20-F 1 china_20f.htm 20-F china_20f.htm  
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
 
S
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
OR
 
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
FOR THE TRANSITION PERIOD FROM _______ TO _______
OR
 
£
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT
   
FOR THE TRANSACTION PERIOD FORM _______ TO _______
 
COMMISSION FILE NUMBER 1-15138
_______________________
 
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. Chen Ge
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
Name of Each Exchange
On Which Registered
American Depositary Shares, each representing
100 H Shares of par value RMB 1.00 per share
New York Stock Exchange, Inc.
   
H Shares of par value RMB 1.00 per share
New York Stock Exchange, Inc.*
 
*   Not for trading, but only in connection with the registration of American Depository Shares.
Securities registered or to be registered pursuant to Section 12 (g) of the Act.
 
None
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act.

 
 

 

None
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
 

 
Shares with selling restriction, par value RMB 1.00 per share
57,087,800,493
H Shares, par value RMB 1.00 per share
16,780,488,000
A Shares, par value RMB 1.00 per share
12,834,150,507
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
 
Yes X
No__
 
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
Yes __
No X
 
 
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
Yes X
No__
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer X
Accelerated filer __
Non-accelerated filer __
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP ___
International Financial Reporting Standards X
Other ___
 
as issued by the International Accounting
 
 
Standards Board
 
 
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 X
 


 
 

 

Table of Contents
 
Page
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
6
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
6
ITEM 3.
KEY INFORMATION
6
     
 
A.  SELECTED FINANCIAL DATA
6
 
B.  CAPITALIZATION AND INDEBTEDNESS
8
 
C.  REASONS FOR THE OFFER AND USE OF PROCEEDS
8
 
D.  RISK FACTORS
8
     
ITEM 4.
INFORMATION ON THE COMPANY
13
     
 
A.  HISTORY AND DEVELOPMENT OF THE COMPANY
13
 
B.  BUSINESS OVERVIEW
14
 
C.  ORGANIZATIONAL STRUCTURE
29
 
D.  PROPERTY, PLANT AND EQUIPMENT
29
     
ITEM 4A.
UNRESOLVED STAFF COMMENTS
30
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
30
     
 
A.  GENERAL
30
 
B.  CONSOLIDATED RESULTS OF OPERATIONS
33
 
C.  DISCUSSIONS ON RESULTS OF SEGMENT OPERATIONS
39
 
D.  LIQUIDITY AND CAPITAL RESOURCES
46
     
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
49
     
 
A.  DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
49
 
B.  COMPENSATION
56
 
C.  BOARD PRACTICE
57
 
D.  EMPLOYEES
58
 
E.  SHARE OWNERSHIP
58
     
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
58
     
 
A.  MAJOR SHAREHOLDERS
58
 
B.  RELATED PARTY TRANSACTIONS
59
 
C.  INTERESTS OF EXPERTS AND COUNSEL
59
     
ITEM 8.
FINANCIAL INFORMATION
60
     
 
A.  CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
60
 
B.  SIGNIFICANT CHANGES
60
     
ITEM 9.
THE OFFER AND LISTING
60
     
 
A.  OFFER AND LISTING DETAILS
60
     
ITEM 10.
ADDITIONAL INFORMATION
61
     
 
A.  SHARE CAPITAL
61
 
B.  MEMORANDUM AND ARTICLES OF ASSOCIATION
61
 
C.  MATERIAL CONTRACTS
69
 
D.  EXCHANGE CONTROLS
69
 
E.  TAXATION
69
 
F.  DIVIDENDS AND PAYING AGENTS
73
 
G.  STATEMENT BY EXPERTS
73
 
H.  DOCUMENTS ON DISPLAY
73
 
I.    SUBSIDIARY INFORMATION
73
     
ITEM 11.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
73
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
80
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
80
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
80
     
 
A.  MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITIES HOLDERS
80
 
B.  USE OF PROCEEDS
80
     
ITEM 15.
CONTROLS AND PROCEDURES
80
ITEM 16.
RESERVED
81
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
81
ITEM 16B.
CODE OF ETHICS
82
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
82
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
82


 
1

 


ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
82
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
82
ITEM 16G.
COMPARISON OF NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE RULES AND CHINA CORPORATE GOVERNANCE RULES FOR LISTED COMPANIES
82
ITEM 17.
FINANCIAL STATEMENTS
85
ITEM 18.
FINANCIAL STATEMENTS
85
ITEM 19.
EXHIBITS
85


 
2

 


CERTAIN TERMS AND CONVENTIONS
 
Definitions
 
Unless the context otherwise requires, references in this annual report to:
 
 
·
"Sinopec Corp.", "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;
 
 
·
"China" or the "PRC" are to the People's Republic of China, excluding for purposes of this annual report Hong Kong, Macau and Taiwan;
 
 
·
"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
 
Conversions of crude oil from tonnes to barrels are made at a rate of one tonne to 7.35 barrels for crude oil we purchase from external sources and one tonne to 7.1 barrels for crude oil we produce, representing the American Petroleum Institute (“API”) gravity of the respective source of crude oil. Conversions of natural gas from cubic meters to cubic feet are made at a rate of one cubic meter to 35.31 cubic feet.
 
Glossary of Technical Terms
 
Unless otherwise indicated in the context, references to:
 
 
·
"billion" are to a thousand million.
 
 
·
"BOE" are to barrels-of-oil equivalent; natural gas is converted at a ratio of 6,000 cubic feet of natural gas to one BOE.
 
 
·
"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.
 

 

 
3

 

CURRENCIES AND EXCHANGE RATES
 
We publish our financial statements in Renminbi. Unless otherwise indicated, all translations from Renminbi to US dollars have been made at a rate of RMB 6.8225 to US$1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2008. We do not represent that Renminbi or US dollar amounts could be converted into US dollars or Renminbi, as the case may be, at any particular rate, the rates below or at all. On May 15, 2009, the noon buying rate was RMB 6.8225 to US$1.00.
 
The following table sets forth noon buying rate for US dollars in New York City for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York for the periods indicated:
 
   
Noon Buying Rate
 
    End     Average(1)     High     Low  
   
(RMB per US$1.00)
 
2004
   
8.2765
     
8.2767
     
8.2774
     
8.2764
 
2005
   
8.0702
 
   
8.1826
     
8.2765
     
8.0702
 
2006
   
7.8041
 
   
7.9723
     
8.0702
     
7.9723
 
2007
   
7.2946
     
7.5806
     
7.8127
     
7.2946
 
2008
   
6.8225
     
6.9193
     
7.2946
     
6.7800
 
November 2008
   
6.8254
     
6.8281
     
6.8373
     
6.8220
 
December 2008
   
6.8225
     
6.8539
     
6.8842
     
6.8225
 
January 2009
   
6.8392
     
6.8360
     
6.8392
     
6.8225
 
February 2009
   
6.8395
     
6.8363
     
6.8470
     
6.8241
 
March 2009
   
6.8329
     
6.8360
     
6.8438
     
6.8240
 
April 2009
   
6.8180
     
6.8304
     
6.8361
     
6.8180
 
May 2009 (up to May 15, 2009)    
6.8225
     
6.8210
     
6.8248
     
6.8176
 
__________
 
(1)
Annual averages are determined by averaging the rates on the last business day of each month during the relevant period. Monthly averages are calculated using the average of the daily rates during the relevant period.


