20-F 1 u98519e20vf.htm PETROCHINA COMPANY LIMITED FORM 20-F PetroChina Company Limited Form 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File Number 1-15006


(PETRO CHINA COMPANY LOGO)

(Exact name of Registrant as specified in its charter)

PetroChina Company Limited

(Translation of Registrant’s name into English)


The People’s Republic of China

(Jurisdiction of incorporation or organization)


16 Andelu

Dongcheng District, Beijing, 100011
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.

         
Title of Name of each exchange
Each class on which registered


 American Depositary Shares, each representing  100 H Shares, par value RMB 1.00 per share*
    New York Stock Exchange, Inc.  
 H Shares, par value RMB 1.00 per share
    New York Stock Exchange, Inc.**  

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

None

(Title of Class)

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

None

(Title of Class)

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

         
State-owned shares, par value RMB 1.00 per share
    158,241,758,000  
H Shares, par value RMB 1.00 per share
    17,582,418,000 ***

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) or the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X  No   

     Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17    Item 18 X


 *  PetroChina’s H Shares are listed and traded on The Stock Exchange of Hong Kong Limited.
 **  Not for trading, but only in connection with the registration of American Depository Shares.
***  Include 649,468,500 H Shares represented by American Depositary Shares.




CERTAIN TERMS AND CONVENTIONS
Conventions Which Apply to this Annual Report
Conversion Table
Certain Oil and Gas Terms
FORWARD-LOOKING STATEMENTS
PART I
ITEM 1 -- IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
ITEM 2 -- OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3 -- KEY INFORMATION
Exchange Rates
Selected Financial Data
Risk Factors
ITEM 4 -- INFORMATION ON THE COMPANY
Introduction
Exploration and Production
Refining and Marketing
Chemicals and Marketing
Natural Gas and Pipeline
Competition
Environmental Matters
Legal Proceedings
Properties
Regulatory Matters
ITEM 5 -- OPERATING AND FINANCIAL REVIEW AND PROSPECTS
General
Operating Results
Liquidity and Capital Resources
Research and Development
Trend Information
Other Information
ITEM 6 -- DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors, Senior Management and Supervisors
Compensation
Board Practices
Employees
Share Ownership
ITEM 7 -- MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
Related Party Transactions
ITEM 8 -- FINANCIAL INFORMATION
Financial Statements
Dividend Policy
Significant Changes
ITEM 9 -- THE OFFER AND LISTING
Nature of the Trading Market and Market Price Information
ITEM 10 -- ADDITIONAL INFORMATION
Memorandum and Articles of Association
Material Contracts
Exchange Controls
Taxation
Documents on Display
Matters Related to Auditors
ITEM 11 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12 -- DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13 -- DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
ITEM 14 -- MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITY HOLDERS
ITEM 15 -- CONTROLS AND PROCEDURES
ITEM 16 -- [RESERVED]
PART III
ITEM 17 -- FINANCIAL STATEMENTS
ITEM 18 -- FINANCIAL STATEMENTS
ITEM 19 -- EXHIBITS
SIGNATURE
INDEX OF FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
PETROCHINA COMPANY LIMITED CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2000, 2001 and 2002 (Amounts in millions except for per share data)
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
PETROCHINA COMPANY LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2000, 2001 and 2002 (Amounts in millions)
PETROCHINA COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions except per share data or unless otherwise stated)
SUPPLEMENTARY INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) (Amounts in millions unless otherwise stated)
EXHIBIT INDEX
EX-4.1 2003 Performance Contract (Chen Geng)
EX-4.2 2003 Performance Contract ((Su Shulin)
EX-4.3 2003 Performance Contract (Wang Fucheng)
EX-4.4 2003 Performance Contract (Wang Guoliang)
EX-4.5 2003 Performance Contract (Liu Baohe)
EX-4.6 2003 Performance Contract (Duan Wende)
EX-4.7 2003 Performance Contract (Jia Chengzao)
EX-4.8 Crude Oil Mutual Supply Framework Agreement
EX-8.1 List of Major Subsidiaries
EX-12(a).1 Certification Pursuant to 18 U.S.C.


Table of Contents

Table of Contents

                 
Page

        Certain Terms and Conventions     2  
        Forward-looking Statements     5  
Part I
  Item 1   Identity of Directors, Senior Management and Advisors     7  
    Item 2   Offer Statistics and Expected Timetable     7  
    Item 3   Key Information     7  
            Exchange Rates     7  
            Selected Financial Data     8  
            Risk Factors     12  
    Item 4   Information on the Company     15  
            Introduction     15  
            Exploration and Production     21  
            Refining and Marketing     31  
            Chemicals and Marketing     39  
            Natural Gas and Pipeline     43  
            Competition     47  
            Environmental Matters     48  
            Legal Proceedings     49  
            Properties     49  
            Regulatory Matters     50  
    Item 5   Operating and Financial Review and Prospects     57  
            General     57  
            Operating Results     66  
            Liquidity and Capital Resources     75  
            Research and Development     83  
            Trend Information     84  
            Other Information     85  
    Item 6   Directors, Senior Management and Employees     88  
            Directors, Senior Management and Supervisors     88  
            Compensation     94  
            Board Practices     95  
            Employees     96  
            Share Ownership     97  
    Item 7   Major Shareholders and Related Party Transactions     98  
            Major Shareholders     98  
            Related Party Transactions     98  
    Item 8   Financial Information     101  
    Item 9   The Offer and Listing     103  
    Item 10   Additional Information     103  
            Memorandum and Articles of Association     103  
            Material Contracts     104  
            Exchange Controls     104  
            Taxation     104  
            Documents on Display     106  
            Matters Related to Auditors     106  
    Item 11   Quantitative and Qualitative Disclosures About Market Risk     107  
    Item 12   Description of Securities Other Than Equity Securities     111  
Part II
  Item 13   Defaults, Dividend Arrearages and Delinquencies     111  
    Item 14   Material Modifications to the Rights to Security Holders     111  
    Item 15   Controls and Procedures     111  
    Item 16   [Reserved]     111  
Part III
  Item 17   Financial Statements     111  
    Item 18   Financial Statements     112  
    Item 19   Exhibits     112  
        Consolidated Financial Statements     F-1  

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CERTAIN TERMS AND CONVENTIONS

 
Conventions Which Apply to this Annual Report

      Unless the context otherwise requires, references in this annual report to:

  •  “CNPC” or “CNPC group” are to our parent, China National Petroleum Corporation and its affiliates and subsidiaries, excluding PetroChina, its subsidiaries and its interests in long-term investments, and where the context refers to any time prior to the establishment of CNPC, those entities and businesses which were contributed to CNPC upon its establishment.
 
  •  “PetroChina”, “we”, “our”, “our company” and “us” are to:

  —  PetroChina Company Limited, a joint stock company incorporated in the People’s Republic of China with limited liability and its subsidiaries and branch companies, or
 
  —  the CNPC group’s domestic crude oil and natural gas exploration and production, refining and marketing, chemicals and natural gas businesses that were transferred to us in the restructuring of the CNPC group in 1999.

  •  “PRC” or “China” are to the People’s Republic of China, but do not apply to Hong Kong, Macau or Taiwan for purposes of this annual report.

      We publish our consolidated financial statements in Renminbi. The audited consolidated financial statements included in this annual report have been prepared as if the operations and businesses transferred to us from CNPC were transferred as of the earliest period presented or from the date of establishment of the relevant unit, whichever is later, and conducted by us throughout the period. In this annual report, IFRS refers to International Financial Reporting Standards.

 
Conversion Table
         
1 barrel-of-oil equivalent
  = 1 barrel of crude oil   = 6,000 cubic feet of natural gas
1 cubic meter
  = 35.315 cubic feet    
1 ton of crude oil
  = 1 metric ton of crude oil   = 7.389 barrels of crude oil (assuming an API gravity of 34 degrees)
 
Certain Oil and Gas Terms

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

 
“acreage” The total area, expressed in acres, over which an entity has interests in exploration or production. Net acreage is the entity’s interest, expressed in acres, in the relevant exploration or production area.
 
“API gravity” An indication of the density of crude oil or other liquid hydrocarbons as measured by a system recommended by the American Petroleum Institute (API), measured in degrees. The lower the API gravity, the heavier the compound.
 
“condensate” Light hydrocarbon substances produced with natural gas that condense into liquid at normal temperatures and pressures associated with surface production equipment.
 
“crude oil” Crude oil, including condensate and natural gas liquids.
 
“day” When used with respect to production or capacity, means the total annual available production or capacity (after taking into account scheduled plant shutdowns) divided by 365.

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“development cost” For a given period, costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas.
 
“finding cost” For a given period, costs incurred in identifying areas that may warrant examination and in examining specific areas that are considered to have prospects of containing oil and gas reserves, including costs of drilling exploratory wells and exploratory-type stratigraphic test wells. Finding cost is also known as exploration cost.
 
“lifting cost” For a given period, costs incurred to operate and maintain wells and related equipment and facilities, including applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. Lifting cost is also known as production cost.
 
“natural gas liquids” Hydrocarbons that can be extracted in liquid form together with natural gas production. Ethane and pentanes are the predominant components, with other heavier hydrocarbons also present in limited quantities.
 
“offshore” Areas under water with a depth of five meters or greater.
 
“onshore” Areas of land and areas under water with a depth of less than five meters.
 
“primary distillation capacity” At a given point in time, the maximum volume of crude oil a refinery is able to process in its basic distilling units.
 
“proved developed reserves” Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
 
“proved reserves” Estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not of escalations based upon future conditions.
 
“proved undeveloped
reserves”
Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is

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continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.
 
“reserve-to-production ratio” For any given well, field or country, the ratio of proved reserves to annual production of crude oil or, with respect to natural gas, to wellhead production excluding flared gas.
 
“sales gas” Marketable production of gas on an “as sold” basis, excluding flared gas, injected gas and gas consumed in operations.
 
“water cut” For a given oil region, the percentage that water constitutes of all fluids extracted from all wells in that region.

      References to:

  •  BOE are to barrels-of-oil equivalent,
 
  •  Mcf are to thousand cubic feet, and
 
  •  Bcf are to billion cubic feet.

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FORWARD-LOOKING STATEMENTS

      This annual report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements are, by their nature, subject to significant risks and uncertainties. These forward-looking statements include, without limitation, statements relating to:

  •  the amount and nature of future exploration, development and other capital expenditures;
 
  •  future prices and demand for crude oil, natural gas, refined products and chemical products;
 
  •  development projects;
 
  •  exploration prospects;
 
  •  reserves potential;
 
  •  production of oil and gas and refined and chemical products;
 
  •  development and drilling potential;
 
  •  expansion and other development trends of the oil and gas industry;
 
  •  the planned development of our natural gas operations;
 
  •  the planned expansion of our refined product marketing network;
 
  •  the planned expansion of our natural gas infrastructure;
 
  •  our future overall business development and economic performance;
 
  •  our anticipated financial and operating information regarding, and the future development and economic performance of, our business;
 
  •  our anticipated market risk exposure arising from future changes in interest rates, foreign exchange rates and commodity prices; and
 
  •  other prospects of our business and operations.

      The words “anticipate”, “believe”, “could”, “estimate”,“expect”, “intend”, “may”, “plan”, “seek”, “will” and “would” and similar expressions, as they related to us, are intended to identify a number of these forward-looking statements.

      By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future and are beyond our control. The forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors set forth in this annual report and the following:

  •  fluctuations in crude oil and natural gas prices;
 
  •  failure to achieve continued exploration success;
 
  •  failures or delays in achieving production from development projects;
 
  •  continued availability of capital and financing;
 
  •  acquisitions and other business opportunities that we may pursue;
 
  •  general economic, market and business conditions, including volatility in interest rates, changes in foreign exchange rates and volatility in commodity markets;
 
  •  liability for remedial actions under environmental regulations;
 
  •  impact of the PRC’s entry into the World Trade Organization;
 
  •  the actions of competitors;
 
  •  wars and acts of terrorism or sabotage;
 
  •  changes in policies, laws or regulations of the PRC;

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  •  the other changes in global economic and political conditions affecting the production, supply and demand and pricing of crude oil, refined products, petrochemical products and natural gas; and
 
  •  the other risk factors discussed in this annual report, and other factors beyond our control.

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

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PART I

ITEM 1 — IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

      Not applicable. However, see “Item 6 — Directors, Senior Management and Employees — Directors, Senior Management and Supervisors.”

ITEM 2 — OFFER STATISTICS AND EXPECTED TIMETABLE

      Not applicable.

ITEM 3 — KEY INFORMATION

Exchange Rates

      Translations of amounts in this annual report from Renminbi into U.S. dollars and vice versa have been made at the rate of RMB 8.2800 to US$1.00, which was the noon buying rate in New York City for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2002. You should not construe these translations as representations that the RMB amounts could be converted into U.S. dollar amounts at that rate, or at all.

      The noon buying rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York was US$1.00=RMB 8.2772 on June 20, 2003. The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars for each month during the previous six months:

                 
Noon buying rate

High Low


(RMB per US$)
December 2002
    8.2800       8.2771  
January 2003
    8.2800       8.2766  
February 2003
    8.2800       8.2768  
March 2003
    8.2776       8.2770  
April 2003
    8.2774       8.2769  
May 2003
    8.2771       8.2768  
June 2003 (through June 20)
    8.2773       8.2768  

      The following table sets forth the average noon buying rates between Renminbi and U.S. dollars for each of 1998, 1999, 2000, 2001 and 2002, calculated by averaging the noon buying rates on the last day of each month during the relevant year:

         
Average noon buying rate

(RMB per US$)
1998
    8.3009  
1999
    8.2784  
2000
    8.2784  
2001
    8.2770  
2002
    8.2772  

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Selected Financial Data

Historical Financial Information

      You should read the selected historical financial data set forth below in conjunction with the consolidated financial statements of PetroChina and their notes and “Item 5 — Operating and Financial Review and Prospects” included elsewhere in this annual report. The application of the accounting treatment to the acquisition discussed below requires that our consolidated financial statements for all relevant periods be retroactively restated to reflect in these periods the acquisition as if the operations of CNPC’s refined products marketing enterprises we acquired from CNPC had always been combined since inception. The selected historical income statement and cashflow data for the years ended December 31, 2000, 2001 and 2002 and the selected historical balance sheet data as of December 31, 2001 and 2002 set forth below are derived from our audited consolidated financial statements, including their notes, included elsewhere in this annual report. The selected historical income statement data and cashflow data for the years ended December 31, 1998 and 1999 and the selected historical balance sheet data as of December 31, 1998, 1999 and 2000 set forth below are derived from our previously unaudited financial statements, not included in this annual report. The financial information included in this section may not necessarily reflect our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we been a separate and stand-alone entity during the relevant periods.

      We have prepared our consolidated financial statements in accordance with IFRS. IFRS differ materially from the generally accepted accounting principals in the U.S., or US GAAP. For a discussion of significant differences between IFRS and US GAAP, see Note 33 to our consolidated financial statements included elsewhere in this annual report and “Item 5 — Operating and Financial Review and Prospects — Other Information — US GAAP Reconciliation”.

      In accordance with an acquisition agreement between CNPC and us dated September 26, 2002, we acquired from CNPC the assets, liabilities and interests related to CNPC’s refined products marketing enterprises consisting primarily of service stations and related facilities. Under IFRS, the acquisition is a combination of entities under common control since the CNPC’s refined products marketing enterprises and we are under the common control of CNPC. As a result, we have accounted for the acquisition in a manner similar to a uniting of interests, whereby the assets and liabilities of the marketing enterprises acquired are accounted for at historical cost to CNPC with net liabilities of RMB 2,956 million at the effective date. Our consolidated financial statements as of and for the years ended December 31, 2000 and 2001 included elsewhere in this annual report and the selected historical financial data as of and for the years ended December 31, 1998, 1999, 2000 and 2001 have been restated to give effect to the acquisition in these periods as if the operations of our company and these marketing enterprises had always been combined in these periods.

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See “Item 5 — Operating and Financial Review and Prospects — General — Acquisition of Certain Refined Products Marketing Enterprises from CNPC”.
                                                     
Year ended December 31,

1998(1) 1999(1) 2000(2) 2001(2) 2002 2002






RMB RMB RMB RMB RMB US$
(in millions, except for per share and per ADS data)
Income Statement Data
                                               
IFRS
                                               
Revenues
                                               
 
Sales and other operating revenues
    153,448       181,671       245,279       241,320       244,424       29,520  
     
     
     
     
     
     
 
Operating expenses
                                               
 
Purchases, services and other
    (63,138 )     (65,868 )     (64,251 )     (78,529 )     (71,690 )     (8,658 )
 
Employee compensation costs
    (10,430 )     (11,598 )     (15,129 )     (14,608 )     (16,248 )     (1,962 )
 
Exploration expenses, including exploratory dry holes
    (5,990 )     (7,344 )     (8,680 )     (7,344 )     (8,095 )     (978 )
 
Depreciation, depletion and amortization
    (18,081 )     (23,706 )     (34,209 )     (33,615 )     (36,782 )     (4,443 )
 
Selling, general and administrative expenses
    (10,617 )     (13,447 )     (17,621 )     (21,735 )     (22,474 )     (2,714 )
 
Employee separation costs and shutting down of manufacturing assets
                (6,579 )     (487 )     (2,121 )     (256 )
 
Revaluation loss
          (1,122 )                        
 
Impairment loss on assets to be retained by CNPC
    (310 )     (2,007 )                        
 
Taxes other than income taxes
    (9,604 )     (10,293 )     (13,258 )     (13,951 )     (14,613 )     (1,765 )
 
Other income/(expenses), net
    (294 )     201       (119 )     88       (60 )     (7 )
     
     
     
     
     
     
 
   
Total operating expenses
    (118,464 )     (135,184 )     (159,846 )     (170,181 )     (172,083 )     (20,783 )
     
     
     
     
     
     
 
Income from operations
    34,984       46,487       85,433       71,139       72,341       8,737  
 
Income from equity affiliates
    88       128       584       341       268       32  
 
Exchange gain (loss), net
    (1,872 )     (2,233 )     1,172       250       (316 )     (38 )
 
Interest income
    1,334       638       591       809       463       56  
 
Interest expense
    (12,402 )     (9,056 )     (6,286 )     (4,408 )     (3,516 )     (425 )
Income before income taxes
    22,132       35,964       81,494       68,131       69,240       8,362  
 
Income taxes
    (7,543 )     (9,414 )     (27,014 )     (23,066 )     (22,231 )     (2,685 )
     
     
     
     
     
     
 
 
Income before minority interests
    14,589       26,550       54,480       45,065       47,009       5,677  
   
(Income) loss applicable to minority interests
    57       (127 )     165       404       (99 )     (12 )
     
     
     
     
     
     
 
Net income
    14,646       26,423       54,645       45,469       46,910       5,665  
     
     
     
     
     
     
 
Basic and diluted net income per share(3)
    0.09       0.17       0.32       0.26       0.27       0.03  
     
     
     
     
     
     
 
Basic and diluted net income per ADS(4)
    9.15       16.51       31.84       25.86       26.68       3.22  
US GAAP
                                               
Net income
    14,646       30,409       60,236       50,934       49,837       6,019  
Basic and diluted net income per share(3)
    0.09       0.19       0.35       0.29       0.28       0.03  
Basic and diluted net income per ADS(4)
    9.15       19.01       35.10       28.97       28.34       3.42  
                                                     
As of December 31,

1998(1) 1999(1) 2000(1) 2001(2) 2002 2002






RMB RMB RMB RMB RMB US$
(in millions, except for per share and per ADS data)
Balance Sheet Data
                                               
IFRS
                                               
Assets
                                               
Current assets
                                               
 
Cash and cash equivalents
    15,413       18,090       18,085       11,127       9,977       1,205  
 
Time deposits with maturities over three months
                      3,253       2,612       315  
 
Short-term investments
    53       1,489                          
 
Receivables under resale agreements
                5,815       11,505       9,786       1,182  
 
Accounts receivable, less allowance for doubtful accounts
    19,482       14,943       12,786       7,392       6,079       734  
 
Inventories, at net book value
    18,423       18,396       32,499       28,313       28,441       3,435  
 
Prepaid expenses and other current assets
    20,747       29,118       11,913       24,427       18,269       2,207  
     
     
     
     
     
     
 
   
Total current assets
    74,118       82,036       81,098       86,017       75,164       9,078  

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As of December 31,

1998(1) 1999(1) 2000(1) 2001(2) 2002 2002






RMB RMB RMB RMB RMB US$
(in millions, except for per share and per ADS data)
Non-current assets
                                               
 
Net assets to be retained by CNPC
    8,478                                
 
Property, plant and equipment, less accumulated depreciation, depletion and amortization
    231,064       327,348       343,319       366,970       397,798       48,043  
 
Long-term investments, at net book value
    3,708       3,845       4,948       5,530       5,680       686  
 
Intangible and other assets
    1,835       2,017       2,681       4,148       4,507       544  
     
     
     
     
     
     
 
 
Total non-current assets
    245,085       333,210       350,948       376,648       407,985       49,273  
     
     
     
     
     
     
 
   
Total assets
    319,203       415,246       432,046       462,665       483,149       58,351  
     
     
     
     
     
     
 
Liabilities and shareholders’ equity
                                               
Current liabilities
                                               
 
Short-term debt
    65,006       62,057       41,514       25,323       20,633       2,492  
 
Accounts payable and accrued liabilities
    42,087       47,707       39,550       53,210       57,793       6,980  
 
Income and other taxes payable
    3,902       4,747       16,570       14,434       10,927       1,320  
     
     
     
     
     
     
 
   
Total current liabilities
    110,995       114,511       97,634       92,967       89,353       10,792  
Non-current liabilities
                                               
 
Payable to CNPC
    8,478                                
 
Long-term debt
    105,432       84,512       53,412       65,546       60,655       7,325  
 
Deferred credits and other long-term obligations
    2,133       1,155       1,196       1,380       1,684       203  
 
Deferred income taxes
    10,381       1,182       3,169       7,030       9,927       1,199  
     
     
     
     
     
     
 
   
Total non-current liabilities
    126,424       86,849       57,777       73,956       72,266       8,727  
     
Total liabilities
    237,419       201,360       155,411       166,923       161,619       19,519  
Minority interest
    3,798       4,200       4,989       5,136       4,854       586  
Owner’s/shareholders’ equity(5)
    77,986       209,686       271,646       290,606       316,676       38,246  
     
     
     
     
     
     
 
   
Total liabilities and owner’s/shareholders’ equity
    319,203       415,246       432,046       462,665       483,149       58,351  
     
     
     
     
     
     
 
Share capital, issued and outstanding, RMB 1.00 par value
                                               
 
State-owned shares
          160,000       158,242       158,242       158,242       19,112  
 
H shares and ADSs
                17,582       17,582       17,582       2,123  
US GAAP
                                               
Property, plant and equipment, less accumulated depreciation, depletion and amortization
    231,064       252,196       276,601       308,498       347,595       41,980  
Total assets
    319,203       340,094       365,328       404,193       432,946       52,288  
Owner’s/shareholders’ equity(5)
    77,986       159,938       227,489       251,914       283,464       34,235  
Other Financial Data
                                               
IFRS
                                               
Dividend per share
                0.14       0.12       0.12       0.01  
Dividend per ADS
                14.14       11.98       12.00       1.45  
     
     
     
     
     
     
 
Capital expenditures(6)
    (43,933 )     (43,310 )     (60,130 )     (61,549 )     (73,726 )     (8,904 )
Net cash provided by operating activities
    38,068       53,658       103,309       84,439       98,341       11,877  
Net cash used for investing activities(7)
    (39,290 )     (40,622 )     (60,126 )     (61,491 )     (71,662 )     (8,655 )
Net cash used for financing activities(8)
    (55 )     (10,359 )     (43,188 )     (29,906 )     (27,829 )     (3,361 )


(1)  Certain financial data for these periods and as of these dates have been retroactively restated and are derived from our previously unaudited consolidated financial statements. See the paragraphs preceding these table for a detailed description.
 
(2)  Certain financial data for these periods and as of these dates have been retroactively restated. See the paragraphs preceding these tables for a detailed description.
 
(3)  Historical income per share for the year ended December 31, 2001 and 2002 has been calculated by dividing the net profit by the number of 175,824 million shares issued and outstanding for the periods presented. Historical income per share for the year ended December 31, 2000 has been calculated by dividing the net profit by the weighted average number of 171,630 million shares issued and outstanding for the period presented. Historical income per share for the years ended December 31, 1998 and 1999 has been calculated by dividing the net profit by the 160,000 million shares issued and outstanding upon the formation of PetroChina on November 5, 1999 for the periods presented.
 
(4)  Historical income per ADS for the year ended December 31, 2001 and 2002 has been calculated by dividing the net profit by the number of 175,824 million shares issued and outstanding for the periods presented, assuming each ADS representing 100 H shares. Historical income per ADS for the year ended December 31, 2000 has been calculated by

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dividing the net profit by the weighted average number of 171,630 million shares issued and outstanding for the period presented, assuming each ADS representing 100 H shares. Historical income per ADS for the years ended December 31, 1998 and 1999 has been calculated by dividing the net profit by the 160,000 million shares issued and outstanding upon the completion of the global offering of our H shares for the periods presented, assuming each ADS representing 100 H shares.
 
(5)  Prior to our formation on November 5, 1999, the financial statements were presented on a carve-out combined basis and no direct ownership existed prior to such date among all the assets, businesses and operations transferred from CNPC to us as part of our formation. Accordingly, owner’s equity was shown in the combined financial statements until November 5, 1999.
 
(6)  Excludes capital expenditures for assets retained by CNPC of RMB 1,687 million and RMB 111 million in 1998 and 1999, respectively. We did not incur such capital expenditures in 2000, 2001 and 2002.
 
(7)  Includes capital expenditures for assets retained by CNPC of RMB 1,687 million and RMB 111 million in 1998 and 1999, respectively. We did not incur such capital expenditures in 2000, 2001 and 2002.
 
(8)  Includes contributions from CNPC for assets retained by CNPC of RMB 1,687 million and RMB 111 million in 1998 and 1999, respectively. CNPC did not make such contributions for such assets in 2000, 2001 and 2002.

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Risk Factors

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

  •  Our operations are affected by the volatility of prices for crude oil and refined products. We and China Petroleum and Chemical Corporation, or Sinopec, set our crude oil median prices monthly based on the Singapore trading prices for crude oil. The PRC government publishes the retail median guidance prices for gasoline and diesel monthly based on the FOB Singapore, Rotterdam and New York gasoline and diesel trading prices in the previous month. Historically, international prices for crude oil and refined products have fluctuated widely in response to changes in many factors, such as global and regional economic and political developments and global and regional supply and demand for crude oil and refined products. We do not have and will not have control over the factors affecting international prices for crude oil and refined products. We expect continued volatility and uncertainty in international prices for crude oil and refined products. Declines in crude oil prices may adversely affect our business, results of operations and financial condition, our capital expenditure plans and the value of our proved reserves.
 
  •  The crude oil and natural gas reserve data in this annual report are only estimates. The reliability of reserve estimates depend on a number of factors, assumptions and variables, such as the quality and quantity of our technical and economic data and the prevailing oil and gas prices applicable to our production, many of which are beyond our control and may prove to be incorrect over time. Results of drilling, testing and production after the date of the estimates may require substantial upward or downward revisions in our reserve data. Our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates because of these revisions.
 
  •  In part as a result of the PRC’s entry into the WTO, we expect that the PRC government will eventually lift its restrictions that prohibit the direct sale of crude oil and natural gas by foreign companies in China or other restrictions that limit, or have the effect of limiting, competition by foreign companies in the PRC oil and gas industry. We may face intensified competition from foreign companies in the future, especially in our refining and marketing and chemical businesses. This could adversely affect our future profitability.
 
  •  CNPC owns approximately 90% of our share capital. This ownership percentage enables CNPC to elect our entire board of directors without the concurrence of any of our other shareholders. Accordingly, CNPC is in a position to:

  —  control our policies, management and affairs;
 
  —  subject to applicable PRC laws and regulations and provisions of our articles of association, determine the timing and amount of dividend payments and adopt amendments to certain of the provisions of our articles of association; and
 
  —  otherwise determine the outcome of most corporate actions and, subject to the requirements of the Listing Rules of the Hong Kong Stock Exchange, cause our company to effect corporate transactions without the approval of minority shareholders.

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

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

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  Comprehensive Products and Services Agreement with CNPC and our transactions with CNPC over the past three years have been conducted on open, fair and competitive commercial terms, we have only limited leverage in negotiating with CNPC and its affiliates over the specific terms of the agreements for the provision of these services and products.
 
  •  The eastern and southern regions of China have a higher demand for refined products and chemical products than the western and northern regions. Most of our refineries and chemical plants are located in the western and northern regions of China. While we continue to expand the sales of these products in the eastern and southern regions of China, we face strong competition from Sinopec. In addition, we incur relatively higher transportation costs for delivery of our refined products and chemical products to certain areas of these regions from our refineries and chemical plants in western and northern China. As a result, we expect that we will continue to encounter difficulty in increasing our sales of refined products and chemical products in these regions.
 
