisitions of equity interest in Sinopec Hainan
and Oil Production Plants in 2006 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 condition and results of
operation 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, Petrochemical
and Catalyst Assets and Oil Production Plants were revalued as of June
30, 2003, October 31, 2003, October 31, 2003, June 30, 2004 and June 30,
2006, 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.
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.
We rely heavily on outside suppliers for crude oil and other raw
materials, and we may not be able to pass on all increases in our crude
oil costs and may even experience disruption of our ability to obtain
crude oil and other raw materials.
We currently consume large amount of crude oil and other raw materials
to manufacture our refined products and petrochemical products. In 2006,
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 in products produced by us 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. For
example, crude oil price fluctuated at a historically high level in the past
three years, but we were not able to fully pass the increased material cost to
our customers, in part due to the government's price control over certain
refined petroleum products including gasoline, diesel and jet fuel. Crude oil
price began to decline since the later part of 2006 and may fluctuate in 2007
and the years beyond. 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.
Since we purchase a significant portion of our crude oil and other
feedstock requirements from outside suppliers located in different countries and
areas in the world, we are subject to the political, geographical and economic
risks associated with these countries and areas. If one or more of our supply
contracts were terminated or disrupted due to any natural disasters or political
events, it is possible that we would be unable to find sufficient alternative
sources of supply in a timely manner or on commercially reasonable terms. As a
result, our business and financial condition could be materially and adversely
affected.
7
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 eventually become
depleted. Exploring for, developing and acquiring reserves is highly risky and
capital intensive. If these activities are unsuccessful and we do not acquire
properties containing proved reserves, our total proved reserves will decline,
which may materially and adversely affect our 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. On December 4, 2006, Ministry of Commerce of the PRC promulgated the
"Administrative Rules for Crude Oil Market" and "Administrative Rules for
Refined Petroleum Products Market" to open the wholesale market of crude oil and
refined petroleum products to new market entrants. As a result, we expect to
face more competition in both crude oil and refined petroleum products. We
believe such trend will continue. Increased competition may have a material
adverse effect on our financial condition and results of operations.
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.
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
8
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 members 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. Moreover, the current terms in the agreements with respect to these
services, utilities, materials and equipment may be subject to change when we
renew these agreements with Sinopec Group Company.
Our financing costs are subject to change in interest rates
Changes in interest rates have affected and will continue to affect our
financing costs and, ultimately, our results of operations. The People's Bank of
China (PBOC) raised the benchmark one-year lending rates from 5.31% to 5.58% in
October 2004 and had further raised the benchmark one-year lending rate three
times since October 2004 to 6.39%, each time by 27 basis points. The increased
lending rate drives up the cost of bank borrowings. Interest expenses (excluding
capitalized interest) in 2004, 2005 and 2006 were RMB 4,583 million, RMB 5,926
million and RMB 7,437 million, respectively. We cannot assure you that we will
be able to obtain bank loans or renew existing credit facilities in the future
on reasonable terms or at all, nor can we assure that the PBOC will not further
raise the lending rates, or that our business, financial condition and results
of operations will not be adversely affected as a result.
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,
9
prices andavailability 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 limited 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 operating 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
damages 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 as well as property or environmental damages, and each of these
incidents could have a material adverse effect 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 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 injuries, property or environmental damages arising from
accidents on our properties 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 financial condition and 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
petroleum and petrochemical industry, continues to exercise a certain degree of
control over the petroleum and petrochemical industry in China by, among other
measures:
o licensing the right to explore and produce crude oil and natural
gas;
o publishing from time to time guidance prices for natural gas and
refined petroleum products such as gasoline, diesel and jet fuel;
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
as well as the expansion of the scope of consumption tax for
petroleum products;
o setting import and export quotas and procedures for crude oil and
refined petroleum products; and
o setting safety, environmental and quality standards.
As a result, we may face constraints on our flexibility and ability to
expand our business operations or to maximize our profitability.
10
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 when we received the required confirmation and registration from
relevant PRC government authorities and the 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.
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, which include, among other things:
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 PBOC. 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.
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
11
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, 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; fax number: (212) 759-6882) 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.
12
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 transferred to us its shareholdings
in 13 then listed companies. 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, between 2001
and 2004 we have acquired from Sinopec Group Company Sinopec National Star,
Sinopec Maoming, Tahe Petrochemical and Xi'an Petrochemical, Petrochemical and
Catalyst Assets, certain refining facilities and service stations. We have also
sold and disposed of certain auxiliary assets to third parties.
On January 1, 2006, we reorganized Sinopec Shengli Oil Field Co., Ltd.,
one of our wholly-owned subsidiaries into Sinopec Shengli Branch Company, a
branch company of Sinopec Corp.
We privatized Sinopec Zhenhai Refinery and Chemicals Co., Ltd., or
ZRCC, by way of merger by absorption and purchased the publicly held H shares of
ZRCC from its shareholders at HK$ 10.60 per share in cash, the total
consideration being HK$ 7.672 billion. ZRCC was delisted from the Hong Kong
Stock Exchange on March 24, 2006.
On February 25, 2006, we announced 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 Petroleum Co., Ltd. at a price of RMB 12.12 per
share, all the publicly-held shares of Shengli Oil Field Dynamic Co., Ltd. at a
price of RMB 10.30 per share and all the non-tradable shares of Shengli Oil
Field Dynamic 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,
Sinopec Yangzi Petrochemical Co., Sinopec Zhongyuan Petroleum Co., Ltd. and
Shengli Oil Field Dynamic Co., Ltd. have been delisted from Shenzhen stock
exchange as of April 21, 2006, and Sinopec Qilu Petrochemical Co., Ltd. has been
delisted from Shanghai Stock Exchange as of April 24, 2006. We paid an aggregate
amount of approximately RMB 14.3 billion to the holders of the above shares.
On September 25, 2006, our reform plan to convert all non-tradable
domestic shares into tradable domestic shares was approved by our shareholder's
meeting. According to the plan, our shareholders of tradable A-shares shall
receive 2.8 shares of us at no additional cost from our shareholders of
non-tradable shares for every 10 tradable A-shares held by them; and all of our
shareholders of the non-tradable shares shall have the rights to list their
shares for trading on Shanghai Stock Exchange with certain selling restriction.
On October 10, 2006, our shareholders of non-tradable shares transferred a total
of 784 million consideration shares to our shareholders of tradable A-shares.
On October 11, 2006, Shengjun International Investment Co., Ltd.
(Shengjun International), an overseas wholly-owned subsidiary of Sinopec Group
Company, and us signed a joint venture contract. Shengjun International and us
agreed to increase the registered capital of Sinopec Hainan by way of capital
injection, of which, Sinopec Corp. shall inject RMB 2,989.5 million and
Shengjun International shall inject RMB 996.5 million of foreign currency
equivalents. After completion of the capital injection, Sinopec Corp. and
Shengjun International held 75% and 25% of equity interest in Sinopec Hainan,
respectively. Sinopec Hainan was put into commercial operation at the end of
2006 with an installed refining capacity of 8 million tonnes of crude oil per
annum.
On December 6, 2006, our board of directors approved our plan to
acquire the oil production assets of Shengli Petroleum Administration Bureau
from Sinopec Group Company. In accordance with the acquisition plan, we acquired
from Sinopec Group Company 64.73% equity interest in Shengli Oil Field Dongsheng
Jinggong Petroleum Development Co., Ltd., 100% equity interest in Petroleum
Development Center of Shengli Petroleum Administration Bureau, 52% equity
interest in Shengli Oil Field Zhongsheng Petroleum Development Co., Ltd, and oil
wells and relevant oil production assets of the former Shengda Group Oil & Gas
Company in Shengli Oil Field for an aggregate consideration of RMB 3.5 billion.
13
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, 2006, we held 207
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 kilometer. Shengli oilfield is the second largest oilfield
in China and accounted for more than 68.2% of our total crude oil production in
2006.
As of December 31, 2006, we held 357 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 69 producing blocks
of various sizes extending over an area of 61,000 square kilometers in northern
Shandong province. Most of the blocks are located in the Jiyang trough with
various oil producing levels. In 2006, Shengli field produced 195 million
barrels of crude oil and 28.28 billion cubic feet of natural gas, with an
average daily production of 546 thousand barrels-of-oil equivalent, accounting
for approximately 60.8% of our total crude oil and natural gas production for
the year.
Oil and Natural Gas Reserves
Our estimated proved reserves of crude oil and natural gas as of
December 31, 2006 were 3,771 million barrels-of-oil equivalent (including 3,293
million barrels of crude oil and 2,856 billion cubic feet of natural gas),
representing a slight decrease of 0.4% from December 31, 2005. 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 and
related data as of and for the years ended December 31, 2004, 2005 and 2006.
14
As of and for the Years Ended December 31,
--------------------------------------------------
2004 2005 2006
---------------- ----------------- -------------
Proved developed and undeveloped reserves (crude oil) (in million barrels)
Beginning of year........................................... 3,257 3,267 3,294
Revisions of previous estimates............................. 23 26 (10)
Improved recovery........................................... 127 142 146
Extensions and discoveries.................................. 134 138 148
Production.................................................. (274) (279) (285)
---------------- ----------------- -------------
End of year................................................. 3,267 3,294 3,293
================ ================= =============
Proved developed reserves (crude oil) (in million barrels)
Beginning of year........................................... 2,786 2,808 2,870
================ ================= =============
End of year................................................. 2,808 2,870 2,903
================ ================= =============
Proved developed and undeveloped reserves
(natural gas)
(in billion cubic feet)
Beginning of year........................................... 2,888 3,033 2,952
Revisions of previous estimates............................. (95) (42) (9)
Extensions and discoveries.................................. 447 183 170
Production.................................................. (207) (222) (257)
---------------- ----------------- -------------
End of year................................................. 3,033 2,952 2,856
================ ================= =============
Proved developed reserves (natural gas) (in billion cubic feet)
Beginning of year........................................... 1,249 1,398 1,557
================ ================= =============
End of year................................................. 1,398 1,557 1,472
================ ================= =============
The following tables set forth proved developed and undeveloped crude
oil and natural gas reserves of our major oil and gas producing fields as of
December 31, 2004, 2005 and 2006.
As of December 31,
-------------------------------------------
2004 2005 2006
------------- ------------- ---------------
(in million barrels)
Proved developed and undeveloped crude oil reserves
Shengli........................................................... 2,307 2,362 2,352
Zhongyuan......................................................... 346 314 302
Xibei............................................................. 218 238 288
Henan............................................................. 173 154 136
Jiangsu........................................................... 112 112 91
Others............................................................ 111 114 124
------------- ------------- ---------------
Total............................................................. 3,267 3,294 3,293
============= ============= ===============
As of December 31,
-------------------------------------------
2004 2005 2006
------------- ------------- ---------------
(in billion cubic feet)
Proved developed and undeveloped natural gas reserves
Shengli........................................................... 357 322 313
Zhongyuan......................................................... 512 383 355
Xibei............................................................. 67 95 147
Jiangsu........................................................... 9 9 12
Xinan............................................................. 801 781 807
Huabei............................................................ 862 908 792
Others............................................................ 425 454 430
------------- ------------- ---------------
Total............................................................. 3,033 2,952 2,856
============= ============= ===============
15
Oil and Natural Gas Production
In 2006, we produced an average of 898 thousand barrels-of-oil
equivalent per day, of which approximately 87.0% was crude oil and 13.0% was
natural gas.
The following tables set forth the average daily production of crude
oil and natural gas for the years ended December 31, 2004, 2005 and 2006. The
production of crude oil includes condensed oil.
For the Years Ended December 31,
--------------------------------------------
2004 2005 2006
------------- -------------- ---------------
(in thousand barrels)
Average daily crude oil production
Shengli.......................................................... 519 524 533
Zhongyuan........................................................ 65 62 60
Xibei............................................................ 69 82 92
Henan............................................................ 37 36 35
Jiangsu.......................................................... 31 32 33
Others........................................................... 28 28 28
------------- -------------- ---------------
Total Production................................................. 749 764 781
============= ============== ===============
For the Years Ended December 31,
--------------------------------------------
2004 2005 2006
------------- -------------- ---------------
(in million cubic feet)
Average daily natural gas production
Shengli.......................................................... 87 85 78
Zhongyuan........................................................ 169 161 159
Xibei............................................................ 47 50 84
Henan............................................................ 11 10 8
Jiangsu.......................................................... 5 6 6
Xinan............................................................ 185 203 213
Huabei........................................................... 9 39 101
Others........................................................... 54 54 54
------------- -------------- ---------------
Total Production................................................. 567 608 703
============= ============== ===============
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, 2004, 2005 and 2006.
Total Shengli Others
------------- ------------- -------------
(RMB) (RMB) (RMB)
For the year ended December 31, 2006
Average petroleum lifting cost per BOE.......................... 73.31 77.16 67.34
Average realized sales price....................................
Per barrel of crude oil...................................... 449.93 443.66 463.70
Per thousand cubic meters of natural gas..................... 794.28 899.76 788.02
For the year ended December 31, 2005
Average petroleum lifting cost per BOE........................... 68.78 70.11 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........................... 57.05 57.35 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
16
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, 2004, 2005 and 2006.
Total Shengli Xibei Others
------------- -------------- ------------- --------------
For the year ended December 31, 2006
Exploration
-- Successful.................................... 226 118 20 88
-- Dry holes..................................... 269 57 19 193
Development
-- Productive.................................... 2,620 1,125 94 1,401
-- Dry holes..................................... 29 4 10 15
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 -
The following table sets forth the numbers of our development crude oil
and natural gas wells as of December 31, 2006.
As of December 31, 2006
---------------------------------------
Total Shengli Others
---------- -------------- -------------
Crude oil development wells
-- Total......................................... 32,238 21,741 10,497
-- Productive.................................... 25,925 16,921 9,004
Natural gas development wells
-- Total......................................... 2,362 350 2,012
-- Productive.................................... 1,851 88 1,763
Refining
Overview
We processed approximately 146.3 million tonnes of crude oil in 2006,
representing approximately 50.7% 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, 2004, 2005 and 2006.
17
For the Years Ended December 31,
----------------------------------------------------
2004 2005 2006
--------------- ---------------------- -------------
(in million tonnes)
Gasoline....................................... 23.6 23.0 23.0
Diesel......................................... 50.9 54.9 57.9
Kerosene including jet fuel.................... 6.4 6.6 6.4
Light chemical feedstock....................... 17.7 21.1 22.7
Lubricant...................................... 1.3 1.3 1.1
Liquefied petroleum gas........................ 7.1 7.4 6.9
Fuel oil....................................... 7.8 6.9 6.0
Gasoline and diesel are our largest revenue producing products, and are
sold mostly through our marketing and distribution segment through both retail
and wholesale channels. We use most of our production of chemical feedstock as
feedstock for our own chemical operations. Most of our 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 27 refineries in China. As of December 31, 2006, our
consolidated primary distillation capacity was 176.1 million tonnes per annum.
The following table sets forth our total primary distillation capacity
per annum and refinery throughputs as of and for the years ended December 31,
2004, 2005 and 2006.
As of and for the Years Ended December 31,
-----------------------------------------------
2004 2005 2006
--------------- ------------------ ------------
Primary distillation capacity (million tonnes per annum)....... 155.2 160.1 176.1
Refinery throughputs (million tonnes).......................... 132.9 139.9 146.3
In 2006, measured by the total output from our refineries, our overall
gasoline yield was 15.7%, overall diesel yield was 39.5%, overall kerosene yield
was 4.3% and overall light chemical feedstock yield was 15.6%. Our products
include lubricant, liquefied petroleum gas, solvent, asphalt, petroleum coke,
paraffin and fuel oil. For the years ended December 31, 2004, 2005 and 2006, our
overall yield for all refined petroleum products at our refineries was 93.1%,
93.2% and 93.5%, respectively.
The following table sets forth the primary distillation capacity per
annum as of and refinery throughput for the years ended, December 31, 2004, 2005
and 2006 of each of our refineries with the primary distillation capacity of 8
million or more per annum throughout 2006.
As of and for the Years Ended December 31,
------------------------------------------------------------------------------------------
2004 2005 2006
------------------------------ ------------------------------ ----------------------------
Primary Primary Primary
Distillation Refinery Distillation Refinery Distillation Refinery
Refinery Capacity Throughput Capacity Throughput Capacity Throughput
-------------- --------------- ---------------- ------------- --------------- ------------
(in million tonnes)
Zhenhai....... 20.0 16.0 20.0 17.1 20.0 17.7
Shanghai...... 8.8 9.1 14.0 9.5 14.0 9.1
Maoming....... 13.5 13.2 13.5 12.7 13.5 14.0
Guangzhou..... 7.7 7.4 7.7 6.7 13.2 7.4
Jinling....... 13.0 8.2 13.0 10.7 13.0 10.8
Gaoqiao....... 11.0 9.1 11.0 10.1 11.0 9.3
Qilu.......... 10.5 8.8 10.5 10.0 10.5 10.5
Yanshan....... 8.0 7.8 8.0 8.0 8.0 8.0
Yangzi........ 8.0 6.4 8.0 7.8 8.0 7.9
In 2006, we newly added 18.5 million tonnes per annum in our primary
distillation capacity in 2006, representing a net increase of 16 million tonnes
per annum compared with December 31, 2005, of which the newly added distillation
capacity of sour crude oil was 11.2 million tonnes per annum. Our hydro-refining
18
capacity and coking capacity increased by 16.5 million tonnes per annum and 2.6
million tonnes per annum, respectively. The revamping projects for a number of
refining facilities aimed to improve capacities for refined petroleum product
quality have progressed smoothly.
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, 2004,
2005 and 2006.
For the Yeas ended December 31,
--------------------------------------------------
2004 2005 2006
---------------- ----------------- ---------------
Source of Supply (in million tonnes)
Self-supply..................... 28.1 28.6 29.6
PetroChina Company Ltd.......... 10.3 8.8 8.8
CNOOC Ltd....................... 6.7 5.1 4.9
Import.......................... 89.0 99.1 101.5
---------------- ----------------- ---------------
Total........................ 134.1 141.6 144.8
================ ================= ===============
Marketing and Sales of Refined Petroleum Products
Overview
We operate the largest sales and distribution network for refined
petroleum products in China. In 2006, we distributed and sold in China
approximately 111.7 million tonnes of gasoline, diesel and kerosene including
jet fuel, representing a market share of approximately 64.0% in China.
Most of the refined petroleum products sold by us are produced
internally. In 2006, approximately 72.5% of our gasoline sales volume and
approximately 82.8% of our diesel sales volumes were produced internally.
The table below sets forth a summary of key data in the marketing and
sales of refined petroleum products for the year ended December 31, 2004, 2005
and 2006.
For the Years Ended December 31,
---------------------------------------------------------
2004 2005 2006
---------------- ------------------- --------------------
Sales volume of refined petroleum products 94.6 104.6 111.7
(in million tonnes) ...........................
Of which: Retail............................... 53.3 63.5 72.2
Direct Sales.................. 19.7 20.4 19.0
Wholesale .................... 21.7 20.7 20.6
Average annual throughput of service stations
(tonnes per station)........................... 2,003 2,321 2,577
Total number of service stations under Sinopec
brand........................... 30,063 29,647 28,801
Of which: Self-operated service stations....... 26,581 27,367 28,001
Franchised service stations.. 3,482 2,280 800
Percentage of retail volume in total sales
(%)............................................ 56.3 60.7 64.6
Retail
All of our retail sales are made through a network of service stations
and petroleum shops operated 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 2006, we sold approximately 72.2 million tonnes of refined petroleum
products through our retail network, representing approximately 64.6% of our
total refined petroleum products sales volume. Our retail market share in 2006
19
was approximately 79.3% in our principal market. As of December 31, 2006, our
retail network mainly consists of 28,001 service stations that are
wholly-owned and operated by us or jointly-owned and operated or leased by us
and 800 franchised service stations that are owned and operated by third
parties.
Direct Sales
In 2006, we sold approximately 19.0 million tonnes of refined petroleum
products, including 2.9 million tonnes of gasoline, 15.9 million tonnes of
diesel and 0.2 million tonnes of kerosene, through direct sales to those
commercial customers such as industrial enterprises, hotels, restaurants and
agricultural producers, representing approximately 17.0% of our total sales
volume of refined petroleum products.
Wholesale
In 2006, we sold approximately 20.6 million tonnes of refined petroleum
products through wholesale channels, representing approximately 18.4% of our
total sales volume of refined petroleum products. Our wholesale sales include
sales to large commercial or industrial customers and independent distributors
as well as sales to certain long-term customers such as railway, airlines,
shipping and public utilities.
Through our wholesale centers, we operate 454 storage facilities with a
total capacity of approximately 12.6 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.
In 2006, we further improved our refined petroleum products retail
networks through acquisition, construction and renovation of service stations,
and added a net of 634 self-operated service stations. We believe we have
further strengthened our leading position in principal market, and further
improved our brand awareness and customer loyalty.
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 a significant portion of our chemical feedstock such as naphtha. Because
of strong domestic demand, most of our petrochemical products are sold in
China's domestic market.
The following table sets forth our production of major chemical
products for the years ended December 31, 2004, 2005 and 2006.
For the Years Ended December 31,
------------------------------------------
2004 2005 2006
------------- -------------- -------------
(in thousand tonnes)
Ethylene....................................................... 4,074 5,319 6,163
Synthetic resins............................................... 6,221 7,605 8,619
Synthetic rubbers.............................................. 561 626 668
Monomers and polymers for synthetic fibers..................... 6,021 6,725 7,242
Synthetic fibers............................................... 1,654 1,570 1,502
Urea........................................................... 2,630 1,780 1,609
Note: The operational data for 2005 and 2006 include 100% production of the two
joint venture ethylene facilities that we have joint control of 50% each,
Shanghai SECCO and BASF-YPC.
20
Products
Intermediate Petrochemicals
We are the largest ethylene producer in China. Our rated ethylene
capacity was 6.15 million tonnes per annum, which represented 62% of China's
total domestic ethylene capacity, as of December 31, 2006. In 2006, we produced
6.16 million tonnes of ethylene, representing approximately 67.0 % 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 para-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,
2006 for our principal intermediate petrochemical products.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Ethylene..................... 6,145 6,163 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin,
Zhongyuan, SECCO and BASF-YPC
Propylene.................... 4,884 4,903 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin,
Zhongyuan, SECCO, BASF-YPC,
Gaoqiao, Anqing, Jinan, Jingmen
and Wuhan
Benzene...................... 2,298 2,226 Yanshan, Shanghai, Yangzi, Qilu,
Guangzhou, Zhenhai, Tianjin,
Luoyang, SECCO and BASF-YPC
Styrene...................... 964 972 Yanshan, Qilu, Guangzhou,
Maoming and SECCO
Para-xylene.................. 2,168 2,239 Shanghai, Yangzi, Qilu, Tianjin
and Luoyang
Phenol....................... 350 390 Yanshan and Gaoqiao
Note: The operational data include 100% production of the two joint ventures
that we have joint control of 50% each, SECCO and BASF-YPC.
Synthetic Resins
We are the largest producer of polyethylene, polypropylene and
polystyrene in China.
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, 2006.
21
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Polyethylene..................... 4,073 4,090 Yanshan, Shanghai, Yangzi, Qilu,
Maoming, Guangzhou, Tianjin,
Zhongyuan, SECCO and BASF-YPC
Polypropylene.................... 3,455 3,449 Yanshan, Shanghai, Yangzi, Qilu,
Guangzhou, Miaoming, Tianjin,
Zhongyuan, SECCO, Wuhan
Fenghuang, Jingmen and Fujian
Polyvinyl chloride............... 600 575 Qilu
Polystyrene...................... 516 357 Yanshan, Qilu, Maoming,
Guangzhou and SECCO
Synthetic Fiber Monomers and Polymers
Our principal synthetic fiber monomers and polymers are purified
teraphthalic acid, ethylene glycol, acrylonitrile, caprolactam, polyester,
polyethylene glycol and polyamide fiber. Based on our 2006 production, we are
the largest producer of purified teraphthalic acid, ethylene glycol, caprolactam
and polyester 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, 2006 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....... 3,034 2,838 Shanghai, Yangzi, Yizheng,
Tianjin and Luoyang
Ethylene glycol.................. 1,033 935 Yanshan, Shanghai, Yangzi,
Tianjin, Maoming and BASF-YPC
Acrylonitrile.................... 510 425 Shanghai, Anqing, Qilu, SECCO
Caprolactam...................... 140 180 Shijiazhuang and Baling
Polyester ..................... 2,766 2,664 Shanghai, Yizheng, Tianjing and
Luoyang
Synthetic Fibers
We are the largest producer of polyester and acrylic fibers in China.
Our principal synthetic fiber products are polyester fiber and acrylic 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, 2006.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Polyester fiber................ 1,416 1,128 Yizheng, Shanghai, Tianjin and
Luoyang
Acrylic fiber.................. 315 369 Shanghai, Anqing and Qilu
22
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 2006 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,
2006 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......... 252 295 Yanshan, Qilu, Maoming and Gaoqiao
Styrene butadiene rubber......... 295 174 Yanshan, Qilu, Maoming and Gaoqiao
Styrene-butadiene-styrene 100 160 Yanshan and Maoming
thermoplastic elastomers ........
Isobulylene isoprene rubber...... 30 40 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, 2006.
Our Rated Our
Capacity Production Major Plants of Production
----------------- ------------ --------------------------------
(thousand tonnes (thousand
per annum) tonnes)
Ammonia.... 2,135 957 Zhenhai, Jinling, Anqing,
Jiujiang, Qilu, Hubei and Baling
Urea....... 3,610 1,609 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 2006, we sold
approximately 64% of our petrochemical products directly to end-users and 36% to
our distributors.
