20-F 1 tm2039442d3_20f.htm FORM 20-F

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

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

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020

 

OR

 

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

 

OR

 

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

 

DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT . . . . . . . . . . . . . . . . . . .

 

FOR THE TRANSACTION PERIOD FORM                       TO                        

 

COMMISSION FILE NUMBER 1-15138

 

中国石油化工股份有限公司
CHINA PETROLEUM & CHEMICAL CORPORATION

 

(Exact name of Registrant as specified in its charter)

 

The People’s Republic of China

 

(Jurisdiction of incorporation or organization)

 

22 Chaoyangmen North Street
Chaoyang District, Beijing, 100728

The People’s Republic of China

 

(Address of principal executive offices)

 

Mr. Huang Wensheng
22 Chaoyangmen North Street
Chaoyang District, Beijing, 100728
The People’s Republic of China
Tel: +86 (10) 5996 0028

 

 

Fax: +86 (10) 5996 0386

 

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

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

 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange On Which Registered
American Depositary Shares, each representing 100 H Shares of par value RMB 1.00 per share   SNP   New York Stock Exchange, Inc.
H Shares of par value RMB 1.00 per share       New York Stock Exchange, Inc.*

 

 

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

 

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

 

None

 

(Title of Class)

 

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

 

None

 

(Title of Class)

 

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

H Shares, par value RMB 1.00 per share 25,513,438,600
A Shares, par value RMB 1.00 per share 95,557,771,046

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☒ Yes   ☐ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

☐ Yes   ☒ No

 

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

 

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

☒ Yes   ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes   ☐ No

 

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

 

Large accelerated filer ☒   Accelerated filer ☐   Non-accelerated filer ☐   Emerging growth company ☐

 

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

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

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

 

U.S. GAAP ☐   International Financial Reporting Standards as issued
by the International Accounting Standards Board ☒
  Other ☐

 

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

☐ Item 17   ☐ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes   ☒ No

 

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

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. * 

☐ Yes   ☐ No

 

*This requirement does not apply to the registrant in respect of this filing.

 

 

Table of Contents

 

CERTAIN TERMS AND CONVENTIONS 1
CURRENCIES AND EXCHANGE RATES 2
FORWARD-LOOKING STATEMENTS 2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 3
ITEM 3. KEY INFORMATION 3
ITEM 4. INFORMATION ON THE COMPANY 17
ITEM 4A. UNRESOLVED STAFF COMMENTS 38
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 38
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 60
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 70
ITEM 8. FINANCIAL INFORMATION 73
ITEM 9. THE OFFER AND LISTING 74
ITEM 10. ADDITIONAL INFORMATION 74
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 89
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 93
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 95
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 95
ITEM 15. CONTROLS AND PROCEDURES 95
ITEM 16. RESERVED 96
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 96
ITEM 16B. CODE OF ETHICS 96
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 96
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 97
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 97
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 97
ITEM 16G. COMPARISON OF NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE RULES AND CHINA CORPORATE GOVERNANCE RULES FOR LISTED COMPANIES 98
ITEM 16H. MINE SAFETY DISCLOSURE 102
ITEM 17. FINANCIAL STATEMENTS 102
ITEM 18. FINANCIAL STATEMENTS 102
ITEM 19. EXHIBITS 103

 

1

CERTAIN TERMS AND CONVENTIONS

 

Definitions

 

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

 

“Sinopec Corp.,” “Company,” “we,” “our” and “us” are to China Petroleum & Chemical Corporation, a PRC joint stock limited company, and its subsidiaries;

 

“Sinopec Group Company” are to our controlling shareholder, China Petrochemical Corporation, a PRC limited liability company;

 

“Sinopec Group” are to the Sinopec Group Company and its subsidiaries other than Sinopec Corp. and its subsidiaries;

 

“provinces” are to provinces and to provincial-level autonomous regions and municipalities in China which are directly under the supervision of the central PRC government;

 

“RMB” are to Renminbi, the currency of the PRC;

 

“HK$” are to Hong Kong dollar, the currency of the Hong Kong Special Administrative Region of the PRC; and

 

“US$” are to US dollars, the currency of the United States of America.

 

Conversion Conventions

 

Unless otherwise specified, conversion of crude oil from tonnes to barrels are made at a rate of one tonne to 7.10 barrels for crude oil we produced domestically and one tonne to 7.21, 7.21 and 7.20 barrels for the years ended December 31, 2018, 2019 and 2020, respectively, for crude oil we produced overseas. Conversions of natural gas from cubic meters to cubic feet are made at a rate of one cubic meter to 35.31 cubic feet; and 6,000 cubic feet of natural gas is converted to one BOE.

 

Glossary of Technical Terms

 

Unless otherwise indicated in the context, references to:

 

“BOE” are to barrels-of-oil equivalent.

 

“primary distillation capacity” are to the crude oil throughput capacity of a refinery’s crude oil distillation units, calculated by estimating the number of days in a year that such crude oil distillation units are expected to operate, excluding downtime for regular maintenance, and multiplying that number by the amount equal to the units’ optimal daily crude oil throughput.

 

“rated capacity” are to the output capacity of a given production unit or, where appropriate, the throughput capacity, calculated by estimating the number of days in a year that such production unit is expected to operate, excluding downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output or throughput, as the case may be.

1

CURRENCIES AND EXCHANGE RATES

 

We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to US dollars in this annual report were made at RMB6.8976 to US$1.00, the average of mid-point exchange rates of Renminbi as published by the PRC State Administration of Foreign Exchange (SAFE) for the year of 2020. We do not suggest that the Renminbi or US dollar amount can be converted to US dollars or Renminbi, as appropriate, at this exchange rate or any specific exchange rate.

 

FORWARD-LOOKING STATEMENTS

 

This annual report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this annual report that address activities, events or developments which we expect or anticipate will or may occur in the future are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words such as believe, intend, expect, anticipate, project, estimate, predict, plan and similar expressions are also intended to identify forward-looking statements. These forward-looking statements address, among others, such issues as:

 

amount and nature of future exploration and development,

 

future prices of and demand for our products,

 

future earnings and cash flow,

 

development projects and drilling prospects,

 

future plans and capital expenditures,

 

estimates of proved oil and gas reserves,

 

exploration prospects and reserves potential,

 

expansion and other development trends of the petroleum and petrochemical industry,

 

production forecasts of oil and gas,

 

expected production or processing capacities, including expected rated capacities and primary distillation capacities, of units or facilities not yet in operation,

 

expansion and growth of our business and operations, and

 

our prospective operational and financial information.

2

These statements are based on assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including the risks set forth in “Item 3. Key Information—D. Risk Factors” and the following:

 

fluctuations in crude oil and natural gas prices,

 

fluctuations in prices of our refined oil and chemical products,

 

failures or delays in achieving production from development projects,

 

failures to receive oil and gas storage and transportation services subject to terms we desire,

 

potential acquisitions and other business opportunities,

 

general economic, market and business conditions, and

 

other risks and factors beyond our control.

 

Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements should be considered in light of the various important factors set forth above and elsewhere in this Form 20-F. In addition, we cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.KEY INFORMATION

 

A.SELECTED FINANCIAL DATA

 

The selected consolidated statement of income data (except per ADS data) and consolidated cash flows data for the years ended December 31, 2018, 2019 and 2020, and the selected consolidated balance sheet data as of December 31, 2019 and 2020 are derived from, and should be read in conjunction with, the audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of income data (except per ADS data) and consolidated cash flows data for the years ended December 31, 2016 and 2017 and the selected consolidated balance sheet data as of December 31, 2016, 2017 and 2018 are derived from our consolidated financial statements as restated as indicated hereinafter which are not included elsewhere in this annual report.

3

Moreover, the selected financial data should be read in conjunction with our consolidated financial statements and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board.

 

   Year Ended December 31, 
   2016   2017   2018   2019   2020 
   (RMB in millions, except per share, per ADS data and number of shares) 
Consolidated Statement of Income Data(1)(4)(5):                    
Operating revenues   1,923,273    2,348,932    2,882,077    2,959,799    2,105,984 
Operating expenses   (1,845,609)   (2,277,115)   (2,799,513)   (2,873,425)   (2,092,791)
Operating income   77,664    71,817    82,564    86,374    13,193 
Earnings before income tax   80,544    86,964    99,339    90,022    48,143 
Income tax expense   (20,715)   (16,291)   (20,278)   (17,939)   (6,219)
Net income attributable to owners of the Company   46,884    51,384    61,708    57,493    33,096 
Basic earnings per share(3)   0.387    0.424    0.510    0.475    0.273 
Basic earnings per ADS(3)   38.72    42.44    50.97    47.49    27.34 
Diluted earnings per share(3)   0.387    0.424    0.510    0.475    0.273 
Diluted earnings per ADS(3)   38.72    42.44    50.97    47.49    27.34 
Declared cash dividend per share   0.249    0.500    0.420    0.310    0.200 
Segment Operating Income/(Loss)                         
Exploration and production   (36,641)   (45,944)   (10,107)   9,284    (16,476)
Refining   56,265    65,007    54,827    30,632    (5,555)
Marketing and distribution   32,153    31,569    23,464    29,107    20,828 
Chemicals   21,094    27,324    27,307    17,327    10,372 
Corporate and others   3,212    (4,484)   (9,293)   64    (393)
Elimination of inter-segment sales   1,581    (1,655)   (3,634)   (40)   4,417 
Operating income   77,664    71,817    82,564    86,374    13,193 
Shares                         
Basic weighted average number of A and H shares   121,071,209,646    121,071,209,646    121,071,209,646    121,071,209,646    121,071,209,646 
Diluted weighted average number of A and H shares   121,071,209,646    121,071,209,646    121,071,209,646    121,071,209,646    121,071,209,646 

 

   As of December 31, 
   2016   2017   2018   2019   2020 
   (RMB in millions, except per share, per ADS data and number of shares) 
Consolidated Balance Sheet Data(1)(4):                         
Cash and cash equivalents   124,513    113,389    111,927    60,438    87,559 
Total current assets   413,322    530,610    505,471    447,310    455,395 
Total non-current assets   1,089,911    1,069,984    1,091,930    1,312,976    1,278,410 
Total assets   1,503,233    1,600,594    1,597,401    1,760,286    1,733,805 
Total current liabilities   (488,292)   (582,711)   (568,611)   (579,978)   (522,190)
Short-term debts and loans from Sinopec Group Company and fellow subsidiaries (including current portion of long-term debts)   (76,819)   (82,649)   (63,127)   (83,810)   (29,033)
Long-term debts and loans from Sinopec Group Company and fellow subsidiaries (excluding current portion of long-term debts)   (117,502)   (99,174)   (93,581)   (58,834)   (83,815)
Total equity attributable to owners of the Company   (711,954)   (727,000)   (718,077)   (738,946)   (741,494)
Total equity   (833,000)   (854,509)   (857,998)   (877,304)   (882,858)

 

   Year Ended December 31, 
   2016   2017   2018   2019   2020 
   (RMB in millions, except per share, per ADS data and number of shares) 
Statement of Cash Flow and Other Financial Data(1)(4):                    
Net cash generated from operating activities   214,341    191,166    175,937    153,619    167,518 
Net cash used in financing activities   (92,880)   (56,562)   (111,269)   (84,204)   (36,955)
Net cash used in investing activities   (66,254)   (145,375)   (66,648)   (121,051)   (102,203)
Capital expenditure Exploration and production                         
    Exploration and production   32,187    31,344    42,155    61,739    56,416 
Refining   14,347    21,075    27,908    31,372    24,722 
Marketing and distribution   18,493    21,539    21,429    29,566    25,403 
Chemicals   8,849    23,028    19,578    22,438    26,202 
Corporate and others   2,580    2,398    6,906    1,979    2,312 
Total   76,456    99,384    117,976    147,094    135,055 

4

 

(1)The acquisition of 55% equity interest of Shanghai Gaoqiao Petrochemical Co., Ltd. (“Gaoqiao”) in 2016 from Sinopec Group Company were considered as “combination of entities under common control” and accounted in a manner of predecessor value accounting. Accordingly, the acquired assets and liabilities have been accounted for at historical cost and the consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and results of operation of these acquired business on a combined basis.

 

(2)In 2020, the Company entered into an Agreement with Sinopec Assets Management Corporation (“SAMC”) in relation to the formation of Sinopec Baling Petrochemical Co. Ltd (“Baling Petrochemical”). After the capital injection, the Company remained to hold 55% of Baling Petrochemical’s voting rights and was still able to control Baling Petrochemical. As Sinopec Group Company controls both the Company and SAMC, the transaction described above between Sinopec and SAMC has been accounted as business combination under common control. Accordingly, the assets and liabilities of which SAMC subscribed have been accounted for at historical cost, and the consolidated financial statements of the Company prior to these acquisitions have been restated to include the results of operation and the assets and liabilities of Baling Branch of SAMC on a combined basis. Such acquisition shall be deemed as business reorganization.

 

(3)Basic earnings per share have been computed by dividing net income attributable to equity shareholders of our company by the weighted average number of shares in issue. Basic and diluted earnings per ADS have been computed as if all of our issued and authorized ordinary shares, including domestic shares and H shares, are represented by ADSs during each of the years presented. Each ADS represents 100 ordinary shares.

 

(4)We have adopted IFRS Standard 16 “Leases” from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from such standard were therefore recognized in the opening balance sheet on January 1, 2019.

 

(5)The Company and Sinomart KTS Development Limited, Sinopec Natural Gas Limited Company and Sinopec Marketing Company Limited (“Marketing Company”), the subsidiaries of the Company entered into the Agreement on Cash Payment to Purchase Equity in Sinopec Yu Ji Pipeline Company Limited, the Agreement on Additional Issuance of Equity and Cash Payment to Purchase Assets, the Agreement on Cash Payment to Purchase Assets and the Agreement on Additional Issuance of Equity to Purchase Assets with China Oil & Gas Pipeline Network Corporation (“PipeChina”), on July 21, 2020 and on July 23, 2020 respectively, pursuant to which the Company and its subsidiaries proposed to dispose target business, including equity interests in the relevant companies, oil and gas pipeline and ancillary facilities, to PipeChina. The above transactions were considered and approved by the 15th Session of 7th Directorate Meeting on July 23, 2020 and the second Extraordinary General Meeting on September 28, 2020. The transaction consideration was mainly additional issuance of equity and/or cash payment by PipeChina and the gain on above transactions was RMB 37,731 million.

 

B.CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

C.REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

5

D.RISK FACTORS

 

Risks Relating to Our Business Operation

 

We are exposed to risks associated with price fluctuations of crude oil and refined oil products and petrochemical products.

 

We consume a large amount of crude oil to produce our refined oil products and petrochemical products. Increases in crude oil prices may result in cost inflation, and high prices may also reduce demand for our products which might adversely affect our profitability. Decreases in prices of crude oil, refined oil products and petrochemical products may cause us to incur impairment to our investment and assets. A prolonged period of low oil prices may impact our profit and ability to maintain our long-term investment projects. We use financial derivatives, including commodity futures, to hedge risks of the volatility in the crude oil price. The use of such financial derivatives may not successfully hedge all risks. The fair value of derivatives fluctuates due to the volatility of crude oil price, which in turn impacts our financial performance. In addition, while we try to adjust the sale prices of our products to reflect international crude oil price fluctuations, our ability to pass on the increased cost resulting from crude oil price increases to our customers may be limited, and is dependent on international and domestic market conditions as well as the PRC government’s price control policies over refined oil products. For instance, the PRC government could exercise price control over refined oil products when international crude oil prices experience a sustained rise or become significantly volatile. As a result, our results of operations and financial condition may be materially affected by the fluctuation of prices of crude oil, refined oil products and petrochemical products.

 

Our continued business success depends in part on our ability to replace reserves and develop newly discovered reserves.

 

Our ability to achieve our growth objectives is dependent in part on our level of success in discovering or acquiring additional oil and natural gas reserves. Our exploration and development activities for additional reserves also expose us to inherent risks associated with drilling, including the risk that no proved oil or natural gas reserves might be discovered. Exploring for, developing and acquiring reserves is highly risky and capital intensive. The fluctuation in the prices of crude oil and natural gas will impact the amount of our proved oil or natural gas reserves. In the low oil price environment, only large scale, high quality reserves meet our development criteria, and some exploration projects may not be viable and thus cannot be carried forward, potentially leading to failure in supplementing our oil and natural gas reserves with additional reserves through future exploration. Without reserve additions through further exploration and development or acquisition activities, or if the prices of crude oil and natural gas fall sharply, our reserves and production will decline over time, which may adversely affect our results of operations and financial condition.

 

We rely heavily on outside suppliers for crude oil and other raw materials, and we may even experience disruption of our ability to obtain crude oil and other raw materials.

 

We purchased a significant portion of crude oil and other feedstock from outside suppliers located in different countries and regions in the world, of which certain amount of the crude oil processed by our refinery business was sourced from countries or regions that were on the sanction list published and administered by the Office of Foreign Assets Control, or OFAC, of the U.S. Department of Treasury, including Iran and Sudan region. In addition, our business growth requires us to source an increasing amount of crude oil from outside suppliers. While we purposely source our crude oil from a diversified portfolio of outside suppliers to avoid any potential disruptions to our normal business operations, we are subject to the political, geographical and economic risks associated with these countries and areas. If our contractual relationships with one or more outside suppliers were terminated or disrupted due to any natural disasters or political events, it is possible that we would not be able to find sufficient alternative sources of supply in a timely manner or on commercially reasonable terms. As a result, our business and financial condition would be materially and adversely affected.

 

Starting from January 2016, the United States suspended most secondary sanctions (i.e., those covering non-U.S. persons) pursuant to the terms of the Joint Comprehensive Plan of Action (the “JCPOA”). In May 2018, the United States withdrew from the JCPOA. Effective on November 5, 2018, all U.S. sanctions on Iran including those on the crude oil and petrochemical sectors were re-imposed, with eight countries and regions including China granted temporary “significant reduction exceptions” as exemptions to such sanctions to allow the importation of crude oil from Iran, which expired on May 2, 2019. As U.S. sanctions on Iran have been resumed, we may be unable to source crude oil from Iran or be subject to secondary sanctions resulting from importing crude oil from Iran, which may have further adverse impact on us, including but not limited to being prohibited from conducting certain business and financing activities that relate to the United States, and in turn materially and adversely impact our ADS trading price, results of operations and financial condition.

6

We rely on our collaboration relationship with PipeChina for the use of certain oil and gas storage and pipeline facilities. Any adverse change to our collaboration with PipeChina may materially impact our business operation and financial status.

 

In September 2020, we closed the transaction with PipeChina, pursuant to which we sold certain oil and gas storage and pipeline facilities to PipeChina in exchange for approximately 14% of registered capital of, and cash paid by, PipeChina as consideration. We have entered into long-term service agreement with respect to the use of oil and gas storage and pipeline facilities with PipeChina, pursuant to which PipeChina shall provide us with oil and gas transportation and storage services on the agreed terms including, among others, that PipeChina shall meet our demand of service following the agreed service specifications and standards.

 

Due to the special nature of our business operations, especially our production, refining and distribution activities, the successful execution of our business operation plan will depend on our access to long-term and high-quality performance of oil and gas storage and transportation services that are satisfactory to us, through investing in self-operated storage and pipeline facilities as we did prior to the transaction with PipeChina, and/or through purchasing storage and transportation services from PipeChina and other third parties. Considering the difficulty of the construction of the oil and gas pipeline, storage and other ancillary facilities, which involves time-consuming construction of major capital expenditure projects that are subject to regulatory approvals, we expect that, in the foreseeable future, it would be hard for us to promptly construct, develop and commission oil and gas pipeline, storage and other ancillary facilities, and our main production sites will be connected with and supported by pipelines and storage facilities owned by PipeChina. As a result, the smooth operation of our business in the future will partially depend upon our harmonious collaboration relationship with PipeChina based on service agreement(s) between us and PipeChina. We do not have control over PipeChina, and all key terms of service agreements between us and PipeChina shall be determined based on the applicable laws and regulations as well as the result of arm’s-length commercial negotiations between us and PipeChina, as a result of which we cannot guarantee that we will continue to secure service from PipeChina on current or desirable terms. If we cannot continue to receive service from PipeChina at terms we desire, the operation of our business may be interrupted, and the results of our operations and our financial condition may be materially impacted.

 

Our business faces operation risks and natural disasters that may cause significant property damages, personal injuries and interruption of operations, and we may not have sufficient insurance coverage for all the financial losses incurred by us.