  •  We are currently constructing and renovating several natural gas and refined product pipelines and storage facilities and plan to construct and renovate other natural gas and refined product pipelines and storage facilities. We cannot give assurance that the cash generated by our operations will be sufficient to fund these development plans or that our actual future capital expenditures and investments will not significantly exceed our current planned amounts. If either of these conditions arises, we may have to seek external financing to satisfy our capital needs. Under such circumstance, our inability to obtain sufficient funding for our development plans could adversely affect our business, financial condition and results of operations.
 
  •  We are also subject to a number of risks relating to the PRC and the PRC oil and gas industry. These risks are described as follows:

  —  Our operations, like those of other PRC oil and gas companies, are subject to extensive regulations and control by the PRC government. These regulations and control affect many material aspects of our operations, such as exploration and production licensing, industry-specific taxes and fees and environmental and safety standards. As a result, we may face significant constraints on our ability to implement our business strategies, to develop or expand our business operations or to maximize our profitability. Our business may also be adversely affected by future changes in certain policies of the PRC government with respect to the oil and gas industry.
 
  —  Currently, the PRC government must approve the construction and major renovation of significant refining and petrochemical facilities as well as the construction of significant natural gas and refined product pipelines and storage facilities. We presently have several significant projects pending approval from the relevant government authorities and will need approvals from the relevant government authorities in connection with several other significant projects. We do not have control over the timing and outcome of the final project approvals.
 
  —  We receive most of our revenues in Renminbi. A portion of our Renminbi revenues must be converted into other currencies to meet our foreign currency obligations. The existing foreign exchange limitations under the PRC laws and regulations could affect our ability to obtain foreign exchange through debt financing, or to obtain foreign exchange for capital expenditures.
 
  —  Because PRC laws, regulations and legal requirements dealing with economic matters are relatively new and continue to evolve, and because of the limited volume of published judicial interpretations and the non-binding nature of prior court decisions, the interpretation and enforcement of these laws, regulations and legal requirements involve some uncertainty. We have included the Mandatory Provisions and certain additional requirements that are imposed by the Hong Kong Stock Exchange Listing Rules in our Articles of

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  Association for the purpose of reducing the scope of difference between the Hong Kong company law and the PRC Company Law. However, because the PRC Company Law is different in certain important aspects from company laws in the United States, Hong Kong and other common law jurisdictions and because the PRC securities laws and regulations are still at an early stage of development, you may not enjoy shareholders’ protections that you may be entitled to in other jurisdictions.
 
  —  In addition to the adverse effect on our revenues, margins and profitability from any future fall in oil and natural gas prices, a prolonged period of low prices or other indicators would lead to a review for impairment of our oil and natural gas properties. This review would reflect management’s view of long-term oil and natural gas prices. Such a review could result in a charge for impairment which could have a significant effect on our results of operations in the period in which it occurs.

      See also “Item 4 — Information on the Company — Regulatory Matters”, “Item 5 — Operating and Financial Review and Prospects”, “Item 8 — Financial Information” and “Item 11 — Qualitative and Quantitative Disclosures About Market Risk”.

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ITEM 4 — INFORMATION ON THE COMPANY

Introduction

History and Development on the Company

     Overview of Our Operations

      We are one of the largest companies in China in terms of sales. We are engaged in a broad range of petroleum-related activities, including:

  •  the exploration, development, production and sale of crude oil and natural gas;
 
  •  the refining, transportation, storage and marketing of crude oil and petroleum products;
 
  •  the production and sale of basic petrochemical products, derivative chemical products and other chemical products; and
 
  •  the transmission of crude oil, refined products and natural gas as well as sale of natural gas.

      We are China’s largest producer of crude oil and natural gas. Currently, substantially all of our crude oil and natural gas reserves and production-related assets are located in China. In the year ended December 31, 2002, we had total revenue of RMB 244,424 million (US$29,520 million) and net income of RMB 46,910 million (US$5,665 million).

      Our exploration, development and production activities commenced in the early 1950s, when we conducted exploration activities in the Yumen oil region in northwestern China. The discovery of crude oil in 1959 in northeastern China’s Daqing oil region, one of the world’s largest oil regions in terms of proved crude oil reserves, marked the beginning of our large-scale upstream activities. Over the past four decades, we have conducted crude oil and natural gas exploration activities in many regions of China. As of December 31, 2002, we had estimated proved reserves of approximately 10.9 billion barrels of crude oil and approximately 38.8 trillion cubic feet of natural gas. We believe that we hold production licenses for the substantial majority of China’s proved crude oil reserves and proved natural gas reserves. In the year ended December 31, 2002, we produced 769.8 million barrels of crude oil and 605.0 billion cubic feet of natural gas for sale, representing an average production of 2,109 thousand barrels of crude oil and 1,658 million cubic feet of sales natural gas per day. Approximately 73% of the crude oil we sold in the year ended December 31, 2002 was supplied to our refineries.

      We commenced limited refining activities in the mid-1950s, when we began producing gasoline and diesel at refineries in the Yumen oil region. We now operate 23 refineries located in eight provinces, two autonomous regions and one municipality. In 2002, our refineries processed approximately 569.0 million barrels of crude oil or 1,558.9 thousand barrels per day. In the year ended December 31, 2002, we produced approximately 47.7 million tons of gasoline, diesel and kerosene and sold approximately 54.1 million tons of these products. Approximately 94% of the crude oil processed in our refineries in the year ended December 31, 2002 was supplied by our exploration and production operations. As of December 31, 2002, our retail distribution network consisted of 10,961 service stations that we own and operate, 317 service stations wholly owned by CNPC or jointly owned by CNPC and third parties to which we provide supervisory support and 1,882 franchise service stations.

      Our chemicals operations commenced in the early 1950s, when we began producing urea at our first petrochemical plant in Lanzhou in northwestern China. In the early 1960s, we began producing ethylene. We currently produce a wide range of basic and derivative petrochemical products and other chemical products at 13 chemical plants located in five provinces and three autonomous regions in China. Our other segments supply substantially all of the hydrocarbon feedstock requirements of our chemicals operations.

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      We are China’s largest natural gas transporter and seller in terms of sales volume. Our natural gas transmission and marketing activities commenced in Sichuan in southwestern China in the 1950s. In 2002, our sales of natural gas totaled 588.4 billion cubic feet, of which 486.3 billion cubic feet was sold through our natural gas and pipeline segment. As of December 31, 2002, we owned and operated regional natural gas pipeline networks consisting of approximately 13,391 kilometers of pipelines, of which approximately 12,299 kilometers were operated by our natural gas and pipeline segment. As of December 31, 2002, we owned and operated a crude oil pipeline network consisting of 9,215 kilometers of pipelines with an average daily throughput of approximately 2.2 million barrels of crude oil. As of December 31, 2002, we also had a refined product pipeline network consisting of approximately 2,276 kilometers of pipelines with an average daily throughput of approximately 15,397 tons of refined products.

      We plan to continue to pursue attractive business opportunities outside China as part of our business growth strategy to utilize both domestic and international resources to strengthen our competitiveness. In connection with this objective, we established PetroChina International Limited, a wholly owned subsidiary, to focus on international oil and gas exploration and development. In April 2002, we acquired Devon Energy Indonesia Limited from Devon Energy Corporation for a price of US$249.9 million. Devon Energy Indonesia Limited holds interests in a number of crude oil and natural gas exploration and production projects in Indonesia, including a 30% interest in an oil and gas production sharing contract relating to the Jabung block located in Sumatra, Indonesia. In April 2003, we acquired a 50% equity interest in Amerada Hess Indonesia Holdings Limited, which holds a 30% interest in the oil and gas production sharing contract relating to the Jabung block, for a price of US$82 million. We used loans and cash generated by our operations to fund these acquisitions. In connection with these acquisitions, we have entered into several take-or-pay agreements with a number of Singapore customers to supply them with natural gas to be produced in Indonesia. In addition, we are currently assessing the feasibility of making further investments in international oil and gas markets.

     Our Corporate Organization and Shareholding Structure

      In March 1998, the PRC government approved a comprehensive restructuring plan for China’s oil and gas industry intended to improve the efficiency and competitiveness of CNPC and Sinopec and to effect the separation of regulatory and business management functions. A series of asset injections and exchanges completed in 1998 as part of this plan substantially increased CNPC’s level of vertical integration.

      PetroChina was established as a joint stock company with limited liability under the Company Law of the PRC on November 5, 1999 as part of a restructuring in which CNPC transferred to us most of the assets, liabilities and interests of CNPC relating to its exploration and production, refining and marketing, chemicals and natural gas businesses. CNPC retained the assets and liabilities relating to its remaining businesses and operations, including assets and liabilities relating to international exploration and production and refining and pipeline operations. CNPC is our primary provider of a wide range of services and products. On April 7, 2000, PetroChina completed a global offering of H shares and ADSs. Currently, CNPC owns an approximate 90% interest in PetroChina.

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      The following chart sets forth our corporate organization and our shareholding structure:

(CNPC CORPORATE ORGANIZATION CHART)


(1)  Indicates approximate shareholding.
 
(2)  Includes subsidiary companies and branches without legal person status.
 
(3)  Represents enterprises directly administered by such segment.
 
(4)  Includes PetroChina Planning & Engineering Institute, PetroChina Exploration & Development Research Institute, PetroChina International Limited, China National United Oil Corporation and PetroChina International Co., Ltd.

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      The following chart sets forth our management structure:

(CHART)


(1)  Includes subsidiary companies and branches without legal person status.
 
(2)  Represents enterprises directly administered and operated by such segment.

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General Information

      Our legal name is (PETROCHINA COMPANY LOGO) , and its English translation is PetroChina Company Limited. Our headquarters are located at 16 Andelu, Dongcheng District, Beijing, China, 100011, and our telephone number at this address is (86-10) 8488-6270. Our website address is www.petrochina.com.cn. The information on our website is not part of this annual report.

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(MAP)

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Exploration and Production

      We are engaged in crude oil and natural gas exploration, development and production in China. Substantially all of our total estimated proved crude oil and natural gas reserves are located in China, principally in northeastern, northern, southwestern and northwestern China. The Songliao basin, located in Heilongjiang and Jilin provinces in northeastern China, including the Daqing and Jilin oil regions, accounted for 51.7% of our proved crude oil reserves as of December 31, 2002 and 52.7% of our crude oil production in 2002. We also have significant crude oil reserves and operations in the area around the Bohai Bay. The Bohai Bay basin includes the Liaohe, Dagang, Huabei and Jidong oil regions and accounted for 20.4% of our proved crude oil reserves as of December 31, 2002 and 21.0% of our crude oil production in 2002. Our proved natural gas reserves and production are generally concentrated in northwestern and southwestern China, specifically in the Erdos, Tarim and Sichuan basins.

      We currently hold exploration licenses covering a total area of approximately 387 million acres and production licenses covering a total area of approximately 13.9 million acres. We believe that we hold a majority of China’s exploration and production acreage. In 2002, our exploration and production segment had income from operations of RMB 72,139 million (US$8,712 million).

Reserves

      Our estimated proved reserves as of December 31, 2002 totaled approximately 10.9 billion barrels of crude oil and approximately 38.8 trillion cubic feet of natural gas. As of December 31, 2002, proved developed reserves accounted for 84.1% and 30.7% of our total proved crude oil and natural gas reserves, respectively. Total proved hydrocarbon reserves on a barrels-of-oil equivalent basis increased by 2.5% from approximately 16,976.2 million barrels-of-oil equivalent as of the end of 2001 to approximately 17,406.4 million barrels-of-oil equivalent as of the end of 2002. Natural gas as a percentage of total proved hydrocarbon reserves increased from 35.4% as of December 31, 2001 to 37.2% as of December 31, 2002.

      The following table sets forth our estimated proved reserves and proved developed reserves of crude oil and natural gas as of December 31, 2000, 2001 and 2002. We prepared our reserve estimates as of December 31, 2000, 2001 and 2002 on the basis of a report prepared by DeGolyer and MacNaughton, independent engineering consultants, in accordance with Statement of Financial Accounting Standards No. 69, or SFAS No. 69. Our reserve estimates include only crude oil and natural gas which we believe can be reasonably produced within the current terms of our production licenses. See “Regulatory Matters — Exploration Licenses and Production Licenses” for a discussion

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of our production licenses. Also see “Item 3 — Key Information — Risk Factors” for a discussion of the uncertainty inherent in the estimation of proved reserves.
                           
Crude oil Natural gas(1) Combined



(millions of barrels) (Bcf) (BOE, in millions)
Proved developed and undeveloped reserves
                       
Reserves as of December 31, 2000
    11,031.8       32,532.6       16,453.9  
 
Revisions of previous estimates
    189.6       487.6       270.9  
 
Extensions and discoveries
    360.4       3,773.4       989.3  
 
Improved recovery
    140.8       35.8       146.7  
 
Production for the year
    (763.5 )     (726.8 )     (884.6 )
Reserves as of December 31, 2001
    10,959.1       36,102.6       16,976.2  
 
Revisions of previous estimates
    348.6       (224.2 )     311.3  
 
Extensions and discoveries
    329.7       3,539.5       919.6  
 
Improved recovery
    30.6       0       30.6  
 
Purchased reserves
    38.7       192.6       70.8  
 
Production for the year
    (769.8 )     (793.8 )     (902.1 )
Reserves as of December 31, 2002
    10,937.0       38,816.8       17,406.4  
Proved developed reserves
                       
 
As of December 31, 2000
    9,545.7       12,502.5       11,629.4  
 
As of December 31, 2001
    9,308.8       12,945.6       11,466.4  
 
As of December 31, 2002
    9,198.1       11,921.2       11,185.0  

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

      The following tables set forth our crude oil and natural gas proved reserves and proved developed reserves by region as of December 31, 2000, 2001 and 2002.

                                                   
As of December 31,

2000 2001 2002



Proved Proved Proved
developed developed developed
and Proved and Proved and Proved
undeveloped developed undeveloped developed undeveloped developed






(millions of barrels)
Crude oil reserves                                
Daqing
    5,682.1       5,426.0       5,349.8       5,029.1       5,073.8       4,729.6  
Liaohe
    1,223.8       999.9       1,217.3       1,027.4       1,227.0       1,007.5  
Xinjiang
    1,084.9       821.5       1,089.9       854.4       1,102.2       912.5  
Changqing
    627.3       472.0       821.8       576.9       885.7       623.1  
Jilin
    477.6       373.7       527.0       371.7       585.8       377.2  
Tarim
    466.1       300.7       495.0       298.8       522.0       342.6  
Huabei
    500.3       375.4       483.3       345.9       494.2       350.8  
Dagang
    439.4       295.8       447.2       331.9       458.4       364.9  
Qinghai
    239.5       192.4       229.9       186.6       240.6       192.7  
Tuha
    196.8       194.4       199.9       188.0       208.7       189.9  
Sichuan
    8.6       8.6       5.7       5.7       5.5       5.5  
Other regions(1)
    85.3       85.3       92.5       92.5       133.1       101.9  
     
     
     
     
     
     
 
 
Total
    11,031.8       9,545.7       10,959.1       9,308.8       10,937.0       9,198.1  
     
     
     
     
     
     
 

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As of December 31,

2000 2001 2002



Proved Proved Proved
Developed developed developed
and Proved and Proved and Proved
undeveloped developed undeveloped developed undeveloped developed






(Bcf)
Natural gas reserves(1)                                
Changqing
    6,798.9       2,360.5       10,256.6       2,864.3       11,222.6       2,719.5  
Tarim
    10,007.0       481.3       10,158.1       531.1       11,026.0       591.2  
Sichuan
    7,247.4       4,917.2       7,074.1       4,814.8       7,461.7       4,040.6  
Qinghai
    2,923.2       101.2       2,946.8       487.0       3,416.1       837.2  
Xinjiang
    1,421.2       1,345.3       1,584.8       1,293.5       1,707.3       1,036.1  
Daqing
    1,617.2       1,459.2       1,551.7       1,374.2       1,324.8       1,171.9  
Dagang
    622.5       211.5       719.9       276.6       655.4       252.4  
Tuha
    599.4       598.7       583.1       329.3       621.2       338.4  
Liaohe
    745.4       645.0       697.6       623.9       606.6       530.5  
Huabei
    364.3       237.4       366.8       229.6       395.8       237.5  
Jilin
    172.3       131.0       151.3       109.5       174.3       109.9  
Other regions(2)
    14.0       14.0       11.9       11.9       204.9       55.9  
     
     
     
     
     
     
 
 
Total
    32,532.8       12,502.5       36,102.6       12,945.6       38,816.8       11,921.2  
     
     
     
     
     
     
 

(1)  Represents natural gas remaining after field separation for condensate removal and reduction for flared gas.
 
(2)  Represents the Jidong and Yumen oil regions and our oil and gas fields in Indonesia.

Exploration and Development

      We are currently conducting exploration and development efforts in eleven provinces, two municipalities under the direct administration of the central government and three autonomous regions in China. In September 2002, the State Development Planning Commission, the predecessor of the National Development and Reform Commission, approved our proposal to explore, in cooperation with foreign companies, fifteen additional crude oil and natural gas fields with an aggregate area of 75,071 kilometers located in Qaiddam basin, Erdos basin, Sichuan basin and Xinjiang basin. We believe that we have more extensive experience in the exploration and development of crude oil and natural gas than any of our principal competitors in China. Since early 1950s, we have worked for nearly five decades to develop exploration and recovery technologies and methods tailored to the specific geological conditions in China.

      The following table sets forth the number of wells we drilled, or in which we participated, and the results thereof, for the periods indicated.

                                                                             
Year Daqing Xinjiang Liaohe Changqing Huabei Dagang Sichuan Others(1) Total










2000
  Net exploratory wells drilled(2)     93       96       70       157       71       36       38       142       706  
    Crude oil     57       79       45       54       30       19       4       61       349  
    Natural gas     1       3       0       28       4       6       20       12       74  
    Dry(3)     35       14       25       75       37       11       14       72       283  
    Net development wells drilled(2)     2,783       1,135       800       614       268       165       41       974       6,780  
    Crude oil     2,774       1,129       792       534       254       159       8       955       6,605  
    Natural gas     1       1       8       61       3       2       23       14       113  
    Dry(3)     8       5       0       19       11       4       10       5       62  

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Year Daqing Xinjiang Liaohe Changqing Huabei Dagang Sichuan Others(1) Total










2001
  Net exploratory wells drilled(2)     84       71       63       127       68       44       37       169       663  
    Crude oil     33       45       34       55       38       32       4       83       324  
    Natural gas     2       13       0       18       3       0       14       5       55  
    Dry(3)     49       13       29       54       27       12       19       81       284  
    Net development wells drilled(2)     2,406       1,140       733       1,168       287       208       23       983       6,948  
    Crude oil     2,392       1,130       722       1,140       275       204       8       964       6,835  
    Natural gas     5       4       11       10       2       1       11       18       62  
    Dry(3)     9       6       0       18       10       3       4       1       51  
 
2002
  Net exploratory wells drilled(2)     67       84       61       170       67       30       28       149       656  
    Crude oil     27       63       28       69       28       21       4       60       300  
    Natural gas     1       3       0       10       4       0       7       11       36  
    Dry(3)     39       18       33       91       35       9       17       78       320  
    Net development wells drilled(2)     1,988       1,247       603       1,285       246       212       40       955       6,576  
    Crude oil     1,975       1,235       583       1,197       238       205       13       926       6,372  
    Natural gas     6       7       20       55       2       3       25       22       140  
    Dry(3)     7       5       0       33       6       4       2       7       64  

(1)  Represents the Jilin, Tarim, Tuha, Qinghai, Jidong and Yumen oil regions and our oil and gas fields in Indonesia.
 
(2)  “Net” wells refer to the wells after deducting interests of others. No third parties own any interests in any of our wells.
 
(3)  “Dry” wells are wells with insufficient reserves to sustain commercial production.

Properties

      The following table sets forth our interests in developed and undeveloped acreage by oil region and in productive crude oil and natural gas wells as of December 31, 2002.

                                                   
Acreage(1) (thousands of acres)

Productive wells(1) Developed Undeveloped



Oil region Crude oil Natural gas Crude oil Natural gas Crude oil Natural gas







Daqing
    33,893       117       560.1       23.7       558.4       93.7  
Liaohe
    15,656       572       153.9       27.7       120.9       12.9  
Xinjiang
    12,951       53       262.3       34.2       74.5       12.9  
Jilin
    10,534       28       222.6       19.5       238.2       25.3  
Changqing
    7,661       283       184.7       577.9       352.3       1,424.8  
Huabei
    4,494       70       87.3       9.5       111.0       6.6  
Dagang
    2,853       46       79.7       14.5       88.2       23.7  
Tuha
    917       12       28.7       0.0       18.2       15.6  
Tarim
    457       54       78.5       69.9       43.5       78.2  
Sichuan
    350       888       273.7       287.8       17.6       118.1  
Other regions(2)
    2,643       112       99.5       122.3       34.9       14.6  
     
     
     
     
     
     
 
 
Total
    92,409       2,235       2,031.0       1,187.0       1,657.7       1,826.4  
     
     
     
     
     
     
 

(1)  Includes all wells and acreage in which we have an interest. No third parties own any interests in any of our wells or acreage.
 
(2)  Represents the Qinghai, Jidong and Yumen oil regions and our oil and gas fields in Indonesia.

      Approximately 67.7% of our proved crude oil reserves are concentrated in the Daqing, Liaohe and Xinjiang oil regions, and approximately 85.3% of our proved natural gas reserves are concentrated in the Changqing oil and gas region, the Tarim oil region, the Sichuan gas region and

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the Qinghai oil region. We believe that the Erdos, Junggar, Tarim and Songliao basins and Bohai Bay have the highest potential for increasing our crude oil reserve base through future exploration and development, and that the Tarim, Erdos, Sichuan and Qaiddam basins have the highest potential for increasing our natural gas reserve base through future exploration and development.

Production

      The following table sets forth our historical average net daily crude oil and natural gas production by region and our average sales price for the periods ended December 31, 2000, 2001 and 2002.

                                     
For the year ended
December 31,

% of
2000 2001 2002 2002 total




Crude oil production(1)
                               
(thousands of barrels per day, except percentages or otherwise indicated)
                               
Daqing
    1,079.0       1,048.4       1,020.5       48.4  
Liaohe
    268.7       265.6       259.1       12.3  
Xinjiang
    188.5       198.4       206.0       9.8  
Changqing
    94.5       105.9       124.2       5.9  
Tarim
    89.0       96.7       102.7       4.9  
Huabei
    92.7       91.6       89.0       4.2  
Jilin
    76.4       82.3       90.4       4.3  
Dagang
    80.5       79.5       79.2       3.8  
Tuha
    61.5       55.0       54.1       2.6  
Other(2)
    65.8       68.3       83.8       4.0  
     
     
     
     
 
   
Total
    2,096.4       2,091.8       2,109.1       100.0 %
     
     
     
     
 
Annual production (million barrels)
    765.2       763.5       769.8          
Average sales price
                               
 
(RMB per barrel)
    225.23       195.37       186.08          
 
(US$ per barrel)
    27.21       23.61       22.48          
 
Natural gas production(1)(3)
                               
(millions of cubic feet per day, except percentages or otherwise indicated)
                               
Sichuan
    740.2       774.6       808.2       48.8  
Changqing
    187.3       299.1       335.7       20.3  
Daqing
    142.0       137.4       137.7       8.3  
Tuha
    61.5       74.0       69.8       4.2  
Liaohe
    64.3       64.8       56.0       3.4  
Xinjiang
    56.8       51.2       53.3       3.2  
Qinghai
    30.5       45.9       92.3       5.6  
Huabei
    32.1       36.9       42.1       2.5  
Dagang
    33.7       32.6       30.6       1.8  
Tarim
    28.8       20.6       24.6       1.5  
Other(4)
    7.2       6.7       7.2       0.4  
     
     
     
     
 
   
Total
    1,384.4       1,543.7       1,657.5       100.0 %
     
     
     
     
 

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For the year ended
December 31,

% of
2000 2001 2002 2002 total




Annual production (Bcf)
    505.3       563.5       605.0          
Average sales price
                               
 
(RMB per Mcf)
    17.63       18.41       19.20          
 
(US$ per Mcf)
    2.13       2.22       2.32          

(1)  Production volumes for each region include our share of the production from all of our cooperative projects with foreign companies in that region.
 
(2)  Represents production from the Qinghai, Jidong and Yumen oil regions, the Sichuan gas region and our oil and gas fields in Indonesia.
 
(3)  Represents production of sales gas.
 
(4)  Represents production from the Jilin, Jidong and Yumen oil regions and our oil and gas fields in Indonesia.

      In 2002, we supplied approximately 73%, 16%, 7% and 4% of our total crude oil sales to our refineries, Sinopec’s refineries, regional refineries controlled by unrelated third parties in China and companies or entities outside China, respectively. We entered into a crude oil mutual supply framework agreement with Sinopec on December 30, 2002 for the supply of crude oil to each other’s refineries in 2003. Under this agreement, we agreed in principle to supply approximately 110 million barrels of crude oil to Sinopec in 2003 at negotiated prices based on the Singapore market FOB prices for crude oil. See “Item 5 — Operating and Financial Review and Prospects — General — Factors Affecting Results of Operations — Crude Oil Prices” for a detailed discussion of the crude oil premium and discount calculation agreement and its supplemental agreement.

Principal Oil and Gas Regions

  Daqing Oil Region

      The Daqing oil region, our largest oil and gas producing property, is located in the Songliao basin and covers an area of approximately one million acres. The successful discovery and development of the oil fields in the Daqing oil region marked a critical breakthrough in the history of both our company and the PRC oil and gas industry. In terms of proved hydrocarbon reserves and annual production, the Daqing oil region is the largest oil region in China and one of the most prolific oil and gas properties in the world. We commenced exploration activities in the Daqing oil region in 1955 and discovered oil in the region in 1959. Annual crude oil production volume in the Daqing oil region reached one million barrels per day in 1976 and has remained relatively stable for the past 27 years. As of December 31, 2002, we produced crude oil from 20 fields in the Daqing oil region.

      As of December 31, 2002, our proved crude oil reserves in the Daqing oil region were 5,073.8 million barrels, representing 46.4% of our total proved crude oil reserves. The proved crude oil reserves in our Daqing oil region decreased by 5.2% in 2002, as compared to 5,349.8 million barrels in 2001, because the crude oil production exceeded the crude oil reserve additions in 2002 in our Daqing oil region. In 2002, our oil fields in the Daqing oil region produced an average of 1,020.5 thousand barrels of crude oil per day, representing approximately 48.4% of our total daily crude oil production. In 2002, the crude oil reserve-to-production ratio of the Daqing oil region was 13.6 years. The crude oil we produce in the Daqing oil region has an average API gravity of 35.7 degrees. In 2002, the crude oil we produced in the Daqing oil region had an average water cut of 87.9%, increasing from 87.4% in 2001.

      The major oil reservoirs in the Daqing oil region are generally evenly spread with relatively moderate depths, and have simple geological structures. As a consequence of these factors, our finding and development costs in the Daqing oil region are the lowest among all oil-producing regions in China.

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      Because the crude oil in the Daqing oil region is primarily located in large reservoirs with relatively moderate depths of approximately 900 meters to 1,500 meters and most of the crude oil produced at Daqing is medium viscosity oil, lifting costs in the Daqing oil region are relatively low among our oil regions. Crude oil produced using enhanced recovery techniques accounted for 17.7%, 18.5%, and 22.6% of our crude oil production from the Daqing oil region in 2000, 2001 and 2002, respectively.

      Because our oil fields in the Daqing oil region are relatively mature, the difficulty of extracting crude oil from these fields has increased in recent years and is likely to continue to increase gradually in the future. As a result, we expect our lifting costs at these fields to increase in future years. However, we intend to adopt a number of measures to contain the increase in our lifting costs at these fields. Those measures include:

  •  terminating unprofitable or marginally profitable exploration and production activities;
 
  •  reducing expenditures on ancillary ground facilities in the outer areas of the Daqing oil region; and
 
  •  increasing preventive maintenance to prolong the useful life of our production facilities.

      We have an extensive transportation infrastructure network to transport crude oil produced in the Daqing oil region to internal and external customers in northeastern China and beyond. Crude oil pipelines link our oil fields in the Daqing oil region to the port of Dalian and the port of Qinhuangdao in Bohai Bay, providing efficient transportation for selling Daqing crude oil. These crude oil pipelines have an aggregate length of more than 900 kilometers and an aggregate throughput capacity of approximately 900,000 barrels per day.

      Daqing’s crude oil has a low sulfur and high paraffin content. As many refineries in China, particularly those in northeastern China, are configured to refine Daqing crude oil, we have a stable market for the crude oil we produce in the Daqing oil region. In 2002, we refined approximately 63% of Daqing crude oil in our own refineries, exported approximately 7% and sold the remaining portion to Sinopec or local refineries.

     Liaohe Oil Region

      The Liaohe oil region is our second largest crude oil producing property and is located in the northern part of the Bohai Bay basin. We began commercial production in the Liaohe oil region in 1971. The Liaohe oil region covers a total area of approximately 580,000 acres. The Liaohe oil region is China’s third largest oil region in terms of production in 2002.