 
4

 

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.
 
These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including the risks set forth in "Item 3. Key Information ¾ Risk Factors" and the following:
 
 
·
fluctuations in crude oil prices,
 
·
fluctuations in prices of our products,
 
·
failures or delays in achieving production from development projects,
 
·
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.
 

 
5

 

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 income statement data and consolidated cash flow data for the years ended December 31, 2006, 2007 and 2008, and the selected consolidated balance sheet data as of December 31, 2007, and 2008 have been derived from, and should be read in conjunction with, the audited consolidated financial statements included elsewhere in this annual report. The selected consolidated income statement data and consolidated cash flow data for the years ended December 31, 2004 and 2005 and the selected consolidated balance sheet data as of December 31, 2004, 2005 and 2006 are derived from our audited consolidated financial statements which are not included elsewhere in this annual report and the financial statements of the acquired businesses described below.
 
We acquired from Sinopec Group Company the operations of Sinopec Group Tianjin Petrochemical Company, Sinopec Group Luoyang Petrochemical General Plant, Zhongyuan Petrochemical Company Limited, Sinopec Group Guangzhou Petrochemical General Plant and certain catalyst plants (collectively, Petrochemical and Catalyst Assets) in 2004, the equity interests in Sinopec Hainan Refining and Chemical Company Limited (Sinopec Hainan) and certain oil and gas production companies (Oil Production Plants) in 2006, and the equity interests in Zhanjiang Dongxing Petroleum Company Limited, Sinopec Hangzhou Oil Refinery Plant, Yangzhou Petrochemical Plant, Jiangsu Taizhou Petrochemical Plant and Sinopec Qingjiang Petrochemical Company Limited (collectively, Refinery Plants) in 2007.  As we and these companies are under the common control of Sinopec Group Company, our acquisitions are reflected in our consolidated financial statements as combination of entities under common control in a manner similar to a pooling-of-interests.  Accordingly, the acquired assets and related liabilities have been accounted for at historical cost and our consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and the results of operation of these companies on a combined basis.
 
Moreover, the selected financial data should be read in conjunction with our consolidated financial statements 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.
 

 
6

 

 
                               
   
Years Ended December 31,
 
    2004     2005     2006     2007    
2008
 
    RMB     RMB     RMB     RMB    
RMB
 
    (in millions, except per share and per ADS data)  
Consolidated Income Statement Data(1):
                             
Operating revenues
   
617,951
     
817,048
     
1,061,741
     
1,204,843
     
1,452,101
 
Other income
   
-
     
9,777
     
5,161
     
4,863
     
50,342
 
Operating expenses
   
(555,003)
     
(758,848)
     
(986,270)
     
(1,123,842)
     
(1,474,320)
 
Operating income
   
62,948
     
67,977
     
80,632
     
85,864
     
28,123
 
Earnings before income tax
   
59,386
     
64,525
     
78,542
     
83,464
   
 
24,317
 
Tax (expense)/benefit
   
(18,096)
     
(19,872)
     
(23,504)
     
(24,721)
   
 
1,883
 
Net income attributable to equity shareholders of the Company
   
35,289
     
41,354
   
 
53,603
   
 
56,533
     
29,769
 
Basic earnings per share
   
0.41
     
0.48
   
 
0.62
     
0.65
     
0.34
 
Basic earnings per ADS(2)
 
 
40.70
     
47.70
     
61.82
     
65.20
     
34.33
 
Diluted earnings per share(2)
 
 
0.41
     
0.48
     
0.62
     
0.65
     
0.30
 
Diluted earnings per ADS(2)
   
40.70
     
47.70
   
 
61.82
     
65.20
     
30.29
 
Cash dividends declared per share
   
0.10
     
0.12
   
 
0.13
     
0.16
     
0.145
 
 
Segment results
   
 
     
 
   
 
 
   
 
       
 
 
Exploration and production
   
26,397
     
48,334
     
63,182
     
48,766
     
66,569
 
Refining
   
4,917
     
(3,695)
     
(25,710)
   
(10,452)
     
(61,538)
 
Marketing and distribution
   
14,716
     
10,350
     
30,234
     
35,727
     
38,209
 
Chemicals
   
18,843
   
 
14,186
     
14,458
     
13,306
     
(13,102)
 
Corporate and others
   
(1,925)
     
(1,198)
     
(1,532)
   
 
(1,483)
     
(2,015)
 
Operating income
   
62,948
     
67,977
     
80,632
     
85,864
     
28,123
 

   
As of December 31,
 
    2004     2005     2006     2007    
2008
 
    RMB     RMB     RMB     RMB    
RMB
 
   
(in millions)
 
Consolidated Balance Sheet Data(1):
                             
Cash and cash equivalents
   
18,817
     
15,088
     
7,063
     
7,696
     
6,948
 
Total current assets
   
125,862
     
148,984
     
146,490
     
185,116
     
164,311
 
Total non-current assets
   
355,729
     
396,169
     
464,342
     
547,609
     
603,516
 
Total assets
   
481,591
     
545,153
     
610,832
     
732,725
     
767,827
 
Total current liabilities
   
151,361
     
177,706
     
216,372
     
265,355
     
274,537
 
Short-term debts and loans from Sinopec Group Company and its affiliates (including current portion of long-term debts)
   
45,231
     
46,674
     
63,480
     
60,494
     
98,483
 
Long-term debts and loans from Sinopec Group Company and its affiliates (excluding current portion of long-term debts)
   
95,784
     
103,408
     
100,637
     
120,314
     
127,144
 
Equity attributable to equity shareholders of the Company
   
195,239
     
226,099
     
264,334
     
307,433
   
 
328,669
 
Capital employed(³)
   
349,909
     
392,267
     
443,711
     
505,870
   
 
568,001
 
 
 
   
Years Ended December 31,
 
    2004     2005     2006     2007    
2008
 
    RMB     RMB     RMB     RMB    
RMB
 
   
(in millions)
 
Other Financial Data(1):
                             
Net cash generated from operating activities
   
68,076
     
78,663
     
92,507
     
119,594
     
67,712
 
Net cash used in investing activities                                                       
   
(72,794)
     
(78,113)
     
(103,385)
     
(113,587)
     
(110,158)
 
Net cash generated from/(used in) financing activities
   
6,250
     
(4,257)
     
2,878
     
(5,310)
     
41,777
 


 
7

 