We also provided after-sale services to our customers, including
technical support. We continuously enhance technical content and added value of
our products to meet the needs of market.
23
Competition
Exploration and Production
Because our production of crude oil can only meet approximately 20% of
our crude oil requirements, we generally do not compete for crude oil customers.
However, we compete with other market participants 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,
awareness of brand name and price. While we constantly face competition from
other market participants, we believe that we have a competitive advantage in
our principal market over our competitors in most of these aspects.
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 2006, we were granted 703 patents in China and overseas. As of
December 31, 2006, we owned a total of 3,285 patents in China. We may also 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, diesel and jet fuel;
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.
24
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. We have exploration and production licenses for the
exploration and production of both onshore and offshore crude oil and natural
gas resources 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.
25
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 once per year 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, Diesel and Jet Fuel
The PRC government continues to exercise control over gasoline, diesel
and jet fuel prices.
Beginning on October 17, 2001, the NDRC has started determining the
retail guidance prices of gasoline, diesel and jet fuel 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 these prices according to the market
conditions in China. The government has started to implement the policies to
adjust the prices of refined petroleum products since March 2003, and imposed
certain controls over the range and frequency of such adjustment. In 2006, it
was reported the new refined petroleum products price-setting mechanism had been
formulated by the relevant government authority. However, the revised
price-setting mechanism has not been fully implemented.
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.
Regulation of Crude Oil and Refined Petroleum Products Market
On December 4, 2006, Ministry of Commerce of the PRC promulgated the
"Administrative Rules for Crude Oil Market" and "Administrative Rules for
Refined Petroleum Products Market" to open the wholesale market of crude oil and
refined petroleum products to new market entrants, respectively. We will face
more competition in both crude oil and refined petroleum products markets. Such
increased competition may have a material adverse effect on our financial
conditions and results of operations.
26
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. 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.
On March 26, 2006, the PRC government imposed a special oil income levy
on revenues generated from the sale of domestically produced crude oil when its
realized price exceeds US$ 40 per barrel. The special oil income 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.
In 2006, the PRC government adjusted the scope of taxable items of oil
consumption tax, and started to impose consumption tax on naphtha, solvent oil,
lubricant, jet fuel and fuel oil.
On March 16, 2007, the PRC government enacted the new Corporate Income
Tax Law of the PRC (the "New Corporate Income Tax Law"), which will take effect
on January 1, 2008. According to the New Corporate Income Tax Law, the corporate
income tax rate for entities other than certain qualified non-resident
enterprises, high-tech enterprises and small-scale enterprises, as defined in
the New Corporate Income Tax Law, will be 25%. In addition, enterprises that
are currently taxed at preferential rates will be subject to a five-year
transition period during which the tax rates will gradually be increased to the
unified tax rate of 25% from January 1, 2008. Therefore, we, except for our
high-tech enterprises and certain of our entities currently taxed at
preferential rates, will be subject to the unified tax rate of 25% starting from
January 1, 2008.
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%; 25% starting from January 1, 2008
Value-added tax Revenue 13% for liquefied petroleum gas, natural gas, and low
density polyethylene for production of 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.
27
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, RMB 117.6 per tonne
self-consumed for diesel, RMB 277 per tonne for naphtha, RMB
256.4 per tonne for solvent oil, RMB 225.2 per tonne for
lubricant, RMB 101.5 per tonne for fuel oil, and RMB
124.6 per tonne for jet fuel, payable by producer. The
actual applicable rates for naphtha, solvent oil,
lubricant and fuel oil is 30% of their respective tax
rates listed above, and the actual applicable rate for
kerosene including jet fuel is zero for the time being.
Import tariff CIF China price 5% for gasoline, 6% for diesel and 5% for jet fuel. The
actual applicable tax rate in 2007 for gasoline, diesel
and jet fuel is 2%.
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 of crude oil and 1%
resources natural gas
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 Oil Income Levy Any revenue derived from Progressive rate of 20% to 40% for revenue derived 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.
28
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 248 million in
2004, RMB 493 million in 2005 and RMB 1,637 million in
2006.
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
302.3 billion of coverage on our property and plants and approximately RMB 43.2
billion of coverage on our inventory. In 2006, we paid an insurance premium of
approximately RMB 1.3 billion to Sinopec Group Company for such coverage.
Transportation vehicles and products in transit are not covered by
29
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 consolidated financial statements and the accompanying notes.
Certain financial information presented in this section is derived from our
audited consolidated 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 37 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, certain Petrochemical and Catalyst
Assets from Sinopec Group Company in 2004 and Sinopec Hainan and Oil Production
Plants in 2006. 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 condition and the results of operation 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.
30
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, 2004, 2005 and 2006.
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. For goodwill, the recoverable
amount is estimated annually. 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 or cash-generating
units are not readily available. In determining the value in use, expected cash
flows generated by the asset or the cash-generating unit 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, 2004, 2005 and 2006 in our statement of income and equity are summarized as
follows:
31
Years ended December 31,
-------------------------------------
2004 2005 2006
----------- ------------ ------------
RMB RMB RMB
Impairment losses on long-lived assets recognized in statement of (in millions)
income
Exploration and production............................................ 98 60 552
Refining.............................................................. 14 -- --
Marketing and distribution............................................ 1,769 366 23
Chemicals............................................................. 2,038 1,425 250
----------- ------------ ------------
3,919 1,851 825
=========== ============ ============
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 the 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, 2004, 2005 and
2006.
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,
2004 and 2006 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,
----------------------------------
2004 2005 2006
--------- ----------- ------------
RMB RMB RMB
(in millions)
At beginning of year.......................................... 3,350 3,671 3,140
Impairment losses recognized for the year..................... 935 328 438
Written-off/reversal of impairment losses..................... (454) (859) (244)
Less: Amount distributed to Sinopec Group Company............ (160) -- --
--------- ----------- ------------
At end of year................................................ 3,671 3,140 3,334
========= =========== ============
32
Recently Pronounced International Financial Reporting Standards
Information relating to the recently pronounced IFRS is presented in
Note 36 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.
33
Year Ended December 31,
---------------------------------------------
2004 2005 2006
------------- --------------- ---------------
RMB RMB RMB
(in billions)
Operating revenues
Sales of goods...................................... 597.3 799.3 1,044.6
Other operating revenues............................ 22.6 24.0 26.8
Total operating revenues.......................... 619.9 823.3 1,071.4
Other income........................................... -- 9.4 5.0
Operating expenses
Purchased crude oil, products and
operating supplies and expenses................. (442.5) (651.2) (861.5)
Selling, general and administrative expenses...... (33.0) (33.9) (37.8)
Depreciation, depletion and amortization.......... (32.5) (31.6) (34.2)
Exploration expenses, including dry holes......... (6.4) (6.4) (8.0)
Personnel expenses................................ (18.7) (18.6) (19.9)
Employee reduction expenses....................... (0.9) (0.4) (0.2)
Taxes other than income tax....................... (16.3) (17.2) (28.6)
Other operating expenses, net..................... (6.7) (5.1) (2.4)
------------- --------------- ---------------
Total operating expenses.......................... (557.0) (764.4) (992.6)
------------- --------------- ---------------
Operating income....................................... 62.9 68.3 83.8
Net finance costs...................................... (4.4) (4.6) (6.1)
Other income and gains................................. 0.9 1.0 1.2
------------- --------------- ---------------
Income before income tax............................... 59.4 64.7 78.9
Income tax............................................. (18.1) (19.9) (23.5)
------------- --------------- ---------------
Net income............................................. 41.3 44.8 55.4
============= =============== ===============
Attributable to:
Equity shareholders of the Company.................. 35.3 41.5 53.9
Minority interests.................................. 6.0 3.3 1.5
------------- --------------- ---------------
41.3 44.8 55.4
============= =============== ===============
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
In 2006, our sales of goods and other operating revenues were RMB
1,044.6 billion and RMB 26.8 billion, respectively, representing an increase of
30.7% and 11.7%, respectively, from those in the previous year. Our operating
income in 2006 was RMB 83.8 billion, representing an increase of 22.8% from
2005. These results were largely attributable to the following factors: by
seizing the opportunities presented by the high market prices of petroleum and
chemical products and strong growth of the Chinese economy, we actively
implemented our strategy on expanding resources and increased our market share
on a number of products. In addition, we sought to optimize our production of
refined petroleum and chemical products through improved production safety,
reduced energy and utilities, consumption and cost savings. All the above
factors contributed to the comparatively good operating results.
Operating Revenues
In 2006, our sales of goods and other operating revenues were RMB
1,071.4 billion, representing an increase of 30.1% compared with 2005. Our sales
of goods were RMB 1,044.6 billion, representing an increase of 30.7% compared
with 2005. These results were largely attributable to our efforts in expanding
resources and markets as well as further optimizing our sales and marketing
structure in order to take advantage of the high prevailing market prices of
crude oil, petroleum and chemical product. Our other operating revenues
increased to RMB 26.8 billion in 2006, representing an increase of 11.7%
compared with 2005. Other operating revenues primarily consist of revenues
generated from our contractor services as well as our sale of raw and auxiliary
materials and utilities such as water, electricity and gas.
34
The following table sets forth the average external sales prices and
sales volumes by selected products, as well as the respective percentage changes
from 2005 to 2006.
Average External Sales Rate of Rate of
Price Change Sales Volume Change
------------------------ from --------------------------- from
2005 2006 2005 to 2006 2005 2006 2005 to 2006
------------ ----------- --------------- ------------ -------------- ---------------
(RMB) (RMB) (%) (%)
Crude Oil................... 2,680(1) 3,218(1) 20.1 5.29(2) 5.08(2) (4.0)
Natural Gas................. 673(3) 789(3) 17.2 4.36(4) 5.37(4) 23.2
Gasoline ................... 4,432(1) 5,225(1) 17.9 30.19(2) 32.59(2) 7.9
Diesel ..................... 3,772(1) 4,469(1) 18.5 67.25(2) 72.93(2) 8.5
Kerosene ................... 3,710(1) 4,524(1) 21.9 6.00(2) 5.43(2) (9.6)
Selected Chemical Products:
Basic chemical
----------------------------
feedstock............ 4,846(1) 5,762(1) 18.9 8.66(2) 10.86(2) 25.5
Synthetic Resin ......... 9,005(1) 9,921(1) 10.2 6.34(2) 7.78(2) 22.6
Synthetic Fiber.......... 11,123(1) 11,389(1) 2.4 1.59(2) 1.61(2) 1.8
Synthetic Rubber......... 13,040(1) 13,928(1) 6.8 0.68(2) 0.80(2) 18.0
Synthetic Fiber Monomer
and Polymer............ 8,879(1) 8,846(1) (0.4) 2.99(2) 3.78(2) 26.1
Chemical fertilizer 1,539(1) 1,650(1) 7.2 1.82(2) 1.65(2) (9.4)
------------
(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 2006, external sales revenues from crude oil and natural gas
amounted to RMB 23.4 billion, or 2.2% of our sales of goods and other operating
revenues, representing an increase of 16.7% from 2005. 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 3,218 per tonne from RMB 2,680 per tonne in 2005, representing an increase
of 20.1%. The effect of increased price was partially offset by the decrease in
the quantity of external sales from 5.29 million tonnes in 2005 to 5.08 million
tonnes in 2006, representing a decrease of 4.0%. The external sales price of
natural gas rose from RMB 673 per thousand cubic meters in 2005 to RMB 789 per
thousand cubic meters in 2006, representing an increase of 17.2%, and the
external sales volume increased from 4.36 billion cubic meters in 2005 to 5.37
billion cubic meters in 2006, representing an increase by 23.2%.
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 2006, the external sales revenue of refined petroleum products
recorded by these two segments amounted to RMB 687.5 billion, or 63.9% of our
sales of goods and other operating revenues, representing an increase of 26.8%
from 2005. The increase was mainly due to our proactive efforts in taking
advantage of the high market prices of refined petroleum products through
increasing sales volume, further optimizing sales and marketing structure and
35
expanding the market of other refined petroleum products. The sales revenue of
gasoline, diesel and kerosene was RMB 520.8 billion, comprising 75.8% of the
total sales revenue of our refined petroleum products, representing an
increase of 27.1% from 2005.
The sales revenues of other refined petroleum products were RMB 166.7
billion, representing an increase of 25.9% over 2005, accounting for 24.2% of
the total sales revenues of refined petroleum products.
Sales of chemical products
Our external sales revenues of chemical products were RMB 209.1
billion, representing an increase of 30.1% over 2005, accounting for 19.4% of
our sales of goods and other operating revenues. The increase was mainly due to
our efforts to capture the opportunity presented by the high market prices of
chemical products by increasing our sales volume.
Other income
In 2006, we received a cash grant of RMB 5.0 billion, representing a
decrease of 46.9% compared with 2005, from the central government 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 2006, our operating expenses amounted to RMB 992.6 billion,
representing an increase of 29.8% compared with 2005. The operating expenses
mainly consisted of the following:
Purchased crude oil, products, and operating supplies and expenses
In 2006, our purchased crude oil, products and operating supplies and
expenses were RMB 861.5 billion, representing an increase of 32.3% over 2005,
accounting for 86.8% of the total operating expenses, of which:
o purchased crude oil expenses were RMB 428.8 billion, representing
an increase of 26.8% compared with 2005, accounting for 43.1% of
the total operating expenses. In 2006, our throughput of crude oil
purchased externally was 114.3 million tonnes (excluding amounts
processed for third parties), representing an increase of 5.9%
compared with 2005. Our average cost for crude oil purchased
externally in 2006 was RMB 3,750 per tonne, representing an
increase of 19.7% compared with 2005.
o In 2006, our other purchase expenses were RMB 432.7 billion,
representing an increase of 38.2% compared with 2005, accounting
for 43.6% 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 2006, our selling, general and administrative expenses totaled RMB
37.8 billion, representing an increase of 11.4% compared with 2005. The increase
was largely due to: an increase of RMB 1.3 billion in repair and maintenance
expenses as a result of our renovation of gas stations, an increase of RMB 0.6
billion in lease expenses as a result of increased rents on leased land, an
increase of RMB 0.7 billion in general and administrative expenses due to
increased number of service outlets and increased expenses from support
functions, and an increase of RMB 0.4 billion in mining resource compensation
charge as a result of increased sales revenue of crude oil and natural gas.
Depreciation, depletion and amortization
In 2006, our depreciation, depletion and amortization amounted to RMB
34.2 billion, representing an increase of 8.3% compared with 2005. The increase
was mainly due to the increased property, plant and equipment in recent years.
Exploration expenses
In 2006, our exploration expenses were RMB 8.0 billion, representing an
increase of 24.5% compared with 2005. The increase was largely due to our
enhanced exploration efforts made to the Southern marine bed and the new areas
in West China.
36
Personnel expenses
In 2006, our personnel expenses were RMB 19.9 billion, up by 6.5%
compared with 2005.
Employee reduction expenses
In 2006, in accordance with our voluntary employee reduction plan, we
recorded employee reduction expenses of approximately RMB 236 million for
approximately 4,000 employees, representing a decrease of RMB 133 million
compared with that in 2005.
Taxes other than income tax
In 2006, the Company's taxes other than income tax were RMB 28.6
billion, representing an increase of 66.7% compared with 2005. The increase was
largely due to a new special oil income levy in the amount of RMB 8.8 billion
that we have been subject to from March 26, 2006, and an increase of RMB 1.7
billion in consumption tax as a result of our increased sales volume of gasoline
and diesel and the enlarged tax scope of the consumption tax by the government.
Other operating expenses, net
In 2006, our other operating expenses, net, were RMB 2.4 billion,
representing a decrease of 52.5% compared with 2005. The decrease was mainly due
to a decrease of RMB 0.5 billion in loss on disposal of property, plant and
equipment, a decrease of RMB 1.0 billion in impairment loss on long-lived assets
and a debt-extinguishment income of RMB 0.5 billion from one of our
subsidiaries.
Operating income
In 2006, our operating income was RMB 83.8 billion, representing an
increase of 22.8 % compared with 2005.
Net finance costs
In 2006, our net finance costs were RMB 6.1 billion, representing an
increase of 31.9% over 2005. The increase was mainly due to an increase of RMB
1.5 billion in net interest expense as a result of the increase in our
outstanding loans and the increase in interest rates associated with these
loans.
Income before income tax
In 2006, our income before income tax was RMB 78.9 billion,
representing an increase of 22.1% compared with 2005.
Income tax
In 2006, our income tax was RMB 23.5 billion, representing an increase
of 18.3% compared with 2005. In 2006, our effective tax rate was 29.8%,
representing a decrease of 0.9 percentage point compared with 2005.
Net income attributable to minority interests
In 2006, our net income attributable to minority interests was RMB 1.5
billion, representing a decrease of 55.0% compared with 2005. The decrease was
largely because we privatized a number of listed subsidiaries and thereby
reduced minority interests in our subsidiaries.
37
Net income attributable to equity shareholders of the Company
In 2006, our net income attributable to equity shareholders of the
Company was RMB 53.9 billion, up by 30.0% over 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, our sales of goods and other operating revenues were RMB 799.3
billion and RMB 24.0 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 823.3
billion, representing an increase of 32.8% compared with 2004. Our sales of
goods were RMB 799.3 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
24.0 billion in 2005, representing an increase of 6% 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 the average external sales prices and
sales volumes by selected products, as well as the respective percentage changes
from 2004 to 2005.
38
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 20.0 billion, or 2.4% of our sales of goods and other income,
representing an increase of 24.3% compared with RMB 16.0 billion in 2004. Such
increase was primarily attributable to the increase in crude oil and natural gas
prices as well as 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 65.8% of our
sales of goods and 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.
39
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 19.5% of
our sales of goods and other operating revenues. 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 764.4 billion,
representing an increase of 37.2% 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 651.2 billion, representing an increase of 47.2% over 2004,
accounting for 85.2% of the total operating expenses, of which:
o purchased crude oil expenses were RMB 338.2 billion, representing
an increase of 45.4% 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, representing an increase of 35.5% compared
with 2004.
o In 2005, our other purchase expenses were RMB 313.0 billion,
representing an increase of 49.1% 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
33.9 billion, representing an increase of 2.8% 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.
40
Depreciation, depletion and amortization
In 2005, our depreciation, depletion and amortization amounted to RMB
31.6 billion, down by 2.7% 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 18.6 billion, down by 0.4%
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 369 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 68.3 billion, representing an
increase of 8.5 % 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 64.7 billion,
representing an increase of 8.8% compared with 2004.
41
Income tax
In 2005, our income tax was RMB 19.9 billion, representing an increase
of 9.9 % 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 0.3 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 3.3
billion, representing a decrease of 44.8% 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 41.5 billion, up by 17.3% over 2004.
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.
42
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
-------------------------------- --------------------- ----------------------
2004 2005 2006 2005 2006 2005 2006
---------- --------- ----------- ---------- ---------- ---------- -----------
RMB RMB RMB (%) (%) (%) (%)
(in billions)
Exploration and Production
External sales(1)...... 25.4 30.8 37.5 2.3 2.1 3.7 3.5
Inter-segment sales...... 60.0 84.4 105.7 6.2 5.8
---------- --------- ----------- ---------- ----------
Total operating revenue. 85.4 115.2 143.2 8.5 7.9
========== ========= =========== ========== ==========
Refining
External sales(1)........ 68.5 88.2 103.8 6.5 5.7 10.6 9.6
Other income............ - 9.4 5.0 0.7 0.3 1.1 0.5
Inter-segment sales...... 289.8 386.5 471.6 28.3 26.1
---------- --------- ----------- ---------- ----------
Total operating revenue. 358.3 484.1 580.4 35.5 32.1
========== ========= =========== ========== ==========
Marketing and distribution
External sales(1)........ 343.6 460.7 589.0 33.8 32.6 55.3 54.7
Inter-segment sales...... 2.8 3.1 4.6 0.2 0.3
---------- --------- ----------- ---------- ----------
Total operating revenue. 346.4 463.8 593.6 34.0 32.9
========== ========= =========== ========== ==========
Chemicals
External sales(1)........ 132.2 166.6 215.8 12.2 11.9 20.0 20.0
Inter-segment sales...... 12.5 12.2 12.3 0.9 0.7
---------- --------- ----------- ---------- ----------
Total operating revenue. 144.7 178.8 228.1 13.1 12.6
========== ========= =========== ========== ==========
Corporate and others
External sales(1)........ 50.2 77.0 125.3 5.6 6.9 9.3 11.7
Inter-segment sales...... 32.0 44.9 136.7 3.3 7.6
---------- --------- ----------- ---------- ----------
Total operating revenue. 82.2 121.9 262.0 8.9 14.5
========== ========= =========== ========== ==========
Total operating revenue
before inter-segment
eliminations......... 1,017.0 1,363.8 1,807.3 100.0 100.0
========== ==========
Elimination of inter-segment
sales............... (397.1) (531.1) (730.9)
---------- --------- -----------
Consolidated operating
revenues............ 619.9 832.7 1,076.4 100.0 100.0
========== ========= =========== ========== ===========
-----------
(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 2005 to 2006.
43
Years Ended December 31, Rate of
--------------------------------------- Change
from 2005
2004 2005 2006 to 2006
------------ ------------ ----------- ----------
(RMB in billions) (%)
Exploration and Production
Total operating revenues.............. 85.4 115.2 143.2 24.3
Total operating expenses.............. (59.0) (66.9) (80.0) 19.6
------------ ------------ -----------
Total operating income.............. 26.4 48.3 63.2 30.7
============ ============ ===========
Refining
Total operating revenues.............. 358.3 474.7 575.4 21.2
Other income......................... - 9.4 5.0 (46.8)
Total operating expenses.............. (353.3) (487.6) (605.7) 24.2
------------ ------------ -----------
Total operating income/(loss)....... 5.0 (3.5) (25.3) 622.9
============ ============ ===========
Marketing and distribution
Total operating revenues.............. 346.4 463.8 593.6 28.0
Total operating expenses.............. (331.7) (453.4) (563.4) 24.2
------------ ------------ -----------
Total operating income.............. 14.7 10.4 30.2 190.4
============ ============ ===========
Chemicals
Total operating revenues.............. 144.7 178.8 228.1 27.6
Total operating expenses.............. (126.0) (164.5) (210.9) 28.2
------------ ------------ -----------
Total operating income.............. 18.7 14.3 17.2 20.3
============ ============ ===========
Corporate and others
Total operating revenues.............. 82.2 121.9 262.0 115.0
Total operating expenses.............. (84.1) (123.1) (263.5) 114.2
------------ ------------ -----------
Total operating loss................ (1.9) (1.2) (1.5) 25.0
============ ============ ===========
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, 2006 Compared with Year Ended December 31, 2005
In 2006, the operating revenues of this segment were RMB 143.2 billion,
representing an increase of 24.3% over 2005, largely due to the increase in the
sales volume and sales price of crude oil and natural gas compared with those in
2005.
In 2006, this segment sold 37.94 million tonnes of crude oil and 5.7
billion cubic meters of natural gas, representing an increase of 2.9% and 28.9%,
respectively, compared with those in 2005. The average realized price of crude
oil was RMB 3,195 per tonne, representing an increase of 19.9% over 2005. The
average realized price of natural gas was RMB 794 per thousand cubic meters,
representing an increase of 18.0% compared with 2005.
In 2006, the operating expenses of this segment were RMB 80.0 billion,
representing an increase of 19.6% compared with 2005. The increase was mainly
due to:
o An increase of RMB 9.4 billion in taxes other than income tax,
which mainly consist of the special oil income levy and the mining
resource compensation charge;
44
o An increase of RMB 1.6 billion in exploration expenses (including
day hole costs) as a result of our enhanced exploration efforts in
the Southern marine bed and the new areas in Western China; and
o An increase of RMB 1.8 billion in depreciation, depletion and
amortization as a result of our continuous investments in property,
plant and equipment.
In 2006, this segment's operating income was RMB 63.2 billion,
representing an increase of 30.7% compared with 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, the operating revenues of this segment were RMB 115.2 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, 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 66.9 billion,
representing an increase of 13.2% 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 48.3 billion,
representing an increase of 83.1% compared with 2004.
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, 2006 Compared with Year Ended December 31, 2005
In 2006, this segment's operating revenues were approximately RMB 580.4
billion, representing an increase of 19.9% compared with 2005. 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 2005 and 2006,
as well as the percentage changes in sales revenue from 2005 to 2006.
45
As a Percentage of
Rate of Refining Segment's
Year Ended December 31, Change from Total Operating Revenue
------------------------------ ----------------- -------------------------
2005 2006 2005 to 2006 2005 2006
------------- -------------- ---------------- ------------ ----------
(RMB) (RMB) (%) (%) (%)
(in billions)
Refining Segments, operating
revenues
Gasoline....................... 81.0 98.2 21.2 16.7 16.9
Diesel ........................ 187.4 222.2 18.6 38.7 38.3
Light chemical feedstock ...... 98.8 120.1 21.6 20.4 20.7
Other refined petroleum
products.................... 102.1 125.9 27.6 21.1 22.5
Other operating revenues....... 5.4 4.6 (14.8) 1.1 0.8
Other income................... 9.4 5.0 (46.8) 2.0 0.8
------------- -------------- ------------ ----------
Total............................. 484.1 580.4 100.0 100.0
============= ============== ============ ==========
In 2006, the sales revenues of gasoline by the segment were RMB 98.2
billion, representing an increase of 21.2% compared with 2005, accounting for
16.9% of this segment's operating revenues. In 2006, the sales revenues of
diesel by the segment were RMB 222.2 billion, representing an increase of 18.6%
compared with 2005, accounting for 38.3% of this segment's operating revenues.
