IMPORTANT

If you are in any doubt about this prospectus, you should consult your stockbroker, bank manager, solicitor, professional accountant or other professional adviser.

PETROCHINA COMPANY LIMITED

(a joint stock limited company incorporated in the People's Republic of China with limited liability)

GLOBAL OFFERING
Number of H Shares: 17,582,418,000 (subject to adjustment) Number of Hong Kong Public Oering Shares: 879,122,000 (subject to adjustment) Oer Price: HK$1.49 per H Share payable in full by applicants in the Hong Kong Public Oering, subject to refund Nominal Value: RMB1.00 each Stock Code: 857
Joint Global Coordinators and Joint Bookrunners

China International Capital Corporation Limited

CICC
Lead Managers and Sponsors

Goldman Sachs (Asia) L.L.C.

Goldman Sachs (Asia) L.L.C. BOCI Asia Limited

China International Capital Corporation (Hong Kong) Limited

Co-Lead Managers

HSBC Investment Bank Asia Limited

Co-Managers

Celestial Capital Limited Hang Seng Securities Limited Ka Wah Capital Limited Vickers Ballas Capital Limited

Core Pacic-Yamaichi International (H.K.) ICEA Capital Tai Fook Securities Company Worldsec Corporate Finance
Financial Adviser to the Company

Limited Limited Limited Limited

NM Rothschild & Sons Limited

The Stock Exchange of Hong Kong Limited (the ""Stock Exchange'') and Hong Kong Securities Clearing Company Limited (""Hongkong Clearing'') take no responsibility for the contents of this prospectus, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this prospectus. A copy of this prospectus, having attached thereto the documents specied in the paragraph headed ""Documents delivered to the Registrar of Companies'' in Appendix XI, has been registered by the Registrar of Companies in Hong Kong as required by section 342C of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong). The Securities and Futures Commission and the Registrar of Companies in Hong Kong take no responsibility for the contents of this prospectus or the documents referred to above. The Oer Price is expected to be xed by agreement between the Global Coordinators, on behalf of the Underwriters, the Company and CNPC on the Price Determination Date. The Price Determination Date is expected to be on or around 30 March 2000 and, in any event, not later than 5 April 2000. Investors applying for Hong Kong Public Oering Shares must pay the maximum Oer Price of HK$1.49 per H Share, together with brokerage of 1 per cent. and Stock Exchange transaction levy of 0.011 per cent. The Global Coordinators, on behalf of the Underwriters, may, with the consent of the Company and CNPC, reduce the indicative Oer Price range below that stated in this prospectus (which is HK$1.23 to HK$1.49 per H Share) at any time on or prior to the morning of the latest day for lodging applications under the Hong Kong Public Oering. In such a case, notices of the reduction in the indicative Oer Price range will be published in the South China Morning Post and the Hong Kong Economic Times not later than the morning of the day which is the latest day for lodging applications under the Hong Kong Public Oering. If applications for Hong Kong Public Oering Shares have been submitted prior to the day which is the latest day for lodging applications under the Hong Kong Public Oering, then even if the Oer Price is so reduced such applications cannot be subsequently withdrawn. If, for any reason, the Oer Price is not agreed between the Company, CNPC and the Global Coordinators, on behalf of the Underwriters, the Global Oering will not proceed. The Company is incorporated, and its businesses are located, in the PRC. Potential investors in the Company should be aware of the dierences in the legal, economic, and nancial systems between the PRC and Hong Kong and that there are dierent risk factors relating to making an investment in a PRC incorporated company. Potential investors should also be aware that the regulatory framework in the PRC is dierent from the regulatory framework in Hong Kong and should take into consideration the dierent market nature of the shares of the Company. Such dierences and risk factors are set out in the sections headed ""Risk Factors'' and ""Appendix IX Summary of Principal Legal and Regulatory Provisions and Articles of Association''. Investors should also be aware that the companies and securities regulatory framework in the PRC to which the Company is subject has only recently been introduced. 27 March 2000

EXPECTED TIMETABLE(1) Latest time to lodge white and yellow application forms Thursday, 12:00 noon on 30 March 2000 Application lists open Thursday, 11:45 a.m. on 30 March 2000(2) Application lists close Thursday, 12:00 noon on 30 March 2000 Announcement of the Oer Price, the level of indication of interest in the Asia Oering, the US Oering and the Europe Oering, the results of applications and the basis of allotment of H Shares under the Hong Kong Public Oering to be published in the South China Morning Post and the Hong Kong Economic Times on or before Wednesday, 5 April 2000 Despatch of share certicates and refund cheques Wednesday, 5 April 2000(3) Dealings in H Shares on the Stock Exchange expected to commence on Friday, 7 April 2000
(1) (2) All times refer to Hong Kong local time, except as otherwise stated. Details of the structure of the Global Oering, including its conditions, are set out in the section headed ""Structure of the Global Oering.'' If there is a ""black'' rainstorm warning or a tropical cyclone warning signal number 8 or above in force at any time between 9:00 a.m. and 12:00 noon on Thursday, 30 March 2000, the application lists will not open on that day. Further information is set out in the section headed ""How to Apply for Hong Kong Public Oering Shares Eect of Bad Weather on the Opening of the Application Lists.'' Refund cheques will also be issued in respect of wholly or partially successful applications in the event that the Oer Price is less than the initial price per H Share actually paid. Applicants for 500,000 H Shares or more may collect refund cheques (where applicable) and share certicates (where applicable) from HKSCC Registrars Limited at 2nd Floor, Vicwood Plaza, 199 Des Voeux Road Central, Hong Kong from 9:00 a.m. to 1:00 p.m. on Wednesday, 5 April 2000. Applicants being individuals must not authorise any other person to make their collection on their behalf. Applicants being corporations must attend by their authorised representatives bearing letters of authorisation from their corporations stamped with the corporations' chops. Both individuals and authorised representatives (if applicable) must produce, at the time of collection, evidence of identity acceptable to HKSCC Registrars Limited. Uncollected share certicates and refund cheques will be despatched by ordinary post at the applicants' own risk to the addresses specied in the relevant application forms shortly thereafter. Further information is set out in the section headed ""How to Apply for Hong Kong Public Oering Shares''.

(3)

CONTENTS
You should rely only on the information contained in this prospectus and the application forms to make your investment decision. The Company has not authorised anyone to provide you with information that is dierent from what is contained in this prospectus. Any information or representation not made in this prospectus must not be relied on by you as having been authorised by the Company, the Underwriters, any of their respective directors or any other person or party involved in the Global Oering.
Page

Expected Timetable Summary Denitions Glossary Risk Factors Information about this Prospectus and the Global Oering Directors, Supervisors and Parties involved in the Global Oering Corporate Information Industry Overview Corporate Structure Business Introduction Company Strengths Exploration and Production Exploration and Development Rening and Marketing Chemicals Natural Gas Competition Research and Development Environmental Matters Legal Proceedings Properties Use of Proceeds Verication Relationship with the CNPC Group Directors, Supervisors, Management and Employees Substantial Shareholders Share Capital Financial Information Future Plans and Use of Proceeds Underwriting Structure of the Global Oering How to Apply for Hong Kong Public Oering Shares

i 1 19 27 30 48 53 60 61 78 79 79 80 83 85 94 105 112 115 116 117 118 118 119 120 136 144 145 147 192 200 205 214

Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix

I II III IV V VI VII VIII IX

Appendix X Appendix XI

Accountants' Report I-1 Additional Financial Information II-1 Unaudited Pro Forma Financial Information III-1 Prot Estimate IV-1 Property Valuation V-1 Independent Technical Consultant's Report VI-1 Taxation VII-1 Foreign Exchange VIII-1 Summary of Principal Legal and Regulatory Provisions and Articles of Association IX-1 Statutory and General Information X-1 Documents Delivered and Available for Inspection XI-1

ii

SUMMARY
This summary aims to give you an overview of the information contained in this prospectus. Because this is a summary, it does not contain all the information that may be important to you. You should read the whole document before you decide to invest in the H Shares. The following information assumes that the Underwriters do not exercise the options granted by the Company and CNPC to purchase additional ADSs or H Shares in the Global Oering.

INTRODUCTION The Company is one of the largest companies in China in terms of sales. It is engaged in a broad range of petroleum-related activities, including: the exploration, development and production of crude oil and natural gas; the rening, transportation, storage and marketing, including import and export, of crude oil and petroleum products; the production and sale of chemicals; and the transmission, marketing and sale of natural gas. In the nine months ended 30 September 1999, the Company had total revenue of RMB126,181 million and net prot of RMB20,779 million. Following the Global Oering of its shares, the Company will be the world's fourth largest publicly traded oil and gas company, based on 1998 proved hydrocarbon reserves. OPERATIONS Exploration and Production The Company is China's largest producer of crude oil and natural gas. Currently, all of the Company's crude oil and natural gas reserves and production-related assets are located in China. As at 30 September 1999, the Company had estimated proved reserves of approximately 10.8 billion barrels of crude oil and approximately 24.3 trillion cubic feet of natural gas. The Directors believe that the Company holds production licences for the substantial majority of China's proved crude oil reserves and proved natural gas reserves. In the nine months ended 30 September 1999, the Company produced 583.3 million barrels of crude oil and 324.7 billion cubic feet of natural gas for sale, representing an average production of 2,130.9 thousand barrels of crude oil and 1,186.0 million cubic feet of natural gas for sale per day. Approximately 64 per cent. of the crude oil the Company sold in the nine months ended 30 September 1999 was supplied to the Company's reneries. Changes in international crude oil prices directly aect the Company's exploration and production business. Declines in crude oil prices may have a negative impact on the Company's business, results of operations, nancial condition and the value of the Company's proved reserves. Rening and Marketing The Company operates 29 reneries located in eight provinces, three autonomous regions and one municipality in China. In the rst nine months of 1999, the Company's reneries processed 364.0 million barrels of crude oil, or 1,329.7 thousand barrels per day. In the nine months ended 30 September 1999, the Company produced approximately 29.6 million tons of gasoline, diesel and jet fuel and sold approximately 34.2 million tons of these products. Approximately 96 per cent. of the crude oil processed in the Company's reneries in the nine months ended 30 September 1999 was supplied by the 1

SUMMARY
Company's exploration and production operations. As at 30 September 1999, the Company's retail distribution network consisted of approximately 1,790 service stations that it owns and operates, approximately 3,600 service stations wholly-owned by CNPC or jointly-owned by CNPC and third parties and to which the Company provides supervisory support and approximately 1,050 franchise service stations. As at 30 September 1999, the Company owned and operated a crude oil transmission network consisting of approximately 8,400 km of pipelines with an average daily throughput of 2.3 million barrels of crude oil. As at 30 September 1999, the Company also had a rened product transmission network consisting of approximately 1,000 km of pipelines with an average daily throughput of approximately 21,237 tons of rened products. Currently, the Company competes directly with Sinopec, its major competitor, in its rening and marketing operations on the basis of price, quality and customer services. In the event of China's entry into the WTO, the Company may gradually face increased competition from foreign producers of rened products as a result of the reduction or elimination over time of tari and non-tari barriers for imported rened products. Chemicals The Company currently produces at 17 chemical plants a wide range of basic and derivative petrochemical products, such as ethylene, polyethylene, polypropylene, terylene bre, and butadiene styrene rubber, and other chemical products, such as urea. The Company's other segments supply substantially all of the hydrocarbon feedstock requirements of the Company's chemicals operations. As at 30 September 1999, the Company had a total annual ethylene production capacity of 1.3 million tons. In the rst nine months of 1999, the Company produced 916.3 thousand tons of ethylene, 597.1 thousand tons of polyethylene, 315.2 thousand tons of polypropylene, 133.2 thousand tons of terylene bre, 79.8 thousand tons of butadiene styrene rubber and 2,257.1 thousand tons of urea. The Company's chemical segment is currently experiencing losses as a result of, among other things, a lack of product focus, and poor investment track record of expenditures in uneconomic projects, plants and facilities. The Company's lack of product focus resulted in its maintaining a very diversied product portfolio comprising some unprotable or marginally protable products. Natural Gas The Company is China's largest natural gas transporter and seller in terms of sales volume. In the rst nine months of 1999, its sales volume of natural gas totaled 280.4 billion cubic feet, of which 257.1 billion cubic feet were sold through its natural gas segment. As at 30 September 1999, the Company owned and operated regional natural gas pipeline networks consisting of an aggregate of approximately 11,100 km of pipelines, of which approximately 10,150 km were used by its natural gas segment. In order to substantially expand the Company's sales of natural gas, the Company will need to make signicant capital investments to increase the capacity of its natural gas transmission and storage facilities. PRINCIPAL STRENGTHS The Company's strengths include the following: it is the dominant crude oil and natural gas producer in China; it has extensive crude oil and natural gas exploration and production expertise; it is a major rener and wholesaler of rened products in a large and growing market; it is the dominant company in the transmission and sale of natural gas in China; and it has an experienced and incentivised management team. 2

SUMMARY
BUSINESS STRATEGY The Company's strategy is to continue to address the opportunities and challenges arising from its recent creation and its ongoing transformation into an ecient, prot-oriented, competitive and integrated oil and gas company. This will be accomplished by enhancing the operating and nancial performance of each of its business segments, improving its technology platform and reducing costs through the ongoing restructuring and rationalisation of its operations. Specically, the Company intends to build upon its strengths to implement its integrated and return-on-capital based strategy. To do so, the Company will focus on the following strategic initiatives: improve performance of its exploration and production segment through cost-cutting and strict capital management; implement an integrated approach to its rening and marketing segment supported by signicant cost-cutting to improve eciency and performance; undertake a turnaround of its chemicals segment; capitalise on growing demand for natural gas and supportive regulations for the industry; and establish centralised nancial management focused on boosting returns and capital eciency. Some of the measures the Company intends to take to achieve its strategy will require PRC Government approval and signicant capital expenditures. THE PRC OIL AND GAS INDUSTRY The PRC Government views oil and gas as important strategic resources and has designated the PRC oil and gas industry as one of the country's ""pillar'' industries. Accordingly, the PRC Government has pursued policies to support and develop its national oil and gas industry since the beginning of the 1950s. China's oil and gas industry is subject to extensive regulation by the PRC Government in respect of a number of aspects of exploration, production, transportation and marketing of crude oil and natural gas as well as production, transportation and marketing of rened products and chemical products. Specically, these regulations relate primarily to: exploration and production licensing; pricing mechanisms for certain products; production and marketing; foreign investment; imports and exports; capital investment and nancing for signicant projects; taxes, fees and royalties; and environmental matters. THE RESTRUCTURING OF THE INDUSTRY AND THE CNPC GROUP In March 1998, the PRC Government approved a comprehensive restructuring plan for China's oil and gas industry intended to improve the eciency and competitiveness of CNPC and Sinopec and to eect the separation of regulatory and business management functions. A series of asset transfers and exchanges completed in 1998 as part of this plan substantially increased CNPC's level of vertical integration. 3

SUMMARY
The Company was established as a joint stock company with limited liability under the Company Law on 5 November 1999 as part of the Restructuring. In this restructuring, CNPC, its parent, transferred to the Company most of the assets, liabilities and interests of CNPC relating to CNPC's domestic exploration and production, rening and marketing, chemicals and natural gas businesses. CNPC retained the assets and liabilities relating to its remaining businesses and operations, including assets and liabilities relating to international crude oil and natural gas exploration and production and rening and pipeline operations. CNPC is the Company's primary provider of a wide range of services and products. Upon completion of the Global Oering, CNPC will own an approximately 90.00 per cent. interest in the Company (approximately 88.65 per cent. if the Over-allotment Options are exercised in full), and will remain the Company's majority shareholder. RISK FACTORS The Directors consider that there are certain risks involved in the operations of the Company. They can be categorised into (i) risks relating to the Company's business; (ii) risks relating to China's oil and gas industry; (iii) risks relating to the PRC in general; and (iv) risks relating to the Global Oering. These risk factors and considerations are set out in the section headed ""Risk Factors'' in this prospectus as follows: (i) Risks relating to the Company's business operations of the Company are aected by the volatility of prices for crude oil and rened products the crude oil and natural gas reserve data in this prospectus are only estimates and the actual production, revenues and expenditures with respect to the Company's reserves may dier materially from these estimates entry by China into the WTO may increase competition in the Company's businesses within China the Company will be controlled by CNPC, whose interests may dier from those of other shareholders CNPC may seek to inuence the dividend policy of the Company because of its reliance on dividends received from the Company business of the Company is substantially dependent on the provision by CNPC and CNPC's aliates of services and products for which the Company currently has limited alternative sources of supply the Company's ability to achieve a number of planned cost reductions may be limited by local governments in China CNPC's resources may not be adequate to allow the Company to collect all recoverable losses expansion of sales of the Company's rened products and chemical products substantially depends on its ability to compete in the eastern and southern regions of China expansion of sales of natural gas and rened products of the Company will require signicant capital expenditures for which the Company may be unable to provide sucient nancing operations of the Company may be aected by signicant operating hazards and natural disasters and resulting losses for which the Company has limited insurance the Company's limited operating history as a separate entity could reduce its operating eciency 4

SUMMARY
the Company's rights as land use rights holder and as lessee of land and its ownership interests in the buildings and structures on the land may be adversely aected if formal land use rights certicates are not obtained within certain time limits (ii) Risks relating to China's oil and gas industry PRC Government regulations may limit the Company's activities and adversely aect its business operations a number of the Company's signicant projects are currently subject to PRC Government approval business operations of the Company may be adversely aected by present or future environmental regulations (iii) Risks relating to China in general political and economic policies of the PRC Government could aect the Company's business certain changes in foreign exchange regulations may adversely aect the Company's nancial condition uctuation of the Renminbi could materially aect the Company's nancial condition and results of operations the PRC legal system is not fully developed (iv) Risks relating to the Global Oering there has been no prior public market for the H Shares or ADSs; the liquidity and market price of the H Shares and ADSs following the Global Oering may be volatile the Company's future nancial performance may vary materially from the estimated nancial information provided in this prospectus because the Oer Price may be substantially higher than the net tangible book value per share, purchasers of H Shares or ADSs will incur immediate and substantial dilution unauthorised e-mails were sent out to 83 institutions; no investor should rely on any such emails, or the statements made in the e-mails when making an investment decision investors should read the entire prospectus carefully and should not consider any particular statement in this prospectus or in published news reports or any published nancial projections without carefully considering the risks and other information contained in this prospectus THE GLOBAL OFFERING The Global Oering comprises (i) the Hong Kong Public Oering of 879,122,000 H Shares (initially representing approximately 5 per cent. of the total number of H Shares initially being oered under the Global Oering), (ii) the Asia Oering of 61,538,460 ADSs, representing 6,153,846,000 H Shares (initially representing approximately 35 per cent. of the total number of H Shares initially being oered under the Global Oering), (iii) the US Oering of 43,956,040 ADSs, representing 4,395,604,000 H Shares (initially representing approximately 25 per cent. of the total number of H Shares initially being oered under the Global Oering) and (iv) the Europe Oering of 61,538,460 ADSs, representing 6,153,846,000 H Shares (initially representing approximately 35 per cent. of the total number of H Shares initially being oered under the Global Oering). The Oer Price per H Share under the Hong Kong Public Oering will be based on the Hong Kong dollar price per H Share under the Asia Oering, the US Oering and the Europe Oering, as 5

SUMMARY
determined by the Global Coordinators, on behalf of the Underwriters, the Company and CNPC. The Oer Price per H Share under the Hong Kong Public Oering will be xed at the Hong Kong dollar amount which, when increased by the 1 per cent. brokerage and 0.011 per cent. Stock Exchange transaction levy payable thereon, is (subject to any necessary rounding) eectively equivalent to the Hong Kong dollar price per H Share under the Asia Oering, the US Oering and the Europe Oering. The transaction levy otherwise payable by investors in the Asia Oering, the US Oering and the Europe Oering on H Shares purchased by them will be paid by the Company and CNPC. The Oer Price is expected to be xed by agreement between the Global Coordinators, on behalf of the Underwriters, the Company and CNPC on the Price Determination Date. If, for any reason, the Oer Price is not agreed between the Company, CNPC and the Global Coordinators, on behalf of the Underwriters, the Global Oering will not proceed. Investors may apply for H Shares under the Hong Kong Public Oering or apply for or indicate an interest for ADSs and/or H Shares under the Asia Oering, the US Oering and the Europe Oering, but may not do both. The Hong Kong Public Oering comprises an oer for subscription by the Company and an oer for sale by CNPC to the public in Hong Kong of an aggregate of, initially, 879,122,000 H Shares divided into two pools, pool A and pool B. The 879,122,000 H Shares initially comprised in the Hong Kong Public Oering will (subject to agreement as to pricing and the other conditions described in the section headed ""Structure of the Global Oering Conditions of the Global Oering'') be oered through the Hong Kong Underwriters. H Shares in pool A are for allocation on an equitable basis to applicants who have applied for H Shares with an aggregate price of HK$5 million (excluding the brokerage and Stock Exchange transaction levy payable) or less and H Shares in pool B are for allocation on an equitable basis to applicants who have applied for H Shares with an aggregate price of more than HK$5 million (excluding the brokerage and Stock Exchange transaction levy payable). Applicants can only receive an allocation of H Shares from either pool A or pool B, but not from both pools. The allocation of H Shares between (a) the Hong Kong Public Oering and (b) the Asia Oering, the US Oering and the Europe Oering is subject to adjustment. If the number of H Shares validly applied for under the Hong Kong Public Oering represents (i) 3 times or more but less than 8 times, (ii) 8 times or more but less than 10 times, (iii) 10 times or more but less than 12 times, (iv)12 times or more but less than 14 times, (v)14 times or more but less than 16 times or (vi)16 times or more of the number of H Shares initially available under the Hong Kong Public Oering, then H Shares will be reallocated to the Hong Kong Public Oering from the Asia Oering, the US Oering and the Europe Oering, so that the total number of H Shares available under the Hong Kong Public Oering will be 1,318,684,000 H Shares (in the case of (i)), 1,758,244,000 H Shares (in the case of (ii)), 2,197,804,000 H Shares (in the case of (iii)), 2,637,364,000 H Shares (in the case of (iv)), 3,076,926,000 H Shares (in the case of (v)) and 3,516,486,000 H Shares (in the case of (vi)) representing approximately 7.5 per cent., 10 per cent., 12.5 per cent., 15 per cent., 17.5 per cent. and 20 per cent. of the H Shares initially available under the Global Oering, respectively. In such circumstances, the additional H Shares reallocated to the Hong Kong Public Oering will be allocated between pool A and pool B and the allocations under the Asia Oering, the US Oering and the Europe Oering will be reduced accordingly. In addition, under the Asia Underwriting Agreement, the US Underwriting Agreement and the Europe Underwriting Agreement, the Company and CNPC have granted to the Asia Underwriters, the US Underwriters and the Europe Underwriters, respectively, Overallotment Options exercisable up to 30 days after the Price Determination Date, to require (i) the Company to allot and issue up to an aggregate of 2,373,626,000 additional H Shares and (ii) CNPC to sell up to an aggregate of 263,736,000 additional H shares, respectively, (all or a portion of which may be 6

SUMMARY
deliverable in the form of ADSs) at the same price per H Share under the Asia Oering, the US Oering and the Europe Oering, solely to cover over-allocations in the relevant oerings, if any (including H Shares or ADSs to be issued or sold to BP Amoco p.l.c. pursuant to any and all exercises of the Over-allotment Options as described in the section headed ""Structure of the Global Oering The Corporate Placing''). For further details of the structure of the Global Oering, please refer to the section headed ""Structure of the Global Oering'' in this prospectus. Corporate Placing As part of the Asia Oering, the Company and CNPC have entered into the Corporate Placing Agreements pursuant to which the Corporate Investors have severally and conditionally agreed to purchase an aggregate of US$350 million of Corporate Placing Shares. The closing of the purchases contemplated by the Corporate Placing Agreements will occur as part of the closing of the Asia Oering. The Corporate Investors will purchase the Corporate Placing Shares under the Corporate Placing at the same price as is payable by other investors who acquire H Shares or ADSs (as the case may be) under the Asia Oering, subject (except as set forth below) to the same terms and conditions as are generally applicable to the Asia Oering. The sale of Corporate Placing Shares to the Corporate Investors will be underwritten solely by the Global Coordinators and will not be aected by any reallocation of H Shares from the Asia Oering to the Hong Kong Public Oering. Each of the Corporate Investors has undertaken to the Company, CNPC and the Global Coordinators that, except with the prior written consent of the Global Coordinators, it will not, at any time during the period of six months following the date of commencement of dealings in the H Shares on the Stock Exchange (the ""lock-up period''), sell, mortgage, create, transfer or otherwise dispose of any legal or benecial interest (including by the creation of an option) in the Corporate Placing Shares purchased by it pursuant to the Corporate Placing, and any shares or other securities of the Company which are derived therefrom (pursuant to any rights issue, capitalisation issue or other form of capital reorganisation) (collectively, ""the relevant shares''), provided that a Corporate Investor may transfer the relevant shares to a wholly-owned subsidiary bound by the same restrictions on disposal, and on condition that such subsidiary must transfer the relevant shares back to that Corporate Investor or another whollyowned subsidiary of that Corporate Investor, before it ceases to be a wholly-owned subsidiary of that Corporate Investor. Since the Corporate Placing Shares do not constitute a substantial percentage of the share capital of the Company, the lock-up arrangements will not have any negative impact on the ability of the Company to maintain the public oat required under the Listing Rules. After the expiration of the lock-up period, the Corporate Investors are not contractually bound to follow any particular arrangements as to how the Corporate Placing Shares may be disposed of. The Asia Oering also includes the issue or sale by the Company and CNPC of 3,516,484,000 H Shares, representing 20 per cent. of all of the H Shares oered in the Global Oering, to BP Amoco p.l.c. or a wholly-owned subsidiary of BP Amoco p.l.c. (either or both together, ""BP Amoco'') under the Asia Oering (except for BP Amoco Over-allotment Shares (as dened below)), which shall be sold or issued, as the case may be, under the Asia Oering and/or the Europe Oering). BP Amoco may elect to receive ADSs instead of H Shares. BP Amoco will purchase such H Shares (or the ADSs representing such H Shares) at the same price as is payable by other investors which acquire ADSs or H Shares under the Asia Oering or the Europe Oering, as the case may be. BP Amoco has also agreed to purchase the number of H Shares which would constitute 20 per cent. of all of the H Shares issued or sold, as the case may be, pursuant to any and all exercises of the Over-allotment Options (for greater certainty, including all of such H Shares issued to BP Amoco (the ""BP Amoco Over-allotment Shares'')). The maximum value of ADSs or H Shares to be purchased by BP Amoco is US$1,000 7

SUMMARY
million. The ADSs or H Shares issued and sold to BP Amoco will be underwritten solely by the Global Coordinators. In connection with any subsequent issue for cash consideration of H Shares, or other securities convertible, exchangeable into or representing H Shares by the Company, for a period of ve years following the commencement of dealings of the H Shares on the Stock Exchange, BP Amoco has, subject to certain restrictions, the right to purchase the number of these H Shares or other securities that would allow BP Amoco to maintain a certain percentage shareholding in the capital of the Company which is based on the number of H Shares it acquires in the Global Oering. The ADSs or H Shares to be issued or sold to BP Amoco will not be aected by any reallocation of H Shares to the Hong Kong Public Oering. BP Amoco p.l.c. has agreed that without the consents of the Company and the Global Coordinators, it will not sell, transfer or otherwise dispose of the ADSs or H Shares for 12 months following the commencement of dealings of H Shares on the Stock Exchange and, after the expiry of such 12-month period, BP Amoco shall rst consult with the Company before the disposal of any such ADSs or H Shares and BP Amoco shall use all reasonable endeavours to ensure that any such disposal will not create a disorderly or false market. For further information on the Corporate Placing, see the section headed ""Structure of the Global Oering The Corporate Placing''.