Capital expenditure
                             
Exploration and production                                                       
   
23,199
   
 
25,479
     
35,198
     
54,498
     
57,646
 
Refining                                                       
   
15,789
     
20,270
     
22,587
     
22,763
     
12,491
 
Marketing and distribution                                                       
   
16,678
     
10,954
     
11,319
     
12,548
     
14,148
 
Chemicals                                                       
   
11,025
     
9,386
     
12,629
   
 
16,184
     
20,622
 
Corporate and others                                                       
   
1,550
     
1,164
     
2,170
   
 
3,289
     
2,393
 
Total                                                       
   
68,241
     
67,253
     
83,903
     
109,282
     
107,300
 
__________
(1)
The acquisitions of Petrochemical and Catalyst Assets in 2004, the acquisitions of equity interests in Sinopec Hainan and Oil Production Plants in 2006 and the acquisitions of equity interests in the Refining Plants in 2007 from Sinopec Group Company are treated as “combination of entities under common control” which are accounted in a manner similar to a pooling-of-interests.  Accordingly, the acquired assets and liabilities have been accounted for at historical cost and the consolidated financial statements for periods prior to the combinations have been restated to include the financial condition and results of operation of these acquired companies on a combined basis.  The considerations for these acquisitions were treated as equity transactions.
(2)
Basic earnings per share have been computed by dividing net income attributable to equity shareholders of the Company by the weighted average number of shares in issue. For the years ended December 31, 2004, 2005, 2006 and 2007, diluted earnings per share and per ADS are calculated on the same basis as basic earnings per share and per ADS, respectively, since there were no dilutive potential ordinary shares during the years. The calculation of diluted earnings per share for the year ended December 31, 2008 is based on the diluted net income attributable to equity shareholders of the Company of RMB 26,592 million and the diluted weighted average number of the shares of 87,789,799,595. Basic and diluted earnings per ADS have been computed as if all of our issued or potential ordinary shares, including domestic shares and H shares, are represented by ADSs during each of the years presented. Each ADS represents 100 shares.
(3)
Capital employed is derived by the sum of short-term debts, long-term debts, loans from Sinopec Group Company and its affiliates and total equity less cash and cash equivalents.

B.        CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
C.       REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
D.       RISK FACTORS
 
Risks Relating to Our Business Operation
 
Our business may be adversely affected by the fluctuation of crude oil and refined petroleum product prices.
 
We currently consume a large amount of crude oil to produce our refined products and petrochemical products. While we try to adjust the sale price of our products to track international crude oil price fluctuations, our ability to pass on the increased cost resulting from crude oil price increases to our customers is dependent on international and domestic market conditions as well as the PRC government’s price control over refined petroleum products. For example, the international crude oil price reached its historically high level in July 2008, but we were not able to effectively pass the increased cost to our customers of refined petroleum products. Although the current price-setting mechanism for refined petroleum products in China allows the PRC government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period, the PRC government still retains discretion as to whether or when to adjust the refined petroleum products price. The PRC government will exercise certain price control over refined petroleum products once international crude oil price experiences sustained growth or becomes significantly volatile. As a result, our results of operations and financial condition may be materially and adversely affected by the fluctuation of crude oil and refined petroleum product prices.
 
Our continued business success depends in part on our ability to replace reserves and develop newly discovered reserves.
 
Our ability to achieve our growth objectives is dependent in part on our level of success in discovering or acquiring additional oil and natural gas reserves and further exploring our current reserve base. Our exploration and
 

 
8

 

development activities for additional reserves also expose us to inherent risks associated with drilling, including the risk that no economically productive oil or natural gas reservoirs might be discovered. Exploring for, developing and acquiring reserves is highly risky and capital intensive. Without reserve additions through further exploration and development or acquisition activities, our reserves and production will decline over time, which may materially and 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 purchase a significant portion of our crude oil and other feedstock requirements from outside suppliers located in different countries and areas in the world. In 2008, approximately 74% of the crude oil required for our refinery business was sourced from international suppliers, some of which are from countries or regions that are on the sanction list published and administered by the Office of Foreign Assets Control of the US Department of Treasury. In addition, our development requires us to source an increasing amount of crude oil from outside suppliers. We are subject to the political, geographical and economic risks associated with these countries and areas. If one or more of our material supply contracts 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.
 
Our business faces operation risks and natural disasters that may cause significant property damages, personal injuries and interruption of operations, and we may not have sufficient insurance coverage for all the financial losses incurred by us.
 
Exploring for, producing and transporting crude oil and natural gas and producing and transporting refined and petrochemical products involve a number of operating hazards.  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.
 
We have been paying high attention to the safety of our operation and implemented Health, Safety and Environment Management System within our company with the view to preventing accident, and reducing personal injuries, property losses and environment pollution. We also maintain insurance coverage on our property, plant, equipment and inventory. However, our preventative measures may not be effective and our insurance coverage may not be sufficient to cover all the financial losses caused by the operation risks and natural disasters. Losses incurred or payments required to be made by us due to operating hazards or natural disasters, which are not fully insured, may have a material adverse effect on our financial condition and results of operations.
 
The oil and natural gas reserves data in this annual report are only estimates, and our actual production, revenues and expenditures with respect to our reserves may differ materially from these estimates.
 
There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves, and in the timing of development expenditures and the projection of future rates of production. The reserve data set forth in this annual report represent estimates only. Adverse changes in economic conditions may render it uneconomical to develop certain reserves. Our actual production, revenues, taxes and fees payable and development and operating expenditures with respect to our reserves may likely vary from these estimates.
 
The reliability of reserves estimates depends on:
 
 
·
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;
 
 
·
extensive engineering judgments; and
 
 
·
consistency in the PRC government's oil policies.
 

 
9

 

In addition, new drilling, testing and production following the estimates may cause substantial upward or downward revisions in the estimates.
 
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. Concerns over stability of the global financial market, inflation, energy costs, geopolitical issues, the availability and cost of credit and commodities have contributed to unprecedented levels of market volatility and diminished expectations for the global economy and the markets in the future. These factors, combined with declining business, consumer confidence and market demand, have precipitated an economic slowdown or even a recession. If the current market fluctuation continues and the global economy, particularly the Chinese economy and other markets where our products are sold, experiences significant or continuous slowdown or downturn, our business, financial condition, results of operations would be adversely affected.
 
Our operations may be adversely affected by the cyclical nature of the market.
 
Most of our revenues are attributable to sales of refined petroleum products and petrochemical products, and certain 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 general economic conditions, such as changes in industry capacity and output levels, cyclical changes in regional and global economic conditions, prices and availability of substitute products and changes in consumer demand. With the further reduction of tariffs and other import restrictions in the PRC on refined petroleum products and petrochemical products, many of our products have become increasingly subject to the cyclicality of global markets, and hence, our operations may be adversely affected by the cyclical nature of the market.
 
We face strong competition from domestic and foreign competitors.
 
Among our competitors, some are major integrated petroleum and petrochemical companies within and outside the PRC, which have recently become more significant participants in the petroleum and petrochemical industry in China. On December 4, 2006, Ministry of Commerce of the PRC promulgated the “Administrative Rules for Crude Oil Market” and “Administrative Rules for Refined Petroleum Products Market” to open the wholesale market of crude oil and refined petroleum products to new market entrants. As a result, we expect to face more competition in both crude oil and refined petroleum product markets. We believe such trend will continue. Increased competition may have a material adverse effect on our financial condition and results of operations.
 
Our financing costs are subject to change in interest rates.
 
Changes in the interest rate in China, which is subject to governmental control, have affected and will continue to affect our financing costs and our results of operations. The People’s Bank of China, or the PBOC, adjusts the benchmark interest rate according to China’s macroeconomic conditions. In 2008, the PBOC reduced the benchmark interest rate five times, and the benchmark one-year lending rate was reduced from 7.47% to 5.31%. There is no assurance that the PBOC will further reduce the benchmark interest rate or keep it at the current level. Any increase in the benchmark interest rate by the PBOC will result in an increase in the financing costs on our debt financing activities, and may materially and adversely affect our business, financial condition and results of operations.
 