 

Exploring for, producing and transporting crude oil and natural gas and producing and transporting refined oil products and petrochemical products involve a number of operating hazards. Our operations are subject to significant hazards and risks inherent in refining operations and in transporting and storing crude oil, intermediate products, refined oil products and chemical products. These hazards and risks include, but are not limited to, natural disasters, fires, explosions, pipeline ruptures and spills, third-party interference and mechanical failure of equipment at our or third-party facilities, any of which could result in production and distribution difficulties and disruptions, environmental pollution, personal injury or wrongful death claims and other damage to our properties and the property of others. There is also risk of mechanical failure and equipment shutdowns both in general and subsequent unforeseen events. In certain situations, undamaged refinery processing units may be dependent on or interact with damaged process units and, accordingly, are also subject to being shut down. Even though we have a strong institutional focus on the safety of our operations and have implemented health, safety, security and environment (HSSE) management system within our company and developed an integral risk evaluation and management platform, “PHAMS,” to conduct dynamical and quantitative management and control of relevant risks with the view to preventing accidents, and reducing personal injuries, property losses and environment pollution, our preventative measures may not be effective. We also maintain insurance coverage on our property, plant, equipment, inventory and potential third party liability, but our insurance coverage may not be sufficient to cover all the financial losses caused by the operation risks and natural disasters. Significant operating hazards and natural disasters may cause interruption to our operations, property or environmental damages as well as personal injuries, and each of these incidents could have a material adverse effect on our financial condition and results of operations.

7

The oil and natural gas reserves data in this annual report are only estimates, and our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates.

 

There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves, and in the timing of development expenditures and the projection of future rates of production. Adverse changes in economic conditions, such as a prolonged period of low oil prices, may render it uneconomical to develop certain reserves and lead to downward revisions in our reserves. Our actual production, revenues, taxes and fees payable and development and operating expenditures with respect to our reserves may likely vary from these estimates.

 

The estimate of reserves is affected by, among other things:

 

the quality and quantity of technical and economic data;

 

the prevailing oil and gas prices applicable to our production;

 

the production performance of the reservoirs; and

 

the production plans.

 

In addition, new drilling, testing and production results achieved following completion of the estimates may cause substantial upward or downward revisions in the estimates.

 

Oilfield exploration and drilling involves numerous risks, including risks that no commercially productive crude oil or natural gas reserves can be discovered and risks of failure to acquire or retain reserves.

 

Our oil and gas business is currently involved in exploration activities in various regions, including in some areas where natural conditions may be challenging and where the costs of such exploration activities may be high. As a result, our oil and gas business may incur cost overruns or may be required to curtail, delay or cancel drilling operations because of many factors, including, but not limited to, the following:

 

disruption caused by unexpected stratigraphic factors;

 

irregularities in geological formations pressure;

 

equipment failures;

 

oil/gas well blowouts;

 

adverse weather conditions or natural disasters;

 

compliance with existing or enhanced environmental regulations;

 

governmental requirements and standards; or

 

delays in the availability of drilling rigs and delivery and maintenance of equipment.

8

The future production of our oil and gas business depends significantly upon our success in finding or acquiring additional reserves and retaining and developing such reserves. If our oil and gas business fails to conduct successful exploration activities or to acquire or retain assets holding proved reserves, it may not meet its production or growth targets, and its proved reserves will decline as it extracts crude oil and natural gas from the existing reservoirs, which could adversely affect our business, financial condition and results of operations.

 

We have been actively pursuing business opportunities outside China to supplement our domestic resources. However, there can be no assurance that we can successfully locate sufficient alternative sources of crude oil supply or at all due to the complexity of the international political, economic and other conditions. If we fail to obtain sufficient alternative sources of crude oil supply, our results of operations and financial condition may be adversely affected.

 

Our exploration, development and production activities and our refining and petrochemical business require substantial expenditure and investments and our plans for and ability to make such expenditures and investments are subject to various risks.

 

Exploring for, developing and producing crude oil and natural gas fields are capital-intensive activities involving a high degree of risk. Our ability to undertake exploration, development and production activities and make the necessary capital expenditures and investments is subject to many risks, contingencies and other uncertainties, which may prevent our oil and gas business from achieving the desired results, or which may significantly increase the expenditures and investments that our oil and gas business makes, including, but not limited to, the following:

 

ability to generate sufficient cash flows from operations to finance our expenditures, investments and other requirements, which are affected by changes in crude oil and natural gas prices and sales volumes, and other factors;

 

availability and terms of external financing;

 

mix of exploration and development activities conducted on an independent basis and those conducted jointly with other partners;

 

extent to which our ability to influence or adjust plans for exploration and development related expenditures is limited under joint operating agreements for those projects in which we have partners;

 

government approvals required for exploration and development-related expenditures and investments in jurisdictions in which we conduct business; and

 

economic, political and other conditions in jurisdictions in which we conduct business.

 

From time to time, we may construct new and/or revamp existing refining and petrochemical facilities, which require substantial capital expenditures and investments. There can be no 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. Our inability to obtain sufficient funding for development plans could adversely affect our business, financial condition and results of operations.

 

Our development projects and production activities involve many uncertainties and operating risks that can prevent us from realizing profits and cause substantial losses.

 

Our development projects and production activities may be curtailed, delayed or cancelled for many reasons, including equipment shortages or failures, natural hazards, unexpected drilling conditions, mechanical and technical difficulties caused by complex geological conditions and operating errors by our employees. These projects and activities, which include projects focused on non-conventional oil and gas exploration and development, will also often require the use of new and advanced technologies that may be expensive to develop, purchase and implement, and may not function as expected. There is a risk that any development project that we undertake may not yield expected returns. In addition, our development projects and production activities, particularly those in remote areas, could become less profitable, or unprofitable, if we experience a prolonged period of low oil or gas prices or cost overruns.

9

Our business may be adversely affected by actions and regulations prompted by global climate changes.

 

Many nations in the world have reached consensus on the importance and urgency of addressing climate change. The oil and gas industry in which we operate is drawing increasing concerns about global climate change in recent years. A number of international, national and regional measures to limit greenhouse gas emissions have been enacted. The Paris Agreement on climate change adopted in December 2015 has placed binding commitments on nations that have ratified it since November 2016, which may lead to more stringent national and regional measures in the near future. Compliance with these measures could result in substantial impact on capital expenditure, profit and strategic growth opportunities. In addition, China has undertaken to strive to peak the CO2 emissions by 2030 or earlier and strive hard to achieve carbon neutrality by 2060, if possible, and to increase the non-fossil fuel share of all energy to around 25%by 2030 while reducing the CO2 emissions by no less than 65% as compared with 2005. China has also implemented a national carbon emissions trading scheme in 2017, with power generation industry included initially, and will gradually expand the industry coverage after the market matures. As most of our domestic subsidiaries may be recognized as emission-control enterprises, such change could have certain effect on our business operations.

 

Our overseas businesses may be adversely affected by changes of overseas government policies and business environment.

 

We have operations and assets and may seek new opportunities in various countries and regions, including countries in Africa, South America, Central Asia , Russia and certain other regions, some of which are deemed to be subject to a high degree of political risk. The operations in these countries and regions may experience debt divergence, changes in taxation and foreign exchange controls, legal litigations, deterioration in compliance management environments or public security, market fluctuations and oil and gas price fluctuations, changes in political situations and sanctions rules and policies, investment decision risk, safety production and equipment integrity risk. Occurrence of any of these conditions could disrupt or curtail our operations or development activities. These events may also limit our ability to pursue new opportunities, affect the recoverability of our assets or cause us to incur additional costs, particularly due to the long-term nature of many of our projects and the significant capital expenditure required by those projects.

 

We may be classified as a passive foreign investment company for United States federal income tax purposes, which could result in adverse United States federal income tax consequences to United States investors in the H shares or ADSs.

 

A non-United States corporation, such as our company, will be a “passive foreign investment company” (PFIC), for United States federal income tax purposes for any taxable year, if either (a) 75% or more of its gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of our assets (generally based on the average quarterly value of our assets during the taxable year) produce or are held for the production of passive income. Depending upon the value of our assets, which may be determined based, in part, on the market price of our H shares or ADSs, and the nature of our assets and income over time, we could be classified as a PFIC for United States federal income tax purposes. Based on our income and assets and the market price of our H shares or ADSs, we do not believe that we were a PFIC for the taxable year ended December 31, 2020 and do not anticipate becoming a PFIC in the current taxable year or in the foreseeable future. Because PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and the value of our active versus passive assets for that year, there can be no assurance that we will not be a PFIC for any future taxable year. The overall level of our passive assets will be affected by how, and how quickly, we expend our liquid assets. Under circumstances where gross income from activities that produce passive income significantly increase relative to our gross income from activities that produce non-passive income or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially increase. If we were to be or become classified as a PFIC, a US Holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gains recognized on the sale or other disposition of the H shares or ADSs and on the receipt of distributions on the H shares or ADSs to the extent such gains or distributions are treated as an “excess distribution” under the United States federal income tax rules. For more information see “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations.”

10

Our operations may be adversely affected by cyber-attacks or similar disruptions.

 

We have established cybersecurity control schemes and operation and maintenance schemes for our information infrastructure and application system, built a cybersecurity risk management and control information platform, and devoted significant resources to protecting our digital infrastructure and information system against cyber-attacks. If our systems against cyber-security risk prove to be ineffective, we could be adversely affected by, among other things, disruptions to our business operations, and loss of proprietary information, including intellectual property, financial information and employer and customer data, injury to people, property, environment and reputation. As cyber-security attacks continue to evolve, we may be required to expend additional resources to enhance our protective measures against cyber-security breaches.

 

COVID-19 pandemic could materially and adversely affect our business.

 

In 2020, the global pandemic of COVID-19 and public prevention measures have had and may continue to have certain adverse impacts for a period of time on the demand for our end products and on our normal operating activities, including disruptions from the temporary closure of offices, suspension of business travel or other disruptions on our normal working schedules, which, in aggregate, may have significant impacts on our business, financial condition and results of operations. We have taken measures in response to the outbreak, including the adoption of more stringent workplace sanitation measure. At present, domestic COVID-19 is generally under control within China, and vaccines are being inoculated within China and abroad, However, unpredictable factors still exist in terms of COVID-19 global trend. The extent to which this outbreak impacts our results will depend on future developments of COVID-19, including new information which may emerge concerning the severity of the outbreak and the actions to contain the outbreak or treat its impact, among others.

 

Risks Relating to Our Industry

 

Our operations may be adversely affected by the global and domestic economic conditions.

 

Our results of operations are materially affected by economic conditions in China and elsewhere around the world. There are some uncertainty and instability in the current global economy. The Chinese economy has entered a new development stage and is moving forward with high quality development. Our operations may also be adversely affected by factors such as foreign countries’ trade protection policies and increase in imports activities facilitated by regional trade agreements.

 

Our operations may be adversely affected by the cyclical nature of the market.

 

Most of our revenues are attributable to sales of refined oil products and petrochemical products, and certain of these businesses and related products have historically been cyclical and sensitive to a number of factors that are beyond our control. These factors include the availability and prices of feedstock and macro-economic conditions, such as changes in industry capacity and output levels, cyclical changes in regional and global economic conditions, prices and availability of substitute products and fluctuation in prices and demands of natural gas, refined oil products and chemical products. Although we are an integrated company with upstream, midstream and downstream businesses, we have limited ability to mitigate the adverse influence of the cyclicality of global markets.

11

We face strong competition from domestic and foreign competitors.

 

Among our competitors, some are major integrated petroleum and petrochemical companies within and outside China, which have recently become more significant participants in the petroleum and petrochemical industry in China. The PRC government has speeded up the release of restrictions on the right to use imported crude oil. This development may lead to refining overcapacity in China and intensify competition among local refineries. The Chinese crude oil and refined oil product markets are becoming increasingly dynamic and internationalized with implementation of tariff concessions and relaxation of market. In the opened-up wholesale market of refined oil products previously dominated by PetroChina Company Limited and us, we are facing stronger competition from new players and imported products. Our market share of chemical products is also under stronger competitive pressure due to the increasingly active participation of diversified new market players including multinational petroleum and petrochemical companies and domestic private enterprises. In addition, we are also expected to face competition in both domestic and overseas refined oil products and petrochemical product market as a result of our domestic and international competitors’ increasing production capacity. Increased competition may have a material adverse effect on our financial condition and results of operations.

 

Risks Relating to Our Controlling Shareholder

 

We engage in related party transactions with Sinopec Group from time to time which may create potential conflict of interest.

 

We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group, which provides us with a number of services, including, but not limited to, ancillary supply, engineering, maintenance, transport, lease of land use right, lease of buildings, as well as educational and ancillary services. The nature of our transactions with Sinopec Group is governed by a number of service and other contracts between Sinopec Group and us. We have established various schemes in those agreements so that these transactions, when entered into, are under terms that are at arm’s length. However, we cannot assure you that Sinopec Group Company or any of its members would not take actions that may favor its interests or its other subsidiaries’ interests over ours.

 

We are controlled by Sinopec Group Company, our ultimate controlling shareholder, whose interest in certain businesses are likely to compete with our business.

 

Sinopec Group Company has interests in certain businesses, such as petrochemical and overseas exploration and development, which compete or are likely to compete, either directly or indirectly, with our businesses. To avoid the adverse effects brought by the competition between us and Sinopec Group Company to the maximum extent possible, we and Sinopec Group Company have entered into a non-competition agreement. In 2012, we received from Sinopec Group Company an undertaking to avoid its competition with us. For details, please refer to the descriptions under “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.” Notwithstanding the foregoing contractual arrangements, because Sinopec Group Company is our controlling shareholder, Sinopec Group Company may take actions that may conflict with our own interests.

 

It is possible that the current or future activities of our ultimate controlling shareholder, Sinopec Group Company, or its affiliates in or with certain countries that are the subject of economic sanctions under relevant U.S. laws could result in negative media and investor attention to us and possible imposition of sanctions on Sinopec Group Company, which could materially and adversely affect our shareholders’ value and operations.

 

Sinopec Group Company undertakes, from time to time and without our involvement, overseas investments and operations in the oil and gas industry, including exploration and production of oil and gas, refining and Liquefied Natural Gas or LNG, oilfield services and refining engineering projects. Sinopec Group Company’s overseas asset portfolio includes a limited number of projects in countries that are subject to U.S. sanctions administrated by OFAC and by the U.S. Department of State, including Iran, Syria and Sudan. We currently do not believe that any existing investments of Sinopec Group Company will result in any direct sanctions imposed by OFAC. However, we cannot predict the interpretation or implementation of sanction policy at the U.S. federal, state or local levels with respect to any current or future activities by Sinopec Group Company or its affiliates in countries or with individuals or entities that are the subject of U.S. sanctions. Similarly, we cannot predict whether U.S. sanctions will be further tightened in the case of Iran, or whether sanction scope will be modified or updated, or if any other countries or regions will be incorporated into the sanction list, or the impact that such actions may have on Sinopec Group Company and us. If becoming the target of U.S. sanctions, Sinopec Group Company may be prohibited from conducting business activities in the United States or with individuals or entities in the United States, and the transactions involving our securities in the United States will also be significantly affected. In addition, certain U.S. state and local governments and colleges have restrictions on the investment of public funds or endowment funds, respectively, in companies that are members of corporate groups with activities in certain countries that are the subject of U.S. sanctions. These investors may not wish to invest, and may divest their investment, in us because of our relationship with Sinopec Group Company and its investments and activities in those OFAC sanctioned countries. It is possible that, as a result of activities by Sinopec Group Company or its affiliates in countries that are the subject of U.S. sanctions, we may be subject to negative media or investor attention, which may distract management, consume internal resources and affect investors’ perception of our Company.

12

Risks Relating to the PRC

 

Government regulations may limit our activities and affect our business operations.

 

The PRC government, though gradually liberalizing its regulations on entry into the petroleum and petrochemical industry, continues to exercise certain controls over the petroleum and petrochemical industry in China. These control mechanisms include granting the licenses to explore for and produce crude oil and natural gas, granting the licenses to market and distribute crude oil and refined oil products, regulating the upper limit of the retail prices for gasoline and diesel; collecting special oil income levies, deciding import and export quotas and procedures, setting safety, environmental and quality standards, and formulating policies to save energy and reduce emission; meanwhile, there could be potential changes to macroeconomic and industry policies such as reforming of the oil and gas industry, and further reforming and improvement of pricing mechanism of refined oil products and natural gas, which could impact the development of the domestic petroleum and petrochemical industry and the production and operations of the domestic enterprises operating in such industry. Such control mechanisms may have material effects on our operations and profitability.

 

The PRC governmental authorities, from time to time, audit or inspect our ultimate controlling shareholder. We cannot predict the impact, if any, of their outcome on our reputation, business and financial condition as well as the trading prices of our ADSs and H shares.

 

The PRC governmental authorities, from time to time, perform audits, inspections, inquiries or similar actions on state-owned companies, such as Sinopec Group Company, our ultimate controlling shareholder. Such inspections are not conducted on a regular basis with specific targets, and therefore we cannot predict the outcome of these governmental activities. If, as a result of such audits, inspections or inquiries, (i) material irregularities are found within Sinopec Group Company or us or our employees or (ii) Sinopec Group Company or we become the target of any negative publicity, our reputation, business and financial condition as well as the trading prices of our ADSs and H shares may be materially and negatively impacted.

 

Our business operations may be adversely affected by present or future environmental regulations.

 

As an integrated petroleum and petrochemical company, we are subject to extensive environmental protection laws and regulations in China. These laws and regulations permit:

 

the government, in accordance with law, to impose fines, to order correction, limitation on production or discharge, and suspend production for pollution discharge exceeding standards;

 

the government to impose fines for late payment of environmental tax for the discharge of waste materials;

 

the government, in accordance with law, to order correction, suspend production and impose fines for unlicensed or uncertified pollution discharge;

13

the government, at its discretion, to seal up or close down any facility which has caused or may cause severe environmental damage and require it to correct or stop operations; and

 

litigations and liabilities arising from pollutions and damages to the environment and public interests.

 

Our production activities produce substantial amounts of liquid, gas and solid waste materials. We have established a system to treat waste materials to prevent and reduce pollution. We may have certain facilities built in regions newly reclassified as ecological preservation areas, and therefore need to be relocated. Also, the PRC government has moved, and may move further, toward more rigorous enforcement of applicable laws, and toward the adoption of more stringent environmental standards.

 

In recent years, we have commenced exploration and production of unconventional oil and gas resources, such as shale oil and gas and coal bed methane, through the application of relatively advanced technologies. As a result, our unconventional oil and gas operations rely on unproven technology which may expose us to higher environmental compliance standards and requirements, which, in turn, would require us to incur additional expenditures on environmental matters.

 

Some of our development plans require compliance with state policies and governmental regulation.

 

We are currently engaged in a number of construction, renovation and expansion projects. Some of our large construction, renovation and expansion projects are subject to governmental confirmation and registration. The timing and cost of completion of these projects will depend on numerous factors, including when we can receive the required confirmation and registration from relevant PRC government authorities and the general economic condition in China. If any of our key projects required for our future growth is not confirmed or registered, or not confirmed or registered in a timely manner, our results of operations and financial condition could be adversely impacted.

 

Government control of currency conversion and exchange rate fluctuation may adversely affect our operations and financial results.

 

We receive a significant majority of our revenues in Renminbi. A portion of such revenues will need to be converted into other currencies to meet our foreign currency needs, which include, among other things:

 

import of crude oil and other materials;

 

debt service on foreign currency-denominated debt;

 

purchases of imported equipment;

 

payment of the principals and interests of bonds issued overseas; and

 

payment of any cash dividends declared in respect of the H shares (including ADS).

 

The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange. The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi.

14

The exchange rate of the Renminbi against the US dollar and other foreign currencies fluctuates with market and is affected by, among other things, the changes in the PRC’s and international political and economic conditions. On July 21, 2005, the PRC government introduced a floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of foreign currencies. On June 19, 2010 and August 11, 2015, respectively, the People’s Bank of China (PBOC) decided to further promote the reform of exchange rate regime and enhance the flexibility of Renminbi exchange rate. The changes in foreign exchange rate will impact our cost in purchasing crude oil given the majority of our crude oil purchases are settled in foreign currencies and priced in US dollar. Besides, prices of refined oil products are guided by the PRC government and are pegged to the exchange rate of the Renminbi against the US dollar. Therefore the impact of Renminbi exchange rate fluctuation on the purchase cost of crude oil could largely be offset by the corresponding fluctuation in the prices of domestic refined oil products and chemical products.

 

Risks relating to enforcement of shareholder rights; Mandatory arbitration.

 

Currently, the primary sources of shareholder rights are our articles of association, the PRC Company Law and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. In general, their provisions for protection of shareholder’s rights and access to information are different from those applicable to companies incorporated in the United States, the United Kingdom and other Western countries. In addition, the mechanism for enforcement of rights under the corporate framework to which we are subject may also be relatively undeveloped and untested. To our knowledge, there has not been any published report of judicial enforcement in the PRC by H share shareholders of their rights under constituent documents of joint stock limited companies or the PRC Company Law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies. We cannot guarantee that our shareholders will enjoy protections that they may be entitled in other jurisdictions.

 

China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other Western countries, and therefore recognition and enforcement in China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may not be assured. Our articles of association as well as the Listing Rules of the Hong Kong Stock Exchange provide that most disputes between holders of H shares and us, our directors, supervisors, officers or holders of domestic shares, arising out of the articles of association or the PRC Company Law concerning the affairs of our company, are to be resolved through arbitration, at the election of the claimant, by arbitration organizations in Hong Kong or the PRC, rather than through a court of law. On June 18, 1999, an arrangement was made between Hong Kong and the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People’s Court of the PRC and the Hong Kong Legislative Council, and became effective on February 1, 2000. We are uncertain as to the outcome of any action brought in China to enforce an arbitral award granted to shareholders.