SUMMARY
SELECTED HISTORICAL COMBINED FINANCIAL INFORMATION The table below sets out selected historical combined nancial information of the Group for the three years ended 31 December 1998 and the nine months ended 30 September 1999, based on the information included in ""Appendix I Accountants' Report'' as set out in Appendix I to this prospectus. The selected historical combined nancial information of the Group has been prepared in accordance with IAS.
Year ended 31 December 1996 1997 1998 Nine months ended 30 September 1999

RMB RMB RMB RMB (Amounts in millions except for per Share information)

TURNOVER AND TOTAL REVENUE Sales and other operating revenues OPERATING EXPENSES Depreciation, depletion, and amortisation Employee compensation costs Exploration expenses, including exploratory dry holes Impairment loss on assets to be retained by CNPC Other (expenses)/income Purchases, services and other Revaluation loss Selling, general and administrative expenses Taxes other than income taxes TOTAL OPERATING EXPENSES PROFIT FROM OPERATIONS FINANCE COSTS Exchange gain Exchange loss Interest expense Interest income TOTAL FINANCE COSTS SHARE OF PROFIT OF ASSOCIATED COMPANIES PROFIT BEFORE TAXATION TAXATION PROFIT BEFORE MINORITY INTERESTS MINORITY INTERESTS 143,677 (13,059) (7,996) (4,725) (248) (51,860) (9,727) (8,471) (96,086) 47,591 2,998 (449) (9,839) 1,033 (6,257) 42 41,376 (9,833) 31,543 (87) 9 157,381 (16,450) (8,826) (6,830) (557) (56,980) (9,827) (9,279) (108,749) 48,632 3,291 (165) (10,928) 1,048 (6,754) 331 42,209 (12,200) 30,009 (161) 147,287 (17,803) (9,752) (5,990) (310) (336) (58,190) (9,838) (9,579) (111,798) 35,489 44 (1,916) (12,276) 1,326 (12,822) 88 22,755 (7,537) 15,218 57 126,181 (16,138) (6,822) (3,538) (2,007) 130 (42,457) (1,122) (9,564) (7,851) (89,369) 36,812 227 (1,781) (7,588) 433 (8,709) 158 28,261 (7,455) 20,806 (27)

SUMMARY
Year ended 31 December 1996 1997 1998 Nine months ended 30 September 1999

RMB RMB RMB RMB (Amounts in millions except for per Share information)

NET PROFIT BASIC AND DILUTED NET PROFIT PER SHARE US GAAP NET PROFIT BASIC AND DILUTED NET PROFIT PER SHARE

31,456 0.20 31,456 0.20

29,848 0.19 29,848 0.19

15,275 0.10 15,275 0.10

20,779 0.13 23,262 0.15

According to paragraph 31 of the Third Schedule to the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) and Rule 4.04 of the Listing Rules, the Company is required to include its nancial results for the year ended 31 December 1999 in the Accountants' Report set out in Appendix I to this prospectus. The Securities and Futures Commission and the Stock Exchange have granted waivers from this requirement in relation to paragraph 31 of the Third Schedule to the Companies Ordinance and Rule 4.04 of the Listing Rules, respectively. Instead, results for the three years ended 31 December 1998 and for the nine months ended 30 September 1999 have been included in the Accountants' Report.

10

SUMMARY
SELECTED PRO FORMA FINANCIAL INFORMATION The table below sets out selected pro forma nancial information of the Group for the year ended 31 December 1998 and the nine months ended 30 September 1999, based on the information included in ""Appendix III Unaudited Pro Forma Financial Information'' to this prospectus. The selected pro forma nancial information of the Group was prepared by the Company to illustrate the estimated eects of the transactions and other changes in connection with the Restructuring described in the notes on description of pro forma adjustments contained in Appendix III to this prospectus as if those transactions and other changes had occurred as at 1 January 1998 and 1 January 1999. The selected pro forma nancial information does not purport to represent the results of the Group that would have been attained if such transactions and other changes had in fact occurred on such date.
Year ended 31 December 1998 Historical RMB Pro forma as adjusted(1) Pro forma combined(2) Nine months ended 30 September 1999 Historical Pro forma as adjusted(1) Pro forma combined(2) RMB

RMB RMB RMB RMB (Amounts in millions except for per Share information)

TURNOVER AND TOTAL REVENUE Sales and other operating revenues

147,287

146,711

146,711

126,181

125,901

125,901

OPERATING EXPENSES Depreciation, depletion, and amortisation (17,803) Employee compensation costs (9,752) Exploration expenses, including exploratory dry holes (5,990) Impairment loss on assets to be retained by CNPC (310) Other (expenses)/income (336) Purchases, services and other (58,190) Revaluation loss Selling, general and administrative expenses (9,838) Taxes other than income taxes (9,579) TOTAL OPERATING EXPENSES (111,798) PROFIT FROM OPERATIONS 35,489 FINANCE COSTS Exchange gain/(loss), net (1,872) Interest expense (12,276) Interest income 1,326 TOTAL FINANCE COSTS (12,822) SHARE OF PROFIT OF ASSOCIATED COMPANIES 88 PROFIT BEFORE TAXATION 22,755 TAXATION (7,537) PROFIT BEFORE MINORITY INTERESTS 15,218

(27,181) (9,720) (6,791) (325) (57,681) (11,826) (9,576) (123,100) 23,611 (1,863) (10,326) 1,326 (10,863) 88 12,836 (4,317) 8,519

(27,181) (9,720) (6,791) (325) (57,681) (11,826) (9,576) (123,100) 23,611 (1,863) (9,652) 1,326 (10,189) 88 13,510 (4,539) 8,971

(16,138) (6,822) (3,538) (2,007) 130 (42,457) (1,122) (9,564) (7,851) (89,369) 36,812 (1,554) (7,588) 433 (8,709) 158 28,261 (7,455) 20,806

(20,001) (6,800) (3,983) 193 (42,229) (1,122) (11,066) (7,850) (92,858) 33,043 (1,553) (6,596) 433 (7,716) 158 25,485 (8,814) 16,671

(20,001) (6,800) (3,983) 193 (42,229) (1,122) (11,066) (7,850) (92,858) 33,043 (1,553) (6,092) 433 (7,212) 158 25,989 (8,980) 17,009

11

SUMMARY
Year ended 31 December 1998 Historical RMB Pro forma as adjusted(1) Pro forma combined(2) Nine months ended 30 September 1999 Historical Pro forma as adjusted(1) Pro forma combined(2) RMB

RMB RMB RMB RMB (Amounts in millions except for per Share information)

MINORITY INTERESTS NET PROFIT BASIC AND DILUTED NET PROFIT PER SHARE US GAAP Net prot Basic and diluted net prot per Share
(1)

57 15,275 0.10 15,275 0.10

57 8,576 0.05 15,011 0.09

57 9,028 0.05 15,463 0.09

(27) 20,779 0.13 23,262 0.15

(27) 16,644 0.10 21,847 0.14

(27) 16,982 0.10 22,185 0.13

Represents number adjusted to reect certain changes, arrangements and transactions in connection with the Restructuring and the incorporation of the Company including the eect of the distribution of RMB3,600 million to CNPC. Represents numbers adjusted to: reect certain changes, arrangements and transactions stated in Note (1); and give eect to the receipt of the proceeds of the Global Oering and the use of RMB8,861 million of the net proceeds to repay shortterm borrowings.

(2)

12

SUMMARY
SUMMARY RESERVE AND OPERATING DATA The table below sets forth certain information with respect to the Company's proved reserves of crude oil and natural gas as at 31 December 1996, 1997 and 1998 and as at 30 September 1999, as well as other operating data as at or for the three years ended 31 December 1996, 1997 and 1998 and as at or for the nine months ended 30 September 1999.
Year ended 31 December 1997 1998

1996

Nine months ended 30 September 1999

Proved reserves Crude oil (million barrels) Natural gas (Bcf) Total (million BOE) Annual oil and gas production Crude oil (million barrels) Natural gas(1) (Bcf) Total production (million BOE) Average daily oil and gas production Crude oil (thousand barrels) Natural gas(1) (MMcf) Total production (thousand BOE) Lifting cost Crude oil and natural gas (RMB/BOE) Three year average nding and development cost(2) Crude oil and natural gas (RMB/BOE) Finding cost(3) Crude oil and natural gas (RMB/BOE) Rening and marketing operations Primary distillation capacity (thousand barrels/day) Primary distillation capacity utilisation (%) Principal rened product(4) sales (million tons) Total number of service stations Chemical operations Principal chemical product sales (thousand tons) Basic petrochemicals(5) Derivative petrochemicals(6)(7) Other chemicals(8) Natural gas operations Length of natural gas pipelines(9)(km) Volume of natural gas sold(10)(Bcf)
(1) (2)

10,420.9 12,869.7 12,565.9 759.6 368.9 821.1 2,081.1 1,010.7 2,249.6 36.56 8.26 1,753.1 65.7 42.1 3,310 122.9 1,612.3 2,418.3 8,522 324.2

10,540.0 17,134.2 13,395.8 783.7 379.8 847.0 2,147.2 1,040.5 2,320.6 42.88 6.89 1,927.2 65.2 47.4 4,720 202.3 2,015.1 2,442.8 8,707 335.0

10,865.0 22,336.5 14,587.7 780.2 409.2 848.4 2,137.4 1,121.0 2,324.2 41.77 17.29 5.26 2,030.5 62.6 48.1 6,000 221.9 2,253.2 2,979.9 11,099 347.6

10,766.0 24,284.2 14,813.3 583.3 324.7 637.5 2,130.9 1,186.0 2,328.6 34.09 6.98 2,030.5 65.5 43.6 6,440 144.9 1,852.3 2,425.4 11,099 280.4

(3)

(4) (5) (6) (7)

Represents production of sales gas. Represents aggregate weighted average nding and development cost for 1996, 1997 and 1998. On a pro forma basis, the Company's weighted average nding and development cost for the three-year period ended 31 December 1998 would have been RMB25.00 per barrel-of-oil equivalent. Historically, the Company's nding and development cost included only direct cost, excluding nance cost and general and administrative expenses attributable to service providers in connection with the services provided to the Company. On a pro forma basis, taking into account certain changes, arrangements and transactions in connection with the Restructuring, the Company's nding cost would have been RMB7.30 and RMB9.86 per barrel-of-oil equivalent, respectively, for the year ended 31 December 1998 and the nine months ended 30 September 1999. Represents gasoline, jet fuel, diesel, lubricants, fuel oil, naphtha, paran and asphalt. Represents ethylene, benzene and propylene. Represents polyethylene, polypropylene, ABS, terylene bre, polyacrylic bre, polypropylene bre, butadiene styrene rubber, polybutadiene rubber, ethylene-propylene rubber, acrylonitrile-butadiene rubber and seven intermediates. Represents the Company's historical sales volumes of derivative petrochemicals, including sales of those products produced by ve chemical production facilities that were not transferred to the Company by CNPC as part of the Restructuring. On a pro forma basis, taking into account the exclusion of the ve chemical production facilities, the Company's sales volumes of

13

SUMMARY
derivative petrochemicals in the years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999 would have been 1,583.0 thousand tons, 1,980.2 thousand tons, 2,203.8 thousand tons and 1,833.9 thousand tons, respectively. Represents urea and ammonium nitrate. Represents the aggregate length of natural gas pipelines used by the Company's natural gas segment as well as its exploration and production segment. Represents the aggregate volume of natural gas sold by the Company's exploration and production segment, including sales to its natural gas segment.

(8) (9) (10)

14

SUMMARY
ESTIMATES FOR THE YEAR ENDED 31 DECEMBER 1999 Consolidated prot after taxation and minority interests but before extraordinary items(1) Earnings per Share on a fully diluted basis(2)
(1) (2)

not less than RMB26,899 million RMB0.15 (HK$0.14)

The bases on which the above prot estimate has been prepared are set out in Appendix IV to this prospectus. The calculation of the estimated fully diluted earnings per Share is based on the estimated consolidated prot after taxation and minority interests but before extraordinary items for the year ended 31 December 1999 and on the assumption that the Company had been listed since 1 January 1999 and that 175,824,176,000 Shares were in issue throughout the year. The calculation assumes that the Over-allotment Options were not exercised and takes no account of any H Shares which may be repurchased by the Company pursuant to the mandate referred to in the section headed ""Share Capital General Mandate to Repurchase H Shares''.

ISSUE STATISTICS Except where otherwise indicated, the issue statistics have been prepared on the assumption that the Over-allotment Options will not be exercised. Issue statistics shown in Hong Kong dollars and the prospective earnings of the Company taken into account in the prospective price/earnings multiple have been translated from Renminbi into Hong Kong dollars at the rate of HK$1.00 RMB1.0635, being the PBOC Rate prevailing on 10 March 2000. The Oer Prices of HK$1.23 and HK$1.49 per H Share do not include the one per cent. brokerage and 0.011 per cent. Stock Exchange transaction levy which are payable by applicants under the Hong Kong Public Oering.
Based on an Oer Price of HK$1.23 per H Share Based on an Oer Price of HK$1.49 per H Share

Market capitalisation of the H Shares(1) Price/earnings multiple on a fully diluted basis(2) Adjusted net tangible asset value per Share(3)
(1)

HK$21,626 million 8.8 times HK$1.16

HK$26,198 million 10.6 times HK$1.18

Except where otherwise indicated, the oer statistics have been prepared on the assumption that the Over-allotment Options will not be exercised. The price/earnings multiple on a fully diluted basis is based on the assumed Oer Price and the estimated fully diluted earnings per Share for the year ended 31 December 1999 calculated based on the assumptions set out in note (2) to the section headed ""Estimates for the year ended 31 December 1999'' above. The adjusted net tangible asset value per Share has been arrived at after the adjustments referred to in the section headed ""Financial Information Adjusted Net Tangible Assets'' in this prospectus and on the basis of 175,824,176,000 Shares in issue immediately following the completion of the Global Oering and assuming that the Over-allotment Options were not exercised and taking no account of any H Shares which may be repurchased by the Company pursuant to the mandate referred to in the section headed ""Shares Capital General Mandate to Repurchase H Shares''.

(2)

(3)

If the Over-allotment Options are exercised in full, the adjusted net tangible assets of the Company will be increased to approximately RMB219,988 million based on an assumed Oer Price of HK$1.36 per H Share (being the midpoint of the proposed Oer Price range of HK$1.23 to HK$1.49 per H Share) and the adjusted net tangible asset value per H Share will be RMB1.25 (HK$1.18). The estimated earnings per Share on a fully diluted basis for the year ended 31 December 1999 will be reduced to RMB0.15 (HK$0.14). 15

SUMMARY
DIVIDEND POLICY The holders of the H Shares will share proportionately, on a per Share basis, all dividends and other distributions declared by the Board of Directors. The Board of Directors will declare dividends semiannually, if any, in Renminbi, with respect to H Shares on a per Share basis and will pay dividends in Hong Kong dollars. The declaration of dividends is subject to the discretion of the Board of Directors. The amounts of dividends actually distributed to H Share and ADS holders will depend upon the following factors: general business conditions; nancial results of the Company; capital requirements; contractual restrictions on the payment of dividends by the Company to its shareholders or by the Company's subsidiaries to the Company; interests of the Company's shareholders; the eect on the Company's debt ratings; and other factors the Board of Directors may deem relevant. The Company may only distribute dividends after it has made allowance for: recovery of losses, if any; allocations to the statutory common reserve fund; allocations to the statutory common welfare fund; and allocations to a discretionary common reserve fund if approved by its shareholders. The minimum and maximum aggregate allocations to the statutory funds are 15 per cent. and 20 per cent., respectively, of the Company's net prot determined in accordance with PRC accounting rules. Under PRC law, the Company's distributable earnings will be equal to its net prot determined in accordance with PRC accounting rules or IAS, whichever is lower, less allocations to the statutory and discretionary funds. Any nal dividend for a nancial year shall be subject to shareholders' approval. Subject to the above and to ensure that the Company's dividend policy is consistent with that of major international oil and gas companies, the Directors currently expect that the Company will distribute as dividends approximately 40 per cent. to 50 per cent. of its reported net prot for all years commencing on or after 1 January 2000.

16

SUMMARY
REASONS FOR THE GLOBAL OFFERING AND THE USE OF PROCEEDS The net proceeds of the Global Oering accruing to the Company (after deduction of underwriting fees and estimated expenses payable by the Company in relation to the Global Oering, assuming the Over-allotment Options are not exercised and assuming an Oer Price of HK$1.36 per H Share, being the midpoint of the proposed Oer Price range of HK$1.23 to HK$1.49 per H Share) are estimated to be approximately HK$20,593 million (HK$23,722 million, if the Over-allotment Options are exercised in full). The Company currently intends to use the net proceeds from the Global Oering as follows: use RMB13,040 million (HK$12,261 million) to fund the Company's capital expenditures and investments and to provide additional funds for general corporate purposes; and repay RMB8,861 million (HK$8,332 million) of its short-term borrowings from third party nancial institutions. The following table sets forth the interest rate and maturity of the borrowings that the Company intends to repay by using RMB8,861 million (HK$8,332 million) of the net proceeds:
Amount (RMB in millions) Interest rate (per cent. per annum) Maturity

463 7,071 1,124 88 115

6.01 7.00 7.01 8.00 8.01 10.00 10.01 12.00 12.01 15.00

within within within within within

one one one one one

year year year year year

To the extent, if any, that the net proceeds of the Global Oering are not immediately used for the above purposes, the Company intends to place the net proceeds on short-term deposit. Following the PRC Government accounting rules applicable to joint stock companies with limited liability, the net proceeds from the Global Oering received by the Company in US dollars and Hong Kong dollars will be accounted for in the Company's nancial statements at the PBOC Rate in eect at the time the net proceeds are rst received. The net proceeds from the Global Oering accruing to CNPC (after deduction of underwriting fees and estimated expenses payable by CNPC in relation to the Global Oering, assuming the Overallotment Options are not exercised and assuming an Oer Price of HK$1.36 per H Share, being the midpoint of the proposed Oer Price range of HK$1.23 to HK$1.49 per H Share) are estimated to be approximately HK$2,319 million (HK$2,667 million, if the Over-allotment Options are exercised in full). Out of the net proceeds it receives from the Global Oering, CNPC will: reduce RMB1,497 million (HK$1,408 million) of borrowings; and repay RMB969 million (HK$911 million) to fund the employee retraining and severance plans established in connection with the Restructuring. CNPC and the Company will establish separate accounts into which their respective proceeds will be deposited. Funds in the separate accounts of the Company and CNPC will only be disbursed for the purposes stated above. See the section headed ""Business Use of Proceeds Verication'' for a more detailed discussion of use of proceeds verication in respect of funds in the separate accounts of the Company and CNPC. 17

SUMMARY
In the event of any material modication to the use of proceeds as described above, the Company and/or CNPC, as appropriate, will issue an announcement in respect of the change. The Hong Kong dollar to Renminbi exchange rate for the purpose of presenting the amounts for use of proceeds under this section is based on the PBOC Rate prevailing on 10 March 2000, of HK$1.00 RMB1.0635. There are risks associated with any investment. Some of the particular risks of investing in the H Shares are set out in the section headed ""Risk Factors''. You should read that section carefully before you decide to invest in the H Shares.

18

DEFINITIONS
In this prospectus, unless the context otherwise requires, the following expressions have the meanings set out below. Certain other terms are explained in the section headed ""Glossary''. ""ADS'' ""Articles of Association'' or ""Articles'' ""Asia Oering'' an American depositary share issued by the Depositary representing ownership of 100 H Shares, which is to be listed on the NYSE the articles of association of the Company, adopted on 3 December 1999 and as amended from time to time the oering of 55,384,620 ADSs by the Company and 6,153,840 ADSs by CNPC (which may, at the option of the purchasers of the ADSs, be delivered in the form of H Shares in lieu of ADSs) to professional and institutional investors in Hong Kong (other than to members of the public in Hong Kong) and to investors outside Hong Kong in Asia and Australasia (including the Corporate Placing) as further described in the section headed ""Structure of the Global Oering'' the H Shares (including any H Shares represented by ADSs) oered pursuant to the Asia Oering the group of underwriters of the Asia Oering, led by the Global Coordinators, and expected to enter into the Asia Underwriting Agreement the underwriting agreement to be dated on or about 30 March 2000 relating to the Asia Oering and to be entered into among the Company, CNPC and the Asia Underwriters the board of directors of the Company the buildings leasing contract dated 10 March 2000 entered into between CNPC and the Company regarding the leasing of certain buildings by CNPC to the Company and members of the Group, eective as of 5 November 1999 the Central Clearing and Settlement System established and operated by Hongkong Clearing (China Foreign Exchange Trading Centre) China International Capital Corporation (Hong Kong) Limited, an investment adviser registered under the Securities Ordinance (Chapter 333 of the Laws of Hong Kong) (China National Oshore Oil Corporation), an enterprise established under the laws of the PRC , an enterprise established under the laws of Hong Kong, being a subsidiary of CNOOC (China National Petroleum Corporation), a State-owned enterprise incorporated under the laws of the PRC 19

""Asia Oering Shares'' ""Asia Underwriters''

""Asia Underwriting Agreement'' ""Board of Directors'' or ""Board'' ""Buildings Leasing Contract''

""CCASS'' ""CFETC'' ""CICC''

""CNOOC'' ""CNOOC Limited'' ""CNPC''

DEFINITIONS
and where the context refers to any time prior to the establishment of CNPC, those entities and businesses which were contributed to CNPC upon its establishment ""CNPC Group'' ""CNSPC'' ""Company'' CNPC and, following the Restructuring, its subsidiaries and aliates, excluding the Group (China National Star Petroleum Corporation), an enterprise established under the laws of the PRC (PetroChina Company Limited), a joint stock limited company incorporated in the PRC on 5 November 1999 under the Company Law, or where the context refers to any time prior to the eective date of the Restructuring, those entities and businesses which were contributed to the Company pursuant to the Restructuring (the Company Law of the PRC), as enacted by the Standing Committee of the Eighth NPC on 29 December 1993 and eective on 1 July 1994, as amended, supplemented or otherwise modied from time to time the comprehensive products and services agreement dated 10 March 2000 entered into between CNPC and the Company regarding the provision by the Group to the CNPC Group and by the CNPC Group to the Group, of a range of products and services from time to time, eective as of 5 November 1999 the computer software licensing contract dated 10 March 2000 entered into between CNPC and the Company regarding the licensing by CNPC to the Company of the right to use certain computer software of CNPC, eective as of 5 November 1999 the contract for the supervision of certain sales enterprises dated 10 March 2000 entered into between CNPC and the Company regarding the supervision of operations by the Company of certain sales enterprises primarily consisting of service stations of CNPC, eective as of the date of the contract the contract for the transfer of rights under production sharing contracts dated 23 December 1999 entered into between CNPC and the Company regarding the transfer of certain production sharing contracts from CNPC to the Company, eective as of the date of the contract Rowley Prots Ltd. (being a subsidiary of Cheung Kong (Holdings) Limited), Terome Developments Limited (being a subsidiary of Hutchison Whampoa Limited), Chow Tai Fook Nominee Limited and Talent Point Investments Limited (being a subsidiary of Sun Hung Kai Properties Ltd.) the placing of an aggregate of US$350 million of H Shares (or ADSs at the option of each of the Corporate Investors) to the Corporate 20

""Company Law''

""Comprehensive Products and Services Agreement''

""Computer Software Licensing Contract''

""Contract for the Supervision of Certain Sales Enterprises''

""Contract for the Transfer of Rights under Production Sharing Contracts''

""Corporate Investors''

""Corporate Placing''