In 2006, the sales revenues of light chemical feedstock by the segment were RMB
120.1 billion, representing an increase of 21.6% compared with 2005, accounting
for 20.7% of this segment's operating revenues. In 2006, the sales revenues of
refined petroleum products other than gasoline, diesel and light chemical
feedstock were RMB 125.9 billion, representing an increase of 27.6% compared
with 2005, accounting for 22.5% of this segment's operating revenues.
The table below sets forth sales volume and average realized prices by
product for 2005 and 2006, as well as the percentage changes in sales volume and
average realized prices for the periods shown.
Rate of Rate of
change change
Sales volume from Average realized prices from
2005 2006 2005 to 2006 2005 2006 2005 to 2006
---- ---- ------------ ---- ---- ------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline................................ 21.52 21.86 1.6 3,763 4,492 19.4
Diesel.................................. 54.13 57.58 6.4 3,462 3,859 11.5
Light Chemical feedstock ............... 26.45 26.55 0.4 3,734 4,523 21.1
Other refined petroleum products........ 32.72 37.02 13.1 3,121 3,521 12.8
In 2006, the operating expenses of the segment were RMB 605.7 billion,
representing an increase of 24.2% compared with 2005. The increase was primarily
due to the increase in crude oil price and throughput. In 2006, the average
crude oil cost was RMB 3,674 per tonne, representing an increase of 19.9%
compared with 2005. Refining throughput was 143.6 million tonnes (excluding
amounts processed for third parties) in 2006, representing an increase of 5.5%
compared with 2005. The total crude oil costs in 2006 were RMB 527.4 billion,
representing an increase of 26.5% compared with 2005, accounting for 87.1% of
the total operating expenses of the segment, up by 1.6 percentage points over
2005.
In 2006, although crude oil prices remained at a high level, the
Chinese government continued to tightly control domestic prices of refined
petroleum products. As a result, while we sought to lower our crude oil cost
through processing more higher-sulphur and higher acid crude oil as well as
expanding our sales of other refined petroleum products than gasoline and
diesel, particularly those higher value-added products, our refining segment
incurred significant loss. In 2006, the operating losses of the segment, after
the receipt of the one-time cash government grant of RMB 5.0 billion, were
46
RMB 25.3 billion, representing an increase in operating loss of RMB 21.8
billion compared with 2005.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
In 2005, this segment's operating revenues were approximately RMB
484.1 billion, representing an increase of 35.1% 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 Refining Segment's
Year Ended December 31, Change from Total Operating Revenue
------------------------------ ----------------- -------------------------
2004 2005 2004 to 2005 2004 2005
------------- -------------- ---------------- ------------ ----------
(RMB) (RMB) (%) (%) (%)
(in billions)
Refining Segments, operating
revenues
Gasoline....................... 63.8 81.0 27.0 17.8 16.7
Diesel ........................ 145.3 187.4 29.0 40.5 38.7
Light Chemical feedstock ...... 62.1 98.8 59.1 17.3 20.4
Other refined petroleum
products.................... 81.9 102.1 24.7 22.8 21.1
Other operating revenues....... 5.2 5.4 3.8 1.6 1.1
Other income................. - 9.4 - - 2.0
Total............................. 358.3 484.1 35.1 100.0 100.0
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
16.7% 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
38.7% 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 59.1% compared with 2004,
accounting for 20.4% of this segment's operating revenues. The increase in the
sales revenues of light 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 21.1% 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.
47
Rate of Rate of
change change
Sales volume from Average 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 38.0% 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,
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 8.5 billion compared with
2004.
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, 2006 Compared with Year Ended December 31, 2005
In 2006, the operating revenues of this segment were RMB 593.6 billion,
representing an increase of 28.0% compared with 2005. The increase was primarily
due to the increases in sales volume and prices of gasoline, diesel and kerosene
including jet fuel and the further optimization of marketing structure with
increased percentage of retail sales in the total sales volume of gasoline and
diesel.
In 2006, the operating revenues from sales of gasoline and diesel were
RMB 500.1 billion, accounting for 84.3% of the operating revenues of this
segment. The percentage of retail sales in the total sales volume of gasoline
and diesel increased from 59.6% in 2005 to 63.4% in 2006, up by 3.8 percentage
points. The percentage of sales of gasoline and diesel by direct sales in the
total sales volume decreased from 19.1% in 2005 to 17.0% in 2006, down by 2.1
percentage points. The percentage of wholesale sales in the total sales volume
of gasoline and diesel decreased from 21.3% in 2005 to 19.6% in 2006, down by
1.7 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 2005 and 2006 in different forms of sales channels for gasoline and diesel.
48
Average
Rate of Change Realized Prices Rate of Change
Sales Volume from --------------- from
2005 2006 2005 to 2006 2005 2006 2005 to 2006
---- ---- ------------ ---- ---- ------------
(million tonnes) (%) (RMB per tonne) (%)
Gasoline............................ 30.32 32.72 7.9 4,430 5,224 17.9
Retail sale...................... 21.63 23.89 10.4 4,562 5,350 17.3
Direct sale...................... 2.84 2.81 (1.0) 4,206 4,922 17.0
Wholesale........................ 5.85 6.02 2.9 4,050 4,867 20.2
Diesel ............................. 67.93 73.69 8.5 3,767 4,466 18.6
Retail sale...................... 36.90 43.53 18.0 3,885 4,527 16.5
Direct sale...................... 15.91 15.31 (3.8) 3,786 4,599 21.5
Wholesale........................ 15.12 14.86 (1.7) 3,458 4,152 20.1
Kerosene including jet fuel......... 5.96 5.40 (9.4) 3,710 4,524 21.9
Fuel Oil............................ 13.33 15.07 13.0 2,374 2,989 25.9
In 2006, the segment's operating expenses were RMB 563.4 billion,
representing an increase of 24.2% compared with 2005. The increase was mainly
due to the increase in purchase expenses, of which, purchase expenses for
gasoline and diesel were RMB 443.8 billion, up by 24.8% over 2005, accounting
for 78.8% of the segment's operating expenses. In 2006, average purchase prices
of gasoline and diesel increased by 19.0% and 13.5%, respectively, to RMB 4,573
per tonne and RMB 3,992 per tonne compared with 2005. The purchase volume of
gasoline and diesel increased by 7.9% and 8.5%, respectively, compared with 2005
to 32.7 million tonnes and 73.7 million tonnes.
In 2006 the segment's operating profit was RMB 30.2 billion,
representing an increase of RMB 19.8 billion compared with 2005.
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 59.6% 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.
Average
Rate of Change Realized Prices Rate of Change
Sales Volume from --------------- 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
49
In 2005, the segment's operating expenses were RMB 453.4 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.
Chemicals Segment
Our chemicals segment consists of operations related to purchasing
chemical feedstock from our refining segment, producing, marketing and
distribution of petrochemical products.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
In 2006, the segment's operating revenues were RMB 228.1 billion,
representing an increase of 27.6% compared with 2005, which was primarily due to
the increases in prices and sales volume of major chemical products.
In 2006, the sales revenues of the Company's six major categories of
chemical products (namely, basic organic chemicals, monomers and polymers for
synthetic fiber, synthetic resin, synthetic fiber, synthetic rubber and chemical
fertilizer) totaled approximately RMB 215.7 billion, representing an increase of
35.3% compared with 2005, accounting for 94.6% 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 2005 to 2006.
Average
Sales Volumes Realized Prices
------------- Rate of Change --------------- Rate of Change
2005 2006 from 2005 to 2006 2005 2006 from 2005 to 2006
---- ---- ----------------- ----- ---- -----------------
(million tonnes) (%) (RMB per tonne) (%)
Basic organic chemicals......... 9.51 12.75 34.1 4,828 5,609 16.2
Synthetic resins................ 6.37 7.89 24.0 9,007 9,870 9.6
Synthetic rubber................ 0.70 0.83 18.4 13,000 13,885 6.8
Synthetic fiber................. 1.59 1.61 1.8 11,123 11,390 2.4
Synthetic fiber monomers
and polymers.............. 3.00 3.80 26.6 8,872 8,839 (0.4)
Chemical fertilizer............. 1.82 1.65 (9.3) 1,539 1,660 7.9
In 2006, the operating expenses of the segment were RMB 210.9 billion,
representing an increase of 28.2% compared with 2005. 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. In particular, the costs for raw
materials increased by RMB 44.9 billion compared with 2005 as a result of
increased consumption of raw materials and their average emit price, and the
costs for fuel and other utilities increased by RMB 1.7 billion compared with
2005 as a result of increased production of chemical products.
In 2006, the segment's operating profit was RMB 17.2 billion,
representing an increase by 20.3% compared with 2005.
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
50
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.
Average
Sales Volumes Realized Prices
------------- Rate of Change --------------- Rate of Change
2004 2005 from 2004 to 2005 2004 2005 from 2004 to 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 tones 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.
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, 2006 Compared with Year Ended December 31, 2005
In 2006, the operating revenues of corporate and others derived from
international trade were RMB 260.4 billion, and the associated operating
expenses were RMB 259.4 billion, resulting an operating income of RMB 1.0
billion for our international trade activities. In 2006, operating expenses
related to our research institutes and headquarter administration were RMB 2.5
billion.
The segment's operating losses were RMB 1.5 billion, representing an
increase of RMB 300 million in operating losses compared with 2005.
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.
51
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.
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, 2006, our short-term debts (including short-term
loans from Sinopec Group Company and its affiliates) were RMB 58.8 billion and
accounted for 35.0% 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, 2006, cash and cash
equivalents were RMB 8.1 billion as compared to RMB 14.1 billion as of December
31, 2005.
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,
---------------------------------------
2004 2005 2006
------------ -------------- -----------
RMB RMB RMB
(in billion)
Net cash from operating activities:
Net cash provided by operations(1).............................. 104.0 106.9 124.5
Changes in working capital and other
assets and liabilities(2)..................................... (13.0) (1.2) (0.7)
Net interest and tax paid(3).................................... (22.1) (27.5) (28.0)
------------ -------------- -----------
Total.................................................... 68.9 78.2 95.8
------------ -------------- -----------
Cash flows from investing activities:
Capital expenditure including capital expenditure of jointly
controlled entities and exploratory wells expenditure........ (75.3) (72.3) (79.0)
Purchase of investments net of proceeds from disposal of
investments................................................... (1.1) (2.4) (2.9)
Net redemption of in time deposits less maturity of
time deposits................................................. 0.3 0.9 0.5
Acquisition of minority interests in subsidiaries............... - (4.3) (22.0)
Proceeds from disposal of property, plant and equipment ........ 0.3 0.6 0.4
------------ -------------- -----------
Total.................................................... (75.8) (77.5) (103.0)
------------ -------------- -----------
Cash flows from financing activities:
Proceeds from bank and other loans including those of jointly
controlled entities, net of repayments........................ 17.4 0.4 10.6
Proceeds from issuance of corporate bonds, net of repayment..... 3.5 9.9 1.7
Contribution from minority interest, net of distributions to
minority interests............................................ 0.2 (1.6) 0.4
Dividend paid................................................... (8.7) (10.4) (11.3)
Distributions to Sinopec Group Company.......................... (3.7) (3.2) (0.2)
------------ -------------- -----------
Total.................................................... 8.7 (4.9) 1.2
------------ -------------- -----------
Net increase/(decrease) in cash and cash equivalents............... 1.8 (4.2) (6.0)
Cash and cash equivalents at beginning of year..................... 16.5 18.3 14.1
------------ -------------- -----------
Cash and cash equivalents at end of year........................... 18.3 14.1 8.1
============ ============== ===========
------------
(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, unrealized
foreign exchange (gains)/losses, loss on disposal of property, plant
and equipment, net, 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.
52
(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 106.9 billion in
2005 to RMB 124.6 billion in 2006. The increase was primarily due to the
increased income before income tax reflecting our better operating results in
2006.
Cash Flows from Investing Activities
Our cash outflows for capital expenditure projects, including
expenditure on exploratory wells, amounted to RMB 69.3 billion, RMB 69.8 billion
and RMB 78.6 billion in 2004, 2005 and 2006, respectively. In addition, we had
RMB 6.0 billion, RMB 2.5 billion and RMB 0.4 billion in 2004, 2005 and 2006,
respectively, of capital expenditure in our jointly controlled entities. In
addition, we paid RMB 22.0 billion for acquisition of minority interests in a
number of listed subsidiaries, including Qilu Petrochemical Co., Ltd., Yangtze
Petrohemical Co., Ltd., Zhongyuan Petroleum Co., Ltd., Shengli Oil Field Dynamic
Co., Ltd., and Zhenhai Refining and Petrochemical Co., Ltd. in 2006.
Cash Flows from Financing Activities
Net cash from financing activities was RMB 1.2 billion in 2006. We
received net proceeds of RMB 22.7 billion from issuance of corporate bonds
including a six-month corporate bond in the principal amount of RMB 10.0 billion
issued in May 2006 and another six-month corporate bond in the principal amount
of RMB 10.0 billion issued in November 2006, and repaid RMB 21.0 billion of
corporate bonds in 2006. In 2006, we had a net drawdown of RMB 10.6 billion in
bank loans and we paid a dividend of RMB 11.3 billion to our Shareholders.
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, 2006.
As of December 31, 2006
-----------------------------------------------------
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......................... 44,173 44,173 - - -
Long-term debts.......................... 139,263 21,109 52,921 18,382 46,851
---------- ------------- ------------ ------------- ------------
Total contractual obligations............ 183,436 65,282 52,921 18,382 46,851
========== ============= ============ ============= ============
Other commercial commitments(2)
Operating lease commitment............... 145,171 4,711 9,099 8,955 122,406
Capital commitment....................... 115,070 110,044 5,026 - -
Exploration and production licenses...... 663 156 214 67 226
Guarantees((3)).......................... 160 160 - - -
---------- ------------- ------------ ------------- ------------
Total commercial commitments............. 261,064 115,071 14,339 9,022 122,632
========== ============= ============ ============= ============
---------
(1) Contractual obligations include the contractual obligations relating to
interest payments. See Note 31 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, 2006, 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, 2006,
53
the maximum amount of potential future payments under the guarantees
was RMB 160 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, 2006, 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, 2004, 2005 and 2006 and the capital
expenditure in each segment as a percentage of our total capital expenditure for
such year.
2004 2005 2006 Total
------------------- --------------------- -------------------- ---------------------
RMB Percent RMB Percent RMB Percent RMB Percent
-------- ---------- ---------- ---------- --------- ---------- --------- -----------
(in billions, except percentage data)
Exploration and production . 21.2 32 23.0 36 31.7 40 75.9 38
Refining................... 15.3 23 19.1 30 22.0 27 56.4 26
Marketing and distribution. 16.7 26 11.0 17 11.3 14 39.0 18
Chemicals.................. 11.0 17 9.4 15 12.6 16 33.0 16
Corporate.................. 1.6 2 1.2 2 2.2 3 5.0 2
Total................. 65.8 100 63.7 100 79.8 100 209.3 100
In 2006, our total capital expenditure was RMB 79.8 billion.
o The capital expenditure for our exploration and production segment
was RMB 31.7 billion. The oil and gas exploration in Northeast
Sichuan and the preparations for "Sichuan-to-East China Gas
Project" were fully commenced, and the construction of new oil and
gas production capacity in Tahe Oil Field in the west, Shengli
Chengbei Offshore Oil Field in the east and Daniudi Gas Field
progressed smoothly. The newly built crude oil and natural gas
production capacity were 6.5 million tones per annum and 1.9
billion cubic meters per annum, respectively.
o The capital expenditure for our refining segment was RMB 22.0
billion. The newly added comprehensive crude oil processing
capacity was 14.7 million tonnes per annum. The newly built and
revamped projects such as Hainan Refinery and Guangzhou Refinery
have been completed and put into operations. Yanshan Refinery
Upgrading Project has also been completed, and Cezi Island Wharf
and Yizhang-Changling Crude Oil Pipeline projects have been put
into operation. Construction of Qingdao Refinery is going smoothly.
o The capital expenditure for our marketing and distribution segment
was RMB 11.3 billion. We have further improved our refined
pertoleum products sales network through construction, acquisition
and renovation of service stations. In 2006, we had a11
self-operated service stations newly added to our network.
o The capital expenditure for our chemicals segment was RMB 12.6
billion. The newly added production capacity of ethylene, PTA and
styrene-butadiene rubber was 0.7 million tonnes, 0.45 million tones
and 0.1 million tonnes per annum, respectively. Maoming ethylene
revamping project has been completed and put into operation, and
the chemical fertilizer revamping projects in Anqing, Hubei, and
Baling were completed and successfully commissioned. The Fujian
Integration Project, Tianjin Ethylene and Zhenhai Ethylene are
progressing on schedule.
o The capital expenditure for corporate and others was RMB 2.2
billion and used for the upgrading of IT system and construction of
R&D infrastructures.
In addition, in 2006, the three oil production plants we acquired at
the end of 2006 incurred the capital expenditure of RMB 3.4 billion and our
jointly controlled entities incurred the capital expenditure of RMB 260 million.
54
In 2007, our planned capital expenditure is RMB 110.1 billion. The
projected capital expenditure for our exploration and production segment is RMB
53.1 billion which is planned to speed up the construction process of
"Sichuan-to-East China Gas Project" and strengthen the oil and gas exploration
and production in Northeast Sichuan, Ordos and Taihe Oil Field and South
Tianshan Mountain. The projected expenditure for our refining segment is RMB
22.7 billion which is primarily planned for Qingdao Oil Refinery Project, Bohai
Bay crude oil terminal, expansion and revamping of Gaoqiao, Yanshan Refining
Project. The projected capital expenditure for our chemicals segment is RMB 19.5
billion which is planned for Fujian, Tianjin and Zhenhai's ethylene projects and
to promote the expansion, revamping and auxiliary facilities construction for
synthetic fiber monomers and organic materials in Yangzi, Shanghai and Jingling
Petrochemical. The projected capital expenditure for our marketing and
distribution segment is RMB 12 billion which is planned to optimize and improve
the marketing and distribution network of refined petroleum products and
accelerate the construction of the pipelines and oil storage for the refined
petroleum products. The projected expenditure for corporate and others is RMB
2.8 billion.
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.
Consumer Price Index
According to the data provided by the National Bureau of Statistics,
the consumer price index in the PRC increased by 1.5% in 2006, compared with
1.8% in 2005 and 3.9% in 2004. 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.
55
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 37 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 our directors is three years, which
will expire in May 2009.
Name Age Positions with Sinopec Corp.
---- --- ----------------------------
Chen Tonghai 58 Chairman of the Board of Directors
Zhou Yuan 59 Vice Chairman of the Board of Directors
Wang Tianpu 44 Director, President
Zhang Jianhua 42 Director, Senior Vice President
Wang Zhigang 49 Director, Senior Vice President
Dai Houliang 43 Director, Senior Vice President, Chief
Financial Officer
Liu Zhongli 72 Independent Non-executive Director
Shi Wanpeng 69 Independent Non-executive Director
Li Deshui 62 Independent Non-executive Director
Yao Zhongmin 54 Director
Fan Yifei 43 Director
Chen Tonghai, 58, Chairman of the Board of Directors of Sinopec Corp.
and President of Sinopec Group Company. Mr. Chen graduated from Northeast
Petroleum Institute in September 1976 specializing 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 the 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 served as
Director and Chairman of the Second Session of the Board of Directors of Sinopec
Corp. from April 2003 to May 2006; he was elected as Director and Chairman of
the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Zhou Yuan, 59, Vice Chairman of the Board of Directors of Sinopec Corp.
and Vice President of the Sinopec Group Company. Mr. Zhou graduated from East
China Petroleum Institute specializing in petroleum geology in September 1975.
He is a senior Economist. He has extensive experience in the management of
petroleum and petrochemical and government entities. From April 1986 to March
1989, he was the Deputy Secretary of the Party Committee of Xinjiang Petroleum
Administration Bureau (Kelamayi City) as well as the Secretary of the Party
Committee of South Xinjiang Petroleum Exploration Company. From March 1989 to
August 1990, he was the Vice Commander, Deputy Secretary of the Party Committee
and Secretary of the Disciplinary Committee of Talimu Exploration and
Development Headquarter. From August 1990 to January 1992, he was the Deputy
Secretary of the Party Committee of Xinjiang Petroleum Administration Bureau
56
(Kelamayi City) and the Secretary of Politics & Law Committee. From January 1992
to December 1993, he served as Vice Minister of Organization Department of the
Party Committee of Xinjiang Autonomous Region. From December 1993 to January
1998, he served as a member of the Standing Committee of Discipline Committee
and the Deputy Minister of the Party Committee of the Organisation Department of
Xinjiang Autonomous Region. From January 1998 to August 1999, he was a member of
the Standing Committee of the Disciplinary Committee of the Xinjiang Autonomous
Region and the Secretary of the Party Committee of Yili Autonomous District.
From August 1999 to November 1999, he was a member of the Standing Committee of
the Party Committee of the Xinjiang Autonomous Region and the Secretary of the
Party Committee of Yili Autonomous District. From November 1999 to July 2004, he
was a member of Standing Committee of the Party Committee of Xinjiang Autonomous
Region and Minister of the Organization Department of the Party Committee of
Xinjiang Autonomous Region. Since July 2004, he has been the Vice President of
Sinopec Group Company; Mr. Zhou was elected as Director and Vice Chairman of the
Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Wang Tianpu, 44, Director of the Board of Directors and President of
Sinopec Corp.. Mr. Wang graduated from Qingdao Chemical Institute in July 1985
majoring in basic organic chemistry. He obtained his MBA degree in Dalian
University of Science & Technology 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; Mr. Wang was elected
as Director of the Third Session of the Board of Directors of Sinopec Corp. in
May 2006 and he is President of Sinopec Corp..
Zhang Jianhua, 42, Director of the Board of Directors and Senior Vice
President of Sinopec Corp.. Mr. Zhang graduated from East China Chemical
Institute in July 1986 majoring in petroleum refining, and obtained a master's
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 2000 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 & Operation Management
Dept. from November 2003 to November 2005. He has been Senior Vice President of
Sinopec Corp. since March 2005; Mr. Zhang was elected as Director of the Third
Session of the Board of Directors of Sinopec Corp. in May 2006 and has been
Senior Vice President of Sinopec Corp..
Wang Zhigang, 49, Director of the Board of Directors of Sinopec Corp.
and 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 master's 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
2000 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 as
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; Mr. Wang was
elected as Director of the Third Session of the Board of Directors of Sinopec
Corp. in May 2006 and has been Senior Vice President of Sinopec Corp..
Dai Houliang, 43, Director of the Board of Directors of Sinopec Corp.,
Senior Vice President and Chief Finance Officer of Sinopec Corp.. Mr. Dai
graduated from Jiangsu Chemical Institute in July 1985, specializing 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 Director and Deputy General Manager of
Sinopec Yangzi Petrochemical Co., Ltd. from April 1998 to July 2002. He was Vice
Chairman and General Manager 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
57
Co., Ltd. and Chairman of Sinopec Yangzi Petrochemical Company from December
2003 to September 2005. He also served as Chairman of BASF-YPC Company Limited
from December 2004 to October 2006. He has been the Deputy CFO of Sinopec Corp.
from September 2005 to May 2006. Mr. Dai has been Vice President of Sinopec
Corp. from November 2005 to May 2006. In May 2006, he was elected as Director of
the Third Session of the Board of Directors, Senior Vice President and CFO of
Sinopec Corp..
Liu Zhongli, 72, Independent Non-Executive Director of Sinopec Corp..
He graduated from the training course of the Training Department of Central
Communist Party School (undergraduate course) in July 1982. He is a senior
economist engaging in treasury finance administration and government work for a
long time, and has extensive experience in macro-economics, financial and
treasury administration. He was working in Commerce Bureau of Heilongjiang
Province in 1952 and in Planning Commission of Heilongjiang Provincial
Government in 1963. He had served as Deputy Division Director of the General
Affairs Office of Planning Commission of Heilongjiang Provincial Government and
Deputy Secretary General of Planning Commission of Heilongjiang Provincial
Government since September 1973. He was Deputy Director General of Planning
Commission of Heilongjiang Provincial Government and a member of Party Committee
of Planning Commission of Heilongjiang Provincial Government from July 1982 to
May 1983. From May 1983 to May 1985, he was Director General of Planning
Commission (Planning & Economics Department) of Heilongjiang Provincial
Government and Secretary of Party Committee of Planning Commission (Planning &
Economics Department) of Heilongjiang Provincial Government. He served as Deputy
Governor of Heilongjiang Province from May 1985 to January 1988. He was Vice
Minister of the Ministry of Finance and Deputy Secretary of Party Committee of
the Ministry of Finance from February 1988 to July 1990. He served as Deputy
Secretary General of the State Council and Deputy Secretary of Party Committee
of the State Council from July 1990 to September 1992. From September 1992 to
March 1998, he was Minister of the Ministry of Finance and Secretary of Party
Committee of the Ministry of Finance and, from February 1994, concurrently
Director-General of State Administration of Taxation. From March 1998 to
November 2000, he was Head of Economic System Reform Office of the State Council
and Secretary of Party Committee of the Economic System Reform Office of the
State Council. From August 2000 to March 2003, he was Chairman of National
Council for Social Security Fund and Secretary of Party Committee of the
National Council for Social Security Fund. He has been a member of the Standing
Committee of the Tenth Session of the Chinese People's Political Consultative
Conference (CPPCC) and Director-General of the Economics Committee of CPPCC
since March 2003. Since October 2004, he has concurrently been Chairman of the
Chinese Institute of Certified Public Accountants. Mr. Liu was elected as
Independent Non-Executive Director of the Third Session of the Board of
Directors of Sinopec Corp. in May 2006.