Risks Relating to Our Controlling Shareholder
 
Related party transactions.
 
We have engaged from time to time and will continue to engage in a variety of transactions with Sinopec Group, which provides to us 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 community 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 would be entered into under terms 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.
 

 
10

 

Non-competition.
 
Sinopec Group Company has interests in certain businesses, such as oil refining, petrochemical producing and retail service stations, 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 whereby Sinopec Group Company has agreed to: refrain from operating new businesses which compete or could compete with us in any of our domestic or international markets; grant us an option to purchase Sinopec Group Company's operations that compete or could compete with our businesses; operate its sales enterprises and service stations in a manner uniform to our sales and service operations; and appoint us as sales agent for certain of its products which compete or could compete with our products. Notwithstanding the foregoing contractual arrangements, because Sinopec Group Company is our controlling shareholder, Sinopec Group Company may take actions that may conflict with our own interests.
 
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 and produce crude oil and natural gas, granting the licenses to market and distribute crude oil and refined petroleum products, setting the pricing policy for the refined petroleum products, collecting special gain levies, assessing taxes and fees payable, deciding import and export quotas and procedures for the oil and gas industry, and setting safety, environmental and quality standards. As a result, we may face constraints on our flexibility and ability to expand our business operations or to maximize our profitability.
 
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 imposition of fees for the discharge of waste substances;
 
 
·
the levy of fines and payments for damages for serious environmental offenses; and
 
 
·
the government, at its discretion, to close any facility which fails to comply with orders and require it to correct or stop operations causing environmental damage.
 
Our production operations produce substantial amounts of waste water, gas and solid waste materials. In addition, our production facilities require operating permits that are subject to renewal, modification and revocation. We have established a system to treat waste materials to prevent and reduce pollution.
 
The PRC government has moved, and may move further, toward more rigorous enforcement of applicable laws, and toward the adoption of more stringent environmental standards, which, in turn, would require us to incur additional expenditures on environmental matters.
 
Some of our development plans require compliance with state policies and regulatory confirmation and registration.
 
We are currently engaged in a number of construction, renovation and expansion projects.  Some of our large construction, renovation and expansion projects are subject to governmental confirmation and registration.  The timing and cost of completion of these projects will depend on numerous factors, including when we can receive the required confirmation and registration from relevant PRC government authorities and the general economic condition in China.  If any of our important projects required for our future growth are not confirmed or registered, or not confirmed or registered in a timely manner, our results of operations and financial condition could be adversely impacted.
 

 
11

 

Foreign enterprise holders of H shares may be subject to PRC taxation.
 
In accordance with the new Enterprise Income Tax Law and its implementation rules that became effective on January 1, 2008, dividends derived from the revenues accumulated from January 1, 2008 and are paid by PRC companies to non-resident enterprises, which are established under the laws of non-PRC jurisdictions and have no establishment or place of business in China or whose dividends from China do not relate to their establishment or place of business in China, are generally subject to a PRC withholding tax levied at a rate of 10% unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions. Under the notice issued by the State Administration of Taxation of the PRC on November 6, 2008, we are required to withhold PRC income tax at the rate of 10% on dividends paid for 2008 and later years payable to our H Share investors that are “non-resident enterprises”. Accordingly, the investors of our American Depositary Shares representing our H Shares will be subject to such withholding of the PRC income tax at the rate of 10%.
 
Government control of currency conversion and exchange rate fluctuation may adversely affect our operations and financial results.
 
We receive substantially all of our revenues in Renminbi. A portion of such revenues will need to be converted into other currencies to meet our foreign currency needs, which include, among other things:
 
 
·
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 for capital expenditures.  The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi.
 
The exchange rate of the Renminbi against the U.S. dollar and other foreign currencies fluctuates and is affected by, among other things, the foreign exchange control policies of the PRC government and 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. From July 21, 2005 to December 31, 2008, the value of the Renminbi has appreciated by approximately 21% against the U.S. dollar. We purchase a significant portion of the crude oil from international suppliers, and the purchase price are benchmarked to US dollar-denominated international prices. Fluctuations in the exchange rate of the Renminbi against the US dollars and certain other foreign currencies may materially and adversely affect our financial condition and results of operations.
 
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
 

 
12

 

in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock limited companies. We cannot assure you that our shareholders will enjoy protections that they may be entitled in other jurisdictions.
 
China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other Western countries, and therefore recognition and enforcement in China of judgments of a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration provision may not be assured. Our articles of association as well as the Listing Rules of the Hong Kong Stock Exchange provide that most disputes between holders of H shares and us, our directors, supervisors, officers or holders of domestic shares, arising out of the articles of association or the PRC Company Law concerning the affairs of our company or with respect to the transfer of our shares, are to be resolved through arbitration by arbitration organizations in Hong Kong or China, rather than through a court of law. On June 18, 1999, an arrangement was made between Hong Kong and the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People's Court of the PRC and the Hong Kong Legislative Council, and became effective on February 1, 2000. So far as we are aware, no action has been brought in China by any shareholder to enforce an arbitral award, and we are uncertain as to the outcome of any action brought in China to enforce an arbitral award granted to shareholders.
 
ITEM 4.
INFORMATION ON THE COMPANY
 
A.        HISTORY AND DEVELOPMENT OF THE COMPANY
 
Our legal and commercial name is China Petroleum & Chemical Corporation. Our head office is located at 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 subsidiary in the United States, SINOPEC-USA Co., Ltd., 410 Park Avenue, 22nd Fl., New York, NY 10022, USA (telephone number: (212) 759-5085; fax number: (212) 759-6882) as our agent for service of processes for actions brought under the U.S. securities laws.
 
We were established as a joint stock limited company on February 25, 2000 under the Company Law of the PRC with Sinopec Group Company as the sole shareholder. Our principal businesses consist of petroleum and petrochemical businesses transferred to us by Sinopec Group Company pursuant to a reorganization agreement.  Such businesses include:
 
 
·
exploration for, development, production and marketing of crude oil and natural gas;
 
 
·
refining of crude oil and marketing and distribution of refined petroleum products, including transportation, storage, trading, import and export of petroleum products; and
 
 
·
production and sales of petrochemical products.
 
Sinopec Group Company's continuing activities consist, among other things, of:
 
 
·
exploring and developing oil and gas reserves overseas;
 
 
·
operating certain petrochemical facilities, small capacity refineries and retail service stations that it retained;
 
 
·
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.
 

 
13

 

Sinopec Group Company transferred the businesses to us either by transferring its equity holdings in subsidiaries or by transferring their assets and liabilities. Sinopec Group Company also agreed in the reorganization agreement to transfer to us its exploration and production licenses and all rights and obligations under the agreements in connection with its core businesses transferred to us. The employees relating to these assets were also transferred to us.
 