      As of December 31, 2002, proved crude oil reserves in the Liaohe oil region were 1,227.0 million barrels, representing 11.2% of our total proved oil reserves. In 2002, our oil fields in the Liaohe oil region produced an average of 259.1 thousand barrels of crude oil per day, representing approximately 12.3% of our total daily crude oil production. In 2002, the crude oil reserve-to-production ratio in the Liaohe oil region was 13.0 years. In 2002, the crude oil we produced in the Liaohe oil region had an average API gravity of 26.0 degrees and an average water cut of 72.8%. We have proved crude oil reserves in 37 fields in the Liaohe oil region, including 32 fields currently in production. We produce several varieties of crude oil in the Liaohe oil region, ranging from light crude oil to heavy crude oil and high pour point crude oil.

      We have easy access to crude oil pipelines for Liaohe crude oil. The pipelines linking Daqing to Dalian port and Qinhuangdao port pass through the Liaohe oil region. In 2002, we sold about 79% of the crude oil we produced at the Liaohe oil region to our own refineries.

     Xinjiang Oil Region

      The Xinjiang oil region is located in the Junggar basin in northwestern China. We commenced our operations in the Xinjiang oil region in 1951. The Xinjiang oil region covers a total area of

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approximately 900 thousand acres. As of December 31, 2002, our proved crude oil reserves in the Xinjiang oil region were 1,102.2 million barrels, representing 10.1% of our total proved crude oil reserves. In 2002, our oil fields in the Xinjiang oil region produced an average of 206.0 thousand barrels of crude oil per day, representing 9.8% of our total crude oil production. In 2002, the crude oil reserve-to-production ratio at the Xinjiang oil region was 14.7 years. In 2002, the crude oil we produced in the Xinjiang oil region had an average API gravity of 36.8 degrees and an average water cut of 70.4%.

     Sichuan Gas Region

      The Sichuan gas region is the largest natural gas region in China in terms of annual natural gas production. We began natural gas exploration and production in Sichuan in the 1950s. The Sichuan gas region covers a total area of approximately 2.3 million acres. The natural gas reserve-to-production ratio in the Sichuan gas region was 24.1 years in 2002. As of December 31, 2002, we had 90 natural gas fields under development in the Sichuan gas region.

      As of December 31, 2002, our proved natural gas reserves in the Sichuan gas region were 7,461.7 billion cubic feet, representing 19.2% of our total proved natural gas reserves. In 2002, our natural gas production for sale in the Sichuan gas region reached 295.0 billion cubic feet, representing 48.8% of our total natural gas production.

      We have increased our efforts in developing natural gas reserves in the Sichuan gas region in the past few years. In 2002, we discovered and proved significant natural gas reserves in Luojiazhai gas field in the Sichuan gas region. As of December 31, 2002, Luojiazhai gas field had a total proved natural gas reserve of 1,143.5 billion cubic feet. Currently, Luojiazhai gas field is the largest gas field in the Sichuan basin. In addition, we have developed a broad range of technologies relating to natural gas exploration, production, pipeline systems and marketing activities tailored to local conditions in Sichuan. We intend to continue to substantially increase our natural gas reserves and annual natural gas production in the Sichuan gas region by adopting advanced technologies and reducing costs.

      In November 2002, we obtained approval from the State Development Planning Commission, the predecessor of the National Development and Reform Commission, to construct pipelines to transmit natural gas produced in the Sichuan gas region to major cities in central China. This is known as the Zhong County to Wuhan City natural gas pipeline project. See “— Natural Gas and Pipeline — Expansion of Our Natural Gas Transmission and Marketing Business” for a discussion of the Zhong County to Wuhan City natural gas pipeline project.

     Changqing Oil and Gas Region

      The Changqing oil and gas region covers parts of Shaanxi Province and Gansu Province and the Ningxia and Inner Mongolia Autonomous Regions. We commenced operations in the Changqing oil and gas region in 1970. In 2002, we produced 45.3 million barrels of crude oil in the Changqing oil and gas region.

      In the early 1990s, we discovered the Changqing gas field, which had total estimated proved natural gas reserves of 11,222.6 billion cubic feet as of December 31, 2002, representing 28.9% of our total proved natural gas reserves. In January 2001, we discovered the Sugeli oil field with total proved natural gas reserves of 2,500.2 billion cubic feet. In 2002, we produced 122.5 billion cubic feet of natural gas for sale in the Changqing oil and gas region. The establishment of a natural gas pipeline from Shaanxi to Beijing in 1997 has significantly expanded the range of target markets for natural gas produced in the Changqing oil and gas region over the years. In the six years following the establishment of the pipeline, we significantly increased daily natural gas production for sale in the Changqing oil and gas region. We intend to build an additional natural gas pipeline from Shaanxi to Beijing in the next two years. This pipeline is designed to have an annual throughput capacity of 423.8 billion cubic feet of natural gas upon its completion. See “— Natural Gas and Pipeline —

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Expansion of Our Natural Gas Transmission and Marketing Business” for a discussion of the additional Shaanxi to Beijing natural gas pipeline project.

     Tarim Oil Region

      The Tarim oil region is located in the Tarim basin in northwestern China with a total area of approximately 590 thousand acres. As of December 31, 2002, our proved crude oil reserves in the Tarim oil region were 522.0 million barrels. The Kela 2 natural gas field, which we discovered in 1998 in the oil region, had estimated proved natural gas reserves of approximately 6,320 billion cubic feet as of December 31, 2002. As of December 31, 2002, the proved natural gas reserves in the Tarim oil region reached 11,026.0 billion cubic feet, representing 28.4% of our total proved natural gas reserves. Currently, the Kela 2 natural gas field is the largest natural gas field in China in terms of proved natural gas reserves.

      In 2002, we produced 9.0 billion cubic feet of natural gas for sale in the Tarim oil region. We are in the process of constructing pipelines to deliver natural gas in the Tarim oil region to the central and eastern regions of China where there is strong demand for natural gas through our West to East natural gas pipeline project. See “— Natural Gas and Pipeline — Expansion of Our Natural Gas Transmission and Marketing Business” for a discussion of our West to East natural gas pipeline project. We plan to significantly increase our natural gas production in the Tarim oil region after the commencement of the operation of this West to East natural gas pipeline.

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(MAP)

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Refining and Marketing

      We engage in refining and marketing operations in China through 23 refineries and 19 regional sales and distribution branch companies and one lubricants branch company. These operations include crude oil refining and the transportation, storage and marketing of refined products, including gasoline, diesel, kerosene and lubricant, in wholesale, retail and export markets.

      The following sets forth the highlights of our refining and marketing segment in 2002:

  •  as of December 31, 2002, our refineries’ annual primary distillation capacity totaled 724.9 million barrels of crude oil per year, or 1,986.0 thousand barrels per day;
 
  •  we processed 569.0 million barrels of crude oil, or 1,558.9 thousand barrels per day;
 
  •  we produced approximately 47.7 million tons of gasoline, diesel and kerosene and sold approximately 54.1 million tons of these products;
 
  •  as of December 31, 2002, our retail distribution network consisted of:

  —  10,961 service stations owned and operated by us,
 
  —  317 service stations wholly owned by CNPC or jointly owned by CNPC and third parties and to which we provide supervisory support, and
 
  —  1,882 franchise service stations owned and operated by third parties with which we have long-term refined product supply agreements; and

  •  our service stations are located throughout China. In 2002, our service stations sold approximately 18.8 million tons of gasoline and diesel, representing 36.0% of the total of these products sold through our marketing operations.

Refining

      Our refineries are located in eight provinces, two autonomous regions and one municipality in the northeastern, northwestern and northern regions of China.

  Refined Products

      We produce a wide range of refined products at our refineries. Some of our refined products are consumed internally as feedstocks for our chemical operations. The table below sets forth production volume for our principal refined products for each of the three years ended December 31, 2000, 2001 and 2002.

                           
Year ended December 31,

Product 2000 2001 2002




(in thousands of tons)
Diesel
    25,160.3       28,080.9       29,229.2  
Gasoline
    15,266.7       16,563.4       16,646.4  
Fuel oil
    7,283.9       6,582.2       6,176.8  
Naphtha
    3,673.6       3,453.3       3,066.0  
Kerosene
    2,277.2       1,893.6       1,774.7  
Lubricants
    1,183.3       1,197.2       1,358.9  
Asphalt
    1,311.6       1,406.8       1,653.5  
Paraffin
    932.7       857.6       856.4  
     
     
     
 
 
Total
    57,089.3       60,035.0       60,761.9  
     
     
     
 

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      In the past five years, we have adjusted our product mix to reflect market demand and to focus on the production of high margin products. This resulted in an overall modest increase in the production of lighter refined products which generally are higher margin products, such as gasoline and lubricants, in the same periods. At the same time, we have decreased our production of low margin products, such as fuel oil.

      In recent years, we have made significant capital investments in facility expansions and upgrades to improve product quality to meet evolving market demand and environmental requirements in China. In each of the three years ended December 31, 2000, 2001 and 2002, our capital expenditures for our refining and marketing segment were RMB 13,595 million, RMB 11,416 million and RMB 11,327 million (US$1,368 million), respectively. These capital expenditures were incurred primarily in connection with our refining facility upgrades and expansion of our refined product retail marketing network and storage infrastructure. In addition, we have also focused on enhancing our processing technologies and methods. These efforts have enabled us to improve the quality of refined products at our refineries, particularly that of gasoline and diesel. We believe that our refined products generally meet product specification and environmental protection requirements as set by the PRC government. We have upgraded our refineries in response to a new PRC specification limiting the olefin and sulfur content in gasoline. All of our refineries are now capable of producing gasoline meeting this new specification. The PRC government requires all gasoline to be sold on the PRC market to comply with this new specification by July 1, 2003. We believe that we have already met this requirement.

  Our Refineries

      Most of our refineries are strategically located close to our crude oil storage facilities, along our crude oil and refined product transmission pipelines and/or railways. These systems provide our refineries with secure supplies of crude oil and facilitate our distribution of refined products to the domestic markets. In each of the three years ended December 31, 2000, 2001 and 2002, our exploration and production operations supplied approximately 93%, 95% and 94%, respectively, of the crude oil processed in our refineries.

      The table below sets forth certain operating statistics regarding our refineries as of December 31, 2000, 2001 and 2002.

                           
As of December 31,

2000 2001 2002



Primary distillation capacity(1) (thousand barrels per day)
                       
Dalian Petrochemical
    143.7       178.1       212.6  
Fushun Petrochemical
    162.0       162.0       162.0  
Lanzhou Petrochemical(2)
    151.8       151.8       151.8  
Daqing Petrochemical
    121.5       121.5       121.5  
Jinzhou Petrochemical(3)
    113.3       113.3       113.3  
Jinxi Petrochemical
    111.3       111.3       111.3  
Jilin Petrochemical(4)
    101.2       101.2       101.2  
Urumqi Petrochemical
    101.2       101.2       101.2  
Other refineries
    911.1       911.1       911.1  
     
     
     
 
 
Total
    1,917.1       1,951.5       1,986.0  
     
     
     
 

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As of December 31,

2000 2001 2002



Refining throughput (thousand barrels per day)
                       
Dalian Petrochemical
    119.5       121.6       136.6  
Fushun Petrochemical
    162.7       168.3       166.3  
Lanzhou Petrochemical(2)
    129.7       128.8       128.6  
Daqing Petrochemical
    107.4       108.9       108.2  
Jinzhou Petrochemical(3)
    90.8       93.9       101.3  
Jinxi Petrochemical
    98.9       104.1       97.2  
Jilin Petrochemical(4)
    91.1       87.9       92.3  
Urumqi Petrochemical
    68.8       71.7       71.7  
Other refineries
    628.5       667.9       656.7  
     
     
     
 
 
Total
    1,497.4       1,553.1       1,558.9  
     
     
     
 
Conversion equivalent(5) (percent)
                       
Dalian Petrochemical
    46.5       37.5       54.3  
Fushun Petrochemical
    96.0       78.6       66.9  
Lanzhou Petrochemical(2)
    38.7       31.3       31.3  
Daqing Petrochemical
    79.4       72.7       61.0  
Jinzhou Petrochemical(3)
    63.6       63.4       62.5  
Jinxi Petrochemical
    70.9       69.1       67.3  
Jilin Petrochemical(4)
    45.6       47.6       54.0  
Urumqi Petrochemical
    52.0       48.0       50.0  
Average of other refineries
    47.5       43.9       43.7  

(1)  Represents the primary distillation capacity of crude oil and condensate.
 
(2)  Includes Lanzhou Refinery, which was merged into Lanzhou Petrochemical in October 2000 as part at our ongoing restructuring.
 
(3)  Includes a 19.05% minority interest held by unrelated third parties in Jinzhou Petrochemical Company Limited in the relevant periods.
 
(4)  Includes Jilin Chemical Industrial Company Limited, in which we held a 67.29% equity interest in the relevant periods. Data regarding the primary distillation capacity, refining throughput and conversion equivalent of Jilin Petrochemical includes a 32.71% minority interest held by unrelated third parties in Jilin Chemical Industrial Company Limited in the relevant periods.
 
(5)  Stated in fluid catalytic cracking, delayed coking and hydrocracking equivalent/ topping (percentage by weight), based on 100% of balanced distillation capacity.

      In each of the three years ended December 31, 2000, 2001 and 2002, the average utilization rate of the primary distillation capacity at our refineries was 78.1%, 80.3% and 79.1%, respectively. We plan to increase the utilization rate of the primary distillation capacity at our refineries by means of shutting down inefficient refining units and facilities. The average yield for our four principal refined products (gasoline, kerosene, diesel and lubricants) at our refineries was 58.9%, 62.2% and 63.7%, respectively, in the same periods. “Yield” represents the number of tons of a refined product expressed as a percentage of the number of tons of crude oil from which that product was processed. In each of the three years ended December 31, 2000, 2001 and 2002, the yield for all refined products at our refineries was approximately 91%.

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      Dalian Petrochemical, Fushun Petrochemical, Lanzhou Petrochemical and Daqing Petrochemical were our leading refineries in terms of both primary distillation capacity and throughput in 2002. They are all located close to our major oil fields in the northeast and northwest regions of China and produce a wide range of refined products. In October 2000, Lanzhou Refinery was consolidated into Lanzhou Petrochemical as part of our ongoing restructuring. Lanzhou Petrochemical has a strategic position in our plan to expand our markets in refined product sales in the southwestern and central regions of China. It is located in the northwestern part of China, providing easy access to markets in southwestern and central regions in China. In 2002, we increased the primary distillation capacity at Dalian Petrochemical by 34.5 thousand barrels per day. We expect its throughput to continue to increase in the future. As of December 31, 2002, these four refineries had an aggregate primary distillation capacity of 236.4 million barrels per year or 647.9 thousand barrels per day, representing approximately 32.6% of the total primary distillation capacity of all our refineries. In 2002, these four refineries processed 197.0 million barrels of crude oil or 539.7 thousand barrels per day in the aggregate, representing approximately 34.6% of our total throughput.

Marketing

      We market a wide range of refined products, including gasoline, diesel, kerosene and lubricants, through an extensive network of sales personnel and independent distributors and a broad wholesale and retail distribution system across China. As of December 31, 2002, our marketing network consisted of:

  •  approximately 780 regional wholesale distribution outlets nationwide. Substantially all of these outlets are located in high demand areas such as economic centers across China, particularly in the coastal areas, along major railways and along the Yangtze River; and
 
  •  10,961 service stations owned and operated by us, 317 service stations wholly owned by CNPC or jointly owned by CNPC and third parties that exclusively sell refined products produced or supplied by us and to which we provide supervisory support under contractual arrangement, and 1,882 franchise service stations owned and operated by third parties.

      In September 2002, we acquired from CNPC all of the assets and liabilities of 686 refined products marketing enterprises. These assets consist primarily of 2,994 service stations and 478 storage facilities located in more than 500 counties in 15 provinces and autonomous regions in the PRC. We believe that the addition of these service stations and storage facilities has provided us with an important platform to further expand and develop our refined product sales and distribution network and develop our retail distribution channels.

      In 2002, we sold approximately 52.2 million tons of gasoline and diesel. The PRC government and other institutional customers, including railway, transportation and fishery operators, are our long-term purchasers of the gasoline and diesel that we produce. We sell gasoline and diesel to those customers at the ex-factory median prices published by the PRC government with an 8% floating range on the ex-factory median prices. See “— Regulatory Matters — Pricing — Refined Products” for a discussion of refined product pricing. Sales of gasoline and diesel to those customers accounted for approximately 4% and 14% of our total sales of gasoline and diesel,

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respectively, in 2002. The following table sets forth our refined product sales volumes by principal product category for each of the three years ended December 31, 2000, 2001 and 2002.
                           
Year ended December 31,

Product 2000(1) 2001(1) 2002(1)




(in thousands of tons)
Diesel
    26,652.4       31,548.4       33,167.1  
Gasoline
    15,649.4       18,170.2       19,001.3  
Fuel oil
    5,059.2       4,785.0       4,327.8  
Naphtha
    3,734.8       4,333.2       4,142.5  
Kerosene
    2,296.3       1,931.7       1,884.5  
Lubricants
    1,668.7       1,979.4       1,997.0  
Asphalt
    936.6       921.9       1,344.0  
Paraffin
    906.8       806.5       868.7  
     
     
     
 
 
Total
    56,904.2       64,476.3       66,732.9  
     
     
     
 


(1)  Includes sales volume of the 2,994 service stations we acquired from CNPC in September 2002.

     Wholesale Marketing

      We sell refined products both directly and through independent distributors into various wholesale markets, as well as the utility, commercial, petrochemical, aviation, agricultural, fishery and transportation companies in China. We sold approximately 52.2 million tons of gasoline and diesel through our wholesale operations in 2002, including transfers to our retail operations. We sold approximately 1.6 million tons of gasoline and diesel through our wholesale operations to Sinopec in 2002, representing approximately 3.1% of our total sales of these products in that period. In 2002, we sold approximately 14.6 million tons of our other principal refined products.

      Until 1998, the refined product distribution system in China was divided on a geographic basis into provincial, municipal and county levels. Our wholesale distribution system was established on the basis of this three-tier system. As a result, our wholesale distribution structure created inefficiencies in our marketing operations. In addition, the unnecessary distribution layers increased distribution costs. As part of the restructuring of the CNPC group in 1999, we completed the implementation of a plan to consolidate our wholesale operations and reduce distribution layers and the number of wholesale outlets. In 2001, we completed a series of initiatives to change the business scope, adjust business functions or shut down operations in respect of 558 county level outlets. In addition, we merged 18 municipal level outlets in 2001. In 2002, we continued these initiatives by integrating our markets in Shandong Province and Anhui Province, enhancing our logistics system and shutting down a number of inefficient oil storage facilities. We expect that the implementation of this plan will continue to increase the overall efficiency of our marketing operations.

     Retail Marketing

      In 2002, we sold approximately 18.8 million tons of gasoline and diesel through our service station network, accounting for 36.0% of the total of these products sold through our marketing operations. Average daily sales volumes of gasoline and diesel at our service station network were approximately 2.7 tons, 3.6 tons and 3.9 tons per service station for the years ended December 31, 2000, 2001 and 2002, respectively, although these numbers vary significantly by geographic region. The weighted average sales volume of gasoline and diesel per business day at our service station network in 2002 was 4.8 tons per service station.

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      We sell our refined products to service stations owned and operated by CNPC. These service stations sell exclusively refined products produced or supplied by us in accordance with contractual arrangements between CNPC and us. Under these contractual arrangements, we also provide supervisory support to these service stations.

      We operate a majority of our service stations under the tradename of “PetroChina”. We are still in the process of gradually converting the tradename for the existing service stations in our service station network that still use the tradename of “CNPC” to “PetroChina”. We intend to use “PetroChina” as the tradename for the service stations to be acquired or constructed by us in the future.

      Most of the service stations in our service station network are concentrated in the northern, northeastern and northwestern regions of China where we have a dominant wholesale market position. However, the eastern and southern regions of China have a higher demand for gasoline and diesel. In 2002, we sold approximately 8,280 thousand tons of gasoline and diesel through our owned and franchised service stations in those regions, as compared to approximately 6,630 thousand tons we sold in 2001. We intend to continue to expand our sales and market share in those regions through expanding the number of our service stations and storage facilities in those regions. As part of this expansion strategy, we established a Sino-foreign equity joint venture with BP Amoco p.l.c. in 2001 to engage in the development and operation of service stations in Guangdong Province and Fujian Province in eastern China. We hold a 51% equity interest in the joint venture and BP Amoco p.l.c. holds a 49% equity interest in the joint venture. The joint venture operated 293 service stations as of December 31, 2002.

      In 2002, we expanded our retail distribution channel through the acquisition from CNPC of 2,994 service stations and 478 storage facilities located in more than 500 counties in 15 provinces and autonomous regions in the PRC. The CNPC enterprises that operated these service stations and storage facilities suffered operating losses in the past two years due primarily to the lack of funds, decreases in sales and high operating costs. Through operational restructuring and business integration, we have improved the profitability of these service stations and storage facilities without incurring material capital expenditures.

      In addition to the 2,994 service stations we acquired from CNPC, we also acquired or constructed in 2002 an additional 1,443 service stations that are owned and operated by us. We plan to further increase our retail market share and improve the efficiency of our retail operations. We currently plan to invest approximately RMB 7,957 million for the period between 2003 to 2005 to expand our service station network by way of acquisition, joint ventures, new construction and franchising from or with CNPC or other third parties. We invested RMB 6,030 million in expanding our service station network in 2002. We currently intend to add 3,400 new service stations, including 1,580 franchised service stations, into our service station network between 2003 to 2005.

      The following table sets forth the number of the service stations in our marketing network as of December 31, 2002:

           
Owned and operated by us(1)
    10,961  
Wholly owned by CNPC or jointly owned by CNPC and third parties(2)
    317  
Franchised
    1,882  
     
 
 
Total
    13,160  
     
 


(1)  Includes 293 service stations operated by the joint venture established by BP Amoco p.l.c. and us.
 
(2)  These service stations exclusively sell refined products produced or supplied by us. We also provide supervisory support to these service stations.

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      In order to improve the efficiency and profitability of our existing service station network, we standardize the interior and exterior of our service stations, our service procedures, staff uniforms and the product quality of all our service stations. We are in the process of promoting the use of pre-paid gasoline/ diesel filling cards at our service stations. We have equipped 343 service stations located in 12 municipalities with facilities that allow customers to purchase gasoline or diesel with their pre-paid filling cards. In addition to selling gasoline and diesel, we have gradually increased the sale of lubricants and other non-fuel products at our service stations.

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(MAP)

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Chemicals and Marketing

      Through 13 chemical plants, we produce basic petrochemical products, derivative petrochemical products, and other chemical products. In the year ended December 31, 2002, our loss from operations of our chemicals segment was RMB 3,162 million (US$382 million).

      Our chemical plants are located in five provinces and three autonomous regions in China. Most of our chemical plants are co-located with our refineries and are also connected with the refineries by pipelines, providing additional production flexibility and opportunities for cost competitiveness. Our exploration and production, refining and natural gas operations supply substantially all of the hydrocarbon feedstock requirements for our chemicals operations. We believe that the proximity of our refineries to our chemical plants promotes efficiency in production, secures feedstock supply and minimizes the risk of production interruption. Our production capacity and our market share in China for chemical products allow us to solidify our dominant position in the northern and western regions of China. In addition, our stable customer base in the eastern and southern regions of China provides us with the opportunity to expand our market share in these regions.

Our Chemical Products

      The table below sets forth the production volumes of our principal chemical products for each of the three years ended December 31, 2000, 2001 and 2002.

                             
Year ended December 31,

2000 2001 2002



(in thousands of tons)
Basic petrochemicals
                       
 
Ethylene
    1,495.3       1,571.2       1,582.0  
 
Propylene
    1,127.1       1,177.4       1,523.9  
 
Benzene
    200.6       215.7       558.7  
Derivative petrochemicals
                       
 
Polyolefin
                       
   
Polyethylene
    970.0       1,028.5       1,014.4  
   
Polypropylene
    508.4       622.4       759.0  
   
ABS
    117.5       201.5       166.7  
   
Other polyolefin products
    250.3       221.5       24.7  
 
Synthetic fiber
                       
   
Terylene fiber
    175.0       177.5       173.0  
   
Polyacrylic fiber
    79.7       81.2       78.6  
   
Other synthetic fiber products
    47.0       70.2       15.5  
 
Synthetic rubber
                       
   
Butadiene styrene rubber
    125.5       128.0       134.9  
   
Other synthetic rubber products
    96.8       115.0       79.1  
 
Intermediates
                       
   
Alkylbenzene
    133.4       130.0       175.3  
Other chemicals
                       
 
Urea
    3,113.2       3,068.1       3,411.2  
 
Ammonium nitrate
    297.0       129.2       143.2  

      We are one of the major producers of ethylene in China. We use the bulk of the ethylene we produce as a principal feedstock for the production of many chemical products, such as polyethylene. As of December 31, 2002, we had a total ethylene production capacity of 1,655 thousand tons per year. In 2001, we implemented a five-year plan to invest

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RMB 11,000 million (US$1,329 million) to upgrade our ethylene production facilities at Daqing Petrochemical Company, Jilin Petrochemical Company, Fushun Petrochemical Company, Liaoyang Petrochemical Company, Dushanzi Petrochemical Company and Lanzhou Petrochemical Company. Once these upgrade projects are completed, we expect our total annual ethylene production capacity to reach 2,600 thousand tons. As of December 31, 2002, we had invested approximately RMB 2,724 million (US$329 million) for these upgrade projects.

      In 2002, the monthly average capacity utilization rate at our ethylene production facilities was 100.9%. The cost of ethylene production is an important component of our overall chemical production costs. Reduction of energy consumption and raw material loss is a key factor in reducing ethylene production costs. After we implemented a series of measures in 2002 to reduce energy consumption, the average energy consumption of our ethylene production facilities decreased from 817.2 kilograms of standard oil per ton in 2001 to 794.6 kilograms in 2002. However, this is still significantly higher than the world average of 500 to 690 kilograms of standard oil per ton. We plan to continue to implement measures to reduce our energy consumption.

      In addition, high ethylene percentage loss has also contributed to the relative high cost of our ethylene production. In order to reduce high ethylene percentage loss in our ethylene production, we have implemented a series of measures at our chemical plants in the past two years, such as improving our process management of key units for ethylene production, reducing unplanned temporary interruptions of our chemical facilities and enhancing pyrolysis material composition and production plans. As a result, the average ethylene percentage loss at our chemical plants decreased from 1.04% in 2001 to 0.83% in 2002. We believe that these measures will enable us to continue to reduce the cost of our ethylene production without significant capital expenditure.

      We produce a number of polyolefin products, including polyethylene, polypropylene and ABS. As of December 31, 2002, our production capacities for polyethylene, polypropylene and ABS were 1,055 thousand tons, 948.5 thousand tons and 200 thousand tons, respectively. In 2002, we produced 1,014.4 thousand tons, 759.0 thousand tons and 166.7 thousand tons of polyethylene, polypropylene and ABS, respectively. Currently, China imports significant volumes of these products to meet the domestic demand due to an inadequate supply of high-quality domestically produced polyethylene, polypropylene and ABS. We intend to increase the production and improve the quality of these products. We are currently building new production facilities with new technology for the production of these products in Daqing Petrochemical Company, Daqing Refining and Chemical Company, Lanzhou Petrochemical Company and other branch companies. The production volume of ABS decreased 17% from 201.5 thousand tons in 2001 to 166.7 thousand tons in 2002. This decrease was due primarily to the termination of the lease for a major ABS production line at Daqing Petrochemical Company in 2002. Since then, we have implemented a number of measures to upgrade our ABS production facilities at our petrochemical companies in order to replace the lost ABS production capacity at Daqing Petrochemical Company. As a result, we expect our production of ABS to increase in 2003.

Sales and Marketing

      Our chemical products are distributed to a number of industries that manufacture components used in a wide range of applications, including automotive, construction, electronics, medical manufacturing, printing, electrical appliances, household products, insulation, packaging, paper, textile, paint, footwear, agriculture and furniture industries.

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      The following table sets forth the sales volumes of our chemical products by principal product category for each of the three years ended December 31, 2000, 2001 and 2002.

                             
Year ended December 31,

Product 2000 2001 2002




(in thousands of tons)
Basic petrochemicals
                       
 
Benzene(1)
    185.3              
 
Propylene(1)
    147.4              
Derivative petrochemicals
                       
 
Polyolefin
                       
   
Polyolefin Polyethylene
    994.0       1,016.2       1,008.3  
   
Polypropylene
    490.0       597.8       589.2  
   
ABS
    118.0       174.5       210.5  
 
Synthetic fiber
                       
   
Terylene fiber
    169.3       183.4       172.2  
   
Polyacrylic fiber
    67.0       105.6       84.9  
 
Synthetic rubber
                       
   
Butadiene styrene rubber
    128.8       128.5       136.5  
 
Intermediates
                       
   
Alkylbenzene
    131.4       115.8       135.3  
Other chemicals
                       
 
Urea
    3,143.9       3,419.7       2,967.5  
 
Ammonium nitrate
    338.6       168.1       145.5  

(1)  Since 2001, we used substantially all of the propylene and benzene we produced as feedstock for the production of our other chemical products.