Shi Wanpeng, 69, Independent Non-Executive Director of Sinopec Corp., 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. Mr. Shi graduated from Northern Jiaotong University in
August 1960 specializing 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 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 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 Deputy Director of the
Economic and Trade Office of the State Council. From April 1993 to July 1997, he
was Vice Minister of the State Economic and Trade Commission. From July 1997 to
March 1998, he was Chairman (minister level) of the China Textiles Association.
From March 1998 to February 2002, he served as 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. from April 2003 to May
2006; he was elected as Independent Non-Executive Director of the Third Session
of the Board of Directors of Sinopec Corp. in May 2006.
Li Deshui, 62, Independent Non-Executive Director of Sinopec Corp.. Mr.
Li graduated from university in 1967. He is a senior engineer, researcher,
part-time professor of the Economics School of Peking University and the
Economics School of Renmin University of China. After graduating from
university, he was assigned to work at Maanshan Steel Company and has acted as
Workshop Section Head and Dispatch Head. In 1977 he worked at the Planning
Institute of the Metallurgy Department. In 1984 he worked at the Raw Materials
Bureau
58
of the State Planning Commission. In 1988 he acted as Deputy Division Director
of the First Industrial Planning Division of the Long-term Planning Department
of the State Planning Commission. In 1989 he was Division Director of the First
Industrial Planning Division of the Long-term Planning Department and Division
Director of the First Industrial Planning Division of the Long-term Planning and
Industrial Policy Department. In 1992 he acted as Deputy Director of the
National Economy Comprehensive Department of the State Planning Commission. In
May 1996 he was Director of the National Economy Comprehensive Department of the
State Planning Commission. In November 1996, he acted as Vice Mayor of Chongqing
in Sichuan Province. In March 1997 he acted as Vice Mayor of Chongqing
Municipality. In November 1999 he worked as Deputy Director of the Research
Office of the State Council and a member of the Party Committee. In April 2002,
he served as Secretary of the Party Committee and Deputy General Manager of
China International Engineering Consultancy Company. In March 2003 he served as
Secretary of the Party Committee and Head of the State Statistics Bureau, a
member of the Monetary Policy Committee of the People's Bank of China and
Chairman of China Statistics Institute. In March 2005, he was elected as Vice
Chairman of the Thirty-sixth Statistics Commission of the United Nations. In
March 2005 he served as a member of the Tenth Session of the Chinese People's
Political Consultative Conference. In April 2006 he acted as a member of the
Economic Commission. In March 2006, he was the consultant of the State
Statistics Bureau. Mr. Li was elected as Independent Non-Executive Director of
the Third Session of the Board of Directors of Sinopec Corp. in May 2006.
Yao Zhongmin, 54, Director of Sinopec Corp.. Mr. Yao graduated from
Dongbei University of Finance & Economics in September 1977 specializing in
Infrastructure Finance & Credit and graduated as postgraduate from Zhongnan
University of Finance & Economics in December 1996 specializing in Investment
Economics with a master's degree. He is a senior Economist. Mr. Yao has worked
for a long time in financial investment management related work and has
extensive experience in finance investment management. From May 1985 to June
1989, he was a member of the Party Committee of China Construction Bank Henan
Branch and its Vice-Chairman. From June 1989 to June 1992, he was leading the
work of China Construction Bank Henan Branch, and was Deputy Secretary of the
Party Committee and Vice Chairman of the bank. From June 1992 to April 1993, he
served as Secretary of the Party Committee and Chairman of China Construction
Bank Henan Branch. He served as Vice Governor of Henan Province from April 1993
to January 1994. From January 1994 to March 1998, he was a member of the Party
Committee of China Development Bank and its Vice Chairman and Chairman of the
Disciplinary Supervision Committee. From March 1998 to June 1998, he was Deputy
Secretary of the Party Committee of China Development Bank and its Vice Chairman
and Chairman of the Disciplinary and Investigation Committee. From June 1998, he
was the Deputy Secretary of the Party Committee of China Development Bank and
its Vice-Chairman. Mr. Yao was elected as Director of the Third Session of the
Board of Directors of Sinopec Corp. in May 2006.
Fan Yifei, 43, 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's degree in
international economics from 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 acted as Director of the Second
Session of the Board of Directors of Sinopec Corp. from April 2003 to May 2006;
he was elected as Director of the Third Session of the Board of Directors of
Sinopec Corp. in May 2006.
59
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 2009.
Name Age Position with the Company
---- --- -------------------------
Wang Zuoran 56 Chairman of the Board of Supervisors
Zhang Youcai 65 Vice Chairman, Independent Supervisor
Kang Xianzhang 58 Supervisor
Zou Huiping 46 Supervisor
Li Yonggui 66 Independent Supervisor
Su Wensheng 50 Employee Representative Supervisor
Zhang Jitian 59 Employee Representative Supervisor
Cui Guoqi 53 Employee Representative Supervisor
Li Zhonghua 55 Employee Representative Supervisor
Wang Zuoran, 56, Chairman of the Supervisory Board of Sinopec Corp..
Mr. Wang graduated from Shandong Economic Administration Institute in September
1994 specializing in economic administration. Mr. Wang is a professor level
senior economist and 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 the 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 Board of Sinopec Corp. from February 2000 to
April 2003. From April 2003 to May 2006, Mr. Wang served as Supervisor and
Chairman of the Second Session of the Supervisory Board of Sinopec Corp.; he was
elected as Supervisor and Chairman of the Third Session of the Supervisory Board
of Sinopec Corp. in May 2006.
Zhang Youcai, 65, Independent Supervisor and Vice Chairman of the
Supervisory Board of Sinopec Corp.. Mr. Zhang graduated from Nanjing Industrial
University in August 1965 majoring in inorganic chemistry. He is a professor and
has long been engaged in business administration, financial management and
government affairs, 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 of Nantong Chemical Fertilizer Plant. From August 1980 to January
1982, he was Deputy Director-General and member of the Party Committee of the
Industrial Bureau of Nantong Region. From January 1982 to February 1983, he
served as Deputy Director - General of Planning Commission of Nantong Region.
From February 1983 to November 1989, he served as Deputy Mayor, Deputy Secretary
of the Party Committee and Mayor of Nantong City. He was Vice Minister and
member of the Party Committee of Ministry of Finance from December 1989 to July
2002 (from May 1994 to March 1998, he served concurrently as Director-General of
State-owned Assets Administration Bureau). He has been Chairman of the Chinese
Institute of Chief Accountants since November 2002. He has been a member of the
Standing Committee of the Tenth National People's Congress (NPC) and Deputy
Director of its Financial and Economic Committee of NPC from March 2003. Mr.
Zhang served as an Independent Non-Executive Director of the Second Session of
Board of Directors of Sinopec Corp. from April 2003 to May 2006; he was elected
as Independent Supervisor and Vice Chairman of the Third Session of the
Supervisory Board of Sinopec Corp. in May 2006.
Kang Xianzhang, 58, 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 specializing 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 specializing in party and political affairs management
(bachelor course). He is a senior political engineer. From June 1995 to August
1996, he was the Deputy Director of the Organization 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 Organization 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
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
60
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 served as Supervisor of
the Second Session of the Supervisory Board of Sinopec Corp. from April 2003
to May 2006; he was elected as Supervisor of the Third Session of the
Supervisory Board of Sinopec Corp. in May 2006.
Zou Huiping, 46, Supervisor of Sinopec Corp.. Mr. Zou graduated from
Jiangxi Institute of Finance and Economics in July 1986 specializing in trade
economics. He is a professor level senior accountant. From November 1998 to
February 2000, he served as Chief Accountant of Sinopec Group Guangzhou
Petrochemical Company. From February 2000 to December 2001, he was Deputy
Director General of Financial Assets Department of Sinopec Group Company. From
December 2001 to March 2006, he was Deputy Director General of Finance Planning
Department of Sinopec Group Company. In March 2006, he was Director General of
Financial Assets Department of Sinopec Assets Management Co.,Ltd.. Since March
2006, he has been Director General of Audit Department of Sinopec Corp.. Mr. Zou
was elected as Supervisor of the Third Session of the Supervisory Board of
Sinopec Corp. in May 2006.
Li Yonggui, 66, Independent Supervisor of Sinopec Corp.. Mr. Li
graduated from Shandong Institute of Finance and Economics in July 1965,
majoring in treasury finance. He is a senior economist and CPA, and has long
been engaged in tax management with extensive management experience in taxation.
From February 1985 to December 1988, he was Deputy Director-General of Taxation
Bureau of Ministry of Finance. He served as Chief Economist of State
Administration of Taxation from December 1988 to April 1991. From April 1991 to
February 1995, he served as Deputy Director-General of State Administration of
Taxation. He was Chief Economist of State Administration of Taxation from
February 1995 to September 2001. Mr. Li has been Chairman of Chinese Association
of Certified Public Taxation Experts since April 2000. Mr. Li served as
Independent Supervisor of the Second Session of Supervisory Board of Sinopec
Corp. from April 2003 to May 2006; he was elected as Independent Supervisor of
the Third Session of Supervisory Board of Sinopec Corp. in May 2006.
Su Wensheng, 50, Employee Representative Supervisor of Sinopec Corp..
Mr. Su graduated from the General Section of Tsinghua University in December
1980 majoring 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
Deputy Secretary of Party Committee and Secretary of Disciplinary Committee of
Beijing Designing Institute of the former Sinopec Group Company. From November
1996 to December 1998, he was Secretary of Party Committee of Beijing Designing
Institute. Mr. Su has been Director-General of Ideology & Politics Department
and Deputy Secretary of the Affiliated Party Committee of Sinopec Group Company
since December 1998. He has been Managing Deputy Secretary of the Party Working
Committee of the Western New Region Exploration Headquarter of Sinopec Group
since December 2001. Mr. Su served as an Employee Representative Supervisor of
the Second Session of Supervisory Board of Sinopec Corp. from April 2003 to May
2006; he was elected as Employee Representative Supervisor of the Third Session
of Supervisory Board of Sinopec Corp. in May 2006.
Zhang Jitian, 59, Employee Representative Supervisor of Sinopec Corp..
Mr. Zhang graduated from Hohhot Transportation Institute in July 1968
specializing in road and bridge construction, and he also graduated from Sinopec
Management Institute in July 1986 specializing in enterprise management
(undergraduate course). He is a senior political engineer. From August 1996 to
December 1998, he was Deputy Director of Personnel and Educational Department of
the former Sinopec Group Company; from December 1998 to September 2005, he was
Deputy Director of Personnel and Educational Department of Sinopec Group
Company; he has been Deputy Director (remunerate as Director) of Personnel
Department of Sinopec Corp. since September 2005. Mr. Zhang was elected as
Employee Representative Supervisor of the Third Session of Supervisory Board of
Sinopec Corp. in May 2006.
Cui Guoqi, 53, Employee Representative Supervisor of Sinopec Corp.. Mr.
Cui graduated from the Correspondence Teaching College of Renmin University of
China in December 1985 majoring in industrial business management. In January
1997, he obtained a MBA degree from the Business Management School of Renmin
University of China. He is a professor level senior political engineer. Mr. Cui
has served as Director and Trade Union Chairman of Sinopec Yanshan Petrochemical
Company since February 2000. He served as a member of the Executive Committee of
All China Federation of Trade Unions in 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. He was Deputy Secretary of Party
Committee of Sinopec Yanshan Petrochemical Company from August 2005 to
61
November 2006. Mr. Cui has been the Deputy Secretary (remunerate as Secretary)
of Party Committee of Sinopec Yanshan Petrochemical Company since November
2006. Mr. Cui served as Employee Representative Supervisor of the Second
Session of Supervisory Board of Sinopec Corp. from April 2003 to May 2006; he
was elected as Employee Representative Supervisor of the Third Session of
Supervisory Board of Sinopec Corp. in May 2006.
Li Zhonghua, 55, Employee Representative Supervisor of Sinopec Corp..
Mr. Li graduated from the Correspondence Teaching Department of the Party
School of Shengli Oilfield in June 1996 specializing in party and political
affairs management (undergraduate course). He also graduated from the
Correspondence Teaching College of the Party School of Shandong Provincial
Party Committee in December 1998 specializing in economic management. He is a
professor level senior political engineer. From March 1995 to January 2004, he
had been Secretary of Party Committee and Vice General Manager of No. 2
Drilling Company of Shengli Petroleum Administration Bureau; Secretary of
Party Committee, General Manager of Offshore Drilling Company of Shengli
Petroleum Administration Bureau; and Deputy Party Secretary, General Manager
of the Yellow River Drilling Company of Shengli Petroleum Administration
Bureau successively. From January 2004 to November 2004, he was Deputy Chief
Engineer, Deputy Secretary of Party Committee and General Manager of the
Yellow River Drilling Company of Shengli Petroleum Administration Bureau; he
has been member of the Standing Committee of Party Committee and Chairman of
the Trade Union of Shengli Petroleum Administration Bureau since November
2004. He was Deputy Secretary of Party Committee of Shengli Petroleum
Administration Bureau since April 2006. Mr. Li was elected as Employee
Representative Supervisor of the Third Session of Supervisory Board of Sinopec
Corp. in May 2006.
Other Executive Officers
Name Age Positions with Sinopec Corp.
---- --- ----------------------------
Cai Xiyou 45 Senior Vice President
Zhang Kehua 53 Vice President
Zhang Haichao 49 Vice President
Jiao Fangzheng 44 Vice President
Chen Ge 44 Secretary of the Board of Directors
Cai Xiyou, 45, Senior Vice President of Sinopec Corp.. 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 Deputy General Manager of Jinzhou Petrochemical Company of
the former Sinopec Group Company. From May 1996 to December 1998, he was Deputy
General Manager of Dalian Western Pacific Petrochemical Co., Ltd (WEPEC). From
December 1998 to June 2001, he was Deputy General Manager of Sinopec Sales
Company, and from June 2001 to December 2001, he was Executive Deputy Manager of
Sinopec Sales Company. He has been Director and General Manager of China
International United Petrochemical Company Limited (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.
Zhang Kehua, 53, Vice President of Sinopec Corp. Mr. Zhang graduated
from Shanghai Chemical Engineering University in January 1980 majoring in
chemical and mechanical engineering. He is a senior engineer and had his
master's degree from University of Petroleum majoring in management science and
engineering in December 2000. He was Deputy Manager of No. 3 Construction
Company of the former Sinopec Group Company from February 1994 to April 1996.
From April 1996 to December 1998, he was Deputy Director General (Deputy Manager
of Sinopec Engineering Incorporation) of the Engineering Department of the
former Sinopec Group Company. He was Deputy Director General of the former
Engineering Department of Sinopec Group Company from December 1998 to December
2001 and was Deputy Director General of Engineering Department of Sinopec Group
Company from December 2001 to September 2002. Mr. Zhang was Director General of
Engineering Department of Sinopec Group Company from September 2002 to October
2004. Mr. Zhang has served as the Assistant to the President of Sinopec Group
Company and Director General of Engineering Department since October 2004. Mr.
Zhang has been Vice President of Sinopec Corp. since May 2006.
Zhang Haichao, 49, Vice President of Sinopec Corp.. Mr. Zhang graduated
from Zhoushan Commercial and Technical School in December 1979, specializing
62
in oil storage and transportation. He also graduated from Jilin Petrochemical
Institute in July 1985 specializing in recycling of lubricating oil. From
January 2001 to June 2002, he participated in the business administration
program at Macau Science & Technology University. He is an economist. He
served as Deputy General Manager of Zhejiang Petroleum Company from March 1998
to September 1999. He served as General Manager of Zhejiang Petroleum Company
from September 1999 to February 2000, and has served as Manager of Sinopec
Zhejiang Petroleum Company from February 2000 to September 2005. He has been
Chairman of Sinopec-BP Zhejiang Petroleum Sales Co., Ltd. since April 2004. He
was Secretary of the Party Committee, Vice Chairman and Deputy General
Manager of Sinopec Sales Co., Ltd. from October 2004 to November 2005. He was
Secretary of Party Committee, Chairman and General Manager of Sinopec Sales
Co., Ltd. from November 2005 to June 2006. He has been Chairman and General
Manager of Sinopec Sales Co., Ltd. since June 2006. He served as Employee
Representative Supervisor of the Second Session of the Supervisory Board of
Sinopec Corp. from April 2003 to November 2005. Mr. Zhang has been Vice
President of Sinopec Corp. since November 2005.
Jiao Fangzheng, 44, Vice President of Sinopec Corp.. Mr. Jiao won his
bachelor's degree in petroleum exploration and won his doctoral degree in
natural gas engineering from Southwest Petroleum Institute respectively in July
1983 and November 2000. Mr. Jiao is a professor level senior engineer. From
January 1999 to February 2000, he was Chief Geologist of Zhongyuan Petroleum
Exploration Bureau of Sinopec Group Company. He then served as Deputy Manager
and Chief Geologist of Zhongyuan Oilfield Company of Sinopec Group Company from
February 2000 to February 2001. He was Vice President of Sinopec Exploration and
Production Research Institute from July 2000 to March 2001. He then served as
Deputy Director General of Sinopec Oilfield E & P Department from March 2001 to
June 2004. Since June 2004, he served as Manager of the Northwest Company of
Sinopec Group Company. Mr. Jiao has served as Vice President of Sinopec Corp.
since October 2006.
Chen Ge, 44, 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 his 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 the Board Secretariat
of Sinopec Corp.. Mr. Chen has been 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.
The following table sets forth the compensation on individual basis for
our directors, supervisors and executive officers who receive compensation from
us in 2006.
Remuneration paid by
Name Position with the Company the Company in 2006
------------------------- ----------------------------- ----------------------
(RMB thousand)
Directors
---------
Chen Tonghai Chairman 0
Zhou Yuan Vice Chairman 0
Wang Tianpu Director, President 616
Zhang Jianhua Director, Senior Vice
President 576
Wang Zhigang Director, Senior Vice
President 576
Dai Houliang Director, Senior Vice
President, CFO 446
Liu Zhongli Independent Non-executive
Director 109
Shi Wanpeng Independent Non-executive
Director 121
63
Li Deshui Independent Non-executive
Director 109
Yao Zhongmin Director 35
Fan Yifei Director 35
Wang Jiming Vice Chairman (till May
2006) 149
Mou Shuling Director (till May 2006) 115
Zhang Jiaren Director, CFO (till May
2006) 122
Cao Xianghong Director (till May 2006) 144
Liu Genyuan Director (till May 2006) 0
Gao Jian Director (till May 2006) 0
Chen Qingtai Independent Non-executive
Director (till May 2006) 12
Ho Tsu Kwok Charles Independent Non-executive
Director (till May 2006) 9
Zhang Youcai Independent Non-executive
Director (till May 2006) 9
Cao Yaofeng Employee Representative
Director (till May 2006) 113
Supervisors
-----------
Wang Zuoran Chairman of Supervisory
Committee 0
Zhang Youcai Vice Chairman,
Independent Supervisor 109
Kang Xianzhang Supervisor 0
Zou Huiping Supervisor 102
Li Yonggui Independent Supervisor 121
Su Wensheng Employee Representative
Supervisor 354
Zhang Jitian Employee Representative
Supervisor 102
Cui Guoqi Employee Representative
Supervisor 329
Li Zhonghua Employee Representative
Supervisor 94
Zhang Chongqing Supervisor (till May 2006) 0
Wang Peijun Supervisor (till May 2006) 0
Wang Xianwen Supervisor (till May 2006) 0
Zhang Baojian Supervisor (till May 2006) 0
Cui Jianmin Independent Supervisor
(till May 2006) 9
Zhang Xianglin Employee Representative
Supervisor (till May 2006) 239
Other Executive officers
------------------------
Cao Xiyou Senior Vice President 518
Zhang Kehua Vice President 123
Zhang Haichao Vice President 415
Jiao Fangzheng Vice President 35
64
Chen Ge Secretary to the Board of
Directors 355
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 Liu Zhongli, Shi Wanpeng and Li
Deshui. The members of strategy committee are Wang Tianpu, Zhang Jianhua, Wang
Zhigang, Li Deshui, Yao Zhongmin and Fan Yifei. The members of remuneration and
evaluation committee are Liu Zhongli, Shi Wanpeng, Li Deshui and Dai Houliang.
D. EMPLOYEES
As of December 31, 2004, 2005 and 2006, we had approximately 389,451,
364,528 and 340,886 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, 2006.
By Segment Percentage of Total Number of
Number of Employees Employees (%)
------------------- -----------------------------
Exploration and Production ........ 112,702 33.1
Refining .......................... 81,352 23.8
Marketing and Distribution ........ 61,269 18.0
Chemicals ......................... 77,185 22.6
Corporate and Others .............. 8,378 2.5
Total.............................. 340,886 100.0
By Employee's Scope of Work Percentage of Total Number of
Number of Employees Employees (%)
------------------- -----------------------------
Production......................... 173,415 50.9
Sales.............................. 60,479 17.7
65
Technical.......................... 44,525 13.1
Finance............................ 8,991 2.6
Administration..................... 27,270 8.0
Others............................. 26,206 7.7
Total.............................. 340,886 100.0
By Education Percentage of Total Number of
Number of Employees Employees (%)
------------------- -----------------------------
Master's degree and above......... 4,392 1.3
University ....................... 54,764 16.1
Tertiary education................ 72,728 21.3
Technical/polytechnic school...... 34,416 10.1
Secondary, technical/polytechnic
school or below................... 174,586 51.2
Total............................. 340,886 100.0
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 implemented an employee reduction plan since 2001 by means of
retirement, voluntary resignation and/or redundancy to enhance our efficiency
and operating profit. In 2006, we recorded employee reduction expenses of
approximately RMB 236 million relating to the reduction of 4,000 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 April 6, 2007.
Number of
Shares Owned Percentage of
Shareholder (in millions) Ownership (%)
----------- --------------- ------------------
Sinopec Group Company.................... 65,758.04 75.84
As of January 1, 2004, Sinopec Group Company held 55.06% of our total
outstanding shares. In 2004 and 2005, China Development Bank ("CDB") and China
Cinda Asset Management Corporation ("Cinda") transferred a total of
approximately 8.1 billion and 5.9 billion state-owned shares of us to Sinopec
Group Company, respectively. In 2006, China Orient Asset Management Corporation,
Cinda and CBD transferred a total of approximately 4.8 billion state-owned
shares of us to Sinopec Group Company. On September 25, 2006, pursuant to our
reform plan to convert all non-tradable domestic shares into tradable domestic
shares, our shareholders of non-tradable shares, including Sinopec Group
Company, transferred a total of 784 million shares to our shareholders of
tradable A-shares at no additional cost, and obtained the rights to list their
shares for trading on Shanghai Stock Exchange with certain selling restrictions.
As a result of the above share transfers and the reform, Sinopec Group Company
held 75.84% of our total outstanding shares as of April 6, 2007.
As of March 30, 2007, we had 66,337,951,000 tradable shares with
selling restrictions, 16,780,488,000 H shares and 3,584,000,000 A shares
outstanding. As of March 30, 2007, 1,327,715,600 H shares were registered in the
name of a nominee of Citibank, N.A., the depositary under our ADS deposit
agreement.
66
Citibank, N.A. has advised us that, as of March 30, 2007, 13,277,156 ADSs,
representing 1,327,715,600 H shares, were held of record by Cede & Co. and 62
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 75.84% of our outstanding equity as of April
6, 2007. 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 is 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.
On March 31, 2006, we entered into a supplemental agreement to amend
the terms of the various related party transactions with Sinopec Group Company.
The supplemental agreement is filed as an exhibit to this annual report on Form
20-F, and brief summary of major changes of the supplemental agreement is set
forth below:
o the Product Agency Agreement shall be terminated immediately as of
the date of the Supplemental Agreement;
o the term of the Agreement for Provision of Culture, Education,
Hygiene and Community Services shall be extended to December 31,
2009 starting from January 1, 2007; and
o the term of the Agreement for Mutual Provision of Products and
Ancillary Services shall be extended to December 31, 2009 starting
from January 1, 2007.
In addition, we have amended the Land Use Rights Leasing Contract and
Property Leasing Contract several times since 2000 to reflect the changes in
rental areas due to our acquisitions of various assets from Sinopec Group
Company as well as rent adjustments. On March 31, 2006, we entered into a
memorandum on adjustment of the rent of land use rights with Sinopec Group
Company. Pursuant to the memorandum, the parties confirmed that the aggregate
areas of the Land Use Rights Leasing Contract were 426 million square meters,
and agreed that the total annual rents shall be RMB 3.1 billion.
Our aggregate amount of connected transactions actually occurred during
2006 was RMB 228.8 billion, of which, incoming trade amounted to RMB 99.5
billion, and outgoing trade amounted to RMB 129.3 billion (including, RMB 129.2
billion of sales of products and services, RMB 52 million of interest earned,
RMB 60 million of income from agency fee). All of these transactions satisfied
the conditions of waiver granted by the Hong Kong Stock Exchange. In 2006, the
products and services provided by Sinopec Group Company (procurement, storage,
transportation, exploration and production services, production-related
services) to us were RMB 87.8 billion, representing 8.9% of our operating
expenses for year 2006, a decrease of 0.7 percentage points compared with those
in 2005, which were within the cap of 18% for waiver. The auxiliary and
community services provided by Sinopec Group Company to us were RMB 1.7 billion,
representing 0.17% of the operating expenses, with a slight decrease compared
with 0.23% in the preceding year, which were within the cap of 2% for waiver. In
2006, the product sales from us to Sinopec Group Company amounted to RMB 76.8
billion, representing 7.16% 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, 2006 was approximately RMB 3.2
billion. In 2006, we paid an insurance premium of approximately RMB 1.3
billion to Sinopec Group Company under the terms of its SPI Fund.