In order to expand our core businesses, prevent competition between us and members of Sinopec Group and reduce related party transactions, between 2001 and 2007 we have acquired from Sinopec Group Company Sinopec National Star Petroleum Company, Sinopec Group Maoming Petrochemical Company, Tahe Oilfield Petrochemical Factory and Xi'an Petrochemical Main Factory, Petrochemical and Catalyst Assets, Refinery Plants and certain service stations, Oil Production Plants, and Sinopec Hainan. We have also sold and disposed of certain auxiliary assets to third parties. In addition, we have completed the privatization of Beijing Yanhua Petrochemical Co., Ltd. and Sinopec Zhenhai Refinery and Chemicals Co., Ltd. and the tender offers for the acquisition of publicly-held A-shares of four subsidiaries formerly listed on stock exchanges in China, namely Sinopec Qilu Petrochemical Co., Ltd., Sinopec Yangzi Petrochemical Co., Ltd., Sinopec Zhongyuan Petroleum Co., Ltd., and Shengli Oil Field Dynamic Co., Ltd.
 
In 2007, we also acquired 20 service stations and fuel business in Hong Kong from China Resources Enterprise, Ltd. We issued HK$ 11.7 billion zero-coupon convertible bonds, the net proceeds from which were used to repay the foreign currency loans borrowed from domestic banks in connection with the privatization of the former Beijing Yanhua Petrochemical Co., Ltd. and Sinopec Zhenhai Refining & Chemical Co., Ltd.
 
On February 20, 2008, we issued bonds with detachable warrants in the amount of RMB 30 billion. The bonds have a 6-year term and 0.8% per annum fixed interest rate. The 3.03 billion warrants have an exercise ratio of two for one A Share and a term of two years. The initial exercise price of the warrants is RMB 19.68 per A Share, subject to further adjustment. The warrants are exercisable within 5 trading days prior to the expiration of the term of the warrants. The bonds and warrants were listed on Shanghai Stock Exchange on March 4, 2008. The proceeds from the issuance will be primarily used to fund our Sichuan-to-East China Gas Project, Tianjin one million tonnes per annum ethylene project, and Zhenhai one million tonnes per annum ethylene project. We also used a portion of the proceeds to repay our bank loans. The proceeds from the exercise of warrants was primarily used to fund our Tianjin one million tonnes per annum ethylene project, Zhenhai one million tonnes per annum ethylene project, and Wuhan ethylene project, as well as to repay our bank loans and to fund our working capital.
 
On June 26, 2008, we entered into a series of assets acquisition agreements with Shengli Oilfields Administrative Bureau, Zhongyuan Petroleum Exploration Bureau, Henan Petroleum Exploration Bureau, Jianghan Oilfield Administrative Bureau, Jiangsu Petroleum Exploration Bureau and Huadong Petroleum Bureau, each of which is the wholly-owned entity of Sinopec Group Company, to acquire all their downhole operation assets. The consideration for the acquisition was RMB1,624 million. We used our internal resources to fund the acquisition. The acquisition was completed on June 30, 2008.
 
On December 22, 2008, we issued RMB 15 billion debentures with a term of six months and at a fixed interest rate of 2.30% per annum. The short-term debentures were sold to institutional investors among Chinese banks on the domestic bond market.
 
On March 27, 2009, we entered into agreements with Sinopec Group Company to acquire the 100% equity interests in Sinopec Qingdao Petrochemical Company Limited and certain other assets relating to our exploration and production, refining and marketing and distribution operations from Sinopec Group Company. On the same date, we also entered into agreement with Sinopec Group Company to dispose certain assets in our chemical segment to Sinopec Group Company. The consideration for the acquisition is RMB 1,839 million and the consideration for the disposal is RMB 157 million.
 
 
B.        BUSINESS OVERVIEW
 
Exploration and Production
 
Overview
 
We currently explore for, develop and produce crude oil and natural gas in a number of areas across China. As of December 31, 2008, we held 190 production licenses with an aggregate acreage of 18,096 square kilometers and
 

 
14

 

with terms ranging from 10 to 80 years. Our production licenses are renewable upon our application at least 30 days prior to expiration. During the term of our production license, we pay an annual production license fee of RMB 1,000 per square kilometers. Shengli oilfield is the second largest oilfield in China and accounted for approximately 58% of our total crude oil and natural gas production in 2008.
 
As of December 31, 2008, we held 334 exploration licenses for various blocks in which we engaged in exploration activities. The maximum term of our exploration licenses is 7 years and the authorized total acreage under such licenses are 965,000 square kilometers. Our exploration licenses may be renewed upon our application at least 30 days prior to expiration of the original term with each renewal for a two-year term. We are obligated to make an annual minimum exploration investment in each of the exploration blocks which we obtained the exploration licenses. In addition, we are also obligated to pay an annual exploration license fee ranging from RMB 100 to RMB 500 per square kilometer.  However, we are entitled under PRC laws and regulations for reduction and exemption of exploration license fee for exploration in China’s western region, northeast region and offshore China.
 
Properties
 
We currently operate 16 oil and gas producing fields, each of which consists of many oil and gas producing blocks and all of which are located in China.
 
Shengli oilfield is our most important producing oil field and the second largest producing oil field in China. It consists of 70 producing blocks of various sizes extending over an area of 2,564 square kilometers in northern Shandong province.  Most of Shengli’s blocks are located in the Jiyang trough with various oil producing levels. In 2008, Shengli field produced 200 million barrels of crude oil and 27.19 billion cubic feet of natural gas, with an average daily production of 552 thousand barrels-of-oil equivalent, accounting for approximately 58% of our total crude oil and natural gas production for the year.
 
Oil and Natural Gas Reserves
 
Our estimated proved reserves of crude oil and natural gas as of December 31, 2008 were 4,001 million barrels-of-oil equivalent (including 2,841 million barrels of crude oil and 6,959 billion cubic feet of natural gas), representing an increase of 2.5% from 2007. Our estimated proved reserves do not include additional quantities recoverable beyond the term of the relevant production licenses, or that may result from extensions of currently proved areas, or from application of improved recovery processes not yet tested and determined to be economical.
 
The following tables set forth our proved oil and gas reserves and related data as of and for the years ended December 31, 2006, 2007 and 2008.
 
   
As of and for the Years Ended December 31,
 
   
2006
   
2007
   
2008
 
Proved developed and undeveloped reserves (crude oil)
 
(in million barrels)
 
Beginning of year
   
3,294
     
3,293
     
3,024
 
Revisions of previous estimates
   
(10)
     
(250)
     
(94)
 
Improved recovery
   
146
     
125
     
98
 
Extensions and discoveries
   
148
     
148
     
110
 
Production
   
(285)
   
 
(292)
     
(297)
 
End of year
   
3,293
     
3,024
     
2,841
 
Proved developed reserves (crude oil)
 
(in million barrels)
 
Beginning of year
   
2,870
     
2,903
     
2,651
 
End of year
   
2,903
     
2,651
     
2,451
 
Proved developed and undeveloped reserves (natural gas)
 
(in billion cubic feet)
 
Beginning of year
   
2,952
     
2,856
     
6,331
 
Revisions of previous estimates
   
(9)
     
222
     
203
 
Extensions and discoveries
   
170
     
3,536
     
718
 
Production
   
(257)
     
(283)
     
(293)
 
End of year
   
2,856
     
6,331
     
6,959
 
Proved developed reserves (natural gas)
 
(in billion cubic feet)
 


 
15

 


Beginning of year
   
1,557
     
1,472
     
1,518
 
End of year
   
1,472
     
1,518
     
1,571
 

 
The following tables set forth proved developed and undeveloped crude oil and natural gas reserves of our primary oil and gas producing fields as of December 31, 2006, 2007 and 2008.
 