 

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection. Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially affect the value of your investment.

 

The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

 

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB.

15

On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.

 

The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President's Working Group on Financial Markets, or the PWG, issued a report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate, some of which were more stringent than the HFCA Act.

 

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of our ADSs to be affected, and our securities could be delisted or prohibited from being traded “over-the-counter,” which may substantially impair the investors’ ability to sell or purchase our ADSs.

 

The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, investors may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

 

Additional remedial measures imposed on certain PRC-based accounting firms, including our independent registered public accounting firm, in proceedings brought by the SEC alleging the firms’ failure to meet specific criteria, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

 

In December 2012, the SEC brought administrative proceedings against the “Big Four” accounting firms in China, including our independent registered public accounting firm, alleging that these firms had refused to produce audit work papers and other documents related to certain other China-based companies whose securities are publicly traded in the United States. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and barring these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until it is endorsed by the SEC. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement required the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission (CSRC) in response to future document requests by the SEC made through the CSRC. We cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions.

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In the event that the Chinese affiliates of the “Big Four” become subject to additional legal challenges by the SEC or PCAOB, listed companies in the United States with PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, and hence face delisting. Moreover, any negative news about the proceedings against these audit firms may give rise to a perception of uncertainty to investors regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.

 

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to delisting of our ADSs from the New York Stock Exchange (NYSE) or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

 

ITEM 4.INFORMATION ON THE COMPANY

 

A.HISTORY AND DEVELOPMENT OF THE COMPANY

 

Our legal and commercial name is China Petroleum & Chemical Corporation. Our head office is located at 22 Chaoyangmen North Street, Chaoyang District, Beijing 100728, the People’s Republic of China, our telephone number is (8610) 5996-0028 and our fax number is (8610) 5996-0386. We have appointed our representative office in the North America, located at 3050 Post Oak Blvd, Suite 800, Houston, 77056, with telephone number of +1 (713) 544 8888 and fax number of +1 (713) 544 8878, as our agent for service of processes for actions brought under the U.S. securities laws. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding us that have been filed electronically with the SEC, which can be accessed at http://www.sec.gov. Information about the Company and documents the Company submitted to the SEC are available on our investor relations website: http://www.sinopec.com/listco/en/investor_centre/corporate_governance/.

 

We were established as a joint stock limited company on February 25, 2000 under the Company Law of the PRC with Sinopec Group Company as the sole shareholder at our inception. Our principal businesses consist of petroleum and petrochemical businesses transferred to us by Sinopec Group Company pursuant to a reorganization agreement. Such businesses include:

 

exploration for, development, production and marketing of crude oil and natural gas;

 

refining of crude oil and marketing and distribution of refined oil products, including transportation, storage, trading, import and export of petroleum products; and

 

production and sales of petrochemical products.

 

Sinopec Group’s continuing activities primarily consist, among other things, of:

 

exploring and developing oil and gas reserves overseas;

 

operating certain petrochemical facilities;

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providing geophysical exploration, and well drilling, survey, logging and downhole operational services;

 

manufacturing production equipment and providing equipment maintenance services;

 

providing construction services;

 

providing utilities, such as electricity and water; and

 

providing other operational services including transportation services.

 

Sinopec Group Company transferred the businesses to us either by transferring its equity holdings in subsidiaries or by transferring their assets and liabilities. Sinopec Group Company also agreed in the reorganization agreement to transfer to us its exploration and production licenses and all rights and obligations under the agreements in connection with its core businesses transferred to us. The employees relating to these assets were also transferred to us.

 

From July 8, 2015 to July 7, 2016, Sinopec Group Company increased its shareholding in the Company through acquisitions of our ordinary shares on the stock market in its own name or through other concerting parties, by way of acquiring 72,000,000 A shares. Immediately following the shareholding increase, Sinopec Group Company directly and indirectly held 86,345,821,101 shares of the Company.

 

On October 29, 2015, we entered into a joint venture agreement with Sinopec Assets Management Co., Ltd. (“SAMC”), a wholly-owned subsidiary of Sinopec Group Company, in relation to the formation of Sinopec Shanghai Gaoqiao Petrochemical Co., Ltd. (“Gaoqiao”). We and SAMC subscribed for 55% and 45% of the registered capital of Gaoqiao, respectively, and Gaoqiao became a subsidiary of the Company.

 

On August 2, 2016, our board of directors unanimously approved the proposal to introduce capitals from potential investors to invest in Sichuan-to-East China gas pipeline project, through our indirectly wholly-owned subsidiary Sinopec Sichuan-to-East China Natural Gas Pipeline Co., Ltd. (“Sichuan-to-East China Pipeline Co.”). On December 12, 2016, Sinopec Natural Gas Limited Company, our wholly-owned subsidiary (“Natural Gas Company”), China Life Insurance Co., Ltd. (“China Life”) and SDIC Communications Holding Co., Ltd. (“SDIC Communications”) entered into the Capital Injection Agreement in relation to Sichuan-to-East China Pipeline Co. and agreed to collectively subscribe for 50% equity interest in Sichuan-to-East China Pipeline Co. for an aggregate amount of RMB 22.8 billion in cash. Upon completion of the capital injection, China Life, SDIC Communications and the Natural Gas Company held 43.86%, 6.14% and 50% equity interest in Sichuan-to-East China Pipeline Co., respectively.

 

On April 27, 2017, our board of directors unanimously approved the proposal of the acquisition of equity interest in Shanghai SECCO Petrochemical Company Limited (“Shanghai SECCO”) by Gaoqiao. On October 26, 2017, Gaoqiao purchased 50% equity interest in Shanghai SECCO from BP Chemicals East China Investment Limited with a cash consideration of RMB 10,135 million. Before the acquisition, we and one of our subsidiaries held 30% and 20% equity interest in Shanghai SECCO, respectively. Upon completion of the acquisition, we, together with our subsidiaries, hold 100% equity interest of Shanghai SECCO, which became a subsidiary of us.

 

Following the instruction by the State-owned Assets Supervision and Administration Commission of the State Council, on August 9, 2018, Sinopec Group Company gratuitously transferred 1,241,721,854 A shares of the Company to Beijing Chengtong Financial Control Investment Co., Ltd., and 1,241,721,854 A shares to Guoxin Investment Co., Ltd. Upon the completion of such transfers, Sinopec Group Company directly and indirectly held 83,862,377,393 shares of the Company.

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In July 2020, we and certain of our subsidiaries entered into transactions with PipeChina to sell the ownership of certain oil and gas pipeline assets and other facilities to PipeChina in exchange for approximately 14% of registered capital of, and cash paid by, PipeChina as consideration (the “Pipeline Transactions”). The Pipeline Transactions closed on September 30, 2020. In accordance with the arrangements of the Pipeline Transactions, we and PipeChina have entered into agreements for the continuous use of relevant oil and gas pipelines and other facilities in the future on the terms and subject to conditions set forth therein.

 

B.BUSINESS OVERVIEW

 

Exploration and Production

 

Overview

 

We currently explore for, develop and produce crude oil and natural gas in a number of areas in China and overseas. As of December 31, 2020, we held 238 production licenses in China, with an aggregate acreage of 33,965 square kilometers and with terms ranging from 10 to 80 years. Our production licenses may be renewed upon our application at least 30 days prior to the expiration date, which are renewable for unlimited times. During the term of our production license, we pay an annual production license fee of RMB 1,000 per square kilometer.

 

As of December 31, 2020, we held 190 exploration licenses in China for various blocks in which we engaged in exploration activities, with an aggregate acreage of approximately 437 thousand square kilometers.

 

As of December 31, 2020, our overseas subsidiary held one production licenses, with an acreage of 322.57 square kilometers. It currently does not have exploration licenses. Our overseas equity-accounted investments held 74 production licenses, with an aggregate acreage of 4,907.4 square kilometers, and no exploration license.

 

Properties

 

We currently operate 248 oil and gas producing fields and blocks.

 

Shengli production field is our most important crude oil production field. It consists of 75 producing blocks of various sizes extending over an area of 2,523 square kilometers in northern Shandong province, all of which are our net developed acreage. Most of Shengli’s blocks are located in the Jiyang trough with various oil producing layers. In 2020, Shengli production field produced approximately 166 million barrels of crude oil and 20.047 billion cubic feet of natural gas, with an average daily production of 463.1 thousand BOE.

 

As of December 31, 2020, the total acreage of our oil and gas producing fields and blocks in China was 16,770 square kilometers, including 10,230 square kilometers of developed acreage, all of which were net developed acreage; and 6,540 square kilometers of gross undeveloped acreage, all of which were net undeveloped acreage.

 

As of December 31, 2020, the total acreage of our oil and gas producing fields and blocks of our overseas subsidiary was 322.57 square kilometers, including 169.21 square kilometers of developed acreage, of which 110 square kilometers were net developed acreage; and 153.36 square kilometers of gross undeveloped acreage, of which 31.8 square kilometers were net undeveloped acreage.

 

As of December 31, 2020, the total acreage of our oil and gas producing fields and blocks of our overseas equity-accounted investments was 1,893.4 square kilometers, including 1,818.4 square kilometers of developed acreage, of which 1,818.4 square kilometers were net developed acreage; and 75.1 square kilometers of gross undeveloped acreage, of which 45.1 square kilometers were net undeveloped acreage.

 

Oil and Natural Gas Reserves

 

As of December 31, 2020, our estimated proved reserves of crude oil and natural gas in China were 2,595 million BOE (including 1,232 million barrels of crude oil and 8,181 billion cubic feet of natural gas), and our estimated proved reserves of crude oil and natural gas outside of China, which included a share of the estimated proved reserves of our equity-accounted investments, were 312.6 million BOE. Our estimated proved reserves do not include additional quantities recoverable beyond the term of the relevant production licenses, or that may result from extensions of currently proved areas, or from application of improved recovery processes not yet tested and determined to be economical.

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The following tables set forth our proved developed and undeveloped crude oil and natural gas reserves by region as of December 31, 2020.

 

Crude Oil Proved Reserves  As of December 31, 2020 
   (in millions of barrels) 
Developed Subsidiaries     
China   1,130 
Shengli   821 
Others   309 
Overseas   15.03 
Subtotal   1,145.03 
Equity-accounted investments     
China   - 
Overseas   244.44 
Subtotal   244.44 
Total Proved Developed   1,389.47 
Undeveloped Subsidiaries     
China   102 
Shengli   16 
Others   86 
Overseas   5.49 
Subtotal   107.49 
Equity-accounted investments     
China   - 
Overseas   45.79 
Subtotal   45.79 
Total Proved Undeveloped   153.28 
Total Crude Oil Proved Reserves   1,542.75 

 

Natural Gas Proved Reserves  As of December 31, 2020 
   (in billions of cubic feet) 
Developed Subsidiaries     
China   6,357 
Puguang   1,675 
Fuling   1,491 
Others   3,191 
Overseas   - 
Subtotal   6,357 
Equity-accounted investments     
China   - 
Overseas   8.34 
Subtotal   8.34 
Total Proved Developed   6,365.34 
Undeveloped Subsidiaries     
China   1,824 
Puguang   71 
Fuling   119 
Others   1,634 
Overseas   - 
Subtotal   1,824 
Equity-accounted investments     
China   - 
Overseas   1.33 
Subtotal   1.33 
Total Proved Undeveloped   1,825.33 
Total Natural Gas Proved Reserves   8,190.67 

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As of December 31, 2020, approximately 101.94 million barrels of our crude oil proved reserves and 1,823.7 billion cubic feet of our natural gas proved reserves were classified as proved undeveloped reserves in China and overseas. 2.23 million barrels of crude oil and 648.04 billion cubic feet natural gas proved reserves in China have been classified as proved undeveloped for more than five years, mainly under Sinopec Shanghai Offshore Petroleum Company, one of our subsidiaries.

 

During 2020, a total of 374 wells were drilled by us in China and 100 wells were drilled overseas. We converted 48.87 million barrels of proved undeveloped crude oil reserves and 139.14 billion cubic feet of proved undeveloped natural gas reserves into proved developed reserves in 2020. Total capital expenditure incurred in converting proved undeveloped reserves into proved developed reserves amounted to RMB8,205 million, including RMB7,096 million and RMB1,109 million incurred in connection with our operations in China and overseas, respectively, in 2020.

 

Our reserves estimation is managed by a two-tier management system. The Oil and Natural Gas Reserves Management Committee, or the RMC, at our headquarters level, organizes, coordinates and oversees the overall reserves estimation, and is in charge of the major issues in reserves estimation and approving the reserves estimation report of our company. Each of our Branches has a reserves management committee that manages and coordinates the reserves estimation process, organizes the evaluators to do reserves estimation, reviews and inspects the evaluation materials and results at the branches level, and reports to the RMC of the Company.

 

Our RMC consists of our senior managements, the senior management of related divisions at our headquarters level, our exploration and production institution and our Branches in each oil field. The current Chairman of our RMC, Mr. Liu Hongbin, Senior Vice President of the company, has over 30 years of experience in the oil and gas industry. A majority of our RMC members hold doctor’s or master’s degrees and our RMC members have an average of 20 years of technical experience in relevant industry fields, such as geology, development and economics.

 

Our reserves estimation is guided by procedural manuals and technical guidance. Initial collection and compilation of reserves information are conducted by different working divisions, including exploration, development and financial divisions, at production bureau level. Technical experts in exploration, development and economics divisions of our Branches in each oil field collectively prepare the initial report on reserves estimation. The reserves management committees at production bureau level then review to ensure the qualitative and quantitative compliance with technical guidance and accuracy and reasonableness of the reserves estimation. We also engage outside consultants who assist us to be in compliance with the U.S. Securities and Exchange Commission rules and regulations. Our reserves estimation process is further facilitated by a specialized reserves database which is reviewed and updated periodically.

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Oil and Natural Gas Production

 

In 2020, we produced an average of 1,168.6 thousand BOE per day in China, of which approximately 58.3% was crude oil and 41.7% was natural gas. We produced an average of 85.8 thousand BOE per day overseas, of which 98.05% was crude oil and 1.95% was natural gas.

 

The following tables set forth our average daily production of crude oil and natural gas for the years ended December 31, 2018, 2019 and 2020. The production of crude oil includes condensate.

 

   Year Ended December 31, 
   2018   2019   2020 
   (in thousands of barrels) 
Average Daily Crude Oil Production               
China   682    683    682 
Subsidiaries   682    683    682 
Shengli   455    455    454 
Others   227    228    228 
Overseas   107    95.3    84.1 
Subsidiary   30    19.2    17.4 
Equity-accounted investments   77    76.1    66.7 
Total Crude Oil Production   789    778.3    766.1 

 

   Year Ended December 31, 
   2018   2019   2020 
   (in millions of cubic feet) 
Average Daily Natural Gas Production               
China   2,668    2,862    2,921 
Subsidiaries   2,668    2,862    2,921 
Puguang   615    664    598 
Fuling   582    613    647 
Others   1,471    1,585    1,676 
Overseas   8    8.5    8.8 
Equity-accounted investments   8    8.5    8.8 
Total Natural Gas Production   2,676    2,870.5    2,929.8 

 

Lifting Cost & Realized Prices

 

The following table sets forth our average lifting costs per BOE of crude oil produced, average sales prices per barrel of crude oil and average sales prices per thousand cubic meters of natural gas for the years ended December 31, 2018, 2019 and 2020.

 

   Weighted Average   China   Overseas(1) 
   (RMB) 
For the year ended December 31, 2020            
Average petroleum lifting cost per BOE   105.28    101.67    154.41 
Average realized sales price               
Per barrel of crude oil   269.85    266.86    294.12 
Per thousand cubic meters of natural gas   1,318.1    1,318.1     
For the year ended December 31, 2019               
Average petroleum lifting cost per BOE   117.0    110.32    164.49 
Average realized sales price               
Per barrel of crude oil   406.0    400.37    445.96 
Per thousand cubic meters of natural gas   1,326.09    1,326.09     
For the year ended December 31, 2018               
Average petroleum lifting cost per BOE   112.45    111.75    116.90 
Average realized sales price               
Per barrel of crude oil   432.32    426.81    467.11 
Per thousand cubic meters of natural gas   1,263.41    1,263.41     

 

 

(1)The exchange rates we used for overseas data in this table were exchange rates for each year ended December 31, 2018, 2019 and 2020, which were RMB 6.6204 to US$ 1.00, RMB 6.8985 to US$ 1.00, and RMB 6.8976 to US$ 1.00, respectively.

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Exploration and Development Activities

 

In 2020, under the environment of low oil prices, we pressed ahead with high quality exploration and profit-oriented development, accelerated the systematic integration of natural gas production, supply, storage and marketing, and achieved tangible results in maintaining oil production, increasing gas output and cutting cost. In exploration, we continued to strengthen risk exploration in strategic areas, oil and gas rich zones and shale resources, which led to new discoveries in Tarim Basin, Sichuan Basin and Bohai Bay Basin. In crude oil development, we efficiently proceeded with the capacity building of Shunbei and other oilfields, strengthened fine development in mature fields, intensified EOR technology breakthrough and application, and consolidated the basis for steady production. In natural gas development, we constantly pushed forward capacity building in Weirong and West Sichuan gas fields, expanded the market and sales, and continuously improved the sales volume with a record high domestic market share. The Company’s production of oil and gas reached 459.02 million barrels of oil equivalent, with domestic crude production reaching 249.52 million barrels and natural gas production totalled 1,072.3 billion cubic feet, up by 2.3% year on year.

 

The following table sets forth the numbers of our exploratory and development wells, including a breakdown of productive wells and dry wells we drilled during the years ended December 31, 2018, 2019 and 2020.

 

   As of December 31, 
   2018   2019   2020 
Number of  Exploratory   Development   Exploratory   Development   Exploratory   Development 
Drilled Wells  Productive   Dry   Productive   Dry   Productive   Dry   Productive   Dry   Productive   Dry   Productive   Dry 
China  286   131   1,941   6   350   174   2,098   5   383   136   2,015   3 
Subsidiaries  286   131   1,941   6   350   174   2,098   5   383   136   2,015   3 
Shengli  149   71   1,201   5   195   81   1,168   4   204   64   1,080   2 
Others  137   60   740   1   155   93   930   1   179   72   935   1 
Overseas        70      3   1   99      2      100    
Subsidiaries                                4    
Equity- accounted investments        70      3   1   99      2      96    
Total  286   131   2,011   6   353   175   2,197   5   385   136   2,115   3 

 

The following table sets forth the number of wells being drilled by us as of December 31, 2018, 2019 and 2020:

 

   As of December 31, 
   2018   2019   2020 
Number of Drilling  Gross   Net   Gross   Net   Gross   Net 
Welling  Exploratory   Development   Exploratory   Development   Exploratory   Development   Exploratory   Development   Exploratory   Development   Exploratory   Development 
China  69   277   69   277   117   177   117   176   92   212   92   212 
Subsidiaries  69   277   69   277   117   177   117   176   92   212   92   212 
Shengli  25   72   25   72   60   20   60   20   29   52   29   52 
Others  44   205   44   205   57   157   57   156   63   160   63   160 
Overseas     10      10               2      2    
Subsidiaries                                    
Equity-accounted investments     10      10               2      2    
Total  69   287   69   287   117   177   117   176   94   212   94   212 

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The following tables set forth our number of productive wells for crude oil and natural gas as of December 31, 2020, as compared to December 31, 2019 and 2018:

 

   As of December 31, 
   2018   2019   2020 
Productive Wells for Crude Oil  Gross   Net   Gross   Net   Gross   Net 
China  51,030   51,030   52,112   52,112   53,240   53,240 
Subsidiaries  51,030   51,030   52,112   52,112   53,240   53,240 
Shengli  32,805   32,805   33,819   33,819   34,572   34,572 
Others  18,225   18,225   18,293   18,293   18,668   18,668 
Overseas  7,293   3,939   7,248   2,855   7,055   2,752 
Subsidiaries  28   14   28   14   28   10 
Equity-accounted investments  7,265   3,925   7,220   2,841   7,027   2,742 
Total  58,323   54,969   59,360   54,967   60,295   55,992 

 

   As of December 31, 
   2018   2019   2020 
Productive Wells for Natural Gas  Gross   Net   Gross   Net   Gross   Net 
China  5,068   5,028   6,420   6,378   6,976   6,928 
Subsidiaries  5,068   5,028   6,420   6,378   6,976   6,928 
Puguang  58   58   61   61   67   67 
Fuling  368   368   482   482   632   632 
Others  4,642   4,602   5,877   5,835   6,277   6,229 
Total  5,068   5,028   6,420   6,378   6,976   6,928 

 

Refining

 

Overview

 

In 2020, our refinery throughputs were approximately 236.91 million tonnes. We produce a full range of refined oil products. The following table sets forth our production of our principal refined oil products for the years ended December 31, 2018, 2019 and 2020.