Please also see Note 30 to our consolidated financial statements
included elsewhere in this annual report.
67
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 surplus reserve funds which are 10% 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.
In accordance with the board resolution adopted on April 6, 2007, our
board has proposed a final dividend of RMB 0.15 per ordinary share for the year
ended December 31, 2006, which is equivalent to RMB 15.0 per ADS. After
deducting the interim dividends distribution of RMB 0.04 per ordinary share, the
year end dividend is RMB 0.11 per ordinary share, which is equivalent to RMB 11
per ADS. The total dividend to be paid amounted to approximately RMB 9,537
million. The resolution is subject to the approval by the general shareholders'
meeting.
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.
68
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 hares, 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)
2007 April (up to 6.90 6.63 87.76 85.78 10.34 10.02
April 4)
March 6.65 6.57 86.22 72.92 9.97 8.56
February 6.78 6.25 86.27 79.25 9.89 8.37
January 7.32 6.30 92.23 80.92 11.20 9.20
December 7.20 6.23 92.64 80.58 9.15 7.55
November 6.32 5.39 80.89 69.05 8.20 6.49
2006 October 5.40 4.67 69.37 60.64 6.43 5.30
Quarterly Data
2007 First Quarter
2006 Fourth Quarter 7.20 4.67 92.64 60.64 9.15 5.30
Third Quarter 4.92 4.15 63.12 53.17 6.80 5.67
Second Quarter 5.50 3.775 71.94 47.40 7.24 5.09
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
Annual Data
2006 7.20 3.775 92.64 47.40 9.15 4.58
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
-----------
Source: Bloomberg
69
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
70
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 surplus reserve fund; and
o allocations to a discretionary surplus reserve fund if approved by
the shareholders.
The allocations to the statutory surplus reserve fund shall be 10% of
our net income determined in accordance with PRC accounting rules and
regulations.
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
71
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;
72
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
73
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 10 percent or more 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 1 percent or more 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
74
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 10 percent or more 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
75
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
76
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 20%. However, such withholding tax is not applicable with respect to those
77
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 20% 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 20%. 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 20% withholding tax.
In accordance with the New Corporate Income Tax Law that will become
effective on January 1, 2008, dividends paid by PRC companies to foreign
enterprises with no permanent establishment in China are generally subject to a
PRC withholding tax levied at a flat rate of 20%. However, such withholding tax
may be exempted or reduced by the State Council. As the State Council has not
yet promulgated any regulations on exemption or reduction of the withholding tax
as of the date of this annual report, it may become applicable to holders of H
shares and ADSs as of January 1, 2008, unless exempted or reduced pursuant to an
applicable double-taxation treaty or other exemptions.
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 20% 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.
In accordance with the New Corporate Income Tax Law, capital gains
realized by foreign enterprises with no permanent establishment in China upon
the sale of oversea shares are generally subject to a PRC withholding tax levied
at a flat rate of 20%. However, such withholding tax may be exempted or reduced
by the State Council under the New Corporate Income Tax Law. As the State
Council has not yet promulgated any regulations on exemption or reduction of the
withholding tax as of the date of this annual report, it may become applicable
to holders of H shares and ADSs as of January 1, 2008, unless exempted or
reduced pursuant to an applicable double-taxation treaty or other exemptions.
78
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 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.
General
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
79
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 dollars 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
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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. Therefore,
fluctuations of prices of crude oil, refined products and petrochemicals have a
significant effect on our operating expenses and net profits.
81
Foreign Exchange Rate Risk
The Renminbi is not a freely convertible currency. With the
authorization from the PRC government, the PBOC 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,
2006 and 2005. 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, 2006 and 2005. For debt
obligations, the table presents cash flows and related weighted average rates by
expected maturity dates.
82
As of December 31, 2006:
Expected maturity
------------------------------------------------------------------
2007 2008 2009 2010 2011 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
---------------------------------------------------
Assets
Cash and cash equivalents
In United States dollar 761 - - - - - 761 761
In Hong Kong dollar 27 - - - - - 27 27
In Japanese yen 17 - - - - - 17 17
In Euro 23 - - - - - 23 23
Liabilities
Debts in United States dollar
< Fixed rate 4,236 220 196 195 113 521 5,481 5,362
Average interest rate 5.3% 3.3% 3.1% 2.7% 2.2% 2.0%
Variable rate 3,902 527 537 546 561 1,305 7,378 7,378
Average interest rate (1) 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Debts in Japanese yen
Fixed rate 165 95 95 95 68 775 1,293 1,479
Average interest rate 2.8% 2.6% 2.6% 2.6% 2.6% 2.6%
Variable rate 361 260 256 180 180 183 1,420 1,420
Average interest rate (1) 3.2% 3.2% 3.1% 3.0% 3.0% 2.1%
Debts in Hong Kong dollar
Fixed rate 50 - - - - - 50 50
Average interest rate 4.7% - - - - -
Variable rate 8,213 - - - - - 8,213 8,213
Average interest rate (1) 4.5% - - - - -
Debts in Euro
Fixed rate 25 25 25 26 - - 101 106
Average interest rate 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 31,2006.
83
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.
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 25 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, 2006 and 2005.
84
As of December 31, 2006:
Expected maturity
----------------------------------------------------
2007 2008 2009 2010 2011 thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
(RMB equivalent in millions, except interest rates)
---------------------------------------------------
Assets
Cash and cash equivalents
In Renminbi 7,260 - - - - - 7,260 7,260
In United States dollar 761 - - - - - 761 761
In Hong Kong dollar 27 - - - - - 27 27
In Japanese yen 17 - - - - - 17 17
In Euro 23 - - - - - 23 23
Time deposits with financial institutions
In Renminbi 635 - - - - - 635 635
Liabilities
Debts in Renminbi
Fixed rate 40,293 24,125 8,057 2,477 258 41,031 116,241 115,767(1)
Average interest rate 4.7% 5.2% 5.0% 4.8% 4.7% 0.6%
Variable rate 1,515 1,277 10,895 7,315 4,130 2,516 27,648 27,648
Average interest rate (2) 5.6% 5.6% 5.6% 5.8% 5.9% 6.1%
Debts in United States dollar
Fixed rate 4,236 220 196 195 113 521 5,481 5,362
Average interest rate 5.3% 3.3% 3.1% 2.7% 2.2% 2.0%
Variable rate 3,902 527 537 546 561 1,305 7,378 7,378
Average interest rate (2) 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Debts in Japanese yen
Fixed rate 165 95 95 95 68 775 1,293 1,479
Average interest rate 2.8% 2.6% 2.6% 2.6% 2.6% 2.6%
Variable rate 361 260 256 180 180 183 1,420 1,420
Average interest rate (2) 3.2% 3.2% 3.1% 3.0% 3.0% 2.1%
Debts in Hong Kong dollar
Fixed rate 50 - - - - - 50 50
Average interest rate 4.7% - - - - -
Variable rate 8,213 - - - - - 8,213 8,213
Average interest rate (2) 4.5% - - - - -
Debts in Euro
Fixed rate 25 25 25 26 - - 101 106
Average interest rate 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, 2006.
85
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 13,346 - - - - - 13,346 13,346
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 29,198 16,233 24,508 5,787 5,517 41,586 122,829 122,588(1)
Average interest rate 4.5% 5.1% 5.1% 5.0% 5.0% 0.7%
Variable rate 1,418 1,167 420 1,158 3,265 2,685 10,113 10,113
Average interest rate (2) 5.3% 5.4% 5.4% 5.4% 5.4% 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.
86
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
Not applicable
ITEM 15. CONTROLS AND PROCEDURES
Disclosure 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.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) of the
Securities Exchange Act of 1934). The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with International Financial Reporting Standards and
generally accepted accounting principles in the United States of America.
Internal control over financial reporting cannot provide absolute
assurance of achieving financial reporting objectives because of its inherent
limitations. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over
financial reporting based upon the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission as of December 31, 2006. Based on that evaluation,
our management has concluded that our internal control over financial reporting
was effective as of December 31, 2006 based on the these criteria.
KPMG, an independent registered public accounting firm, has audited the
consolidated financial statements included in this annual report on Form 20-F
and, as part of the audit, has issued a report, included herein, on our
87
management's assessment of the effectiveness of our internal control over
financial reporting and the effectiveness of our internal control over
financial reporting.
Attestation Report of the Registered Public Accounting Firm
The Board of Directors and Shareholders of
China Petroleum & Chemical Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that China
Petroleum & Chemical Corporation and subsidiaries (the "Group") maintained
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Group's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Group's
internal control over financial reporting based on our audit.
We conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Group maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by COSO. Also, in our opinion, the
Group maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control--Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Group as of December 31, 2005 and 2006, and the related
consolidated statements of income, cash flows and equity for each of the years
in the three-year period ended December 31, 2006, and our report dated April 6,
2007 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG
Hong Kong, China
April 6, 2007
88
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2006, there have been no changes in
our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors has determined that Mr. Liu Zhongli qualifies as
an audit committee financial expert in accordance with the terms of Item 16A of
Form 20-F. Mr. Liu was appointed as an independent non-executive director and a
member of the audit committee of the third board of our company in May 2006. For
Mr. Liu'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 Tianpu (President), and our principal
financial officer, Mr. Dai Houliang (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 out 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 2005 and
2006:
Audit Fees Audit-Related Fees Tax Fees Other Fees
---------- ------------------ -------- ----------
2005 RMB 72 million -- -- --
2006 RMB 81 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.
89
ITEM 19. EXHIBITS
1* Articles of Association of the Registrant, amended and adopted by the
shareholders' meeting on May 24, 2006 (English translation).
4.1* Forms of Director Service Contracts dated May 24, 2006 (English
translation).
4.2* Forms of Supervisor Service Contracts dated May 24, 2006 (English
translation).
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).
90
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).
4.15* Agreement on Adjustment to Related Party Transactions between China
Petrochemical Corporation and China Petroleum & Chemical Corporation
dated June 11, 2001 (English translation).
4.16* Land Use Right Leasing Agreement between China Petrochemical
Corporation and China Petroleum & Chemical Corporation dated August
22, 2003 (English translation).
4.17* 2004 Agreement on Adjustment to Related Party Transactions between
China Petrochemical Corporation and China Petroleum & Chemical
Corporation dated October 31, 2004 (English translation).
4.18* Memorandum on Adjustment of Rent of Land Use Rights between China
Petrochemical Corporation and China Petroleum & Chemical Corporation
dated March 31, 2006 (English translation).
4.19* Supplementaral Agreement on Related Party Transactions between China
Petrochemical Corporation and China Petroleum & Chemical Corporation
dated March 31, 2006 (English translation).
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.
91
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, 2004, 2005 and 2006 ...........................................F-3
Consolidated balance sheets as of December 31, 2005 and 2006................F-4
Consolidated statements of cash flows for the years ended
December 31, 2004, 2005 and 2006............................................F-5
Consolidated statements of equity for the years ended December 31, 2004,
2005 and 2006...............................................................F-7
Notes to consolidated financial statements..................................F-8
Supplemental information on oil and gas producing activities (unaudited)....F-71
F-1
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, 2005 and 2006, and the related consolidated statements of income, cash flows
and equity for each of the years in the three-year period ended December 31,
2006, 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 the Group as
of December 31, 2005 and 2006, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2006, in conformity with International Financial Reporting Standards promulgated
by the International Accounting Standards Board.
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 37 to the consolidated financial statements.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Group's internal control over financial reporting as of December 31, 2006, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated April 6, 2007 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG
Hong Kong, China
April 6, 2007
F-2
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Amounts in millions, except per share data)
Years ended December 31,
--------------------------------
Note 2004 2005 2006
---- ----------- ----------- ---------
RMB RMB RMB
Operating revenues
Sales of goods....................................... 597,318 799,259 1,044,652
Other operating revenues............................. 3 22,597 24,013 26,750
----------- ----------- ---------
619,915 823,272 1,071,402
Other income 4 - 9,415 5,000
Operating expenses
Purchased crude oil, products and operating supplies
and expenses...................................... (442,503) (651,201) (861,437)
Selling, general and administrative expenses......... (32,969) (33,880) (37,758)
Depreciation, depletion and amortization............. (32,493) (31,618) (34,235)
Exploration expenses, including dry holes............ (6,396) (6,411) (7,983)
Personnel expenses................................... 5 (18,719) (18,649) (19,857)
Employee reduction expenses.......................... 6 (919) (369) (236)
Taxes other than income tax.......................... 7 (16,347) (17,185) (28,639)
Other operating expenses, net........................ 8 (6,678) (5,128) (2,437)
----------- ----------- ---------
Total operating expenses........................ (557,024) (764,441) (992,582)
----------- ----------- ---------
Operating income.......................................... 62,891 68,246 83,820
----------- ----------- ---------
Finance costs
Interest expense..................................... 9 (4,583) (5,926) (7,437)
Interest income...................................... 378 384 555
Foreign exchange losses.............................. (223) (79) (153)
Foreign exchange gains............................... 61 996 935
----------- ----------- ---------
Net finance costs............................... (4,367) (4,625) (6,100)
Investment income......................................... 121 178 256
Income from associates.................................... 797 857 947
----------- ----------- ---------
Income before income tax.................................. 59,442 64,656 78,923
Income tax................................................ 10 (18,091) (19,880) (23,515)
----------- ----------- ---------
Net income ............................................. 41,351 44,776 55,408
=========== ========== ==========
Attributable to:
Equity shareholders of the Company............... 35,335 41,455 53,912
Minority interests............................... 6,016 3,321 1,496
----------- ----------- ---------
Net income ............................................. 41,351 44,776 55,408
=========== ========== ==========
Basic and diluted earnings per share...................... 11 0.41 0.48 0.62
=========== ========== ==========
Weighted average number of shares......................... 11 86,702 86,702 86,702
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2006
(Amounts in millions)
December 31,
------------
Note 2005 2006
----- -----
RMB RMB
ASSETS
Current assets
Cash and cash equivalents................................. 14,069 8,088
Time deposits with financial institutions................. 1,002 635
Trade accounts receivable, net............................ 12 14,646 15,590
Bills receivable.......................................... 7,167 8,757
Inventories............................................... 13 89,519 93,436
Prepaid expenses and other current assets................. 14 20,654 18,961
-------- --------
Total current assets................................. 147,057 145,467
-------- --------
Non-current assets
Property, plant and equipment, net........................ 15 317,382 366,475
Construction in progress.................................. 16 54,380 53,180
Goodwill.................................................. 17 2,203 14,325
Investments............................................... 18 3,151 2,582
Interest in associates.................................... 19 9,267 11,617
Deferred tax assets....................................... 21 6,072 7,158
Lease prepayments......................................... 2,407 2,937
Long-term prepayments and other assets.................... 22 7,121 8,049
-------- --------
Total non-current assets............................. 401,983 466,323
-------- --------
Total assets......................................... 549,040 611,790
======== ========
LIABILITIES AND EQUITY
Current liabilities
Short-term debts.......................................... 23 40,411 53,359
Loans from Sinopec Group Company and its affiliates....... 23 2,805 5,401
Trade accounts payable.................................... 24 53,817 52,125
Bills payable............................................. 23,243 21,685
Accrued expenses and other payables....................... 25 49,523 69,056
Income tax payable........................................ 5,212 9,176
-------- --------
Total current liabilities............................ 175,011 210,802
-------- --------
Non-current liabilities
Long-term debts........................................... 23 72,359 69,970
Loans from Sinopec Group Company and its affiliates....... 23 39,933 39,095
Deferred tax liabilities.................................. 21 5,975 6,339
Other liabilities......................................... 782 795
-------- --------
Total non-current liabilities........................ 119,049 116,199
-------- --------
Total liabilities.................................... 294,060 327,001
-------- --------
Equity
Share capital............................................. 26 86,702 86,702
Reserves.................................................. 27 137,599 176,143
-------- --------
Total equity attributable to equity shareholders of the
Company 224,301 262,845
Minority interests........................................ 30,679 21,944
-------- --------
Total equity......................................... 254,980 284,789
-------- --------
Total liabilities and equity......................... 549,040 611,790
======== ========
See accompanying notes to consolidated financial statements.
F-4
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(Amounts in millions)
Years ended December 31,
-----------------------
Note 2004 2005 2006
---- ---- ----
RMB RMB RMB
Net cash generated from operating activities...................... (a) 68,941 78,214 95,875
--------- ------------ ------
Cash flows from investing activities
Capital expenditure.......................................... (64,313) (63,993) (70,604)
Exploratory wells expenditure................................ (4,959) (5,810) (7,985)
Capital expenditure of jointly controlled entities........... (6,035) (2,474) (382)
Purchase of investments, investments in associates and
subsidiaries, net of cash acquired........................ (1,305) (3,650) (3,571)
Proceeds from disposal of investments and investments in
associates................................................ 186 1,264 717
Proceeds from disposal of property, plant and equipment...... 322 567 406
Acquisition of minority interests in subsidiaries............ -- (4,324) (21,971)
Purchase of time deposits with financial institutions........ (1,932) (565) (916)
Maturity of time deposits with financial institutions........ 2,217 1,462 1,283
--------- ------------ ------
Net cash used in investing activities................... (75,819) (77,523) (103,023)
--------- ------------ ------
Cash flows from financing activities
Proceeds from bank and other loans........................... 403,201 554,187 764,659
Proceeds from bank and other loans of jointly controlled
entities.................................................. 3,014 3,954 87
Proceeds from issuance of corporate bonds................... 3,472 9,875 22,689
Repayments of bank and other loans........................... (388,811) (557,692) (754,159)
Repayment of corporate bonds................................. -- -- (21,000)
Distributions to minority interests.......................... (823) (1,682) (852)
Contributions from minority interests........................ 1,008 129 1,255
Dividend paid............................................... (8,670) (10,404) (11,271)
Distributions to Sinopec Group Company...................... (3,741) (3,218) (216)
--------- ------------ ------
Net cash generated from/(used in) financing activities 8,650 (4,851) 1,192
--------- ------------ ------
Net increase/(decrease) in cash and cash equivalents.............. 1,772 (4,160) (5,956)
Effect of foreign exchange rate changes........................... 1 (22) (25)
Cash and cash equivalents at January 1............................ 16,478 18,251 14,069
--------- ------------ ------
Cash and cash equivalents at December 31.......................... 18,251 14,069 8,088
========= ============ ======
See accompanying notes to consolidated financial statements.
F-5
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(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,
-------------------------
2004 2005 2006
------ ------ -----
RMB RMB RMB
Operating activities
Income before income tax.......................................... 59,442 64,656 78,923
Adjustment for:
Depreciation, depletion and amortization..................... 32,493 31,618 34,235
Dry hole cost................................................ 2,976 2,992 3,960
Income from associates....................................... (797) (857) (947)
Investment income............................................ (121) (178) (256)
Interest income.............................................. (378) (384) (555)
Interest expense............................................. 4,583 5,926 7,437
Unrealized foreign exchange losses/(gains)................... 150 (852) (689)
Loss on disposal of property, plant and equipment, net....... 1,697 2,098 1,646
Impairment losses on long-lived assets....................... 3,919 1,851 825
------- ------- -------
Operating income before changes in working capital................ 103,964 106,870 124,579
Increase in trade accounts receivable........................ (521) (4,759) (737)
(Increase)/decrease in bills receivable...................... (1,495) 652 (1,570)
Increase in inventories...................................... (16,526) (25,037) (3,112)
Decrease in prepaid expenses and other current assets........ 2,930 1,786 371
Decrease/(increase) in lease prepayments..................... 187 (1,071) (559)
Increase in long-term prepayments and other assets........... (4,321) (2,222) (1,123)
Increase/(decrease) in trade accounts payable................ 850 29,142 (1,901)
Increase/(decrease) in bills payable......................... 6,521 (7,554) (1,613)
(Decrease)/increase in accrued expenses and other payables... (289) 8,154 9,531
(Decrease)/increase in other liabilities..................... (334) (227) 13
------- ------- -------
Cash generated from operations ................................... 90,966 105,734 123,879
Interest received............................................ 378 388 558
Interest paid................................................ (5,450) (6,967) (8,861)
Investment and dividend income received...................... 330 668 619
Income tax paid.............................................. (17,283) (21,609) (20,320)
------- ------- -------
Net cash generated from operating activities...................... 68,941 78,214 95,875
======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
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, 2004, as
previously reported................86,702 (18,960) 18,072 30,341 23,528 31,832 171,515 26,051 197,566
Adjusted for the acquisition of the
Acquired Group..................... -- -- -- -- 984 -- 984 665 1,649
------ ------- ------- -------- ------- ------ -------- -------- -------
Balance at January 1, 2004, as adjusted 86,702 (18,960) 18,072 30,341 24,512 31,832 172,499 26,716 199,215
Net income / (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.............................. -- -- -- -- -- 35,335 35,335 6,016 41,351
------ ------- ------- -------- ------- ------ -------- -------- -------
Total recognized income for the year.... -- (257) -- (452) 257 35,335 34,883 6,016 40,899
Final dividend for 2004 ................ -- -- -- -- -- (5,202) (5,202) -- (5,202)
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..................... -- -- -- -- 815 (815) -- -- --
Net assets distributed to Sinopec Grou
Company (Note 27(g))............... -- -- -- -- (2,244) -- (2,244) -- (2,244)
Consideration for Acquisition of
Petrochemical and Catalyst Assets
(Note 30).......................... -- -- -- -- (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 26,663 53,122 193,340 31,955 225,295
Net income / total recognized income
for the year....................... -- -- -- -- -- 41,455 41,455 3,321 44,776
Final dividend for 2004 ................ -- -- -- -- -- (6,936) (6,936) -- (6,936)
Interim dividend for 2005............... -- -- -- -- -- (3,468) (3,468) -- (3,468)
Appropriation (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 -- -- --
Transfer from retained earnings to
other reserves..................... -- -- -- -- 535 (535) -- -- --
Distribution to Sinopec Group Company
(Note 27(g))....................... -- -- -- -- (90) -- (90) -- (90)
Acquisitions of minority interests in
subsidiaries ...................... -- -- -- -- -- -- -- (2,957) (2,957)
Distributions to minority interests net
of contribution.................... -- -- -- -- -- -- -- (1,640) (1,640)
------ ------- ------- -------- ------- ------ -------- -------- -------
Balance at December 31, 2005............86,702 (19,217) 18,072 26,342 35,015 77,387 224,301 30,679 254,980
F-7
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY - (Continued)
(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 December 31, 2005............86,702 (19,217) 18,072 26,342 35,015 77,387 224,301 30,679 254,980
Net income recognized directly in equity:
Change in fair value of
available-for-sale securities,
net of deferred tax -- -- -- -- 34 -- 34 -- 34
Net income.............................. -- -- -- -- -- 53,912 54,226 1,496 55,408
------ ------- ------- -------- ------- ------ -------- -------- -------
Total recognized income for the year -- -- -- -- 34 53,912 53,946 1,496 55,442
Final dividend for 2005................. -- -- -- -- -- (7,803) (7,803) -- (7,803)
Interim dividend for 2006............... -- -- -- -- -- (3,468) (3,468) -- (3,468)
Appropriation (Note 27(c) and (e))...... -- -- -- -- 25,066 (25,066) -- -- --
Revaluation surplus realized ........... -- -- -- (1,590) -- 1,590 -- -- --
Realization of deferred tax on land use
rights............................. -- -- -- -- (7) 7 -- -- --
Transfer from retained earnings to
other reserves..................... -- -- -- -- 1,013 (1,013) -- -- --
Transfer from capital reserve to other
reserves........................... -- (2,373) -- -- 2,373 -- -- -- --
Distribution to Sinopec Group Company
(Note 27(g))....................... -- -- -- -- (631) -- (631) -- (631)
Consideration for the Acquisition of
Oil Production Plants (Note 1)..... -- -- -- -- (3,500) -- (3,500) -- (3,500)
Acquisitions of minority interests in
subsidiaries....................... -- -- -- -- -- -- -- (9,730) (9,730)
Contributions from minority interests
net of distributions............. -- -- -- -- -- -- -- 242 242
Disposal of a subsidiary (Note 33)..... -- -- -- -- -- -- -- (743) (743)
------ ------- ------- -------- ------- ------ -------- -------- -------
Balance at December 31, 2006............86,702 (21,590) 18,072 24,752 59,363 95,546 262,845 21,944 284,789
====== ======= ======= ======== ======= ====== ======== ======== =======
F-8
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.
As part of 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. On February 25, 2000, 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").
Basis of presentation
Pursuant to the resolution passed at the Directors' meeting on October 10,
2006, the Group acquired equity interests in Sinopec Hainan Refining and
Chemical Company Limited ("Sinopec Hainan") for cash of RMB 2,990 (hereinafter
referred to as the "Acquisition of Sinopec Hainan"). Sinopec Hainan was
previously wholly owned by Sinopec Group Company.
Pursuant to the resolution passed at the Directors' meeting on December 6,
2006, the Group acquired the equity interests in certain oil and gas production
companies ("Oil Production Plants") from Sinopec Group Company, for a total
consideration of RMB 3,500 payable in 2007 (hereinafter referred to as the
"Acquisition of Oil Production Plants").