   
As of December 31,
 
   
2006
   
2007
   
2008
 
   
(in million barrels)
 
Proved developed and undeveloped crude oil reserves
                 
Shengli                                                                                
   
2,352
     
2,231
     
2,151
 
Zhongyuan                                                                                
   
302
     
235
     
165
 
Xibei                                                                                
   
288
     
280
     
275
 
Henan                                                                                
   
136
     
96
     
81
 
Jiangsu                                                                                
   
91
     
87
     
91
 
Others 
   
124
     
95
     
78
 
Total                                                                                
   
3,293
     
3,024
     
2,841
 

 
   
As of December 31,
 
   
2006
   
2007
   
2008
 
   
(in billion cubic feet)
 
Proved developed and undeveloped natural gas reserves
                 
Shengli                                                                                
   
313
     
328
     
264
 
Zhongyuan                                                                                
   
355
     
361
     
189
 
Xibei                                                                                
   
147
     
198
     
452
 
Jiangsu                                                                                
   
12
     
10
     
12
 
Xinan                                                                                
   
807
     
757
     
682
 
Huabei                                                                                
   
792
     
781
     
709
 
Puguang                                                                                
   
-
   
 
3,509
     
4,001
 
Others                                                                                
   
430
   
 
387
     
650
 
Total                                                                                
   
2,856
     
6,331
     
6,959
 

 
Oil and Natural Gas Production
 
In 2008, we produced an average of 945 thousand barrels-of-oil equivalent per day, of which approximately 85.64% was crude oil and 14.36% was natural gas.
 
The following tables set forth the average daily production of crude oil and natural gas for the years ended December 31, 2006, 2007 and 2008. The production of crude oil includes condensed oil.
 
   
For the Years Ended December 31,
 
   
2006
   
2007
   
2008
 
   
(in thousand barrels)
 
Average daily crude oil production
                 
Shengli                                                                               
   
533
     
539
     
538
 
Zhongyuan                                                                               
   
60
     
59
     
58
 
Xibei                                                                               
   
92
     
104
     
116
 
Henan                                                                               
   
35
     
35
     
35
 
Jiangsu                                                                               
 
 
33
     
33
     
33
 
Others                                                                               
   
28
     
29
     
31
 
Total Production                                                                               
   
781
     
799
     
811
 


 
16

 


   
For the Years Ended December 31,
 
   
2006
   
2007
   
2008
 
   
(in million cubic feet)
 
Average daily natural gas production
                 
Shengli                                                                               
   
78
     
76
     
74
 
Zhongyuan                                                                               
   
159
     
143
     
102
 
Xibei                                                                               
   
84
     
92
     
123
 
Henan                                                                               
   
8
     
7
     
6
 
Jiangsu                                                                               
   
6
     
5
     
6
 
Xinan                                                                               
   
213
     
260
     
261
 
Huabei 
   
101
     
140
     
185
 
Others                                                                               
   
54
     
51
     
44
 
Total Production                                                                               
   
703
     
774
     
801
 

Lifting Cost & Realized Prices
 
The following table sets forth our average lifting costs per barrel-of-oil equivalent of crude oil and natural gas produced, average sales prices per barrel of crude oil and average sales prices per thousand cubic meters of natural gas for the years ended December 31, 2006, 2007 and 2008.
 
   
Total
   
Shengli
   
Others
 
   
(RMB)
   
(RMB)
   
(RMB)
 
For the year ended December 31, 2008
                 
Average petroleum lifting cost per BOE                                                                             
   
88.80
     
92.24
     
83.99
 
Average realized sales price
   
 
                 
   Per barrel of crude oil                                                                             
   
601.22
     
598.99
     
605.80
 
   Per thousand cubic meters of natural gas                                                                             
   
941.47
     
992.15
     
939.48
 
For the year ended December 31, 2007
                       
Average petroleum lifting cost per BOE                                                                             
   
84.62
     
87.23
     
80.78
 
Average realized sales price
 
 
 
     
 
         
   Per barrel of crude oil                                                                             
   
435.94
     
421.66
     
466.17
 
   Per thousand cubic meters of natural gas                                                                             
   
822.83
     
939.92
     
817.72
 
For the year ended December 31, 2006
 
 
 
                 
Average petroleum lifting cost per BOE                                                                               
 
 
73.31
     
77.16
     
67.34
 
Average realized sales price
           
 
     
 
 
   Per barrel of crude oil                                                                               
   
449.93
     
443.66
     
463.70
 
   Per thousand cubic meters of natural gas                                                                               
 
 
794.28
     
899.76
     
788.02
 

Exploration and Development Activities
 
The following table sets forth the numbers of our exploration and development wells, including a breakdown of successful or productive wells and dry holes we drilled during the years ended December 31, 2006, 2007 and 2008.
 
   
Total
   
Shengli
   
Xibei
   
Others
 
For the year ended December 31, 2008
                       
Exploration
                       
     — Successful                                                                
   
248
     
128
     
26
     
94
 
     — Dry holes                                                                
   
296
     
105
     
18
     
173
 
Development
   
 
   
 
 
     
 
         
     — Productive                                                                
   
3,128
   
 
1,563
     
141
     
1,424
 
     — Dry holes                                                                
   
24
     
4
     
12
     
8
 
For the year ended December 31, 2007
 
 
 
     
 
                 
Exploration
                               
     — Successful                                                                
   
251
     
118
     
16
     
117
 
     — Dry holes                                                                
   
306
   
 
119
     
24
     
163
 
Development
   
 
                     
 
 
     — Productive                                                                
   
2,956
     
1,136
     
112
     
1,708
 
     — Dry holes                                                                
   
20
     
2
     
8
     
10
 
For the year ended December 31, 2006
                               


 
17

 


Exploration
                       
     — Successful                                                                
   
226
     
118
     
20
     
88
 
     — Dry holes                                                                
   
269
   
 
57
     
19
     
193
 
Development
   
 
                     
 
 
     — Productive                                                                
   
2,620
     
1,125
     
94
     
1,401
 
     — Dry holes                                                                
   
29
     
4
     
10
     
15
 

The following table sets forth the numbers of our development crude oil and natural gas wells as of December 31, 2008.
 
   
As of December 31, 2008
 
   
Total
   
Shengli
   
Others
 
Crude oil development wells
                 
     — Total                                                                
   
36,893
     
24,303
     
12,590
 
     — Productive                                                                
   
29,485
     
18,889
     
10,596
 
Natural gas development wells
   
 
     
 
         
     — Total                                                                
   
2,886
 
   
394
     
2,492
 
     — Productive                                                                
   
2,875
     
394
     
2,481
 

In 2008, we continued to increase our production capacity and scale of our reserve development. We made progress with our key exploration and development projects in northeastern Sichuan and Tahe. As a result, our crude oil production capacity increased by 5.80 million tonnes per annum and our natural gas production capacity increased by 1.33 billion cubic meters per annum in 2008. In addition, the Sichuan-to-East China Gas Project and the construction of Songnan gas field have been progressing on schedule.
 