 

   Year Ended December 31, 
   2018   2019   2020 
   (in million tonnes) 
Gasoline   61.16    62.77    57.91 
Diesel   64.72    66.06    63.21 
Kerosene   28.91    31.16    20.38 
Light chemical feedstock   38.52    39.78    40.22 
Liquefied petroleum gas   13.17    12.57    11.61 
Fuel oil   1.68    1.95    7.71 

 

Gasoline and diesel are our largest revenue-generating products, and are sold mostly through Sinopec Marketing Co., Ltd., our subsidiary, through both wholesale and retail channels. We use most of our production of chemical feedstock as feedstock for our own chemical operations. Most of our other refined oil products were sold in China to a wide variety of industrial and agricultural customers, and a small amount is exported.

 

Refining Facilities

 

Currently we operate 30 refineries in China. As of December 31, 2020, our total primary distillation capacity of crude oil was 296.9 million tonnes per annum.

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The following table sets forth our total primary distillation capacity per annum of crude oil and refinery throughputs as of and for the years ended December 31, 2018, 2019 and 2020.

 

   As of and for the Year Ended December 31, 
   2018   2019   2020 
Primary distillation capacity of crude oil (million tonnes per annum)(1)   293.5    295.5    296.90 
Refinery throughputs (million tonnes)(2)   244.0    248.5    236.91 

 

 

(1)The primary distillation capacity and refinery throughputs of joint ventures are fully included in our statistics.

 

(2)When calculating refinery throughputs, conversion from tonnes to barrels are made at a rate of one tonne to 7.35 barrels.

 

In 2020, our gasoline yield was 24.44%, diesel yield was 26.68%, kerosene yield was 8.6%, and light chemical feedstock yield was 16.98%. For the years ended December 31, 2018, 2019 and 2020, our overall yield for all refined oil products at our refineries was 94.93%, 94.98% and 94.77%, respectively.

 

The following table sets forth the primary distillation capacity per annum as of December 31, 2020 of each of our refineries with the primary distillation capacity of 8 million tonnes or more per annum.

 

Refinery  Primary Distillation Capacity as of
December 31, 2020
 
   (in million tonnes per annum) 
Maoming   18.0 
Zhenhai   23.0 
Jinling   19.0 
Zhongke   15.0 
Shanghai   14.0 
Qilu   12.5 
Yangzi   13.5 
Fujian   14.0 
Tianjin   13.8 
Guangzhou   12.8 
Gaoqiao   13.0 
Qingdao Refining & Chemical   12.0 
Changling   11.5 
Yanshan   11.0 
Shijiazhuang   10.0 
Jiujiang   10.0 
Hainan   9.2 
Anqing   9.0 
Wuhan   8.5 

 

In 2020, the newly-built 10 million-ton oil refining project of Zhongke was put into production, and we adjusted the statistical caliber of the primary processing capacity. Newly added hydrogenation refining capacity totaled 14 million tons/year (with new heavy oil hydrogenation projects such as Zhongke, Tianjin, Maoming, etc., totaling 9.6 million tons/year put into production, and Zhongke S Zorb, diesel hydrogenation, etc., totaling 4.4 million tons/year were put into production). Some of the equipment upgrading projects to improve oil quality were completed and put into production.

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Source of crude oil

 

In 2020, approximately 88.6% of the crude oil required for our refinery business was imported.

 

Marketing and Sales of Refined Oil Products

 

Overview

 

We operate the largest sales and distribution network for refined oil products in China. In 2020, we distributed and sold approximately 167.99 million tonnes of gasoline, diesel and kerosene domestically. Most of the refined oil products sold by us are produced internally. In 2020, approximately 67.3% of our gasoline sales volume and approximately 79.5% of our diesel sales volumes were produced internally.

 

The table below sets forth a summary of key data in the marketing and sales of refined oil products in the years of 2018, 2019 and 2020.

 

   As of December 31, 
   2018   2019   2020 
Total sales volume of refined oil products (in million tonnes)*   237.69    254.95    217.91 
Domestic sales volume of refined oil products (in million tonnes)   180.24    184.45    167.99 
Retail   121.64    122.54    113.19 
Wholesale and Distribution   58.61    61.91    54.80 
Average annual throughput of service stations (in tonnes per station)   3,979    3,992    3,686 

 

 

* The total sales volume of refined oil products includes the amount of refined oil marketing and trading sales volume.

 

   As of December 31, 
   2018   2019   2020 
Total number of service stations under Sinopec brand   30,661    30,702    30,713 
Self-operated service stations   30,655    30,696    30,707 

 

Retail

 

All of our retail sales are made through a network of service stations and petroleum shops operated under the Sinopec brand. Through this unified network we are able to implement consistent pricing policies, maintain both product and service quality standards and more efficiently deploy our retail network.

 

In 2020, we sold approximately 113.19 million tonnes of gasoline, diesel and kerosene through our retail network, representing approximately 67.4% of our total domestic gasoline, diesel, jet fuel and kerosene sales volume. Our retail network mainly consists of service stations that are wholly-owned and operated by us, and jointly-owned and generally operated or leased by us, all of which are operated under the Sinopec brand. We also franchised the Sinopec brand to third parties services stations. As of December 31, 2020, we had 6 franchised service stations that are owned and operated by third parties.

 

Wholesale and Distribution

 

In 2020, we sold approximately 54.8 million tonnes of refined oil products, including 13.15 million tonnes of gasoline, 26.83 million tonnes of diesel and 14.82 million tonnes of kerosene, through wholesale and distribution to independent distributors such as domestic industrial enterprises, hotels, restaurants and agricultural producers and long-term large-scale end users such as railways, airlines, shipping and public utilities.

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We operate 330 storage facilities with a total capacity of approximately 18.0 million cubic meters, substantially all of which are wholly-owned by us. These storage facilities and our wholesale centers are connected to our refineries by railway, waterway and pipelines. We also own some dedicated railways, oil wharfs and oil barges, as well as a number of rail tankers and oil trucks.

 

Chemicals

 

Overview

 

We are the largest petrochemicals producer and distributor in China, with our petrochemical production plants located in economically developed regions such as central, eastern and southern China. We produce and distribute a full range of chemical products including intermediate petrochemicals, synthetic resins, synthetic fiber monomer and polymers, synthetic fibers and synthetic rubber. Synthetic resins, synthetic fibers, and synthetic rubber comprise a significant majority of our external sales. Synthetic fiber monomer and polymers and intermediate petrochemicals, on the other hand, are mostly internally consumed as feedstock for the production of other chemical products. Our chemical operations are integrated upstream and downstream with our refining businesses, which supply a significant portion of our naphtha and light hydrocarbons feedstock. Due to the high demand in China, we sell most of our chemical products in China.

 

Products

 

Intermediate Petrochemicals

 

We are the largest ethylene producer in China. Our rated ethylene capacity as of December 31, 2020 was 12.548 million tonnes per annum. In 2020, we produced 12.06 million tonnes of ethylene. Nearly all of our olefins production is used as feedstock for our petrochemical operations.

 

We produce aromatics mainly in the forms of benzene and para-xylene, which are used primarily as feedstock for purified terephthalic acid, or PTA, the preferred raw material for polyester.

 

Chemicals extracted from olefins and aromatics are mainly used to produce synthetic resins, synthetic rubber and synthetic fibers, as well as intermediate petrochemicals.

 

The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2020 for our principal intermediate chemical products.

 

   Our Rated
Capacity
   Our
Production
   Major Plants of Production
   (thousand tonnes
per annum)
   (thousand
tonnes)
    
Ethylene   12,548    12,060   Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, Shanghai SECCO, BASF-YPC*, Fujian*, Sinopec Sabic (Tianjin)*, Zhongke, Zhenhai, Sino-Korean (Wuhan) and Great Wall EC
Propylene   11,066    10,536   Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, Shanghai SECCO, Zhongke, BASF-YPC*, Jinling, Anqing, Qingdao, Hainan, Fujian*, Sinopec Sabic (Tianjin)*, Zhenhai, Sino-Korean (Wuhan) and Great Wall EC
Benzene   5,762    4,324   Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Zhenhai, Tianjin, Luoyang, Shanghai SECCO, Zhongke, BASF-YPC*, Fujian*, Maoming, Hainan and Sino-Korean (Wuhan), Jinling
Styrene   2,530    2,287   Zhenhai, Yanshan, Qilu, Guangzhou, Maoming, Shanghai SECCO, Anqing, Hainan and BASF-YPC*
Para-xylene   5,834    4,940   Shanghai, Yangzi, Qilu, Tianjin, Luoyang, Zhenhai, Jinling, Fujian* and Hainan
Phenol   757    723   Yanshan, Gaoqiao and Sinopec Sabic (Tianjin)*

 

*Joint ventures, of which the production capacities and outputs are fully included in our statistics.

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Synthetic Resins

 

We are the largest producer of polyethylene, polypropylene and polystyrene and supplier of major synthetic resins products in China.

 

The following table sets forth our rated capacity per annum, production volumes and major plants of production for each of our principal synthetic resins as of or for the year ended December 31, 2020.

 

   Our Rated
Capacity
   Our
Production
   Major Plants of Production
   (thousand tonnes
per annum)
   (thousand
tonnes)
    
Polyethylene   8,439    8,013   Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, Shanghai SECCO, Zhongke, BASF-YPC*, Fujian*, Sinopec Sabic (Tianjin)*, Zhenhai, Sino-Korean (Wuhan) and Great Wall EC
Polypropylene   8,304    7,925   Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Maoming, Tianjin, Zhongyuan, Shanghai SECCO, Zhongke, Jingmen Branch, Fujian*, Sinopec Sabic (Tianjin)*, Zhenhai, Sino-Korean (Wuhan), Great Wall EC, Luoyang, Jiujiang, Jingmen, Hainan, Beihai and Shijiazhuang
Polyvinyl chloride   600    331   Qilu
Polystyrene   583    620   Maoming, Guangzhou, Shanghai SECCO and BASF-YPC*
Acrylonitrile butadiene styrene   200    181   Gaoqiao

 

*Joint ventures, of which the production capacities and outputs are fully included in our statistics.

  

Synthetic Fiber Monomers and Polymers

 

Our principal synthetic fiber monomers and polymers are purified terephthalic acid, ethylene glycol, acrylonitrile, caprolactam, polyester, polyethylene glycol and polyamide fiber.

 

The following table sets forth our rated capacity per annum, our production volume and major plants of production as of or for the year ended December 31, 2020 for each type of our principal synthetic fiber monomers and polymers.

 

   Our Rated
Capacity
   Our
Production
   Major Plants of Production
   (thousand tonnes
per annum)
   (thousand
tonnes)
    
Purified terephthalic acid   2,819    2,382   Shanghai, Yangzi, Yizheng, Tianjin and Luoyang
Ethylene glycol   3,699    2,029   Yanshan, Shanghai, Yangzi, Tianjin, Maoming, Zhongke, Fujian*, BASF-YPC*, Sinopec Sabic (Tianjin)*, Zhenhai
Acrylonitrile   1,070    861   Anqing, Qilu Koruhr* and Shanghai SECCO
Caprolactam   909    809   Baling
Polyester   3,378    2,772   Shanghai, Yizheng, Tianjin and Luoyang

 

*Joint ventures, of which the production capacities and outputs are fully included in our statistics.

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Synthetic Fibers

 

Our principal synthetic fiber products are polyester fiber and acrylic fiber.

 

The following table sets forth our rated capacity per annum, production volume and major plants of production for each type of our principal synthetic fibers as of or for the year ended December 31, 2020.

 

   Our Rated
Capacity
   Our Production   Major Plants of Production
   (thousand tonnes
per annum)
   (thousand
tonnes)
    
Polyester fiber   1,206    1,120   Yizheng, Shanghai, Tianjin and Luoyang
Acrylic fiber   265    184   Shanghai, Anqing and Qilu

 

Synthetic Rubbers

 

Our principal synthetic rubbers are cis-polybutadiene rubber, styrene butadiene rubber, or SBR, styreneic block copolymers (SBCs) thermoplastic elastomer, isobutadiene isoprene rubber, or IIR, and ethylene propylene rubber. Based on our 2020 production, we are the largest producer of SBR, cis-polybutadiene rubber and SBCs thermoplastic elastomer in China.

 

The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2020 for each of our principal synthetic rubbers.

 

   Our Rated
Capacity
   Our
Production
   Major Plants of Operation
   (thousand tonnes
per annum)
   (thousand
tonnes)
    
Cis-polybutadiene rubber   420    445   Yanshan, Qilu, Maoming, Yangzi and Gaoqiao
Styrene butadiene rubber   430    412   Qilu, Yangzi, Gaoqiao and Yanshan
Styrene-butadiene-styrene thermoplastic elastomers   140    124   Yanshan and Maoming
Isobutylene isoprene rubber   125    26   Yanshan
Ethylene propylene rubber   75    60   Gaoqiao*

 

*Joint ventures, of which the production capacities and outputs are fully included in our statistics.

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Marketing and Sales of Petrochemicals

 

The central, eastern and southern regions in China, where most of our petrochemical plants are located, constitute the major petrochemical market in China. Our proximity to the major petrochemical market gives us a geographic advantage over our competitors.

 

The prices of petrochemical products in China have become market-oriented. Our principal sales channels consist of (i) direct sales to domestic and foreign large- and medium-sized manufacturing enterprises, which account for more than 76% of our direct sales, (ii) sales to distributors, who are responsible for sales and distribution to a portion of our smaller and scattered customers or specific customers, and (iii) sales of chemical products through our e-commerce platform “Chem E-Mall,” which effectively launched an e-commerce channel of petrochemical products and improved customer experience.

 

Competition

 

According to the Measures for the Administration of Overseas Investment of Enterprises (Decree No. 11 of 2017 of the National Development and Reform Commission), when an investment entity conducts overseas investment, it shall undergo the formalities for the confirmation or recordation of overseas investment projects, report relevant information, and cooperate in supervision and inspection. The scope of implementation of confirmation management is sensitive projects conducted by investors directly or through overseas enterprises controlled by them, including projects involving sensitive countries and regions, and projects involving sensitive industries. The scope of the implementation of recordation management is non-sensitive projects that are directly conducted by investors, namely, non-sensitive projects that involve investors’ direct contribution of assets or rights and interests or provision of financing or security. The confirmation or recordation authority is the National Development and Reform Commission (NDRC).

 

Pursuant to the Anti-Monopoly Law of the PRC which became effective on August 1, 2008, when market concentration by business carriers through merger, acquisition of control through shares or assets acquisition, or acquisition of control or the ability to exercise decisive influence over other business carriers by contract or by other means reaches a threshold of declaration level prescribed by the State Council, the business carriers shall declare in advance to the Anti-monopoly Law enforcement agency, otherwise, the business carriers shall not implement such market concentration.

 

Refining and Marketing of Refined Oil Products

 

Market participants compete primarily on the basis of wide-established sales network and logistics system, quality of products and service, efficiency of operations including proximity to customers, awareness of brand name and price. While we constantly face competition from other market participants, we believe that we have a competitive advantage in our principal market against our competitors.

 

Chemicals

 

We compete with domestic and foreign chemicals producers and distributors in the chemicals market. We adopt the strategy of “one product one policy, one customer one case” to meet customers’ needs, coordinate production, sales, research and application, produce targeted solutions based on client’s needs, provide customized services, and strive to create value for customers. Our petrochemical production facilities’ proximity to customers has given us significant regional advantages over our competitors, resulting in lower transportation costs and better competitiveness of our products.

 

Patents and Trademarks

 

In 2020, we were granted 4,254 patents in China and overseas. As of December 31, 2020, we owned a total of 38,695 patents in China and overseas.

 

In 2020, we had 391 material trademarks approved internally.

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Business Operations Relating to Iran Threat Reduction and Syria Human Rights Act of 2012

 

In 2020, we did not source any of our refinery throughputs of crude oil from Iran. Based on our internal reports and statistics, no revenue or net profit was recorded from trading activity with Iranian companies.

 

Based on feedback to our inquiries to Sinopec Group Company, our controlling shareholder, Sinopec Group Company engaged in a small amount of business activities in Iran such as providing engineering services and designs. Sales revenue from these business activities accounted for 0.014% of its total unaudited sales revenue, with a minor net loss incurred from these business.

 

Regulatory Matters

 

Overview

 

China’s petroleum and petrochemical industry has seen significant deregulation in the past ten years. However, the exploration, production, marketing and distribution of crude oil and natural gas, as well as the production, marketing and distribution of certain refined oil products are still subject to regulation of many government agencies including:

 

National Development and Reform Commission (NDRC)

 

NDRC is responsible for formulating and implementing key policies in respect of petroleum and petrochemical industry, including:

 

Formulating guidance plan for annual production, import and export amount of crude oil, natural gas and petroleum products nationwide based on its forecast on macro-economic conditions in China;

 

Setting the pricing policy for refined oil products;

 

Approving certain domestic and overseas resource investment projects which are subject to NDRC’s approval as required by the Catalogue of Investment Projects Approved by the Government in effect; and

 

National Energy Administration (NEA)

 

NEA is primarily responsible for the formulation of energy development plans and annual directive plans, approving major energy-related projects and facilitating the implementation of sustainable development of energy strategies, coordinating the development and utilization of renewable energies and new energies, and organizing matters relating to energy conservation and comprehensive utilization as well as environmental protection for the energy industry.

 

The Ministry of Commerce (MOFCOM)

 

MOFCOM is responsible for the record-filing of Sino-foreign equity joint venture contracts and Sino-foreign cooperation joint venture contracts, and monitoring the foreign investors’ oil and gas exploration projects in the PRC. It is responsible for approving or filing of the overseas investment by PRC enterprises and issuing the enterprise overseas investment certificate and quotas and licenses for import and export of crude oil and refined oil products. According to the law, MOFCOM is also responsible for supervising, approving and record-filing of foreign investment (excluding financial investment) of domestic enterprises.

 

Ministry of Natural Resources (MNR)

 

The MNR (formerly known as the Ministry of Land and Resources, or MLR) is responsible for issuing the licenses that are required to explore and produce crude oil and natural gas in China. In March 2018, according to the Institutional Reform Plan of the State Council, the responsibilities of the Ministry of Land and Resources were integrated to form the Ministry of Natural Resources of the People’s Republic of China.

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Regulation of Exploration and Production

 

Exploration and Production Rights

 

The PRC Constitution provides that all mineral and oil resources belong to the state. In 1986, the Standing Committee of the National People’s Congress passed the Mineral Resources Law which authorizes MNR, to exercise administrative authority over the exploration and production of the mineral and oil resources within the PRC, including its territorial waters. The Mineral Resources Law and its supplementary regulations provide the basic legal framework under which exploration licenses and production licenses are granted. The MNR has the authority to grant exploration licenses and production licenses on a competitive bidding or other basis it considers appropriate. Applicants for these licenses must be companies approved by the State Council to engage in oil and gas exploration and production activities. Currently, we are one of the few companies that have received such exploration licenses and production licenses in oil and gas industry.

 

Applicants for exploration licenses must first submit applications to the MNR with respect to blocks in which they intend to engage in exploration activities. The holder of an exploration license is obligated to make an annual minimum exploration investment and pay annual exploration license fees, ranging from RMB 100 to RMB 500 per square kilometer, relating to the exploration blocks in respect of which the license is issued. The maximum term of an oil and gas exploration license is 7 years. Such exploration license may be renewed upon application by the holder at least 30 days prior to expiration date, with each renewal for a maximum two-year term. Under the PRC laws and regulations, we are entitled for reductions and exemptions of exploration license fees for exploration in the western, offshore and northeastern regions of China.

 

At the exploration stage, an applicant can also apply for a progressive exploration and production license that allows the holder to test and develop reserves not yet fully proved. The progressive oil and gas exploration and production license has a maximum term of 15 years. When the reserves become proved for a block, the holder must apply for a full production license in order to undertake production.

 

The MNR issues full production licenses to applicants on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. Due to a special dispensation granted to us by the State Council, the maximum term of our full production licenses is 80 years. The full production license is renewable upon application by the holder at least 30 days prior to expiration of the original term. A holder of the full production license has to pay an annual full production right usage fee of RMB 1,000 per square kilometer.

 

Exploration and production licenses do not grant the holders the right to enter upon any land for the purpose of exploration and production. Holders of exploration and production licenses must separately obtain the right to use the land covered by the licenses, and if permissible under applicable laws, current owners of the rights to use such land may transfer or lease the land to the license holder.

 

Incentives for Shale Gas Development

 

In order to incentivize the exploration, discovery and development of China’s shale gas reserves, to increase the supply of natural gas and to relieve the imbalance between supply and demand of natural gas, the Ministry of Finance of China and China National Energy Administration issued the Notice on Subsidy for Shale Gas Development and Utilization (Ministry of Finance No. 847 [2012]), pursuant to which the central government will subsidize shale gas production companies at a rate of RMB 0.4 per cubic meter of shale gas produced from 2012 to 2015.

32

China National Energy Administration issued the Shale Gas Industry Policy (NEA No. 5 [2013]) in October 2013, which classifies shale gas as a “national strategic new industry” and calls for more fiscal support for exploration and development of shale gas. In particular, subsidies should be given directly to a shale gas production company according to the amount of its shale gas development and utilization. Local governments are also encouraged to provide subsidies to shale gas production companies, with the subsidy amount to be determined by local fiscal authorities. The Policy also reduces or waives compensatory fee for mineral resources, license and royalty fees for shale gas production companies. For encouraged projects like shale gas exploration and discovery, the policy also waives customs duty for imported equipment and machineries that cannot be manufactured domestically in accordance with relevant regulations.