DEFINITIONS
Investors and the placing of H Shares or ADSs to BP Amoco p.l.c. referred to in the section headed ""Structure of the Global Oering The Corporate Placing'', as part of the Asia Oering ""Corporate Placing Agreements'' the corporate placing agreements all dated 14 March 2000 among the Company, CNPC, the Corporate Placing Underwriters and each of the Corporate Investors setting out the terms and conditions subject to which each of the Corporate Investors is to purchase Corporate Placing Shares under the Corporate Placing the H Shares (or ADSs at the option of each of the Corporate Investors) to be placed with the Corporate Investors pursuant to the Corporate Placing China International Capital Corporation Limited and Goldman Sachs, being the underwriters of the Corporate Placing (China Securities Regulatory Commission), a regulatory body responsible for the supervision and regulation of the PRC national securities market The Bank of New York, as issuer and depositary in relation to the ADSs the directors of the Company ordinary shares issued by the Company, with a nominal value of RMB1.00 each, which are subscribed for or credited as paid up in Renminbi the oering of 55,384,620 ADSs by the Company and 6,153,840 ADSs by CNPC (which may, at the option of the purchasers of the ADSs, be delivered in the form of H Shares in lieu of ADSs) to investors outside the United States, Canada, Asia and Australasia as further described in the section headed ""Structure of the Global Oering'' the H Shares (including any H Shares represented by ADSs) oered pursuant to the Europe Oering the group of underwriters of the Europe Oering, led by the Global Coordinator, and expected to enter into the Europe Underwriting Agreement the Europe Underwriting Agreement to be dated on or about 30 March 2000 relating to the Europe Oering and to be entered into among the Company, CNPC and the Europe Underwriters ordinary shares issued by the Company, the par value of which is denominated in Renminbi, and which are subscribed for in a currency other than Renminbi gross domestic product 21

""Corporate Placing Shares''

""Corporate Placing Underwriters'' ""CSRC''

""Depositary'' ""Directors'' ""Domestic Shares''

""Europe Oering''

""Europe Oering Shares'' ""Europe Underwriters''

""Europe Underwriting Agreement'' ""Foreign Shares''

""GDP''

DEFINITIONS
""Global Coordinators'' ""Global Oering'' ""GNP'' ""Goldman Sachs'' Goldman Sachs and China International Capital Corporation Limited the Hong Kong Public Oering, the Asia Oering, the US Oering and the Europe Oering gross national product Goldman Sachs (Asia) L.L.C., an investment adviser registered under the Securities Ordinance (Chapter 333 of the Laws of Hong Kong) the Company and its subsidiaries the guarantee of debts contract dated 10 March 2000 entered into between CNPC and the Company regarding the guarantee of certain debts assumed by the Company pursuant to the Restructuring, eective as of 5 November 1999 Foreign Shares issued by the Company, with a nominal value of RMB1.00 each, which are subscribed for and traded in HK dollars and for which applications have been made for the granting of listing, and permission to deal, on the Stock Exchange Hong Kong dollars, the lawful currency of Hong Kong The Hong Kong Special Administrative Region of the PRC Hong Kong Securities Clearing Company Limited the oering by the Company of initially 791,208,000 H Shares for subscription by, and the oering by CNPC of initially 87,914,000 H Shares for sale to, the public in Hong Kong (subject to adjustment as described in the section headed ""Structure of the Global Oering''), in each case at the Oer Price and on and subject to the terms and conditions described in this prospectus and the application forms relating thereto the H Shares oered for subscription or for sale pursuant to the Hong Kong Public Oering CICC, Goldman Sachs, BOCI Asia Limited, HSBC Investment Bank Asia Limited, Celestial Capital Limited, Core PacicYamaichi International (H.K.) Limited, Hang Seng Securities Limited, ICEA Capital Limited, Ka Wah Capital Limited, Tai Fook Securities Company Limited, Vickers Ballas Capital Limited and Worldsec Corporate Finance Limited, being the underwriters of the Hong Kong Public Oering the underwriting agreement dated 24 March 2000 relating to the Hong Kong Public Oering entered into among the Company, CNPC and the Hong Kong Underwriters International Accounting Standards 22

""Group'' ""Guarantee of Debts Contract''

""H Shares''

""HK$'' or ""HK dollars'' ""Hong Kong'' ""Hongkong Clearing'' ""Hong Kong Public Oering''

""Hong Kong Public Oering Shares'' ""Hong Kong Underwriters''

""Hong Kong Underwriting Agreement'' ""IAS''

DEFINITIONS
""Land Use Rights Leasing Contract'' the land use rights leasing contract dated 10 March 2000 entered into between CNPC and the Company regarding the leasing of certain properties by CNPC to the Company, eective as of 5 November 1999 the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (as amended from time to time) the Macau Special Administrative Region of the PRC (the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas) (as amended and supplemented from time to time), for inclusion in the articles of association of companies incorporated in the PRC to be listed overseas, which were promulgated by the Securities Commission and the State Restructuring Commission on 27 August 1994 (the PRC Ministry of Finance), the ministry responsible for the administration of State revenues and expenditures, nancial and taxation policies and overall supervision of nancial institutions (the PRC Ministry of Foreign Trade and Economic Cooperation) (the Notice Relating to Foreign Exchange Control Matters for Enterprises Listed Overseas), issued by the CSRC and MOFTEC in January 1994 (the National People's Congress) New York Stock Exchange the nal price per H Share (exclusive of brokerage and Stock Exchange transaction levy) at which the H Shares are to be subscribed for or purchased pursuant to the Hong Kong Public Oering, to be determined as further described in the section headed ""Structure of the Global Oering Pricing of the Global Oering'' the Hong Kong Public Oering Shares, the Asia Oering Shares, the Europe Oering Shares and the US Oering Shares together, where relevant, with any additional H Shares (including any H Shares represented by ADSs) issued pursuant to the exercise of the Over-allotment Options collectively the options granted by the Company and CNPC to the Asia Underwriters, the US Underwriters and the Europe Underwriters to require (i) the Company to allot and issue up to an aggregate of 2,373,626,000 additional H Shares and (ii) CNPC to sell up to an aggregate of 263,736,000 additional H Shares (all or a portion of which may be deliverable in the form of ADSs) at the same price per H Share under the Asia Oering, the US Oering and the Europe 23

""Listing Rules'' ""Macau'' ""Mandatory Provisions''

""Ministry of Finance''

""MOFTEC'' ""Notice Relating to Foreign Exchange Control Matters for Enterprises Listed Overseas'' ""NPC'' or ""National People's Congress'' ""NYSE'' ""Oer Price''

""Oer Shares''

""Over-allotment Options''

DEFINITIONS
Oering, solely to cover over-allocations in the Asia Oering, the US Oering and the Europe Oering, if any (including H Shares or ADSs to be issued or sold to BP Amoco p.l.c. pursuant to any and all exercises of the Over-allotment Options as described in the section headed ""Structure of the Global Oering The Corporate Placing'') ""Patent and Know-how Licensing Contract'' the patent and know-how licensing contract dated 10 March 2000 entered into between CNPC and the Company regarding the licensing by CNPC to the Company of the right to use a number of patents and certain know-how of CNPC, eective as of 5 November 1999 (the People's Bank of China), the central bank of the PRC ""PBOC Notice'' (the Notice of the People's Bank of China Concerning Further Reform of the Foreign Currency Control System), issued in December 1993 the exchange rate for foreign exchange transactions set daily by the PBOC based on the previous day's PRC interbank foreign exchange rates the People's Republic of China. Except where the context requires, references in this prospectus to the PRC or China do not apply to Hong Kong, Macau or Taiwan the central government of the PRC including all governmental subdivisions (including provincial, municipal and other regional or local government entities) and instrumentalities thereof the agreement to be entered into between the Company, CNPC and the Global Coordinators, on behalf of the Underwriters, on the Price Determination Date to record the Oer Price the date, expected to be on or around 30 March 2000 but no later than 5 April 2000, on which the Oer Price is xed CNPC, the initial promoter of the Company holders of Shares excluding CNPC, after completion of the Global Oering Regulation S under the US Securities Act the restructuring of the CNPC group of companies now comprised within the Group and their respective businesses the restructuring agreement dated 10 March 2000 entered into between CNPC and the Company regarding the Restructuring, eective as of 5 November 1999 Renminbi yuan, the lawful currency of the PRC Rule 144A under the US Securities Act 24

""PBOC''

""PBOC Rate''

""PRC'' or ""China''

""PRC Government''

""Price Determination Agreement'' ""Price Determination Date'' ""Promoter'' ""Public Shareholders'' ""Regulation S'' ""Restructuring'' ""Restructuring Agreement''

""RMB'' or ""Renminbi'' ""Rule 144A''

DEFINITIONS
""SAFE'' (the PRC State Administration for Foreign Exchange), the PRC Government agency responsible for matters relating to foreign exchange administration (the former Securities Commission of the State Council) ""SETC'' of the PRC) ""Shares'' ""Sino-Foreign Joint Venture Law'' ""Sinopec'' ""Special Regulations'' Domestic Shares and H Shares (Sino-Foreign Joint Venture Law) (as amended and supplemented from time to time), issued on 1 July 1979 by the NPC (China Petrochemical Group Corporation), an enterprise established under the laws of the PRC (the PRC Special Regulations on the Overseas Oering and Listing of Shares by Joint Stock Limited Companies), issued by the State Council on 4 August 1994, as amended, supplemented or otherwise modied from time to time CICC and Goldman Sachs, being the joint sponsors of the Hong Kong Public Oering the PRC Government (the State Council of the PRC) (the PRC State Development Planning Commission), (formerly, the PRC State Planning Commission, the name of which was changed as of 10 March 1998) one of the ve commissions reporting directly to the State Council and responsible for planning the development of the PRC economy plans devised or approved and implemented by various authorities of the State relating to the economic and social development of the PRC (the State Commission for Restructuring the Economic Systems of the PRC), one of the commissions reporting directly to the State Council which was responsible for coordinating and directing the restructuring of China's economic systems and which was dissolved on 10 March 1998 and has become an oce of the State Council for restructuring the economic system, the head of which body is the president of the State Council The Stock Exchange of Hong Kong Limited the members of the supervisory committee of the Company 25 (the State Economic and Trade Commission

""Securities Commission''

""Sponsors'' ""State'' ""State Council'' ""State Development Planning Commission''

""State Plans''

""State Restructuring Commission''

""Stock Exchange'' ""Supervisors''

DEFINITIONS
""Trademark Licensing Contract'' the trademark licensing contract dated 10 March 2000 entered into between CNPC and the Company regarding the licensing by CNPC to the Company of the right to use a number of trademarks of CNPC, eective as of 5 November 1999 the non-competition agreement dated 10 March 2000 entered into between CNPC and the Company regarding the regulation of competition issues between the Company and the CNPC Group, eective as of 5 November 1999 collectively, the Hong Kong Underwriters, the Asia Underwriters, the US Underwriters and the Europe Underwriters collectively, the Hong Kong Underwriting Agreement, the Asia Underwriting Agreement, the US Underwriting Agreement and the Europe Underwriting Agreement the United States of America United States dollars, the lawful currency of the United States the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder generally accepted accounting principles in the United States the oering of 39,560,440 ADSs by the Company and 4,395,600 ADSs by CNPC (which may, at the option of the purchasers of the ADSs, be delivered in the form of H Shares in lieu of ADSs) to the public in the United States and on a private placement basis in Canada, as further described in the section headed ""Structure of the Global Oering'' the H Shares (including any H Shares represented by ADSs) oered pursuant to the US Oering the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder the group of underwriters of the US Oering, led by the Global Coordinators, and expected to enter into the US Underwriting Agreement the underwriting agreement to be dated on or about 30 March 2000 relating to the US Oering and to be entered into among the Company, CNPC and the US Underwriters the World Trade Organisation

""Undertaking''

""Underwriters'' ""Underwriting Agreements''

""United States'' or ""US'' ""US$'' or ""US dollars'' ""US Exchange Act'' ""US GAAP'' ""US Oering''

""US Oering Shares'' ""US Securities Act'' ""US Underwriters''

""US Underwriting Agreement''

""WTO''

26

GLOSSARY
""acreage'' the total area, expressed in acres, over which an entity has interests in exploration or production. Net acreage is the entity's interest, expressed in acres, in the relevant exploration or production area an indication of the density of crude oil or other liquid hydrocarbons as measured by a system recommended by the American Petroleum Institute, measured in degrees. The lower the API gravity, the heavier the compound billion cubic feet barrels-of-oil equivalent. One BOE means one barrel of crude oil and is assumed to equal 6,000 cubic feet of natural gas light hydrocarbon substances produced with natural gas which condense into liquid at normal temperatures and pressures associated with surface production equipment crude oil, including condensate and natural gas liquids one cubic metre is equivalent to 35.315 cubic feet a barrel of Brent crude oil for delivery in the month following the date of purchase. Brent crude oil is a blend of North Sea crude oil when used with respect to production or capacity, means the total annual available production or capacity (after taking into account scheduled plant shutdowns) divided by 365 for a given period, costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas underground in the well bore (as in ""down hole maintenance'') for a given period, costs incurred in identifying areas that may warrant examination and in examining specic areas that are considered to have prospects of containing oil and gas reserves, including costs of drilling exploratory wells and exploratory-type stratigraphic test wells. Also known as exploration cost International Accounting Standards kilogram(s) kilometre(s) for a given period, costs incurred to operate and maintain wells and related equipment and facilities, including applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. Also known as production costs thousand cubic feet million cubic feet 27

""API gravity''

""Bcf'' ""BOE'' ""condensate''

""crude oil'' ""cubic metre'' ""dated Brent'' ""day''

""development cost''

""down hole'' ""nding cost''

""IAS'' ""kg'' ""km'' ""lifting cost''

""Mcf'' ""MMcf''

GLOSSARY
""natural gas liquids'' hydrocarbons that can be extracted in liquid form together with natural gas production. Ethane and pentanes are the predominant components, with other heavier hydrocarbons also present in limited quantities areas under water with a depth of ve metres or greater areas of land and areas under water with a depth of less than ve metres at a given point in time, the maximum volume of crude oil a renery is able to process in its basic distilling units percentage reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of uid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as ""proved developed reserves'' only after testing by a pilot project or after the operation of an installed program has conrmed through production response that increased recovery will be achieved estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not of escalations based upon future conditions reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. for a given year, gross additions to proved reserves divided by production during the year for any given well, eld or country, the ratio of proved reserves to annual production of crude oil or, with respect to natural gas, to wellhead production excluding ared gas marketable production of gas on an ""as sold'' basis, excluding ared gas, injected gas and gas consumed in operations 28

""oshore'' ""onshore'' ""primary distillation capacity'' ""per cent.'' or ""%'' ""proved developed reserves''

""proved reserves''

""proved undeveloped reserves''

""reserve replacement ratio'' ""reserve-to-production ratio'' ""sales gas''

GLOSSARY
""Tcf'' ""ton'' ""water cut'' ""well logging'' trillion cubic feet metric ton. One ton of crude oil is equivalent to approximately 7.389 barrels of crude oil (assuming an API gravity of 34) for a given oil region, the percentage that water constitutes of all uids extracted from all wells in that region gathering, analysis and interpretation of data obtained down hole with special tools and techniques regarding geological attributes and hydrocarbon potential of an area

29

RISK FACTORS
An investment in the H Shares or ADSs of the Company involves a number of risks. An investment in the Company also involves special concerns and signicant risks not usually involved with an investment in the equity securities of companies incorporated in Hong Kong or other economically advanced jurisdictions. Investors should carefully consider the following information about these risks, together with the other information in this prospectus before buying the H Shares or ADSs of the Company. RISKS RELATING TO THE COMPANY'S BUSINESS Operations of the Company are aected by the volatility of prices for crude oil and rened products The PRC Government publishes benchmark crude oil prices monthly based on the Singapore trading price for crude oil, which reects the changes in prevailing international market prices for crude oil. The State Development Planning Commission publishes the retail median guidance prices for gasoline and diesel primarily by reference to the Singapore trading prices of gasoline and diesel. When the cumulative uctuation of the Singapore gasoline and diesel trading prices exceeds 5 per cent., the State Development Planning Commission can adjust the retail median guidance prices accordingly. Historically, international prices for crude oil and rened products have uctuated widely in response to changes in many factors. The Company does not and will not have control over the factors aecting international prices for crude oil and rened products. These factors include: global and regional economic and political developments in crude oil producing regions, particularly in the Middle East; the ability of the Organisation of Petroleum Exporting Countries and other crude oil producing nations to set and maintain crude oil production levels and prices; other actions taken by major crude oil producing or consuming countries; global and regional supply and demand for crude oil and rened products; competition from other energy sources; domestic and foreign government regulations; weather conditions; and global economic conditions. A substantial decline in international crude oil prices occurred in late 1997 and continued in 1998. The average prices of dated Brent, an international benchmark oil, for the years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999, were approximately US$20.82, US$19.31, US$13.11 and US$16.17 per barrel, respectively. In December 1998, dated Brent prices fell to a 12-year low of US$9.55 per barrel. This has also aected the prices for rened products. Lower crude oil prices in 1998 and early 1999 have had various adverse eects on the Company, including reducing the Company's revenues, prot and cash ows. Although international crude oil prices have risen signicantly since March 1999, the Company expects continued volatility and uncertainty in international prices for crude oil and rened products. Declines in crude oil prices may adversely aect the Company's business, results of operations and nancial condition and the value of the Company's proved reserves. For further details regarding the eect of lower crude oil prices on the Company's nancial results, see the section headed ""Financial Information Results of Operations''. 30

RISK FACTORS
The crude oil and natural gas reserve data in this prospectus are only estimates and the actual production, revenues and expenditures with respect to the Company's reserves may dier materially from these estimates The reliability of reserve estimates depends on: the quality and quantity of the Company's technical and economic data; the prevailing oil and gas prices applicable to production; the production performance of the Company's reservoirs; extensive engineering judgments; and consistency in the PRC Government's policies regarding taxes and fees. Many of the factors, assumptions and variables involved in estimating reserves are beyond the Company's control and may prove to be incorrect over time. Results of drilling, testing and production after the date of the estimates may require substantial upward or downward revisions in the Company's reserve data. For more information on the Company's crude oil and natural gas reserve data, see the section headed ""Business Exploration and Production Reserves''. Entry by China into the WTO may increase competition in the Company's businesses within China China recently concluded agreements with a number of countries, including the United States, on issues relating to China's entry into the WTO. These agreements established a framework and certain conditions related to access to China's domestic market in the event of China's entry into the WTO. The Directors believe that the agreements reached between China and these countries, which the Company expects to serve as a foundation for the changes required in the event of China's entry into the WTO, may result in certain changes to the competitive environment within China, including: opening over time the retail and wholesale markets in China for rened products and chemical products to foreign competition; reducing taris on rened products and chemical products; and eliminating over time quotas and other non-tari barriers for imports and exports of crude oil, rened products and chemical products. As a result of these changes, the Company may face intensied competition in the Company's rening and marketing and chemical businesses. The intensied competition could have an adverse eect on the Company's results of operations. In addition, the trade agreements under the WTO are periodically renegotiated, sometimes resulting in further reductions in taris, elimination of non-tari barriers such as import quotas and opening of markets to foreign competition. The Company will be controlled by CNPC, whose interests may dier from those of other shareholders Immediately following the Global Oering (assuming no exercise of the Over-allotment Options), CNPC will own a total of approximately 90.00 per cent. of the share capital of the Company. This ownership percentage will enable CNPC to elect the entire Board of Directors without the concurrence of any of the Company's other shareholders. Accordingly, CNPC will be in a position to: control the policies, management and aairs of the Company; subject to applicable PRC laws and regulations and provisions of the Articles of Association, determine the timing and amount of dividend payments; 31

RISK FACTORS
subject to applicable PRC laws and regulations and provisions of the Articles of Association, adopt amendments to certain of the provisions of the Articles of Association; and otherwise determine the outcome of most corporate actions (including, the enforcement of indemnities against CNPC) and, subject to the requirements of the Listing Rules, cause the Company to eect corporate transactions without the approval of minority shareholders. CNPC's interests may sometimes conict with those of some or all of the minority shareholders. The Company cannot give any assurance that CNPC, as controlling shareholder, will always vote its Shares in a way that benets minority shareholders of the Company. CNPC may seek to inuence the dividend policy of the Company because of its reliance on dividends received from the Company The Company anticipates that CNPC may incur future operating losses arising in part from its obligations to provide supplementary social services to the employees of the CNPC Group and a limited number of third parties. These services include education, hospitals, public transportation services, property management and security services. Dividends received from the Company are likely to be one of CNPC's principal means of funding these losses. The Directors believe that subsidies which the Ministry of Finance has committed to provide will enable CNPC to fund substantially all of any future operating shortfalls arising out of CNPC's obligations to provide social services. The Directors believe that these subsidies will substantially reduce CNPC's reliance on dividends from the Company. These subsidies are to be provided until the social services currently provided by CNPC have been fully assumed by the PRC Government. Nevertheless, subject to the relevant provisions of the Company Law and the Articles of Association as described in the sections headed ""Financial Information Prot Estimate and Dividend Policy Dividend Policy'' and ""Appendix IX Summary of Principal Legal and Regulatory Provisions and Articles of Association'', CNPC may seek to inuence the Company's determination of dividends with a view to satisfying CNPC's cash ow requirements. Any resulting increase in the dividend payout of the Company would reduce funds available for reinvestment in its business. Business of the Company is substantially dependent on the provision by CNPC and CNPC's aliates of services and products for which the Company currently has limited alternative sources of supply In addition to its relationship with the Company as the Company's controlling shareholder, CNPC by itself or through its aliates also provides the Company with services and products necessary for the Company's business activities, including: construction and technical services; production services; supply of material services; social services; ancillary services; and nancial services. The interests of CNPC and its aliates as provider of these services and products to the Company may conict with the interests of the Company. The Company currently has limited alternative sources of supply at reasonable cost and quality for a number of these services and products. Therefore, the Company has limited leverage in negotiating with CNPC and its aliates over the terms of the 32

RISK FACTORS
agreements for the provision of these services and products. Please see the section headed ""Business Relationship with the CNPC Group Connected Transactions Comprehensive Products and Services Agreement'' for a detailed description of the services and products to be provided to the Group by the CNPC Group. The Company's ability to achieve a number of planned cost reductions may be limited by local governments in China The Company is currently planning a number of initiatives focused on improving operating performance and reducing costs, including closing inecient rening and chemical production facilities. Implementation of certain of these cost-cutting measures may require the approval or acquiescence of provincial or municipal governments in China. Although the PRC Government encourages and supports these initiatives, provincial or municipal governments may have conicting economic considerations based on their regional needs. As a result, some of the planned cost-cutting measures of the Company may be delayed or fail to achieve the contemplated reduction in costs. In the event the Company implements these initiatives, it may also be required to assist workers displaced by these measures in securing new jobs or to provide displaced workers with more substantial nancial assistance than is required by the relevant labour contracts or under PRC law. CNPC's resources may not be adequate to allow the Company to collect all recoverable losses In connection with the Restructuring, CNPC has agreed to indemnify the Company for any claims incurred in connection with or arising from, among other things: (a) assets transferred to the Company in the Restructuring and arising before 5 November 1999 except for those claims specically assumed by the Company as part of the Restructuring;

(b) negligence of the CNPC Group acting for and on behalf of the Company in carrying out any contract that was not transferred to the Company pending third party consents on or after 5 November 1999; (c) the failure of the CNPC Group to transfer assets to the Company in accordance with the Restructuring Agreement;

(d) assets, rights and debts retained by the CNPC Group in the Restructuring; and (e) taxes and fees associated with the Restructuring that are not payable by the Company.