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(OUT NATURAL GAS AND PIPELINE SEGMENT MAP)

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Natural Gas and Pipeline

      We are China’s largest natural gas transporter and seller in terms of sales volume, with revenues of RMB 12,733 million (US$1,538 million) and total sales volume of 588.4 billion cubic feet in 2002, of which 486.3 billion cubic feet was sold by our natural gas segment. We sell natural gas primarily to fertilizer and chemical companies, commercial users and municipal utilities owned by local governments.

      The following table sets forth the length of our natural gas pipelines and the volumes of natural gas sold by us as of December 31, 2000, 2001 and 2002 or in each of the three years ended December 31, 2000, 2001 and 2002.

                         
As of December 31 or year
ended December 31,

2000 2001 2002



Length of natural gas pipelines used by our natural gas segment (km)
    10,525       11,826       12,299  
Total length of natural gas pipelines (km)
    11,617       12,918       13,391  
Volume of natural gas sold by our natural gas segment (Bcf)
    391.0       442.2       486.3  
Total volume of natural gas sold(1)(Bcf)
    480.5       529.8       588.4  

(1)  Represents the aggregate volume of natural gas sold by our exploration and production segment, including sales to our natural gas segment.

      Currently, natural gas consumption in China represents 2.5% of China’s total primary energy consumption. The PRC government has forecast that natural gas consumption in China will represent 7.9% of China’s total primary energy consumption in 2010. We believe this growth will provide us with the opportunity to expand our natural gas business.

      In addition, we also conduct the operation of crude oil and refined product transmission and storage infrastructure in the natural gas and pipeline segment.

Our Principal Markets for Natural Gas

      In 2002, 60.7%, 20.4%, 14.9% and 4.0% of our natural gas sales were to the southwestern, northern, northwestern and northeastern regions of the PRC, respectively.

      Currently, Sichuan Province and Chongqing Municipality in southwest China are two of our principal markets for natural gas. We sold 262.6 billion cubic feet of natural gas to Sichuan Province and Chongqing Municipality in 2002, representing approximately 44.6% of our total natural gas sales. We supply natural gas to Sichuan Province and Chongqing Municipality from our exploration and production operations in the Sichuan oil region. Our natural gas pipelines in these areas are well developed, consisting of a natural gas transmission network with a total length of approximately 6,469 kilometers. As these areas lack adequate supply of alternative energy resources, such as coal, we believe that we can further expand our natural gas sales as energy demand increases in these areas.

      Beijing, Tianjin, Hebei Province and Shandong Province in northern China also have high energy consumption levels. These areas are also important markets for our natural gas transmission and marketing business. We sold 97.7 billion cubic feet of natural gas to these areas in 2002. Our natural gas sales to Beijing increased 18.4% from 59.4 billion cubic feet in 2001 to 70.3 billion cubic feet in 2002. We supply natural gas to Beijing, Tianjin and Hebei Province primarily from the Changqing oil region through the Shaanxi to Beijing natural gas pipeline, which is one of our natural gas trunk pipelines, and from the Huabei and Dagang oil regions. We have approximately 1,741 kilometers of natural gas pipelines in these areas.

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      Henan Province, Anhui Province, Shanghai and other provinces and cities in the Yangtze River Delta, Wuhan City and other regions in Hubei Province, Hunan Province, Lanzhou City and other areas in Gansu Province, Qinghai Province and Shanxi Province are also natural gas markets we are developing. We have commenced the construction of several pipelines linking our natural gas fields to those regions. We believe that upon completion of the construction of those pipelines, we will be able to increase our market share in those regions.

      Each year, we must supply natural gas to customers subject to the government-formulated guidance supply plan first as required by the PRC government. We enter into natural gas supply contracts with those customers on the basis of the amount of natural gas to be supplied according to the guidance supply plan for the following year’s supply.

      We have entered into long-term take-or-pay contracts with 11 municipalities and enterprises in Qinghai Province and Gangsu Province, 27 municipalities and enterprises in Hubei Province and Hunan Province and 8 municipalities in Shandong Province. Under these take-or-pay contracts, we have agreed in principle to supply natural gas to these customers in the next 20 to 25 years at prices determined based on the ex-factory prices published by the National Development and Reform Commission, formerly the State Development Planning Commission, supplemented by the pipeline transportation tariffs. See “— Regulatory Matters — Pricing — Natural Gas” for a discussion of natural gas pricing.

      In 2002, we sold 401.5 billion cubic feet, or 82.6% of the natural gas sales volume of our natural gas and pipeline segment, to customers not subject to the government-formulated guidance supply plan, such as commercial end users and municipal utilities, representing a 19.2% increase over 2001. We believe that sales volume of our natural gas to customers not subject to the government-formulated guidance supply plan as a percentage of our total sales will continue to increase. See “— Regulatory Matters — Pricing — Natural Gas” for a discussion of the government- formulated guidance supply plan.

      Driven by environmental and efficiency concerns, the PRC government is increasingly encouraging industrial and residential use of natural gas to meet primary energy and environmental protection needs. The PRC government has adopted a number of laws and regulations to require municipal governments to increase the use of clean energy, such as natural gas and liquefied petroleum gas, to replace the use of raw coal. Several municipal governments, including that of Beijing, have adopted policies to facilitate natural gas consumption in order to reduce the air pollution level. The PRC government has also adopted a preferential value-added tax rate of 13% for natural gas production as compared to a 17% value-added tax rate for crude oil production.

      We believe that these policies have had a positive impact on the development and consumption of natural gas in many municipalities that are our existing or potential markets for natural gas. We believe that these favorable policies will continue to benefit our natural gas business.

Natural Gas Transmission Infrastructure

      As of December 31, 2002, our natural gas and pipeline segment owned and operated approximately 12,299 kilometers of natural gas pipelines in China, which represented the vast majority of China’s onshore natural gas pipelines. Since 1990, the length of our natural gas pipelines has grown at a compound annual rate of 5.7%. Our existing natural gas pipelines form regional natural gas supply networks in southwestern and northern China. Our experience in the design, construction management and operation of our existing natural gas pipelines has enabled us to develop relatively advanced technologies and skills in China in long distance pipeline design, construction and automated operational communications. We believe that we will continue to benefit from those technologies and skills in the future expansion of our natural gas pipeline networks and their ancillary facilities.

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Expansion of Our Natural Gas Transmission and Marketing Business

      In September 2001, we completed the construction of a natural gas pipeline from Sebei, Qinghai Province, to Xining City, Qinghai Province and Lanzhou City, Gansu Province, with a total length of 930 kilometers. The capital investment for this project was RMB 2,220 million, which was funded by cash generated by our operations. Currently, this is the longest gas pipeline in China.

      In 2002, we continued our efforts in expanding our natural gas transmission and marketing business. In March 2002, we completed the construction, and commenced the operation, of a natural gas pipeline from Cangzhou City to Zibo City with a total length of 213.5 kilometers. We own a 70% interest in this project. An unrelated natural gas company in Shandong Province holds the remaining interest in this project.

      We plan to construct natural gas pipelines transporting natural gas produced in our natural gas fields in western and southwestern regions to large potential markets for natural gas in Wuhan City, other areas in Hubei Province, Hunan Province, Henan Province, Anhui Province, Shanghai and other areas in the Yangtze River Delta. These projects are known as the Zhong County to Wuhan City natural gas pipeline project and the West to East natural gas pipeline project. In November 2002, the State Development Planning Commission, the predecessor of the National Development and Reform Commission, approved the feasibility study report for the Zhong County to Wuhan City natural gas pipeline project. This project is designed to link the Sichuan gas region with Hubei Province and Hunan Province with a designed annual throughput capacity of 105.9 billion cubic feet of natural gas. We expect to start the construction of the pipeline in 2003 upon obtaining the construction commencement approval from the National Development and Reform Commission. As of May 31, 2003, we have entered into take-or-pay contracts with 27 municipalities and enterprises in Hubei Province and Hunan Province to provide natural gas to be delivered through this pipeline.

      Our West to East natural gas pipeline project will link our natural gas fields in Xinjiang and Changqing with Henan Province, Anhui Province, Shanghai and other areas in the Yangtze River Delta. The total length of the main line for the West to East natural gas pipeline project is expected to be approximately 3,800 kilometers. In December 2001, the State Development Planning Commission approved the feasibility study report for the West to East natural gas pipeline project. We have entered into non-binding letters of intent with 45 subscribers and distributors for the purchase of natural gas to be supplied to them through the West to East natural gas pipeline project. As of December 31, 2002, we had invested RMB 10,493 million in this project, accounting for 24% of the total expected investment of the project. We expect to commence the operation of the eastern part of the pipeline from Jingbian to Shanghai in January 2004, and the western part from Lunnan to Jingbian in January 2005. We believe that the successful completion of these natural gas pipeline and storage facilities will substantially enhance our ability to capitalize on anticipated growth in demand for natural gas in these regions.

      In addition, we plan to build an additional natural gas pipeline from Shaanxi to Beijing with a total length of 860 kilometers. This second line of the Shaanxi to Beijing natural gas pipeline will deliver natural gas from our Changqing oil and gas region to Shaanxi Province, Shanxi Province, Hebei Province and Beijing with a designed annual throughput capacity of 423.8 billion cubic feet of natural gas.

      We plan to develop certain of our natural gas pipeline and storage projects, including the West to East natural gas pipeline project, jointly with foreign natural gas companies to attract foreign capital and learn advanced technologies and management skills from them. We believe that these projects will assist us in developing our existing natural gas resources and expanding our natural gas markets.

      On July 4, 2002, we, Sinopec and an international investment consortium, which consists of six multinational energy companies including Shell International Gas Limited, OAO Gazprom and ExxonMobil China Gas Pipeline Limited, entered into a West to East Joint Venture Framework

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Agreement. This agreement contemplates a number of structural and operation principles relating to the West to East project, including:

  •  to adopt a production sharing contract model for oil and gas exploration and production;
 
  •  to establish a co-operative pipeline joint venture for a term of 45 years;
 
  •  to establish an equity joint venture natural gas sales company for a term of 45 years; and
 
  •  to have shareholding interests of 50%, 45%, and 5% for us, the foreign party and Sinopec, respectively, in the pipeline joint venture.

      Currently, we are negotiating relevant agreements relating to the establishment of the joint ventures for this project.

Crude Oil and Refined Product Transportation and Storage Infrastructure

      In order to improve management effectiveness, operating efficiency and safety of our crude oil and refined product transportation and storage businesses, we transferred the pipeline operations for our crude oil and refined products from the refining and marketing segment to the natural gas segment in January 2001, which was then renamed the natural gas and pipeline segment. See “Item 5 — Operating and Financial Review and Prospects — General — Overview”.

      We have an extensive network for the transportation, storage and distribution of both crude oil and refined products, which covers many regions of China. Our goal is to exploit and optimize our existing infrastructure to further consolidate our presence as the leading integrated oil and gas company in China.

      As of December 31, 2002, our crude oil transportation and storage infrastructure consisted of:

  •  9,215 kilometers of crude oil pipelines with an average daily throughput of approximately 2.2 million barrels; and
 
  •  crude oil storage facilities with an aggregate storage capacity of approximately 14.0 million cubic meters.

      We deliver crude oil to customers through our pipeline and storage facility network, through crude oil storage facilities that we lease from third parties and by ships leased by customers. In 2002, approximately 67.3% of our crude oil production was delivered to our refineries through our crude oil pipeline network. We believe that our crude oil pipeline network is sufficient for our current and anticipated transportation needs. During the past six years, we have not experienced any delays in our ability to deliver crude oil due to pipeline capacity constraints.

      Our transportation and storage infrastructure also includes:

  •  2,276 kilometers of refined product pipelines with an average daily throughput of approximately 15,397 tons; and
 
  •  refined product storage facilities with a total storage capacity of approximately 15.2 million cubic meters.

      Most of our refineries are located in the northeastern and northwestern regions of China. Our ability to distribute products through our own product distribution infrastructure to the eastern and southern regions will provide us with greater flexibility in supplying refined products to the domestic markets across China. We plan to continue to enhance our product distribution infrastructure in the northeastern, northwestern, northern and southwestern regions where we already have a significant market share, and expand our product distribution infrastructure in the eastern and southern regions by acquiring and constructing transportation storage facilities and distribution storage facilities in these regions.

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      In October 2002, we completed the construction, and commenced the operation, of a refined product pipeline from Lanzhou, Gansu Province, to Chengdu, Sichuan Province and Chongqing Municipality. This pipeline connects Lanzhou Petrochemical Company directly with the southwestern region of China. In this region, there is a lack of crude oil resources and refining capacity, which has resulted in the demand for refined products significantly exceeding supply. This pipeline has a total length of 1,250 kilometers and a throughput capacity of five million tons of refined products per year. Currently, this pipeline is the longest refined product pipeline in China.

      Together with the expansion of our service stations, we expect that our pipelines, primary storage and secondary distribution storage facilities will greatly enhance our existing distribution infrastructure for refined products. We believe that our enhanced distribution infrastructure will help us increase the sales of our refined products.

Competition

      As an oil and gas company operating in a competitive industry, we compete in each of our business segments in both China and international markets for desirable business prospects and for customers. Our principal competitors in China are Sinopec, including its subsidiary China National Star Petroleum Corporation, or CNSPC, and China National Offshore Oil Corporation, or CNOOC.

Exploration and Production Operations

      We are the largest onshore oil and gas company in China in terms of proved crude oil and natural gas reserves as well as crude oil and natural gas production and sales. However, we compete with Sinopec for the acquisition of desirable crude oil and natural gas prospects. We believe that our experience in crude oil and natural gas exploration and production and our advanced exploration technologies that are suitable for diverse geological conditions in China will enable us to maintain our dominant position in discovering and acquiring desirable crude oil and natural gas prospects in China.

Refining and Marketing and Chemicals and Marketing Operations

      We compete directly with Sinopec in our refining and marketing and chemicals and marketing operations on the basis of price, quality and customer service. Most of our refineries and chemical plants are located in the northeastern, northwestern and northern regions of China where we have the dominant market share for refined products and chemical products. We also sell our refined products and chemical products in the eastern, southern, southwestern and central-southern regions of China, where our products have a considerable market share. The eastern and southern regions of China, where refined products and chemical products are in higher demand, are important markets for our refined products and chemical products. Sinopec has a strong presence in the eastern and southern regions of China in competition with us, and most of Sinopec’s refineries, chemical plants and distribution networks are located in these regions in close proximity to these markets. We expect that we will continue to face competition from, among other competitors, Sinopec in increasing our refined products and chemical products sales in these regions. See “Item 3 — Key Information — Risk Factors”.

      We also face competition from imported refined products and chemical products on the basis of price and quality. As a result of China’s entry into the WTO, we expect that competition from foreign producers of refined products and chemical products may increase as tariff and non-tariff barriers for imported refined products and chemical products will be reduced or eliminated over time, including the opening over time of retail and wholesale markets in China for refined products and chemical products to foreign competition. Our ability to compete with foreign producers of refined products and chemical products will depend on our ability to reduce our production costs and improve the quality of our products. See “Item 3 — Key Information — Risk Factors”.

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Natural Gas and Pipeline Operations

      We are the largest supplier of natural gas in terms of volume of natural gas supplied. Currently, we face very limited competition in the supply of natural gas in Beijing, Tianjin, Hebei Province and the northwestern regions of China, our existing principal markets for natural gas. Currently, Sinopec has natural gas fields in Sichuan Province and sells natural gas to users in that province. We, therefore, have limited competition from Sinopec in our markets in Sichuan Province. Further, we intend to expand our markets for natural gas into the coastal regions in eastern China where we may face competition from CNOOC and, to a lesser extent, Sinopec. We believe that our dominant natural gas resources base, our relatively advanced technologies and skills in managing long distance pipelines will enable us to continue to be a dominant player in the natural gas markets in China.

Environmental Matters

      Together with other companies in the industries in which we operate, we are subject to numerous national, regional and local environmental laws and regulations concerning our oil and gas exploration and production operations, petroleum and petrochemical products and other activities. In particular, these laws and regulations:

  •  require an environmental evaluation report to be submitted and approved prior to the commencement of exploration, production, refining and chemical projects;
 
  •  restrict the type, quantities, and concentration of various substances that can be released into the environment in connection with drilling and production activities;
 
  •  limit or prohibit drilling activities on certain lands lying within protected areas; and
 
  •  impose criminal and civil liabilities for pollution resulting from oil, natural gas and petrochemical operations.

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

      We anticipate that the environmental laws and regulations to which we are subject will become increasingly strict and are therefore likely to have an increasing impact on our operations. It is impossible, however, to predict accurately the effect of future developments in such laws and regulations on our future earnings and operations. Some risk of environmental costs and liabilities is inherent in certain of our operations and products, as it is with other companies engaged in similar businesses, and there can be no assurance that material costs and liabilities will not be incurred. However, we do not currently expect any material adverse effect on our financial condition or results of operations as a result of compliance with such laws and regulations. We paid pollutant discharge fees of approximately RMB 85 million, RMB 113 million and RMB113 million (US$14 million) in 2000, 2001 and 2002, respectively.

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

  •  reducing sulphur levels in heavy fuel oil and diesel fuel;
 
  •  reducing olefin and benzene content in gasoline and the quantity of emissions and effluents from our refineries and petrochemical plants; and
 
  •  developing and installing monitoring systems at our facilities and developing environmental impact assessments for major projects.

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      Our capital expenditures on environmental programs in 2000, 2001 and 2002 totaled approximately RMB 1,151 million, RMB 1,205 million and RMB 1,363 million (US$165 million), respectively.

Legal Proceedings

      We are not involved in any judicial and arbitral proceedings, the results of which, in the aggregate, would have a material adverse impact on our financial condition.

Properties

      Under a restructuring agreement we entered into with CNPC on March 10, 2000 in connection with the restructuring of the CNPC group and the establishment of our company, CNPC has undertaken to us the following:

  •  CNPC will use its best endeavours to obtain formal land use right certificates to replace the entitlement certificates in relation to the 28,649 parcels of land, which were leased or transferred to us from CNPC, within one year from August, September and October 1999 when the relevant entitlement certificates were issued;
 
  •  CNPC will complete, within one year from November 5, 1999, the necessary governmental procedures for the requisition of the collectively owned land on which 116 service stations owned by us are located; and
 
  •  CNPC will obtain individual building ownership certificates in our name for all of the 57,482 buildings transferred to the Company by CNPC, before November 5, 2000.

      As of December 31, 2002, CNPC obtained formal land use right certificates for 22,670 of the 28,649 parcels of land and some of the building ownership certificates. The necessary governmental procedures for the above-mentioned service stations located on collectively owned land have not been completed to date. Our directors confirm that the use of and the conduct of relevant activities at the above-mentioned parcels of land, service stations and buildings are not affected by the fact that the relevant land use right certificates or individual building ownership certificates have not been obtained or the fact that the relevant governmental procedures have not been completed. Our directors believe that these will not have any material adverse effect on our results of operations and financial condition.

      We own substantially all of the equipment and production facilities relating to the business activities of all our segments. We hold production licenses covering all of our interests in developed and undeveloped acreage and productive crude oil and natural gas wells. See “— Exploration and Production — Properties”.

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Regulatory Matters

Overview

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

  •  The Ministry of Land and Resources has the authority for granting, examining and approving oil and gas exploration and production licenses, the administration of registration and transfer of exploration and production licenses.
 
  •  The Ministry of Commerce, which was established in March 2003 to consolidate the authorities and functions of the former State Economic and Trade Commission and the former Ministry of Foreign Trade and Economic Cooperation:

  —  has the industry administration and policy coordination authority over China’s oil and gas industry;
 
  —  sets import and export quotas for crude oil and refined products on the basis of overall supply and demand for crude oil and refined products in China as well as WTO requirements for China;
 
  —  issues import and export licenses for crude oil and refined products to oil and gas companies that have obtained import and export quotas; and
 
  —  examines and approves production sharing contracts and Sino-foreign equity and cooperative joint venture contracts.

  •  The National Development and Reform Commission, which was established in March 2003 to replace the former State Development Planning Commission:

  —  determines mandatory minimum volumes and applicable prices of natural gas to be supplied to certain fertilizer producers;
 
  —  publishes guidance prices for natural gas and retail median guidance prices for certain refined products, including gasoline and diesel;
 
  —  approves investment and finance projects exceeding certain capital expenditure amounts; and
 
  —  approves Sino-foreign equity and cooperative projects exceeding certain capital amounts.

Exploration Licenses and Production Licenses

      The Mineral Resources Law authorizes the Ministry of Land and Resources to exercise administrative authority over the exploration and production of mineral resources within the PRC. The Mineral Resources Law and its supplementary regulations provide the basic legal framework under which exploration licenses and production licenses are granted. The Ministry of Land and Resources has the authority to issue exploration licenses and production licenses. Applicants must be companies approved by the State Council to engage in oil and gas exploration and production activities.

      Applicants for exploration licenses must first register with the Ministry of Land and Resources blocks in which they intend to engage in exploration activities. The holder of an exploration license is obligated to make a progressively increasing annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. Investments range from RMB 2,000 per square kilometer for the initial year to RMB 10,000 per square kilometer for the third and subsequent

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years. Additionally, the holder has to pay an annual exploration license fee that starts at 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 seven years, subject to renewal upon expiration of the original term, with each renewal being 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 proven. 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 begin production. In addition, the holder needs to obtain the right to use that block of land. Generally, the holder of a full production license must either obtain a land use rights certificate for industrial land use covering that block of land or lease such land from the relevant land administrative authorities.

      The Ministry of Land and Resources issues production licenses to applicants on the basis of the reserve reports approved by the relevant authorities. Production license holders are required to pay an annual production right usage fee of RMB 1,000 per square kilometer. Administrative rules issued by the State Council provide that the maximum term of a production license is 30 years. However, in accordance with a special approval from the State Council, the Ministry of Land and Resources has issued production licenses effective March 2000 to PetroChina for all of its crude oil and natural gas reservoirs with terms coextensive with the projected productive life of those reservoirs, ranging up to 55 years. Production licenses to be issued to us in the future will be subject to the 30 year maximum unless we obtain additional special approvals from the State Council. Each of our production licenses is renewable upon our application 30 days prior to expiration. Oil and gas price increases may extend the productive life of our crude oil and natural gas reservoirs beyond the current terms of the relevant production licenses.

      PetroChina and Sinopec have exploration licenses and production licenses for the exploration and production of onshore crude oil and natural gas in China. CNOOC and Sinopec (through its subsidiary CNSPC) have exploration licenses and production licenses for the exploration and production of offshore crude oil and natural gas in China.

Pricing

  Crude Oil

      PetroChina and Sinopec set their crude oil median prices each month based on the average Singapore market FOB prices for crude oil of different grades in the previous month. In addition, PetroChina and Sinopec negotiate a premium or discount to reflect transportation costs, the differences in oil quality and market supply and demand. The National Development and Reform Commission will mediate if PetroChina and Sinopec cannot agree on the amount of premium or discount.

  Refined Products

      Prior to October 2001, PetroChina set its retail prices based on the published retail median guidance prices of gasoline and diesel published by the State Development Planning Commission, the predecessor of the National Development and Reform Commission, with an allowable upward or downward adjustment of up to 5%. Since October 2001, PetroChina has set its retail prices within an 8% floating range of the published retail median guidance prices of gasoline and diesel. These retail median guidance prices of gasoline and diesel vary in each provincial level distribution region. Since October 2001, the National Development and Reform Commission has published the retail median guidance prices of gasoline and diesel from time to time based on the weighted average FOB Singapore, Rotterdam and New York trading prices for diesel and gasoline plus transportation costs and taxes. Generally, adjustments will be made only if the weighted average prices fluctuate beyond 8% of the previously published retail median guidance price.

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      PetroChina sets the wholesale prices for its gasoline and diesel on the basis of its retail prices and a discount to its retail prices of at least 5.5% as required by the National Development and Reform Commission.

      In addition, the National Development and Reform Commission sets the ex-factory median prices for gasoline and diesel sold to the PRC government and other institutional customers, including airlines and railway operators. These ex-factory median prices are calculated with reference to the average FOB Singapore, Rotterdam and New York trading prices for gasoline and diesel in the previous month. PetroChina may set the prices it charges its customers on the basis of the ex-factory median prices set by the National Development and Reform Commission, which may be adjusted upward or downward up to 8%.

  Chemical Products

      PetroChina determines the prices of all of its chemical products.

  Natural Gas

      The price of natural gas has two components:

  •  ex-factory price; and
 
  •  pipeline transportation tariff.

      Prior to January 2002, our natural gas price was comprised of wellhead price, pipeline transportation tariff and purification fee. In January 2002, the State Development Planning Commission, the predecessor of the National Development and Reform Commission, merged the purification fee into the wellhead price to establish a unified natural gas ex-factory price.

      Ex-factory prices vary depending on whether or not the natural gas sold is within the government-formulated natural gas supply plan. For natural gas sold within the government-formulated supply plan, the National Development and Reform Commission fixes ex-factory prices according to the nature of the customers. Most of these customers are fertilizer producers.

      For natural gas sold above the government-formulated natural gas supply plan, the National Development and Reform Commission publishes the median guidance ex-factory price with permissible upward or downward adjustments of 10% by the natural gas producer.

      PetroChina negotiates the actual ex-factory price with commercial natural gas users and municipal governments within the adjustment range.

      The National Development and Reform Commission sets the pipeline transportation tariff for the natural gas transported by pipelines constructed prior to 1991. For the natural gas transported by pipelines constructed after 1991, PetroChina submits to the National Development and Reform Commission for examination and approval proposed pipeline transmission tariffs based on the capital investment made in the pipeline, the depreciation period for the pipeline, the ability of end users to pay and PetroChina’s profit margin.

Production and Marketing

  Crude Oil

      Each year, the National Development and Reform Commission publishes the projected target for the production and sale of crude oil by PetroChina, Sinopec and CNOOC, based on the domestic consumption estimates submitted by domestic producers, including PetroChina, Sinopec and CNOOC, the production capacity of these companies as well as the forecast of international crude oil prices. The actual production levels are determined by the producers themselves and may vary from the submitted estimates.

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  Refined Products

      Currently, only PetroChina, Sinopec and joint ventures established by the two companies have the right to conduct gasoline and diesel wholesale business. Other companies, including foreign invested companies, may not engage in wholesale of gasoline and diesel in China’s domestic market. In general, only domestic companies, including Sino-foreign joint venture companies, are permitted to engage in retail of gasoline and diesel. See “Item 3 — Key Information — Risk Factors” for a discussion of the likely impact on the distribution of refined products in China after China’s admission to the WTO.

  Natural Gas

      The National Development and Reform Commission publishes in each year the production targets for natural gas producers based on the annual production target prepared on the basis of consumption estimates submitted by all natural gas producers such as PetroChina. The National Development and Reform Commission also formulates the annual natural gas guidance supply plan, which requires natural gas producers to distribute a specified amount of natural gas to specified fertilizer producers. The actual production levels of natural gas, except the amount supplied to the fertilizer producers, are determined by the natural gas producers.

Foreign Investments

  Cooperation in Exploration and Production with Foreign Companies

      Currently, only CNPC and Sinopec have the right to cooperate with foreign companies in onshore crude oil and natural gas exploration and production in China. CNOOC and Sinopec (through its subsidiary CNSPC) have the right to cooperate with foreign companies in offshore crude oil and natural gas exploration and production in China.

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

      As authorized by the Regulations of the PRC on Exploration of Onshore Petroleum Resources in Cooperation with Foreign Enterprises, CNPC has the right to enter into joint cooperation arrangements with foreign oil and gas companies for onshore crude oil and natural gas exploration and production. PetroChina does not have the capacity to enter into production sharing contracts directly with foreign oil and gas companies under existing PRC law. Accordingly, CNPC will continue to enter into production sharing contracts. After signing a production sharing contract, CNPC will, subject to approval of the Ministry of Commerce, assign to PetroChina most of its commercial and operational rights and obligations under the production sharing contract as required by the Non-competition Agreement between CNPC and PetroChina. See “Item 7 — Major Shareholders and Related Party Transactions — Contract for the Transfer of Rights under Production Sharing Contracts”.

  Transportation and Refining

      The PRC regulations permit foreign minority ownership in pipeline transportation, oil storage facilities and oil jetties. There is no express general restriction on foreign investment in refineries and petrochemical facilities. However, the construction of refineries with an annual capacity of five million tons or less must receive special approval and the production of ethylene and PVC resins with annual production capacity exceeding 600,000 tons must be conducted by companies majority-owned by Chinese persons. Furthermore, when appropriate, projects must receive necessary approvals from relevant PRC government agencies. See “Item 3 — Key Information — Risk Factors”.

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Import and Export

      The import and export of crude oil and refined products is subject to quota and licensing control in China. Currently, there are eighteen companies licensed to import crude oil, four licensed to import gasoline, diesel and kerosene and three licensed to export crude oil and refined products. The Ministry of Commerce sets import and export quotas for crude oil and refined products by taking into account the supply and demand in China as well as the WTO requirements for China. The Ministry of Commerce is also responsible for issuing import and export licenses for products subject to quotas. Upon receiving quota allocation, refining companies or enterprises can import crude oil through State-authorized import companies. See “Item 3 — Key Information — Risk Factors” for a discussion of the expected opening of domestic markets to foreign competition in China.