 

In April 2015, to facilitate the development of the shale gas industry, the Ministry of Finance of China and China National Energy Administration issued the Notice on Fiscal Subsidies for Shale Gas Development and Utilization (Ministry of Finance No. 112 [2015]) to further implement the policy of fiscally subsidizing the shale gas industry during the period of the thirteenth “five-year” plan, and the subsidy will be RMB 0.3 per cubic meter of shale gas produced and RMB 0.2 per cubic meter of shale gas produced from 2016 to 2018 and from 2019 to 2020, respectively.

 

In March 2018, in order to promote the development and utilization of shale gas, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on the Reduction of Resource Tax on Shale Gas (Ministry of Finance No. 26 [2018]) which provides that from April 1, 2018 to March 31, 2021, a 30% reduction shall be applied to the 6% tax rate applicable to shale gas.

 

In June 2019, the Ministry of Finance issued the Supplemental Notice on Interim Measures for the Management of Special Funds for Renewable Energy Development (Ministry of Finance No. 298 [2019]), which cancels the fixed-rate subsidy on shale gas industry, and provides that the increased gradient subsidy shall be granted to enterprises if their production of shale gas increases over the last year, while only reduced subsidy shall be granted if the production decreases over the last year. The Notice also provides increased subsidy for the incremental production of unconventional natural gas in winter.

 

Price Controls on Crude Oil

 

According to Measures for Administration of Petroleum Products Price issued by NDRC on January 13, 2016, the crude oil price shall be determined by reference to the international market price.

 

Price Controls on Natural Gas

 

In recent years, the pace of market-oriented natural gas price reforms has accelerated significantly. In April 2015, according to the change in the price of alternative energy, NDRC unified the stock natural gas and incremental natural gas prices. In November 2015, NDRC to further liberalized the pricing of natural gas by replacing the reference ceiling price for city-gate prices of non-residential natural gas with a reference base rate. In October 2016, NDRC has relaxed the control over service prices for gas prices used for fertilizer production, determined that the relevant prices of gas storage facilities were market-oriented, and launched a trial reform of the marketization of city-gate prices in Fujian Province.

 

In August 2017, based on the results of the supervision and review of the pricing of natural gas pipelines, NDRC adjusted the pipeline transportation prices, in conjunction with the adjustment of the natural gas value-added tax rate. The non-residential natural gas reference city-gate prices have been reduced by RMB 0.1 per cubic meter. NDRC encouraged the natural gas production and operation enterprises and users to actively enter the natural gas trading platform, and the prices of natural gas that have been openly traded on trading platforms such as the Shanghai Oil and Gas Exchange Center and Chongqing Oil and Gas Exchange Center are formed by the market. In May 2018, NDRC adjusted the price of natural gas for civil use, improved price mechanism, replaced the reference ceiling price for city-gate prices of residential natural gas with a reference base rate, and thus brought the price of residential gas in line with the price of non-resident gas.

 

In March 2019, NDRC issued the Notice on Adjusting the City-Gate Price (NDRC Pricing Circular No, 562 [2019]) to adjust the city-gate price based on adjustments on value-added tax applicable to natural gas with effective date on April 1, 2019. We have adjusted the sales price of natural gas to grant the benefits of the lower value-added tax rate to our customers.

33

Regulation of Pipelines Networks

 

In October 2016, NDRC issued the Interim Provisions for Management Measures of Natural Gas Pipeline Transmission Prices and the Interim Provisions for Supervision and Review of Natural Gas Pipeline Transmission Cost (for Trial Implementation) (NDRC Pricing Circular 2142[2016]) (the “Interim Provisions”).

 

In August 2017, according to the Interim Provisions, after the supervision and review of the pricing of natural gas interprovincial pipelines, NDRC adjusted the prices of 13 natural gas interprovincial pipelines. Since September 1, 2017, based on the pipeline transmission prices (traffic price rate) of the Sichuan-East Gas Pipeline and Yulin-Jinan Pipeline published by the NDRC, along the transportation distance of the natural gas inlet and export, we have calculated and determined the prices of the gas transmission points for Sichuan-East Gas Pipeline and the Yulin-Jinan Pipeline and published the list of prices on our official website. We have updated the information disclosure on our website regarding the cost of operation and the maintenance expense on annual basis.

 

In March 2019, the NDRC issued the Notice on Adjusting the Prices of Trans-provincial Pipeline Transportation of Natural Gas (NDRC Pricing Circular No.561 [2019]) to adjust the trans-provincial pipeline transportation price of natural gas based on adjustments on the value-added tax rate applicable to natural gas with effective date on April 1, 2019. We have adjusted our trans-provincial pipeline transportation price.

 

In 2020, we sold certain pipeline assets to PipeChina. Pursuant to the oil and gas pipeline transportation service price policy specified by the NDRC, (i) if there exists government-specified price, such price shall be applied, and (ii) if there exists no government-specified price, the supply and demand parties shall negotiate and determine a price, or refer to the existing similar pipeline transportation rates. We negotiated with PipeChina to determine the pipeline transportation service price, among which, the natural gas and crude oil pipeline transportation service fee and LNG receiving terminal usage fee shall be priced pursuant to government policy, and refined oil pipeline transportation service fee shall be negotiated by both Parties with reference to the pricing principle applicable to natural gas pipeline transportation service fee.

 

Regulation of Refining and Marketing of Refined Oil Products

 

Gasoline and Diesel Prices

 

Gasoline and diesel prices are government-guided.

 

In March 2013, NDRC released Circular on Establishment of Sound Price Formation Mechanism of Refined Oil Products (NDRC Pricing Circular 624[2013]), which specified that a reformed refined oil product price formation mechanism shall include shortening of the refined oil product price adjustment period to 10 working days. To save social resources, if the assessed adjustment in domestic refined oil product prices is less than RMB 50 per tonne, the adjustment will be postponed to next period. In cases of special conditions such as significant increase in domestic CPI, significant emergencies or significant fluctuations of crude oil price on international market which may trigger adjustment of domestic refined oil price, NDRC may implement ad hoc suspension, delay or narrowing of price adjustment upon the approval by the State Council. Upon elimination of the special conditions, the price formation mechanism may resume operation after NDRC obtains the State Council’s for approval.

 

On January 13, 2016, NDRC made further adjustments to the pricing mechanism for refined oil products, effective immediately. When benchmark crude oil price falls below US$ 40/bbl, NDRC will not further adjust oil product prices, the unadjusted portion would be transferred into a risk fund, which can be used for energy conservation and emission reduction, refined oil product quality upgrading and security of crude oil and gas supply upon approval by relevant departments.

 

Jet Fuels Price

 

The ex-factory price of the jet fuels will be determined by the buyers and the sellers, with reference to the price in the Singapore market.

34

Regulation of Crude Oil and Refined Oil Products Market

 

On December 4, 2006, Ministry of Commerce of the PRC promulgated the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Oil Products Market.”

 

Starting in 2015, qualified refineries has been allowed to use, and conduct business in connection with, imported crude oil. On December 4, 2019, Ministry of Commerce issued the Notice of Reform of “Release-Management-Service” on Crude Oil and Refined Oil Products to further open up the domestic oil and refined oil products market. Ministry of Commerce formally abolished the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Oil Products Market” on July 1, 2020, and promogulated the “Guidelines for the Administration of Petroleum Refined Oil Circulation Industry” on December 31, 2020. In September 2020, the State Council issued the “Decision on the Cancellation and Decentralization of a Batch of Administrative Licensing Items”, clarifying that “the approval of the wholesale and warehousing operation qualifications for petroleum refined oil will be cancelled, and the approval for the retail operation qualification of refined oil products will be delegated to the formulation department of the municipal people’s government with local governments to implement territorial supervision responsibilities.” The domestic crude oil and refined oil product markets are increasingly open.

 

Investment

 

Overseas investments by Chinese enterprises involving sensitive countries or regions or sensitive industries shall be submitted to NDRC and MOFCOM for approval, and other overseas investments by Chinese enterprises will only need to submit a filing with NDRC and MOFCOM or its regional branches.

 

According to Measures for the Administration of Overseas Investment of Enterprises (NDRC No.11 [2017]), promulgated on December 26, 2017, investments made directly, or indirectly through offshore entities controlled by the investor, involving sensitive countries or regions or sensitive industries shall be approved by the NDRC. For non-sensitive direct investments, namely investments for which the investor provide financing or guarantee, or make asset or interest investment directly, filings with NDRC or its local branches shall be made.

 

According to the Measures for Supervision and Administration of Overseas Investment by Central Enterprises (SASAC Decree No. 35[2017]) promulgated by the State-owned Assets Supervision and Administration Commission of the State Council, central enterprises shall establish a negative list for overseas investment under which prohibited investments and specially supervised investments shall be administered separately. Central enterprises shall not make any investments categorized as prohibited ones. The foreign investment projects listed in the special supervision category of the negative list shall be submitted to the SASAC for approval.

 

In accordance with the Administrative Measures for Overseas Investments (MOFCOM Order No. 3 [2014]) issued by MOFCOM, overseas investment shall be subject to approval or filing requirements of MOFCOM or its provincial counterparts based on its investment category.  Overseas investments involving sensitive countries (regions) or sensitive industries shall be approved by MOFCOM. All other investments will require only a filing with MOFCOM.

 

Taxation, Fees and Royalty

 

Companies which operate petroleum and petrochemical businesses in China are subject to a variety of taxes, fees and royalties.

 

Effective from December 1, 2014, the rate of mineral resource compensation charges on crude oil and natural gas is reduced to zero, and the applicable resource tax rate is correspondingly increased from 5% to 6%.

 

Effective from January 1, 2015, the threshold of the special oil income levy is increased from US$55 to 65 per barrel, and a five-level progressive rate is applied to special oil income levy collection based on the sale prices.

35

From November 29, 2014 to January 12, 2015, the unit tax amount of consumption tax on gasoline, naphtha, solvent and lubricant have been adjusted three times and the current applicable consumption tax rates are set forth in the table below. For further information about consumption tax rates, see Note 7 to our consolidated financial statements.

 

Effective from May 1, 2016, business tax has been completed replaced by value-added tax to cover all the business sectors that used to fall under the business tax regime.

 

In April 2017, the State Council issued a notice to implement the reform of the existing mineral resources income levy system, in which the existing license fees of exploration rights and production rights will be integrated into mining rights occupancy fees, and will be dynamically adjusted based on the changes in mineral product prices and economic development needs. Collection methods and standards have not yet been released.

 

Starting on January 1, 2018, environmental tax has been levied, with the original sewage charges being cancelled.

 

Starting in April 2019, the value-added tax rate has been further lowered.

 

Applicable tax, fees and royalties on refined oil products and other refined oil products generally payable by us or by other companies in similar industries are shown below.

 

Tax Item   Tax Base   Tax Rate/Fee Rate
Enterprise income tax   Taxable income   25% effective from January 1, 2008.
Value-added tax   Revenue   9% for liquefied petroleum gas, natural gas, low-density polyethylene for production of agricultural film and fertilizers, 13% for other commodities and 6% for the taxable service. On behalf of the tax authorities, we collect value-added tax from users other than the selling price of the products when settling payments with users. The value-added tax paid by us when purchasing raw materials for production, and the payment of drilling and other engineering service fees may be deducted from the value-added tax collected by us from users.
Consumption tax   Aggregate volume sold or self-consumed   Effective from January 13, 2015, RMB 1.52 per liter for gasoline, naphtha, solvent oil and lubricant, and RMB 1.2 per liter for diesel, fuel oil and jet kerosene.
Import tariff   CIF China price   5% for gasoline, 6% for diesel, 9% for jet kerosene and 6% for fuel oil. In 2017, the applicable tax rate for motor gasoline and aviation gasoline, No. 5-7 fuel oil and diesel is 1%, and 0% for jet kerosene and naphtha.
Resource tax   Aggregate Sales Revenue   Effective from December 1, 2014, for domestic production of crude oil and natural gas, the applicable tax rate is increased from 5% to 6% of the sales revenue, exemption or deduction may apply if qualified.
Resource compensation tax   Sales revenue of crude oil and natural gas   Effective from December 1, 2014, the applicable tax rate is reduced from 1% to zero.
Exploration license fee   Area   RMB 100 to RMB 500 per square kilometer per annum.
Production license fee   Area   RMB 1,000 per square kilometer per annum.
Royalty fee(1)   Production volume   Progressive rate of 0-12.5% for crude oil and 0-3% for natural gas.
City construction tax   Total payment of value-added tax and consumption tax   1%, 5% and 7%.
Education surcharge and local education surcharge   Total payment of value-added tax and consumption tax   3% for education surcharge and 2% for local education surcharge.
Special Oil Income Levy   Any revenue derived from sale of domestically produced crude oil when the realized crude oil price exceeds US$65 per barrel.   Progressive rate of 20% to 40% for revenues derived from crude oil with realized price in excess of US$65 per barrel.

 

 
(1)Sino-foreign oil and gas exploration and development cooperative projects whose contracts were signed prior to November 1, 2011 and have not yet expired are still subject to royalty fee, and the project companies of those cooperative projects are not subject to any other resource taxes or fees. Sino-foreign oil and gas exploration cooperative projects whose contracts are signed after November 1, 2011 are not subject to royalty fee, but are subject to resource taxes.

36

C.ORGANIZATIONAL STRUCTURE

 

For a description of our relationship with Sinopec Group Company, see “Item 4. Information on the Company—A. History and Development of the Company” and “Item 7. Major Shareholders and Related Party Transactions.” For a description of our significant subsidiaries, see Note 39 to our consolidated financial statements.

 

D.PROPERTY, PLANT AND EQUIPMENT

 

We own substantially all of our properties, plants and equipment relating to our business activities. See “Item 4. Information on the Company—B. Business Overview” for description of our property, plant and equipment.

 

Environmental Matters

 

We are subject to various national environmental laws and regulations and also environmental regulations promulgated by the local governments in those jurisdictions we have operations, and we must pay the environmental tax for pollutant emissions. Usually the environmental tax increases for each incremental amount of discharge up to a certain level. Above a certain level prescribed by the pollutant discharge permits or other standards, the PRC regulations permit the local government to order any of our facilities to cure certain behavior causing environmental damage and subject to the central government’s approval, the local government may also issue orders to close any of our facilities that fail to comply with the existing regulations. In addition, we have incurred capital expenditure specifically in compliance with the various environmental protection objectives set by the PRC government for the petroleum and chemical industry, to promote energy saving and environmental protection.

 

Our Energy Management and Environmental Protection Department is responsible for environmental management functions such as energy saving, emission reduction, environmental protection, water saving, comprehensive utilization of resources and clean production. Each of our production subsidiaries has implemented policies to control its pollutant emissions and discharge and to oversee compliance with the PRC environmental regulations.

 

Most of our production facilities have their own environmental protection facilities, and the rest of our production facilities utilize available social resources, to guarantee the effective treatment of waste water, solid waste and waste gases, to ensure the compliance with applicable emission standard for our emission of waste water and waste gas, and to follow applicable disposal procedures for our disposal of solid waste.

37

Environmental regulations also require companies to file an environmental impact evaluation report to the Ministry of Ecology and Environment or local ecology and environment department for approval before undertaking any project with negative impact on the environment. When carrying out such projects, companies shall construct and implement environmental protection facilities and measures as required by the environmental bureau. After the completion of the construction, the projects shall be assessed according to the relevant requirements of environmental assessment, and the projects will only be permitted to operate after the assessment of its discharge treatment facilities, measures and pollutant discharge satisfactory environmental assessment and approval requirements and reporting on the national information platform for completion-based environmental protection check and acceptance of construction projects.

 

We believe our environmental protection systems and facilities are adequate for us to comply with current applicable national and local environmental protection regulations. The PRC government, however, may impose stricter regulations which may require additional expenditure on compliance with environmental regulations. In addition, to actively undertake our social responsibility, we may adopt and implement stricter internal policies with respect to environmental protections.

 

Our environmental protection expenditures were approximately RMB 7.9 billion in 2018, RMB 9.3 billion in 2019 and RMB 11.4 billion in 2020.

 

Insurance

 

In respect of our refining, petrochemical production, and marketing and sales operations, we currently maintain with Sinopec Group Company, under the terms of its Safety Production Insurance Fund (SPI Fund), approximately RMB 954.3 billion of coverage on our property and plants and approximately RMB 123.5 billion of coverage on our inventory. In 2020, we paid an insurance premium of approximately RMB 2.282 billion to Sinopec Group Company for such coverage.

 

Transportation vehicles and products in transit are not covered by Sinopec Group Company and we maintain insurance policies for those assets with insurance companies in the PRC.

 

The insurance coverage under SPI Fund applies to all domestic enterprises controlled by Sinopec Group Company under regulations published by the Ministry of Finance. We believe that, in the event of a major accident, we will be able to recover most of our losses from insurance proceeds paid under the SPI Fund or by insurance companies.

 

Pursuant to an approval of the Ministry of Finance, Sinopec Group Company entered into an agreement with PICC Property and Casualty Company Limited on January 29, 2002 to purchase a property and casualty policy which would also cover our assets. The policy provides for an annual maximum cumulative claim amount of RMB 4 billion and a maximum of RMB 2.36 billion per occurrence.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A.GENERAL

 

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements. Our consolidated financial statements have been prepared in accordance with IFRS. Certain financial information presented in this section is derived from our audited consolidated financial statements. Unless otherwise indicated, all financial data presented on a consolidated basis or by segment, are presented net of inter-segment transactions (i.e., inter-segment and other intercompany transactions have been eliminated).

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Critical Accounting Policies

 

Our reported consolidated financial condition and consolidated results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an on-going basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

 

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in Note 2 to the consolidated financial statements. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

 

Oil and gas properties and reserves

 

The accounting for the exploration and production activities of oil and gas is subject to accounting rules that are unique to the oil and gas industry. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. We have elected to use the successful efforts method. The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include dry hole costs, seismic costs and other exploratory costs. Under the full cost method, these costs are capitalized and written-off or depreciated over time.

 

Engineering estimates of our oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgements involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as “proved.” Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in relation to depreciation rates. Oil and gas reserves have a direct impact on the assessment of the recoverability of the carrying amounts of oil and gas properties reported in the financial statements. If proved reserves estimates are revised downwards, earnings could be affected by changes in depreciation expense or an immediate write-down of the property’s carrying amount.

 

Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in similar geographic area, including estimation of economic life of oil and gas properties, technology and price level. The present values of these estimated future dismantlement costs are capitalized as oil and gas properties with equivalent amounts recognized as provisions for dismantlement costs.

 

Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment loss and future dismantlement costs. Capitalized costs of proved oil and gas properties are amortized on a unit-of-production method based on volumes produced and reserves.

 

Impairment for long-lived assets

 

If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered “impaired,” and an impairment loss may be recognized in accordance with IAS 36 “Impairment of Assets.” The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. For goodwill, the recoverable amount is estimated annually. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for our assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgement relating to level of sale volume, selling price, amount of operating costs and discount rate. Management uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price, amount of operating costs and discount rate.

39

Impairment losses recognized for each of the three years ended December 31, 2018, 2019 and 2020 in our statement of income on long-lived assets are summarized as follows:

 

   Year ended December 31, 
   2018   2019   2020 
   (RMB in millions) 
Exploration and production   4,274    3    8,495 
Refining   353    245    1,923 
Marketing and distribution   264    80    536 
Chemicals   1,379    17    3,606 
Corporate and others   16    -    - 
Total*   6,286    345    14,560 

 

 
*Information relating to the detailed analysis of the change in impairment losses is presented in Note 8 to the consolidated financial statements.

 

Depreciation

 

Property, plant and equipment, other than oil and gas properties, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. Management reviews the estimated useful lives of the assets at least annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on our historical experience with similar assets and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.

 

Measurement of expected credit losses

 

We measure and recognize expected credit losses, considering reasonable and supportable information about the relevant past events, current conditions and forecasts of future economic conditions. We regularly monitor and review the assumptions used for estimating expected credit losses. The changes in the impairment losses for bad and doubtful accounts of bills receivable and accounts receivable are as follows:

 

   Year ended December 31, 
   2018   2019   2020 
   (RMB in millions) 
Balance as of January 1   612    606    1,848 
Impairment losses recognized for the year   83    1,566    2,173 
Reversal of impairment losses   (77)   (283)   (68)
Written off   (19)   (41)   (23)
Others   7    -    (70)
Balance as of December 31   606    1,848    3,860 

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Allowance for diminution in value of inventories

 

If the costs of inventories become higher than their net realizable values, an allowance for diminution in value of inventories is recognized. Net realizable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Management bases the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than estimated. Allowance for diminution in value of inventories is analyzed as follows:

 

   Year ended December 31, 
   2018   2019   2020 
   (RMB in millions) 
Balance as of January 1   1,165    6,389    2,585 
Allowance for the year   5,538    1,616    11,689 
Reversal of allowance on disposal   (114)   (199)   (328)
Written off   (217)   (5,233)   (10,795)
Others   17    12    (51)
Balance as of December 31   6,389    2,585    3,100 

 

Recently Pronounced International Financial Reporting Standards

 

Information relating to the recently pronounced IFRS is presented in Note 1 to the consolidated financial statements.