The Company cannot provide any assurance that CNPC will have adequate resources to cover all liabilities arising from matters within the scope of CNPC's indemnication obligations. Expansion of sales of the Company's rened products and chemical products substantially depends on its ability to compete in the eastern and southern regions of China The eastern and southern regions of China have a higher demand for rened products and chemical products than the western and northern regions. Most of the Company's reneries and chemical plants are located in the western and northern regions of China. In order to increase the Company's sales of rened products and chemical products, it needs to expand the sales of these products in the eastern and southern regions of China. However, the Company faces strong competition from Sinopec, one of the Company's main competitors, because most of the reneries, chemical plants and distribution networks of Sinopec are located in these regions. In addition, the Company incurs relatively higher transportation costs for delivery of its rened products and chemical products to certain areas in these regions from its 33

RISK FACTORS
reneries and chemical plants in western and northern China. As a result, the Company expects that it will continue to encounter diculty in increasing its sales in these regions. The Company can give no assurance that it will be able to maintain or expand its presence in the markets in the eastern and southern regions. Any increase in domestic competition from Sinopec or any other competitor, or failure by the Company to maintain and expand its presence in these markets, may adversely impact its rening, marketing and chemicals operations. Expansion of sales of natural gas and rened products of the Company will require signicant capital expenditures for which the Company may be unable to provide sucient nancing The Company's ability to expand the production and sales of its natural gas and rened products from certain of its natural gas elds and reneries is currently constrained by the capacity limits of existing transportation and storage facilities. The Company will need to make signicant capital investments to increase the capacity of these facilities. It is currently constructing and renovating several natural gas and rened product pipelines and storage facilities and plans to construct and renovate other natural gas and rened product pipelines and storage facilities. The purpose of these construction and renovation projects is to link natural gas elds in the western regions of China to the eastern regions of China and to reduce rened product transportation costs. The Company plans to invest approximately RMB15,800 million and RMB2,800 million prior to the end of 2004 for the construction and renovation of natural gas pipelines and rened product pipelines, respectively. The Company also plans to invest approximately RMB400 million and RMB3,900 million over the same period to acquire and construct storage facilities for natural gas and rened products, respectively. However, the Directors cannot give any assurance that the cash generated by the Company's operations will be sucient to fund these development plans or that the actual future capital expenditures and investments will not signicantly exceed the current planned amounts. If either of these conditions arises, the Company may have to seek external nancing to satisfy its capital needs. The Company's ability to obtain external nancing in the future is subject to a variety of uncertainties, including: future nancial condition, results of operations and cash ows of the Company; the amount of capital that other PRC entities and foreign oil and gas companies may seek to raise in international capital markets; economic, political and other conditions in the PRC; the PRC Government's policies relating to foreign currency borrowings; and the liquidity of the PRC, Hong Kong and international capital markets. The Company's inability to obtain sucient funding for its development plans could adversely aect its business, nancial condition and results of operations. For additional information on the Company's capital expenditure plans and nancing requirements, see the section headed ""Financial Information Indebtedness and Capitalisation''. Operations of the Company may be aected by signicant operating hazards and natural disasters and resulting losses for which the Company has limited insurance Exploring for, producing and transporting crude oil and natural gas and producing and transporting rened products and chemical products involve many hazards. These hazards may result in: res; explosions; 34

RISK FACTORS
spills; blow-outs; and other unexpected or dangerous conditions causing personal injuries or death, property damage, environmental damage and interruption of operations. As with many other companies around the world that conduct similar businesses, the Company has experienced accidents that have caused property damage and personal injuries. Some of the oil elds of the Company are located in areas where natural disasters, such as earthquakes, oods and sandstorms, tend to occur more frequently than in other areas. Signicant operating hazards and natural disasters may cause partial interruptions to the Company's operations and property and environmental damage that could have an adverse impact on the nancial condition of the Company. Except limited insurance coverage for vehicles and certain assets that the Company considers to be subject to signicant operating risks, the Company does not carry any other insurance for its property, facilities or equipment in respect of its business operations. The Company does not currently carry any third party liability insurance against claims relating to personal injury, property or environmental damage arising from accidents on its property or relating to its operations. The Company does not currently carry any business interruption insurance. The limited insurance coverage of its assets exposes the Company to substantial risks and will not cover most losses. The Company's limited operating history as a separate entity could reduce its operating eciency In 1988, the PRC Government formed CNPC, the parent of the Company, to conduct onshore oil and gas exploration and production and, to a lesser extent, rening and chemical production. In June 1998, CNPC began to operate large-scale rening, marketing and chemical businesses when Sinopec and local governments transferred 15 reneries and petrochemical plants and certain other assets to CNPC. As part of the Restructuring, CNPC transferred to the Company its domestic assets and businesses relating to crude oil and natural gas exploration and production, rening and marketing, chemicals and natural gas. The Company was created in its present form on 5 November 1999 as a result of the Restructuring. Therefore, the Company has a limited operating history as a separate entity. Achieving the integration of various business segments as a large-scale oil and gas company will present challenges to management with respect to the assimilation of operations and personnel and the implementation of an eective management information system. The Company may also experience diculties in implementing new internal reporting systems and coordinating the procurement from CNPC and its aliates of services and products that were previously sourced internally. The Company's rights as land use rights holder and as lessee of land and its ownership interests in the buildings and structures on the land may be adversely aected if formal land use right certicates are not obtained within certain time limits The Company owns or leases from CNPC many parcels of land and buildings throughout China. For 49 parcels of land with an aggregate area of approximately 2.4 square km that were transferred to the Company by CNPC, and for 28,600 parcels of land with an aggregate area of approximately 933.4 square km that were leased from CNPC, CNPC holds only entitlement certicates, which are substitute title documents issued by competent PRC Governmental authorities. Application must be made to the Ministry of Land and Resources for formal land use rights certicates to be issued to the Company, in respect of the land transferred to the Company, and to CNPC, in respect of the land leased to the 35

RISK FACTORS
Company, within one year after issuance of the entitlement certicates in August, September and October 1999. Those parcels of land account for more than 80 per cent. of all the land occupied by the Company on which it conducts its principal business activities. It is uncertain whether and how the Company's rights as land use rights holder and as lessee of the land, and its ownership interests in the buildings and structures on the land, would be adversely aected if the formal certicates are not obtained within the stipulated time limits. RISKS RELATING TO CHINA'S OIL AND GAS INDUSTRY PRC Government regulations may limit the Company's activities and adversely aect its business operations The operations of the Company, like those of other PRC oil and gas companies, are subject to extensive regulation by the PRC Government. Central governmental authorities, such as the State Development Planning Commission, the SETC, the Ministry of Finance, the Ministry of Land and Resources, the MOFTEC and the State Bureau of Taxation and the local price bureaus, exercise extensive control over various aspects of China's oil and gas industry. These controls aect the following material aspects of the operations of the Company: exploration and production licensing; pricing mechanisms for the Company's main products; industry-specic taxes and fees; capital investments; import and export quotas and procedures; environmental and safety standards; and technology development. As a result, the Company may face signicant constraints on its ability to implement its business strategies, to develop or expand its business operations or to maximise its protability. Its business may also be adversely aected by future changes in certain policies of the PRC Government in respect of the oil and gas industry. A number of the Company's signicant projects are currently subject to PRC Government approval Currently, the PRC Government must approve the construction and major renovation of signicant rening and petrochemical facilities as well as the construction of signicant natural gas and rened product pipelines and storage facilities. The Company currently has several signicant projects pending approval from relevant government authorities, including: the Zhong County, Sichuan to Wuhan section of the West to East natural gas pipeline project; and the ethylene production facility technological upgrade projects at several of the Company's chemical plants. 36

RISK FACTORS
In addition, the Company will need approvals from relevant government authorities in connection with several other signicant projects, including: other sections of the West to East natural gas pipeline project; and signicant technological upgrade projects at some reneries and chemical plants of the Company. Although these projects are in compliance with the PRC Government's industrial policies and the Company has obtained approvals in principle for some of the projects, the Company does not have control over the timing and outcome of the nal project approvals. As a result, the Company cannot give any assurance that any of these projects will be approved on a timely basis or at all. Because the viability of the future development plans for the Company's rening, chemical and natural gas operations depends largely on these projects, the Company's future protability and nancial condition could be adversely aected if any of these projects is not approved, or is not approved on a timely basis. Business operations of the Company may be adversely aected by present or future environmental regulations As a producer of crude oil, natural gas, rened products and chemical products, the Company is subject to signicant and extensive environmental protection laws and regulations in China. These laws and regulations: impose fees for the discharge of waste substances; require the payment of nes for serious environmental oences; and allow the PRC Government, at its discretion, to close any facility which fails to comply with orders requiring it to correct or stop operations causing environmental damage. The Company's production operations produce signicant amounts of wastewater, gas and solid waste materials. The Company has established a system to treat waste materials in order to prevent or reduce pollution and the Directors believe that most of the Company's operations substantially comply with all applicable laws and regulations relating to environmental protection as they have been previously interpreted and enforced. However, the PRC Government is moving toward a more rigorous enforcement of applicable laws and regulations, and toward the adoption and enforcement of more stringent environmental standards. The Company intends to meet these standards through capital expenditures of approximately RMB 5,500 million over the next ve years for environmental compliance. However, eorts and plans to comply with current or future environmental laws and regulations may not be successful. The budgeted amounts may also not be sucient to carry out these plans. If the Company fails to comply with current or future environmental laws and regulations, it may need to incur new expenditures or pay penalties or close certain operations. This may have a material adverse eect on its business operations and protability. RISKS RELATING TO CHINA IN GENERAL Currently, all of the assets of the Company are located in China and all of its revenue is primarily derived from its operations in China. Accordingly, the nancial condition and results of operations of the Company are, to a signicant degree, subject to economic, political and legal developments in China. 37

RISK FACTORS
Political and economic policies of the PRC Government could aect the Company's business The economy of China diers from the economies of most countries belonging to the Organisation for Economic Co-operation and Development in a number of respects, including: structure; level of government involvement; level of development; level of capital reinvestment; control of foreign exchange; and allocation of resources. Before its adoption of reform and open-door policies beginning in 1978, China was primarily a planned economy. Since that time, the PRC Government has been reforming the PRC economic system, and has also begun reforming the government structure in recent years. These reforms have resulted in signicant economic growth and social progress. Although the PRC Government still owns a signicant portion of the productive assets in China, economic reform policies since the late 1970s have emphasised autonomous enterprises and the utilisation of market mechanisms. The Directors currently expect that the PRC Government will continue these reforms, further reduce governmental intervention with enterprises and rely more heavily on market mechanisms to allocate resources. Although the Directors believe these reforms will have a positive eect on the Company's overall and long-term development, the Directors cannot predict whether certain changes to China's political, economic and social conditions, laws, regulations and policies will have any adverse eect on the Company's current or future business or results of operations. Certain changes in foreign exchange regulations may adversely aect the Company's nancial condition The Renminbi currently is not a freely convertible currency. The Company receives most of its revenues in Renminbi. A portion of its Renminbi revenues must be converted into other currencies to meet foreign currency obligations of the Company. The Company has substantial requirements for foreign currency, including: debt service on foreign currency-denominated debt; purchases of imported equipment and materials; and payment of any dividends declared in respect of the H Shares. Under the existing foreign exchange regulations in China, following the completion of the Global Oering, the Company may undertake current account foreign exchange transactions, including the payment of dividends, without prior approval from the SAFE by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The PRC Government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, uncertainty exists as to whether the PRC Government may restrict access to foreign currency for current account transactions if foreign currency becomes scarce in the PRC. Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to limitations and require the prior approval of the SAFE. These limitations could aect the Company's ability to obtain foreign exchange through debt nancing, or to obtain foreign exchange for capital expenditures. 38

RISK FACTORS
Fluctuation of the Renminbi could materially aect the Company's nancial condition and results of operations The value of the Renminbi is subject to changes in the PRC Government's policies and depends to a large extent on China's domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the ocial exchange rate for the conversion of Renminbi to US dollars has generally been stable, and the Renminbi has appreciated slightly against the US dollar. However, given the economic instability and currency uctuations in Asia in recent years, the Directors cannot give any assurance that the value of the Renminbi will continue to remain stable against the US dollar or any other foreign currency. Because prices for the Company's crude oil and rened products are set generally with reference to US dollar-denominated international prices, a devaluation of the Renminbi may not have a negative impact on the Company's overall operations. However, any devaluation of the Renminbi may adversely aect the value of, and dividends payable on, the H shares in foreign currency terms since the Company will receive its revenues and express its prots in Renminbi. Results of operations and the nancial condition of the Company may also be aected by changes in the value of certain currencies other than the Renminbi in which the Company's earnings and obligations are denominated. In particular, a devaluation of the Renminbi is likely to increase the portion of the Company's cash ow required to satisfy its foreign currency-denominated obligations. On the other hand, an appreciation of the Renminbi against the US dollar may decrease the Company's revenues without a corresponding decrease in the Company's operating expenses. The PRC legal system is not fully developed There are uncertainties regarding interpretation and enforcement of PRC laws and regulations The PRC legal system is based on statutory law. Under this system, prior court decisions may be cited as persuasive authority but do not have binding precedential eect. Since 1979, the PRC Government has been developing a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organisation and governance, foreign investment, commerce, taxation and trade. Because these laws, regulations and legal requirements, including the newly adopted amendment to the Highway Law of the PRC that imposes a fuel tax, are relatively new and because of the limited volume of published case law and judicial interpretations and the non-binding nature of prior court decisions, the interpretation and enforcement of these laws, regulations and legal requirements involve some uncertainty. Shareholders of the Company may not enjoy protections that they may be entitled to in other jurisdictions As substantially all of the Company's business is conducted in the PRC, the Company's operations are governed principally by the laws of the PRC. As a PRC company oering and listing its shares outside the PRC, the Company is subject to the Special Regulations and to the Mandatory Provisions. The Mandatory Provisions contain certain provisions that are required to be included in the articles of association of PRC companies to be listed abroad and are intended to regulate the internal aairs of those companies. The Company Law and the Special Regulations, in general, and provisions for the protection of shareholders' rights and access to information, in particular, are less developed than those applicable to companies incorporated in Hong Kong, the United Kingdom, the United States and other developed countries or regions. The Company Law is dierent in certain important aspects from company laws in Hong Kong, the United States and other common law countries or regions, particularly with regard to investor protection, including in such areas as derivative actions by minority shareholders and other minority protections, 39

RISK FACTORS
restrictions on directors, nancial disclosure, variations of class rights, procedures at general meetings and payments of dividends. The limited nature of investor protection under the Company Law is compensated for, to a certain extent, by the introduction of the Mandatory Provisions and certain additional requirements that are imposed by the Listing Rules with a view to reducing the scope of dierences between Hong Kong company law and the Company Law. The Mandatory Provisions and those additional requirements must be included in the articles of association of all PRC companies applying to be listed in Hong Kong. The Articles of Association incorporate the provisions required by the Mandatory Provisions and the Listing Rules. Despite the incorporation of those provisions, there can be no assurance that shareholders of the Company will enjoy protections that they may be entitled to in other jurisdictions. Securities laws and regulations are still at an early stage of development At present, the regulatory framework for the securities industry in China is at an early stage of development. The CSRC is responsible for administering and regulating the national securities markets and drafting relevant regulations for the regulation of the national securities markets. Regulations of the State Council and the relevant implementing measures of the CSRC, such as provisions dealing with acquisitions of listed PRC companies and disclosure of information, apply to listed companies in general without being conned to companies listed on any particular stock exchange. Hence it is possible that those provisions may be applicable to a joint stock company with limited liability with shares listed on a stock exchange outside the PRC, such as the Company. On 1 July 1999, the PRC Securities Law became eective. The PRC Securities Law is the fundamental law comprehensively regulating the securities markets in the PRC and applies to the issuance and trading in the PRC of shares, company bonds and other securities designated by the State Council according to law. The Company Law, the rules and regulations recently promulgated thereunder and laws relating to PRC companies whose shares are oered overseas provide, to a certain extent, a legal framework governing the corporate behavior of companies, such as the Company, and their directors and shareholders. The exemption from withholding tax on dividends and capital gains tax currently available to shareholders may not continue in the future Under current PRC tax laws, regulations and rulings, dividends paid by the Company to holders of H Shares who are foreign individuals not resident in the PRC or which are foreign enterprises with no permanent establishment in the PRC are not currently subject to PRC withholding tax. In addition, gains realised by individuals or enterprises upon the sale or other disposition of H Shares are not currently subject to PRC capital gains tax. There can be no assurance, however, that withholding or capital gains taxes will not become applicable to those dividends or gains in the future. In this event, holders of H Shares could become subject to a withholding tax on dividends, which is currently imposed at the rate of 20 per cent. or to a capital gains tax, which may currently be imposed at the rate of 20 per cent., unless reduced or eliminated by an applicable taxation treaty between China and the country in which such foreign individual or enterprise resides. The Articles of Association require shareholders to submit their dispute with the Company and certain other persons to arbitration The Articles of Association require a holder of H Shares having a claim against or a dispute with the Company, a director, a supervisor or an ocer or a holder of the Company's Domestic Shares relating to any rights or obligations conferred or imposed by the Articles of Association, the Company Law or any other PRC laws or administrative regulations and relating to the aairs of the Company, to submit the 40

RISK FACTORS
dispute or claim to the China International Economic and Trade Arbitration Commission or to the Hong Kong International Arbitration Centre for arbitration. The Articles of Association further provide that the arbitrator's award shall be nal and binding on all parties. The PRC is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ""New York Convention'') which has historically permitted reciprocal enforcement in the PRC of awards of arbitral bodies located in other New York Convention signatory countries. Following the resumption of sovereignty over Hong Kong by the PRC on 1 July 1997, the New York Convention no longer applies to the enforcement of Hong Kong arbitration awards in other parts of the PRC. On 21 June 1999, an arrangement was made between Hong Kong and the PRC for the mutual enforcement of arbitration awards. This new arrangement was approved by the Supreme Court of the PRC and the Hong Kong Legislative Council, and became eective on 1 February 2000. It may be dicult to eect service of process upon the Company or Directors or executive ocers of the Company who live inside the PRC or to enforce against them outside the PRC any judgments obtained from non-PRC courts The Company is a joint stock company incorporated in the PRC with limited liability. All of its Directors (other than Mr. Chee-Chen Tung, who resides in Hong Kong), Supervisors and executive ocers reside within the PRC, and all the assets of the Company and of those persons (other than Mr. Chee-Chen Tung) are located within the PRC. Therefore, it may not be possible for investors to eect service of process upon the Company or those persons outside the PRC or to enforce against them outside the PRC any judgments obtained from non-PRC courts. The PRC does not have treaties or arrangements providing for the recognition and enforcement of judgments of the courts of the United Kingdom, the United States or most other Western countries or Hong Kong, and therefore recognition and enforcement in the PRC of judgments obtained in those jurisdictions may be impossible. RISKS RELATING TO THE GLOBAL OFFERING There has been no prior public market for the H Shares or ADSs; the liquidity and market price of the H Shares and ADSs following the Global Oering may be volatile Before the Global Oering, there was no public market for the H Shares or ADSs. The initial oering price range to the public for the H Shares and ADSs was the result of negotiations between the Company, CNPC, and the Global Coordinators on behalf of the Underwriters and the Oer Price may dier signicantly from the market price for the H Shares or ADSs following the Global Oering. The Company has applied to list and deal in the H Shares on the Stock Exchange and to list ADSs on the NYSE. However, being listed on the Stock Exchange and the NYSE does not guarantee that an active trading market for the H Shares or ADSs will develop following the Global Oering. The price and trading volume for the H Shares and ADSs may be highly volatile. Factors such as variations in the Company's revenue, earnings and cash ow and announcements of new investments, discovery of new reserves, strategic alliances and/or acquisitions, or uctuations in market prices for its products could cause the market price for the H Shares and ADSs to change substantially. As a result of unpredictable international economic and political developments, international crude oil prices have had a history of volatility. Any such developments may result in large and sudden changes in the volume and price at which the H Shares and ADSs will trade. The Company can give no assurance that these developments will not occur in the future.

41

RISK FACTORS
The Company's future nancial performance may vary materially from the estimated nancial information provided in this prospectus The estimated nancial information included in this prospectus reects management's current judgment of expected conditions and its expected course of action. The audited results may vary from these estimates and these variations could be material. Prospective investors in the H Shares and ADSs are cautioned not to place undue reliance on these estimates. The Company does not intend to update or otherwise revise these estimates prior to the announcement of the results of operation for the year. The Company has prepared the estimates in accordance with customary practices in securities oerings in Hong Kong. Further details are set out in ""Appendix IV Prot Estimate''. Because the Oer Price may be substantially higher than the net tangible book value per Share, purchasers of H Shares or ADSs will incur immediate and substantial dilution The Oer Price of the H Shares and consequently of the ADSs may be substantially higher than the net tangible book value per Share of the outstanding Shares issued to CNPC. Therefore, purchasers of the H Shares or ADSs in the Global Oering will experience an immediate and substantial dilution in pro forma combined net tangible book value of HK$0.24 per H Share or US$3.06 per ADS and the existing shareholder will receive a material increase in the net tangible book value per Share of its Shares. Unauthorized e-mails (similar to that set forth below) were sent out to 83 institutions; no investor should rely on any such e-mails, or the statements made in the e-mails, including in the e-mail set forth below, when making an investment decision Prior to the eectiveness of the registration statement covering the H Shares and ADSs being sold in the Global Oering, four salespersons at Goldman, Sachs & Co., an aliate of Goldman Sachs which is a Joint Global Coordinator and Joint Bookrunner of the Global Oering, composed and sent e-mails to 83 of Goldman, Sachs & Co.'s institutional and hedge fund clients (including 80 located in the United States) in connection with a pre-marketing program designed to obtain the views of those clients in connection with establishing the estimated price range and appropriate size of the Global Oering. Neither the Company, CNPC nor PricewaterhouseCoopers were involved in any way in the preparation or sending of these e-mails and neither the Company, CNPC nor PricewaterhouseCoopers has any responsibility for the content or the sending of the e-mails. The e-mails, which were substantially similar in content, contained various types of information about the Company and the Global Oering, and may have constituted a prospectus that did not meet the requirements of the US Securities Act. Realizing this, Goldman, Sachs & Co. immediately attempted to re-call the e-mails and also notied those clients that received them that the e-mails had been sent in error and should be disregarded and deleted from their systems. No person who received the e-mails should rely upon them in any manner in making a decision whether to purchase H Shares or ADSs in the Global Oering. All potential purchasers of the H Shares and ADSs should only rely on the information set forth in other places in this prospectus and should only make an investment decision after carefully reviewing and evaluating all of the information in other places in this prospectus including the risks described in this section and throughout this prospectus. The form of one of the e-mails is set forth below. Goldman Sachs has modied the e-mail from its original form only to footnote certain incorrect information in order to indicate the correct information or where the correct information can be found in this prospectus. Neither the Company, CNPC nor PricewaterhouseCoopers authorized or participated in the preparation of the e-mail and each of them disclaims all responsibility for its contents. In particular, neither the Company, CNPC nor 42

RISK FACTORS
PricewaterhouseCoopers have reviewed or commented on the projections, market share, valuation and other forward looking statements included in the e-mail. None of them participated in the preparation of any of the forward looking information or any of the nancial models or the assumptions underlying the forward looking information included in the e-mail. Neither the Company, CNPC nor PricewaterhouseCoopers make any representation as to whether any of the forward looking statements or underlying assumptions will be achieved. The Company strongly cautions investors not to place any reliance on any of the information set forth in the e-mail, including the projections, market share, valuation and other forward looking information contained in the e-mail. The Company does not make, and in the future does not intend to make, public nancial projections (except as may be required by applicable law or stock exchange requirements) and does not intend to comment on or revise existing projections of others. Form of Email

Subject: PetroChina IPO: China's Restructuring Giant Hi. We launched Petrochina in the US yesterday. Pre-marketing begins in New York tomorrow, and pricing will be the end of March. This is China's most ambitious attempt to restructure its system of SOE's yet: Management (top 300) will have up to 75% of their compensation linked to equity/options.(1) Headcount reduced from 1.5mil to 480,000(2) They plan on cutting over US$1bn from their cost structure in 2 years.(3) This company with grow earnings at 15%, even assuming a $16. price of Oil. If assume $18.50, company CAGR would be 26% New growth areas: Natural Gas (2% of China's consumption vs 26% in US) and Retail (70,000(4) service stations in waiting). Valuation (2000): 5x P/GCF, 4.6x Ev/EBITDA, 9x P/E, 4.9% div yield, 1.45x P/B(5) Comparable: Petrobras, ENI, Repsol. Please advise on interest in pre-marking and mgmt visit. Best regards, PETROCHINA COMPANY LIMITED IPO of ""H'' shares & ADRs HKSE & NYSE oering Goldman Sachs: Joint Global Coordinator, Joint Lead Manager, Joint Bookrunner with CICC
Size: Filing Range: Primary/secondary: Selling Shareholder: Ticker Symbols: Expected Dividend: HK Retail Oering: Clawback Provisions: Pre-Marketing: Mgmt Roadshow: Expected Pricing Date: Expected Listing Date: Use of Proceeds(10): 160 Bn ""H'' Shares / ADR ratio 200:1(6) To be announced on Monday 3/13/100 (looking to raise over US$4 Bn(7)) 60% / 40%(8) CNPC China National Petroleum Corp (Parent) 857.HK (HKSE) / PTR (NYSE) 3.9% 6.2%(9) Mon. 3/27/00 (5% of Global oering), subscription price to be announced on Sun 3/26/00 (max. price to be oered in global oering). 7.5% 20% if between 3x 16x HK oversubscription Wed. 3/1/00 to Thursday 3/9/00 USA: Wed. 3/22/00 to Wed. 3/29/00 Thursday 3/30/00 Thursday 4/6/00 on NYSE / Friday 4/7/00 on HKSE Primary proceeds: PetroChina will apply 70% to debt reduction, 30% to capex & general corporate purposes. Secondary Proceeds: CNPC will use it to pay down debt & to fund employee retraining & severance plans.