      The PRC government authorities have granted PetroChina the right to conduct crude oil and refined product import and export business. PetroChina holds quota to import and export crude oil and refined products, and conducts import and export of crude oil and refined products through its affiliate, China National United Oil Corporation which holds relevant import and export licenses.

Capital Investment and Financing

      Capital investments in exploration and production of crude oil and natural gas made by Chinese oil and gas companies are not subject to government approval. However, oil and gas companies must obtain prior approval from the relevant government authorities for capital investments in other projects. They must obtain prior approval from the National Development and Reform Commission for capital investments in any projects if the amount of capital involved exceeds RMB 50 million. Oil and gas companies need to obtain approval from the National Development and Reform Commission and the State Administration of Foreign Exchange to borrow from foreign banks and foreign governments in connection with those capital investments.

Taxation, Fees and Royalty

      PetroChina is subject to a variety of taxation, fees and royalty. The table below sets forth the various taxation, fees and royalty payable by PetroChina or by Sino-foreign oil and gas exploration and development cooperative projects. Since January 1, 2000, PetroChina and its wholly owned subsidiaries and branch companies have been taxed on a consolidated basis as approved by the Ministry of Finance and the State Taxation Bureau.

         
Tax item Tax base Tax rate



Corporate income tax
  Taxable income   Generally at a rate of 33%. However, our qualified branch companies in the west regions of the PRC are entitled to a rate of 15%. Tax concession or exemption enjoyed by any subsidiary or branch company continues to apply.

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Tax item Tax base Tax rate



Value-added tax
  Revenue   13% for liquified natural gas, natural gas, agricultural film and fertilizers and 17% for other items. PetroChina charges value-added tax from its customers at the time of settlement on top of the selling prices of its products on behalf of the taxation authority. The value-added tax paid by PetroChina for purchasing materials to be consumed during the production process and for charges paid for drilling and other engineering services and labor are deducted from value-added tax payable by PetroChina. 13% of the value-added tax paid in connection with export of crude oil and diesel is subject to a full rebate.
    Sales volume   5% for the Sino-foreign oil and gas exploration and development cooperative projects, but input value-added tax cannot be deducted.
Business tax
  Revenue from transportation services   3%
Consumption tax
  Aggregate volume sold or self-consumed   RMB 277.6 per ton for gasoline

RMB 117.6 per ton for diesel

All consumption taxes paid in connection with export of gasoline and diesel are subject to a full rebate.
Resource tax
  Aggregate volume sold or self-consumed   RMB 8 to 30 per ton for crude oil

RMB 2 to 15 per thousand cubic meter for natural gas

The actual applicable rate for each oil field may differ depending on the resource differences, volume of the exploration and production activities and costs required for the production at the particular oil field.
Compensatory fee for mineral resources
  Revenue   1% for crude oil and natural gas
Exploration license fee
  Area   RMB 100 to 500 per square kilometer per year
Production license fee
  Area   RMB 1,000 per square kilometer per year
Royalty fee(1)
  Production volume   Progressive rate of 0–12.5% for crude oil and 0–3% for natural gas

(1)  Payable only by Sino-foreign oil and gas exploration and development cooperative projects. The project entity of those cooperative projects is not subject to any other resource tax or fee.

      The PRC Highway Law, as amended on October 31, 1999, provides that the PRC government shall collect funds for highway maintenance by imposing fuel taxes. The State Council will formulate

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specific implementation methods and procedures for the imposition of fuel tax. The State Council has not yet announced or published any specific rate, implementation method or procedure for the imposition of the tax.

Environmental Regulations

      China has adopted extensive environmental laws and regulations that affect the operation of the oil and gas industry. There are national and local standards applicable to emissions control, discharges to surface and subsurface water, and the generation, handling, storage, transportation, treatment and disposal of waste materials.

      The environmental regulations require a company, such as us, to register or file an environmental impact report with the relevant environmental bureau for approval before it undertakes any construction of a new production facility or any major expansion or renovation of an existing production facility. The new facility or the expanded or renovated facility will not be permitted to operate unless the relevant environmental bureau has inspected to its satisfaction that environmental equipment that satisfies the environmental protection requirements has been installed for the facility. A company that wishes to discharge pollutants, whether it is in the form of emission, water or materials, must submit a pollutant discharge declaration statement detailing the amount, type, location and method of treatment. After reviewing the pollutant discharge declaration, the relevant environmental bureau will determine the amount of discharge allowable under the law and will issue a pollutant discharge license for that amount of discharge subject to the payment of discharge fees. If a company discharges more than is permitted in the pollutant discharge license, the relevant environmental bureau can fine the company up to several times the discharge fees payable by the offending company for its allowable discharge, or require the offending company to close its operation to remedy the problem.

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ITEM 5 — OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 
General

      You should read the following discussion together with our consolidated financial statements and their notes included elsewhere in this annual report. Our consolidated financial statements have been prepared in accordance with IFRS, which differ in many material respects from US GAAP. Note 33 to our consolidated financial statements included elsewhere in this annual report and the section headed “— Other Information — US GAAP Reconciliation” summarize the significant differences between IFRS and US GAAP as they relate to us.

      Our consolidated financial statements and operating data present, and the discussion and analysis in this annual report pertain to, the results of operations of the businesses transferred to us by CNPC and are based on the historical financial information of CNPC. Specifically, in connection with the 1998 restructuring of China’s oil and gas industry, CNPC transferred to Sinopec six crude oil and natural gas production enterprises located in the eastern and coastal regions of China and Sinopec transferred to CNPC 15 refineries and petrochemical plants located in the northeastern, northern and western regions of China. In addition, local governments in the northeastern, northern and western regions of China transferred to CNPC 15 provincial and municipal petroleum distribution companies. Our financial and operating information gives effect to these transactions for all periods presented. A significant portion of revenues generated prior to the asset transfer represented sales from our exploration and production segment to Sinopec.

      In addition, in accordance with an acquisition agreement between CNPC and us dated September 26, 2002, we acquired from CNPC the assets, liabilities and interests related to CNPC’s refined products marketing enterprises consisting primarily of service stations and related facilities for RMB 3,200 million. Under IFRS, the acquisition is a combination of entities under common control since the CNPC’s refined products marketing enterprises and us are under the common control of CNPC. As a result, we have accounted for the acquisition in a manner similar to a uniting of interests, whereby the assets and liabilities of the marketing enterprises acquired are accounted for at historical cost to CNPC with net liabilities of RMB 2,956 million at the effective date. Our consolidated financial statements as of and for the years ended December 31, 2000 and 2001 included elsewhere in this annual report have been restated to give effect to the acquisition in these periods as if the operations of our company and these marketing enterprises have always been combined in these periods. The difference between RMB 3,200 million paid and the net liabilities transferred from CNPC has been adjusted against equity. See “— Acquisition of Certain Refined Products Marketing Enterprises from CNPC”.

Overview

      We are engaged in a broad range of petroleum related activities, including:

  •  the exploration, development, production and sale of crude oil and natural gas;
 
  •  the refining, transportation, storage and marketing of crude oil and petroleum products;
 
  •  the production and sale of basic petroleum products, derivative chemical products and other chemical products; and
 
  •  the transmission of crude oil, refined products and natural gas as well as sale of natural gas.

      We are China’s largest producer of crude oil and natural gas and are one of the largest companies in China in terms of sales. In the year ended December 31, 2002, we produced approximately 769.8 million barrels of crude oil and approximately 605.0 billion cubic feet of natural gas for sale. Our refineries also processed approximately 569.0 million barrels of crude oil in the year ended December 31, 2002. In the year ended December 31, 2002, we had total revenue of RMB 244,424 million (US$29,520 million) and net income of RMB 46,910 million (US$5,665 million).

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      Effective January 1, 2001, our pipeline operations were transferred from the refining and marketing segment to the natural gas segment, which was subsequently renamed as the natural gas and pipeline segment. Accordingly, our results of operations, together with the corresponding assets and liabilities, of certain pipeline operations are reclassified from the refining and marketing segment to the natural gas and pipeline segment to reflect the changes in the manner under which these operations are managed.

Critical Accounting Policies

      The preparation of our consolidated financial statements requires our management to select and apply significant accounting policies, the application of which may require management to make judgments and estimates that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Notwithstanding the presentation of our principal accounting policies in Note 3 to our consolidated financial statements included elsewhere in this annual report, we have identified the accounting policies below as some of our most critical to our business operations and the understanding of our financial condition and results of operations in accordance with IFRS. Although these estimates are based on our management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates.

  Oil and Gas Accounting

      We use successful efforts method of accounting, with specialized accounting rules that are unique to the oil and gas industry, for oil and gas exploration and production activities. Under this method, geological and seismic costs incurred are expensed prior to the discovery of proved reserves. However, all costs for developmental wells, support equipment and facilities, and mineral interests in oil and gas properties are capitalized. Costs of exploratory wells are capitalized as construction in progress pending determination of whether the wells find proved reserves.

  Oil and Gas Reserves

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

      Before estimated oil and gas reserves are designated as “proved”, certain engineering criteria must be met in accordance with industry standards and the regulations of the U.S. Securities and Exchange Commission. 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. Therefore, these estimates do not include probable or possible reserves. Annually, our proved reserve estimates are updated by an independent, qualified and experienced oil and gas reserve engineering firm in the United States. Our oil and gas reserve engineering department has policies and procedures in place to ensure that these estimates are consistent with these authoritative guidelines. Among other factors as required by authoritative guidelines, this estimation takes into account recent information about each field, including production and seismic information, estimated recoverable reserves of each well, and oil and gas prices and operating costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Therefore, as prices and cost levels change from year to year, the estimate of proved reserves also changes. We have no costs of unproved properties capitalized in oil and gas properties.

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      Despite the inherent imprecision in these engineering estimates, estimated proved oil and gas reserve quantity has a direct impact on certain amounts reported in the financials statements. In addition to the capitalization of costs related to oil and gas properties on the balance sheet discussed earlier, estimated proved reserves also impacts the calculation of depreciation, depletion and amortization expenses of oil and gas properties. The cost of oil and gas properties is amortized at the field level on the unit of production method. Unit of production rates are based on the total oil and gas reserves estimated to be recoverable from existing facilities based on the current terms of our production licenses. Our reserve estimates include only crude oil and natural gas which management believes can be reasonably produced within the current terms of the production licenses that are granted by the Ministry of Land and Resources, ranging from 30 years to 55 years from the effective date of issuance in March 2000, renewable upon application 30 days prior to expiration. Consequently, the impact of changes in estimated proved reserves are reflected prospectively by amortizing the remaining book value of the oil and gas property assets over the expected future production. If proved reserve estimates are revised downward, earnings could be affected by higher depreciation expense or an immediate write-down of the property’s book value had the downward revisions been significant. See “— Property, Plant and Equipment” below. Given our large number of producing properties in our portfolio, and the estimated proved reserves, it is unlikely that any changes in reserve estimates will have a significant effect on prospective charges for depreciation, depletion and amortization expenses.

      We did not incur and do not anticipate to incur any material dismantlement, restoration or abandonment cost given the nature of its onshore producing activities and current PRC regulations governing such activities.

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

  Property, Plant and Equipment

      We record property, plant and equipment, including oil and gas properties, initially at cost less accumulated depreciation, depletion and amortization. Cost represents the purchase price of the asset and other costs incurred to bring the asset into existing use. Subsequent to their initial recognition, property, plant and equipment are carried at revalued amount, being the estimated fair value at the date of the revaluation less accumulated depreciation and impairment losses. Revaluations are performed by independent qualified valuers on a regular basis to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. Revaluation surpluses pertaining to revalued assets depreciated or disposed of are retained in the revaluation reserve and will not be available to offset against possible future revaluation losses. As disclosed in Note 16 to our consolidated financial statements included elsewhere in this annual report, our property, plant and equipment, excluding oil and gas reserves, were revalued as of June 30, 1999.

      Depreciation, depletion and amortization to write off the cost or valuation of each asset, other than oil and gas properties, to their residual values is calculated using the straight-line method over their estimated useful lives as follows:

     
Land and buildings
  25-50 years
Plant and machinery
  10-15 years
Equipment and motor vehicles
  3-16 years

      We do not provide depreciation for construction in progress until it is completed and ready for use.

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      The useful lives of non-oil-and-gas properties are estimated at the time these purchases are made after considering future changes, business developments and our strategies. Estimated production lives for oil and gas properties are also made after considering the specific factors discussed under “— Oil and Gas Reserves” above. Should there be unexpected adverse changes in these circumstances or events, which include declines in projected operating results, negative industry or economic trends, among others, we would be required to assess the need to shorten the useful lives and/or make impairment provisions.

      In performing this impairment assessment, we review internal and external sources of information to identify indications of these unexpected adverse changes. The sources utilized to identify indications of impairment are often times subjective in nature and require us to use judgment in applying such information to our businesses. Our interpretation of this information has a direct impact on whether an impairment assessment is performed as at any given balance sheet date. Such information is particularly significant as it relates to our oil and gas properties. If an indication of impairment is identified, the recoverable amount of each cash generating unit is estimated, which is the higher of its net selling price and its value in use, which is the estimated net present value of future cash flows to be derived from the continuing use of the asset and from its ultimate disposal. To the extent the carrying amount of a cash generating unit exceeds the recoverable amount, an impairment loss is recognized in the income statement.

      Depending on our assessment of the overall materiality of the asset under review and complexity of deriving reasonable estimates of the recoverable value, we may perform such assessment utilizing internal resources or we may engage external advisors to counsel us in making this assessment. Regardless of the resources utilized, we are required to make many assumptions to make this assessment, including our utilization of such asset, plans to continue to produce and develop proved and associated probable or possible reserves, the cash flows to be generated based on assumptions for future commodity prices and development costs, appropriate market discount rates and the projected market and regulatory conditions. Changes in any of these assumptions could result in a material change to future estimates of the recoverable value of any asset.

  Impairment of Accounts Receivable

      Accounts receivables are stated at cost less provision for impairment. Accounts where there are indications that a receivable may be impaired or not collectible, a provision would be recorded based on best estimates to reduce the receivable balance to the amount that is expected to be collected. Factors considered include the historical payment and collection experience, debtors’ credit worthiness and appropriate discount rates. The recording of provisions requires the application of judgments about the ultimate resolution of these receivables. As a result, provisions are reviewed at each balance sheet date and adjusted to reflect our current best estimate.

  Deferred Tax Assets

      We are required to exercise considerable judgment in making provisions for deferred tax under the liability method. Under this method, deferred income tax is provided or temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Specifically, we must make estimates of projected capital expenditure to be incurred and the resulting incremental timing difference that such capital expenditure would generate for the determination of the amount of temporary difference that will be recovered. We use currently enacted tax rates to determine deferred income tax. If these rates changed, we would have to adjust our deferred tax in the period these changes happen through the income statement.

      The principal temporary differences arise from depreciation on oil and gas properties and equipment and allowances for impairment of receivables, inventories, investments and property, plant and equipment. Deferred tax assets relating to the carry-forward of unused tax losses are recognized

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to the extent that it is probable that future taxable income will be available against which the unused tax losses can be utilized.

     Revenue Recognition

      Sales are recognized upon delivery of products and customer acceptance, if any, or performance of services, net of sales taxes and discounts. Revenues are recognized only when we have transferred to the buyer the significant risks and rewards of ownership of the goods, and when the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

      In addition to the above significant accounting policies and estimates, in connection with the preparation and reconciliation of our financial statements in accordance with US GAAP, we believe the following additional accounting estimate is also critical.

     One-time Remedial Payments for Staff Housing

      As disclosed in Note 4 to our consolidated financial statements included elsewhere in this annual report, certain of our employees who joined the workforce prior to December 31, 1998 and have housing conditions below local standards are to be reimbursed for such differences. These one-time remedial payments are to be borne by our State-owned shareholder, CNPC. Under IFRS, such direct payments to employees or reimbursements will not be recorded in our consolidated income statement. US GAAP contain no such exemption but require this principal shareholder’s action on our behalf to be recorded in the consolidated income statement. During the year ended December 31, 2002, we and CNPC have completed the process of estimating the amounts payable to qualified employees at the level of the affected business units as a whole. We have reflected this best available estimate of such payments in determining our net income for the year ended December 31, 2002, under US GAAP. Since this amount is borne by our State-owned shareholder, a corresponding amount has been included as an addition to the other reserves in our shareholders’ equity. The estimation process of such payments down to level of the individual employees is still on going. Actual results may differ from these estimates at the time when more information becomes available.

      For detailed discussions of significant differences between IFRS and US GAAP, see Note 33 to our consolidated financial statements included elsewhere in this annual report and the section headed “— Other Information — US GAAP Reconciliation” below.

Factors Affecting Results of Operations

      Our results of operations and the period-to-period comparability of our financial results are affected by a number of external factors, including changes in the prices of crude oil, refined products, natural gas and chemical products and fluctuations in exchange rates and interest rates.

     Crude Oil Prices

      Our results of operations are substantially influenced by crude oil prices. From June 1998 to March 2001, the PRC government published benchmark prices for crude oil in China which were adjusted on a monthly basis to equal Singapore market FOB prices for similar grades of crude oil, supplemented by an amount equal to the customs duty payable on the import of crude oil. Since March 2001, the PRC government has ceased publishing benchmark prices for crude oil in China and we and Sinopec have set our crude oil median prices monthly based on the Singapore market FOB prices for crude oil. Our actual realized crude oil prices include a premium on, or discount from, the median prices which primarily reflects transportation costs, differences in oil quality and market supply and demand conditions.

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      Prior to September 1, 1999, the premiums and discounts applied to our crude oil sales were largely determined through negotiations between CNPC and Sinopec, our largest customer. Since September 1, 1999, these discounts and premiums have been determined in accordance with a crude oil premium and discount calculation agreement and its supplemental agreement we entered into with Sinopec. These agreements establish premiums and discounts which effect adjustments to the benchmark prices. These agreements do not obligate either party to purchase or sell any crude oil and is thus subject to renegotiation. Under these agreements, the National Development and Reform Commission, formerly the State Development Planning Commission, will mediate if we cannot agree with Sinopec on the premium or discount applicable to a particular crude oil purchase. The table below sets forth the median prices for our principal grades of crude oil in 2000, 2001 and 2002 and the negotiated premiums and discounts applicable to those grades of crude oil since July 2000.

                                                         
Median prices for principal grades Premium/(discount)
of crude oil (RMB/barrel) (RMB/barrel)


Grade of Year 2000 Year 2001 Year 2002 July 2000- July 2001- Since
crude oil Benchmark average average average June 2001 December 2002 January 2002








Daqing
    Minas       240.3       209.0       198.7       (3.8) – 0       0 – 2.8       0 – 5.6  
Jidong
    Minas       240.3       209.0       198.7       (3.8) – 0       0 – 2.8       0 – 5.6  
Huabei
    Minas       240.3       209.0       198.7       (3.8) – 0       0 – 2.8       1.4 – 6.9  
Dagang
    Cinta       232.2       199.3       192.6       (3.8) – 0       0 – 3.0       1.4 – 5.6  
Tarim
    Minas       240.3       209.0       198.7       (26.4) – (22.6 )     (29.4) – (22.6 )     (34.8 )
Tuha
    Tapis       262.2       233.8       203.9       (31.0) – (27.2 )     (27.2) – (25.0 )     (27.2) – (21.5 )

      In 2002, the median prices for our principal grades of crude oil and crude oil produced in our Daqing oil region were RMB 195.0 per barrel and RMB 198.7 per barrel, respectively.

      Increases or decreases in the price of crude oil in China have a significant impact on the revenue from our exploration and production segment. In the year ended December 31, 2002, our average realized selling price for crude oil was RMB 186.1 (US$22.48) per barrel, as compared to RMB 195.4 (US$23.61) per barrel in the year ended December 31, 2001. As a result, the revenue from our exploration and production segment decreased 0.7% from RMB 148,277 million in the year ended December 31, 2001 to RMB 147,308 million (US$17,791 million) in the year ended December 31, 2002. See “Item 4 — Information on the Company — Regulatory Matters — Pricing” for a more detailed discussion of current PRC crude oil pricing regulations.

     Refined Product Prices

      Until June 5, 1998, the State Development Planning Commission, the predecessor of the National Development and Reform Commission, set wholesale and retail prices for our major refined products (gasoline, diesel and kerosene). However, during the first six months of 1998, due to then prevailing market conditions and increased smuggling of refined products, actual wholesale prices in the refined products market were lower than the wholesale prices set by the PRC government. In June 1998, the State Development Planning Commission pegged the prices of refined products of gasoline and diesel to the FOB Singapore trading prices, supplemented by transportation costs, customs duties, insurance charges, taxes and retail margins. Prior to October 2001, the State Development Planning Commission published from time to time retail median gasoline and diesel guidance prices for major cities and provinces. Once published, the retail median prices remained unchanged until either we or Sinopec requested an adjustment and demonstrated that the cumulative change of the FOB Singapore gasoline or diesel trading price from the then applicable retail median guidance price exceeded 5%. Since October 2001, the State Development Planning Commission or the National Development and Reform Commission has adjusted such retail median prices from time to time to reflect the FOB Singapore, Rotterdam and New York trading prices for gasoline and diesel, supplemented by transportation costs and taxes. See “Item 4 — Information on the Company — Regulatory Matters — Pricing” for a more detailed discussion of current PRC refined products pricing regulations.

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      Prior to October 2001, based on the published median gasoline and diesel guidance prices, we and Sinopec set our respective retail prices with an allowable upward or downward adjustment of up to 5% in individual markets. Since October 2001, we and Sinopec have set our retail prices within an 8% floating range of the published median gasoline and diesel guidance prices. We determine the prices of other refined products with reference to the published median guidance prices of gasoline and diesel. Our retail prices may differ from those of Sinopec within a given market. Our average realized selling prices tend to be higher in the western and northern regions of China, where we dominate the market, as compared to our average realized selling prices in the eastern and southern regions, where Sinopec has a stronger presence.

      The following table sets forth the retail median prices for 90(#) gasoline and 0(#) diesel published by the State Development Planning Commission from January 2002 to December 2002 when such adjustments were made.

                 
90(#)
Gasoline 0(#) Diesel


(RMB/ton) (RMB/ton)
January – February 2002
    2,712       2,420  
March 2002
    2,842       2,550  
April 2002
    3,102       2,790  
May – September 2002
    3,342       3,030  
October – December 2002
    3,542       3,220  

     Chemical Product Prices

      We determine and set the prices of all chemical products produced by our chemicals business segment.

     Natural Gas Prices

      Prior to January 2002, our natural gas price was comprised of wellhead price, pipeline transportation tariff and purification fee. Since January 2002, the State Development Planning Commission, the predecessor of the National Development and Reform Commission, has merged the purification fee into the wellhead price to establish a unified natural gas ex-factory price. As a result of the price merger, our natural gas price is comprised of the following two components:

  •  Ex-factory Price. We set our ex-factory price within a 10% floating range of the median ex-factory price published by the National Development and Reform Commission, except for natural gas sold within the PRC government’s natural gas supply plan, which must be sold at prices determined by the National Development and Reform Commission; and
 
  •  Pipeline Transportation Tariff. The National Development and Reform Commission sets the pipeline transportation tariff for natural gas transported by pipelines constructed prior to 1991. For natural gas transported by pipelines constructed after 1991, we prepare a tariff schedule based on our actual cost plus a profit margin and submit it to the National Development and Reform Commission for approval.

      We sell our natural gas at prices which exceed our production and transportation costs.

      The results of operations of these segments will be impacted to the extent that our prices do not vary to reflect increases or decreases in our costs. See “Item 4 — Information on the Company — Regulatory Matters — Pricing” for a further discussion of these pricing controls.

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     Foreign Currency Exposure

      For a discussion of the effect of exchange rate fluctuations on our results of operations, please see “Item 11 — Quantitative and Qualitative Disclosures About Market Risk — Foreign Exchange Rate Risk”.

     Interest Rate Exposure

      For a discussion of the effect of interest rate changes on our results of operations, please see “Item 11 — Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk”.

The Restructuring of the CNPC Group

      Effective as of November 5, 1999, CNPC transferred to us its domestic assets and operations relating to:

  •  the exploration, development and production of crude oil and natural gas;
 
  •  the refining, transportation, storage and marketing of crude oil and petroleum products;
 
  •  the production and sale of chemicals; and
 
  •  the transmission, marketing and sale of natural gas.

      CNPC retained the remaining assets and operations. As part of this restructuring, we have made arrangements with CNPC for the provision to us of certain essential products and services. In addition, we have effected transactions to transfer a portion of the debt obligations of the subsidiaries of our predecessor to CNPC, resulting in a decrease in debt of RMB 30,500 million, primarily long-term debt, and a corresponding increase in owner’s equity as of September 30, 1999.

      In addition, as part of this restructuring and our formation, a valuation of the contributed fixed assets on the asset class level by business segment, excluding oil and gas reserves, was carried out as of June 30, 1999 as required by the applicable PRC regulations. The revaluation was performed in order to determine the fair value of such contributed fixed assets and establish amounts for share capital and capital reserve.

Acquisition of Certain Refined Products Marketing Enterprises from CNPC

      In accordance with an acquisition agreement between CNPC and us dated September 26, 2002, we acquired from CNPC the assets, liabilities and interests related to CNPC’s refined products marketing enterprises consisting primarily of service stations and related facilities for RMB 3,200 million. The acquisition price was determined on the basis of independent valuation and appraisals of the assets and liabilities of these marketing enterprises under applicable rules and regulations promulgated in the PRC. Of the RMB 3,200 million in purchase price, RMB 430 million was paid in cash, RMB 1,124 million was set off against receivables from CNPC, and the remaining balance of RMB 1,646 million was included as payables to CNPC at December 31, 2002.

      Under IFRS, the acquisition is a combination of entities under common control since the CNPC’s refined products marketing enterprises and us are under the common control of CNPC. As a result, we have accounted for the acquisition in a manner similar to a uniting of interests, whereby the assets and liabilities of the marketing enterprises acquired are accounted for at historical cost to CNPC with net liabilities of RMB 2,956 million at the effective date. Our consolidated financial statements as of and for the years ended December 31, 2000 and 2001 included elsewhere in this annual report have been restated to give effect to the acquisition in these periods as if the operations of our company and these marketing enterprises have always been combined in these periods. The difference between RMB 3,200 million paid and the net liabilities transferred from CNPC has been adjusted against equity.

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      The following table sets forth the summarized results of operations for the years ended December 31, 2000 and 2001 and the financial position as at December 31, 2001 for the separate entities and on a consolidated basis:

                           
Marketing
PetroChina enterprises Consolidated



(RMB in millions)
Results of operations of 2000:
                       
 
Revenues
    241,992       16,079       245,279  
 
Net income/(loss)
    55,231       (586 )     54,645  
 
Basic and diluted net income per share
    0.32       0       0.32  
Results of operations of 2001:
                       
 
Revenues
    238,893       12,354       241,320  
 
Net income/(loss)
    46,808       (1,339 )     45,469  
 
Basic and diluted net income per share
    0.27       (0.01 )     0.26  
Financial position at December 31, 2001:
                       
 
Current assets
    86,412       981       86,017  
 
Total assets
    460,874       3,167       462,665  
 
Current liabilities
    88,748       5,595       92,967  
 
Total liabilities
    162,616       5,683       166,923  
 
Net assets/(liabilities)
    293,122       (2,516 )     290,606  

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Operating Results

      The following discussion is based on our historical results of operations. As a result of the factors discussed above, such results of operations may not be indicative of our future operating performance. In addition, our operating results discussed below reflect our restated results of operations to give effect to the acquisition in 2002 of the assets, liabilities and interests related to CNPC’s refined products marketing enterprises in all periods presented as if the operations of our company and these marketing enterprises have always been combined.

      Our income statement for each of the three years ended December 31, 2002 is summarized in the table below.

                                 
Year ended December 31,

2000 2001 2002 2002




RMB RMB RMB US$
(in millions)
Total revenues
    245,279       241,320       244,424       29,520  
Operating expenses
    (159,846 )     (170,181 )     (172,083 )     (20,783 )
     
     
     
     
 
Income from operations
    85,433       71,139       72,341       8,737  
Exchange gain (loss), net
    1,172       250       (316 )     (38 )
Interest expense, net
    (5,695 )     (3,599 )     (3,053 )     (369 )
Income from equity affiliates
    584       341       268       32  
     
     
     
     
 
Income before income taxes
    81,494       68,131       69,240       8,362  
Income taxes
    (27,014 )     (23,066 )     (22,231 )     (2,685 )
(Income) loss applicable to minority interests
    165       404       (99 )     (12 )
     
     
     
     
 
Net income
    54,645       45,469       46,910       5,665  
     
     
     
     
 

      The table below sets forth our revenues by business segment for each of the three years ended December 31, 2002, as well as the percentage changes in revenues for the periods shown.