As the Group, Sinopec Hainan and Oil Production Plants are under the common
control of Sinopec Group Company, the Acquisitions of Sinopec Hainan and Oil
Production Plants 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 assets and
liabilities acquired from Sinopec Hainan and Oil Production Plants have been
accounted for at historical cost. 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 and the considerations paid by the Company for these acquisitions were
treated as equity transactions.
The financial condition and results of operation previously reported by
the Group as of December 31, 2005 and for the years ended December 31, 2004 and
2005 have been restated to include the financial condition and results of
operation of Sinopec Hainan and Oil Production Plants (collectively the
"Acquired Group") as set out below.
F-9
The
The Group without the Acquired
Acquired Group Group Combined
-------------- ----- --------
RMB RMB RMB
2004
Results of operation:
Operating revenue..................................... 619,783 132 619,915
Net income attributable to the equity shareholders of
the Company....................................... 36,019 (684) 35,335
Basic and diluted earnings per share.................. 0.42 (0.01) 0.41
2005
Results of operation:
Operating revenue..................................... 823,117 155 823,272
Net income attributable to the equity shareholders of
the Company....................................... 40,920 535 41,455
Basic and diluted earnings per share.................. 0.47 0.01 0.48
Financial condition:
Current assets........................................ 145,291 1,766 147,057
Total assets.......................................... 537,321 11,719 549,040
Current liabilities................................... 170,649 4,362 175,011
Total liabilities..................................... 284,325 9,735 294,060
Total equity attributable to equity shareholders
of the Company.................................... 223,556 745 224,301
For the years presented, all significant balances and transactions between
the Group and the Acquired Group have been eliminated.
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.
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 37.
The accompanying consolidated financial statements are prepared on the
historical cost basis as modified by the revaluation of certain property, plant
and equipment (Note 15).
The preparation of the financial statements requires management to make
judgments, 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 judgments 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.
F-10
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Key assumptions and estimation made by management in the application of
IFRS that have significant effect on the financial statements and have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities in the following year are disclosed in Note 35.
F-11
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 net
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 applicable PBOC rates at the balance sheet date.
F-12
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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, 2004, 2005 and 2006.
(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(l)).
(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(l)). 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 15), 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.
F-13
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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(l)). 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(l)). Cost of an item 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.
F-14
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(j) 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 accumulated impairment losses. Goodwill is
allocated to cash-generating units and is tested annually for impairment (Note
2(l)). In respect of associates, the carrying amount of goodwill is included in
the carrying amount of the interest in associates.
(k) Investments
Investment in available-for-sale equity securities are carried at fair
value with any change in fair value, other than impairment losses (Note2(l)),
recognized directly in equity. When these investments are derecognized or
impaired, the cumulative gain or loss previously recognized directly in equity
is recognized in the consolidated statements of income. Investments in equity
securities, other than investments in associates, 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(l)).
(l) Impairment of assets
(i) Impairment of trade accounts receivable, other receivables and investment
in equity securities other than investments in associates are accounted as
follows:
Trade accounts receivable, other receivables and investment in equity
securities other than investments in associates 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 asset's carrying
amount 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, and is recognized as an expense in the consolidated statements of
income. Impairment losses for trade and other receivables are reversed through
the consolidated statements of income if in a subsequent period the amount of
the impairment losses decreases. Impairment losses for equity securities are not
reversed.
(ii) Impairment of other long-lived assets is accounted for as follows:
The carrying amounts of other long-lived assets, including property, plant
and equipment, construction in progress, lease prepayment and investments in
associates, 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 favorable change in the estimates used to determine the
recoverable amount. A
F-15
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 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.
(m) 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.
(n) 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 the consolidated
statements of income over the period of borrowings using the effective interest
method.
(o) 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.
(p) 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.
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 thereafter offset against
the cost of the related assets upon the transfer of these assets to property,
plant and equipment. The grants are recognized as 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 is recognized as income in
the period in which it becomes receivable.
(q) Borrowing costs
F-16
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.
(r) Repairs and maintenance expenditure
Repairs and maintenance expenditure is expensed as incurred.
(s) 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.
(t) 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 1,541,
RMB 2,244 and RMB 2,902 for the years ended December 31, 2004, 2005 and 2006,
respectively.
F-17
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(u) 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 4,288, RMB 5,516 and RMB 6,128 for the
years ended December 31, 2004, 2005 and 2006, respectively.
(v) 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.
(w) 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.
(x) Dividends
Dividends are recognized as a liability in the period in which they are
declared.
(y) 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.
F-18
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
3. OTHER OPERATING REVENUES
Other operating revenues represent:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Sale of materials, service and others.........22,224 23,619 26,366
Rental income................................. 373 394 384
------ ------ ------
22,597 24,013 26,750
====== ====== ======
4. OTHER INCOME
During the years ended December 31, 2005 and 2006, the Group received cash
government grants from the Ministry of Finance of the PRC of RMB 9,415 and RMB
5,000, respectively, as a compensation of loss incurred due to the distortion of
the correlation of domestic refined petroleum product prices and the crude oil
prices. There are no unfilled conditions and other contingencies attached to the
receipt of the 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,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Wages and salaries............................13,660 13,742 14,840
Staff welfare..................................1,782 1,808 1,927
Contributions to retirement schemes............2,245 2,273 2,270
Social security contributions..................1,032 826 820
------ ------ ------
18,719 18,649 19,857
====== ====== ======
6. EMPLOYEE REDUCTION EXPENSES
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 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.
During the year ended December 31, 2006, in accordance with the Group's
voluntary employee reduction plan, the Group recorded employee reduction
expenses of RMB 236 in respect of the voluntary termination of approximately
4,000 employees.
F-19
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
7. TAXES OTHER THAN INCOME TAX
Taxes other than income tax represent:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Consumption tax...............................11,920 12,430 14,121
Special oil income levy....................... - - 8,747
City construction tax......................... 2,544 2,589 3,038
Education surcharge........................... 1,260 1,311 1,615
Resources tax................................. 458 642 854
Business tax.................................. 165 213 264
------ ------ ------
16,347 17,185 28,639
====== ====== ======
Consumption tax is levied on producers of gasoline, diesel, naphtha, fuel
oil, jet fuel, lubricant oil and solvent oil based on a tariff rate applied to
the volume of sales. Effective March 26, 2006, a special oil income levy has
been levied on oil exploration and production entities based on the progressive
rates ranging from 20% to 40% on the portion of the monthly weighted average
sales price of the crude oil produced in the PRC exceeding USD 40 per barrel.
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,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Fines, penalties and compensations....................... 277 155 65
Donations................................................ 291 203 98
Loss on disposal of property, plant and equipment, net... 1,697 2,098 1,646
Impairment losses on long-lived assets (i)............... 3,919 1,851 825
Gain from debt extinguishment (ii)....................... - - (486)
Others................................................... 494 821 289
------ ------ ------
6,678 5,128 2,437
====== ====== ======
(i) Impairment losses recognized on long-lived assets of the refining segment
were RMB 14, RMB nil and RMB nil for the years ended December 31, 2004, 2005 and
2006, respectively. Impairment losses recognized on long-lived assets of the
chemicals segment were RMB 2,747, RMB 1,425 and RMB 250 for the years ended
December 31, 2004, 2005 and 2006, 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 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 2,052, RMB 1,425 and RMB 250 for the years
ended December 31, 2004, 2005 and 2006, 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.
F-20
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Impairment losses recognized on long-lived assets of the marketing and
distribution segment of RMB 1,769, RMB 366 and RMB 23 respectively, for the
years ended December 31, 2004, 2005 and 2006 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 98, RMB 60 and RMB 552 for the years ended December 31,
2004, 2005 and 2006, 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.
(ii) During the year ended December 31, 2006, a subsidiary of the Group reached
an agreement with a bank to waive loan principal balance and related interest
payable totaling RMB 486.
9. INTEREST EXPENSE
Interest expense represents:
Years ended December 31,
--------------------------------------------
2004 2005 2006
--------- --------- ---------
RMB RMB RMB
Interest expense incurred...................................... 5,493 7,311 8,931
Less: Interest expense capitalized*............................ (910) (1,385) (1,494)
--------- --------- ---------
4,583 5,926 7,437
========= ========= =========
* Interest rates per annum at which borrowing costs were
capitalized for construction in progress.................... 3.1% to 6.0% 3.3% to 6.6% 3.6% to 6.1%
============= ============ ============
F-21
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
10. INCOME TAX
Income tax in the consolidated statements of income represents:
Years ended December 31,
-------------------------
2004 2005 2006
------ ------ ------
RMB RMB RMB
Current tax
- Provision for the year.............. 18,458 20,646 23,981
- Under-provision in prior years...... 340 477 260
Deferred taxation (Note 21)................ (707) (1,243) (726)
------ ------ ------
18,091 19,880 23,515
======= ====== ======
A reconciliation between actual tax expense and accounting profit at
applicable tax rates is as follows:
Years ended December 31,
------------------------
2004 2005 2006
-------- -------- --------
RMB RMB RMB
Income before income tax................................................. 59,453 64,656 78,923
======== ======== ========
Expected PRC income tax expense at a statutory tax rate of 33%........... 19,620 21,336 26,045
Tax effect of non-deductible expenses.................................... 821 461 516
Tax effect of non-taxable income......................................... (216) (567) (648)
Tax effect of differential tax rate on subsidiaries' income (Note)....... (2,091) (2,010) (2,867)
Tax effect of tax losses not recognized for deferred tax, net............ 409 391 258
Under-provision in prior years........................................... 94 477 260
Tax credit for domestic equipment purchases.............................. (546) (208) (49)
-------- -------- --------
Actual tax expense ...................................................... 18,091 19,880 23,515
======== ======== ========
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 entities of the Group, which are taxed at a
preferential rate of 15%.
11. BASIC AND DILUTED EARNINGS PER SHARE
The calculation of basic and diluted earnings per share are based on the
net income attributable to the equity shareholders of the Company of RMB 35,335,
RMB 41,455 and RMB 53,912 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, 2006.
F-22
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
12. TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable are analyzed as follows:
December 31,
------------
2005 2006
---- ----
RMB RMB
Amounts due from third parties.................................. 13,564 14,601
Amounts due from Sinopec Group Company and its affiliates....... 3,145 3,396
Amounts due from associates..................................... 572 380
Amounts due from jointly controlled entities.................... 505 547
------ ------
17,786 18,924
Less: Impairment losses for bad and doubtful debts.............. (3,140) (3,334)
------ ------
14,646 15,590
====== ======
The impairment losses for bad and doubtful debts are analyzed as follows:
Years ended December 31,
------------------------
2004 2005 2006
-------- -------- --------
RMB RMB RMB
At beginning of year................................................... 3,350 3,671 3,140
Impairment losses recognized for the year.............................. 935 328 438
Written-off/reversal of impairment losses.............................. (454) (859) (244)
Less: Amount distributed to Sinopec Group Company in connection with
the Acquisition of Petrochemical and Catalyst Assets........... (160) -- --
-------- -------- --------
At end of year......................................................... 3,671 3,140 3,334
======== ======== =========
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.
F-23
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
13. INVENTORIES
Inventories represent:
December 31,
------------
2005 2006
---- ----
RMB RMB
Crude oil and other raw materials.........................53,360 54,227
Work in progress.......................................... 9,422 9,828
Finished goods............................................23,173 25,762
Spare parts and consumables............................... 4,456 4,485
------ ------
90,411 94,302
Less: Allowance for diminution in value of inventories.... (892) (866)
------ ------
89,519 93,436
====== =======
The allowance for diminution in value of inventories is analyzed as
follows:
Years ended December 31,
------------------------
2004 2005 2006
-------- -------- --------
RMB RMB RMB
At beginning of year................................................... 601 906 892
Provision for the year................................................. 648 262 419
Written back on sales.................................................. (261) (276) (445)
Less: Amount distributed to Sinopec Group Company in connection with
the Acquisition of Petrochemical and Catalyst Assets............ (82) -- --
-------- -------- --------
At end of year......................................................... 906 892 866
======== ======== =========
The cost of inventories recognized as an expense in the consolidated
statements of income amounted to RMB 474,104, RMB 682,288 and RMB 895,290 for
the years ended December 31, 2004, 2005 and 2006, respectively.
14. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets represent:
December 31,
------------
2005 2006
---- ----
RMB RMB
Advances to third parties..................................................1,776 1,732
Amounts due from Sinopec Group Company and its affiliates..................2,965 2,020
Other receivables..........................................................1,977 2,298
Purchase deposits..........................................................2,496 3,106
Prepayments in connection with construction work and equipment purchases...6,613 4,658
Prepaid value-added tax and customs duty...................................4,288 4,815
Amounts due from associates................................................ 539 332
----- -----
20,654 18,961
===== ======
F-24
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
15. 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, 2005 194,466 116,923 65,345 163,222 4,092 544,048
Additions 412 129 382 271 150 1,344
Transferred from construction in progress 23,451 8,121 14,017 18,457 381 64,427
Proportionate share of a jointly
controlled entity -- -- -- 1,028 -- 1,028
Reclassification (157) (432) 204 289 96 --
Disposals (3,131) (2,859) (2,927) (3,164) (245) (12,326)
---------- -------- ----------- ------- ------ --------
Balance at December 31, 2005 215,041 121,882 77,021 180,103 4,474 598,521
---------- -------- ----------- ------- ------ --------
Balance at January 1, 2006 215,041 121,882 77,021 180,103 4,474 598,521
Additions 1,175 145 1,280 280 456 3,336
Transferred from construction in progress 28,695 26,994 10,087 15,461 161 81,398
Acquisition of a subsidiary 2,071 -- -- -- -- 2,071
Reclassification (56) (600) -- 725 (69) --
Disposals (5,562) (1,522) (2,280) (4,302) (153) (13,819)
---------- -------- ----------- ------- ------ --------
Balance at December 31, 2006 241,364 146,899 86,108 192,267 4,869 671,507
---------- -------- ----------- ------- ------ --------
Accumulated depreciation:
Balance at January 1, 2005 94,977 56,581 13,465 92,042 1,407 258,472
Depreciation charge for the year 11,090 6,974 3,013 9,392 282 30,751
Impairment losses for the year 60 -- 366 1,425 -- 1,851
Reclassification (78) (214) 78 160 54 --
Written back on disposals (2,706) (2,206) (2,110) (2,719) (194) (9,935)
---------- -------- ----------- ------- ------ --------
Balance at December 31, 2005 103,343 61,135 14,812 100,300 1,549 281,139
---------- -------- ----------- ------- ------ --------
Balance at January 1, 2006 103,343 61,135 14,812 100,300 1,549 281,139
Depreciation charge for the year 12,839 7,671 3,422 9,391 401 33,724
Acquisition of a subsidiary 592 -- -- -- -- 592
Impairment losses for the year 552 -- 23 250 -- 825
Reclassification (23) (392) -- 420 (5) --
Written back on disposals (5,253) (1,314) (1,103) (3,470) (108) (11,248)
---------- -------- ----------- ------- ------ --------
Balance at December 31, 2006 112,050 67,100 17,154 106,891 1,837 305,032
---------- -------- ----------- ------- ------ --------
Net book value:
At January 1, 2005 99,489 60,342 51,880 71,180 2,685 285,576
========== ======== =========== ======= ====== ========
At December 31, 2005 111,698 60,747 62,209 79,803 2,925 317,382
========== ======== =========== ======= ====== ========
At December 31, 2006 129,314 79,799 68,954 85,376 3,032 366,475
========== ======== =========== ======= ====== ========
F-25
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
By asset class:
Oil depots,
storage Plant,
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, 2005 45,119 175,522 60,533 262,874 544,048
Additions 108 253 228 755 1,344
Transferred from construction in progress 2,535 22,235 13,851 25,806 64,427
Proportionate share of a jointly controlled entity 182 -- -- 846 1,028
Reclassification (406) (802) 650 558 --
Disposals (1,034) (1,928) (2,145) (7,219) (12,326)
--------- ---------- -------- ---------- -------
Balance at December 31, 2005 46,504 195,280 73,117 283,620 598,521
--------- ---------- -------- ---------- -------
Balance at January 1, 2006 46,504 195,280 73,117 283,620 598,521
Additions 748 777 1,071 740 3,336
Transferred from construction in progress 2,777 26,579 14,549 37,493 81,398
Acquisition of a subsidiary 519 1,313 -- 239 2,071
Reclassification (1,569) 10 3,170 (1,611) --
Disposals (749) (5,266) (1,658) (6,146) (13,819)
--------- ---------- -------- ---------- -------
Balance at December 31, 2006 48,230 218,693 90,249 314,335 671,507
--------- ---------- -------- ---------- -------
Accumulated depreciation:
Balance at January 1, 2005 20,334 85,996 11,781 140,361 258,472
Depreciation charge for the year 1,724 10,431 2,914 15,682 30,751
Impairment losses for the year 79 60 261 1,451 1,851
Reclassification (98) (430) 153 375 --
Written back on disposals (598) (1,683) (1,379) (6,275) (9,935)
--------- ---------- -------- ---------- -------
Balance at December 31, 2005 21,441 94,374 13,730 151,594 281,139
--------- ---------- -------- ---------- -------
Balance at January 1, 2006 21,441 94,374 13,730 151,594 281,139
Depreciation charge for the year 1,787 12,126 3,728 16,083 33,724
Acquisition of a subsidiary 49 468 -- 75 592
Impairment losses for the year 118 532 23 152 825
Reclassification (352) (45) 1,221 (824) --
Written back on disposals (437) (5,073) (834) (4,904) (11,248)
--------- ---------- -------- ---------- -------
Balance at December 31, 2006 22,606 102,382 17,868 162,176 305,032
--------- ---------- -------- ---------- -------
Net book value:
At January 1, 2005 24,785 89,526 48,752 122,513 285,576
========= ========== ======== ========== =======
At December 31, 2005 25,063 100,906 59,387 132,026 317,382
========= ========== ======== ========== =======
At December 31, 2006 25,624 116,311 72,381 152,159 366,475
========= ========== ======== ========== =======
F-26
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 acquisitions of certain entities and related
operations from Sinopec Group Company in prior years, the related property,
plant and equipment were revalued by independent valuers in accordance with PRC
relevant rules and regulations. The surplus on these revaluations of RMB 1,409,
net of amounts allocated to minority interests, was credited to revaluation
reserve.
In connection with the Acquisition of Oil Production Plants, the property,
plant and equipment of the Oil Production Plants were revalued at June 30, 2006,
by a firm of independent valuers in accordance with the PRC relevant rules and
regulations. The value of property, plant and equipment of the Oil Production
Plants pursuant to the valuation, based on depreciated replacement costs, was
determined at RMB 2,303, 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.
F-27
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
16. 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, 2005..................... 9,387 9,483 13,781 13,170 1,513 47,334
Additions...................................... 27,245 18,971 10,572 9,115 1,014 66,917
Additions by 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............................. (23,451) (8,121) (14,017) (19,014) (381) (64,984)
-------- ------ -------- --------- ------ -------
Balance at December 31, 2005................... 11,003 20,333 10,336 10,562 2,146 54,380
======== ====== ======== ========= ====== =======
Balance at January 1, 2006..................... 11,003 20,333 10,336 10,562 2,146 54,380
Additions...................................... 37,892 21,824 10,039 12,361 1,714 83,830
Additions by jointly controlled entities....... 91 -- -- 148 -- 239
Acquisition of a subsidiary.................... 89 -- -- -- -- 89
Dry hole costs written off..................... (3,960) -- -- -- -- (3,960)
Transferred to property, plant and equipment... (28,695) (26,994) (10,087) (15,461) (161) (81,398)
-------- ------ -------- --------- ------ -------
Balance at December 31, 2006................... 16,420 15,163 10,288 7,610 3,699 53,180
======== ====== ======== ========= ====== =======
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 2,888 and RMB 504, respectively, as of December 31, 2005,
and RMB 2,979 and RMB 603, respectively, as of December 31, 2006.
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,
------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
At beginning of year................................................... 2,438 2,898 3,573
Additions, net of amount that were capitalized and subsequently
expensed in the same year, pending the determination of proved
reserves.......................................................... 2,031 2,554 3,241
Transferred to oil and gas properties based on the determination of
proved reserves................................................... (382) (671) (305)
Dry hole costs written off............................................. (1,189) (1,208) (1,738)
------- ------- -------
At end of year......................................................... 2,898 3,573 4,771
======= ======= =======
Aging of capitalized exploratory well costs based on the date the drilling
was completed are analyzed as follows:
December 31,
------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
One year or less....................................................... 2,711 3,277 4,393
Over one year.......................................................... 187 296 378
------- ------- -------
2,898 3,573 4,771
======= ======= =======
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.
The geological and geophysical costs paid during the years ended December
31, 2004, 2005 and 2006 amounted to RMB 3,235, RMB 3,200 and RMB 3,878,
respectively.
F-28
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
17 Goodwill
2005 2006
------ ------
RMB RMB
Cost:
Balance at January 1.............................. 383 2,203
Additions......................................... 1,820 12,122
------ ------
Balance at December 31............................ 2,203 14,325
====== ======
Accumulated impairment losses:
Balance at January 1 and December 31.............. - -
------ ------
Net book value....................................
Balance at January 1.............................. 383 2,203
====== ======
Balance at December 31............................ 2,203 14,325
====== ======
Impairment tests for cash-generating units containing goodwill
Goodwill is allocated to the following Group's cash-generating units:
December 31,
------------
2005 2006
----- -----
RMB RMB
Sinopec Beijing Yanshan Branch ("Sinopec Yanshan").......................... 1,157 1,157
Sinopec Zhenhai Refining and Chemical Company Limited ("Sinopec Zhenhai")... - 3,952
Sinopec Qilu Petrochemical Company Limited ("Sinopec Qilu")................. - 2,159
Sinopec Yangzi Petrochemical Company Limited ("Sinopec Yangzi")............. - 2,737
Sinopec Zhongyuan Petroleum Company Limited ("Sinopec Zhongyuan")........... - 1,391
Shengli Oil Field Dynamic Company Limited ("Dynamic")....................... - 1,361
Multiple units without significant goodwill................................. 1,046 1,568
----- ------
2,203 14,325
===== ======
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 Sinopec Beijing Yanshan Petrochemical Company Limited from minority
interests shareholders 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 RMB 1,157.
During the year ended December 31, 2006, the Group acquired additional
equity interests in Sinopec Zhenhai, Sinopec Qilu, Sinopec Yangzi, Sinopec
Zhongyuan and Dynamic of 28.7%, 17.7%, 14.8%, 28.5% and 71.4%, respectively. The
Company acquired these additional equity interests to reduce management layers
and improve the efficiency of the production, management and sales of the Group
as a whole. The total consideration paid by the Group was approximately RMB
21,971 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)
in Sinopec Zhenhai, Sinopec Qilu, Sinopec Yangzi, Sinopec Zhongyuan and Dynamic
were RMB 3,952, RMB 2,159, RMB 2,737, RMB 1,391 and RMB 1,361, respectively.
Management of the Company considers the acquisitions of additional equity
interests in these companies can reduce management layers and improve the
efficiency of the production, management and sales of the Group as a whole.
As of December 31, 2006, the goodwill allocated to the E&P, refining,
chemicals, and marketing and distribution segments were RMB 2,774, RMB 4,346,
RMB, 6,053 and 1,152, respectively. As of December 31, 2005, the goodwill
allocated to the refining, chemicals, and marketing and distribution segments
were RMB 394, RMB 1,157 and 652, respectively.
F-29
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
The recoverable amounts of the Sinopec Yanshan, Sinopec Zhenhai, Sinopec
Yangzi, Sinopec Qilu, Sinopec Zhongyuan and Dynamic are determined based on
value in use calculations. These calculations use cash flow projections based on
financial budgets approved by management covering a one-year period and pre-tax
discount rates primarily ranging from 14.2% to 17.2%. Cash flows beyond the
one-year period are maintained constant. Management believes any reasonably
possible change in the key assumptions on which these entities' recoverable
amounts are based would not cause these entities' carrying amounts to exceed
their recoverable amounts.
Key assumptions used for the value in use calculations for these entities
are the gross margin and sales volume. Management determined the budgeted gross
margin based on the gross margin achieved in the period immediately before the
budget period and its expectation for the development of international crude oil
prices. The sales volume was based on the production capacity and the sales
volume in the period immediately before the budget period.
18. INVESTMENTS
December 31,
-------------
2005 2006
---- ----
RMB RMB
Available-for-sale securities.................... 119 157
Other unlisted investments, at cost.............. 3,359 2,741
----- -----
3,478 2,898
Less: Impairment losses.......................... (327) (316)
----- -----
3,151 2,582
===== =====
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, 2004, 2005 and 2006 were RMB 96, RMB 77 and RMB 48, respectively.