 

Overview of Our Operations

 

We are the largest integrated petroleum and petrochemical company in China and one of the largest in Asia in terms of operating revenues. We engage in exploring for, developing and producing crude oil and natural gas, operating refineries and petrochemical facilities and marketing crude oil, natural gas, refined oil products and petrochemical products. We have reported our consolidated financial results according to the following four principal business segments and the corporate and others segment.

 

Exploration and Production Segment, which consists of our activities related to exploring for and developing, producing and selling crude oil and natural gas;

 

Refining Segment, which consists of purchasing crude oil from our exploration and production segment and from third parties, processing of crude oil into refined oil products, selling refined oil products principally to our marketing and distribution segment;

 

Marketing and Distribution Segment, which consists of purchasing refined oil products from our refining segment and third parties, and marketing, selling and distributing refined oil products by wholesale to large customers and independent distributors and retail through our retail network;

 

Chemicals Segment, which consists of purchasing chemical feedstock principally from the refining segment and producing, marketing, selling and distributing chemical products; and

 

Corporate and Others Segment, which consists principally of trading activities of the import and export subsidiaries and our research and development activities.

41

B.CONSOLIDATED RESULTS OF OPERATIONS

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, our total operating revenues were RMB 2,106.0 billion, representing a decrease of 28.8% over 2019. Our operating income was RMB 13.2 billion, representing a decrease of 84.7% over 2019.

 

The following table sets forth major revenue and expense items in the consolidated statement of income for the years ended December 31, 2019 and 2020.

 

   Year Ended December 31, 
   2019(1)  2020(2)  Change from
2019 to 2020
 
   (RMB in millions)   (%) 
Operating revenues   2,959,799    2,105,984    (28.8)
Sales of goods   2,899,682    2,049,456    (29.3)
Other operating revenues   60,117    56,528    (6.0)
Operating expenses   (2,873,425)   (2,092,791)   (27.2)
Purchased crude oil, products and operating supplies and expenses   (2,370,699)   (1,594,130)   (32.8)
Selling, general and administrative expenses   (55,438)   (55,315)   (0.2)
Depreciation, depletion and amortization   (109,172)   (106,965)   (2.0)
Exploration expenses, including dry holes   (10,510)   (9,716)   (7.6)
Personnel expenses   (82,743)   (86,006)   3.9 
Taxes other than income tax   (244,517)   (234,947)   (3.9)
Other operating expenses, net   (346)   (5,712)   1,550.9 
Operating income   86,374    13,193    (84.7)
Net finance costs   (10,048)   (9,506)   (5.4)
Investment income and share of profits less losses from associates and joint ventures   13,696    44,456    224.6 
Earnings before income tax   90,022    48,143    (46.5)
Income tax expense   (17,939)   (6,219)   (65.3)
Net income   72,083    41,924    (41.8)
Attributable to:               
Owners of the Company   57,493    33,096    (42.4)
Non-controlling interests   14,590    8,828    (39.5)

 

 
(1)We have adopted IFRS Standard 16 “Leases” from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from such standard were therefore recognized in the opening balance sheet on January 1, 2019.
(2)Information relating to the detailed information of gain on sale is presented in Note 10 to the consolidated financial statements.

 

Operating revenues

 

In 2020, our sales of goods were RMB 2,049.5 billion, representing a decrease of 29.3% over 2019. This was mainly due to decreased price and sales volume of refined oil products, decreased price of chemical products, and shrank international trading scale of crude oil and refined oil products, which was impacted by the COVID-19 outbreak and the slump in international crude oil price.

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The following table sets forth our external sales volume, average realized prices and the respective rates of change from 2019 to 2020 for our major products:

 

   Sales Volume   Change from   Average Realized Price   Change from 
   2019   2020   2019 to 2020   2019   2020   2019 to 2020 
   (thousand tonnes)   (%)   (RMB per tonne)   (%) 
Crude oil   6,034    7,422    23.0    3,000    2,029    (32.4)
Natural gas   27,073(1)    26,280(1)     (2.9)   1,562(2)    1,352(2)    (13.4)
Gasoline   92,233    86,193    (6.5)   7,387    6,298    (14.7)
Diesel   87,083    77,280    (11.3)   5,811    4,792    (17.5)
Kerosene   27,041    20,828    (23.0)   4,298    2,635    (38.7)
Basic chemical feedstock   41,022    36,683    (10.6)   4,599    3,635    (21.0)
Monomer and polymer for synthetic fiber   14,019    9,691    (30.9)   5,714    4,297    (24.8)
Synthetic resins   16,103    17,112    6.3    7,804    7,148    (8.4)
Synthetic fiber   1,370    1,402    2.3    8,438    6,381    (24.4)
Synthetic rubber   1,280    1,361    6.3    9,583    7,982    (16.7)
Chemical fertilizer   924    1,177    27.4    2,110    1,955    (7.3)

 

 
(1)million cubic meters

 

(2)RMB per thousand cubic meters

 

Sales of crude oil and natural gas

 

Most of crude oil and a small portion of natural gas we produced were used internally for refining and chemical production and the remaining were sold to external customers. In 2020, the total revenue from crude oil, natural gas and other upstream products that were sold externally amounted to RMB 104.5 billion, representing a decrease of 5.9% over 2019. The change was mainly due to decreases in crude oil and natural gas prices.

 

Sales of refined petroleum products

 

In 2020, our refining segment and marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel and kerosene which are referred to as the refined oil products and other refined petroleum products) to external parties. The external sales revenue realized by these two segments were RMB 1,164.7 billion, accounting for 55.3% of our operating revenues and representing a decrease of 24.1% over 2019. The change was mainly due to the decrease in prices and volume of major products, such as gasoline, diesel and kerosene, resulting from the impact of COVID-19 and slump of international crude oil price. The sales revenue of gasoline, diesel and kerosene was RMB 968.0 billion, accounting for 83.1% of the total revenue of other refined petroleum products and representing a decrease of 25.7% over 2019. The sales revenue of other refined petroleum products was RMB 196.6 billion, accounting for 16.9% of the total revenue of petroleum products and representing a decrease of 15.1% over 2019.

 

Sales of chemical products

 

Our external sales revenue of chemical products was RMB 322.1 billion, accounting for 15.3% of our operating revenues and representing a decrease of 24.9% over 2019. This was mainly attributable to the decrease in price of chemical products.

 

Revenue from corporate and others

 

In 2020, our corporate and others realized operating revenue of RMB 890.3 billion (including an operating revenue of RMB 886.4 billion in import and export trade business), representing a decrease of 39.9% over 2019. This was mainly because sales volume and prices of crude oil and refined oil products plunged as a result of COVID-19 impact.

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Operating expenses

 

In 2020, our operating expenses were RMB 2,092.8 billion, representing a decrease of 27.2% over 2019. Among the operating expenses:

 

Purchased crude oil, products and operating supplies and expenses were RMB 1,594.1 billion, representing a decrease of 32.8% over 2019, accounting for 76.2% of the total operating expenses, of which:

 

crude oil purchase expenses were RMB 479.1 billion, representing a decrease of 29.7% over 2019. In 2019, the total throughput of crude oil that was purchased externally was 222.79 million tonnes (excluding the volume processed for third parties), representing a decrease of 2.6% over 2019; the average unit processing cost for crude oil purchased externally was RMB 2,380 per tonne, representing a decrease of 28.4% over 2019;

 

refined oil purchase expenses were RMB 257.6 billion, representing a decrease of 29.4% over 2019;

 

trade purchase expenses were RMB 421.2 billion, representing a decrease of 42.6% over 2019; and

 

other purchasing expenses were RMB 436.3 billion, representing a decrease of 26.1% over 2019.

 

Selling, general and administrative expenses totaled RMB 55.3 billion, representing a decrease of 0.2% over 2019.

 

Depreciation, depletion and amortization was RMB 107.0 billion, representing a decrease of 2.0% over 2019. This was mainly due to the depletion ratio of oil and gas assets decreased.

 

Exploration expenses, including dry holes were RMB 9.7 billion, representing a decrease of 7.6% over 2019. That was mainly due to optimization of investment scale and structure in upstream and improvement of success rate in exploration.

 

Personnel expenses were RMB 86.0 billion, representing an increase of 3.9% over 2019.

 

Taxes other than income tax were RMB 234.9 billion, representing a decrease of 3.9% over 2019. That was mainly due to the decrease of consumption tax resulting from the decrease of production volume in gasoline and diesel.

 

Other operating expenses, net were RMB 5.7 billion, representing an increase of RMB 5.4 billion over the same period of 2019. That was mainly due to the increased impairment in fixed and long-term assets.

 

Operating income

 

In 2020, our operating income was RMB 13.2 billion, representing a decrease of 84.7% over 2019, mainly due to the decrease of processing volume, sales volume, and products margin affected by the COVID-19 outbreak, slump of crude oil prices, and drop of market demand.

 

Net finance costs

 

In 2020, our net finance costs were RMB 9.5 billion, representing a decrease of RMB 0.5 billion over 2019.

 

Earnings before income tax

 

In 2020, our earnings before income tax were RMB 48.1 billion, representing a decrease of 46.5% over 2019.

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Income tax expense

 

In 2020, we recognized income tax expense of RMB 6.2 billion, representing a decrease of 65.3% over 2019. That was mainly due to decrease of profit before taxation, resulting in a decrease of RMB 10.5 billion in income tax.

 

Net income attributable to non-controlling interests

 

In 2020, our net income attributable to non-controlling interests was RMB 8.8 billion, representing a decrease of RMB 5.8 billion over 2019.

 

Net income attributable to owners of the Company

 

In 2020, our net income attributable to our owners was RMB 33.1 billion, representing a decrease of 42.4% over 2019.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, our total operating revenues were RMB 2,959.8 billion, representing an increase of 2.7% over 2018. Our operating income was RMB 86.4 billion, representing an increase of 4.6% over 2018.

 

The following table sets forth major revenue and expense items in the consolidated statement of income for the years ended December 31, 2018 and 2019.

 

   Year Ended December 31, 
   2018   2019(1)  Change from
2018 to 2019
 
   (RMB in millions)   (%) 
Operating revenues   2,882,077    2,959,799    2.7 
Sales of goods   2,822,375    2,899,682    2.7 
Other operating revenues   59,702    60,117    0.7 
Operating expenses   (2,799,513)   (2,873,425)   2.6 
Purchased crude oil, products and operating supplies and expenses   (2,279,844)   (2,370,699)   4.0 
Selling, general and administrative expenses   (65,770)   (55,438)   (15.7)
Depreciation, depletion and amortization   (110,344)   (109,172)   (1.1)
Exploration expenses, including dry holes   (10,744)   (10,510)   (2.2)
Personnel expenses   (78,967)   (82,743)   4.8 
Taxes other than income tax   (248,587)   (244,517)   (1.6)
Other operating expenses, net   (5,257)   (346)   (93.4)
Operating income   82,564    86,374    4.6 
Net finance costs   930    (10,048)    
Investment income and share of profits less losses from associates and joint ventures   15,845    13,696    (13.6)
Earnings before income tax   99,339    90,022    (9.4)
Income tax expense   (20,278)   (17,939)   (11.5)
Net income   79,061    72,083    (8.8)
Attributable to:               
Owners of the Company   61,708    57,493    (6.8)
Non-controlling interests   17,353    14,590    (15.9)

 

 
(1)We have adopted IFRS Standard 16 “Leases” from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from such standard were therefore recognized in the opening balance sheet on January 1, 2019.

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Operating revenues

 

In 2019, our sales of goods were RMB 2,899.7 billion, representing an increase of 2.7% over 2018. This was mainly attributable to the expansion of business scale and trading volume.

 

The following table sets forth our external sales volume, average realized prices and the respective rates of change from 2018 to 2019 for our major products:

 

   Sales Volume   Change from   Average Realized Price   Change from 
   2018   2019   2018 to 2019   2018   2019   2018 to 2019 
   (thousand tonnes)   (%)   (RMB per tonne)   (%) 
Crude oil   6,595    6,034    (8.5)   3,100    3,000    (3.2)
Natural gas   24,197(1)    27,073(1)    11.9    1,400(2)    1,562(2)    11.6 
Gasoline   88,057    92,233    4.7    7,870    7,387    (6.1)
Diesel   84,630    87,083    2.9    5,996    5,811    (3.1)
Kerosene   25,787    27,041    4.9    4,562    4,298    (5.8)
Basic chemical feedstock   40,520    41,022    1.2    5,488    4,599    (16.2)
Monomer and polymer for synthetic fiber   11,127    14,019    26.0    6,971    5,714    (18.0)
Synthetic resins   14,433    16,103    11.6    8,634    7,804    (9.6)
Synthetic fiber   1,314    1,370    4.3    9,712    8,438    (13.1)
Synthetic rubber   1,114    1,280    14.9    10,619    9,583    (9.8)
Chemical fertilizer   794    924    16.4    2,096    2,110    0.7 

 

 
(1)million cubic meters

 

(2)RMB per thousand cubic meters

 

Sales of crude oil and natural gas

 

Most of crude oil and a small portion of natural gas we produced were used internally for refining and chemical production and the remaining were sold to external customers. In 2019, the total revenue from crude oil, natural gas and other upstream products that were sold externally amounted to RMB 111.1 billion, representing an increase of 18.8% over 2018. The change was mainly due to increases in natural gas sales volume and prices as the result of promoting natural gas production-supply-storage-sale system, and actively expanding market share.

 

Sales of refined petroleum products

 

In 2019, our refining segment and marketing and distribution segment sell petroleum products (mainly consisting of gasoline, diesel and kerosene which are referred to as the refined oil products and other refined petroleum products) to external parties. The external sales revenue realized by these two segments were RMB 1,535.2 billion, accounting for 51.8% of our operating revenues and representing a decrease of 1.5% over 2018. The change was mainly due to the decrease in petroleum products’ prices. The sales revenue of gasoline, diesel and kerosene was RMB 1,303.6 billion, accounting for 85% of the total revenue of other refined petroleum products and representing a decrease of 1.1% over 2018. The sales revenue of other refined petroleum products was RMB 231.6 billion, accounting for 15% of the total revenue of petroleum products and representing a decrease of 3.4% over 2018.

 

Sales of chemical products

 

Our external sales revenue of chemical products was RMB 428.8 billion, accounting for 14.5% of our operating revenues and representing a decrease of 7% over 2018. This was mainly attributable to the decrease in price of chemical products, which resulted from the increase of supply in chemical market.

46

Revenue from corporate and others

 

In 2019, our corporate and others realized operating revenue of RMB 1,480.7 billion (including an operating revenue of RMB1,478.4 billion in import and export trade business), representing an increase of 8.7% over 2018. This was mainly attributable to the increase in trading volumes of crude oil and refined oil products outside China, as well as the rapid development of our Epec platform, especially on facilities and chemical products segments.

 

Operating expenses

 

In 2019, our operating expenses were RMB 2,873.4 billion, representing an increase of 2.6 % over 2018. Among the operating expenses:

 

Purchased crude oil, products and operating supplies and expenses were RMB 2,370.7 billion, representing an increase of 4.0 % over 2018, accounting for 82.5% of the total operating expenses, of which:

 

crude oil purchase expenses were RMB 681.2 billion, representing a decrease of 2.9% over 2018. In 2019, the total throughput of crude oil that was purchased externally was 228.74 million tonnes (excluding the volume processed for third parties), representing an increase of 0.7% over 2018; the average unit processing cost for crude oil purchased externally was RMB 3,326 per tonne, representing a decrease of 3.6% over 2018;

 

refined oil purchase expenses were RMB 364.9 billion, representing an increase of 2.6% over 2018;

 

trade purchase expenses were RMB 738.3 billion, representing an increase of 12.6% over 2018; and

 

other purchasing expenses were RMB 586.2 billion, representing an increase of 2.7% over 2018.

 

Selling, general and administrative expenses totaled RMB 55.4 billion, representing a decrease of 15.7% over 2018, mainly because the company significantly reduced non-operating costs, and adjusted accounting of some of the service station, land and other rental expenses to depreciation and interests expense as required by the New Lease Standard.

 

Depreciation, depletion and amortization was RMB 109.2 billion, representing a 1.1% decrease over 2018. This was mainly due to the depletion of oil and gas assets decreased as a result of the Company’s proved reserves of crude oil and natural gas increased.

 

Exploration expenses, including dry holes were RMB 10.5 billion, representing a decrease of 2.2% over 2018.

 

Personnel expenses were RMB 82.7 billion, representing an increase of 4.8% over 2018.

 

Taxes other than income tax were RMB 244.5 billion, representing a decrease of 1.6% over 2018. That was mainly due to the decrease of RMB 3.2 billion in urban maintenance and construction tax and education surcharges resulting from the decrease of value added tax rate.

 

Other operating expenses, net were RMB 0.35 billion.

 

Operating income

 

In 2019, our operating income was RMB 86.4 billion, representing an increase of 4.6% over 2018, mainly due to a significant increase of profit in upstream business.

47

Net finance costs

 

In 2019, our net finance costs were RMB 10 billion, representing an increase of RMB 11 billion over 2018. This decrease in finance costs was mainly attributable to the adoption of the New Lease Standard.

 

Earnings before income tax

 

In 2019, our earnings before income tax were RMB 90.0 billion, representing a decrease of 9.4% over 2018, mainly due to the narrower margin of our refining segment.

 

Income tax expense

 

In 2019, we recognized income tax expense of RMB 17.9 billion, representing a decrease of 11.5% over 2018.

 

Net income attributable to non-controlling interests

 

In 2019, our net income attributable to non-controlling interests was RMB 14.6 billion, representing a decrease of RMB 2.8 billion over 2018.

 

Net income attributable to owners of the Company

 

In 2019, our net income attributable to our owners was RMB 57.5 billion, representing an decrease of 6.8% over 2018.

 

C.DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS

 

We divide our operations into four business segments (exploration and production segment, refining segment, marketing and distribution segment and chemicals segment, and corporate and others). Unless otherwise specified, the inter-segment transactions have not been eliminated in the financial data discussed in this section. In addition, the operating revenue data of each segment have included the “other operating revenues” of this segment.

 

The following table sets forth the operating revenues by each segment, the contribution of external sales and inter-segment sales as a percentage of operating revenues before elimination of inter-segment sales, and the contribution of external sales as a percentage of consolidated operating revenues (i.e. after elimination of inter-segment sales) for the periods indicated.

 

   Year Ended December 31,   As a Percentage of
Consolidated
Operating Revenues
Before Elimination of
Inter-segment Sales
   As a Percentage of
Consolidated
Operating Revenues
After Elimination of
Inter-segment Sales
 
   2018   2019   2020   2019   2020   2019   2020 
   (RMB in billions)   (%)   (%)   (%)   (%) 
Exploration and production                                   
External sales(1)   104    122    110    2.5    3.2    4.1    5.2 
Inter-segment sales   96    89    58    1.8    1.7           
Total operating revenue   200    211    168    4.3    4.9           
Refining                                   
External sales(1)   154    147    119    3.0    3.4    5.0    5.6 
Inter-segment sales   1,109    1,077    826    22.2    23.7           
Total operating revenue   1,263    1,224    945    25.2    27.1           
Marketing and distribution                                   
External sales(1)   1,441    1,427    1,097    29.3    31.6    48.2    51.9 
Inter-segment sales   5    4    5    0.1    0.1           
Total operating revenue   1,447    1,431    1,102    29.4    31.7           
Chemicals                                   
External sales(1)   471    438    331    9.0    9.5    14.8    15.4 
Inter-segment sales   101    78    41    1.6    1.2           
Total operating revenue   572    516    372    10.6    10.7           
Corporate and others                                   
External sales(1)   711    827    460    17.0    13.2    27.9    21.9 
Inter-segment sales   651    654    430    13.5    12.4           
Total operating revenue   1,362    1,481    890    30.5    25.6           
Total operating revenue before inter-segment eliminations   4,844    4,863    3,477    100.0    100.0           
Elimination of inter-segment sales   (1,962)   (1,903)   (1,371)                    
Consolidated operating revenues   2,882    2,960    2,106              100.0    100.0 

 

 
(1)include other operating revenues.

48

The following table sets forth the operating revenues, operating expenses and operating income/(loss) by each segment before elimination of the inter-segment transactions for the periods indicated, and the changes from 2019 to 2020.