                                         
2001 2002
vs. vs.
2000 2001 2000 2002 2001





(RMB in millions, except percentages)
Sales and other operating revenues
                                       
Exploration and production
    170,928       148,277       (13.3 )%     147,308       (0.7 )%
Refining and marketing(1)
    164,435 (2)     171,961       4.6 (2)     174,621       1.5  
Chemicals and marketing
    33,364       31,776       (4.8 )     29,661       (6.7 )
Natural gas and pipeline(1)
    7,163 (3)     11,321       58.0 (3)     12,733       12.5  
Other
                             
     
     
     
     
     
 
Total
    375,890       363,335       (3.3 )%     364,323       0.3 %
     
     
     
     
     
 
Less intersegment sales
    (130,611 )     (122,015 )     (6.6 )     (119,899 )     (1.7 )
     
     
     
     
     
 
Consolidated net sales from operations
    245,279       241,320       (1.6 )%     244,424       1.3 %
     
     
     
     
     
 

(1)  Effective January 1, 2001, our results of operations, together with the corresponding assets and liabilities, of certain pipeline operations are reclassified from the refining and marketing segment to the natural gas and pipeline segment to reflect the changes in the manner under which these operations are managed. The results of operations, together with the corresponding assets and liabilities, of these pipeline operations were included in the refining and marketing segment in the segment information for the year ended December 31, 2000.

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(2)  The sales and other operating revenue of our pipeline operations for the year ended December 31, 2000 was RMB 2,506 million (US$303 million). Taking into account the exclusion of the pipeline operations in 2000, the sales and other operating revenue for our refining and marketing segment would have increased 6.2% from RMB 161,929 million for the year ended December 31, 2000 to RMB 171,961 million for the year ended December 31, 2001.
 
(3)  The sales and other operating revenue of our pipeline operations for the year ended December 31, 2000 was RMB 2,506 million (US$303 million). Taking into account the inclusion of the pipeline operations in 2000, the sales and other operating revenue for our natural gas and pipeline segment would have increased 17.1% from RMB 9,669 million for the year ended December 31, 2000 to RMB 11,321 million for the year ended December 31, 2001.

      The table below sets forth our operating income by business segment for each of the three years ended December 31, 2002, as well as the percentage changes in operating income for the periods shown. Other income from operations shown below consists of research and development, business services and infrastructure support to our operating business segments.

                                         
2001 2002
vs. vs.
2000 2001 2000 2002 2001





(RMB in millions, except percentages)
Income (loss) from operations
                                       
Exploration and production
    95,143       76,932       (19.1 )%     72,139       (6.2 )%
Refining and marketing(1)
    (9,068 ) (2)     (3,324 )     63.3 (2)     2,818       184.8  
Chemicals and marketing
    70       (2,374 )     (3,491.4 )     (3,162 )     (33.2 )
Natural gas and pipeline(1)
    14 (3)     722       5,057.1 (3)     1,552       115.0  
Other
    (726 )     (817 )     (12.5 )     (1,006 )     (23.1 )
     
     
     
     
     
 
Total
    85,433       71,139       (16.7 )%     72,341       1.7 %
     
     
     
     
     
 

(1)  Effective January 1, 2001, our results of operations, together with the corresponding assets and liabilities, of certain pipeline operations are reclassified from the refining and marketing segment to the natural gas and pipeline segment to reflect the changes in the manner under which these operations are managed. The results of operations, together with the corresponding assets and liabilities, of these pipeline operations were included in the refining and marketing segment in the segment information for the year ended December 31, 2000.
 
(2)  The income from operations of our pipeline operations for the year ended December 31, 2000 was RMB 29 million (US$4 million). Taking into account the exclusion of the pipeline operations in 2000, the loss from operations for our refining and marketing segment would have decreased 63.5% from RMB 9,097 million for the year ended December 31, 2000 to RMB 3,324 million for the year ended December 31, 2001.
 
(3)  The income from operations of our pipeline operations for the year ended December 31, 2000 was RMB 29 million (US$4 million). Taking into account the inclusion of the pipeline operations in 2000, the income from operations for our natural gas and pipeline segment would have increased 1,579.1% from RMB 43 million for the year ended December 31, 2000 to RMB 722 million for the year ended December 31, 2001.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

  Consolidated Results of Operation

      Total Revenue. Total Revenue increased 1.3% from RMB 241,320 million for the year ended December 31, 2001 to RMB 244,424 million (US$29,520 million) for the year ended December 31, 2002. This increase was due primarily to an increase in sales volume of products such as crude oil, natural gas, gasoline and diesel and an increase in the comprehensive selling price of natural gas,

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which was partially offset by a decrease in our average realized selling prices of crude oil, gasoline and diesel. The sales volume of our crude oil, natural gas, gasoline and diesel increased by 2.6%, 11.1%, 4.6% and 5.1%, respectively, in 2002.

      Operating Expenses. Operating expenses increased 1.1% from RMB 170,181 million for the year ended December 31, 2001 to RMB 172,083 million (US$20,783 million) for the year ended December 31, 2002. This increase was due primarily to increases in exploration expenses of 10.2%, employee compensation costs of 11.2% and depreciation, depletion and amortization of 9.4%. In addition, the increase in operating expenses was also caused by expenses we incurred of RMB 2,121 million in 2002 in connection with the shutting down of certain inefficient manufacturing assets. We did not incur similar expenses in 2001. These operating expense increases were offset in part by a decrease in purchases, services and other expenses of 8.7% and a reduction in various other costs resulting from the effective implementation of our cost reduction measures and our streamlined management.

      Purchases, Services and Other Expenses. Purchases, services and other expenses decreased 8.7% from RMB 78,529 million for the year ended December 31, 2001 to RMB 71,690 million (US$8,658 million) for the year ended December 31, 2002. This decrease was due primarily to a 6.4% decrease in the cost of refined products raw materials as a result of a decline in the price of crude oil and a decrease in the cost of chemicals raw materials due to price declines.

      Employee Compensation Costs. Employee compensation costs increased 11.2% from RMB 14,608 million for the year ended December 31, 2001 to RMB 16,248 million (US$1,962 million) for the year ended December 31, 2002. This increase was due primarily to (i) an increase of RMB 1,021 million in bonuses for meeting or exceeding cost reduction and production targets and (ii) an increase of RMB 119 million in employee compensation costs as a result of increased labor for the expansion of the selling and retailing network for the refining and marketing segment.

      Depreciation, Depletion and Amortization. Depreciation, depletion and amortization increased 9.4% from RMB 33,615 million for the year ended December 31, 2001 to RMB 36,782 million (US$4,443 million) for the year ended December 31, 2002. This increase was due primarily to an increase of RMB 494 million in current depreciation, depletion and amortization expenses relating to the newly acquired assets and an increase of RMB 1,753 million in the impairment provision for inefficient plants and equipment held for use by our chemicals and marketing segment and our refining and marketing segment.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 3.4% from RMB 21,735 million for the year ended December 31, 2001 to RMB 22,474 million (US$2,714 million) for the year ended December 31, 2002. The increase was due primarily to an increase of RMB 691 million in our transportation costs resulting from increased sales volume in refined products and increased selling, general and administrative expenses resulting from an increase in maintenance expenses associated with upgrading of our service stations.

      Expenses Relating to Workforce Reduction and the Shutting Down of Manufacturing Facilities and Units. Expenses relating to workforce reduction and the shutting down of manufacturing facilities and units for the year ended December 31, 2001, consisted only of the work force reduction of RMB 487 million (US$59 million). We did not lay off any employees for the year ended December 31, 2002, but shut down some manufacturing facilities and units of the refining and marketing segment and the chemicals and marketing segment. Consequently, expenses relating to work force reduction and the shutting down of manufacturing facilities and units for the year ended December 31, 2002, consisted only of the costs for shutting down of manufacturing assets of RMB 2,121 million (US$256 million).

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      Taxes Other than Income Taxes. Taxes other than income taxes increased 4.7% from RMB 13,951 million for the year ended December 31, 2001 to RMB 14,613 million (US$1,765 million) for the year ended December 31, 2002. This increase was due primarily to an increase in consumption tax resulting from an increase in the sales volume of gasoline and diesel and an increase in urban construction and education surcharges as a result of increases in VAT and consumption tax in 2002.

      Income From Operations. As a result of the factors discussed above, income from operations increased 1.7% from RMB 71,139 million for the year ended December 31, 2001 to RMB 72,341 million (US$8,737 million) for the year ended December 31, 2002.

      Net Exchange Gain (Loss). Net exchange gain (loss) decreased from a net gain of RMB 250 million for the year ended December 31, 2001 to a net loss of RMB 316 million (US$38 million) for the year ended December 31, 2002. This decrease was due primarily to an increase in exchange rate loss for borrowings in foreign currencies as a result of a relatively large appreciation of foreign exchange rates in 2002, particularly with respect to the Japanese Yen, British Sterling and Euro.

      Net Interest Expense. Net interest expense decreased 15.2% from RMB 3,599 million for the year ended December 31, 2001 to RMB 3,053 million (US$369 million) for the year ended December 31, 2002. This decrease was due primarily to the decline of market interest rates as well as a decrease in the average outstanding balance of debts in 2002.

      Income Before Income Taxes. Income before income taxes increased 1.6% from RMB 68,131 million for the year ended December 31, 2001 to RMB 69,240 million (US$8,362 million) for the year ended December 31, 2002.

      Income Taxes. Income Taxes decreased 3.6% from RMB 23,066 million for the year ended December 31, 2001 to RMB 22,231 million (US$2,685 million) for the year ended December 31, 2002. This decrease was due primarily to the tax reductions of RMB 2,377 million enjoyed by us in 2002 under the preferential tax treatment policy promulgated by the Chinese government in order to encourage development of western China’s economy which, however, was offset in part by an increase of RMB 511 million in expenses other than tax deductible expenses and the tax settlement for previous years.

      Net Income. As a result of the factors discussed above, net income increased 3.2% from RMB 45,469 million for the year ended December 31, 2001 to RMB 46,910 million (US$5,665 million) for the year ended December 31, 2002.

 
   Exploration and Production

      Sales and Other Operating Revenue. Sales and other operating revenue decreased 0.7% from RMB 148,277 million for the year ended December 31, 2001 to RMB 147,308 million (US$17,791 million) for the year ended December 31, 2002. This decrease was due primarily to a decrease in the average realized price of our crude oil from US$23.61 per barrel for the year ended December 31, 2001 to US$22.48 per barrel for the year ended December 31, 2002, which, however, was offset in part by the increase in sales revenue resulting from the inclusion into this segment of the small refineries in Tarim, Changqing and Xinan oil fields or gas fields in 2002.

      Intersegment sales decreased 4.0% from RMB 110,738 million for the year ended December 31, 2001 to RMB 106,266 million (US$12,834 million) for the year ended December 31, 2002. This decrease was due primarily to a 4.5% decrease in the price and a 2.3% decrease in sales volume of crude oil sold to our other business segments.

      Sales of crude oil to Sinopec increased 6.9% from RMB 21,299 million for the year ended December 31, 2001 to RMB 22,778 million (US$2,751 million) for the year ended December 31,

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2002. This increase was due primarily to an increase in the sales volume to Sinopec and was offset in part by the decrease of our average realized selling price of our crude oil sold to Sinopec.

      Operating Expenses. Operating expenses increased 5.4% from RMB 71,345 million for the year ended December 31, 2001 to RMB 75,169 million (US$9,078 million) for the year ended December 31, 2002. This increase was due primarily to (i) increases in purchases, services and other expenses by RMB 1,091 million and exploration expenses by RMB 752 million as a result of the inclusion of the small refineries in Tarim, Changqing and Xinan oil fields or gas fields into this segment for administrative purposes in 2002 and (ii) an increase in employee compensation costs by 13.1% as a result of increases in bonuses for meeting or exceeding cost reduction and production targets.

      Income From Operations. As a result of the factors discussed above, income from operations decreased 6.2% from RMB 76,932 million for the year ended December 31, 2001 to RMB 72,139 million (US$8,712 million) for the year ended December 31, 2002.

 
   Refining and Marketing

      Sales and Other Operating Revenue. Sales and other operating revenue increased 1.5% from RMB 171,961 million for the year ended December 31, 2001 to RMB 174,621 million (US$21,089 million) for the year ended December 31, 2002. This increase was due primarily to an increase in the sales volume of principal refined products such as gasoline by 4.6%, diesel by 5.1% and lubricant oil by 1.0% in 2002, which was offset in part by decreases in the average realized selling prices of gasoline, diesel and kerosene and a decrease in the sales volume of kerosene in 2002.

      Sales revenue from gasoline increased 3.7% from RMB 47,079 million for the year ended December 31, 2001 to RMB 48,834 million (US$5,898 million) for the year ended December 31, 2002. This increase was due primarily to a 4.6% increase in the sales volume of gasoline from 18.2 million tons for the year ended December 31, 2001 to 19.0 million tons for the year ended December 31, 2002. The average realized selling price of gasoline decreased 0.8% from RMB 2,591 per ton for the year ended December 31, 2001 to RMB 2,570 (US$310.39) per ton for the year ended December 31, 2002.

      Sales revenue from diesel increased 3.3% from RMB 76,534 million for the year ended December 31, 2001 to RMB 79,081 million (US$9,551 million) for the year ended December 31, 2002. This increase was due primarily to a 5.1% increase in the sales volume of diesel from 31.6 million tons for the year ended December 31, 2001 to 33.2 million tons for the year ended December 31, 2002. The average realized selling price of diesel decreased 1.7%, from RMB 2,426 per ton in the year ended December 31, 2001 to RMB 2,384 (US$287.92) per ton for the year ended December 31, 2002.

      Sales revenue from kerosene decreased 12.6% from RMB 4,423 million for the year ended December 31, 2001 to RMB 3,864 million (US$467 million) for the year ended December 31, 2002. This decrease was due primarily to a decrease in sales volume of kerosene from 1.93 million tons for the year ended December 31, 2001 to 1.88 million tons for the year ended December 31, 2002. The average realized selling price of kerosene decreased 10.5%, from RMB 2,290 per ton in the year ended December 31, 2001 to RMB 2,050 (US$247.58) per ton for the year ended December 31, 2002.

      Intersegment sales revenue increased 18.4% from RMB 8,436 million for the year ended December 31, 2001 to RMB 9,988 million (US$1,206 million) for the year ended December 31, 2002. This increase was due primarily to a 43.2% increase in the sales volume of naphtha and liquefied gas to our other segments in 2002.

      Operating Expenses. Operating expenses decreased 2.0% from RMB 175,285 million for the year ended December 31, 2001 to RMB 171,803 million (US$20,749 million) for the year ended

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December 31, 2002. This decrease was due primarily to (i) the decline of raw material purchase prices, (ii) a 1.5% decrease in processing volume as a result of the exclusion from this segment of the small refineries in Tarim, Changqing and Xinan oil fields or gas fields for administrative purposes in 2002 and (iii) the decline of processing losses and maintenance expenses arising from management improvements in production, operations and equipment management as well as the active implementation of technical renovations and energy-savings measures for installations. The effect of these declines and decreases on operating expenses was partially offset by an increase in 2002 of RMB 369 million (US$45 million) in the impairment provision for inefficient plants and equipment held for use by our refining and marketing segment.

      Income (Loss) From Operations. As a result of the factors discussed above, income (loss) from operations increased from a loss of RMB 3,324 million for the year ended December 31, 2001 to a gain of RMB 2,818 million (US$340 million) for the year ended December 31, 2002.

 
   Chemicals and Marketing

      Sales and Other Operating Revenue. Sales and other operating revenue decreased 6.7% from RMB 31,776 million for the year ended December 31, 2001 to RMB 29,661 million (US$3,582 million) for the year ended December 31, 2002. This decrease was due primarily to a 12.7% decrease in the sales volume of chemical products.

      Operating Expenses. Operating expenses decreased 3.9% from RMB 34,150 million for the year ended December 31, 2001 to RMB 32,823 million (US$3,964 million) for the year ended December 31, 2002. This decrease was due primarily to (i) an 11.9% decrease in purchases, services and other expenses as a result of the decrease in sales volume, (ii) a reduction of costs resulting from the effective implementation of various cost reduction and efficiency improvement measures as well as streamlined management and (iii) a 21.9% decrease in selling and administrative expenses as a result of a decrease in the provision for impairment of receivables in 2002 as compared to 2001. The effect of such decreases and reduction on operating expenses was partially offset by an increase in 2002 of RMB 1,384 million (US$167 million) in the impairment provision for inefficient plants and equipment held for use by our chemicals and marketing segment.

      Income (Loss) From Operations. As a result of the factors discussed above, loss from operations increased 33.2% from RMB 2,374 million for the year ended December 31, 2001 to RMB 3,162 million (US$382 million) for the year ended December 31, 2002.

 
   Natural Gas and Pipeline

      Sales and Other Operating Revenue. Sales and other operating revenue increased 12.5% from RMB 11,321 million for the year ended December 31, 2001 to RMB 12,733 million (US$1,538 million) for the year ended December 31, 2002. This increase was due primarily to increases in the price at which we sold natural gas and a 10.0% increase in the sales volume of our natural gas as a result of our efforts in optimizing our natural gas sales structure in 2002.

      Operating Expenses. Operating expenses increased 5.5% from RMB 10,599 million for the year ended December 31, 2001 to RMB 11,181 million (US$1,350 million) for the year ended December 31, 2002. This increase was due primarily to an 8.4% increase in the costs of purchasing natural gas resulting from an increase in the sales volume of natural gas, which was partially offset by a decrease of 1.5% in the price at which we purchased natural gas from our exploration and production segment.

      Income From Operations. As a result of the factors discussed above, income from operations increased 115.0% from RMB 722 million for the year ended December 31, 2001 to RMB 1,552 million (US$187 million) for the year ended December 31, 2002.

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Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

  Consolidated Results of Operation

      Total Revenue. Total revenue decreased 1.6% from RMB 245,279 million for the year ended December 31, 2000 to RMB 241,320 million for the year ended December 31, 2001. This decrease reflected the decrease in revenues in our exploration and production segment and chemicals and marketing segment as a result of a decrease in the sales volume and decline in the average realized selling price of crude oil, and a decrease in the selling prices of chemical products.

      Operating Expenses. Operating expenses increased 6.5% from RMB 159,846 million for the year ended December 31, 2000 to RMB 170,181 million for the year ended December 31, 2001. This increase was due primarily to the increases in purchases, services and other expenses, selling, general and administrative expenses as well as taxes other than income taxes.

      Purchases, Services and Other Expenses. Purchases, services and other expenses increased 22.2% from RMB 64,251 million for the year ended December 31, 2000 to RMB 78,529 million for the year ended December 31, 2001. This increase was due primarily to an increase in the purchase of direct materials as a result of an increase in the sales volume of refined products.

      Employee Compensation Costs. Employee compensation costs decreased 3.4% from RMB 15,129 million for the year ended December 31, 2000 to RMB 14,608 million for the year ended December 31, 2001. This decrease was due primarily to the reduction in the number of employees.

      Depreciation, Depletion and Amortization. Depreciation, depletion and amortization decreased 1.7% from RMB 34,209 million for the year ended December 31, 2000 to RMB 33,615 million for the year ended December 31, 2001. This decrease was due primarily to the fact that our refining enterprises disposed of a number of installations in 2000, resulting in a decrease in the base value of the provision for depreciation in 2001.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 23.3% from RMB 17,621 million for the year ended December 31, 2000 to RMB 21,735 million for the year ended December 31, 2001. This increase was due primarily to the higher transportation costs resulting from an increased sales volume in the refining and marketing segment, the expansion and extension of the sales and distribution network, and the expansion of our markets and changes in the marketing methods and structures of the chemicals and marketing segment.

      Expenses Relating to Workforce Reduction and the Shutting Down of Manufacturing Facilities and Units. Expenses relating to our workforce reduction and the shutting down of manufacturing facilities and units decreased 92.6%. For the year ended December 31, 2000, the expenses relating to our workforce reduction and the shutting down of certain inefficient manufacturing facilities and units were RMB 4,215 million and RMB 2,364 million, respectively. We did not incur any costs for the shutting down of manufacturing facilities and units in 2001, with the costs for this period comprising only workforce reduction expenses of RMB 487 million.

      Taxes Other than Income Taxes. Taxes other than income taxes increased 5.2% from RMB 13,258 million for the year ended December 31, 2000 to RMB 13,951 million for the year ended December 31, 2001. This increase was due primarily to an increase in consumption tax and other relevant taxes resulting from an increased sales volume in the refining and marketing segment.

      Income From Operations. As a result of the factors discussed above, income from operations decreased 16.7% from RMB 85,433 million for the year ended December 31, 2000 to RMB 71,139 million for the year ended December 31, 2001.

      Net Exchange Gain. Net exchange gain decreased 78.7% from RMB 1,172 million for the year ended December 31, 2000 to RMB 250 million for the year ended December 31, 2001.

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This decrease was due primarily to a substantial decrease in the balance of loans denominated in currencies which had been affected to a greater extent by fluctuations in exchange rates, such as the Japanese Yen and Euro.

      Net Interest Expense. Net interest expense decreased 36.8% from RMB 5,695 million for the year ended December 31, 2000 to RMB 3,599 million for the year ended December 31, 2001. This decrease was due primarily to our reinforcement of the centralization of capital management and a decrease in the average balance of debts as well as a decrease in the average interest rate.

      Income Before Income Taxes. Income before income taxes decreased 16.4% from RMB 81,494 million for the year ended December 31, 2000 to RMB 68,131 million for the year ended December 31, 2001.

      Income Taxes. Income taxes decreased 14.6% from RMB 27,014 million for the year ended December 31, 2000 to RMB 23,066 million for the year ended December 31, 2001 due primarily to an decrease in income before income taxes.

      Net Income. As a result of the factors discussed above, net income decreased 16.8% from RMB 54,645 million for the year ended December 31, 2000 to RMB 45,469 million for the year ended December 31, 2001.

  Exploration and Production

      Sales and Other Operating Revenue. Sales and other operating revenue decreased 13.3% from RMB 170,928 million for the year ended December 31, 2000 to RMB 148,277 million for the year ended December 31, 2001. This decrease was due primarily to a decrease in our sales volume of crude oil (not including condensate) and a decline in its average realized selling price. As our oil prices are directly linked to the international oil prices, the decline of international oil prices has resulted in a decrease of 13.2% in the average realized selling price of our crude oil from US$27.21 per barrel as at December 31, 2000 to US$23.61 per barrel as at December 31, 2001.

      Intersegment sales decreased 8.7% from RMB 121,265 million for the year ended December 31, 2000 to RMB 110,738 million for the year ended December 31, 2001. This decrease was due primarily to a decline in the price at which crude oil was sold to other business segments in 2001 as compared with 2000.

      Sales of crude oil to Sinopec decreased 32.7% from RMB 31,637 million for the year ended December 31, 2000 to RMB 21,299 million for the year ended December 31, 2001, primarily due to a decrease in the sales volume and the average realized selling price of crude oil sold to Sinopec.

      Operating Expenses. Operating expenses decreased 5.9% from RMB 75,785 million for the year ended December 31, 2000 to RMB 71,345 million for the year ended December 31, 2001. This decrease was due primarily to our continued implementation of cost reduction measures resulting in decreases in purchases, services and other expenses and decreases in expenses relating to workforce reduction and exploration expenses.

      Income From Operations. As a result of the factors discussed above, income from operations decreased 19.1% from RMB 95,143 million for the year ended December 31, 2000 to RMB 76,932 million for the year ended December 31, 2001.

  Refining and Marketing

      Sales and Other Operating Revenue. Sales and other operating revenue increased 4.6% from RMB 164,435 million for the year ended December 31, 2000 to RMB 171,961 million for the year ended December 31, 2001. The increase was due primarily to an increase in the sales volume of principal refined products such as gasoline and diesel. The sales and other operating revenue of our pipeline transmission business for the year ended December 31, 2000 was RMB 2,506 million. Taking into account the exclusion of the pipeline transmission business in 2000, the sales and other

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operating revenue for our refining and marketing segment would have increased 6.2% from RMB 161,929 million for the year ended December 31, 2000 to RMB 171,961 million for the year ended December 31, 2001.

      Sales revenue from gasoline increased 7.0% from RMB 43,984 million for the year ended December 31, 2000 to RMB 47,079 million for the year ended December 31, 2001. This increase was due primarily to an increase in the sales volume of gasoline. The average realized selling price of gasoline decreased 7.8%, from RMB 2,811 per ton for the year ended December 31, 2000 to RMB 2,591 per ton for the year ended December 31, 2001.

      Sales revenue from diesel increased 13.7% from RMB 67,283 million for the year ended December 31, 2000 to RMB 76,534 million for the year ended December 31, 2001. This increase was due primarily to an increase in the sales volume. The average realized selling price of diesel decreased 3.9%, from RMB 2,524 per ton for the year ended December 31, 2000 to RMB 2,426 per ton for the year ended December 31, 2001.

      Sales revenue from kerosene decreased 18.8% from RMB 5,447 million for the year ended December 31, 2000 to RMB 4,423 million for the year ended December 31, 2001. This decrease was due primarily to a decrease in the price and sales volume of kerosene.

      Intersegment sales increased 3.2% from RMB 8,176 million for the year ended December 31, 2000 to RMB 8,436 million for the year ended December 31, 2001. This increase was due primarily to an increase in the sales volume to other segments.

      Sales of refined products to Sinopec decreased 4.1% from RMB 4,950 million for the year ended December 31, 2000 to RMB 4,747 million for the year ended December 31, 2001. This decrease was due primarily to a decrease in the sales volume of diesel and the average selling price of kerosene sold to Sinopec. We expect sales to Sinopec to continue to decline in future periods as a percentage of our total sales of refined products as we continue to expand our marketing network.

      Operating Expenses. Operating expenses increased 1.0% from RMB 173,503 million for the year ended December 31, 2000 to RMB 175,285 million for the year ended December 31, 2001. This increase was due primarily to an increase in the output and sales volume of refined products. The operating expenses of our pipeline transmission business for the year ended December 31, 2000 were RMB 2,477 million. Taking into account the exclusion of the pipeline transmission business in 2000, the operating expenses for our refining and marketing segment would have increased 2.5% from RMB 171,025 million for the year ended December 31, 2000 to RMB 175,285 million for the year ended December 31, 2001.

      Income (Loss) From Operations. As a result of the factors discussed above, loss from operations decreased 63.3% from RMB 9,068 million for the year ended December 31, 2000 to RMB 3,324 million for the year ended December 31, 2001.

  Chemicals and Marketing

      Sales and Other Operating Revenue. Sales and other operating revenue decreased 4.8% from RMB 33,364 million for the year ended December 31, 2000 to RMB 31,776 million for the year ended December 31, 2001. This decrease was due primarily to a decrease in the prices of principal chemical products as a result of the downturn in the market of chemical products, despite an increase in the sales volume of chemical products.

      Operating Expenses. Operating expenses increased 2.6% from RMB 33,294 million for the year ended December 31, 2000 to RMB 34,150 million for the year ended December 31, 2001. This increase resulted primarily from the increase in purchases, services and other expenses due to an increase in the sales volume and inventory-related changes. Operating expenses also increased due to higher sales and administrative expenses as a result of increased losses related to bad debts.

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      Income From Operations. As a result of the factors discussed above, we recorded a loss of RMB 2,374 million for the year ended December 31, 2001, as compared to a gain of RMB 70 million for the year ended December 31, 2000.

  Natural Gas and Pipeline

      Sales and Other Operating Revenue. Sales and other operating revenue increased 58.0% from RMB 7,163 million for the year ended December 31, 2000 to RMB 11,321 million for the year ended December 31, 2001. This increase was due primarily to an increase in the selling price and sales volume of natural gas and the transfer of pipeline transmission business from the refining and marketing segment to the natural gas and pipeline segment. The sales volume of natural gas increased 13.1% from 391.0 billion cubic feet in 2000 to 442.2 billion cubic feet in 2001. The sales and other operating revenue of our pipeline transmission business for the year ended December 31, 2000 was RMB 2,506 million. Taking into account the inclusion of the pipeline transmission business in 2000, the sales and other operating revenue for our natural gas and pipeline segment would have increased 17.1% from RMB 9,669 million for the year ended December 31, 2000 to RMB 11,321 million for the year ended December 31, 2001.

      Operating Expenses. Operating expenses increased 48.3% from RMB 7,149 million for the year ended December 31, 2000 to RMB 10,599 million for the year ended December 31, 2001. This increase was due primarily to an increase in the sales volume of natural gas resulting in an increase in natural gas purchased and an increase in the transmission costs for crude oil caused by the transfer of the pipeline transmission business from the refining and marketing segment. The operating expenses of our pipeline transmission business for the year ended December 31, 2000 were RMB 2,477 million. Taking into account the exclusion of the pipeline transmission business in 2000, the operating expenses for our natural gas and pipeline segment would have increased 10.1% from RMB 9,626 million for the year ended December 31, 2000 to RMB 10,599 million for the year ended December 31, 2001.

      Income From Operations. As a result of the factors discussed above, income from operations increased 5,057.1% from RMB 14 million for the year ended December 31, 2000 to RMB 722 million for the year ended December 31, 2001.

Liquidity and Capital Resources

      Our primary sources of funding are cash provided by operating activities, short-term and long-term borrowings, cash and cash equivalents. Historically, our primary uses of funds were for capital expenditures, repayment of short-term and long-term borrowings and distributions of dividends to shareholders. Our payments to CNPC are limited to dividends and payments for services provided to us by CNPC. In the year ended December 31, 2002, we distributed as dividends 45% of our reported net income. We expect that we will continue to distribute as dividends approximately 40% to 50% of our reported net income for all years. See “Item 8 Financial Information — Dividend Policy” for a discussion of factors which may affect the determination by our board of directors of the appropriate level of dividends.