F-30
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
19. INTEREST IN ASSOCIATES
December 31,
-------------
2005 2006
----- ------
RMB RMB
Share of net assets................................. 9,267 11,617
===== ======
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 340, RMB 420 and RMB 439 for the years
ended December 31, 2004, 2005 and 2006, respectively. The principal investments
in associates, all of which are incorporated in the PRC, are as follows:
Percentage
Percentage of of equity
Form of equities held by the
business Particulars of issued held by the Company's
Name of company structure and paid up capital Company subsidiaries Principal activities
--------------- --------- --------------------- ------- ------------ --------------------
% %
Sinopec Shandong Taishan Incorporated 480,793,320 ordinary 38.68 ___ Trading of petroleum
Petroleum Company shares of RMB 1.00 products and decoration of
Limited ("Taishan") each service gas stations
Sinopec Finance Company Incorporated Registered capital 49.00 ___ Provision of non-banking
Limited RMB 6,000,000,000 financial services
Shanghai Petroleum National Incorporated Registered capital 30.00 ___ Exploration and production
Gas Corporation RMB 900,000,000 of crude oil and natural gas
Shanghai Chemical Industry Incorporated Registered capital ___ 38.26 Planning, development and
Park Development Company RMB 2,372,439,000 operation of the Chemical
Limited Industry Park in Shanghai,
the PRC
China Shipping & Sinopec Incorporated Registered capital ___ 50.00 Transportation of
Suppliers Company Limited RMB 876,660,000 petroleum products
China Aviation Oil Supply Incorporated Registered capital ___ 29.00 Marketing and distribution
Company Limited RMB 3,800,000,000 of refined petroleum
products
During the year ended December 31, 2006, the Group acquired 71.4% equity
interests in Dynamic, which was previously an associate of the Group, and
thereafter, Dynamic became a subsidiary of the Company (Note 17 and 33).
F-31
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 as follows:
Percentage
Percentage of of equity
Form of equities held by the
business Particulars of issued held by the Company's
Name of company structure and paid up capital Company subsidiaries Principal activities
--------------- --------- --------------------- ------- ------------ --------------------
% %
Shanghai Secco Petrochemical Incorporated Registered capital 30.00 20.00 Manufacturing and
Company Limited USD 901,440,964 distribution of
petrochemical products
BASF-YPC Company Limited Incorporated Registered capital 30.00 10.00 Manufacturing and
RMB 8,793,000,000 distribution of
petrochemical products
Yueyang Sinopec and Shell Coal Incorporated Registered capital 50.00 -- Manufacturing and
Gasification Company Limited USD 45,588,700 distribution of industrial
gas
Block A Oil Field in the Unincorporated -- -- 43.00 Exploration and production
Western Area Chengdao in of crude oil and natural
Bohai Bay gas
Included in the consolidated financial statements are the following items
that represent the Group's proportionate share of the jointly controlled
entities' results of operation, financial condition and cash flows.
Years ended December 31,
--------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
Results of operation:
Operating revenue..................... 313 10,082 17,913
Expenses.............................. (450) (9,773) (15,180)
----- --------- --------
Net (loss) / income................... (137) 309 2,733
===== ========= ========
December 31,
------------
2005 2006
---- -----
RMB RMB
Financial condition:
Current assets.................................................. 2,631 4,966
Non-current assets, primarily property, plant and equipment and construction in
progress with net book value of RMB 14,259 (2005: RMB 15,287) and RMB 3,582
(2005: RMB 3,392), respectively.............................. 19,522 18,635
Current liabilities............................................. (2,543) (2,736)
Non-current liabilities, primarily long-term bank loans, excluding current portion,
of RMB 8,267 (2005: RMB 10,006) ............................. (10,177) (8,643)
-------- -------
Net assets...................................................... 9,433 12,222
======== =======
Years ended December 31,
------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
Cash flows:
Net cash generated from / (used in) operating activities........ 233 (1,434) 2,452
Net cash used in investing activities........................... (6,035) (2,474) (382)
Net cash generated from / (used in) financing activities....... 5,909 4,011 (939)
F-32
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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,
------------- -------------- ----------------
2005 2006 2005 2006 2005 2006
-------- ------ ------ ------ ------ ------
RMB RMB RMB RMB RMB RMB
Current
Receivables and inventories..................... 3,448 3,531 -- -- 3,448 3,531
Accruals........................................ 456 865 -- -- 456 865
Non-current
Property, plant and equipment................... 1,642 2,295 (1,619) (1,678) 23 617
Accelerated depreciation........................ -- -- (4,290) (4,657) (4,290) (4,657)
Tax value of losses carried forward, net of
valuation allowances........................ 128 53 -- -- 128 53
Lease prepayments .............................. 359 351 -- -- 359 351
Others.......................................... 39 63 (66) (4) (27) 59
-------- ------ ------ ------ ------ ------
Deferred tax assets/(liabilities) .............. 6,072 7,158 (5,975) (6,339) 97 819
======== ====== ====== ====== ====== ======
As of December 31, 2006, certain subsidiaries of the Company provided
valuation allowance against tax value of losses carried forward for PRC income
tax purpose of RMB 4,382 which are available to offset their future PRC taxable
income, if any. Tax value of losses carried forward of RMB 215, RMB 341, RMB 720
RMB 1,185 and RMB 1,921 will expire in 2007, 2008, 2009, 2010, and 2011,
respectively.
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, 2004,
2005 and 2006. Based on this review, net valuation allowances of RMB 409, RMB
391 and RMB 258 were provided for the years ended December 31, 2004, 2005 and
2006, 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,
-------------------------
2004 2005 2006
------ ------ -----
RMB RMB RMB
At beginning of year.................... 641 1,050 1,354
Allowance during the year, net.......... 409 391 258
Written-off............................. -- (87) (166)
------ ------ ------
At end of year ......................... 1,050 1,354 1,446
====== ====== ======
Movements in temporary differences between calculations of certain items
for accounting and for taxation purposes can be specified as follows:
F-33
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Recognized in
Balance at consolidated Recognized in Balance at
January 1, statements of other December 31,
2004 income reserve 2004
---- ------ ------- ----
RMB RMB RMB RMB
Current
Receivables and inventories........................... 1,446 814 ___ 2,260
Accruals.............................................. 23 245 ___ 268
Non-current
Property, plant and equipment.......................... (709) 571 ___ (138)
Accelerated depreciation............................... (3,673) (327) ___ (4,000)
Tax value of losses carried forward, net of valuation
allowance (Note i)................................. 923 (591) (266) 66
Lease prepayments...................................... 373 (7) ___ 366
Others................................................ 30 2 ___ 32
------- ------- --------- --------
Net deferred tax (liabilities)/assets.................. (1,587) 707 (266) (1,146)
======= ======= ========= ========
(Note 10)
Recognized in
Balance at consolidated Recognized in Balance at
January 1, statements of other December 31,
2004 income reserve 2004
---- ------ ------- ----
RMB RMB RMB RMB
Current
Receivables and inventories........................... 2,260 1,188 ___ 3,448
Accruals.............................................. 268 188 ___ 456
Non-current
Property, plant and equipment.......................... (138) 161 ___ 23
Accelerated depreciation............................... (4,000) (290) ___ (4,290)
Tax value of losses carried forward, net of valuation 66 62 ___ 128
allowance..........................................
Lease prepayments ..................................... 366 (7) ___ 359
Others................................................. 32 (59) ___ (27)
------- ------- --------- --------
Net deferred tax (liabilities)/assets.................. (1,146) 1,243 ___ 97
======= ======== ========= ========
(Note 10)
Recognized in
Balance at consolidated Recognized in Balance at
January 1, statements of other December 31,
2004 income reserve 2004
---- ------ ------- ----
RMB RMB RMB RMB
Current
Receivables and inventories............................ 3,448 83 ___ 3,531
Accruals............................................... 456 409 ___ 865
Non-current
Property, plant and equipment.......................... 23 594 ___ 617
Accelerated depreciation............................... (4,290) (367) ___ (4,657)
Tax value of losses carried forward, net of valuation 128 (75) ___ 53
allowance..........................................
Lease prepayments...................................... 359 (8) ___ 351
Others (Note ii)....................................... (27) 90 (4) 59
------- ------- --------- --------
Net deferred tax assets................................ 97 726 (4) 819
======= ======== ========= ========
(Note 10)
Note:
(i) 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.
(ii) The amount recognized in equity represents the tax effect of change
in fair value of available-for-sale securities, which was recognized
directly in equity.
F-34
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
22. LONG-TERM PREPAYMENTS AND OTHER ASSETS
Long-term prepayments and other assets primarily represent prepaid rental
expenses over one year, computer software and catalysts.
23. SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND
ITS AFFILIATES
Short-term debt represent:
December 31,
------------
2005 2006
------ ------
RMB RMB
Third parties' debt
Short-term bank loans............................................................. 15,392 25,666
------ ------
Current portion of long-term bank loans........................................... 14,879 15,291
Current portion of long-term other loans.......................................... 26 27
Current portion of long-term bank loans of jointly controlled entities ........... 193 490
------ ------
15,098 15,808
------ ------
Corporate bonds (a)............................................................... 9,921 11,885
------ ------
40,411 53,359
------ ------
Loans from Sinopec Group Company and its affiliates
Short-term loans.................................................................. 2,705 4,849
Current portion of long-term loans................................................ 100 552
------ ------
2,805 5,401
------ ------
43,216 58,760
====== ======
The Group's weighted average interest rates on short-term loans were 4.0%
and 5.2% as of December 31, 2005 and 2006, respectively.
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.
As of December 31, 2006, 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 5.020%. As of December 31, 2006, the Company's
outstanding borrowings under these facilities were RMB 4,420 and were included
in short-term bank loans. These facilities expire at various dates in 2007 and
contain no financial covenants.
F-35
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Long-term debt comprise:
Interest rate and final maturity December 31,
-------------------------------- -----------------
2005 2006
------ -------
RMB RMB
Third parties' debt
Long-term bank loans
Renminbi denominated Interest rates ranging from interest free to
6.9% per annum as of December 31, 2006 with
maturities through 2016 65,069 65,484
Japanese Yen denominated Interest rates ranging
from 2.6% to 5.8% per annum as of
December 31, 2006 with maturities
through 2024 3,394 2,713
US Dollar denominated Interest rates ranging
from interest free to 7.4% per annum as
of December 31, 2006 with
maturities through 2031 5,056 2,081
Euro denominated Fixed interest rate at 6.7% per annum as of
December 31, 2006 with maturities through 2010 117 101
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; Paid off
as of December 31, 2006 94 ___
--------- ---------
73,730 70,379
Long-term other loans
Renminbi denominated Interest rates ranging from interest free to
5.2% per annum as of December 31, 2006 with
maturities through 2009 170 3,098
US Dollar denominated Interest rates ranging from interest free to
2.0% per annum as of December 31, 2006 with
maturities through 2015 51 44
--------- --------
221 3,142
--------- --------
Total long-term banks and other loans carried forward 73,951 73,521
F-36
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Long-term debt comprise:
Interest rate and final maturity December 31,
-------------------------------- -----------------
2005 2006
------ -------
RMB RMB
Total long-term banks and other loans brought forward 73,951 73,521
Corporate bonds
Renminbi denominated Fixed interest rate at 4.61% per annum as of December
31, 2006 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, 2006 with maturities
through 2021 5,710 5,019
US Dollar denominated Floating rate at London
Interbank Offer Rate plus 0.4% to 0.7% per
annum as of December 31, 2006
with maturities through 2021 4,296 3,738
------- -------
10,006 8,757
------- -------
Total third parties' long-term debts 87,457 85,778
Less: Current portion (15,098) (15,808)
-------- --------
72,359 69,970
------- -------
Long-term loans from Sinopec Group Company and its affiliates
Renminbi denominated Interest rates ranging from interest free to 5.7%
per annum as of December 31, 2006 with maturities
through 2020 39,962 39,572
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, 2006 with maturities through 2021 71 75
Less: Current portion (100) (552)
------- -------
39,933 39,095
------- -------
112,292 109,065
======== ========
F-37
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(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. The Company redeemed the corporate bonds in
April 2006.
A subsidiary of the Company issued 270-day corporate bonds of face value
at RMB 1,000 to corporate investors in PRC debenture market on February
23, 2006, at a discounted value of RMB 97.78 per RMB 100 par value with an
effective yield of 3.07% per annum. The Company redeemed the corporate
bonds in November 2006.
The Company issued 183-day corporate bonds of face value at RMB 10,000 to
corporate investors in PRC debenture market on May 16, 2006, at a
discounted value of RMB 98.68 per RMB 100 par value, with an effective
yield of 2.67% per annum. The Company redeemed the corporate bonds in
November 2006.
The Company issued 182-day corporate bonds of face value at RMB 10,000 to
corporate investors in PRC debenture market on November 13, 2006, at a
discounted value of RMB 98.43 per RMB 100 par value, with an effective
yield of 3.20% per annum. The bonds mature in May 2007.
A subsidiary of the Company issued 365-day corporate bonds of face value
at RMB 2,000 to corporate investors in the PRC debenture market on
December 11, 2006 at par value, with an effective yield 3.83% per annum.
The bonds mature in December 2007.
(b) The Company issued ten-year 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 35 and RMB 171 as of December 31, 2005 and
2006, 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 83 and RMB 288 as of December 31, 2005 and
2006, respectively.
The aggregate maturities of long-term debts and loans from Sinopec Group
Company and its affiliates subsequent to December 31, 2006 are as follows:
RMB
2007............................................................. 16,360
2008............................................................. 26,529
2009............................................................. 20,061
2010............................................................. 10,834
2011............................................................. 5,310
Thereafter....................................................... 46,331
--------
125,425
========
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,
----------------
2005 2006
--------- --------
US Dollars................................. USD 2,158 USD 985
Japanese Yen............................... JPY 50,507 JPY 41,350
Euro ..................................... EUR 12 EUR 10
Hong Kong Dollars.......................... HKD 128 HKD 7,789
============= ===============
F-38
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
24. TRADE ACCOUNTS PAYABLE
Trade accounts payable are analyzed as follows:
December 31,
------------------
2005 2006
-------- -------
RMB RMB
Amounts due to third parties................................. 50,353 49,177
Amounts due to Sinopec Group Company and its affiliates...... 2,763 2,194
Amounts due to jointly controlled entities................... 650 750
Amounts due to associates.................................... 51 4
--------- --------
53,817 52,125
========= ========
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,
------------------
2005 2006
-------- -------
RMB RMB
Amounts due to Sinopec Group Company and its affiliates.... 8,133 12,670
Accrued expenditures....................................... 19,660 23,266
Taxes other than income tax................................ 3,092 6,313
Receipts in advance........................................ 12,375 18,513
Advances from third parties................................ 1,226 1,356
Others..................................................... 5,037 6,938
------ -------
49,523 69,056
====== =======
F-39
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
26. SHARE CAPITAL
December 31,
------------------
2005 2006
-------- -------
RMB RMB
Registered, issued and fully paid
69,921,951,000 domestic listed A shares of RMB 1.00 each...... ___ 69,922
16,780,488,000 overseas listed H shares of RMB 1.00 each...... 16,780 16,780
67,121,951,000 domestic state-owned A shares of RMB 1.00 each. 67,122 ___
2,800,000,000 domestic listed A shares of RMB 1.00 each....... 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.
On September 25, 2006, the shareholders of listed A shares accepted the
proposal offered by the shareholders of state-owned A shares whereby the
shareholders of state-owned A shares agreed to transfer 2.8 state-owned A shares
to shareholders of listed A shares for every 10 listed A shares they held, in
exchange for the approval for the listing of all state-owned A shares. In
October 2006, the 67,121,951,000 domestic state-owned A shares became listed A
shares.
All A shares and H shares rank pari passu in all material aspects.
F-40
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
27. RESERVES
2005 2006
--------- ---------
RMB RMB
Capital reserve (Note (a))
At January 1..................................................................... (19,217) (19,217)
Transfer from capital reserve to other reserves.................................. -- (2,373)
--------- --------
December 31...................................................................... (19,217) (21,590)
--------- --------
Share premium (Note (b))
At January 1 and December 31..................................................... 18,072 18,072
--------- --------
Revaluation reserve
At January 1..................................................................... 27,998 26,342
Revaluation surplus realized..................................................... (1,656) (1,590)
--------- --------
At December 31................................................................... 26,342 24,752
--------- --------
Statutory surplus reserve (Note (c))
At January 1..................................................................... 9,558 13,514
Appropriation.................................................................... 3,956 5,066
Statutory public welfare fund transferred to statutory surplus reserve........... -- 13,514
--------- --------
At December 31................................................................... 13,514 32,094
--------- --------
Statutory public welfare fund (Note (d))
At January 1..................................................................... 9,558 13,514
Appropriation.................................................................... 3,956 --
Statutory public welfare fund transferred to statutory surplus reserve........... -- (13,514)
--------- --------
At December 31................................................................... 13,514 --
--------- --------
Discretionary surplus reserve (Note (e))
At January 1 .................................................................... 7,000 7,000
Appropriation.................................................................... -- 20,000
--------- --------
At December 31................................................................... 7,000 27,000
--------- --------
Other reserves
At January 1, as adjusted........................................................ 547 987
Change in fair value of available-for-sale securities, net of deferred tax -- 34
Realization of deferred tax on land use rights (Note (f))........................ (5) (7)
Transfer from retained earnings to other reserves................................ 535 1,013
Transfer from capital reserve to other reserves.................................. -- 2,373
Distribution to Sinopec Group Company (Note (g))................................. (90) (631)
Consideration for Acquisition of Oil Production Plants (Note 1).................. -- (3,500)
--------- --------
At December 31................................................................... 987 269
--------- --------
F-41
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
2005 2006
--------- --------
RMB RMB
Retained earnings (Note (h))
At January 1..................................................................... 53,122 77,387
Net income attributable to equity shareholders of the Company.................... 41,455 53,912
Final dividend in respect of the previous financial years, approved and paid
during the year (Note (i)).................................................... (6,936) (7,803)
Interim dividend (Note (j))...................................................... (3,468) (3,468)
Appropriation.................................................................... (7,912) (25,066)
Revaluation surplus realized..................................................... 1,656 1,590
Realization of deferred tax on land use rights................................... 5 7
Transfer from retained earnings to other reserves................................ (535) (1,013)
--------- --------
At December 31................................................................... 77,387 95,546
--------- --------
137,599 176,143
========= ========
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 of certain entities and related
operations acquired from Sinopec Group Company.
(b) The application of the share premium account is governed by Sections 168
and 169 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, 2005 and 2006, the Company
transferred RMB 3,956 and RMB 5,066, respectively, being 10% of the
current year's net income determined in accordance with the PRC Accounting
Rules and Regulations, to this reserve.
(d) Before January 1, 2006, according to the Company's Articles of
Association, the Company was 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 could 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. 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 income 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, being 10% of the net
income for the six-month period ended December 31, 2005 determined in
accordance with the PRC Accounting Rules and Regulations, which was
approved by the shareholders at the Annual General Meeting on May 24,
2006, to this fund.
According to the Company Law of the PRC which was revised on October 27,
2005, the Company is no longer required to make appropriation to the
statutory public welfare fund commencing from January 1, 2006. Pursuant to
the notice "Cai Qi [2006] No. 67" issued by the Ministry of Finance on
March 15, 2006, the balance of this fund as of December 31, 2005 was
transferred to the statutory surplus reserve.
(e) The directors authorized the transfer of RMB 20,000 for the year ended
December 31, 2006, subject to the shareholders' approval at the Annual
General Meeting, to the discretionary surplus reserve. There was no
F-42
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
transfer to this fund for the year ended December 31, 2005. 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) These represent net assets distributed to Sinopec Group Company for no
monetary consideration. 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, 2005 and 2006, the amounts of retained
earnings available for distribution were RMB 20,591 and RMB 42,156,
respectively, being the amount determined in accordance with IFRS.
Pursuant to a resolution passed at the Directors' meeting on April 6,
2007, a final dividend in respect of the year ended December 31, 2006 of
RMB 0.11 per share totaling RMB 9,537 was proposed for shareholders'
approval at the Annual General Meeting. Final dividend of RMB 9,537 in
respect of the year ended December 31, 2006 has not been not 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, 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.
Pursuant to the shareholders' approval at the Annual General Meeting on
May 24, 2006, a final dividend of RMB 0.09 per share totaling RMB 7,803 in
respect of the year ended December 31, 2005 was declared and paid on June
30, 2006.
(j) 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.
Pursuant to the Company's Articles of Association and a resolution passed
at the Director's meeting on August 25, 2006, the directors authorized to
declare an interim dividend for the year ended December 31, 2006 of RMB
0.04 per share totaling RMB 3,468, which was paid on September 28, 2006.
F-43
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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, 2006, the future minimum lease payments under operating
leases are as follows:
RMB
2007............................................ 4,711
2008............................................ 4,568
2009............................................ 4,531
2010............................................ 4,505
2011............................................ 4,450
Thereafter...................................... 122,406
---------
Total minimum lease payments.................... 145,171
=========
The Group's leasing arrangement impose no restrictions on dividends,
additional debt and/or further leasing.
Capital commitments
As of December 31, 2006, the Group had capital commitments as follows:
RMB
The Group
Authorized and contracted for................... 113,192
Authorized but not contracted for............... 165,967
-------
279,159
=======
Jointly controlled entities
Authorized and contracted for................... 1,878
Authorized but not contracted for............... 5
-------
1,883
=======
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 interest 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.
F-44
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 189, RMB 208
and RMB 236 for the years ended December 31, 2004, 2005 and 2006, respectively.
Estimated future annual payments as of December 31, 2006 are as follows:
RMB
2007........................................... 156
2008........................................... 147
2009........................................... 67
2010........................................... 57
2011........................................... 10
Thereafter..................................... 226
------
Total payments................................. 663
======
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, 2006, guarantees given to banks in respect of
banking facilities granted to the parties below were as follows:
RMB
Associates...................................... 160
===
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,
2006, it is not probable that the Group will be required to make payments under
the guarantees. Thus no liability has been accrued for a loss related to the
Group's obligation under these guarantee arrangements.
F-45
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 248,
RMB 493 and RMB 1,637 for the years ended December 31, 2004, 2005 and 2006,
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, 2004, 2005 and 2006.
No other financial assets carry a significant exposure to credit risk.
F-46
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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.
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 debt
of the Group are disclosed in Note 23.
F-47
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 2004 2005 2006
-------- -------- ------
RMB RMB RMB
Sales of goods........................................................... (i) 63,507 95,043 132,345
Purchases................................................................ (ii) 35,402 45,923 57,005
Transportation and storage............................................... (iii) 2,003 1,959 1,582
Exploration and development services..................................... (iv) 14,446 17,001 22,000
Production related services.............................................. (v) 9,036 10,653 12,340
Ancillary and social services............................................ (vi) 1,740 1,790 1,737
Operating lease charges.................................................. (vii) 3,297 3,213 3,826
Agency commission income................................................. (viii) 41 48 60
Intellectual property licence fee paid................................... (ix) 10 9 -
Interest received........................................................ (x) 59 52 52
Interest paid............................................................ (xi) 623 1,036 1,039
Net deposits placed with/ (withdrawn from) related parties............... (xii) 340 (67) (3,910)
Net loans obtained from/ (repaid to) related parties..................... (xiii) 3,548 (4,714) 1,758
The amounts set out in the table above in respect of each of the years in
the three-year period ended December 31, 2006 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, 2005
and 2006. 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.
F-48
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 materials 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 equipment.
(viii) Agency commission income represents commission earned for acting as an
agent in respect of sales of products 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
certain licenses for 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, 2005 and 2006 were RMB 4,599 and RMB 689, 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 placed with / withdrawn from Sinopec Finance Company
Limited.
(xiii) The Group obtained loans from / repaid loans to 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:
F-49
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(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 3,241 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, however such amount cannot
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.
F-50
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
During the year ended December 31, 2004, the Group acquired the equity
interest 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 from
Sinopec Group Company for a total consideration of RMB 3,128 which was fully
paid in 2005 (the "Acquisition of Petrochemical and Catalyst Assets"). 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.
As discussed in Note 1, pursuant to the resolution passed at the
Directors' meeting on October 10, 2006, the Group acquired equity interests in
Sinopec Hainan for cash of RMB 2,990. Sinopec Hainan was previously wholly owned
by Sinopec Group Company.
As discussed in Note 1, pursuant to the resolution passed at the
Directors' meeting on December 6, 2006, the Group acquired the equity interests
in Oil Production Plants from Sinopec Group Company, for a total consideration
of RMB 3,500 payable in 2007.
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,
--------------
2005 2006
----- -----
RMB RMB
Trade accounts receivable.................................................... 4,222 4,323
Prepaid expenses and other current assets...................................... 3,504 2,352
------- ------
Total amounts due from Sinopec Group Company and its affiliates, associates
and jointly controlled entities.............................................. 7,726 6,675
======= ======
Trade accounts payable......................................................... 3,464 2,948
Accrued expenses and other payables............................................ 8,133 12,670
Short-term loans and current portion of long-term loans from Sinopec Group
Company and its affiliates................................................... 2,805 5,401
Long-term loans excluding current portion from Sinopec Group Company and its
affiliates................................................................... 39,933 39,095
------- ------
Total amounts due to Sinopec Group Company and its affiliates, associates and
jointly controlled entities.................................................. 54,335 60,114
======= ======
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 of and for the year ended December 31, 2006, 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.
F-51
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(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,
--------------------------
2004 2005 2006
---- ---- ----
RMB'000 RMB'000 RMB'000
Short-term employee benefits............ 3,997 2,868 4,562
Retirement scheme contributions......... 202 115 184
---- ---- ----
4,199 2,983 4,746
===== ===== =====
Total emoluments are included in "personnel expenses" as disclosed in Note
5.
(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 of December 31,
2006, there was no material outstanding contribution to post-employment benefit
plans.
(d) Transactions with other state-controlled entities in the PRC
The Group is a state-controlled energy and chemical enterprise and operates
in an economic regime currently dominated by entities directly or indirectly
controlled by the PRC government through its government authorities, agencies,
affiliations and other organizations (collectively referred as "state-controlled
entities").
Apart from transactions with Sinopec Group Company and its affiliates, the
Group has transactions with other state-controlled entities include but not
limited to the following:
o sales and purchase of goods and ancillary materials;
o rendering and receiving services;
o lease of assets;
o depositing and borrowing money; and
o use of public utilities.