43

RISK FACTORS
HUGE SCALE & IMPACT (indices & benchmarks): 1. PetroChina is the largest producer of crude oil & natural gas.(11) It has 10.8 Bn BOE in proved reserves & 24.3 Trillon of of natural gas.(12) 2. It is one of the largest companies in China by revenues. 3. By market cap, assuming it comes to the market between US$35 45 Bn, it will be the largest ""H'' share company, top 5 in HK, #8 in Asia ex-Japan & #8 in Global Energy sector. 4. It will be the World's 4th largest listed oil company in terms of proved reserves & production. WHY FOCUS ON PETROCHINA? A Restructuring Story: 1) spin o from CNPC, keeping productive assets and less than 1/3 of its employees. 2) closing inecient sites. 3) plan to turnaround the Chemical segment. 4) implementing a return-based capital mgmt system. 5) reducing levarge. 6) implementing a performance based mgmt incentive system. A cost cutting story: to bring cost level comparable to int'l peers. Aiming to reduce pre-tax operating cost by RMB 9 Bn (US$1.1 bn) by 2002. A growth story: 1. One of the fastest growing economies in the world: GDP growth of 7 7.5%, with energy (13) use growing between 8% 14%. Our 3 yr EPS ("99-'02) CAGR: 15%. 2. Gov't to increase natural gas usage from 2% to 8% in 10 yrs via lower taxes (13% vs. 17%). 3. To increase mkt share(14) in the fragmented retail business (service stations), from 13% to 46% in '02. Petrochina controls virtually all major oil elds & most large reneries & chemical plants (entire value chain)(14). A Defensive/Value play: time to diversify from your tech / telecom skewered portfolio. Valuation is at the bottom of Global Energy comparison range. Relative to H shares, it will be at a 25%(15) discount to '00 P/E, or 16%(15)disct on '00 EV/EBITDA. Assuming US$35-45 Bn fully distributed, post-money equity value:(16) 1. '00 P/E: 8x-10.3x vs key comps (ENI, Repsol YPF & Petrobras) of 12x, a 23% discount at midpoint. 2. '01 P/E: 10-12.8x vs. 13.5x, a 15% discount. 3. '00 EV/EBITDA(17): 4.5x-5.6x vs. 6.4x, 12.5%-30% discount. 4. '01 EV/EBITDA(17): 4.8x-5.9x vs. 6.8x, 13%-29% discount. COMPANY: PetroChina was est. on 11/5/99 as part of restructuring of CNPC, its parent company, to be an integrated oil company conforming to int'l standards similar to Exxon Mobil & Royal Dutch /Shell. It's dominance is in upstream nationwide and downstream in the Northern & eastern part of China. It holds all core oil & gas related domestic onshore assets. CNPC is to keep all ""non-core assets, such as drilling services & social services. It is engaged in 4 business segments: 1. Exploration & Production (upstream) of oil & natural gas 43%(18) of revenue: It accounts for over 70% of China's proved reserves / 2/3 of its '98 production. 2. Rening & Marketing (downstream) of crude oil & petroleum products 45%(18) of revenue: duopoly with Sinopec. Owns 39% of primary distillation capacity & has a 45% domestic share in wholesaling of rened products. 3. Chemicals 9.5%(18) of revenue: production & sale. 4. Natural gas; transmission, marketing & sale 2.4% of revenue: owns 84%(19) of gas pipelines & accts for 64%(19) of sales volume. CHINA'S OIL & GAS INDUSTRY: China is the world's 4th largest oil country(20) by reserve, the 5th largest by production. China is the fastest growing country in the world in terms of energy consumption: 6%(21) for oil & up to 14% for gas ('98-'10). Industry participants: 3 others that matter. 1) Sinopec: focus on the Southern part of China, the only other integrated oil company, assets much more concentrated in less protable downstream and chemical segments. 2) CNOOC: 3rd largest company engaged exclusively in oshore E&P. 3) China Nat'l Star Petroleum: much smaller, both on and o shore. Petrochina's '98 production was 11.2x and its reserves 8.3x those of CNOOC. EARNINGS SENSITIVITY: We are using $18.5 & $16 as our oil forecast for '00 & thereafter (vs. currently US$30.00). Extremely conservative. If we use US$18.50 thru out the next 3 years, the 3 year EPS CAGR will be 26%. Vs. currently 15%. For every $1 /bbl change in oil assumption, this leads to a RMB 3.8 Bn(22) change in Net Income, or 11% of '00 & 12% of '02 net income. We are looking for Net Income; '99 '01 E (in RMB): $20.753 Bn / $36,286 / $29,075. (In US$): $2.606 Bn / $4.382 Bn / $3.511 Bn

44

RISK FACTORS
RISKS: Management track record, needs to be proven in a new entity. CNPC the controlling shareholder, is in a position to inuence Petrochina's policies, mgmt & aairs. WTO entry may increase competition. Regulatory risks.

(1)

(2)

(3) (4) (5)

(6)

(7) (8)

(9)

(10)

(11) (12) (13) (14) (15) (16) (17) (18)

(19)

(20) (21) (22)

Please see the section headed ""Directors, Supervisors, Management and Employees Senior Management Compensation System'' for the correct information. Please see the section headed ""Financial Information Selected Reserve and Operation Data'' and ""Directors, Supervisors, Management and Employees Employees'' for the correct information. The Company's target is to reduce costs by RMB 9 billion from 1998 levels by 2002. Please see the section headed ""Industry Overview The PRC Oil and Gas Industry Service Stations'' for correct information. Please see the sections headed ""Underwriting'', ""Structure of the Global Oering'', ""Financial Information Prot Estimate and Dividend Policy Dividend Policy'' and the Company's nancial statements and nancial information set out in Appendices I and II for the relevant pricing, dividend and nancial information. Please see the section headed ""Structure of the Global Oering'' for the correct number of shares oered and the section headed ""Denitions ADS'' for the correct ratio of ADS to H Shares. Please see the section headed ""Structure of the Global Oering'' for the correct aggregate oering size. Please see the section headed ""Structure of the Global Oering'' for the correct proportion of the H shares being oered by the Company and CNPC, respectively. Please see the sections headed ""Underwriting'', ""Structure of the Global Oering'', ""Financial Information Prot Estimate and Dividend Policy Dividend Policy'' and the Company's nancial statements and nancial information set out in Appendices I and II for the relevant pricing, dividend and nancial information. Please see the section headed ""Future Plans and Use of Proceeds Use of Proceeds'' for the correct information on the use of proceeds. Within China. See the section headed ""Business Exploration and Production Reserves'' for the correct information. Should refer to natural gas consumption. Should refer to market share in the Northern region of China only. Assumes US$35-45 billion fully distributed value and comparables are as at 25 February 2000. As at 25 February 2000. Should be EBIDA. Please see the section headed ""Financial Information Results of Operations Review of Historical Performance and Results of Operations by Business Segment'' for correct information. Please see the section headed ""Industry Overview The PRC Oil and Gas Industry Crude Oil and Natural Gas Transportation Infrastructure'' for correct information. Outside of OPEC countries. Should be 4.4 per cent. Assumes product prices will change proportionately within 2 months after any change in crude oil prices.

The Company strongly cautions investors not to place any reliance on the contents of the e-mail. The contents of the e-mail should be totally disregarded when making any investment decision regarding the H shares or the ADSs. Please see the following risk factor for risks regarding the forward looking statements in the e-mails and the news reports discussed below. Investors should read the entire prospectus carefully and should not consider any particular statement in this prospectus or in published news reports or any published nancial projections without carefully considering the risks and other information contained in this prospectus. Information, including certain nancial projections, regarding the Group and the Global Oering has been published in various newspapers. Certain of this information has been derived from a Goldman Sachs research report that was distributed only outside the United States. The publication of this information was without the Company's consent or that of Goldman Sachs. In the research report, Goldman Sachs prepared certain nancial projections based upon a nancial model for the Group's net prot in 2000, 2001 and 2002 and its three year compound annual growth rate for net earnings for the years 1999 through 2002. These net prot projections and certain other information derived from these 45

RISK FACTORS
projections were also included in certain e-mails sent to institutional clients of Goldman Sachs & Co. as described in the preceding risk factor. The net prot projected was dependent upon a series of dierent assumptions, none of which may occur. For example, under one set of assumptions, Goldman Sachs projected the Group's net prot to be RMB 36,286 million in 2000, RMB 29,075 million in 2001 and RMB 31,829 million in 2002 and its three year compound annual growth rate in net prot from 1999 through 2002 to be 15 per cent. These projections were based upon a signicant number of inter-related estimates and assumptions and are inherently subject to signicant uncertainties and contingencies. Failure of any one assumption to prove to be correct is expected to result in one or more other assumptions being incorrect. The most important assumptions for these projections were: dated Brent will average US$18.50 per barrel in 2000 and US$16.00 per barrel in 2001 and beyond; the Group will be able to sell its crude oil at a price equal to dated Brent; repayment on 1 July 2000 of approximately RMB 53.3 billion of the Group's outstanding debt (out of the proceeds of the Global Oering and cash ow from operations); the Group will sell 807 million, 794 million and 808 million BOE of crude oil and natural gas in 2000, 2001 and 2002, respectively; the Group will have reduced its aggregate pre-tax costs across all segments from 1998 levels by RMB 3.8 billion, RMB 7.2 billion and RMB 9.0 billion on an annual basis by 2000, 2001 and 2002, respectively; the Group will have increased its market share of the retail market for rened products to 9 per cent., 14 per cent. and 19 per cent. by 2000, 2001 and 2002, respectively; the Group will have increased its sales volume of natural gas in its natural gas segment to 395 Bcf, 440 Bcf and 525 Bcf by 2000, 2001 and 2002, respectively; the Group will have decreased its total debt as a percentage of total debt plus owner's equity to 26 per cent., 24 per cent. and 19 per cent. by 2000, 2001 and 2002, respectively; the Group's net margins on its retail sales of rened products will average RMB 188, RMB 209 and RMB 237 per ton in 2000, 2001 and 2002, respectively; and a signicant improvement in the net margins received by chemical companies in the world due to an improvement in the petrochemical business cycle commencing in 2000. Goldman Sachs' models based upon other assumptions resulted in a wide range of projected compound annual growth rates in net prot, including one of 5 per cent. In addition, Goldman Sachs various projected compound annual growth rates in net prot from 1999 through 2002 were based upon a net prot for 1999 that assumes that certain changes, arrangements and transactions entered into in connection with the Restructuring and the incorporation of the Company were made as at 1 January 1999. Neither the Company, CNPC nor PricewaterhouseCoopers participated in the preparation of any of these projections or any of the nancial models or assumptions on which the projections were based. According to Rule 11.16 of the Listing Rules, a listing document must not contain reference (general or particular) to future prots or contain dividend forecasts based on an assumed future level of prots unless supported by a formal prot forecast. Rule 11.17 of the Listing Rules requires that where a prot forecast appears in the listing document, the principal assumptions, including commercial assumptions, upon which it is based, must be stated. The accounting policies and calculations for the forecast must be reviewed and reported on by the reporting accountants and their report must be set out. The prot projections contained in pages 42 to 47 of the prospectus have not been reviewed by the Company, CNPC or PricewaterhouseCoopers, and therefore are not in compliance with the Listing Rules. None of these projections was prepared with a view toward compliance with published guidelines of the 46

RISK FACTORS
Securities and Exchange Commission, the American Institute of Certied Public Accountants or generally accepted accounting principles. Accordingly, these projections do not include disclosures of all information required by AICPA guidelines. Neither PricewaterhouseCoopers nor any other independent accountants have expressed an opinion or any other form of assurance on these projections. Projections are forward-looking statements that are necessarily speculative in nature, and it is expected that one or more of the estimates and assumptions on which the projections were based will not materialize or will vary signicantly from actual results, and such variances will likely increase over time. In addition, these projections were prepared as at 10 February 2000 and have not been updated for any subsequently available information. Accordingly, actual results during the periods covered will vary from the nancial projections, which variations may be material and adverse. Investors should not regard the inclusion of these projections in this prospectus or any e-mails described above as a representation by the Company, Goldman Sachs or any other person that these projections or the assumptions underlying the projections will be achieved. The Company strongly cautions investors not to place any reliance on these projections. For these reasons, investors should only consider these projections after carefully evaluating all of the information in this prospectus including the risks described in this section and throughout this prospectus. Furthermore, the Company does not make, and in the future does not intend to make, public nancial projections or revisions to existing projections of others. The Company has received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by its ocers and employees. Neither the Company nor any of the Underwriters have conrmed, endorsed or adopted any statements that were not made by the Company for utilization by, or distribution to, prospective purchasers in the Global Oering. To the extent any such statements are inconsistent with, or conict with, the information contained in this prospectus, or relate to information not contained in this prospectus, they are disclaimed by the Company and the Underwriters. Accordingly, prospective investors should not rely on such statements.

47

INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING

DIRECTORS' RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS This prospectus contains particulars given in compliance with the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), the Securities (Stock Exchange Listing) Rules 1989 (as amended) and the Listing Rules for the purpose of giving information to the public with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this prospectus and conrm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement in this prospectus misleading. CONSENT OF THE CSRC The CSRC has given its consent to the Global Oering and the making of applications to list the H Shares on the Stock Exchange and the ADSs on the NYSE. In granting such consent, the CSRC accepts no responsibility for the nancial soundness of the Company nor the accuracy of any of the statements made or opinions expressed in this prospectus or in the application forms. UNDERWRITING This prospectus is published solely in connection with the Hong Kong Public Oering which forms part of the Global Oering. For applicants under the Hong Kong Public Oering, this prospectus and the application forms in relation thereto, set out the terms and conditions of the Global Oering. The Global Oering comprises (i) the Hong Kong Public Oering of 879,122,000 H Shares (initially representing approximately 5 per cent. of the total number of H Shares initially being oered under the Global Oering); (ii) the Asia Oering of 61,538,460 ADSs, representing 6,153,846,000 H Shares (initially representing approximately 35 per cent. of the total number of H Shares initially being oered under the Global Oering); (iii) the US Oering of 43,956,040 ADSs representing 4,395,604,000 H Shares (initially representing approximately 25 per cent. of the total number of H Shares initially being oered under the Global Oering) and (iv) the Europe Oering of 61,538,460 ADSs, representing 6,153,846,000 H Shares (initially representing approximately 35 per cent. of the total number of H Shares initially being oered under the Global Oering). The number of H Shares and/or (as the case may be) ADSs to be oered under the Hong Kong Public Oering, the Asia Oering, the US Oering and the Europe Oering respectively may be subject to reallocation as described under the section headed ""Structure of the Global Oering.'' The listing of the H Shares on the Stock Exchange is sponsored by the Sponsors. Pursuant to the Hong Kong Underwriting Agreement, the 879,122,000 H Shares initially comprised in the Hong Kong Public Oering will be oered through the Hong Kong Underwriters. The Global Oering is managed by the Global Coordinators. The Asia Underwriting Agreement relating to the Asia Oering, the US Underwriting Agreement relating to the US Oering and the Europe Underwriting Agreement relating to the Europe Oering are expected to be entered into on or about 30 March 2000, subject to agreement on the pricing of the H Shares and the ADSs between the Company, CNPC and the Global Coordinators (on behalf of the Underwriters). If, for any reason, the oer price of the ADSs and the Oer Price are not agreed between the Company, CNPC and the Global Coordinators, on behalf of the Underwriters, the Global Oering will not proceed. For full information about the Underwriters and the underwriting arrangements, see the section headed ""Underwriting''.

48

INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING

RESTRICTIONS ON SALE OF H SHARES No action has been taken to permit a public oering of the Hong Kong Public Oering Shares or the distribution of this prospectus in any jurisdiction other than Hong Kong. Accordingly, this prospectus may not be used for the purpose of, and does not constitute an oer or invitation in any jurisdiction or in any circumstances in which such an oer or invitation is not authorised or to any person to whom it is unlawful to make such an oer or invitation. This prospectus has not been registered under the US Securities Act, and, accordingly, may not be delivered within the United States or to, or for the benet of, nationals or residents thereof, or any corporation or other entity formed or organised therein (collectively, ""US persons''), and the H Shares may not be oered or sold, directly or indirectly, in the United States or to US persons except pursuant to an eective registration statement or pursuant to an exemption available under the US Securities Act. The H Shares may not be oered or sold, directly or indirectly, in Canada in contravention of the securities laws of Canada or any province or territory thereof. Any oer or sale of H Shares in Canada may be made only pursuant to an exemption from the requirement to le a prospectus in the province or territory of Canada in which such oer or sale is made. This prospectus has not been approved by an authorised person in the United Kingdom and has not been registered with the Registrar of Companies in the United Kingdom. The H Shares may not be oered or sold in the United Kingdom prior to the date six months from the date on which dealings in H Shares commence on the Stock Exchange except to persons whose ordinary activities involve acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their businesses, or otherwise in circumstances which have not resulted and will not result in an oer to the public in the United Kingdom for the purpose of the Financial Services Act 1986 as amended by the Public Oers of Securities Regulations 1995 and where applicable provisions of the Financial Services Act 1986 and the Public Oers of Securities Regulations 1995 have been complied with. In addition, no person may issue or pass on to any person in the United Kingdom any document received by it in connection with the Global Oering (including this prospectus) unless that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996, as amended or is a person to whom such document may otherwise lawfully be issued or passed on. This prospectus has not been and will not be registered as a prospectus with the Registrar of Companies and Businesses in Singapore. The H Shares are not being oered or sold and may not be oered or sold, nor may this prospectus or any document or other material in connection with the H Shares be issued, circulated or distributed, either directly or indirectly, to the public or any member of the public in Singapore other than pursuant to and in accordance with the conditions of an exemption invoked under Division 5A of Part IV of the Companies Act, Chapter 50 of Singapore (the ""Singapore Companies Act'') or otherwise pursuant to, and in accordance with the conditions of, any other provision of the Singapore Companies Act. An oering circular in respect of the Asia Oering will be lodged with the Registrar of Companies and Businesses in Singapore as an information memorandum for the purposes of Section 106D of the Singapore Companies Act. The Registrar of Companies and Businesses in Singapore takes no responsibility as to the contents of such oering circular. The H Shares have not been and will not be registered under the Securities and Exchange Law of Japan and are not being oered or sold and may not be oered or sold, directly or indirectly, in Japan or to or for the account of any resident of Japan, except (i) pursuant to an exemption from the registration and prospectus delivery requirements of the Securities and Exchange Law of Japan, and (ii) in compliance with any other applicable requirements of Japanese law. 49

INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING

This prospectus does not constitute a public oer of the H Shares, whether by way of sale or subscription, in the PRC. The H Shares are not being oered and may not be oered or sold directly or indirectly in the PRC to or for the benet of, legal or natural persons of the PRC. According to the laws and regulatory requirements of the PRC, the H Shares shall only be oered or sold to natural or legal persons in Taiwan, Hong Kong or Macau or any country other than the PRC by means of this prospectus or otherwise. Each person acquiring the H Shares under the Hong Kong Public Oering will be required to, or be deemed by his acquisition of H Shares to conrm that, he is aware of the restrictions on oers of the H Shares described in this prospectus. APPLICATION FOR LISTING ON THE STOCK EXCHANGE The Company has applied to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the H Shares to be issued and sold pursuant to the Global Oering (including the additional H Shares which may be issued and sold pursuant to the exercise of the Over-allotment Options). The ADSs have been approved for listing, subject to notice of issuance, on the NYSE under the symbol ""PTR''. Save as disclosed in this prospectus, no part of the share or loan capital of the Company is listed on or dealt in on any other stock exchange and no such listing or permission to list is being or proposed to be sought in the near future. HONG KONG BRANCH REGISTER AND STAMP DUTY All H Shares sold pursuant to applications made in the Hong Kong Public Oering will be registered on the Company's branch register of members to be maintained in Hong Kong. The Company's principal register of members will be maintained by the Company at its headquarters in the PRC. Dealings in H Shares registered in the Hong Kong branch register of the Company, which are the only H Shares in which dealings may be transacted on the Stock Exchange, will be subject to Hong Kong stamp duty. PROFESSIONAL TAX ADVICE RECOMMENDED Potential investors in the Global Oering are recommended to consult their professional advisers if they are in any doubt as to the taxation implications of subscribing for, purchasing, holding and dealing in the H Shares or ADSs. None of the Company, CNPC, the Underwriters, any of their respective directors or any other person or party involved in the Global Oering accepts responsibility for any tax eects on, or liabilities of, any person resulting from the subscription, purchase, holding or disposition of H Shares or ADSs. REGISTRATION OF SUBSCRIPTION, PURCHASE AND TRANSFER OF H SHARES The Company has instructed HKSCC Registrars Limited, its Hong Kong share registrar, and HKSCC Registrars Limited has agreed not to register the subscription, purchase or transfer of any H Shares in the name of any particular holder unless and until the holder delivers a signed form to the share registrar in respect of those H Shares bearing statements to the eect that the holder: (i) agrees with the Company and each shareholder of the Company, and the Company agrees with each shareholder, to observe and comply with the Company Law, the Special Regulations and the Articles of Association; 50

INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING

(ii) agrees with the Company, each shareholder, Director, Supervisor, manager and ocer of the Company, and the Company acting for itself and for each Director, Supervisor, manager and ocer of the Company agrees with each shareholder to refer all dierences and claims arising from the Articles of Association or any rights or obligations conferred or imposed by the Company Law or other relevant laws and administrative regulations concerning the aairs of the Company to arbitration in accordance with the Articles of Association, and any reference to arbitration shall be deemed to authorise the arbitration tribunal to conduct hearings in open session and to publish its award, which arbitration shall be nal and conclusive; (iii) agrees with the Company and each shareholder of the Company that H Shares in the Company are freely transferable by the holders thereof; and (iv) authorises the Company to enter into a contract on his behalf with each Director and ocer of the Company whereby such Directors and ocers undertake to observe and comply with their obligations to shareholders as stipulated in the Articles of Association. STABILISATION In connection with the Global Oering, the Global Coordinators, on behalf of the Underwriters, may over-allocate H Shares (all or a portion of which may be deliverable in the form of ADSs) and may cover such over-allocations by exercising the Over-allotment Options no later than 30 days after the Price Determination Date or making open market purchases in the secondary market. The number of H Shares over-allocated will not be greater than the number of H Shares which may be issued and sold upon exercise of the Over-allotment Options, being 2,637,362,000 H Shares, which is approximately 15 per cent. of the H Shares initially available under the Global Oering. The Global Coordinators may also, on behalf of the Underwriters, eect transactions which stabilise or maintain the market price of the H Shares or the ADSs. Such transactions may be eected in all jurisdictions where it is permissible to do so, in each case in compliance with all applicable laws and regulatory requirements. Such transactions, if commenced, may be discontinued at any time. Should stabilising transactions be eected in connection with the distribution of H Shares or the ADSs, they will be done at the absolute discretion of the Global Coordinators. Stabilisation is a practice used by underwriters in some markets to facilitate the distribution of securities. To stabilise, the underwriters may bid for, or purchase, the newly issued securities in the secondary market, during a specied period of time, to retard and, if possible, prevent a decline in the initial public oer prices of the securities. In Hong Kong, the stabilisation price will not exceed the initial public oer price. In other jurisdictions, the stabilisation price will not be higher than the initial public oer price. Stabilisation is not a practice commonly associated with the distribution of securities in Hong Kong. In Hong Kong, such stabilisation activities on the Stock Exchange are restricted to cases where underwriters genuinely purchase shares on the secondary market solely for the purpose of covering overallocations in an oering. The relevant provisions of the Securities Ordinance (Chapter 333 of the Laws of Hong Kong) prohibit market manipulation in the form of pegging or stabilising the price of securities in certain circumstances. PROCEDURE FOR APPLICATION FOR HONG KONG PUBLIC OFFERING SHARES The procedure for applying for Hong Kong Public Oering Shares is set out in the section headed ""How to Apply for Hong Kong Public Oering Shares'' and on the relevant application forms relating thereto. 51

INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING

STRUCTURE OF THE GLOBAL OFFERING Details of the structure of the Global Oering, including its conditions, are set out in the section headed ""Structure of the Global Oering''. EXCHANGE RATE CONVERSION Except as otherwise noted, this prospectus contains translations of Renminbi amounts into Hong Kong dollars at the rate of HK$1.00 RMB1.0635, the PBOC Rate prevailing on 10 March 2000, for reference only. No representation is made that the Renminbi or Hong Kong dollar amounts set out in this prospectus could have been or could be converted into Hong Kong dollars or Renminbi, as the case may be, at any particular rate on such date or any other date. Further information in respect of foreign exchange rates is set out in ""Appendix VIII Foreign Exchange''.