      In accordance with the restructuring agreement we entered into with CNPC in connection with the restructuring of the CNPC group, we distributed RMB 2,640 million to CNPC in June 2000 in respect of our net income during the period from October 1, 1999 to November 4, 1999. We do not believe that this distribution had a material impact on our liquidity or our ability to fund planned capital expenditures. This distribution was made in respect of a period prior to our formation and was therefore not determined in accordance with our dividend policy as described in “Item 8 — Financial Information — Dividend Policy”.

      Our shareholders approved at our shareholders’ meeting held on May 28, 2003 the proposed issuance of our corporate bonds in the principal amount of up to RMB 5,500 million to PRC citizens

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and enterprises. We intend to use the proceeds received from the issuance of these corporate bonds for various crude oil and natural gas exploration projects in a number of our oil and gas regions as well as for upgrading refining facilities in Daqing Petrochemical and constructing the natural gas pipeline from Zhong County to Wuhan city. We have obtained approval from the PRC government in connection with the issuance of a portion of these corporate bonds. However, the issuance of these corporate bonds will be subject to market conditions. We cannot assure you that we will complete the issuance of these corporate bonds in accordance with the terms approved by our shareholders or at all.

      In the year ended December 31, 2001, we reduced our workforce by 19,800 employees. We had provided for expenses in the aggregate amount of RMB 1,035 million in the year ended December 31, 2000 for the reduction of 13,900 employees and incurred expenses in the aggregate amount of RMB 487 million in the year ended December 31, 2001 in connection with the reduction of additional 6,020 employees. We believe that our workforce reduction will have a positive effect on our financial condition and results of operations in the long run.

      We finance a significant portion of our business operations with short-term borrowings, including short-term debt obtained from the PRC State-owned banks. As of December 31, 2002, short-term debt comprised approximately 5% of our capital employed as compared to approximately 7% as of December 31, 2001. Our ability to obtain adequate financing to satisfy our capital expenditure and debt servicing requirements may be limited by our financial condition and our results of operations and the liquidity of international and domestic capital markets. Prior to accessing international capital markets, we must obtain approval from various PRC government authorities. In general, we must obtain PRC government approval for any project involving significant capital investment for our refining and marketing, chemicals and marketing and natural gas and pipeline segments. For a more detailed discussion of factors which may affect our ability to satisfy our financing requirements, see “Item 3 — Key Information — Risk Factors”.

      We plan to fund the capital and related expenditures described in this annual report principally through cash provided by operating activities, short-term and long-term debt and cash and cash equivalents. Net cash provided by operating activities in the year ended December 31, 2002 was RMB 98,341 million. As of December 31, 2002, we had cash and cash equivalents of RMB 9,977 million. While each of the projects described in this annual report for which significant capital expenditures will be required is important to our future development, we do not believe that the failure to implement any one of these projects would have a material adverse impact on our financial condition or results of operations. If the price of crude oil undergoes a steep decline in the future, it is likely that we would delay or reduce the scale of the capital expenditures for our exploration and development segment.

      We currently do not have any outstanding options, warrants or other rights for any persons to require us to issue any common stock at a price below its market value. We do not currently intend to issue any such rights or to otherwise issue any common stock for a price below its market value.

      In addition, we did not have for the year ended December 31, 2002, and do not currently have, any transactions, arrangements and other relationships with unconsolidated entities or other persons that are reasonably likely to affect materially liquidity or the availability of or requirements for our capital resources.

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      The table below sets forth our cash flows for each of the three years ended December 31, 2000, 2001 and 2002 and our cash equivalents at the end of each period.

                         
Year ended December 31,

2000 2001 2002



(RMB in millions)
Net cash provided by operating activities
    103,309       84,439       98,341  
Net cash used for investing activities
    (60,126 )     (61,491 )     (71,662 )
Net cash provided by (used for) financing activities
    (43,188 )     (29,906 )     (27,829 )
Cash and cash equivalents at the end of period
    18,085       11,127       9,977  

      Our cash and cash equivalents decreased by RMB 1,150 million from RMB 11,127 million as of December 31, 2001 to RMB 9,977 million (US$1,205 million) as of December 31, 2002, representing a 10.3% decrease over 2001.

Cash Provided by Operating Activities

      Our net cash provided by operating activities increased 16.5% from RMB 84,439 million for the year ended December 31, 2001 to RMB 98,341 million (US$11,877 million) for the year ended December 31, 2002. This increase was due primarily to the increase in income from operations and a significant amount of cash inflow to working capital resulting from a shortened collection period of receivables imposed by us.

      We had a working capital deficit of RMB 6,950 million as of December 31, 2001 and RMB 14,189 million (US$1,714 million) as of December 31, 2002. The increase in our working capital deficit was primarily because the reduction rate of our current assets was higher than the reduction rate of our current liabilities. As part of our efforts to increase the collection of receivables, accounts receivables and other receivables were reduced significantly, thereby reducing our current assets. The reduction of current liabilities was due primarily to (i) our continuous efforts to strengthen the centralized management of funds and debts and (ii) a reduction of the current liabilities by repaying a portion of short-term borrowings.

      We have continued to implement our centralized cash management system. This system has the following principal components:

  •  requiring our subsidiaries and branches to remit their sales revenues to bank accounts designated by our headquarters;
 
  •  utilizing excess bank deposits to reduce bank borrowings; and
 
  •  centralizing and simplifying internal clearing and settlement procedures.

      The implementation of this centralized cash management system has maintained our short receivable collection cycle.

      Our notes and other receivables include notes receivable from customers. Other receivables represent advances to employees, non-trade related receivables from other companies, and receivables from government agencies. Allowance for doubtful accounts were primarily related to other receivables which we estimated to be uncollectible. Our notes receivable do not include past due customer amounts and, as a majority portion of our notes receivable are approved by banks, we do not have special arrangements with respect to extended payment terms on notes receivable.

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Cash Provided by (Used for) Financing Activities

      Our net borrowings as of December 31, 2000, 2001 and 2002 were as follows:

                             
December 31,

2000 2001 2002



(RMB in millions)
Short-term debt (including current portion of long-term debt)
    41,514       25,323       20,633  
Long-term debt
    53,412       65,546       60,655  
     
     
     
 
 
Total debt
    94,926       90,869       81,288  
Less:
                       
 
Cash and cash equivalents
    18,085       11,127       9,977  
 
Time deposits with term exceeding three months
          3,253       2,612  
 
Receivables under resale agreements
    5,815       11,505       9,786  
     
     
     
 
   
Net debt
    71,026       64,984       58,913  
     
     
     
 

      See Note 20 to our consolidated financial statements for information regarding the maturity profile of debt, currency and interest rate structure.

      The debts which were guaranteed by CNPC amounted to RMB 17,712 million, RMB 1,697 million and RMB 939 million for the three years ended December 31, 2000, 2001 and 2002, respectively. As of December 31, 2000, we had repaid all short-term debts guaranteed by CNPC. CNPC and ourselves have undertaken to the Hong Kong Stock Exchange that we will continue to, on a best endeavor basis, approach each lender with respect to these guaranteed debts with a view toward obtaining the unconditional release of such guarantees.

      Of the total debts outstanding as of December 31, 2002, approximately 29.6% were fixed-rate loans and 70.4% were floating-rate loans. Of the total debts outstanding as of December 31, 2002, approximately 81.0% were denominated in Renminbi, approximately 16.0% were denominated in the U.S. dollar and approximately 3.0% were denominated in other major foreign currencies.

      The amount of short-term debts owed to related parties as of December 31, 2000, 2001 and 2002 were RMB 14,269 million, RMB 1,268 million and RMB 570 million, respectively. The amount of long-term debts owed to related parties as of December 31, 2000, 2001 and 2002 were RMB 9,652 million, RMB 20,753 and RMB 24,132 million, respectively.

      Our debts included short-term and long-term debts owed to China Petroleum Finance Company Limited of RMB 23,896 million, RMB 22,021 million and RMB 24,702 million as of December 31, 2000, 2001 and 2002, respectively. These debts were unsecured with interest bearing at below the prime rate as published by the People’s Bank of China. We also maintain a significant portion of our deposits at China Petroleum Finance Company Limited.

      Our net cash used for financing activities for the year ended December 31, 2002 decreased 7.0% over the year ended December 31, 2001. This decrease resulted primarily from the following:

  •  an increase in new short-term loans leading to an increase of RMB 3,779 million in cash inflow;
 
  •  a decrease in the repayment of short-term loans leading to a decrease of RMB 1,852 million in cash outflow;
 
  •  a decrease in the distribution of dividends leading to a decrease of RMB 9,049 million in cash outflow;

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      This decrease was offset by the following:

  •  an increase in the repayment of long-term loans leading to an increase of RMB 252 million in cash outflow;
 
  •  a decrease in new long-term loans leading to a decrease of RMB 11,370 million in cash inflow;
 
  •  a sum of RMB 430 million cash payment made in 2002 as part of the purchase price for the acquisition of refined products marketing enterprises from CNPC leading to an increase of RMB 430 million in cash outflow.

      Our net cash used for financing activities for the year ended December 31, 2001 decreased 30.8% over the year ended December 31, 2000. This decrease resulted primarily from the following:

  •  a decrease in the repayment of long-term loans, leading to a decrease of RMB 71,779 million in cash outflow;
 
  •  a distribution of RMB 2,640 million was made to CNPC in 2000 whereas no such distribution was made in 2001; and
 
  •  a decrease in the repayment of short-term loans, leading to a decrease of RMB 1,985 million in cash outflow.

      This decrease was offset by the following:

  •  a decrease in new short-term and long-term loans, leading to a decrease of RMB 26,152 million in cash inflow;
 
  •  new shares were issued in 2000 whereas no new shares were issued in 2001, leading to a decrease of RMB 20,336 million in cash inflow in the year ended December 31, 2001; and
 
  •  an increase in the distribution of dividends leading to an increase of RMB 16,318 million in cash outflow.

      As at December 31, 2002, our loans of RMB 398 million were secured loans (including financing leases and bank loans), of which RMB 276 million in banks loans were secured by our plants and equipment in the aggregate value of RMB 426 million. We consider financing leases as secured debts. As at December 31, 2002, the debts incurred by us by way of financing leases amounted to RMB 122 million. The net book value of the properties, plant and equipment under financing leases was RMB 399 million.

      Our debt to equity ratio(calculated by dividing interest-bearing debts by the aggregate of interest-bearing debts and shareholder’s equity) as of December 31, 2002 was 20.4%, as compared to 23.8% as of December 31, 2001.

Long-Term Contractual Obligations and Other Commercial Commitments and Payment Obligations

      The tables below set forth certain information in connection with our long-term contractual obligations and other commercial commitments outstanding at December 31, 2002.

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Payment due by period

Less than 1-3 3-5 After
Contractual obligations Total 1 year years years 5 years






(RMB in millions)
Long-term debt
    66,742       6,143       35,863       15,635       9,101  
Capital lease obligations
    122       66       56              
Operating leases
    98,099       2,403       4,520       4,494       86,682  
Capital commitments
    3,276       3,276       0       0       0  
     
     
     
     
     
 
Total contractual cash obligations
    168,239       11,888       40,439       20,129       95,783  
     
     
     
     
     
 
                                         
Amount of commitment expiration per period
Total
Other commercial amounts Less than 1-3 3-5 Over
commitments committed 1 year years years 5 years






(RMB in millions)
Lines of credit
    60,200       60,200       0       0       0  
Standby letters of credit
    128       125       3       0       0  
Guarantees
    926       267       586       32       41  
     
     
     
     
     
 
Total commercial commitments
    61,254       60,592       589       32       41  
     
     
     
     
     
 

      The table below sets forth the annual payments we are obligated to make with respect to our exploration and production licenses to the Ministry of Land and Resources.

         
Year Annual payment


(RMB in millions)
2003
    382  
2004
    515  
2005
    618  
2006
    681  
2007 and thereafter
    840  

Capital Expenditures and Investments

      Our net cash used for investing activities includes capital expenditures and investments, offset by proceeds from the sale of assets and dividends received. The table below sets forth our capital expenditures and investments (including non dry hole exploration expenses) by business segment for each of the years ended December 31, 2000, 2001 and 2002 as well as those anticipated for the year ended December 31, 2003. Actual capital expenditures and investments for periods after January 1, 2003 may differ materially from the amounts indicated below.

                                                                   
2003
2000 2001 2002 anticipated




(RMB in (RMB in (RMB in (RMB in
millions) % millions) % millions) % millions) %
Exploration and production
    42,968       66.6       45,115       68.9       50,646       64.7       49,100       60.0  
Refining and marketing
    13,595       21.1       11,416       17.4       11,327       14.5       9,463       11.6  
Chemicals and marketing
    4,104       6.4       4,062       6.2       3,175       4.1       5,737       7.0  
Natural gas and pipeline
    3,214       5.0       4,557       7.0       13,013       16.6       17,000       20.7  
Corporate and other
    563       0.9       321       0.5       133       0.2       600       0.7  
     
     
     
     
     
     
     
     
 
 
Total
    64,444       100.0       65,471       100.0       78,294       100.0       81,900       100.0  
     
     
     
     
     
     
     
     
 

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      Our capital expenditures and investments increased 19.6% from RMB 65,471 million for the year ended December 31, 2001 to RMB 78,294 million (US$9,456 million) for the year ended December 31, 2002. This increase was due primarily to an increase of RMB 7,985 million in capital expenditure for our West to East natural gas pipeline project, the construction of which has commenced, an increase of RMB 1,952 million in capital expenditure for expanding our overseas oil exploration and development business and an increase in capital expenditure for our investments in domestic exploration of oil and gas. Taking into account the exclusion of the investments relating to the non dry hole exploration expenses, our capital expenditures for the years ended 2000, 2001 and 2002 would have been RMB 60,130 million, RMB 61,549 million and RMB 73,726 million (US$8,904 million), respectively.

      As of December 31, 2002, the capital expenditures contracted for at the balance sheet date but not recognized in our consolidated financial statements were RMB 3,276 million (US$396 million).

      On July 4, 2002, we entered into a Joint Venture Framework Agreement with a group of international energy companies, or the International Consortium, to form a pipeline contractual joint venture for the development, construction and operation of the West to East natural gas pipelines.

      The International Consortium includes six international energy companies, including Shell International Gas Limited, or Shell, OAO Gazprom, or Gazprom, and ExxonMobil China Gas Pipeline Limited, or ExxonMobil. Shell, Gazprom and ExxonMobil lead the International Consortium and will hold equal interest in the pipeline contractual joint venture.

      We, the International Consortium and Sinopec will hold 50%, 45% and 5%, respectively, of the equity interests in the pipeline contractual joint venture. The term of the cooperation for the West to East natural gas pipeline project is 45 years.

      We expect that a total amount of RMB 27,300 million will be required for the development and production of natural gas fields to provide natural gas to the West to East gas pipelines for 45 years. We and the International Consortium will be responsible for financing the development and production of natural gas fields based on our respective interests in each of the upstream projects. We anticipate that the pipeline joint venture will require a total investment of approximately RMB 43,500 million, 35% of which is expected to be provided by us, Sinopec and the International Consortium in the form of equity capital in proportion to our respective interests in the pipeline joint venture, and 65% of which is expected to be provided by way of debt financing. Our equity investment in the pipeline joint venture is estimated at approximately RMB 7,600 million. At present, the total amount of investment in a sales joint venture to be established in connection with the West to East natural gas pipeline project has not yet been determined.

      Our expected total equity investment in the upstream projects and the pipeline contractual joint venture is approximately RMB 22,600 million.

      We believe that the West to East natural gas pipeline project is strategically important to us in terms of enhancing our corporate value, economic efficiency and competitiveness.

  Exploration & Production

      A majority of our capital expenditures and investments relate to our exploration and production segment. Our capital expenditures and investments for the year ended December 31, 2002 totaled RMB 50,646 million (US$6,117 million), including RMB 10,704 million for exploration activities and RMB 35,558 million for development activities. Our capital expenditures and investments for the year ended December 31, 2001, totaled RMB 45,115 million, including RMB 10,146 million for exploration activities and RMB 29,444 million for development activities. This increase in our capital expenditures from the year ended December 31, 2001 to the year ended December 31, 2002 was due primarily to increases in capital expenditures for expanding our overseas exploration and development business and for upstream development projects in relation to the West to East natural gas pipeline project and increases in expenses for development activities resulting from an appropriate increase in the

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crude oil production capacity in light of higher oil prices. Taking into account the exclusion of the investments relating to the non-dry hole exploration expenses, the capital expenditures of our exploration and production segment for the years ended December 31, 2000, 2001 and 2002 would have been RMB 38,654 million, RMB 41,193 million and RMB 46,078 million (US$5,565 million), respectively.

      Our anticipated capital expenditures and investments for our exploration and production segment for the year ended December 31, 2003 amount to RMB 49,100 million. Approximately RMB 12,429 million is expected to be used for exploration activities and approximately RMB 34,371 million for development activities. We plan to focus our natural gas exploration efforts in the Tarim basin and our crude oil exploration efforts in the Erdos, Junggar and Songliao basins.

  Refining and Marketing

      Our capital expenditures and investments for our refining and marketing segment for each of the three years ended December 31, 2000, 2001 and 2002 were RMB 13,595 million, RMB 11,416 million and RMB 11,327 million (US$1,368 million), respectively. The capital expenditures for our refining and marketing segment for the year ended December 31, 2002 were basically maintained at the same level as the capital expenditures for our refining and marketing segment for the year ended December 31, 2001.

      Our anticipated capital expenditures and investments for our refining and marketing segment for the year ended December 31, 2003 amount to RMB 9,463 million, which include:

  •  approximately RMB 4,800 million for the construction and expansion of refining facilities; and
 
  •  approximately RMB 4,663 million for the construction of service stations and storage facilities.

  Chemicals and Marketing

      Our capital expenditures and investments for our chemicals and marketing segment for each of the three years ended December 31, 2000, 2001 and 2002 were RMB 4,104 million, RMB 4,062 million and RMB 3,175 million (US$383 million), respectively. In the five years ended December 31, 2001, we have significantly decreased our capital expenditures and investments in our chemicals and marketing segment as we moved to a more rigorous return-based evaluation system for our capital expenditures and investments, which led to a stricter control over and a decrease in capital expenditure for the chemicals and marketing segment.

      Our anticipated capital expenditures and investments for our chemicals and marketing segment for the year ended December 31, 2003 amount to RMB 5,737 million, which include the capital expenditures and investments for expanding the capacity and transforming Daqing Petrochemical’s ethylene installations.

  Natural Gas and Pipeline

      Our capital expenditures and investments for our natural gas and pipeline segment for each of the three years ended December 31, 2000, 2001 and 2002 were RMB 3,214 million, RMB 4,557 million and RMB 13,013 million (US$1,572 million). The increase in our capital expenditures in this segment from the year ended December 31, 2000 to the year ended December 31, 2001 was due primarily to an increase in capital expenditures resulting from the commencement of the experimental phase of the West to East natural gas pipeline project.

      Our anticipated capital expenditures and investments for our natural gas and pipeline segment for the year ended December 31, 2003 amount to RMB 17,000 million (US$2,053 million). Of this amount, approximately RMB 14,000 million is expected to be invested in the West to East natural gas pipeline project and RMB 1,600 million for the Zhong County to Wuhan and the second Shaanxi-Beijing natural gas pipelines. We currently expect to invest approximately RMB 900 million

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in natural gas storage infrastructure projects and other natural gas pipelines and approximately RMB 500 million in the pipelines for the transmission of crude oil and refined products. See “Item 4 — Information on the Company — Natural Gas and Pipeline — Expansion of Our Natural Gas Transmission and Marketing Business” for a more detailed discussion of the expansion plans of our natural gas segment.

  Corporate and Other

      Our non-segment-specific capital expenditures and investments for each of the three years ended December 31, 2000, 2001 and 2002 were RMB 563 million and RMB 321 million and RMB 133 million (US$16 million), respectively. Our non segment-specific capital expenditures and investments related primarily to purchase of non-segment-specific equipment and research and development activities.

      Our anticipated non-segment-specific capital expenditures and investments for the year ended December 31, 2002 amount to RMB 600 million. These planned capital expenditures and investments relate primarily to the construction work of various segments for their mutual benefits.

The Restructuring of Our Long-Term Investments

      In 2002, we entered into a number of transactions to streamline our long-term investments and to focus our resources on our core business activities. We entered into a share transfer agreement with each of Xian Feitian Science, Industrial and Trading Group Company Limited, or Xi’an Feitian, and Wuhan Luzhou Enterprise (Group) Company Limited, or Wuhan Luzhou, on May 23, 2002. Under the share transfer agreements, we transferred 27% and 8.90% of the state-owned legal person shares in Petroleum Long Champ (Group) Co., Ltd., or Long Champ, to Xi’an Feitian and Wuhan Luzhou, respectively. The share transfer agreements were approved by the Ministry of Finance and became effective on December 31, 2002. We ceased having any interest in Long Champ upon completion of the share transfers.

      We entered into a share transfer agreement with China Electronic Information Industrial Group Company, or China Electronic, on July 12, 2002. Under the share transfer agreement, we transferred 51.60% of the state-owned legal person shares in Gansu Tristar Petrochemical (Group) Co., Ltd., or Tristar, to China Electronic. On July 25, 2002, the Ministry of Finance granted its approval to the transfer of the state-owned legal person shares in Tristar and the share transfer agreement became effective. We ceased having any interest in Tristar upon completion of the share transfer.

      We have used the entire proceeds received from the transfer of shares in Long Champ and cash provided by our cash and cash equivalents to purchase Long Champ’s equity interest in three crude oil pipeline transmission enterprises. We have used the entire proceeds received from the transfer of shares in Tristar and cash provided by our cash and cash equivalents to purchase certain Tristar’s refining and chemical assets or businesses. We believe that the purchase of these assets and businesses did not have a material adverse impact on our financial condition or results of operations.

Research and Development

      We have a research and development management department, directly under which there are two research institutions. Except for our subsidiaries and branch companies in our marketing operation, each of our subsidiaries and branch companies has its own research and development department and technology centers. Our research and development department is responsible for coordinating research and development activities conducted by the research institutions and the relevant departments and technology centers of our subsidiaries and branch companies. These departments and technology centers of our subsidiaries and branch companies focus on developing specific technology for their respective subsidiaries or branch companies independently or in

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cooperation with our research and development department. As of December 31, 2002, we had 22,192 employees engaged in research and development functions.

      In each of the three years ended December 31, 2000, 2001 and 2002, our total expenditures for research and development were approximately RMB 1,751 million, RMB 1,896 million and RMB 1,806 million (US$218 million), respectively.

Exploration and Production

      China’s major oil and gas fields are characterized by a broad range of geological conditions, and a majority of China’s oil and gas fields are in sedimentary basins with continental formation. We have developed effective exploration and production techniques and methods that are suitable for these geological conditions. Our research and development efforts with respect to our exploration and production business focus on:

  •  geological structures of crude oil and natural gas reserves;
 
  •  oil and gas exploration and development;
 
  •  oil and gas production and pipeline transportation; and
 
  •  monitoring of the environment.

Refining and Marketing

      Our refining technology centers carry out research and development for new products and improvements to manufacturing processes, particularly through the evaluation of catalysts. Our research and development efforts in respect of our refining business focus on:

  •  research and development of advanced refining techniques;
 
  •  the implementation of new refining technologies; and
 
  •  research and development of catalysts and additives.

Chemicals

      We attempt to ensure that our chemical products are competitive through research and development in the application of new products, new technologies and new techniques. We have concentrated our research and development efforts in the areas of applications and products in order to increase our competitiveness in the market. Currently, we are in the process of establishing four research and development centers in Daqing, Liaoyang, Lanzhou and Jilin.

Trend Information

      We plan to further streamline our production facilities within the next several years to further improve our operating efficiency and competitiveness by consolidating or shutting down some of our production facilities. Our management has not approved all significant actions to be taken to implement such plans. We do not believe that the implementation of such plans will have a material adverse impact on our financial position, although we believe that it could have a material adverse effect on our results of operations because we would be required under our accounting policies to recognize in our income statement any impairment loss or impairment provision associated with shutting down our production facilities.

      See “— General — Critical Accounting Policies” and “— General — Factors Affecting Results of Operations” above for a detailed discussion of other trend information.

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Other Information

Inflation

      Inflation or deflation has not had a significant impact on our results of operations for the year ended December 31, 2002.

Non-Exchange Traded Contracts

      We did not engage for the year ended December 31, 2002, and do not currently engage, to a material extent, in any trading activities involving commodity contracts that are accounted for at fair value but for which a lack of market price quotations necessitates the use of fair value estimation techniques.

Related Party Transactions

      For a discussion of related party transactions, see “Item 7 — Major Shareholders and Related Party Transactions — Related Party Transactions” and Note 30 to our consolidated financial statements included elsewhere in this annual report.

US GAAP Reconciliation

      We prepared our consolidated financial statements in accordance with IFRS. This basis of accounting may differ from US GAAP. Such differences involve methods for measuring the amounts shown in the financial statements, as well as additional disclosures required by US GAAP.

      A summary of the principal differences and additional disclosures applicable to us is set out below:

          Revaluation of Fixed Assets

      As described in Note 16 to our consolidated financial statements, the fixed assets, excluding oil and gas reserves, transferred to us by CNPC were appraised as of June 30, 1999, as required by the relevant PRC regulations, by a firm of independent valuers registered in the PRC, China Enterprise Appraisal. The revaluation of the fixed assets transferred resulted in RMB 80,549 million in excess of the prior carrying value and a revaluation loss of RMB 1,122 million on certain fixed asset items. The depreciation charge on the revaluation surplus from January 1, 2000 to December 31, 2000 was RMB 8,483 million, from January 1, 2001 to December 31, 2001 was RMB 8,305 million, and from January 1, 2002 to December 31, 2002 was RMB 8,157 million (US$985 million).

      For purposes of reconciling to the US GAAP financial data, the effect of the revaluation and the related depreciation charges is reversed. A deferred tax asset relating to the reversal of the revaluation effect is established, together with a corresponding increase in the shareholders’ equity. Under a special approval granted by the Ministry of Finance, the effect of the revaluation is available as additional depreciation base for purposes of determining taxable income.

          Related Party Transactions

      We have disclosed in Note 29 to our consolidated financial statements transactions with significant customers and in Notes 13, 15, 19, 20 and 30 to our consolidated financial statements transactions and balances with its immediate parent, CNPC, and related companies. CNPC is owned by the PRC government, which also owns a significant portion of the productive assets in the PRC. IFRS exempt state controlled enterprises from disclosing transactions with other state controlled enterprises. IFRS also exclude from related parties government departments and agencies to the extent that such dealings are in the normal course of business. US GAAP contain no similar exemptions but require disclosure of material related party transactions. We believe that we have

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provided meaningful disclosures of related party transactions through the major customer disclosures in Note 29 to our consolidated financial statements and the transactions with the CNPC Group disclosed in Note 30 to our consolidated financial statements. Although the majority of our activities are with PRC government authorities and affiliates and other state controlled enterprises, none of these entities individually constituted a major customer or supplier other than those disclosed.

          One-time Remedial Payments for Staff Housing

      As disclosed in Note 4 to our consolidated financial statements, certain of our employees who joined the workforce prior to December 31, 1998 and have housing conditions below local standards are to be reimbursed for such differences. These one-time remedial payments are to be borne by our State-owned shareholder, CNPC. Under IFRS, such direct payments to employees or reimbursements will not be recorded through our consolidated income statement. US GAAP contain no such exemption but require this principal shareholder’s action on our behalf to be recorded in the consolidated income statement. During the year ended December 31, 2002, we and CNPC completed the process of estimating the amounts payable to our qualified employees. An amount of RMB 2,553 million has been reflected as such payments in determining our net income for the year ended December 31, 2002, under US GAAP. Since this amount is borne by our State-owned shareholder, a corresponding amount has been included as an addition to the other reserves in our shareholders’ equity.

          Recent US Accounting Pronouncements

      In August 2001, FASB issued Statement of Financial Accounting Standards No. 143 (FAS 143), “Accounting for Asset Retirement Obligations”. FAS 143 establishes accounting standards for the recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. FAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. We are currently evaluating the effect of the adoption by us of FAS 143.

      In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (FAS 146). This Standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, “Liability Recognition for Certain Costs, Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 replaces EITF 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We have begun complying with FAS 146 in 2003.

      FASB issued Interpretation (FIN) 45, “Guarantor — Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions under FIN 45 are applicable prospectively to guarantees issued or modified after December 31, 2002. The adoption of the disclosure requirements that are effective for the year ended December 31, 2002, did not have a material effect on our consolidated financial statements.

      FASB issued in January 2003, FIN 46, “Consolidation of Variable Interest Entities”. FIN 46 provides guidance on the identification of and financial reporting for entities over which control is achieved through means other than voting rights. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. The interpretation applies immediately to variable

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interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We have not yet completed our assessment of the accounting effects of this new accounting interpretation upon adoption.

Information Technology Systems

      Our information technology systems were largely developed for use by individual departments, subsidiaries, branches, plants or oilfields on a stand-alone basis and are in need of further development. As a result, our information technology system lacked integrated application systems to process and control different categories of technical, operating and financial data.