 

   Year Ended December 31,   Change from 
   2018   2019   2020   2019 to 2020 
   (RMB in billions)    (%) 
Exploration and production                    
Total operating revenues   200    211    168    (20.4)
Total operating expenses   (210)   (201)   (184)   (8.5)
Total operating (loss)/income   (10)   9    (16)   - 
Refining                    
Total operating revenues   1,263    1,224    945    (22.8)
Total operating expenses   (1,209)   (1,194)   (950)   (20.4)
Total operating income   54    31    (6)     
Marketing and distribution                    
Total operating revenues   1,446    1,431    1,102    (23.0)
Total operating expenses   (1,423)   (1,402)   (1,081)   (22.9)
Total operating income   23    29    21    (27.6)
Chemicals                    
Total operating revenues   572    516    372    (28.0)
Total operating expenses   (544)   (499)   (361)   (27.6)
Total operating income   27    17    10    (40.2)
Corporate and others                    
Total operating revenues   1,362    1,481    890    (39.9)
Total operating expenses   (1,371)   (1,481)   (891)   (39.8)
Total operating (loss)/income   (9)   0.1    (0.39)   - 
Elimination of inter-segment income   (4)   (0.04)   4.42    - 

49

Exploration and Production Segment

 

Most of the crude oil and a small portion of the natural gas produced by the exploration and production segment were used for our refining and chemicals operations. Most of our natural gas and a small portion of crude oil were sold to other customers.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues of this segment were RMB 167.8 billion, representing a decrease of 20.4% over 2019. This was mainly attributed to the decrease of realized price in crude oil, natural gas and LNG.

 

This segment sold 34.52 million tonnes of crude oil and 27.8 billion cubic meters of natural gas in 2020, representing an increase of 0.5% and a decrease of 3.6% over 2019, respectively; 15.7 billion cubic meters of gasified LNG, representing an increase of 40.3% over 2019; and 6.17 million tonnes of LNG, representing an increase of 30.2% over 2019. The average realized price of crude oil and natural gas was RMB 1,902 per tonne and RMB 1,360 per thousand cubic meters, respectively, representing a decrease of 33.6% and a decrease of 13.2%, respectively, over 2019, and the average realized price of gasified LNG and LNG was RMB 1,774 per thousand cubic meters and RMB 2,543 per tonne, respectively, representing a decrease of 13.0% and a decrease of 23.1%, respectively.

 

In 2020, the operating expenses of this segment were RMB 184.2 billion, representing a decrease of 8.5% over 2019. This was mainly due to:

 

Procurement cost decreased by RMB 12.0 billion year on year, as a result of decrease of LNG price;

 

Depreciation, depletion and amortization decreased by RMB 4.5 billion year on year;

 

Cost of power fuel and purchased materials decreased by RMB 2.1 billion year on year;

 

Resource Tax and special oil income levy decreased by RMB 2.0 billion year on year; and

 

Impairment losses on long-lived assets increased by RMB 7.9 billion year on year.

 

The lifting cost for oil and gas was RMB 729.59 per tonne in 2020, representing a decrease of 6.7% over 2019, mainly attributable to the decrease in the cost of purchased material, fuels, and power since the upstream segment proactively reinforced the cost control to cope with the low oil price environment.

 

In 2020, the operating loss of the exploration and production segment was RMB 16.5 billion, representing a decrease of RMB 25.8 billion compared with 2019, mainly attributable to decrease of international oil price.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, the operating revenues of this segment were RMB 210.7 billion, representing an increase of 5.3% over 2018. This was mainly attributed to the rise of realized price of, and sales volume in, natural gas as a result of the expansion of natural gas business.

 

This segment sold 34.35 million tonnes of crude oil and 28.78 billion cubic meters of natural gas in 2019, representing a decrease of 1.3% and an increase of 9.7% over 2018, respectively; 11.16 billion cubic meters of gasified LNG, representing an increase of 33.9% over 2018; and 4.74 million tonnes of LNG, representing an increase of 65.9% over 2018. The average realized price of crude oil and natural gas was RMB 2,862 per tonne and RMB 1,566 per thousand cubic meters, respectively, representing a decrease of 6.0% and an increase of 11.1%, respectively, over 2018, and the average realized price of gasified LNG and LNG was RMB 2,040 per thousand cubic meters and RMB 3,305 per tonne, respectively, representing an increase of 5.5% and a decrease of 12.6%, respectively.

50

In 2019, the operating expenses of this segment were RMB 201.4 billion, representing a decrease of 4.2% over 2018. This was mainly due to:

 

Depreciation, depletion and amortization decreased by RMB 9.6 billion;

 

Payment of land use right and community services expenses decreased by RMB 5.7 billion year on year;

 

Impairment losses on long-lived assets decreased by RMB 4.3 billion year on year;

 

Resource tax and special oil income levy decreased by RMB 2.0 billion year on year;

 

Procurement cost increased by RMB 10.6 billion year on year, as a result of expansion of LNG business scale; and

 

Personnel expenses increased by RMB 1.7 billion year on year.

 

The lifting cost for oil and gas was RMB 782 per tonne in 2019, representing a decrease of 1.8% over 2018.

 

In 2019, the operating profit of the exploration and production segment was RMB 9.3 billion, representing an increase of RMB 19.4 billion compared with 2018. The segment reinforced efficient exploration and profit-oriented development, enhanced stable production of crude oil, accelerated construction of natural gas production-supply-storage-sale system and actively expanded market and promoted sales, strengthened cost control, and effectively improved profitability.

 

Refining Segment

 

Business activities of the refining segment consist of purchasing crude oil from third parties and from our exploration and production segment, processing crude oil into refined oil products, selling gasoline, diesel and kerosene to the marketing and distribution segment, selling a portion of chemical feedstock to our chemicals segment, and selling other refined oil products to the domestic and overseas customers.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues of this segment was RMB 944.5 billion, representing a decrease of 22.8% over 2019. This was mainly attributed to the decrease in products prices and crude oil throughput compared with the same period of last year as a result of recession in market demand which was impacted by the COVID-19 pandemic.

 

The table below sets forth sales volume and average realized prices by product for 2020 and 2019, as well as the percentage changes in sales volume and average realized prices for the periods shown.

 

   Sales volume   Change from   Average realized prices   Change from 
   2019   2020   2019 to 2020   2019   2020   2019 to 2020 
   (thousand tonnes)   (%)   (RMB per tonne)   (%) 
Gasoline   60,750    56,259    (7.4)   7,057    5,813    (17.6)
Diesel   63,509    61,167    (3.7)   5,477    4,354    (20.5)
Kerosene   23,890    17,309    (27.6)   4,252    2,673    (37.2)
Chemical feedstock   39,720    39,872    0.4    3,531    2,596    (26.5)
Other refined oil products   61,890    65,353    5.6    3,237    3,011    (7.0)

 

In 2020, our sales revenues of gasoline were RMB 327.0 billion, representing a decrease of 23.7% over 2019; the sales revenues of diesel were RMB 266.3 billion, representing a decrease of 23.4% over 2019; the sales revenues of kerosene were RMB 46.3 billion, representing a decrease of 54.5% over 2019; the sales revenues of chemical feedstock were RMB 103.5 billion, representing a decrease of 26.2% over 2019; and the sales revenues of other refined oil products other than gasoline, diesel, kerosene and chemical feedstock were RMB 196.8 billion, representing a decrease of 1.8% over 2019.

51

This segment’s operating expenses were RMB 950.1 billion in 2020, representing a decrease of 20.4% over 2019, which is mainly attributable to the decrease in procurement cost of crude oil resulted from the slump of international crude oil price.

 

In 2020, the average processing cost of crude oil was RMB 2,456 per tonne, representing a decrease of 27.8% over 2019. Refining throughput were 245.92 million tonnes (excluding the volume processed for third parties), representing a decrease of 2.6% over 2019. In 2020, the total costs of crude oil processed were RMB 603.9 billion, representing a decrease of 29.7% over 2019, which was accounted for 63.6% of the segment’s operating expenses, a decrease of 8.4 percentage points year on year.

 

The refining margin was RMB 240 per tonne in 2020, representing a decrease of RMB 126 per tonne compared with 2019. This is mainly due to the significant shrink of margin in kerosene and other refined petroleum products which was impacted by the COVID-19 outbreak and market demand recession as well as inventory losses of crude oil and refined products due to crude oil price slump.

 

In 2020, the refining cash operating cost (defined as operating expenses less the processing cost of crude oil and refining feedstock, depreciation and amortization, taxes other than income tax and other operating expenses, then divided by the throughput of crude oil and refining feedstock) was RMB 181.48 per tonne, an increase of 2.1% over 2019, which was mainly because the unit cost increased as a result of the throughput decreased compared with last year.

 

In 2020, the operating loss of the segment totaled RMB 5.6 billion, representing a decline of RMB 36.2 billion compared with 2019.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, the operating revenues of this segment were RMB 1,224.2 billion, representing a decrease of 3.1% over 2018. This was mainly attributable to the decrease in products prices compared with the same period of last year.

 

The table below sets forth sales volume and average realized prices by product for 2019 and 2018, as well as the percentage changes in sales volume and average realized prices for the periods shown.

 

   Sales volume   Change from   Average realized prices   Change from 
   2018   2019   2018 to 2019   2018   2019   2018 to 2019 
   (thousand tonnes)   (%)   (RMB per tonne)   (%) 
Gasoline   59,746    60,750    1.7    7,386    7,057    (4.5)
Diesel   62,676    63,509    1.3    5,766    5,477    (5.0)
Kerosene   22,418    23,890    6.6    4,515    4,252    (5.8)
Chemical feedstock   38,524    39,720    3.1    3,910    3,531    (9.7)
Other refined oil products   61,439    61,890    0.7    3,312    3,237    (2.3)

 

In 2019, our sales revenues of gasoline were RMB 428.7 billion, representing a decrease of 2.9% over 2018; the sales revenues of diesel were RMB 347.8 billion, representing a decrease of 3.7% over 2018; the sales revenues of kerosene were RMB 101.6 billion, representing an increase of 0.4% over 2018; the sales revenues of chemical feedstock were RMB 140.2 billion, representing a decrease of 6.9% over 2018; and the sales revenues of other refined oil products other than gasoline, diesel, kerosene and chemical feedstock were RMB 200.3 billion, representing a decrease of 1.6% over 2018.

 

This segment’s operating expenses were RMB 1,193.5 billion in 2019, representing a decrease of 1.2% over 2018, which is mainly attributable to the decrease in procurement cost of crude oil.

52

In 2019, the average processing cost of crude oil was RMB 3,403 per tonne, representing a decrease of 4.1% over 2018. Refining throughput were 252.5 million tonnes (excluding the volume processed for third parties), representing an increase of 1.7 % over 2018. In 2019, the total costs of crude oil processed were RMB 859.3 billion, representing a decrease of 2.4% over 2018.

 

The refining margin was RMB 366 per tonne in 2019, representing a decrease of RMB 96 per tonne, or 20.8%, compared with 2018. This is mainly due to the fluctuation of price spread between heavy and light crude oil, increase of freight and insurance costs for overseas shipments, as well as the narrowed gross margin of refined petroleum products other than gasoline, diesel and kerosene.

 

In 2019, the unit refining cash operating cost (defined as operating expenses less the processing cost of crude oil and refining feedstock, depreciation and amortization, taxes other than income tax and other operating expenses, then divided by the throughput of crude oil and refining feedstock) was RMB 178 per tonne, a decrease of RMB 2 per tonne, or 1.1%, over 2018.

 

This segment’s operating profit of the segment was RMB 30.6 billion in 2019, representing a decrease of RMB 24.2 billion as compared with 2018.

 

Marketing and Distribution Segment

 

The business activities of the marketing and distribution segment include purchasing refined oil products from our refining segment and third parties, making wholesale and distribution to domestic customers, and retail of the refined oil products through this segment’s retail distribution network, as well as providing related services.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues of this segment was RMB 1,102.2 billion, down by 23.0% year-on-year. This was mainly because demand and sales volume of refined oil products decreased as a result of COVID-19 impact and reduced oil prices. The sales revenues of gasoline totaled RMB 549.2 billion, down by 19.4% year-on-year; the sales revenues of diesel were RMB 377.0 billion, down by 25.7% year-on-year; and the sales revenues of kerosene was RMB 54.9 billion, down by 52.8% year-on-year.

 

The following table sets forth the sales volumes, average realized prices and the respective rates of changes of the four major product categories in 2020 and 2019, including breakdown in retail, wholesale and distribution of gasoline and diesel.

 

   Sales Volume   Change from   Average Realized Prices   Change from 
   2019   2020   2019 to 2020   2019   2020   2019 to 2020 
   (thousand tonnes)   (%)   (RMB per tonne)   (%) 
Gasoline   92,261    86,216    (6.6)   7,387    6,370    (13.8)
Retail sale   66,440    61,446    (7.5)   7,968    6,940    (12.9)
Wholesale and distribution   25,820    24,770    (4.1)   5,892    4,955    (15.9)
Diesel   87,335    77,507    (11.3)   5,812    4,865    (16.3)
Retail sale   43,503    36,757    (15.5)   6,227    5,351    (14.1)
Wholesale and distribution   43,832    40,750    (7.0)   5,399    4,426    (18.0)
Kerosene   27,068    20,828    (23.1)   4,297    2,634    (38.7)
Fuel oil   21,772    23,331    7.2    3,072    2,536    (17.4)

 

In 2020, the operating expenses of the segment were RMB 1,081.4 billion, representing a decrease of RMB 320.5 billion year-on-year, down by 22.9%. This was mainly due to the decrease of sales volumes and procurement costs.

 

In 2020, the operating revenues of nonfuel business was RMB 33.9 billion, up by RMB 1.8 billion year-on-year and the profit of non-fuel business was RMB 3.7 billion, up by RMB 0.5 billion. This was mainly because the Company vigorously promoted company-owned brands and innovated marketing model to boost the increase of volume and profit of non-fuel business. 

53

In 2020, the segment’s marketing operating cash cost (defined as the operating expenses less the purchase costs, taxes other than income tax, depreciation and amortization, divided by sales volume) was RMB 189.86 per tonne, up by 4.0% year-on-year, which was mainly because the unit cost increased as a result of the decreased sales volume.

 

In 2020, the segment’s operating profit was RMB 20.8 billion, down by 28.4% year-on-year. This was mainly because sales volume decreased as a result of shrinking demand of refined oil product.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, the operating revenues of this segment were RMB 1,431.0 billion, representing a decrease of 1.1% compared with 2018.

 

In 2019, the sales revenues of gasoline, diesel and kerosene were RMB 681.5 billion, RMB 507.5 billion and RMB 116.3 billion, representing a decrease of 1.7%, 0.3% and 1.1%, respectively, over 2018.

 

The following table sets forth the sales volumes, average realized prices and the respective rates of changes of the four major product categories in 2019 and 2018, including breakdown in retail, wholesale and distribution of gasoline and diesel.

 

   Sales Volume   Change from   Average Realized Prices   Change from 
   2018   2019   2018 to 2019   2018   2019   2018 to 2019 
   (thousand tonnes)   (%)   (RMB per tonne)   (%) 
Gasoline   88,076    92,261    4.8    7,870    7,387    (6.1)
Retail sale   66,855    66,440    (0.6)   8,296    7,968    (4.0)
Wholesale and distribution   21,221    25,820    21.7    6,524    5,892    (9.7)
Diesel   84,865    87,335    2.9    5,998    5,812    (3.1)
Retail sale   43,327    43,503    0.4    6,435    6,227    (3.2)
Wholesale and distribution   41,537    43,832    5.5    5,541    5,399    (2.6)
Kerosene   25,787    27,068    5.0    4,562    4,297    (5.8)
Fuel oil   23,372    21,772    (6.8)   2,974    3,072    3.3 

 

In 2019, the operating expenses of the segment were RMB 1,401.9 billion, representing a decrease of RMB 21.3 billion or 1.5% as compared with that of 2018. This was mainly due to the decrease in refined oil products procured price which resulting in the decrease of procurement cost for RMB 22 billion.

 

In 2019, the segment’s non-petroleum business income was RMB 32.2 billion with the profit of RMB 3.2 billion.

 

In 2019, the segment’s marketing cash operating cost (defined as the operating expenses less purchase costs, taxes other than income tax, depreciation and amortization, and then divided by the sales volume) was RMB 183 per tonne, representing a decrease of 11.6% compared with that of 2018, due to the adjusted accounting of some of the service stations, land and other right of use assets as required by the New Lease Standard.

 

In 2019, the segment exerted advantages of integrated business and distribution network into full play, reinforced the coordination of internal and external resources, promoted targeted marketing and differentiated marketing to improve service quality, and constantly increased profits and sales volume. Meanwhile, we enhanced the development and sales of company-owned brand and put efforts to expand non-fuel business scale and profitability. The operating income of this segment in 2019 was RMB 29.1 billion, representing an increase of 24% compared with 2018.

54

Chemicals Segment

 

The business activities of the chemicals segment include purchasing chemical feedstock from the refining segment and third parties, producing, marketing and distributing petrochemical and inorganic chemical products.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues of this segment was RMB 371.9 billion, down by 28.0% year-on-year. This was mainly due to the decrease in chemical products prices and sales volume of some products because of COVID-19 impact.

 

In 2020, the sales revenue generated by the segment’s six major categories of chemical products (namely basic organic chemicals, synthetic resin, synthetic fiber monomer and polymer, synthetic fiber, synthetic rubber, and chemical fertilizer) was RMB 354.4 billion, down by 24.3%, accounting for 95.3% of the operating revenues of the segment. 

 

The following table sets forth the sales volume, average realized price and the respective rates of changes for each of these six categories of chemical products of this segment from 2019 to 2020.

 

   Sales Volume   Change from   Average Realized Prices   Change from 
   2019   2020   2019 to 2020   2019   2020   2019 to 2020 
   (thousand tonnes)   (%)   (RMB per tonne)   (%) 
Basic organic chemicals   52,007    47,109    (9.4)   4,534    3,564    (21.4)
Synthetic fiber monomers and polymers   14,089    9,743    (30.8)   5,722    4,302    (24.8)
Synthetic resins   16,131    17,124    6.2    7,804    7,150    (8.4)
Synthetic fiber   1,370    1,403    2.4    8,438    6,407    (24.1)
Synthetic rubber   1,284    1,364    6.3    9,595    7,986    (16.8)
Chemical fertilizer   925    1,181    27.8    2,109    1,950    (7.5)

 

In 2020, the operating expenses of the segment was RMB 361.5 billion, down by 27.6% year-on-year.

 

In 2020, the segment’s operating profit was RMB 10.4 billion, down by RMB 7 billion year-on-year. This was mainly due to the decrease in chemical product prices and narrowed gross margin as a result of COVID-19 impact.

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

The operating revenues of the chemicals segment in 2019 were RMB 516.3 billion, representing a decrease of 9.8% over 2018, which was mainly attributable to sharp decrease in prices of chemical products as a result of the concentrated release of new capacity, as well as the change of supply-demand structure.

 

The sales revenues generated by the segment’s six major categories of chemical products (namely basic organic chemicals, synthetic resins, synthetic fiber monomer and polymer, synthetic fiber, synthetic rubber, and chemical fertilizer) totaled RMB 468.1 billion, representing a decrease of 9.7% as compared with 2018, and accounted for 90.7% of the operating revenues of the segment.

 

The following table sets forth the sales volume, average realized price and the respective rates of changes for each of these six categories of chemical products of this segment from 2018 to 2019.

 

   Sales Volume   Change from   Average Realized Prices   Change from 
   2018   2019   2018 to 2019   2018   2019   2018 to 2019 
   (thousand tonnes)   (%)   (RMB per tonne)   (%) 
Basic organic chemicals   52,450    52,007    (0.8)   5,281    4,534    (14.1)
Synthetic fiber monomers and polymers   11,252    14,089    25.2    6,978    5,722    (18.0)
Synthetic resins   15,325    16,131    5.3    8,646    7,804    (9.7)
Synthetic fiber   1,314    1,370    4.3    9,712    8,438    (13.1)
Synthetic rubber   1,278    1,284    0.5    10,750    9,595    (10.7)
Chemical fertilizer   796    925    16.2    2,093    2,109    0.8 

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In 2019, the operating expenses of the chemicals segment were RMB 498.9 billion, representing a decrease of 8.4% over 2018, mainly because of the decrease in the price of externally procured raw materials as compared with the same period in 2018.

 

In 2019, confronted with the business cycle correction and decreased chemical margin, the Company strengthened the coordination among research, development, production and marketing, continuously reinforced the profit prediction based on the market, optimized the structures of feedstock, product and facilities, intensified allocation of resources, pushed ahead with targeted marketing and precise service strategy, and achieved steadily growing sales volume of petrochemicals. The operating income of this segment was RMB 17.3 billion.

 

Corporate and Others

 

The business activities of corporate and others mainly consist of the import and export business activities of our subsidiaries, research and development activities of us and managerial activities of our headquarters.

 

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

 

In 2020, the operating revenues generated from corporate and others was RMB 890.3 billion (of which the operating revenues of trading companies was RMB 886.4 billion), down by 39.9% year-on-year. This was mainly because sales volume and prices of crude oil and refined oil products plunged as a result of COVID-19 impact.

 

In 2020, the operating expenses for corporate and others was RMB 890.7 billion (of which the operating expenses of trading companies was RMB 882.2 billion), down by 39.8% year-on-year.

 

In 2020, the segment’s operating loss was RMB 0.4 billion, of which trading companies realized an operating profit of RMB 4.1 billion. 

 

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

In 2019, the operating revenue generated from corporate and others was RMB 1,480.7 billion, representing an increase of 8.7% over 2018, which was mainly attributable to the increase in value of trade from crude oil and overseas refined oil products, as well as the rapid growth of the equipment and petrochemicals business transaction scale through Epec platform.