Refining
 
Overview
 
We processed approximately 169.0 million tonnes of crude oil in 2008, representing approximately 53% of China's total crude oil throughput.  We produce a full range of refined petroleum products. The following table sets forth our production of our principal refined petroleum products for the years ended December 31, 2006, 2007 and 2008.
 
   
For the Years Ended December 31,
 
   
2006
   
2007
   
2008
 
   
(in million tonnes)
 
Gasoline                                                        
   
24.5
     
26.0
     
29.1
 
Diesel                                                        
   
60.2
     
62.5
     
68.8
 
Kerosene including jet fuel                                                        
   
6.4
     
8.3
     
8.0
 
Light chemical feedstock                                                        
   
22.7
     
23.5
     
23.0
 
Lubricant                                                        
   
1.1
   
 
1.3
     
1.2
 
Liquefied petroleum gas                                                        
   
6.9
     
7.4
     
8.0
 
Fuel oil                                                        
   
6.0
     
7.3
     
4.9
 

Gasoline and diesel are our largest revenue producing products, and are sold mostly through our marketing and distribution segment through both wholesale and retail channels. We use most of our production of chemical feedstock as feedstock for our own chemical operations. Most of our refined petroleum products were sold domestically to a wide variety of industrial and agricultural customers, and a small amount are exported.
 
Refining Facilities
 
Currently we operate 33 refineries in China, all of which are located in our principal market. As of December 31, 2008, our total primary distillation capacity was 205.5 million tonnes per annum.
 
The following table sets forth our total primary distillation capacity per annum and crude oil throughputs as of and for the years ended December 31, 2006, 2007 and 2008.
 

 
18

 


 
   
As of and for the Years Ended December 31,
 
   
2006
   
2007
   
2008
 
Primary distillation capacity (million tonnes per annum)
   
178.9
     
189.4
     
205.5
 
Crude oil throughputs (million tonnes)
   
152.4
     
161.5
     
168.8
 

In 2008, measured by the total output from our refineries, our overall gasoline yield was 17.23%, overall diesel yield was 40.75%, overall kerosene yield was 4.73% and overall light chemical feedstock yield was 13.62%. Other products include lubricant, liquefied petroleum gas, solvent, asphalt, petroleum coke, paraffin and fuel oil. For the years ended December 31, 2006, 2007 and 2008, our overall yield for all refined petroleum products at our refineries was 93.47%, 93.95% and 94.07%, respectively.
 
The following table sets forth the primary distillation capacity per annum as of, and refinery throughput for the years ended, December 31, 2006, 2007 and 2008 of each of our refineries with the primary distillation capacity of  8 million tonnes or more per annum as of December 31, 2008.
 
   
As of and for the Years Ended December 31,
 
   
2006
   
2007
   
2008
 
Refinery
 
Primary
Distillation
Capacity
   
Refinery
Throughput
   
Primary
Distillation
Capacity
   
Refinery
Throughput
   
Primary
Distillation
Capacity
   
Refinery
Throughput
 
   
(in million tonnes)
 
                                     
Zhenhai                 
   
20.0
     
17.7
     
20.0
     
18.6
     
20.0
     
19.4
 
Shanghai                 
   
14.0
     
9.1
     
14.0
     
8.9
     
14.0
     
9.2
 
Maoming                 
   
13.5
     
14.0
     
13.5
     
13.1
     
13.5
     
13.0
 
Guangzhou
 
 
13.2
     
7.4
     
13.2
   
 
10.4
     
13.2
     
11.6
 
Jinling                 
   
13.0
     
10.8
   
 
13.0
   
 
11.5
     
13.0
     
11.2
 
Yanshan                 
   
8.0
     
8.0
     
13.0
     
8.6
   
 
13.0
   
 
10.7
 
Gaoqiao                 
   
11.0
     
9.3
     
11.0
     
8.1
 
 
 
11.0
     
10.2
 
Qilu                 
   
10.5
     
10.5
     
10.5
     
10.6
     
10.5
     
10.0
 
Qingdao(1)
   
-
     
-
     
-
     
-
     
10.0
     
5.1
 
Yangzi                 
   
8.0
     
7.9
     
8.0
     
8.2
     
8.0
     
7.5
 
Hainan                 
   
8.0
     
2.2
     
8.0
     
8.0
     
8.0
     
7.8
 
Luoyang                 
   
6.5
     
5.2
     
6.5
     
5.2
     
8.0
     
4.8
 
Wuhan                 
   
5.0
     
4.0
 
   
5.0
     
4.3
     
8.0
     
4.0
 
__________
(1)
Qingdao Refinery Project was completed and commenced operation in May 2008.

In 2008, we revamped or ramped up 581 sets of refining facilities, representing an increase of 23.9 million tonnes per annum of our primary distillation capacity of crude oil, including an increase of 16.7 million tones per annum in the distillation capacity of high-sulfur crude oil, from 2007. In addition, our hydro-refining capacity and coking capacity increased by 10.13 million tonnes per annum and 7.7 million tonnes per annum, respectively, in 2008 compared to 2007. The revamping projects for a number of refining facilities to improve refined petroleum product quality were also progressing as planned.
 
Sources of Crude Oil
 
Crude oil is our most important raw material.  The following table sets forth the sources of our crude oil supply for the years ended December 31, 2006, 2007 and 2008.
 
   
For the Years ended December 31,
 
   
2006
   
2007
   
2008
 
Source of Supply
 
(in million tonnes)
 
Self-supply
   
30.81
     
30.83
     
30.88
 
PetroChina Company Ltd.
   
8.81
     
6.89
     
6.13
 
CNOOC Ltd.
   
6.38
     
7.42
     
7.55
 
Import
   
106.52
     
116.87
     
125.61
 
Total
   
152.52
     
162.01
     
170.17
 


 
19

 

Marketing and Sales of Refined Petroleum Products
 
Overview
 
We operate the largest sales and distribution network for refined petroleum products in China. In 2008, we distributed and sold in China approximately 122.98 million tonnes of gasoline, diesel and kerosene including jet fuel, representing a market share of approximately 60.1% in China.  Most of the refined petroleum products sold by us are produced internally. In 2008, approximately 81% of our gasoline sales volume and approximately 88% of our diesel sales volumes were produced internally.
 
The table below sets forth a summary of key data in the marketing and sales of refined petroleum products for the year ended December 31, 2006, 2007 and 2008.
 
   
For the Years Ended December 31,
 
   
2006
   
2007
   
2008
 
Sales volume of refined petroleum products
(in million tonnes)                                                        
   
111.68
     
119.39
     
122.98
 
Of which:  Retail                                                        
   
72.16
     
76.62
     
84.10
 
                  Direct Sales                                                        
   
18.95
     
20.17
     
19.63
 
                  Wholesale                                                        
   
20.57
     
22.60
     
19.25
 
Average annual throughput of service stations (tonnes per station)
   
2,577
     
2,694
     
2,935
 
Total number of service stations under Sinopec brand as of December 31 of the respective year 
   
28,801
   
 
29,062
     
29,279
 
Of which:  Self-operated service stations
   
28,001
     
28,405
     
28,647
 
                  Franchised service stations
   
800
     
657
     
632
 

 
Retail
 
All of our retail sales are made through a network of service stations and petroleum shops operated under the Sinopec brand. Through this unified network we are more able to implement consistent pricing policies, maintain both product and service quality standards and more efficiently deploy our retail network.
 