      In 2000, we retained PricewaterhouseCoopers Consultant (Shanghai) Limited, a former affiliate of PricewaterhouseCoopers, our independent accountants, to assist us in formulating our information technology system strategic plan. This strategic plan covers development strategies in the areas of the construction of our information technology infrastructure, upstream and downstream professional application system, enterprise resource planning, management information system, corporate structure system and electronic business system. From 2001 to the sale by PricewaterhouseCoopers of PricewaterhouseCoopers Consultant (Shanghai) Limited to International Business Machines Corporation in 2002, we retained PricewaterhouseCoopers Consultant (Shanghai) Limited again to assist us in upgrading such strategic plan.

      In June 2000, we began to use our newly upgraded financial information management system after the satisfactory evaluation of this system by independent system experts. The implementation of this system has improved the level of integration of our information technology systems to ensure the timeliness, completeness and reliability of our consolidated financial and operating data. The implementation of this new financial management information system has assisted us in:

  •  implementing stricter internal control processes, and ensuring the timeliness, completeness, and reliability of financial data on an IFRS basis; and
 
  •  producing relevant key performance indicator data, giving our management timely access to financial and non-financial information, and improving our information sharing level.

      On June 12, 2001, we established a joint venture with CNPC, Hutchison Whampoa Limited and other investors to operate a business to business online trading platform for oil and gas products. The total registered capital of this joint venture is US$15 million. We, CNPC and Hutchison Whampoa Limited each owns a 44%, 26% and 26% interest in this joint venture, respectively. The joint venture’s e-commerce website “www.energyahead.com” was launched on July 6, 2001 and offers a neutral and collaborative transaction platform that is intended to serve PRC and international petrochemical enterprises.

Environmental Expenses and Capital Expenditures

      We paid pollutant discharge fees of approximately RMB 85 million and RMB 113 million and RMB 113 million (US$14 million), respectively, in 2000, 2001 and 2002. Our capital expenditures on environmental programs in 2000, 2001 and 2002 were approximately RMB 1,151 million, RMB 1,205 million and RMB 1,363 million (US$165 million), respectively. There were no material environmental liabilities accrued as of December 31, 2002.

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ITEM 6 — DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 
Directors, Senior Management and Supervisors

      Our board of directors consists of twelve directors, three of whom are independent non-executive directors. The directors are elected at a meeting of our shareholders for a term of three years, renewable upon re-election and re-appointment. The functions and duties conferred on the board of directors include:

  •  convening shareholders’ meetings and reporting its work to the shareholders’ meetings;
 
  •  implementing the resolutions of the shareholders’ meetings;
 
  •  determining our business plans and investment plans;
 
  •  formulating our annual budget and final accounts;
 
  •  formulating our proposals for dividend and bonus distributions and for the increase or reduction of capital; and
 
  •  exercising other powers, functions and duties as conferred by our articles of association.

      Five of the directors are currently affiliated with CNPC or an affiliate of CNPC.

      The PRC Company Law requires a joint stock company with limited liability to establish a supervisory committee. This requirement is reflected in our articles of association. The supervisory committee is responsible for monitoring our financial matters and overseeing the actions of our board of directors and our management personnel. The supervisory committee consists of seven supervisors, six of whom are elected, including four shareholders representatives and two independent supervisors, and may be removed, by the shareholders in a general meeting and one of whom is an employees’ representative who is elected by our staff, and may be removed, by our staff. Three of our supervisors are affiliated with CNPC. The term of office of our supervisors is three years, renewable upon re-election and re-appointment. An elected supervisor cannot concurrently hold the position of a director, manager or financial controller. The functions and powers conferred on the supervisory committee include:

  •  attending board meetings;
 
  •  examining our financial affairs;
 
  •  examining balance sheets, profit and loss accounts, business reports, dividend distribution proposals and other financial information proposed at shareholders’ general meetings by the directors from time to time; and
 
  •  overseeing the actions of our board of directors and our senior management personnel in carrying out their duties.

      In the event that any action of our directors adversely affects our interests, supervisors shall confer with or initiate legal proceedings against such directors on our behalf. A resolution proposed at any meeting of the supervisory committee shall be adopted only if it is approved by two-thirds or more of our supervisors.

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      The following table sets forth certain information concerning our directors, supervisors and executive officers.

                     
Name Age Position Date of election(1)




Ma Fucai
    56     Chairman of the board of directors     November 19, 2002  
Wu Yaowen
    59     Vice Chairman of the board of directors     November 19, 2002  
Ren Chuanjun
    58     Vice Chairman of the board of directors     November 19, 2002  
Chen Geng
    56     Director and President     June 8, 2001  
Su Shulin
    40     Director and Senior Vice President     November 19, 2002  
Wang Fucheng
    52     Director and Vice President     May 28, 2003  
Zheng Hu
    56     Director     May 28, 2003  
Gong Huazhang
    56     Director     November 19, 2002  
Zou Haifeng
    56     Director     November 19, 2002  
Chee-Chen Tung
    60     Independent non-executive director     November 19, 2002  
Liu Hongru
    72     Independent non-executive director     November 19, 2002  
Franco Bernabè
    54     Independent non-executive director     May 28, 2003  
Li Huaiqi
    53     Secretary to the board of directors        
Wang Guoliang
    50     Chief Financial Officer        
Liu Baohe
    56     Vice President        
Duan Wende
    51     Vice President        
Jia Chengzao
    54     Chief Geologist        
Li Kecheng
    59     Chairman of Supervisory Committee        
Chen Weizhong
    58     Supervisor        
Wen Qingshan
    44     Supervisor        
Bai Xinhe
    59     Supervisor        
Sun Chongren
    52     Supervisor        
Zhang Youcai
    61     Independent supervisor        
Wu Zhipan
    46     Independent supervisor        

(1)  For directors only.

Directors

      Ma Fucai, aged 56, is Chairman of the board of directors of PetroChina. Mr. Ma is also President of CNPC. Mr. Ma is a senior engineer. Mr. Ma graduated from Beijing Petroleum Institute and has over 30 years’ experience in China’s oil and gas industry. From February 1990 to December 1996, Mr. Ma worked as a Deputy Director, Standing Deputy Director and Director of Shengli Petroleum Administration Bureau, a subsidiary of CNPC. He worked as an Assistant President of CNPC from November 1996 to December 1996 and Vice President of CNPC from December 1996 to April 1998 as well as Director of Daqing Petroleum Administration Bureau from June 1997 to November 1998. Mr. Ma has been President of CNPC since April 1998 and Chairman of the board of directors of PetroChina since November 5, 1999.

      Wu Yaowen, aged 59, is a Vice Chairman of the board of directors of PetroChina. Mr. Wu is a Vice President of CNPC. Mr. Wu is a senior engineer. Mr. Wu graduated from Beijing Petroleum Institute, and has over 30 years’ experience in China’s oil and gas industry. From 1983 to 1986, Mr. Wu worked as a Vice President of the Nanhuanghai Oil Company under the Ministry of Petroleum Industry. From 1986 to 1988, Mr. Wu was the Director of Qinghai Petroleum Administration Bureau. From 1988 to 1994, Mr. Wu worked as a chief petroleum engineer of the Ministry of Energy, Head of the Energy Industry Department and Vice Director of the Preparatory

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Committee of the Communications and Energy Department under the State Planning Committee. He was appointed Director of International Cooperation Bureau of CNPC in May 1994, an Assistant President in March 1996 and a Vice President in December 1996. He has been a Vice President of CNPC since April 1998, and a director of PetroChina since November 5, 1999. Mr. Wu was elected as a Vice Chairman of PetroChina on December 3, 2002.

      Ren Chuanjun, aged 58, is a Vice Chairman of the board of directors of PetroChina. Mr. Ren is a Vice President of CNPC. Mr. Ren is a senior economist. Mr. Ren graduated from Hefei Industry University and has over 30 years’ experience in China’s oil and gas and chemical fibers industries. Mr. Ren became a Deputy General Manager and General Manager of China Yizheng Fiber Industrial United Corporation in 1983. From 1994, he worked as a Vice Minister of China National Textile Council as well as a Vice Chairman of the board of directors of Yizheng Fiber United Corporation and Yizheng Fiber Company Limited. Mr. Ren acted as a Vice President of CNPC from April 1998. Mr. Ren worked as Senior Vice President of PetroChina from November 5, 1999 to November 2002. He has been a director of PetroChina since November 5, 1999. Mr. Ren was elected as a Vice Chairman of PetroChina on December 3, 2002.

      Chen Geng, aged 56, is a director and President of PetroChina. Mr. Chen is a senior economist. Mr. Chen graduated from Beijing Economics Institute (currently named Capital University of Economics and Business) and has over 30 years’ experience in China’s oil and gas industry. From 1983 to 2001, Mr. Chen was Deputy Director of Changqing Petroleum Exploration Bureau, Deputy Director of the Labour Department under the Ministry of Petroleum Industry, Director of the Labour Bureau of CNPC, Assistant President of CNPC, Vice President of CNPC and Deputy Director of the State Petroleum and Chemical Industry Bureau. He has been a director of PetroChina since June 8, 2001. Mr. Chen was appointed President of PetroChina on December 3, 2002.

      Su Shulin, aged 40, is a director and Senior Vice President of PetroChina. Mr. Su is a senior engineer. Mr. Su graduated from Daqing Petroleum Institute and received a master’s degree at Harbin Institute of Technology. Mr. Su has many years’ experience in China’s oil and gas industry. Since 1996, Mr. Su had worked as a Director Assistant, Director of the First Oil and Natural Gas Development Department, a Standing Deputy Director and Director of Daqing Petroleum Administration Bureau until November 5, 1999 when he was appointed to a Vice President of PetroChina and General Manger and Chairman of Daqing Oilfield Company, a subsidiary of PetroChina. Mr. Su was elected a director of PetroChina on November 19, 2002 and appointed Senior Vice President of PetroChina on December 3, 2002.

      Wang Fucheng, aged 52, is a director and Vice President of PetroChina. Mr. Wang is a senior economist. Mr. Wang graduated from the Shandong Teacher’s University and has over 30 years’ experience in China’s oil and gas industry. Mr. Wang worked in the Shengli Oil Field, Zhongyuan Oil Field and Liaohe Oil Field. From 1986 to 1999, Mr. Wang worked as Senior Executive of the Shengli Oil Field, Deputy Director of the Liaohe Oil Exploration Bureau, Director of the Liaohe Oil Exploration Bureau and General Manager of the Branch Office of Liaohe Oil Field. Mr. Wang has been a director of PetroChina since June 30, 2000 and a Vice President of PetroChina since July 12, 2000.

      Zheng Hu, aged 56, is a director of PetroChina and a Vice President of CNPC. Mr. Zheng is a senior engineer. He graduated from the Beijing Petroleum Institute in 1970 and has over 30 years’ experience in China’s oil and gas industry. From 1990 to 1992, Mr. Zheng acted as vice director of Beijing Petroleum Managers Training Institute. From 1992 to 1999, Mr. Zheng worked as Deputy General Manager and General Manager of China Petroleum Technology & Development Corporation, as Deputy General Manager and General Manager of China Petroleum Materials and Equipment (Group) Corporation, and as Director of Personnel and Labour Department of CNPC. He has been a Director of PetroChina since June 30, 2000.

      Gong Huazhang, aged 56, is a director of PetroChina. Mr. Gong is General Accountant of CNPC. Mr. Gong is a senior accountant. Mr. Gong graduated from Yangzhou Business School and has over 30 years’ experience in China’s oil and gas industry. Mr. Gong worked as Chief

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Accountant, Deputy Director and Director of the Finance Bureau of CNPC from 1991. Mr. Gong has been Director of the Finance and Assets Department of CNPC since October 1998 and has been General Accountant of CNPC since February 1999. Mr. Gong has been a director of PetroChina since November 5, 1999.

      Zou Haifeng, aged 56, is a director of PetroChina. Mr. Zou is a Deputy Manager of Jilin Petrochemical Branch Company and the Chairman of the Supervisory Committee of Jilin Chemical Industrial Company Limited. Mr. Zou is a senior engineer. Mr. Zou graduated from Northeastern Industry Institute and has nearly 30 years’ experience in the petrochemical industry. Since 1994, Mr. Zou has been a Deputy Manager of Jilin Petrochemical Group Corporation and a Director and Deputy Manager of Jilin Chemical Industrial Company Limited. Mr. Zou has been a Deputy Manager of Jilin Petrochemical Branch Company, a subsidiary of PetroChina since 1999 and a director of PetroChina since November 5, 1999.

Independent Non-executive Directors

      Chee-Chen Tung, aged 60, is an independent non-executive director of PetroChina. Mr. Tung is Chairman and Chief Executive Officer of Orient Overseas (International) Limited (OOIL). He was educated at the University of Liverpool, England, where he received his Bachelor of Science degree. He later acquired a Master’s degree in Mechanical Engineering at the Massachusetts Institute of Technology in the United States. Mr. Tung served as Chairman of Hong Kong Shipowner’s Association between 1993 and 1995. From 1999 to 2001, Mr. Tung served as Chairman of the Hong Kong General Chamber of Commerce, an independent non-executive Director of Zhejiang Expressway Company Limited and an independent non-executive director of Cathay Pacific Airways, a member of the Port Development Board, a Council member of Hong Kong Trade Development Council and an International Councillor of Center for Strategic & International Studies. Mr. Tung is also Chairman of the Hong Kong-America Center, Chairman of the Institute for Shipboard Education Foundation, Chairman of the Court and a member of the Council of the Hong Kong Polytechnic University, a member of the Board of Trustees of the University of Pittsburgh, and a member of the Board of Visitors of the School of Foreign Service, Georgetown University. Mr. Tung has been an independent non-executive director of PetroChina since November 5, 1999.

      Liu Hongru, aged 72, is an independent non-executive director of PetroChina. Mr. Liu graduated from the Economics Department of the University of Moscow in 1959 with an associate doctor’s degree. Mr. Liu worked as a Vice Governor of the Agricultural Bank of China, a Vice Governor of the People’s Bank of China, a Deputy Director of the State Economic Restructuring Committee and Chairman of China Securities Regulatory Commission. Mr. Liu is currently a Deputy Director of the Economic Committee under the Chinese People’s Political Consultative Conference, and concurrently serves as a Vice President of China Finance and Banking Society, a Vice President of China National Debt Association and Director of Shanghai Finance and Law Research Institute. Mr. Liu is also a professor at each of Beijing University, the Graduate School of People’s Bank of China and the City University of Hong Kong. Mr. Liu served as an independent supervisor of PetroChina from December 3, 1999 to November 19, 2002 when he was elected as an independent non-executive director of PetroChina.

      Franco Bernabè, aged 54, is an independent non-executive director of PetroChina. Mr. Bernabè is the Chairman of the Franco Bernabè Group and Vice Chairman of H3G, a mobile telephone company which owns a third generation mobile licence in Italy. He is also Chairman of Kelyan, an internet professional services company of the Franco Bernabè Group. Mr. Bernabè is a member of the board of FIAT and the TNT Post Group. He serves in the Executive Committee of Confindustria, the Italian Confederation of Industry, in the Board of the Peres Centre for Peace and in the International Board of the World Economic Forum. He also serves as a special representative of the Italian government for the reconstruction of the Balkan region. Mr. Bernabè joined ENI in 1983 to become the assistant to the chairman; in 1986 he became director for development, planning and control; and between 1992 and 1998 was the Chief Executive Officer of ENI. Mr. Bernabè led the

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restructuring program of the ENI Group, making it one of the world’s most profitable oil companies. Between 1998 and 1999, Mr. Bernabè was the Chief Executive Officer of Telecom Italia. Prior to his joining ENI, Mr. Bernabè was the head of economic studies at FIAT. He was also a senior economist at the OECD Department of Economics and Statistics in Paris. Earlier, he was a professor of economic politics at the School of Industrial Administration, Turin University. Mr. Bernabè has been an independent non-executive director of PetroChina since June 30, 2000.

Secretary to the Board of Directors

      Li Huaiqi, aged 53, is the secretary to the board of directors of PetroChina. Mr. Li is a senior economist. He has over 30 years’ experience in China’s oil and gas industry. Mr. Li worked with Daqing, Liaohe, Nanhai and Huabei oil and gas companies. From 1992 to 1996, Mr. Li worked as Deputy Director of Foreign Affairs Bureau and Chairman of the Foreign Service Company of CNPC and as Director of Foreign Affairs Bureau of CNPC. In 1999, Mr. Li was appointed as Director of the International Co-operation Department (Foreign Affairs Bureau) of CNPC. Mr. Li has been the secretary to the board of directors of PetroChina since August 29, 2001.

Other Senior Management Personnel

      Wang Guoliang, aged 50, is Chief Financial Officer of PetroChina. Mr. Wang has a master’s degree and is a senior accountant. He graduated from Heilongjiang Business College. He has over 20 years’ experience in China’s oil and gas industry. Mr. Wang worked as a Vice President of CNPC Finance Co., Ltd. from 1995 to 1997 and as a Deputy General Manager and General Accountant of China National Oil & Gas Exploration and Exploitation Corporation from 1998 to November 5, 1999 when he was appointed as Chief Financial Officer of PetroChina.

      Liu Baohe, aged 56, is a Vice President of PetroChina. Mr. Liu is a senior engineer of professor grade. Mr. Liu graduated from Beijing Petroleum Institute and has over 30 years’ experience in China’s oil and gas industry. From 1994 to 1997, Mr. Liu worked as Vice Director and Director of the Exploration and Production Bureau of CNPC. Mr. Liu was Director of the Department of Oil and Gas Exploitation of CNPC from 1998 to 1999. From 1999 to August 2001, Mr. Liu worked as Deputy General Manager of the exploration and production segment of PetroChina. In September 2001, Mr. Liu was appointed a Vice President and General Manager of the Exploration and Production Branch Company of PetroChina. In December 2002, Mr. Liu was re-appointed a Vice President of PetroChina.

      Duan Wende, aged 51, is a Vice President of PetroChina. Mr. Duan is a senior engineer. Mr. Duan graduated from the graduate school of Chinese Academy of Social Sciences with a master’s degree in investment economy. He has over 30 years’ experience in China’s oil and chemical industry. From 1975 to August 2001, Mr. Duan was a Deputy Factory Manager of Fushun Factory No. 628 and a chemical fiber factory, the Commander of Command Division of Fushun Ethylene Project, a Deputy Factory Manager of an ethylene factory, the Factory Manager of an acrylic fiber factory and a detergent factory, a Deputy Manager and Manager of Fushun Petrochemical Corporation, and General Manager of Fushun Petrochemical Branch Company. From 1997 to 2001, Mr. Duan worked as Deputy Manager, Manager and General Manger of PetroChina Fushun Petrochemical Branch. He has been Assistant to President of CNPC since August 2001 and Vice President of PetroChina since March 2002.

      Jia Chengzao, aged 54, is Chief Geologist of PetroChina. Mr. Jia is a doctor degree holder and a senior engineer. He graduated from Nanjing University and has over 25 years’ experience in China’s oil and geological industry. From 1994 to 1999, Mr. Jia held several senior management positions at Tarim Oil Exploration and Exploitation Headquarters, including Deputy Chief Geologist, Chief Geologist and Deputy Commander. Since 1998, he has been a Vice Director of the Oil Exploration and Exploitation Scientific Research Institute of CNPC. From 1999, Mr. Jia worked as a Deputy General Manager of China Petroleum Tarim Oil Field Branch Company and a Vice Director

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of China Oil Exploration and Exploitation Research Institute. Mr. Jia has been Chief Geologist of PetroChina since July 2000.

Supervisors

      Li Kecheng, aged 59, is Chairman of PetroChina’s supervisory committee. Mr. Li is a senior engineer. Mr. Li graduated from Beijing Science and Technology University and has over 30 years’ experience in China’s oil and gas industry. From 1986 to 1992, Mr. Li was the head of the Petroleum Pipeline Bureau and a senior executive of the Northeastern Oil Transmission Administration Bureau. Since November 1992, Mr. Li has been taking several senior administrative positions at CNPC. Mr. Li has been Chairman of PetroChina’s supervisory committee since November 5, 1999.

      Chen Weizhong, aged 58, is a supervisor of PetroChina. Mr. Chen is a senior auditor. Mr. Chen graduated from Anhui Finance and Trade Institute and has over 30 years’ experience in China’s oil and gas industry. He was a Deputy Director of the Auditing Office of CNPC from 1993 to 1998 and a Deputy Director of the Auditing Bureau of CNPC. Mr. Chen was a Deputy Director of the Auditing Department of CNPC from October 1998 and has been the Director of the Auditing Department since October 2000. Mr. Chen has been a supervisor of PetroChina since November 5, 1999.

      Wen Qingshan, aged 44, is a supervisor of PetroChina. Mr. Wen is a senior accountant. Mr. Wen graduated from Jilin Yanbian University. He served as Deputy Chief Accountant of the Finance and Assets Department of CNPC from November 1998 to May 1999, when he was appointed as a Deputy Director of the Finance and Assets Department of CNPC. Mr. Wen has been Director of the Finance and Assets Department of CNPC since May 2002. Mr. Wen was appointed as a supervisor of PetroChina on November 19, 2002.

      Bai Xinhe, aged 59, is a supervisor and director of the office of the supervisory committee of PetroChina. Mr. Bai is a senior auditor. Mr. Bai graduated from Central Finance Institute and has over 30 years’ experience in China’s oil and gas industry. Mr. Bai was Chief Auditor of the Auditing Department of CNPC from August 1988 to December 1998. Mr. Bai worked as the Deputy General Manager and General Manager of the Auditing Department of PetroChina from January 1999 to December 2001, during which period he was also concurrently the head of the office of the Supervisory Committee of PetroChina. Mr. Bai has been Director of the office of the Supervisory Committee of PetroChina since December 2001. Mr. Bai has been a supervisor of PetroChina since November 5, 1999.

      Sun Chongren, aged 52, is a supervisor of PetroChina and an employee representative of PetroChina’s supervisory committee. Mr. Sun graduated from Huadong Petroleum Institute and has 30 years’ experience in China’s oil and gas industry. Mr. Sun has been working at Liaohe Petroleum Administration Bureau for 30 years. Since 1996, he has been a senior executive and Chairman of the workers’ union of Liaohe Petroleum Administration Bureau. Mr. Sun has been a supervisor of PetroChina since November 5, 1999.

      Zhang Youcai, aged 61, is an independent supervisor of PetroChina. Mr. Zhang is a professor. Mr. Zhang graduated from Nanjing Industrial University and has over 30 years’ experience in enterprise management and financing. Mr. Zhang worked as Chief Manager of Nantong Fertilizer Factory, Deputy Director of Nantong Municipal Industrial Bureau, Vice Chairman of Nantong Municipal Development and Planning Committee and Vice Mayor of Nantong city, until his appointment as Mayor of Nantong city in April 1984. Mr. Zhang was a Vice Minister of the Ministry of Finance from December 1989 to July 2002. He also served as General Director of the State Asset Administration Bureau from May 1994 to July 1998. Mr. Zhang was appointed as an independent supervisor of PetroChina on November 19, 2002.

      Wu Zhipan, aged 46, is an independent supervisor of PetroChina. Mr. Wu acquired a Doctor in Laws from Beijing University School of Law in 1988, and was a visiting scholar at Harvard Law

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School from 1991 to 1992. Mr. Wu is a Vice President of Beijing University. He is concurrently an expert consultant of the Supreme People’s Court, an arbitrator on the Arbitrator Panel of the China International Economic and Trade Arbitration Commission and a Director of China and Economic Law Society. Mr. Wu is the author of a number of legal publications and has rich experience in law practice. Mr. Wu has been an independent supervisor of PetroChina since December 3, 1999.

Compensation

Senior Management Compensation System

      Our senior management compensation system links our senior management members’ financial interests, including those of our executive directors and our supervisors, with our results of operations and the performance of our shares. Most of our senior management members have entered into performance contracts with us. Under this system, the senior management members’ compensation system has three components, namely, basic salaries, performance bonuses and stock appreciation rights. The variable components in their compensation account for approximately 70% to 75% of our senior management officers’ total potential compensation, including up to 25% forming the performance bonus component and approximately 50% to 70% forming the stock appreciation rights component. Variable compensation rewards are linked to the attainment of specific performance targets, such as net income, return on capital and cost reduction targets. The chart below sets forth the components of the total potential compensation for key officers.

                         
% Stock
% Basic appreciation % Performance
salary rights bonus



Chairman
    30       70       0  
President
    25       60       15  
Vice President
    25       60       15  
Department GM
    25       50       25  

      We have granted stock appreciation rights to 300 persons, including members of the board of directors and the supervisory committee, president, vice presidents and departmental managers, general managers and deputy general managers of specialized companies and local subsidiaries. Upon exercise of these stock appreciation rights, members of the senior management will not receive any of our shares, but will, by way of stock appreciation rights, receive a monetary sum that is calculated on the basis of the price of our H shares. In 2002, none of the directors and senior management exercised any of the stock appreciation rights granted to them. Since companies are not permitted to repurchase and hold their own shares for offering stock options under current PRC law, we expect to calculate our book gains and losses on the basis of share prices and in accordance with stock appreciation rights measures and make cash payment of such compensations.

Directors’ and Supervisors’ Compensation

      We were incorporated on November 5, 1999. Our directors and supervisors, who hold senior management positions or are otherwise employed by us, receive compensation in the form of salaries, housing allowances, other allowances and benefits in kind, including our contribution to the pension plans for these directors and supervisors.

      The aggregate amount of salaries, housing allowances, other allowances and benefits in kind paid by us to the five highest paid individuals of PetroChina during the year ended December 31, 2002 was RMB 853,594. We paid RMB 7,964 as our contribution to the pension plans in respect of those individuals in the year ended December 31, 2002.

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      The aggregate amount of salaries or other compensation, housing allowances, other allowances and benefits in kind paid by us to our directors, who hold senior management positions or are otherwise employed by us, during the year ended December 31, 2002 was RMB 766,646.

      Save as disclosed, no other payments have been paid or are payable, in respect of the year ended December 31, 2002, by us or any of our subsidiaries to our directors. In addition, we have no obligation for the payment of any benefits to our directors upon the termination of their employment with us.

      In 2002, we paid RMB 25,219 as our contribution to the pension plans in respect of our directors and supervisors, who hold senior management positions or are otherwise employed by us. The aggregate amount of salaries or other compensation, housing allowances, other allowances and benefits in kind paid by us to our supervisors, who hold senior management positions or are otherwise employed by us, during the year ended December 31, 2002 was RMB 275,465.

Board Practices

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

Audit Committee

      The current members of our audit committee are Mr. Franco Bernabè, as chairman of the committee, Mr. Gong Huazhang and Mr. Zou Haifeng. The audit committee’s major responsibilities include:

  •  supervise the compliance and effectiveness of material financial policies, financial reporting processes, significant rules and systems in place and substantial operating activities;
 
  •  review audit plans, critical accounting policies, and audit reports compiled by our internal audit department and carry out any audit initiatives proposed by the board of directors;
 
  •  review, observe and question our external auditor’s work; and
 
  •  monitor related party transactions and ensure that all such transactions are in compliance with our stated policies and other applicable laws and regulations.

Evaluation and Remuneration Committee

      The current members of our evaluation and remuneration committee are Mr. Liu Hongru, as chairman of the committee, Mr. Chee-Chen Tung and Mr. Zheng Hu. The evaluation and remuneration committee’s major responsibilities include:

  •  review the current standing of President-appointed Senior Vice President, Vice Presidents, Chief Financial Officer and other senior management personnel and make recommendations for such review to the board of directors;
 
  •  manage and conduct performance evaluations for our President and report the results of such evaluations to the board of directors;
 
  •  monitor performance evaluations conducted by our President for Senior Vice President, Vice Presidents, Chief Financial Officer and other senior management personnel; and
 
  •  study our incentive plan, compensation plan and stock appreciation rights plan, supervise and evaluate the implementation of these plans and make recommendations for further improvements to such plans.

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Investment and Development Committee

      The current members of our investment and development committee are Mr. Ren Chuanjun, as chairman of the committee, and Mr. Su Shulin. The investment and development committee’s major responsibilities include:

  •  study strategic action plans as proposed by our President and make recommendations to the board of directors;
 
  •  study the annual investment budget as proposed by our President and make recommendations to the board of directors; and
 
  •  review preliminary feasibility studies and feasibility studies for material investment projects requiring approval of the board of directors and make recommendations to the board of directors.

Health, Safety and Environment Committee

      The current members of our health, safety and environment committee are Mr. Wu Yaowen, as chairman of the committee, and Mr. Wang Fucheng. The health, safety and environment committee’s major responsibilities include:

  •  supervise the implementation of our health, safety and environment plan;
 
  •  make recommendations and proposals to the board of directors or our President regarding significant issues affecting us in the areas of health, safety or the environment; and
 
  •  investigate any major accidents relating to us, our property or our employees or other affiliates and supervise the conduct and progress of those involved in the investigation, clean-up or other efforts relating to such major accidents.

Employees

      As of December 31, 2000, 2001 and 2002, we had 441,612, 422,554 and 419,598 employees, respectively. The table below sets forth the number of our employees by business segment as of December 31, 2002.

                   
Employees % of total