52

DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING

DIRECTORS
Name Address Nationality

Executive Directors Ma Fucai Apartment 501, Building No. 2 Residential Area 33, Beisihuan Zhonglu Chaoyang District Beijing, PRC C-301/302, Building No. 3 Residential Area 1-6, Liupukang Xicheng District Beijing, PRC A-402, Building No. 2 Fulaiyin Xiaoqu, Shazikou Chongwen District Beijing, PRC Apartments 703/704, Building No. 16 Residential Area 2, Anhuali Chaoyang District Beijing, PRC Apartment 1, 6th Floor, Building No. 17 Residential Area 6, Hepingli Dongcheng District Beijing, PRC Apartment 533, Building No. 112 Andelu, Deshengmenwai Xicheng District Beijing, PRC C-401/402, Building No. 3 Residential Area 1-6, Liupukang Xicheng District Beijing, PRC Apartment 801, Building No. 2 Residential Area 33, Beisihuan Zhonglu Chaoyang District Beijing, PRC Apartment 431, Building No. 112 Andelu, Deshengmenwai Xicheng District Beijing, PRC Residential Area 19-19, Longtan Street Longtan District, Jilin City Jilin Province, PRC 53 PRC

Huang Yan

PRC

Ren Chuanjun

PRC

Jiang Jiemin

PRC

Non-Executive Directors Yan Sanzhong PRC

Wu Yaowen

PRC

Jiang Jinchu

PRC

Zhang Hong

PRC

Gong Huazhang

PRC

Zou Haifeng

PRC

DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING

Name Address Nationality

Independent NonExecutive Directors Chee-Chen Tung 22B, Block 1, Grand Garden 61 South Bay Road Hong Kong D-402, Le Yu Building No. 7 Beijing Normal University Haidian District Beijing, PRC British National (Overseas) PRC

Wu Jinglian

SUPERVISORS
Name Address Nationality

Li Kecheng

Apartment 1030, Building No. 112 Andelu, Deshengmenwai Xicheng District Beijing, PRC Apartment 830, Building No. 112 Andelu, Deshengmenwai Xicheng District Beijing, PRC Apartment 109, Building No. 2 Residential Area 33, Beisihuan Zhonglu Chaoyang District Beijing, PRC Apartment 207, Building No. 43 Residential Area 2, Liupukang Xicheng District Beijing, PRC A-301, Building No. 11 Zhenxing Xiaoqu, Xinglongtai District Panjin City Liaoning Province, PRC B-502, Building No. 16 Beilixiqu, Donghuashi Chongwen District Beijing, PRC Apartment 315, Building No. 16 Beilixiqu, Donghuashi, Chongwen District Beijing, PRC 54

PRC

Lin Jingao

PRC

Chen Weizhong

PRC

Bai Xinhe

PRC

Sun Chongren

PRC

Liu Hongru

PRC

Wu Zhipan

PRC

DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING

PARTIES INVOLVED Joint Global Coordinators and Joint Bookrunners Goldman Sachs (Asia) L.L.C. 68th Floor Cheung Kong Center 2 Queen's Road Central Central Hong Kong China International Capital Corporation Limited 23rd Floor, Everbright Building 6 Fuxingmenwai Avenue Beijing 100045 PRC Sponsors China International Capital Corporation (Hong Kong) Limited Room 4302, 43rd Floor Central Plaza 18 Harbour Road Wanchai Hong Kong Goldman Sachs (Asia) L.L.C. 68th Floor Cheung Kong Center 2 Queen's Road Central Central Hong Kong Lead Managers Goldman Sachs (Asia) L.L.C. 68th Floor Cheung Kong Center 2 Queen's Road Central Central Hong Kong China International Capital Corporation (Hong Kong) Limited Room 4302, 43rd Floor Central Plaza 18 Harbour Road Wanchai Hong Kong

55

DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING

Co-Lead Managers

BOCI Asia Limited 10th Floor Bank of China Building 1 Garden Road Hong Kong HSBC Investment Bank Asia Limited Level 15 HSBC Building 1 Queen's Road Central Hong Kong

Co-Managers

Celestial Capital Limited 22nd Floor The Center 99 Queen's Road Central Hong Kong Core Pacic-Yamaichi International (H.K.) Limited 30th Floor Two Pacic Place 88 Queensway Hong Kong Hang Seng Securities Limited Room 1601 Hang Seng Building 77 Des Voeux Road Central Hong Kong ICEA Capital Limited 42nd Floor Jardine House 1 Connaught Place Central Hong Kong Ka Wah Capital Limited 8th Floor Ka Wah Bank Centre 232 Des Voeux Road Central Hong Kong

56

DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING

Tai Fook Securities Company Limited 25th Floor New World Tower 16-18 Queen's Road Central Hong Kong Vickers Ballas Capital Limited 19th Floor Far East Finance Centre 16 Harcourt Road Admiralty Hong Kong Worldsec Corporate Finance Limited 11th Floor Bank of America Tower 12 Harcourt Road Central Hong Kong Corporate Placing Underwriters China International Capital Corporation Limited 23rd Floor Everbright Building 6 Fuxingmenwai Avenue Beijing 100045 PRC Goldman Sachs (Asia) L.L.C. 68th Floor Cheung Kong Center 2 Queen's Road Central Central Hong Kong Auditors and reporting accountants PricewaterhouseCoopers Certied Public Accountants 22nd Floor Prince's Building Central Hong Kong as to Hong Kong Law: Linklaters 10th Floor Alexandra House Chater Road Hong Kong 57

Legal advisers to the Company

DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING

as to United States law: Shearman & Sterling 20th Floor, Standard Chartered Bank Building 4 Des Voeux Road Central Hong Kong as to PRC law: King and Wood 11th Floor, C Tower Fuhua Mansion 8 Chaoyangmen Beidajie Dongcheng District Beijing 100027 PRC Legal advisers to the Underwriters as to Hong Kong law: Baker & McKenzie 14th Floor, Hutchison House 10 Harcourt Road Central Hong Kong as to United States law: Sullivan & Cromwell 28th Floor 9 Queen's Road Central Hong Kong as to PRC law: Gong Cheng Law Oce Suite 1105, Union Plaza No. 20 Chaoyangmenwai Dajie Beijing 100020 PRC Haiwen & Partners Room 1016, Beijing Silver Tower No. 2 Dong San Huan North Road Chao Yang District Beijing 100027 PRC

Property valuer

Chesterton Petty Limited 16th Floor, CITIC Tower 1 Tim Mei Avenue Central Hong Kong

58

DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING

Independent technical consultant DeGolyer and MacNaughton Suite 400, One Energy Square 4925 Greenville Avenue Dallas, Texas 75206 United States

Receiving bankers

Bank of China, Hong Kong Branch 1 Garden Road Central Hong Kong Hang Seng Bank Limited Hang Seng Bank Building 83 Des Voeux Road Central Hong Kong Standard Chartered Bank 8th Floor Edinburgh Tower The Landmark Central Hong Kong

Financial adviser to the Company

NM Rothschild & Sons Limited New Court St. Swithin's Lane London EC4P 4DU United Kingdom

59

CORPORATE INFORMATION
Legal address 6-8 Liu Pu Kang Jie Xicheng District Beijing 100724 PRC Unit 1809 Tower One, Lippo Centre 89 Queensway Hong Kong Shou Xuancheng Jiang Jiemin Shou Xuancheng

Place of business in Hong Kong

Company Secretary Authorised representatives

Hong Kong share registrar and transfer oce

HKSCC Registrars Limited 2nd Floor Vicwood Plaza 199 Des Voeux Road Central Hong Kong Bank of China 410 Fuchengmenwai Street Xicheng District Beijing, PRC CITIC Industrial Bank Jingcheng Mansion, 6 Xinyuannan Street Chaoyang District Beijing, PRC Bank of Communication 33 Finance Street Xicheng District Beijing, PRC Industrial and Commercial Bank of China 55 Fuxingmennei Avenue Xicheng District Beijing, PRC China Construction Bank 25 Finance Street Xicheng District Beijing, PRC China Development Bank 29 Fuchengmenwai Street Xicheng District Beijing, PRC

Principal bankers

60

INDUSTRY OVERVIEW
The information provided in this section and elsewhere in this prospectus relating to the PRC is derived from various government and private publications or obtained from communications with various PRC Government agencies. This information has not been prepared or independently veried by the Company or the Underwriters. The information may not be consistent with other information compiled within or outside the PRC or other information contained elsewhere in this prospectus. Unless otherwise stated, statements regarding China do not apply to Hong Kong, Macau or Taiwan.

THE PRC OIL AND GAS INDUSTRY Introduction During the past twenty years, China has experienced rapid economic growth due to the continuing implementation of economic reform and open-door policies starting in the late 1970s. China's GDP increased at a compound annual rate of approximately 9.7 per cent. from 1978 to 1998, making China one of the fastest growing economies in the world. In 1998, China's GDP increased at a rate of 7.8 per cent. The PRC Government views oil and gas as important strategic resources and has designated the PRC oil and gas industry as one of the country's ""pillar'' industries. Accordingly, the PRC Government has pursued policies to support and develop its national oil and gas industry since the beginning of the 1950s. The Company and Sinopec are the only two oil and gas companies engaged in onshore crude oil and natural gas exploration and production, rening and marketing and chemical operations in the PRC. CNOOC Limited is engaged in oshore oil and gas exploration and production. CNSPC is engaged in onshore and oshore oil and gas exploration and production. Crude Oil and Natural Gas Reserves and Production All of the crude oil reserves and natural gas reserves in the PRC are held by the Company, Sinopec, CNOOC Limited and CNSPC. The Company holds the substantial majority of those reserves. For the year ended 31 December 1998, the PRC produced 1,189.6 million barrels of crude oil and became the world's 5th largest crude oil producer. In 1998, the production of natural gas in the PRC reached 822.8 billion cubic feet. The chart below sets forth crude oil production and natural gas production in the PRC for the years ended 31 December 1996, 1997 and 1998, respectively.
Year ended 31 December 1996 1997 1998

Crude Oil Production (in million barrels) Natural Gas Production (in billion cubic feet)
Sources: A Statistical Survey of China, 1999 and China Statistical Yearbook, 1999

1,162.3 709.8

1,187.4 801.6

1,189.6 822.8

The Company holds the production licences for the substantial majority of the PRC's proved crude oil reserves and natural gas reserves. For the year ended 31 December 1998, the Company's crude oil and natural gas production represented approximately 66 per cent. and 64 per cent., respectively, of the total crude oil and natural gas production in the PRC for that year. 61

INDUSTRY OVERVIEW
The chart below sets forth the percentages of the PRC's total crude oil production and natural gas production produced by each of the Company, Sinopec, CNOOC Limited and CNSPC for the year ended 31 December 1998.
Year ended 31 December 1998 Percentage Percentage of China's of China's Crude Oil Natural Gas Production Production

The Company Sinopec CNOOC Limited CNSPC

Sources: China Statistical Yearbook, 1999 and Statistical Yearbook of Oil and Chemical Industry, 1998

65.6 21.9 10.1 0.6

64.3 10.0 16.6 4.4

Crude Oil and Natural Gas Consumption The rapid growth of China's economy in recent years has generated signicant growth in the consumption of primary energy in China, from 1,038 million tons of standard coal equivalent for the year ended 31 December 1991 to 1,360 million tons of standard coal equivalent for the year ended 31 December 1998. From 1991 to 1998, crude oil and natural gas consumption in China increased by compound annual growth rates of 6.1 per cent. and 4.7 per cent., respectively, while crude oil and natural gas production increased by compound annual rates of 1.9 per cent. and 5.1 per cent., respectively. Driven by environmental and eciency concerns, coal as a percentage of primary energy consumption has decreased from 76.1 per cent. to 71.6 per cent. from 1991 to 1998. Over the same period, crude oil and natural gas consumption has increased as a percentage of total primary energy consumption from 17.1 per cent. to 19.8 per cent. and 2.0 per cent. to 2.1 per cent., respectively. For the year ended 31 December 1998, consumption of crude oil in China was 269.3 million tons of standard coal equivalent, making China the third largest crude oil consumer in the world. The following chart sets forth the total energy consumption in the PRC and the percentage of the total energy consumption represented by coal, crude oil and natural gas for each of the eight years ended 31 December 1998.
Year Total energy consumption (in million tons of standard coal equivalent) Percentage of total energy consumption Coal Crude oil Natural gas (percentage)

1991 1992 1993 1994 1995 1996 1997 1998

Source: China Statistical Yearbook, 1999

1,037.8 1,091.7 1,159.9 1,227.4 1,311.8 1,389.5 1,381.7 1,360.0

76.1 75.7 74.7 75.0 74.6 74.7 71.5 71.6

17.1 17.6 18.2 17.4 17.6 18.0 20.4 19.8

2.0 1.9 1.9 1.9 1.8 1.8 1.7 2.1

62

INDUSTRY OVERVIEW
The current leading markets in the PRC for natural gas are located in Sichuan and Heilongjiang provinces and the Xinjiang Uygur Autonomous Region. In 1998, total consumption of natural gas in the PRC reached 28.6 million tons of standard coal equivalent. The chart below sets forth crude oil and natural gas consumption in the PRC for the years ended 31 December 1988 to 1998, respectively.
1988 1989 1990 For the year ended 31 December 1991 1992 1993 1994 1995 (in million tons of standard coal equivalent) 1996 1997 1998

Crude Oil Consumption 158.1 Natural Gas Consumption 19.5

165.8 19.4

163.8 20.7

177.5 20.8

191.0 20.7

211.1 22.0

213.6 23.3

229.6 23.6

250.1 25.0

281.9 23.5

269.3 28.6

Source: A Statistical Survey of China, 1999

Crude Oil and Natural Gas Transportation Infrastructure Pipeline transmission is the major means of transporting crude oil and natural gas within the PRC. Prior to the restructuring of the PRC oil and gas industry in 1998, the majority of the PRC's pipeline network was entirely under the administration of CNPC. As part of the industry restructuring, the PRC's onshore crude oil and natural gas pipeline network was divided between the Company and Sinopec. As at 31 December 1998, the total length of onshore crude oil pipelines in the PRC reached approximately 11,123 km. As at 31 December 1998, the Company owned and operated crude oil pipelines with a total length of approximately 8,400 km and the total throughput of crude oil by those pipelines was approximately 811.3 million barrels. As at 31 December 1998, the total length of onshore natural gas pipelines in the PRC reached approximately 11,733 km. As at 31 December 1998, the Company had natural gas pipelines with a total length of approximately 11,100 km, including the natural gas pipelines used by the Company's natural gas segment with a total length of approximately 10,150 km, and the total throughput of natural gas by those pipelines was approximately 380 billion cubic feet. Production and Consumption for Rened Products As at 31 December 1998, the PRC's annual primary distillation capacity was approximately 1,921 million barrels. For the year ended 31 December 1998, the PRC's aggregate annual rening throughput was approximately 1,174.0 million barrels. In 1998, the PRC's aggregate production of rened products was approximately 140 million tons. The chart below sets forth the production and consumption of major rened products in the PRC, and the export and import of these products into the PRC from 1995 to 1998:
Production of Rened Products Year ended 31 December 1995 1996 1997 1998 1995 (in million tons) Consumption of Rened Products Year ended 31 December 1996 1997 1998(1)

Gasoline 30.5 Jet fuel 4.5

32.8 5.4

35.2 5.8

34.7 5.7

29.1 5.1

31.8 5.6

33.1 6.8

63

INDUSTRY OVERVIEW
Production of Rened Products Year ended 31 December 1995 1996 1997 1998 1995 (in million tons) Consumption of Rened Products Year ended 31 December 1996 1997 1998(1)

Diesel 39.7 Fuel oil 29.6

Source: State Statistics Bureau of China (1) Not available.

44.2 25.0

49.2 23.1

48.8 21.0

43.2 36.9

46.9 35.7

52.9 38.5

Import of Rened Products Export of Rened Products Year ended 31 December Year ended 31 December 1995 1996 1997 1998 1995 1996 1997 (in million tons)

1998

Gasoline Jet fuel Diesel Fuel oil

0.2 0.8 6.1 6.6

0.1 0.7 4.6 9.4

0.1 1.4 7.4 13.7

0.01 1.3 3.1 16.3

1.9 0.4 1.3 0.3

1.3 0.7 1.6 0.4

1.8 0.7 2.3 0.5

1.8 0.9 1.0 0.6

Source: Monthly Statistical Report of General Administration of Customs, 1999

As at 31 December 1998, the Company's annual primary distillation capacity was 741.1 million barrels, representing approximately 39 per cent. of the PRC's total annual primary distillation capacity as of that date. Sinopec's annual primary distillation capacity was 956.9 million barrels as at 31 December 1998, representing approximately 50 per cent. of the PRC's total primary distillation capacity as of that date. In 1998, the Company's annual rening throughput was approximately 463.7 million barrels, representing approximately 40 per cent. of the PRC's total annual rening thoughput in that year. Sinopec's annual rening throughput in 1998 was approximately 595.6 million barrels, representing approximately 51 per cent. of the PRC's total annual rening throughput in that year. The chart below sets forth the production by the Company and Sinopec and their respective percentage of China's total production by principal rened product for each of the Company and Sinopec for the year ended 31 December 1998.
The Company Sinopec(1) Production Market Share % Production Market Share % (in million tons except percentage)

Gasoline Jet fuel Diesel Fuel oil Lubricants Naphtha Paran Asphalt

13.3 1.8 19.3 7.8 1.2 4.8 0.7 1.2

38.4 31.5 39.4 36.9 41.0 28.8 61.8 28.2

16.5 3.7 23.2 9.4 0.9 11.5 0.4 2.0

47.6 64.9 47.5 44.8 30.2 69.4 35.8 45.7

(1) Sources: Sinopec Statistical Annual Report 1998 and State Statistical Bureau of China

Service Stations In the past few years, the number of service stations in the PRC has been increasing. For the year ended 31 December 1996, there were approximately 78,000 service stations in the PRC. As at 64

INDUSTRY OVERVIEW
31 December 1998, this number had increased to approximately 88,000. Service station operators in the PRC include CNPC, the Company, Sinopec, local State-owned petroleum enterprises, collective organisations, Sino-foreign joint ventures and private individuals. As at 31 December 1998, the Company owned approximately 1,630 service stations, had franchising arrangements with 770 service stations and provided supervisory support to approximately 3,600 service stations that are wholly-owned by CNPC or jointly-owned by CNPC and third parties and sell exclusively rened products produced or supplied by the Group. Those service stations are located primarily in the northeastern, northern and western regions of the PRC, while Sinopec owned or operated approximately 9,015 service stations, which are located primarily in the eastern and southern regions of the PRC. Rened Product Transportation Infrastructure Pipeline transmission is one of the major means of transporting rened products within China. As at 31 December 1998, the total length of rened product pipelines owned and operated by the Company and Sinopec in China was approximately 1,364 km. As at 31 December 1998, the Company owned and operated rened product pipelines with a total length of approximately 1,000 km which are primarily located in the northeastern and northwestern regions of China and the average daily throughput of rened products by those pipelines was approximately 24,475 tons. As at 31 December 1998, Sinopec owned and operated rened products pipelines with a total length of 368.1 km and, for the year ended 31 December 1998, the average daily throughput of rened products by those pipelines was approximately 18,216 tons. Production and Markets for Chemical Products For the year ended 31 December 1998, the PRC produced approximately 3.8 million tons of ethylene, 6.9 million tons of polyolens and polymer and 589 thousand tons of synthetic rubber. The Company and Sinopec are the two leading producers of chemical products in the PRC. The chart below sets forth percentages of China's total production of main chemical products which were produced by the Company and Sinopec for the year ended 31 December 1998 as well as total production and export and import volumes of these chemical products in China for the year ended 31 December 1998.
The Company % of China's Total Production Year Ended 31 December 1998 Sinopec % of China's China Total Production Production Import (in million tons)

Export

Ethylene Polyolens(1)and polymer Synthetic bre Synthetic rubber Urea

33.6 18.6 6.0 31.9 9.8

59.9 47.6 18.6 62.6 17.5

3.8 6.9 4.6 0.6 26.4

0.03 9.6 1.5 0.5 0.1

0.01 0.3 0.1 0.03 0.1

Sources: Sinopec Annual Report 1998; China Statistical Yearbook on Foreign Trade and Economic Cooperation 1999; A Statistical Survey of China, 1999; China Statistical Yearbook, 1999; and Statistical Yearbook of the Textile Industry, 1998 (1) Include polyethylene, polypropylene and ABS.

REGULATORY MATTERS Overview China's oil and gas industry is subject to extensive regulation by the PRC Government with respect to a number of aspects of exploration, production, transmission and marketing of crude oil and natural 65

INDUSTRY OVERVIEW
gas as well as production, transportation and marketing of rened products and chemical products. The following central government authorities exercise control over various aspects of China's oil and gas industry: The SETC has the industry administration and policy coordination authority over China's oil and gas industry. It is also responsible for setting import and export quotas for crude oil and rened products on the basis of overall supply and demand for crude oil and rened products in China. The Ministry of Land and Resources has the authority for granting, examining and approving oil and gas exploration and production licences, the administration of registration and transfer of exploration and production licences. The MOFTEC has the authority to examine and approve production sharing contracts and Sinoforeign equity and cooperative joint venture contracts. It is also responsible for issuing import and export licences for crude oil and rened products to oil and gas companies once they have obtained import or export quotas from the SETC. The State Development Planning Commission: determines mandatory minimum volumes and applicable prices of natural gas to be supplied to certain fertiliser producers; publishes benchmark prices for crude oil and guidance prices for natural gas and certain rened products, including gasoline and diesel; approves investment and nance projects exceeding certain capital expenditure amounts; and approves Sino-foreign equity and cooperative projects exceeding certain capital amounts. Exploration Licences and Production Licences The Mineral Resources Law authorises the Ministry of Land and Resources to exercise the administrative authority over the exploration and production of mineral resources within the PRC. The Mineral Resources Law and its supplementary regulations provide the basic legal framework under which exploration licences and production licences are granted. The Ministry of Land and Resources has the authority to issue exploration licences and production licences. Applicants must be companies approved by the State Council to engage in oil and gas exploration and production activities. Applicants for exploration licences must rst register with the Ministry of Land and Resources blocks in which they intend to engage in exploration activities. The holder of an exploration licence is obliged to make a progressively increasing annual minimum exploration investment relating to the exploration blocks in respect of which the licence is issued. Investment ranges from RMB2,000 per square km for the initial year to RMB10,000 per square km for the third and subsequent years. Additionally, the holder has to pay an annual exploration licence fee that starts at RMB100 per square km for each of the rst three years and increases by an additional RMB100 per square km per year for the subsequent years up to a maximum of RMB500 per square km. The maximum term of an exploration licence is seven years subject to renewal upon expiration of the original term, with each renewal being for a two-year term. At the exploration stage, an applicant can also apply for a progressive exploration and production licence that allows the holder to test and develop reserves not yet fully proved. The progressive exploration and production licence has a maximum term of 15 years. Upon the reserves becoming proved for a block, the holder must apply for a full production licence in order to undertake production. In addition, the holder needs to obtain the right to use that block of land. Generally, the 66

INDUSTRY OVERVIEW
holder must either obtain a land use rights certicate covering that block of land or lease such land from the relevant land administrative authorities. The Ministry of Land and Resources issues production licences to applicants on the basis of the reserve reports approved by the relevant authorities. Production licence holders are required to pay an annual production right usage fee of RMB1,000 per square km. Administrative rules issued by the State Council provide that the maximum term of a production licence is 30 years. However, in accordance with a special approval from the State Council, the Ministry of Land and Resources has issued production licences eective March 2000 to the Company for all of its crude oil and natural gas reservoirs with terms coextensive with the projected productive life of those reservoirs, ranging up to 55 years. Production licences to be issued to the Company in the future will be subject to the 30 year maximum unless the Company obtains additional special approvals from the State Council. Each of the Company's production licences is renewable upon its application 30 days prior to expiration. Oil and gas price increases may extend the productive life of the Company's crude oil and natural gas reservoirs beyond the current terms of the relevant production licences. The Company, Sinopec and CNSPC have exploration licences and production licences for the exploration and production of onshore crude oil and natural gas in China. CNOOC and CNSPC have exploration licences and production licences for the exploration and production of oshore crude oil and natural gas in China. Pricing Crude Oil The Company negotiates with its major domestic customer, Sinopec, crude oil prices with reference to the benchmark crude oil prices published by the State Development Planning Commission. The negotiation is based on the principle that the prices of onshore crude oil produced in China as delivered at any renery should generally be at the same level as those of imported crude oil of similar grade as delivered at the same renery. To reect this principle and to assist the Company and Sinopec in their negotiations, the State Development Planning Commission publishes, each month as the benchmark crude oil prices, the average Singapore market FOB prices for crude oil of dierent grades in the previous month plus an amount equal to the customs duties payable on the import of crude oil. On top of the benchmark crude oil prices, the Company and Sinopec negotiate a premium or discount to reect transportation costs, the dierences in oil quality and market supply and demand. The State Development Planning Commission will mediate if the Company and Sinopec cannot agree on the amount of premium or discount and will make a nal decision on the amount of premium or discount if mediation fails. Rened Products The Company sets the retail prices of its gasoline and diesel within a range of 5 per cent. above or below the retail median guidance prices of gasoline and diesel published by the State Development Planning Commission. Once the Company makes a gasoline or diesel price adjustment within the 5 per cent. adjustment range, it cannot make another adjustment again within two months of the previous adjustment unless warranted by market conditions and approved by the State Development Planning Commission. These retail median guidance prices of gasoline and diesel vary in each provincial level 67

INDUSTRY OVERVIEW
distribution region. The State Development Planning Commission publishes the retail median guidance prices of gasoline and diesel based on the total of: FOB Singapore trading prices for diesel and gasoline; ocean insurance, customs duties, consumption tax, value added tax and other fees; reasonable transportation expenses; and retail margins. When the cumulative change of the FOB Singapore trading prices for diesel and gasoline exceeds 5 per cent. from the FOB Singapore trading prices upon which the previous retail median guidance prices were based, the State Development Planning Commission can adjust the retail median guidance prices at the request of the Company or Sinopec. When the State Development Planning Commission rst introduced the retail median guidance prices in June 1998, the retail median guidance prices were set higher than the then prevailing FOB Singapore trading prices plus all other relevant items. This price level remained in place until 5 November 1999. On 5 November 1999, State Development Planning Commission made an upward adjustment of approximately 5 per cent. at the request of both Sinopec and the Company to reect the then prevailing FOB Singapore trading prices plus all other relevant items. The Company sets the wholesale prices for its gasoline and diesel on the basis of its retail prices and a discount to its retail prices of at least 5.5 per cent. as required by the State Development Planning Commission. Chemical Products The Company determines the prices of all of its chemical products other than fertiliser and material for agricultural lm for which the guidance prices are set by the State Development Planning Commission. Natural Gas The price of natural gas has three components: wellhead price; pipeline transportation tari; and purication fee. Wellhead prices vary depending on whether or not the natural gas sold is within the government formulated natural gas supply plan. For natural gas sold within the government formulated supply plan, the State Development Planning Commission xes wellhead prices according to the nature of the customers. Most of these customers are fertiliser producers. For natural gas sold above the government-formulated natural gas supply plan, the State Development Planning Commission publishes the median guidance wellhead price with permissible upward or downward adjustments of 10 per cent. by the natural gas producer. The Company negotiates the actual wellhead price with commercial natural gas users and municipal governments within the adjustment range. The Company submits to the State Development Planning Commission for examination and approval proposed pipeline transmission taris based on the capital investment made in the pipeline, the depreciation period for the pipeline, the ability of end users to pay and the Company's prot margin. The 68