These transactions are conducted in the ordinary course of the Group's
business on terms comparable to those with other entities that are not
state-controlled. The Group has established its procurement policies, pricing
strategy and approval process for purchases and sales of products and services
which do not depend on whether the counterparties are state-controlled entities
or not.
Having considered the transactions potentially affected by related party
relationships, the entity's pricing strategy, procurement policies and approval
processes, and the information that would be necessary for an understanding of
the potential effect of the related party relationship on the financial
statements, the directors are of the opinion that the following related party
transactions require disclosure of numeric details:
F-52
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(i) Transactions with other state-controlled energy and chemical companies
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"), which are state-controlled entities.
During the years ended December 31, 2004, 2005 and 2006, the aggregate
amount of crude oil purchased by refining segment from CNPC and CNOOC Group and
refined petroleum purchased by marketing and distribution segment from CNPC
Group was RMB 41,652, RMB 58,957 and RMB 60,863, respectively.
The aggregate amounts due from / to CNPC Group and CNOOC Group are
summarized as follows:
December 31,
-----------------
2005 2006
----- -----
RMB RMB
Trade accounts receivable................................. 213 111
Prepaid expenses and other current assets................. 120 115
----- -----
Total amounts due from CNPC Group and CNOOC Group......... 333 226
===== =====
Trade accounts payable....................................1,237 1,231
Accrued expenses and other payables....................... 127 7
----- -----
Total amounts due to CNPC Group and CNOOC Group...........1,364 1,238
===== =====
(ii) Transactions with state-controlled banks
The Group deposits its cash with several state-controlled banks in the
PRC. The Group also obtains short-term and long-term loans from these banks in
the ordinary course of business. The interest rates of the bank deposits and
loans are regulated by the PBOC. The Group's interest income from and interest
expense to these state-controlled banks in the PRC are as follows:
Years ended December 31,
---------------------------
2004 2005 2006
---- ---- ----
RMB RMB RMB
Interest income................ 315 323 458
====== ====== ======
Interest expense............... 3,786 4,878 6,163
====== ====== ======
F-53
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
The amounts of cash deposited at and loans from state-controlled banks in
the PRC are summarized as follows:
December 31,
------------------
2005 2006
---- ----
RMB RMB
Cash and cash equivalents............................................ 9,418 7,366
Time deposits with financial institutions............................ 964 615
------ ------
Total deposits at state-controlled banks in the PRC.................. 10,382 7,981
====== ======
Short-term loans and current portion of long-term loans.............. 27,891 34,803
Long-term loans excluding current portion of long-term loans......... 67,641 62,346
------ ------
Total loans from state-controlled banks in the PRC................... 95,532 97,149
====== ======
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, 2004, 2005 and 2006 were RMB 2,245, RMB 2,273 and RMB 2,270,
respectively.
F-54
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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, that 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 billed for direct corporate
services. Inter-segment transfer pricing is based on cost plus an appropriate
margin, as specified by the Group's policy.
F-55
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Reportable information on the Group's business segments is as follows:
Years ended December 31,
--------------------------
2004 2005 2006
-------- --------- ---------
RMB RMB RMB
Sales of goods
Exploration and production
External sales..................... 16,091 20,006 23,355
Inter-segment sales................ 60,053 84,423 105,656
-------- --------- ---------
76,144 104,429 129,011
Refining
External sales..................... 63,388 82,810 99,201
Inter-segment sales................ 289,699 386,456 471,571
-------- --------- ---------
353,087 469,266 570,772
Marketing and distribution
External sales..................... 342,840 459,292 588,270
Inter-segment sales................ 2,831 3,172 4,601
-------- --------- ---------
345,671 462,464 592,871
Chemicals
External sales..................... 126,013 160,783 209,135
Inter-segment sales................ 12,510 12,199 12,299
-------- --------- ---------
138,523 172,982 221,432
Corporate and others
External sales..................... 48,986 76,368 124,693
Inter-segment sales................ 32,046 44,897 136,775
-------- --------- ---------
81,032 121,265 261,468
Elimination of inter-segment sales...... (397,139) (531,147) (730,902)
-------- --------- ---------
Total sales of goods.................... 597,318 799,259 1,044,652
-------- --------- ---------
Other operating revenues
Exploration and production.............. 9,294 10,756 14,155
Refining................................ 5,186 5,421 4,590
Marketing and distribution.............. 755 1,358 687
Chemicals............................... 6,170 5,841 6,661
Corporate and others.................... 1,192 637 657
-------- --------- ---------
Total other operating revenues.......... 22,597 24,013 26,750
-------- --------- ---------
Other income
Refining................................ -- 9,415 5,000
-------- --------- ---------
Total other income...................... -- 9,415 5,000
-------- --------- ---------
619,915 832,687 1,076,402
======== ========= =========
F-56
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Years ended December 31,
--------------------------
2004 2005 2006
-------- --------- ---------
RMB RMB RMB
Operating income by segment
- Exploration and production............ 26,397 48,334 63,182
- Refining.............................. 4,982 (3,536) (25,298)
- Marketing and distribution............ 14,716 10,350 30,234
- Chemicals............................. 18,721 14,296 17,234
- Corporate and others.................. (1,925) (1,198) (1,532)
-------- --------- ---------
Total operating income..................... 62,891 68,246 83,820
-------- --------- ---------
Income/(loss) from associates
- Exploration and production............ 447 326 233
- Refining.............................. 58 23 58
- Marketing and distribution............ 302 241 404
- Chemicals............................. (164) 1 20
- Corporate and others.................. 154 266 232
-------- --------- ---------
Aggregate income from associates .......... 797 857 947
-------- --------- ---------
Finance costs
Interest expense...................... (4,583) (5,926) (7,437)
Interest income....................... 378 384 555
Foreign exchange losses............... (223) (79) (153)
Foreign exchange gains............... 61 996 935
-------- --------- ---------
Net finance costs.......................... (4,367) (4,625) (6,100)
Investment income.......................... 121 178 256
-------- --------- ---------
Income before income tax................... 59,442 64,656 78,923
Income tax.................................(18,091) (19,880) (23,515)
-------- --------- ---------
Net income................................. 41,351 44,776 55,408
======== ========= =========
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 15 and
16.
F-57
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Years ended December 31,
--------------------------
2004 2005 2006
-------- --------- ---------
RMB RMB RMB
Assets
Segment assets
- Exploration and production.............112,720 127,471 155,043
- Refining...............................112,963 142,776 163,898
- Marketing and distribution............. 93,722 102,935 108,053
- Chemicals..............................105,032 115,942 125,051
- Corporate and others................... 17,574 20,570 22,641
-------- --------- ---------
Total segment assets........................442,011 509,694 574,686
-------- --------- ---------
Interest in associates
- Exploration and production............. 1,396 1,494 1,063
- Refining............................... 319 571 1,117
- Marketing and distribution............. 2,410 4,298 4,692
- Chemicals.............................. 4,315 1,092 1,245
- Corporate and others................... 1,787 1,812 3,500
-------- --------- ---------
Aggregate interest in associates............ 10,227 9,267 11,617
-------- --------- ---------
Unallocated assets.......................... 28,600 30,079 25,487
-------- --------- ---------
Total assets................................480,838 549,040 611,790
======== ========= =========
Liabilities
Segment liabilities
- Exploration and production............. 17,158 20,262 30,082
- Refining............................... 28,170 27,311 30,162
- Marketing and distribution............. 23,419 23,713 27,090
- Chemicals.............................. 16,528 19,442 19,619
- Corporate and others................... 15,547 35,855 35,913
-------- --------- ---------
Total segment liabilities...................100,822 126,583 142,866
-------- --------- ---------
Unallocated liabilities.....................154,721 167,477 184,135
-------- --------- ---------
Total liabilities...........................255,543 294,060 327,001
======== ========= =========
F-58
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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,
--------------------------
2004 2005 2006
-------- --------- ---------
RMB RMB RMB
Capital expenditure
Exploration and production............................................ 21,234 23,095 31,734
Refining.............................................................. 15,319 19,100 21,969
Marketing and distribution............................................ 16,678 10,954 11,319
Chemicals............................................................. 11,025 9,386 12,629
Corporate and others.................................................. 1,550 1,164 2,170
-------- --------- ---------
65,806 63,699 79,821
======== ========= =========
Capital expenditure of Oil Production Plants
Exploration and production.............................. 642 1,612 3,362
======== ========= =========
Capital expenditure of jointly controlled entities
Exploration and production............................................ 1,323 772 102
Chemicals............................................................. 5,178 1,830 160
-------- --------- ---------
6,501 2,602 262
======== ========= =========
Depreciation, depletion and amortization
Exploration and production............................................ 12,217 11,118 12,945
Refining.............................................................. 7,730 7,055 7,733
Marketing and distribution............................................ 2,759 3,026 3,452
Chemicals............................................................. 9,325 9,697 9,697
Corporate and others.................................................. 462 722 408
-------- --------- ---------
32,493 31,618 34,235
======== ========= =========
Impairment losses on long-lived assets recognized
in consolidated statements of income
Exploration and production............................................ 98 60 552
Refining.............................................................. 14 ___ ___
Marketing and distribution............................................ 1,769 366 23
Chemicals............................................................. 2,038 1,425 250
-------- --------- ---------
3,919 1,851 825
======== ========= =========
Impairment losses on revalued long-lived assets recognized in equity
attributable to equity shareholders of the Company
Chemicals............................................................. 709 -- --
======== ========= =========
F-59
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
33. PRINCIPAL SUBSIDIARIES
Percentage
Percentage of of equity
equities held by the
Particulars of issued Type of held by the Company's
Name of company and paid up capital Legal Entity Company subsidiaries Principal activities
--------------- --------------------- ------------ ------- ------------ --------------------
% %
China Petrochemical International RMB 1,663 Limited 100.00 __ Trading of crude oil and
Company Limited company petrochemical products
Sinopec Sales Company Limited RMB 1,700 Limited 100.00 __ Marketing and distribution
company of refined petroleum
products
Sinopec Zhenhai Refining and Chemical RMB 2,524 Limited 100.00 __ Manufacturing of
Company Limited (Note 17) company intermediate
petrochemical products
and petroleum products
Sinopec Qilu Petrochemical Company RMB 1,950 Limited 99.76 __ Manufacturing of
intermediate petrochemical
products and petroleum
products
Sinopec Yangzi Petrochemical Company RMB 2,330 Limited 99.81 __ Manufacturing of
intermediate petrochemical
products and petroleum
products
Sinopec Zhongyuan Petroleum Company RMB 875 Limited 99.35 __ Exploration and production
Limited (Note 17) company of crude oil and natural
gas
Shengli Oil Field Dynamic Company RMB 364 Limited 97.71 __ Exploration and production
Limited (Note 17) company of crude oil and
distribution of
petrochemical products
Sinopec Fujian Petrochemical Company RMB 2,253 Limited 50.00 __ Manufacturing of plastics,
Limited (i) company intermediate petrochemical
products and petroleum
products
Sinopec Shanghai Petrochemical RMB 7,200 Limited 55.56 __ Manufacturing of synthetic
Company Limited company fibres, resin and plastics,
intermediate petrochemical
products and petroleum
products
Sinopec Shijiazhuang Refining- RMB 1,154 Limited 79.73 __ Manufacturing of
Chemical Company Limited company intermediate petrochemical
products and petroleum
products
Sinopec Kantons Holdings Limited HK$ 104 Limited __ 72.40 Trading of crude oil and
company petroleum products
Sinopec Wuhan Petroleum Group RMB 147 Limited 46.25 __ Marketing and distribution
Company Limited (i) company of refined petroleum
products
Sinopec Yizheng Chemical Fibre RMB 4,000 Limited 42.00 __ Production and sale of
Company Limited (i) company polyester chips and
polyester fibres
Sinopec Zhongyuan Petrochemical RMB 2,400 Limited 93.51 __ Manufacturing of chemical
Company Limited company products
Sinopec Shell (Jiangsu) Petroleum RMB 830 Limited 60.00 __ Marketing and distribution
Marketing Company Limited company of refined petroleum
products
BP Sinopec (Zhejiang) Petroleum RMB 800 Limited 60.00 __ Marketing and distribution
Company Limited company of refined petroleum
products
Sinopec Qingdao Refining and Chemical RMB 800 Limited 85.00 __ Manufacturing of
Company Limited company intermediate petrochemical
products and petroleum
products
Sinopec Hainan Refining and Chemical RMB 3,986 Limited 75.00 __ Manufacturing of
Company Limited company intermediate 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) 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.
F-60
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(ii) During the year ended December 31, 2006, the Company disposed the
211,423,651 A shares, representing approximately 40.72% of the issued
share capital, in Sinopec Wuhan Phoenix Company Limited pursuant to an
agreement entered into with a third party. No significant disposal
gain or loss was recorded from this transaction.
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, 2005 and
2006.
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, 2005 and 2006:
December 31,
------------
2005 2006
---- ----
RMB RMB
Carrying amount......................... 87,457 85,778
Fair value.............................. 87,461 85,376
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.
Unquoted equity securities 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 listed 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. 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
F-61
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
and which form the basis for making judgments 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 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 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 judgments 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
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.
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.
F-62
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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. For goodwill, the recoverable amount is estimated annually.
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 or cash-generating units are not readily
available. In determining the value in use, expected cash flows generated by the
asset or the cash-generating unit are discounted to their present value, which
requires significant judgment 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.
F-63
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
36. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED
BUT NOT YET EFFECTIVE FOR THE ANNUAL ACCOUNTING PERIOD ENDED DECEMBER 31,
2006
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, 2006 and which
have not been adopted in these financial statements:
Effective for accounting
period beginning on or after
IFRS 7, Financial instruments: disclosures January 1, 2007
IFRS 8, Operating Segments January 1, 2009
IFRIC 7, Applying the restatement approach under IAS 29, Financial March 1, 2006
reporting in hyperinflationary economies
IFRIC 8, Scope of IFRS 2 May 1, 2006
IFRIC 9, Reassessment of Embedded Derivatives June 1, 2006
IFRIC 10, Interim financial reporting and impairment November 1, 2006
IFRIC 11, IFRS 2 - Group and treasury share transaction March 1, 2007
IFRIC 12, Service concession arrangements January 1, 2008
Amendment to IAS 1, Presentation of financial statements: capital
disclosures January 1, 2007
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 7, IFRIC 8, IFRIC 9,
IFRIC 10, IFRIC 11, IFRIC 12 and the amendment to IAS 1 are not applicable to
any of the Group's operations and that the adoption of the remainder of the
above new standards and new interpretations is unlikely to have a significant
impact on the Group's results of operations and financial position.
F-64
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
37. 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 241 and
RMB 195 as of December 31, 2005 and 2006, respectively.
(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 reversed and expensed 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, 2005 and 2006,
respectively.
(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, Petrochemical and Catalyst
Assets and Oil Production Plants were revalued at December 31, 2000, June 30,
2003, October 31, 2003, June 30, 2004 and June 30, 2006, respectively, in
connection with the acquisitions of Sinopec National Star, Sinopec Maoming,
Refining Assets, Petrochemical and Catalyst Assets and Oil Production Plants.
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 1,838 and RMB 86 as of
December 31, 2005 and 2006, 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
F-65
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 509 and RMB 486 as of December 31, 2005 and 2006, respectively.
(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 asset's 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 456 and RMB 418 as of
December 31, 2005 and 2006, respectively.
(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 486 and RMB
446 as of December 31, 2005 and 2006, respectively.
F-66
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
(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, 2005 and 2006, respectively, 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 on the face of the
consolidated statements 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 statements 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 owns 20% to 50% of total outstanding
voting stock 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 income 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.
F-67
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
Presented below is summarized financial information prepared in accordance
with US GAAP of such subsidiaries and jointly controlled entities.
Years ended December 31,
-------------------------
2004 2005 2006
---- ----- ----
RMB RMB RMB
Sales of goods................. 28,004 53,768 75,184
Income before income tax....... 1,373 286 6,119
Net income / (loss)............ 969 (204) 5,672
At December 31,
----------------
2005 2006
----- ----
RMB RMB
Current assets................. 12,101 19,417
Total assets................... 64,560 68,458
Current liabilities............ 8,901 12,231
Total liabilities.............. 31,727 31,448
Total equity................... 32,833 37,010
(j) Recently issued accounting standards
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements"
which defines fair value, provides a framework for measuring fair value, and
expands the disclosures required for fair value measurements. SFAS No. 157
applies to other accounting pronouncements that require fair value measurements
and does not require any new fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. Currently, the Group does
not expect the adoption of SFAS No. 157 will have a material impact on its
consolidated financial statements.
FIN No. 48
In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes - an interpretation of SFAS No. 109" ("FIN48"),
which clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109. FIN 48
requires that the Group recognizes in the consolidated financial statements the
impact of a tax position, if that position is more likely than not of being
sustained upon examination, based on the technical merits of the position. FIN
48 will be effective for the first fiscal year beginning after December 15,
2006. Currently, the Group does not expect the adoption of this Interpretation
will have a material effect on its consolidated financial statements.
F-68
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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
in note Years ended December 31,
above 2004 2005 2006
----- ---- ---- ----
RMB RMB RMB
Net income attributable to equity shareholders of the
Company under IFRS.................................... 35,335 41,455 53,912
US GAAP adjustments:
Foreign exchange gains and losses..................... (a) 60 54 46
Capitalization of property, plant and equipment....... (b) 22 - -
Depreciation on revalued property, plant and equipment. (c) 4,301 4,016 1,340
Disposal of property, plant and equipment............. (c) 2,099 1,838 57
Exchange of assets.................................... (d) 23 23 23
Depreciation effect of reversal of impairment of
long-lived assets................................. (e) 29 76 38
Capitalized interest on investments in associates, net
of amortization effect............................ (f) 205 (40) (40)
Goodwill amortization for the year.................... (g) 13 - -
Deferred tax effect of US GAAP adjustments............ (2,277) (1,786) (421)
Minority interests.................................... (h) (519) (489) (93)
--------- --------- ========
Net income attributable to equity shareholders of the
Company under US GAAP................................. 39,291 45,147 54,862
======== ======== ========
Basic and diluted earnings per share under US GAAP......... 0.45 0.52 0.63
======== ======== ========
Basic and diluted earnings per ADS under US GAAP*.......... 45.31 52.07 63.28
======== ======== ========
*Basic and diluted earnings per ADS is calculated on the basis that one ADS
is equivalent to 100 H shares.
F-69
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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
in note Years ended December 31,
above 2005 2006
----- ---- ----
RMB RMB
Total equity attributable to equity shareholders of the
Company under IFRS...................................... 224,301 262,845
US GAAP adjustments:
Foreign exchange gains and losses....................... (a) (241) (195)
Revaluation of property, plant and equipment............ (c) (1,838) (441)
Exchange of assets...................................... (d) (509) (486)
Reversal of impairment of long-lived assets............. (e) (456) (418)
Capitalized interest on investments in associates....... (f) 486 446
Goodwill................................................ (g) 43 43
Effect of US GAAP adjustments on deferred tax assets.... 921 487
Effect of US GAAP adjustments on deferred tax
liabilities......................................... (134) (121)
Minority interests...................................... (h) 230 137
-------- --------
Total equity attributable to equity shareholders of the 222,803 262,297
======== ========
Company under US GAAP...................................
38. SUBSEQUENT EVENT
On December 6, 2006, the Group announced its proposal to issue US$ 1,500
convertible bonds, which are convertible into H shares of the Company. This
proposal was subsequently approved by the shareholders of the Company at the
Extraordinary General Meeting held on January 22, 2007.
On March 16, 2007, the Fifth Plenary Session of the Tenth National People's
Congress passed the Corporate Income Tax Law of the People's Republic of China
("new tax law"), which will take effect on January 1, 2008. According to the new
tax law, the corporate income tax rate for entities other than certain high-tech
enterprises and small-scale enterprises, as defined in the new tax law will be
revised to 25%. In addition, entities that are currently taxed at preferential
rates will be subject to a five-year transition period during which the tax
rates will gradually be increased to the unified rate of 25% from January 1,
2008. As a result of the new tax law, it is expected that the income tax rate
applicable to the Company and certain of its subsidiaries will be reduced from
33% to 25% from January 1, 2008. However, since the detailed implementation
rules as to how the existing preferential rates will gradually be increased to
the unified rate of 25% over the five-year transition period have not been
formulated and promulgated, management is not yet in a position to estimate the
impact of the new tax law on the deferred tax assets and liabilities of certain
entities which are being taxed at preferential rates. The financial effect of
the new tax law, if any, will be reflected in the Group's 2007 financial
statements. The enactment of the new tax law is not expected to have any
financial effect on the amounts accrued in the balance sheet in respect of
current tax payable.
39. PARENT AND ULTIMATE HOLDING COMPANY
The directors consider the parent and ultimate holding company of the Group
as of December 31, 2006 is Sinopec Group Company, a state-owned enterprise
established in the PRC. This entity does not produce financial statements
available for public use.
F-70
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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 at December 31, 2004, 2005 and
2006, and for each of the years then ended 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,
--------------------------
2004 2005 2006
RMB RMB RMB
Property cost......................................................... ___ ___ ___
Wells and related equipment and facilities............................ 160,380 180,138 203,551
Supporting equipment and facilities................................... 12,756 13,573 16,483
Uncompleted wells, equipment and facilities........................... 9,387 11,003 16,420
--------- --------- --------
Total capitalized costs............................................... 182,523 204,714 236,454
Accumulated depreciation, depletion, amortization and impairment
allowances......................................................... (80,491) (88,274) (96,485)
--------- --------- --------
Net capitalized costs................................................. 102,032 116,440 139,969
========= ========= =========
Table II: Cost incurred in exploration and development
Years ended December 31,
--------------------------
2004 2005 2006
RMB RMB RMB
Exploration...................................................... 8,481 9,086 11,127
Development...................................................... 21,113 22,804 32,054
------ ------ ------
Total cost incurred.............................................. 29,594 31,890 43,181
====== ====== ======
Table III: Results of operations for oil and gas producing activities
Years ended December 31,
--------------------------
2004 2005 2006
RMB RMB RMB
Revenues
Sales....................................................... 13,380 16,796 21,683
Transfers................................................... 60,053 84,423 105,656
------- -------- -------
73,433 101,219 127,339
Production costs excluding taxes................................. (17,606) (21,722) (24,040)
Exploration expenses............................................. (6,396) (6,411) (7,983)
Depreciation, depletion, amortization and impairment provisions.. (11,707) (10,595) (13,001)
Taxes other than income tax...................................... (1,167) (1,687) (10,784)
------- --------- --------
Income before income tax......................................... 36,557 60,804 71,531
Income tax expense............................................... (12,064) (20,065) (23,605)
-------- -------- --------
Results of operations from producing activities................... 24,493 40,739 47,926
======= ====== ======
F-71
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
The results of operations for producing activities for the years ended
December 31, 2004, 2005 and 2006 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, 2004, 2005 and 2006 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,
-----------------------------
2004 2005 2006
Proved developed and undeveloped reserves (oil) (million barrels)
Beginning of year................................................ 3,257 3,267 3,294
Revisions of previous estimates.................................. 23 26 (10)
Improved recovery................................................ 127 142 146
Extensions and discoveries....................................... 134 138 148
Production....................................................... (274) (279) (285)
------- ------- -------
End of year...................................................... 3,267 3,294 3,293
======= ======= =======
Proved developed reserves
Beginning of year................................................ 2,786 2,808 2,870
======= ======= =======
End of year...................................................... 2,808 2,870 2,903
======= ======= =======
Proved developed and undeveloped reserves (gas) (billion cubic feet)
Beginning of year................................................ 2,888 3,033 2,952
Revisions of previous estimates.................................. (42) (9)
(95)
Extensions and discoveries....................................... 447 183 170
Production....................................................... (207) (222) (257)
------- ------- -------
End of year...................................................... 3,033 2,952 2,856
======= ======= =======
Proved developed reserves
Beginning of year................................................ 1,249 1,398 1,557
======= ======= =======
End of year...................................................... 1,398 1,557 1,472
======= ======= =======
F-72
CHINA PETROLEUM & CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in millions, except per share data and except otherwise stated)
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, 2004, 2005 and 2006 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,
-------------------------------
2004 2005 2006
Future cash flows..............................................1,003,511 1,401,283 1,235,524
Future production costs........................................ (350,012) (440,743) (487,895)
Future development costs....................................... (25,577) (26,994) (33,523)
Future income tax expenses..................................... (174,060) (270,607) (189,465)
---------- ---------- ---------
Undiscounted future net cash flows............................. 453,862 662,939 524,641
10% annual discount for estimated timing of cash flows......... (204,183) (304,893) (241,180)
---------- ------------ ---------
Standardized measure of discounted future net cash flows....... 249,679 358,046 283,461
========== ============ =========
Table VI: Changes in the standardized measure of discounted future net cash
flows
Years ended December 31,
-----------------------------
2004 2005 2006
RMB RMB RMB
Sales and transfers of oil and gas produced, net of production costs (46,145) (61,346) (92,849)
Net changes in prices and production costs 69,305 130,221 (114,796)
Net change due to extensions, discoveries and improved recoveries 36,209 56,131 51,445
Revisions of previous quantity estimates 2,204 3,964 (1,207)
Previously estimated development costs incurred during the year 7,148 8,134 8,516
Accretion of discount 16,176 21,352 30,190
Net change in income taxes (22,733) (50,397) 43,784
Others 213 308 332
---------- -------- -------
Net change for the year 62,377 108,367 (74,585)
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F-73
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: April 6, 2007