In 2008, we sold approximately 84.1 million tonnes of refined petroleum products through our retail network, representing approximately 64.2% of our total refined petroleum products sales volume. Our retail market share in 2008 was approximately 79.8% in our principal market. As of December 31, 2008, our retail network mainly consists of service stations that are wholly-owned and operated by us or jointly-owned and operated or leased by us and franchised service stations that are owned and operated by third parties.
 
In 2008, we further improved our refined petroleum products retail networks through acquisition, construction and renovation of service stations, and added 720 new service stations into our retail network. We believe we have further strengthened our leading position in our principal market, and further improved our brand awareness and customer loyalty.
 
Direct Sales

In 2008, we sold approximately 19.63 million tonnes of refined petroleum products, including 2.58 million tonnes of gasoline, 16.96 million tonnes of diesel and 0.09 million tonnes of kerosene, through direct sales to commercial customers such as industrial enterprises, hotels, restaurants and agricultural producers.
 
Wholesale
 
In 2008, we sold approximately 19.25 million tonnes of refined petroleum products through wholesale channels, representing approximately 15.7% of our total sales volume of refined petroleum products. Our wholesale sales include sales to large commercial or industrial customers and independent distributors as well as sales to certain long-term customers such as railway, airlines, shipping and public utilities.
 

 
20

 

Through our wholesale centers, we operate 414 storage facilities with a total capacity of approximately 14.1 million cubic meters, substantially all of which are wholly-owned by us. Our wholesale centers are connected to our refineries by railway, waterway and, in some cases, by pipelines. We also own some dedicated railways, oil wharfs and oil barges, as well as a number of rail tankers and oil trucks.
 
Chemicals
 
Overview
 
We are the largest petrochemical producer in China.  We produce a full range of petrochemical products including intermediate petrochemicals, synthetic resins, synthetic fiber monomers and polymers, synthetic fibers, synthetic rubber and chemical fertilizers. Synthetic resins, synthetic fibers, synthetic rubber, chemical fertilizers and some intermediate petrochemicals comprise a significant majority of our external sales. Synthetic fiber monomers and polymers and intermediate petrochemicals, on the other hand, are mostly internally consumed as feedstock for the production of other chemical products. Our chemical operations are integrated with our refining businesses, which supply a significant portion of our chemical feedstock such as naphtha. Because of strong domestic demand, most of our petrochemical products are sold in China’s domestic market.
 
In 2008, our Fujian refinery and ethylene project, Tianjin refinery and ethylene project and Zhenhai ethylene project progressed smoothly. In addition, our Jinling para-xylene project, Yangzi butadiene project and the expansion project of Yanshan isobulylene isoprene rubber have been completed and commenced operation in 2008.
 
Products
 
Intermediate Petrochemicals
 
We are the largest ethylene producer in China.  Our rated ethylene capacity was 6.15 million tonnes per annum, which represented 61.5% of China’s total domestic ethylene capacity, as of December 31, 2008. In 2008, we produced 6.29 million tonnes of ethylene, representing approximately 61.3% of the total domestic output. Nearly all of our olefins production is used as feedstock for our petrochemical operations.
 
We produce aromatics mainly in the forms of benzene and para-xylene, which are used primarily as feedstock for purified terephthalic acid, or PTA, the preferred raw material for polyester. We are the largest aromatics producer in China.
 
Organic chemicals extracted mainly from olefins and aromatics are intermediate petrochemicals and are essential raw materials for synthetic resins, synthetic rubber and synthetic fibers. We are the largest producer of butanol, styrene, paraxylene, vinyl acetate, phenol and acetone in China.
 
The following table sets forth our rated capacity per annum, production volume and major plants of production as of or for the year ended December 31, 2008 for our principal intermediate petrochemical products. These operational data include 100% of the rated capacity and production of the two joint ventures, SECCO and BASF-YPC, which we own 50% each.
 
   
Our Rated
Capacity
   
Our
Production
 
 
Major Plants of Production
   
(thousand tonnes per annum)
   
(thousand
tonnes)
   
               
Ethylene                                   
   
6,145
     
6,289
 
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO and BASF-YPC
                   
Propylene
   
5,545
     
5,830
 
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO, BASF-YPC, Gaoqiao, Anqing, Jinan, Jingmen and Wuhan
             
 
   
Benzene
   
2,699
     
2,236
 
Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Zhenhai, Tianjin, Luoyang, SECCO and BASF-YPC


 
21

 


             
 
               
Styrene                                   
   
964
     
983
 
Yanshan, Qilu, Guangzhou, Maoming and SECCO
             
 
   
Para-xylene                                   
   
2,768
     
1,932
 
Shanghai, Yangzi, Qilu, Tianjin and Luoyang
                   
Phenol                                   
   
350
     
346
 
Yanshan and Gaoqiao

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, 2008. These operational data include 100% of the rated capacity and production of the two joint ventures, SECCO and BASF-YPC, which we own 50% each.
 
   
Our Rated
Capacity
   
Our
Production
 
Major Plants of Production
   
(thousand tonnes
per annum)
   
(thousand
tonnes)
   
               
Polyethylene
   
4,323
     
4,454
 
Yanshan, Shanghai, Yangzi, Qilu, Maoming, Guangzhou, Tianjin, Zhongyuan, SECCO and BASF-YPC
               
 
 
Polypropylene
   
3,672
     
3,897
 
Yanshan, Shanghai, Yangzi, Qilu, Guangzhou, Maoming, Tianjing, Zhongyuan, SECCO, Wuhan Fenghuang, Jingmen and Fujian
                   
Polyvinyl chloride
   
600
     
575
 
Qilu
                   
Polystyrene
   
536
     
374
 
Yanshan, Qilu, Maoming, Guangzhou and SECCO
                   
Acrylonitrile butadiene styrene
   
200
     
135
 
Gaoqiao

Synthetic Fiber Monomers and Polymers
 
Our principal synthetic fiber monomers and polymers are purified teraphthalic acid, ethylene glycol, acrylonitrile, caprolactam, polyester, polyethylene glycol and polyamide fiber. Based on our 2008 production, we are the largest producer of purified teraphthalic acid, ethylene glycol, caprolactam and polyester in China.  Most of our production of synthetic fiber monomers and polymers are used as feedstock for synthetic fibers.
 
The following table sets forth our rated capacity per annum, our production volume and major plants of production as of or for the year ended December 31, 2008 for each type of our principal synthetic fiber monomers and polymers. These operational data include 100% of the rated capacity and production of the two joint ventures, SECCO and BASF-YPC, which we own 50% each.
 
   
Our Rated
Capacity
   
Our
Production
 
Major Plants of Production
   
(thousand tonnes per annum)
   
(thousand
tonnes)
   
               
Purified teraphthalic acid