INDUSTRY OVERVIEW
Company sets the purication fee based on the cost of natural gas purication, and the purication fee must be approved by the State Development Planning Commission. The PRC Government has proposed to replace the xed wellhead price with the median wellhead guidance price in the near future. In September 1999, the PRC Government proposed to set a pricing formula based on a reasonable ratio between the thermal value and the price of composite alternative energy. If these proposals are adopted, natural gas producers would be able to negotiate prices of natural gas with customers based on market demand and supply with reference to the pricing formula. Sales of natural gas to fertiliser producers would still be made at a discount set by the PRC Government at the market price of natural gas supplied. Production and Marketing Crude Oil Each year, the State Development Planning Commission publishes the projected target for the production and sale of crude oil by the Company, Sinopec, CNOOC Limited and CNSPC based on the domestic consumption estimates prepared and submitted by domestic producers, including the Company, Sinopec, CNOOC Limited and CNSPC, the production capacity of these companies as well as the forecast of international crude oil prices. The actual production levels are determined by the producers themselves and may vary from the submitted estimates. Rened Products Currently, only the Company and Sinopec have the right to conduct gasoline and diesel wholesale business. Other companies, including foreign invested companies, may not engage in wholesale of gasoline and diesel in China's domestic market. In general, only domestic companies, including Sinoforeign joint venture companies, are permitted to engage in retail of gasoline and diesel. See the section headed ""Risk Factors Risks Relating to the Company's Business Entry by China into the WTO may increase competition in the Company's businesses within China'' for a discussion of the likely impact on the distribution of rened products in China after China's admission to the WTO. Natural Gas Each year, the State Development Planning Commission publishes the production targets for natural gas producers based on the annual production target prepared on the basis of consumption estimates submitted by all natural gas producers such as the Company. The State Development Planning Commission also formulates the annual natural gas guidance supply plan, which requires natural gas producers to distribute a specied amount of natural gas to specied fertiliser producers. The actual production levels of natural gas, except the amount supplied to fertiliser producers, are determined by the natural gas producers. Foreign Investments Cooperation in Exploration and Production with Foreign Companies Currently, only CNPC, Sinopec and CNSPC have the right to cooperate with foreign companies in onshore crude oil and natural gas exploration and production in China. CNOOC and CNSPC have the right to cooperate with foreign companies in oshore crude oil and natural gas exploration and production in China. 69

INDUSTRY OVERVIEW
Sino-foreign cooperation projects and foreign parties in onshore oil and gas exploration and production in China are generally selected through open bids and bilateral negotiations. Those projects are generally conducted through production sharing contracts. MOFTEC must approve those contracts. As authorised by the Regulations of the PRC on Exploration of Onshore Petroleum Resources in Cooperation with Foreign Enterprises, CNPC has the right to enter into joint cooperation arrangements with foreign oil and gas companies for onshore crude oil and natural gas exploration and production. The Company does not have the capacity to enter into production sharing contracts directly with foreign oil and gas companies under existing PRC law. Accordingly, CNPC will continue to enter into production sharing contracts. After signing a production sharing contract, CNPC will, subject to approval of the MOFTEC, assign to the Company all of its commercial and operational rights and obligations under the production sharing contract as required by the Undertaking between CNPC and the Company. See the section headed ""Business Relationship with the CNPC Group Connected Transactions Contract for the Transfer of Rights under Production Sharing Contracts''. Transportation and Rening The PRC regulations permit foreign minority ownership in pipeline transportation, oil storage facilities and oil jetties. There is no express general restriction on foreign investment in reneries and petrochemical facilities. However, the construction of reneries with an annual capacity of ve million tons or less must receive special approval and the production of ethylene and PVC resins with annual production capacity exceeding 600,000 tons must be conducted by companies majority-owned by Chinese persons. Furthermore, when appropriate, projects must receive proper approvals from relevant PRC government agencies. See the section headed ""Risk Factors Risks Relating to the Company's Business Entry by China into the WTO may increase competition in the Company's businesses within China''. Import and Export The import and export of crude oil and rened products is subject to quota and licensing control in China. Currently, only a small number of State authorised companies, including China National United Oil Corporation, a subsidiary of the Company, have licences to import and export crude oil and rened products. The SETC sets import and export quotas for crude oil and rened products by taking into account the supply and demand in China as well as the country's overall import and export volume. MOFTEC is responsible for issuing import and export licences for products subject to quotas. Upon receiving quota allocation, rening companies or enterprises can import crude oil through Stateauthorised import companies. See the section headed ""Risk Factors Risks Relating to the Company's Business Entry by China into the WTO may increase competition in the Company's businesses within China'' for a discussion of the expected opening of domestic markets to foreign competition in China. The PRC Government authorities have recently granted the Company the right to conduct crude oil and rened product import and export business. The Company holds quota to import and export crude oil and rened products, and conducts import and export of crude oil and rened products through China National United Oil Corporation which holds relevant import and export licences. Capital Investment and Financing Capital investments in exploration and production of crude oil and natural gas made by Chinese oil and gas companies are not subject to government approval. However, oil and gas companies must obtain prior approval from the relevant government authorities for capital investments in other projects. They 70

INDUSTRY OVERVIEW
must obtain prior approval from the State Development Planning Commission for capital investments in any new projects if the amount of capital involved exceeds RMB50 million, or obtain prior approval from the SETC for capital investments in renovation and expansion projects if the amount of capital involved exceeds RMB50 million. Oil and gas companies need to obtain approval from the State Development Planning Commission and the SAFE to borrow from foreign banks and foreign governments in connection with their capital investments. Taxation, Fees and Royalties The Company is subject to a variety of taxation, fees and royalties. The table below sets forth the various taxation, fees and royalties payable by the Company or by Sino-foreign oil and gas exploration and development cooperative projects. The Ministry of Finance has approved the Company and its wholly-owned subsidiaries and branch companies to be taxed on a consolidated basis.
Tax Item Tax Base Tax Rate

Corporate income tax Value-added tax

Taxable income Revenue

Sales volume

Business tax Consumption tax

Revenue from transportation services Sales volume

33 per cent. 13 per cent. for liquied natural gas, natural gas, agricultural lm and fertilisers and 17 per cent. for other items. The Company charges valueadded tax from its customers at the time of settlement on top of the selling prices for its products on behalf of the tax authority. Any value-added tax paid by the Company for purchasing materials consumed during the production process for charges paid for drilling and other engineering services and labour are deducted from the value-added tax to be charged to the Company's customers. 13 per cent. of the valueadded tax paid in connection with export of diesel is subject to a full rebate. 5 per cent. for the Sino-foreign oil and gas exploration and development cooperative projects. 3 per cent. RMB277.6 per ton for gasoline RMB117.6 per ton for diesel All consumption taxes paid in connection with export of gasoline and diesel are subject to a full rebate. Domestic sales of diesel are subject to a rebate of RMB 30 per ton in respect of consumption tax paid.

71

INDUSTRY OVERVIEW
Tax Item Tax Base Tax Rate

Resource tax

Aggregate volume sold or selfconsumed

Compensatory fee for mineral resources Exploration licence fee Production licence fee Royalty fee(1)

Revenue Area Area Production volume

RMB8 to RMB30 per ton for crude oil RMB2 to RMB15 per thousand cubic metre for natural gas The actual applicable rate for each oil eld may dier depending on the volume of the exploration and production activities and costs required for the production at the particular oil eld. 1 per cent. for crude oil and natural gas RMB100 to 500 per square km RMB1000 per square km Progressive rate of 0 to 12.5 per cent. for crude oil and natural gas

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

The PRC Highway Law was recently amended, and the amendment became eective on 31 October 1999. The amended Highway Law provides that the PRC Government shall collect funds for highway maintenance by imposing fuel taxes. The State Council will formulate specic implementation methods and procedures for the imposition of fuel tax. The State Council has not yet announced or published any specic rate, implementation method or procedure for the imposition of the tax. Environmental Regulations China has adopted extensive environmental laws and regulations that aect the operation of the oil and gas industry. There are national and local standards applicable to emissions control, discharges to surface and subsurface water and the generation, handling, storage, transportation, treatment and disposal of waste materials. The environmental regulations require a company such as the Company to register or le an environmental impact report with the relevant environmental bureau for approval before it undertakes any construction of a new production facility or any major expansion or renovation of an existing production facility. The new facility or the expanded or renovated facility will not be permitted to operate unless the relevant environmental bureau has inspected to its satisfaction that environmental equipment that satises the environmental protection requirements has been installed for the facility. A company that wishes to discharge pollutants, whether it is in the form of emission, water or materials must submit a pollutant discharge declaration statement detailing the amount, type, location and method of treatment. After reviewing the pollutant discharge declaration, the relevant environmental bureau will determine the amount of discharge allowable under the law and will issue a pollutant discharge licence for that amount of discharge subject to the payment of discharge fees. If a company discharges more than is permitted in the pollutant discharge licence, the relevant environmental bureau can ne the company up to several times the discharge fees payable by the oending company for its allowable discharge, or require the oending company to close its operation to remedy the problem. 72

INDUSTRY OVERVIEW
INDUSTRY AND CORPORATE RESTRUCTURINGS The development of the oil and gas industry in the PRC began in the 1950s with several major discoveries of crude oil and natural gas in Yumen, Xinjiang, Qinghai and Daqing. In the 1960s and 1970s, the production of crude oil in the PRC experienced rapid growth, reaching 739 million tons (approximately 100 million tons) in 1978. In that year, the PRC became the eighth largest crude oil producing country in the world. Since 1955 and until 1988, the PRC oil and gas industry was administered at dierent times by the Ministry of Petroleum, the Ministry of Fuel and Chemical Industry and the Ministry of Petroleum and Chemical Industry and the Ministry of Petroleum Industry. The 1980s Restructuring In order to further facilitate growth, during the 1980s, the PRC Government implemented a major restructuring of the PRC oil and gas industry. In 1982, the PRC Government approved the establishment of CNOOC, to be responsible for the Sino-foreign cooperative development of China's oshore oil and gas resources under the administration of the Ministry of Petroleum Industry. In 1983, the PRC Government approved the separation of the rening and petrochemical sections of the Ministry of Petroleum Industry, together with some other chemical and bre manufacturing enterprises under the administration of the Ministry of Chemicals and the Ministry of Textile to form Sinopec, to conduct the rening and petrochemical production and distribution businesses. In 1988, the PRC Government abolished the Ministry of Petroleum Industry and grouped together the onshore oil and gas exploration and production entities formerly under the administration of the Ministry of Petroleum Industry to form CNPC. CNPC was formed to conduct only onshore oil and gas exploration and production in China. CNOOC began its independent operation in 1988. However, in addition to their business management functions, all three companies retained a number of administrative functions in their respective areas of activity. The 1998 Restructuring In 1998, in accordance with the decisions made at the Ninth Session of the National People's Congress, the State Council approved a comprehensive restructuring plan for the PRC oil and gas industry to form two group companies. The purpose of this restructuring was to improve the eciency and competitiveness of CNPC and Sinopec and to separate their industry administrative functions from their business management functions. The principal goal of this restructuring was to eventually create two nationwide vertically integrated oil and gas companies and to thereby increase competition in this sector. In March 1998, the State Petroleum and Chemical Industry Bureau of the SETC was formed as part of the PRC's ministerial restructuring to administer the PRC petroleum and chemical industry and supervise sector regulation. As part of an asset exchange transaction, which became eective on 1 June 1998, CNPC transferred to Sinopec six crude oil and natural gas production enterprises located in the eastern and coastal regions of the PRC and Sinopec transferred to CNPC 15 reneries and petrochemical plants located in the northeastern, northern and western regions of the PRC. As part of this restructuring, local governments transferred 15 and 19 provincial and municipal petroleum distribution companies to CNPC and Sinopec, respectively. In the 1998 restructuring, two crude oil and natural gas production, rening and petrochemical enterprises under the administration of the then Ministry of Chemical Industry and a local government were also injected into CNPC. These asset injections were also made primarily along regional lines. After the completion of the 1998 restructuring, CNPC's production assets are primarily located in the northern, northeastern and northwestern regions of China while Sinopec's production assets are primarily located in the eastern and southern regions of China. 73

INDUSTRY OVERVIEW
The 1998 restructuring resulted in CNPC and Sinopec each engaging in upstream and downstream business and ended their respective monopolies. As a result of the 1998 restructuring, the percentage of China's overall oil and natural gas production and reserves controlled by CNPC was reduced, while CNPC gained signicant rening and petrochemical production capability and a marketing and distribution network for its products. The Restructuring To facilitate the transformation of CNPC into a more ecient and competitive international oil and gas company, in November 1999, CNPC implemented a major internal restructuring. Prior to the Restructuring, the CNPC Group's major business activities included: exploration and production of onshore crude oil and natural gas and related geographical surveying, drilling and provision of down hole operational services; crude oil rening and transportation, storage and marketing of rened products; production and marketing of chemical products; supply, transmission and marketing of natural gas; cooperative exploration, development and production of onshore crude oil and natural gas in China with foreign oil and gas companies; exploration, development and production of crude oil and natural gas and rening operations overseas; import and export of crude oil and rened products and chemical products; various supplementary businesses related to oil and gas operations, such as drilling machinery manufacturing and maintenance, transportation, utilities and material supply; and large-scale supplementary social services including education, hospitals, public transportation services, property management and security services. On 5 November 1999, CNPC, as the sole promoter, incorporated the Company as a joint stock company with limited liability under the applicable PRC laws and regulations. Under the Restructuring Agreement eective as of 5 November 1999, CNPC transferred to the Company substantially all of its assets, liabilities (RMB 30.5 billion debt was transferred to CNPC as at 30 June 1999) and interests in connection with the following businesses and operations in China including: the exploration, development and production of onshore crude oil and natural gas; the rening, transportation, storage and marketing (including import and export) of crude oil and rened products; the production and sale of chemicals; and the transmission, marketing and sale of natural gas. These businesses and operations include: 13 crude oil and natural gas exploration and production enterprises and one exploration unit, including their respective rening and petrochemical operations; 15 rening and petrochemical production enterprises, including its entire 70.25 per cent. and 80.95 per cent. interests in Jilin Chemical Industrial Company Limited and Jinzhou Petrochemical Company Limited, respectively; 21 marketing companies, including their wholesale outlets, service stations and storage facilities; a company engaged in the high pressure crude oil, natural gas and rened product pipeline transmission business and other supplementary pipelines previously owned by CNPC; 74

INDUSTRY OVERVIEW
two research institutions; and 23 production sharing contracts in respect of cooperative exploration, development and production in China of onshore crude oil and natural gas with foreign companies. CNPC retained the assets, liabilities and interests relating to its remaining businesses and operations, special technical services, supplementary production services and social services, including: all ten international projects relating to overseas exploration and production of crude oil and natural gas, rening operation and pipelines located in Canada, Peru, Kazakstan, Sudan, Venezuela and Thailand; approximately 3,600 service stations and related transportation and storage facilities; ve chemical production facilities; its entire interests in CNPC (Hong Kong) Limited, a company listed on the Stock Exchange; and RMB 30.5 billion in debt. The Restructuring also involved the reorganisation of the management structure of the businesses and operations transferred to the Company into the following four segments: exploration and production; rening and marketing; chemicals; and natural gas. In connection with the Restructuring, the Company has entered into a number of agreements with CNPC which govern the provision by CNPC or its aliates to the Company of exploration and production services, products and other various services such as the provision of nancial guarantees, the lease of land and real properties, the licence of computer software, technical knowledge, trademarks and patents and other commercial agreements. Further information is contained in the section headed ""Business Relationship with the CNPC Group Connected Transaction''. In connection with the Restructuring, CNPC has undertaken to the Company that: it will adopt steps to limit competition with the Company; it will oer the Company options to purchase certain of CNPC's domestic and international projects; it will guarantee payment of certain debt transferred from it to the Company; and it will (i) within one year from August, September and October 1999 when the relevant entitlement certicates were issued, obtain all necessary formal land use rights certicates in respect of the land transferred or leased by CNPC to the Company, (ii) within one year from 5 November 1999, complete the necessary governmental procedures for the requisition of the collectively-owned land on which 116 service stations owned by the Company are located and (iii) by 5 November 2000, obtain individual building ownership certicates in the name of the Company for all buildings transferred to the Company by CNPC, and be responsible for any costs, expenses and claims incurred in obtaining such licences and title documents, and will indemnify the Company for any claims and losses in the event CNPC fails to complete such procedures. 75

INDUSTRY OVERVIEW
The projects that the Company may purchase under the options granted to it by CNPC are within the domain of the Company's core businesses but were not transferred to it as part of the Restructuring. These projects, which are permitted exceptions under the Undertaking, comprise assets and businesses which CNPC is allowed to continue to have an interest in notwithstanding that they are directly or indirectly in, or may lead to, competition with the Company's core businesses. Any decision by the Company to exercise these options to purchase will be based on a consideration of all relevant factors, including the performance of these projects. See ""Business Relationship with the CNPC Group Non-competition Undertaking'' for a detailed description of the options to purchase and the exercise of these options. In addition, under the Restructuring Agreement, CNPC has agreed to indemnify the Company for any claims incurred in connection with or arising from, among other things: assets transferred to the Company in the Restructuring and arising before 5 November 1999 except for those claims specically assumed by the Company as part of the Restructuring; negligence of the CNPC Group acting for and on behalf of the Company in carrying out any contract that was not transferred to the Company pending third party consents (on or after 5 November 1999); the failure of the CNPC Group to transfer assets to the Company in accordance with the Restructuring Agreement; assets, rights and debts retained by the CNPC Group in the Restructuring; taxes and fees associated with the Restructuring that are not payable by the Company; the process of obtaining by CNPC, within one year from August, September and October 1999 when the relevant entitlement certicates were issued, formal land use rights certicates to replace the entitlement certicates in relation to the 28,649 parcels of land which were leased or transferred to the Company from CNPC; the process of CNPC completing within one year from 5 November 1999 the necessary governmental procedures for the requisition of the collectively-owned land on which 116 service stations owned by the Company are located; and the process of obtaining individual building ownership certicates in the name of the Company for all the buildings transferred to the Company by CNPC before 5 November 2000. In accordance with the Restructuring Agreement, the Company distributed RMB3,600 million to CNPC in respect of the net prot of the Group during the period from 1 October 1999 to 4 November 1999. This distribution will be reduced by the amount, if any, by which RMB3,600 million exceeds the net prot of the Group during the period from 1 October to 4 November 1999 determined in accordance with PRC accounting standards. Any such reduction will be eected by a cash payment by CNPC to the Company within 30 days following the date on which the Company publishes its audited 1999 nancial statements, but in any event no later than 30 June 2000. This distribution was made in respect of a period prior to the formation of the Company and was therefore not determined in accordance with its dividend policy as described in the section headed ""Financial Information Prot Estimate and Dividend Policy Dividend Policy.'' This distribution is approximately twice the amount that could have been distributed in accordance with the dividend policy of the Company. The Restructuring required approvals from relevant PRC Government authorities, including the SETC, the Ministry of Finance, the Ministry of Land and Resources and the MOFTEC. CNPC and the Company have obtained all relevant approvals for the Restructuring. The Company has complied with all applicable regulations relating to, and has obtained all required licences for, its existing business operations. 76

INDUSTRY OVERVIEW
In connection with the Restructuring, the Directors are of the view that the Group's nancial statements, as presented in the Accountants' Report set out in Appendix I to this prospectus, include all of the Group's historical operating costs actually incurred during the relevant track record period in respect of the operations which were transferred to the Group by CNPC as part of the Restructuring. In particular, the Directors are of the view that all relevant employee costs (including related compensation and retraining costs) associated with the operations transferred by CNPC to the Group have been reected in the Group's nancial statements. Further, the Directors understand from CNPC that the costs of those employees of the CNPC Group who provided services to the Group have been fully reected in CNPC's charges to the Group for providing such services during the relevant track record period.

77

CORPORATE STRUCTURE
The following chart sets out the corporate organisation of the Group and the shareholders of the Company immediately after the Global Oering (assuming the Over-allotment Options are not exercised):

Public shareholders (Including Corporate Investors)

90.00%

10.00%

14 enterprises(1)

36 enterprises(1)

11 enterprises(1)

2 enterprises(1)

(1)

Include subsidiary companies and branches without legal person status. The Restructuring was eected on 5 November 1999 in preparation for the Global Oering.

Upon completion of the Global Oering, CNPC will directly own or control an aggregate of approximately 90.00 per cent. (and approximately 88.65 per cent. if the Over-allotment Options are exercised in full) of the Company's issued share capital.

78

BUSINESS
INTRODUCTION The Company is one of the largest companies in China in terms of sales. It is engaged in a broad range of petroleum-related activities, including: the exploration, development and production of crude oil and natural gas; the rening, transportation, storage and marketing, including import and export, of crude oil and petroleum products; the production and sale of chemicals; and the transmission, marketing and sale of natural gas. The Company is the largest producer of crude oil and natural gas in China. Currently, all of the Company's crude oil and natural gas reserves and production-related assets are located in China. In the nine months ended 30 September 1999, the Company had total revenue of RMB126,181 million and net prot of RMB20,779 million. Following the Global Oering, the Company will be the world's fourth largest publicly traded oil and gas company, based on 1998 proved hydrocarbon reserves. The Company's exploration, development and production activities commenced in the early 1950's, when it conducted exploration activities in the Yumen oil region in northwestern China. The discovery of crude oil in 1959 in northeastern China's Daqing oil region, one of the world's largest oil regions in terms of proved crude oil reserves, marked the beginning of the Company's large-scale upstream activities. Over the past four decades, the Company has conducted crude oil and natural gas exploration activities in many regions of China. As at 30 September 1999, the Company had estimated proved reserves of approximately 10.8 billion barrels of crude oil and approximately 24.3 trillion cubic feet of natural gas. The Directors believe that the Company holds production licences for the substantial majority of China's proved crude oil reserves and proved natural gas reserves. In the nine months ended 30 September 1999, the Company produced 583.3 million barrels of crude oil and 324.7 billion cubic feet of natural gas for sale, representing an average production of 2,130.9 thousand barrels of crude oil and 1,186.0 million cubic feet of natural gas for sale per day. Approximately 64 per cent. of the crude oil that the Company sold in the nine months ended 30 September 1999 was supplied to its reneries. The Company commenced limited rening activities in the mid-1950s, when it began producing gasoline and diesel at reneries in the Yumen oil region. The Company now operates 29 reneries located in eight provinces, three autonomous regions and one municipality. In the nine months ended 30 September 1999, the Company's reneries processed 364.0 million barrels of crude oil or 1,329.7 thousand barrels per day. In the nine months ended 30 September 1999, the Company produced approximately 29.6 million tons of the gasoline, diesel and jet fuel and sold approximately 34.2 million tons of these products. Approximately 96 per cent. of the crude oil processed in the Company's reneries in the nine months ended 30 September 1999 was supplied by its exploration and production operations. As at 30 September 1999, the Company's retail distribution network consisted of approximately 1,790 service stations that it owns and operates, approximately 3,600 service stations wholly-owned by CNPC or jointly-owned by CNPC and third parties to which the Company provides supervisory support and approximately 1,050 franchise service stations. As at 30 September 1999, the Company owned and operated a crude oil pipeline network consisting of approximately 8,400 km of pipelines with an average daily throughput of approximately 2.3 million barrels of crude oil. As at 30 September 1999, the Company also had a rened product pipeline network consisting of approximately 1,000 km of pipelines with an average daily throughput of approximately 21,237 tons of rened products. The Company's chemicals operations commenced in the early 1950s, when it began producing urea at its rst petrochemical plant in Lanzhou in northwestern China. In the early 1960s, the Company 79

BUSINESS
began producing ethylene. The Company currently produces a wide range of basic and derivative petrochemical products and other chemical products at 17 chemical plants located in eight provinces and three autonomous regions in China. The Company's other segments supply substantially all of the hydrocarbon feedstock requirements of its chemical operations. The Company is China's largest natural gas transporter and seller in terms of sales volume. The Company's natural gas transmission and marketing activities commenced in Sichuan in southwestern China in the 1950s. In the rst nine months of 1999, the Company's sales of natural gas totalled 280.4 billion cubic feet, of which 257.1 billion cubic feet were sold through its natural gas segment. As at 30 September 1999, the Company owned and operated regional natural gas pipeline networks consisting of approximately 11,100 km of pipelines, of which approximately 10,150 km were used by its natural gas segment. In March 1998, the PRC Government approved a comprehensive restructuring plan for China's oil and gas industry intended to improve the eciency and competitiveness of CNPC and Sinopec and to eect the separation of regulatory and business management functions. A series of asset injections and exchanges completed in 1998 as part of this plan substantially increased CNPC's level of vertical integration. As part of its ongoing eorts to enhance its competiveness and shift its focus from production to protability and return-based targets, the Company has begun redesigning its management structure and implementing a range of cost-cutting initiatives. The Company was established as a joint stock company with limited liability under the Company Law on 5 November 1999 as part of a restructuring in which CNPC transferred to the Company most of the assets and liabilities and interests of CNPC relating to its exploration and production, rening and marketing, chemicals and natural gas businesses. CNPC retained the assets and liabilities relating to its remaining businesses and operations, including assets and liabilities relating to international exploration and production and rening and pipeline operations. CNPC is the Company's primary provider of a wide range of services and products. Upon completion of the Global Oering, CNPC will own an approximately 90.00 per cent. interest in the Company (and approximately 88.65 per cent. if the Over-allotment Options are exercised in full). Further details regarding the Restructuring are set out in the section headed ""Industry Overview Industry and Corporate Restructurings''. COMPANY STRENGTHS Dominant crude oil and natural gas producer in China The Company is the dominant crude oil and natural gas producer in China. For the year ended 31 December 1998, it produced more than three times as much crude oil and natural gas as its largest domestic competitor in each market. Furthermore, its extensive estimated proved crude oil and natural gas reserves provide the Company with a stable production base and gives it an advantage over its competitors with less abundant reserves. Based on its 1998 production of 884.6 million barrels-of-oil equivalent, the Company had a reserve-to-production ratio of 16.5 years. It has substantial exploration acreage, totalling 148.3 million acres as at 30 September 1999. It also has a high ratio of proved developed reserves to total proved reserves as evidenced by the proved developed reserves to total reserves ratio of 78.6 per cent. as at 30 September 1999. Extensive crude oil and natural gas exploration and production expertise In developing the Chinese oil and gas industry over the past four decades, the Company has developed superior exploration, development and production expertise for crude oil and natural gas elds with continental formation. Such expertise has proved to be particularly eective for the specic geology 80

BUSINESS
of China's subsoil. The Company continues to enhance its upstream expertise with in-house research and development and has developed a wide range of enhanced recovery and other advanced exploration and development techniques. Major rener and wholesaler of rened products in a large and growing market The Company is one of the only two major reners of crude oil and wholesalers of rened products in China. Under current regulations, only the Company and Sinopec have licences to conduct gasoline and diesel wholesale operations in China. For the year ended 31 December 1998, it rened approximately 463.7 million barrels of crude oil, or 1,270.4 thousand barrels per day, and it sold approximately 36.8 million tons of gasoline, diesel and jet fuel. The Company has a dominant rening and marketing presence in the northern and western regions and a wholesale distributing network throughout China. The Company intends to leverage this presence to expand retail marketing throughout China. The Company's exploration and production operations are well linked to its rening and marketing operations through extensive logistic infrastructure, providing it with a signicant competitive advantage over its principal competitors. Dominant company in integrated natural gas business Building on its dominance in natural gas exploration and production, the Company has achieved a dominant position within the natural gas value chain, from production to wholesale distribution. It is the leading natural gas transporter and wholesaler in China. The Directors believe that the Company is uniquely positioned to take advantage of the anticipated growth in natural gas consumption in China. Experienced and incentivised management team The Company's management team has extensive experience in the petroleum industry. Most of the Company's management personnel have more than 15 years of experience working in one or more of the Company's business segments. The Company incentivises and rewards its management team by linking compensation with the performance of the Company. In addition, the compensation for the senior management team of the Company will, to the extent permissible by law, be composed of both cash and stock options which is intended to keep the management interests aligned with the interests of the Company's shareholders.