 

In 2019, the operating expenses of this segment was RMB 1,480.6 billion, representing an increase of 8.0% over 2018.

 

In 2019, the operating income of this segment was RMB 0.1 billion.

 

D.            LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of funding have been cash provided by our operating activities, along with short-term and long-term loans. Our primary uses of cash have been for working capital, capital expenditures and repayment of short-term and long-term loans. We arrange and negotiate financing with financial institutions to finance our capital resource requirement, and maintain a certain level of standby credit facilities to reduce liquidity risk. We believe that our current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet our working capital requirements and repay our short-term debts and obligations when they become due.

56

The following table sets forth a summary of our consolidated statements of cash flow data for the years ended December 31, 2018, 2019 and 2020.

 

   Year Ended December 31, 
Statement of cash flow data  2018   2019(1)  2020 
   (RMB in millions) 
Net cash generated from operating activities   175,937    153,619    167,518 
Net cash used in investing activities   (66,648)   (121,051)   (102,203)
Net cash used in financing activities   (111,269)   (84,204)   (36,955)
Net decrease in cash and cash equivalents   (1,980)   (51,636)   28,360 

 

 

(1)We have adopted IFRS Standard 16 “Leases” from January 1, 2019, but has not restated comparative amounts for the 2018 reporting period, as permitted under the specific transition provision in the standard. The reclassifications and the adjustments arising from such standard were therefore recognized in the opening balance sheet on January 1, 2019.

 

In 2020, the net cash generated from operating activities of the Company was RMB 167.5 billion, representing an increase in cash of RMB 13.9 billion year on year. This was mainly due to the strengthened management of inventories and receivables and payables and sharp decrease of occupation of funds.

 

In 2019, the net cash generated from operating activities of the company was RMB 153.6 billion, representing a decrease of RMB 22.3 billion as compared with 2018, of which: profit before taxation decreased by RMB 9.3 billion, loss from assets impairment decreased by RMB 9.8 billion, interest expenses increased by RMB 9.7 billion, exchange rate and derivatives financial instruments loss/(gain) increased by 5.5 billion, net change of accounts receivable and other current assets decreased by RMB 10.9 billion, net change of inventory decreased by RMB 7.1 billion, net change of accounts payable and other current liabilities decreased by RMB 15.7 billion, and the paid income tax decreased by RMB 13.6 billion as compared with 2018.

 

The net cash generated from our operating activities in 2018 was RMB 175.9 billion, representing a decrease of RMB 15.2 billion over 2017, among which, profit before taxation increased by RMB 12.4 billion, depreciation, depletion and amortization and assets impairment loss decreased by RMB 15.5 billion, accounts receivable and net change for other current assets decreased by RMB 30.1 billion, net change for inventory decreased by RMB 27.0 billion, accounts payable and net change for other current liabilities decreased by RMB 58.7 billion, and the paid income tax increased by RMB 13.0 billion as compared with 2017.

 

In 2020, the net cash used in investing activities was RMB 102.2 billion, representing a year on year decrease of RMB 18.8 billion, mainly because capital expenditures decreased by RMB 12.2 billion.

 

In 2019, the net cash used in investing activities was RMB 121.1billion, representing an increase of cash outflow of RMB 54.4 billion over 2018, of which: capital expenditure and wildcat expenditure increased by RMB 38.4 billion, purchasing investment and associates and joint ventures investments decreased by RMB 6.6 billion, cash inflow from changes of financial assets at fair value through profit or loss decreased by RMB 3.0 billion, outcome from time deposit with maturities over three months increased by RMB 9.2 billion.

 

The net cash used in our investing activities in 2018 was RMB 66.6 billion, representing a decrease of RMB 78.7 billion over 2017, which was mainly due to an increase in capital expenditure of RMB 31.2 billion, an increase of RMB 76.6 billion in proceeds from matured financial assets at fair value through profit or loss, and an increase of RMB 30.5 billion in gains from the time deposits with maturities over three months.

 

In 2020, the net cash used in financing activities were RMB 37.0 billion, representing a year on year decrease of RMB 47.2 billion, mainly because proceeds from bank and other loans decreased by RMB 43.8 billion, repayments of bank and other loans decreased by RMB 74.1 billion, dividends paid by the Company decreased by RMB 14.5 billion, distributions by subsidiaries to non-controlling shareholders decreased by RMB 3.2 billion.

57

In 2019, the net cash used in financing activities was RMB 84.2 billion, representing a decrease of cash outflow by RMB 27.1 billion over 2018. This was mainly due to the cash outflow from the changes of loans increased to RMB 13.8 billion, cash paid for dividends decrease by RMB 21.8 billion, subsidiary companies allocated to non-controlling shareholders reduced by RMB 6.3 billion, investments from non-controlling shareholders increased by RMB 1.9 billion, and repayment for lease liabilities increased by RMB 16.8 billion.

 

The net cash used in the Company’s financing activities in 2018 was RMB 111.3 billion, representing an increase of cash out flow by RMB 54.7 billion over 2017, among which, the dividend payment increased by RMB 35.1 billion, the net repayments of bank and other loans increased by RMB 13.9 billion and the distributions by subsidiaries to non-controlling shareholders increased by RMB 6.2 billion.

 

In respect of our cash flow situation of 2020, we further strengthened the centralized management of funds, strictly controlled the scale of monetary funds and interest-bearing debts, reduced capital precipitation, accelerated capital turnover, and maintained stable operating cash flow throughout the year.

 

In respect of our debts and borrowings in 2020, due to our stable cash flow, we decreased our debts to RMB 112.8 billion at the end of 2020 from RMB 142.6 billion from the beginning of 2020. Among which, our short-term debts decreased by RMB 54.8 billion as compared to the beginning of 2020, representing a decrease from 59% at the beginning of 2020 to 26% at the end of 2020 of the debts, primarily because of repayment of matured debts. Our long-term debts increased by RMB 25.0 billion from the beginning of 2020, representing an increase from 41% at the beginning of 2020 to 74% at the end of 2020 of the debts, which was mainly due to increase in imported crude oil loans and project loans from companies such as Sino-SK. Our short-term debts consist of revolving loans borrowed according to our business plan and operation needs and overdrawing agreements entered into on the corporate bank account with our strategic-alliance banks to meet our intra-day payment requirements.

 

Contractual Obligations and Commercial Commitments

 

The following table sets forth our obligations and commitments to make future payments under contracts and commercial commitments as of December 31, 2020.

 

   As of December 31, 2020 
   Total   less than 1
year
   1-3 years   4-5 years   After 5 years 
   (RMB in millions) 
Contractual obligations(1)                    
Short-term debt   45,912    45,912    -    -    - 
Long-term debt   93,865    2,176    62,080    21,125    8,484 
Total contractual obligations   139,777    48,088    62,080    21,125    8,484 
                          
Other commercial commitments                         
Capital commitments   205,277    165,700    38,443    1,134    - 
Exploration and production licenses   1,498    390    165    119    824 
Guarantees(2)   14,840    14,840    -    -    - 
Total commercial commitments   221,615    180,930    38,608    1,253    824 

 

 

(1)Contractual obligations include the contractual obligations relating to interest payments.

 

(2)Guarantee is not limited by time, therefore specific payment due period is not applicable. As of December 31, 2020, with respect to guarantees in relation to banking facilities granted to certain parties, we have not entered into any off-balance sheet arrangements. As of December 31, 2020, the maximum amount of potential future payments under the guarantees was RMB 14.8 billion. As of December 31, 2019, the maximum amount of potential future payments under the guarantees was RMB 17.2 billion. See Note 34 to the consolidated financial statements for further information of the guarantees.

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Historical and Planned Capital Expenditure

 

The following table sets forth our capital expenditure by segment for the years of 2018, 2019 and 2020 and the capital expenditure in each segment as a percentage of our total capital expenditure for such year.

 

   2018   2019   2020   Total 
   RMB   Percent   RMB   Percent   RMB   Percent   RMB   Percent 
   (in billions, except percentage data) 
Exploration and production   42.16    35.73%   61.74    41.97%   56.42    42%   160.32    38%
Refining   27.91    23.66%   31.37    21.33%   24.72    18%   84.00    20%
Marketing and distribution   21.43    18.16%   29.57    20.10%   25.40    19%   76.40    18%
Chemicals   19.58    16.59%   22.44    15.26%   26.20    19%   68.22    16%
Corporate and others   6.90    5.86%   1.97    1.34%   2.31    2%   11.18    7%
Capital Expenditure   117.98    100.00%   147.09    100.00%   135.05    100%   400.12    100%

 

In 2020, focusing on quality and profitability of investment, the Company optimized its investment management system, with total capital expenditures of RMB 135.1 billion, among which:

 

Exploration and production. RMB 56.4 billion, mainly for Shengli and Northwest crude oil capacity building projects, Fuling and Weirong shale gas projects, phase II of Tianjin LNG project, and phase II of Shandong LNG project.

 

Refining. RMB 24.7 billion, mainly for Zhongke Refining and Petrochemical project, Zhenhai, Tianjin, Maoming, Luoyang and Sinopec-SK refining upgrading projects.

 

Marketing and distribution. RMB 25.4 billion, mainly for construction of service stations, oil products depots and nonfuel business.

 

Chemicals. RMB 26.2 billion, mainly for Zhongke, Zhenhai and Gulei projects, Amur gas chemical complex project, Sinopec-SK ethylene revamping projects, Jiujiang aromatics project and meltblown fabric capacity building.

 

Corporate and others. RMB 2.3 billion, mainly for R&D facilities and information technology projects.

 

Capital expenditures for the year 2021 are budgeted at RMB 167.2 billion, among which,

 

Exploration and production. The planned capital expenditure in 2021 for this segment is approximately RMB 66.8 billion, with focuses on the production capacity building of Fuling and Weirong shale gas fields, Shengli and Northwest crude oil development projects, and the Phase II LNG project in Tianjin and Phase II LNG project in Shandong.

 

Refining. The planned capital expenditure in 2021 for this segment is RMB 20.1 billion, mainly on the structural adjustment projects of Yangzi and Anqing, as well as the expansion of Zhenhai.

 

Marketing and distribution. The planned capital expenditure in 2021 for this segment is RMB 26.5 billion with emphasis on service stations, gas stations, hydrogen stations, depots and non-fuel business.

59

Chemicals. The planned capital expenditure in 2021 for this segment is RMB 48.6 billion, mainly on projects such as Zhenhai, Gulei, Hainan and Tianjin Nangang, Sinopec-SK and the Amur ethylene projects, Jiujiang aromatics, Baling caprolactam project, Shanghai large-tow carbon fiber, Yizheng PTA and other projects.

 

Corporate and others. The planned capital expenditure in 2021 for this segment is RMB 5.2 billion, mainly for R&D facilities and information technology projects.

 

Research and Development

 

Our expenditures for research and development were RMB 12.9 billion in 2018, RMB 15.5 billion in 2019 and RMB 15.2 billion in 2020, among which, the research expenses were RMB 8.0 billion, RMB 9.5 billion and RMB 10.1 billion for each of the three years, respectively.

 

Consumer Price Index

 

According to the data provided by the National Bureau of Statistics, the consumer price index (CPI) in the PRC increased by 2.5% in 2020 over 2019 (CPI increased by 2.9% in 2019) and increased by 5.4% over 2018.

 

ITEM 6.                DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.            DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT

 

Directors

 

The table and discussion below set forth certain information concerning our directors. The current term for all of our directors of the seventh session of the Board of Directors will expire in May 2021.

 

Name  Age  Position with the Company
Zhang Yuzhuo  59  Chairman
Ma Yongsheng  59  Director, President
Yu Baocai  56  Director, Senior Vice President
Liu Hongbin  58  Director, Senior Vice President
Ling Yiqun  58  Director, Senior Vice President
Zhang Shaofeng  49  Director
Tang Min  67  Independent Director
Cai Hongbin  53  Independent Director
Ng, Kar Ling Johnny  60  Independent Director

 

Zhang Yuzhuo, aged 59, Chairman of the Board of Directors of Sinopec Corp. Mr. Zhang is a Research Fellow, Ph.D. in engineering and Academician of the Chinese Academy of Engineering. Mr. Zhang is an alternate member of the 19th Central Committee of the Communist Party of China (“CPC”). In January 1997, he was appointed as Vice President of China Coal Research Institute; in February 1998, he temporarily served as Deputy General Manager of Yankuang Group Co. Ltd.; in July 1998, he was appointed as Vice President of China Coal Research Institute, Director and Deputy General Manager of China Coal Technology Corporation; in March 1999, he served as President of China Coal Research Institute and Chairman of China Coal Technology Corporation; in June 1999, he was appointed as President and Deputy Secretary of CPC Committee of China Coal Research Institute, and Chairman and Deputy Secretary of CPC Committee of China Coal Technology Corporation; in January 2002, he was appointed as Deputy General Manager of Shenhua Group Corporation Limited, and served concurrently as Chairman and General Manager of China Shenhua Coal Liquefaction Company Limited; in August 2003, he was appointed as Deputy General Manager and Member of the Leading Party Member Group of Shenhua Group Corporation Limited, and served concurrently as Chairman of China Shenhua Coal Liquefaction Company Limited; in December 2008, he was appointed as Director, General Manager and Member of the Leading Party Member Group of Shenhua Group Corporation Limited; in July 2009, he served concurrently as Vice Chairman of All-China Federation of Returned Overseas Chinese; in May 2014, he was appointed as Chairman and Secretary of the Leading Party Member Group of Shenhua Group Corporation Limited, and served concurrently as Chairman of China Shenhua Energy Company Limited; in March 2017, he served as a member of the Standing Committee of the CPC Tianjin Municipal Committee and Secretary of the CPC Binhai New Area Committee; in July 2017, he served concurrently as Chairman of Sino-Singapore Tianjin Eco-City Investment & Development Co., Ltd.; in May 2018, he served concurrently as Director of China (Tianjin) Pilot Free Trade Zone Administration; in January 2020, he was appointed as Chairman and Secretary of the Leading Party Member Group of China Petrochemical Corporation. In March 2020, he was elected as Chairman of the Board of Directors of Sinopec Corp.

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Ma Yongsheng, aged 59, Director and President of Sinopec Corp. Mr. Ma is a professor level senior engineer with a Ph.D. degree and an academician of the Chinese Academy of Engineering. Mr. Ma is a member of the 13th National Committee of Chinese People’s Political Consultative Conference (“CPPCC”). In April 2002, he was appointed as Chief Geologist of Sinopec Southern Exploration and Production Company; in April 2006, he was appointed as Executive Deputy Manager (in charge of overall management), Chief Geologist of Sinopec Southern Exploration and Production Company; in January 2007, he was appointed as General Manager and Party Secretary of CPC Committee of Sinopec Southern Exploration and Production Company; in March 2007, he served as General Manager and Deputy Party Secretary of CPC Committee of Sinopec Exploration Company; in May 2007, he was appointed as Deputy Commander of Sichuan-East China Gas Pipeline Project Headquarter of Sinopec Corp., General Manager and Deputy Secretary of CPC Committee of Sinopec Exploration Company; in May 2008, he was appointed as Deputy Director General of Exploration and Production Department of Sinopec Corp. (Director General Level) and Deputy Commander of Sichuan-East China Gas Pipeline Project Headquarter; in July 2010, he served as Deputy Chief Geologist of Sinopec Corp.; in August 2013, he was appointed as Chief Geologist of Sinopec Corp.; in December 2015, he served as Vice President of China Petrochemical Corporation and was appointed as Senior Vice President of Sinopec Corp.; in January 2017, he was appointed as Member of the Leading Party Member Group of China Petrochemical Corporation; in April 2019, he was appointed as Director, President and Vice Secretary of the Leading Party Member Group of China Petrochemical Corporation. In February 2016, he was elected as Director of Sinopec Corp.; in October 2018, he was appointed as President of Sinopec Corp.

 

Yu Baocai, aged 56, Director and Senior Vice President of Sinopec Corp. Mr. Yu is a senior engineer with a master’s degree in economics. In September 1999, Mr. Yu was appointed as Deputy General Manager of Daqing Petrochemical Company; in December 2001, he was appointed as General Manager and Deputy Secretary of CPC Committee of Daqing Petrochemical Company; in September 2003, he was appointed as General Manager and Secretary of CPC Committee of Lanzhou Petrochemical Company; in June 2007, he was appointed as General Manager and Deputy Secretary of CPC Committee of Lanzhou Petrochemical Company and General Manager of Lanzhou Petroleum & Chemical Company; in September 2008, he was appointed as a member of the Leading Party Member Group and Deputy General Manager of China National Petroleum Corporation (“CNPC”) and since May 2011, he acted concurrently as Director of PetroChina Company Limited; in June 2018, he was appointed as a Member of the Leading Party Member Group and Vice President of China Petrochemical Corporation. In October 2018, Mr. Yu was elected as Director of Sinopec Corp.; in September 2020, he was appointed as Senior Vice President of Sinopec Corp.

 

Liu Hongbin, aged 58. Director and Senior Vice President of Sinopec Corp. Mr. Liu is a senior engineer with a bachelor’s degree. In June 1995, he was appointed as Chief Engineer of Tuha Petroleum Exploration & Development Headquarters; in July 1999, he was appointed as Deputy General Manager of PetroChina Tuha Oilfield Company; in July 2000, he was appointed as Commander and Deputy Secretary of CPC Committee of Tuha Petroleum Exploration & Development Headquarters; in March 2002, he served as General Manager of the Planning Department of PetroChina Company Limited; in September 2005, he served as Director of the Planning Department of CNPC; in June 2007, he was appointed as Vice President of PetroChina Company Limited, and in November 2007, he served concurrently as General Manager and Secretary of CPC Committee of the Marketing Branch of PetroChina Company Limited; in June 2009, he served concurrently as General Manager and Deputy Secretary of CPC Committee of the Marketing Branch of PetroChina Company Limited; in July 2013, he was appointed as Member of the Leading Party Member Group and Deputy General Manager of CNPC and in August 2013, he served concurrently as an Executive Director and General Manager of Daqing Oilfield Company Limited, Director of Daqing Petroleum Administration Bureau and Deputy Secretary of CPC Committee of Daqing Oilfield; in May 2014, he served concurrently as Director of PetroChina Company Limited; in November 2019, he was appointed as a member of the Leading Party Member Group of China Petrochemical Corporation; in December 2019, he was appointed as Vice President of China Petrochemical Corporation. In March 2020, he was appointed as Senior Vice President of Sinopec Corp.; in May 2020, he was elected as Director of Sinopec Corp.

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Ling Yiqun, aged 58, Director and Senior Vice President of Sinopec Corp. Mr. Ling is a professor level senior engineer with a Ph.D. degree. From 1983, he worked in the refinery of Beijing Yanshan Petrochemical Company and the Refining Department of Beijing Yanshan Petrochemical Company Ltd.; in February 2000, he was appointed as Deputy Director General of Refining Department of Sinopec Corp.; in June 2003, he was appointed as Director General of Refining Department of Sinopec Corp.; in July 2010, he was appointed as Vice President of Sinopec Corp.; in May 2012, he was appointed concurrently as Executive Director, President and Secretary of CPC Committee of Sinopec Refinery Product Sales Company Limited; in August 2013, he was appointed concurrently as President and Secretary of CPC Committee of Sinopec Qilu Petrochemical Company, and President of Sinopec Qilu Company; in March 2017, he was appointed as Vice President of China Petrochemical Corporation; since April 2019, he has been a member of the Leading Party Member Group of China Petrochemical Corporation. In February 2018, he was appointed as Senior Vice President of Sinopec Corp.; in May 2018, he was elected as Director of Sinopec Corp.

 

Zhang Shaofeng, aged 49, Director of Sinopec Corp., Mr. Zhang is a professor level senior accountant with a master’s degree in business administration. In December 2008, he was appointed as Chief Accountant and Member of the CPC Committee of Trans-Asia Gas Pipeline Company Limited of CNPC; in July 2017, he was appointed as General Manager of Finance Department of CNPC and served concurrently as General Manager of Finance Department of PetroChina Company Limited; in December 2017, he was appointed as General Manager of Finance Department of CNPC and served concurrently as General Manager of Finance Department of PetroChina Company Limited; in July 2020, he was appointed as Member of the Leading Party Member Group and Chief Accountant of China Petrochemical Corporation. In September 2020, he was elected as Director of Sinopec Corp.

 

Tang Min, aged 67, Independent Director of Sinopec Corp. Mr. Tang has a Ph.D. degree in economics. He presently acts as Counsellor of the State Council of the PRC and Executive Vice Chairman of YouChange China Social Entrepreneur Foundation. He was an economist and senior economist at the Economic Research Centre of the Asian Development Bank between 1989 and 2000; chief economist at the Representative office of the Asian Development Bank in China between 2000 and 2004; Deputy Representative at the Representative Office of the Asian Development Bank in China between 2004 and 2007 and Deputy Secretary-General of the China Development Research Foundation between 2007 and 2010. In May 2015, he was appointed as Independent Director of Sinopec Corp.

 

Cai Hongbin, aged 53, Independent Director of Sinopec Corp. Mr. Cai is Dean of Faculty of Business and Economics and Professor