81

Xinjiang Oil Region

Urumqi

THE EXPLORATION AND PRODUCTION SEGMENT OF THE COMPANY

Daqing Oil Region Jilin Oil Region

Harbin

Tuha Oil and Gas Region Tarim Oil and Gas Region

Erlian Oil and Gas Region

Huhehaote Beijing Yinchuan

Qinghai Oil and Gas Region

Bohai Bay Oil and Gas Region

YELLOW SEA

Lanzhou

Changqing Oil and Gas Region

Xian

82
Lhasa

Sichuan Gas Region

Shanghai

EAST CHINA SEA

Quiyang Kunming

Fuzhou

Nanning

Guangzhou

Gas Field Oil Field

SOUTH CHINA SEA

BUSINESS

EXPLORATION AND PRODUCTION The Company is engaged in crude oil and natural gas exploration, development and production in China. All of its total estimated proved crude oil and natural gas reserves are located in China, principally in northeastern, northern, southwestern and northwestern China. The Songliao basin, located in Heilongjiang and Jilin provinces in northeastern China including the Daqing and Jilin oil regions, accounted for 59.9 per cent. of the Company's proved crude oil reserves as at 30 September 1999 and 55.9 per cent. of crude oil production in the rst nine months of 1999. The Company also has signicant crude oil reserves and operations in the area around Bohai Bay. The Bohai Bay basin includes the Liaohe, Dagang, Huabei and Jidong oil regions and accounted for 18.0 per cent. of proved crude oil reserves as at 30 September 1999 and 22.0 per cent. of crude oil production in the rst nine months of 1999. The Company's proved natural gas reserves and production are generally concentrated in northwestern and southwestern China, specically in the Shanganning and Sichuan basins. The Company currently holds exploration licences covering a total area of approximately 148.3 million acres and production licences covering a total area of approximately ten million acres. The Directors believe that the Company holds a majority of China's exploration and production acreage. In the rst nine months of 1999, the Company's prot from operations was RMB38,167 million. Reserves The estimated proved reserves of crude oil and natural gas of the Company as at 30 September 1999 totalled approximately 10.8 billion barrels of oil and approximately 24.3 trillion cubic feet of natural gas, respectively. As at 30 September 1999, proved developed reserves accounted for 89.4 per cent. and 50.0 per cent. of the Company's total proved crude oil and natural gas reserves, respectively. Total proved hydrocarbon reserves on a barrels-of-oil equivalent basis increased by a total of 20.2 per cent. from approximately 12,134.4 million barrels-of-oil equivalent as at the end of 1995 to approximately 14,587.7 million barrels-of-oil equivalent as at the end of 1998. Natural gas as a percentage of total proved hydrocarbon reserves increased from 15.5 per cent. to 25.5 per cent. over the same period. The following table sets forth the Company's estimated proved reserves and proved developed reserves of crude oil and natural gas as at 31 December 1996, 1997 and 1998 and as at 30 September 1999. The Company prepared its reserve estimates as at 30 September 1999 on the basis of a report prepared by DeGolyer and MacNaughton, independent engineering consultants, in accordance with Statement of Financial Accounting Standards No. 69 of the US. The Company's reserve estimates include only crude oil and natural gas which it believes can be reasonably produced within the current terms of its production licences. Please refer to the section headed ""Industry Overview Regulatory Matters Exploration Licences and Production Licences'' for a discussion of the Company's production licences. Prior to 30 September 1999, the Company did not keep records of operating costs on a eld-byeld basis. For the purpose of estimating the reserve information, operating costs were allocated from the region level to the eld level based primarily on the number of producing wells in each eld. In preparing the proved reserve estimates as at and for the years ended 31 December 1996, 1997 and 1998, the economic tests specied in Statement of Financial Accounting Standards No. 69 of the US were applied on an oil region basis. The Directors do not believe that this method of evaluation materially aects its reserve estimates. A discussion of the uncertainty inherent in the estimation of proved reserves is set out in the section headed ""Risk Factors Risks Relating to the Company's Business The crude oil and 83

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natural gas reserve data in this prospectus are only estimates and the actual production, revenues and expenditures with respect to the Company's reserves may dier materially from these estimates''.
Crude Oil (millions of barrels) Proved Developed and Undeveloped Reserves Reserves as at 31 December 1996. Revisions of previous estimates Extensions and discoveries Improved recovery Production for the year(1) Reserves as at 31 December 1997 Revisions of previous estimates Extensions and discoveries Improved recovery Production for the year(1) Reserves as at 31 December 1998 Revisions of previous estimates Extensions and discoveries Improved recovery Production for the nine month period(1) Reserves as at 30 September 1999 Proved Developed Reserves As at 31 December 1996 As at 31 December 1997 As at 31 December 1998 As at 30 September 1999 10,420.9 (2.7) 500.6 404.9 (783.7) 10,540.0 149.4 547.0 408.7 (780.2) 10,864.9 27.5 302.7 154.2 (583.3) 10,766.0 9,533.1 9,517.0 9,639.2 9,622.5 Natural Gas (Bcf) 12,869.7 1,440.6 3,144.3 302.5 (622.9) 17,134.2 729.7 5,016.9 82.0 (626.3) 22,336.5 126.6 2,268.3 34.6 (481.8) 24,284.2 7,243.6 9,288.9 11,543.4 12,141.8 Combined (BOE, in millions) 12,565.9 237.4 1,024.7 455.4 (887.5) 13,395.9 271.0 1,383.1 422.4 (884.6) 14,587.8 48.6 680.7 159.9 (663.7) 14,813.3 10,740.3 11,065.2 11,563.1 11,646.1

(1) Represents crude oil wellhead production and natural gas wellhead production, less ared gas.

The following tables set forth the Company's crude oil and natural gas proved reserves and proved developed reserves by region as at 31 December 1996, 1997 and 1998 and as at 30 September 1999.
As at 31 December As at 1997 1998 30 September 1999 Proved Proved Proved Proved developed developed developed developed and Proved and Proved and Proved and Proved undeveloped developed undeveloped developed undeveloped developed undeveloped developed (millions of barrels) 1996

Crude oil reserves Daqing Xinjiang Liaohe Changqing Huabei Jilin Dagang Tarim Qinghai Tuha Sichuan Other regions(1) Total

6,353.0 748.2 979.6 439.0 475.9 263.4 311.1 417.9 187.8 151.2 10.9 82.9 10,420.9

6,236.1 564.7 817.5 273.1 377.3 232.6 263.3 361.3 164.4 148.9 10.9 83.0

6,139.9 5,946.5 792.2 576.2 993.3 829.1 478.9 338.4 485.8 393.0 427.4 356.2 338.6 283.1 381.3 324.8 202.6 173.0 205.7 202.4 10.9 10.9 83.5 83.4

6,082.8 5,903.4 1,037.4 693.1 1,012.4 856.3 541.7 405.2 490.8 383.0 450.3 353.7 374.1 275.3 364.8 308.7 229.2 184.5 190.6 185.2 10.9 10.9 80.0 79.9

5,983.3 5,799.3 1,048.7 855.2 1,020.0 859.2 546.4 375.0 469.4 364.3 461.0 352.5 404.6 293.0 330.6 276.3 230.8 183.5 176.6 169.6 9.7 9.7 84.9 84.9

9,533.1 10,540.0 9,517.0 10,865.0 9,639.2 10,766.0 9,622.5

84

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As at 31 December As at 1997 1998 30 September 1999 Proved Proved Proved Proved developed developed developed developed and Proved and Proved and Proved and Proved undeveloped developed undeveloped developed undeveloped developed undeveloped developed (Bcf) 1996

Natural gas reserves Sichuan Changqing Tarim Qinghai Daqing Xinjiang Liaohe Tuha Dagang Huabei Jilin Other regions(1)

3,935.8 3,541.4 1,685.1 0 1,438.7 1,028.6 682.2 0 179.9 308.4 69.6 0

2,718.9 311.3 862.1 0 1,307.0 893.0 637.4 0 152.1 300.5 61.3 0

5,402.7 4,257.7 1,934.0 911.1 1,364.8 1,204.4 675.1 787.1 194.3 302.7 83.3 17.0

3,705.7 434.7 877.7 33.9 1,230.1 1,071.8 630.2 763.1 164.3 294.8 65.7 16.9

6,621.4 5,296.4 2,925.1 2,240.4 1,465.7 1,691.7 689.3 686.0 283.4 295.6 124.5 17.0

4,633.6 1,277.5 942.5 43.7 1,320.7 1,439.5 610.6 651.1 221.9 287.9 97.5 16.9

7,019.1 5,805.0 3,504.7 2,929.2 1,606.6 1,321.4 713.8 644.5 314.4 277.5 131.7 16.3

4,755.3 1,651.1 1,120.4 55.0 1,444.0 1,240.9 629.8 610.6 240.9 269.4 108.1 16.3

Total 12,869.7
(1) Represents the Jidong and Yumen oil regions.

7,243.6 17,134.2

9,288.9 22,336.5 11,543.4 24,284.2 12,141.8

EXPLORATION AND DEVELOPMENT The Company is currently conducting exploration and development eorts in eleven provinces, two municipalities and three autonomous regions in China. The Company has more extensive experience in the exploration and development of crude oil and natural gas than any of its principal competitors. Beginning in the early 1950s, the Company has worked for nearly ve decades to develop exploration and recovery technologies and methods tailored to the specic geological conditions in China. The Company plans to spend approximately RMB36,000 million on exploration and development activities in 2000. The Company's planned expenditures include RMB6,800 million to drill approximately 528 new exploratory wells and RMB13,500 million to drill approximately 5,822 new development wells; RMB2,600 million to shoot and process two-dimensional seismic covering approximately 39,210 km and three-dimensional seismic covering approximately 5,050 square km; and RMB13,100 million to construct ground development support facilities and to conduct exploration-related support activities. The following table sets forth the number of wells the Company drilled, or in which the Company participated, and the results thereof, for the periods indicated.
Year Daqing Xinjiang Liaohe Changqing Huabei Dagang Sichuan Other(1) Total

1996

Net Exploratory Wells Drilled(2) Crude oil Natural gas Dry(3)

85 56 2 27

33 17 0 16

104 35 0 69

111 47 8 56

80 19 1 60

35 15 2 18

17 0 6 11

128 32 17 79

593 221 36 336

85

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

Net Development Wells Drilled(2) Crude oil Natural gas Dry(3) 1997 Net Exploratory Wells Drilled(2) Crude oil Natural gas Dry(3) Net Development Wells Drilled(2) Crude oil Natural gas Dry(3) 1998 Net Exploratory Wells Drilled(2) Crude oil Natural gas Dry(3) Net Development Wells Drilled(2) Crude oil Natural gas Dry(3)

3,441 3,425 7 9 102 88 3 11 3,460 3,440 0 20 114 64 3 47 3,535 3,518 3 14

850 842 4 4 75 42 1 32 1,016 1,012 1 3 94 56 0 38 1,148 1,128 16 4

1,061 1,048 12 1 88 49 0 39 1,070 1,032 37 1 69 27 0 42 942 902 39 1

626 621 1 4 112 49 11 52 1,045 1,024 13 8 116 63 6 47 747 704 31 12

326 303 8 15 70 21 0 49 350 337 1 12 68 19 2 47 330 317 4 9

162 158 2 2 32 13 1 18 147 142 2 3 21 12 2 7 121 119 0 2

79 39 40 0 33 0 14 19 104 18 64 22 25 1 10 14 65 8 38 19

856 7,401 838 7,274 13 87 5 40 171 42 30 99 683 304 60 319

1,326 8,518 1,297 8,302 15 133 14 83 138 42 19 77 645 284 42 319

944 7,832 916 7,612 21 152 7 68

(1) Represents the Jilin, Tarim, Tuha, Qinghai, Jidong and Yumen oil regions. (2) ""Net'' wells refer to the wells after deducting interests of others. No third parties own any interests in any of the Company's wells. (3) ""Dry'' wells are wells with insucient reserves to sustain commercial production.

The following table sets forth the Company's drilling wells by region as at 8 March 2000.
Daqing Xinjiang Liaohe Changqing Huabei Dagang Sichuan Others(1) Total

Net drilling wells

(2)

117

23

85

36

30

37

128

456

(1) Represents the Jilin, Tarim, Tuha, Qinghai, Jidong and Yumen oil regions. (2) Include all wells in which the Company has an interest. No third parties own any interests in any of the Company's drilling wells.

86

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Properties The following table sets forth the Company's interests in developed and undeveloped acreage by oil region and in productive crude oil and natural gas wells as at 30 September 1999.
Productive Wells(1) Crude oil Natural gas Oil Region Acreage(1) (thousands of acres) Developed Undeveloped Crude oil Natural gas Crude oil Natural gas

Daqing Liaohe Xinjiang Huabei Dagang Changqing Jilin Tarim Tuha Sichuan Other regions(2) Total

27,166 13,836 9,852 3,795 2,445 4,753 8,351 296 653 367 1,978 73,492

89 500 70 46 39 73 25 0 0 948 46 1,836

485.7 167.4 181.9 127.5 86.3 158.3 122.2 38.5 29.7 0 44.6 1,442.1

87.6 33.2 11.5 10.4 23.1 294.1 2.6 0 3.2 200.5 2.5 668.7

165.4 41.7 50.8 60.9 67.6 219.5 65.8 20.8 11.3 0 21.0 724.8

30.9 3.6 19.6 1.1 4.8 1,034.5 31.5 101.4 10.3 15.5 31.7 1,284.9

(1) Includes all wells and acreage in which the Company has an interest. No third parties own any interests in any of its wells or acreage. (2) Represents the Qinghai, Jidong and Yumen oil regions.

Approximately 74.8 per cent. of the Company's proved crude oil reserves are concentrated in the Daqing, Liaohe and Xinjiang oil regions, and approximately 79.3 per cent. of its proved natural gas reserves are concentrated in the Sichuan gas region, the Changqing oil and gas region, and the Tarim and Qinghai oil regions. The Directors believe that the Bohai Bay, Junggar, Shanganning and Songliao basins have the highest potential for increasing the Company's crude oil reserve base through future exploration and development, and the Tarim, Shanganning, Sichuan and Qaiddam basins have the highest potential for increasing its natural gas reserve base through future exploration and development. Production For the years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1998 and 1999 respectively, the following table sets forth the Company's historical average net daily crude oil and natural gas production by region and its average sales price.
Year Ended Nine Months Ended Percentage of 31 December 30 September September 1996 1997 1998 1998 1999 1999 total (thousands of barrels per day, except percentages or otherwise indicated)

Crude Oil Production(1) Daqing Liaohe Xinjiang Huabei Changqing Tarim Dagang Jilin

1,140.2 288.5 169.1 94.9 53.3 61.7 84.9 74.7

1,140.2 288.5 178.3 95.1 67.2 86.0 87.5 81.5

1,133.9 278.5 178.5 96.1 81.4 78.8 86.5 80.8

1,127.8 279.8 176.9 96.9 79.2 77.3 86.1 81.2

1,114.5 275.3 183.4 96.1 86.9 86.0 83.5 77.7

52.3 12.9 8.6 4.5 4.1 4.0 3.9 3.6

87

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Year Ended Nine Months Ended Percentage of 31 December 30 September September 1996 1997 1998 1998 1999 1999 total (thousands of barrels per day, except percentages or otherwise indicated)

Tuha Other(2) Total Annual production (million barrels) Average sales price (RMB per barrel)

62.7 51.1 2,081.1 759.6 106.16

64.7 58.2 2,147.2 783.7 119.20

63.6 59.3 2,137.4 780.2 112.44

62.9 60.5 2,128.6 582.7 114.16

63.6 63.9 2,130.9 583.3 126.57

3.0 3.1 100.0

Year Ended Nine Months Ended Percentage of 31 December 30 September September 1996 1997 1998 1998 1999 1999 total (millions of cubic feet per day, except percentage or otherwise indicated)

Natural Gas Production(1)(3) Sichuan Daqing Changqing Liaohe Tuha Dagang Tarim Qinghai Huabei Xinjiang Other(4) Total Annual production (Bcf) Average sales price (RMB per Mcf)

682.0 145.2 5.3 92.9 0 32.1 4.9 1.2 22.6 14.0 10.5 1,010.7 368.9 14.98

695.3 148.3 9.6 75.5 24.0 32.0 3.2 1.3 23.4 17.2 10.7 1,040.5 379.8 16.08

692.3 161.0 37.8 71.5 44.2 29.5 16.8 18.0 23.9 16.7 9.3 1,121.0 409.2 16.34

669.4 147.4 26.7 64.3 45.4 30.3 16.8 19.0 21.5 16.7 8.9 1,066.4 291.9 15.53

689.1 134.3 88.8 62.1 57.2 33.1 31.0 29.7 26.3 25.3 9.1 1,186.0 324.7 15.50

58.1 11.3 7.5 5.2 4.8 2.8 2.6 2.5 2.2 2.1 0.9 100.0

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

In 1998, the Company supplied approximately 64 per cent., 23 per cent., 8 per cent. and 5 per cent. of its total crude oil sales to its reneries, Sinopec's reneries, regional reneries controlled by unrelated third parties in China and companies or entities outside China, respectively. In the rst nine months of 1999, the Company supplied approximately 64 per cent., 23 per cent., 9 per cent. and 4 per cent. of its total crude oil sales to its reneries, Sinopec's reneries, regional reneries controlled by unrelated third parties in China and companies or entities outside China, respectively. The Company entered into a crude oil mutual supply framework agreement with Sinopec on 29 December 1999 for the supply of crude oil to each other's reneries in 2000. Under this agreement, the Company agreed in principle to supply 18.7 million tons (approximately 138.2 million barrels) of crude oil to Sinopec in 2000 at prices determined on the basis of the crude oil benchmark prices published by the PRC Government and the premium and discount formulas set forth in the crude oil premium and discount calculation agreement between Sinopec and CNPC, which was assigned to the Company under the agreement for transfer of 88

BUSINESS
rights and interests under the crude oil premium and discount calculation agreement between CNPC and the Company. See ""Financial Information Results of Operations Factors Aecting Results of Operations Crude Oil Prices'' for a detailed discussion of the crude oil premium and discount calculation agreement. Principal Oil and Gas Regions Daqing Oil Region The Daqing oil region, the Company's largest oil and gas producing property, is located in the Songliao basin and covers an area of approximately one million acres. In terms of proved hydrocarbon reserves and annual production, the Daqing oil region is the largest oil region in China and one of the most prolic oil and gas properties in the world. The Company commenced exploration activities in the Daqing oil region in 1955 and discovered oil in the region in 1959. Annual crude oil production volume in the Daqing oil region reached one million barrels per day in 1976 and has remained relatively stable for the past 24 years. As at 30 September 1999, the Company produced crude oil from 19 elds in the Daqing oil region. The successful discovery and development of the oil elds in the Daqing oil region marked a critical breakthrough in the history of both the Company and China's oil and gas industry. As at 30 September 1999, the Company's proved crude oil reserves in the Daqing oil region were 5,983.3 million barrels, representing 55.6 per cent. of its total proved crude oil reserves. In the rst nine months of 1999, the Company's oil elds in the Daqing oil region produced an average of 1,114.5 thousand barrels of crude oil per day, representing approximately 52.3 per cent. of the Company's total daily crude oil production. In 1998, the crude oil reserve-to-production ratio at the Daqing oil region was 14.7 years. The crude oil the Company produces in the Daqing oil region has an average API gravity of 35.7. During the rst nine months of 1999, the crude oil produced by the Company in the Daqing oil region had an average water cut of 85.5 per cent. The major oil reservoirs in the Daqing oil region are generally evenly spread with relatively moderate depths, and have simple geological structures. As a consequence of these factors, the Company's nding and development costs in the Daqing oil region are the lowest among all oil-producing regions in China. As a result of certain changes, arrangements and transactions in connection with the Restructuring, the Company estimates that its nding costs will increase. See ""Business Relationship with the CNPC Group Connected Transactions Comprehensive Products and Services Agreement'' for a description of such changes, arrangements and transactions. Because the crude oil in the Daqing oil region is primarily located in large reservoirs with relatively moderate depths of approximately 900 metres to 1,500 metres and most of the crude oil produced at Daqing is medium viscosity oil, lifting costs in the Daqing oil region are the lowest among its oil regions. The Company's average lifting costs in the Daqing oil region increased from 1996 to 1998 as a result of material and power cost increases, as well as the application of enhanced recovery techniques which resulted in higher direct lifting costs but lower overall nding costs. Crude oil produced using enhanced recovery techniques accounted for 2.9 per cent., 10.3 per cent. and 13.7 per cent. of the Company's crude oil production from the Daqing oil region for the years ended 31 December 1996, 1997 and 1998, respectively. Consistent with its shift in focus from production to protability and return-based targets, the Company has been implementing measures at the Daqing oil region since 1996 designed to control its nding and development costs and increase its production eciency. Because its oil elds in the Daqing oil region are relatively mature, the diculty of extracting crude oil from these elds has increased in 89

BUSINESS
recent years and is likely to continue to increase gradually in the future. Nevertheless, the Directors believe that the Company will be able to maintain its lifting costs at these elds at the current level by: terminating unprotable or marginally protable exploration and production activities; reducing expenditures on ancillary ground facilities in the outer areas of the Daqing oil region; and increasing preventive maintenance to prolong the useful life of the Company's production facilities. The Company has established an extensive transportation infrastructure network to transport crude oil produced in the Daqing oil region to internal and external customers in northeastern China and beyond. Crude oil pipelines link its oil elds in the Daqing oil region to the port of Dalian and the port of Qinhuangdao in Bohai Bay, providing ecient transportation for selling Daqing crude oil. These crude oil pipelines have an aggregate length of more than 900 km and an aggregate throughput capacity of approximately 900,000 barrels per day. Daqing's crude oil has a low sulphur content and a high paran content. As many reneries in China, particularly those in northeastern China, are congured to rene Daqing crude oil, the Company has a stable market for the crude oil it produces in the Daqing oil region. In 1998, it rened approximately 45.3 per cent. of Daqing crude oil in its own reneries, exported approximately 16.5 per cent. and sold the remaining portion to Sinopec or local reneries. Liaohe Oil Region The Liaohe oil region is the Company's second largest crude oil producing property and is located in the northern part of the Bohai Bay oil region. The Company began commercial production in the Liaohe oil region in 1971. The Liaohe oil region covers a total area of approximately 580,000 acres. The Liaohe oil region is China's third largest oil region in terms of 1998 production and its fth largest in terms of proved hydrocarbon reserves as at the end of 1998. As at 30 September 1999, proved crude oil reserves in the Liaohe oil region were 1,020.0 million barrels, representing 9.5 per cent. of the Company's total proved oil reserves. In the rst nine months of 1999, the Company's oil elds in the Liaohe oil region produced an average of 275.3 thousand barrels of crude oil per day, representing approximately 12.9 per cent. of total daily crude oil production. In 1998, the crude oil reserves-to-production ratio in the Liaohe oil region was 10 years. During the rst nine months of 1999, the crude oil the Company produced in the Liaohe oil region had an average API gravity of 26.0 and an average water cut of 71.2 per cent. Production levels in the Liaohe oil region have remained relatively stable during the past ve years. The Company has proved crude oil reserves in 35 elds in the Liaohe oil region, including 30 elds currently in production. The Company's nding and development costs in the Liaohe oil region in 1998 were among the lowest in China. The Company produces several varieties of crude oil in the Liaohe oil region, ranging from light crude oil to heavy crude oil and high pour point crude oil. For the year ended 31 December 1998, approximately 58 per cent. of the crude oil produced in the Liaohe oil region was heavy viscosity oil. The increased use of special technology for thermal extraction of heavy oil in recent years resulted in relatively high lifting costs in the Liaohe oil region in 1996 and 1997. However, the Company's lifting costs in the Liaohe oil region decreased in 1998 from their level in 1996 and 1997. In order to limit the impact of the higher lifting costs associated with high pour point crude oil and heavy crude oil, the Company reduced production volume of both types of crude oil in 1998 when the crude oil price was relatively low. The Company plans to continue to reduce lifting costs in the Liaohe oil region by optimising steam-injection parameters, reducing fuel and energy expenses, implementing stricter management of water-injection wells and reducing its maintenance workforce. 90

BUSINESS
The Company has easy access to crude oil pipelines for Liaohe crude oil. The pipelines linking Daqing to Dalian port and Qinhuangdao port pass through the Liaohe oil region. In 1998, the Company sold about 81.5 per cent. of the crude oil it produced in the Liaohe oil region to its own reneries. Xinjiang Oil Region The Xinjiang oil region is located in the Junggar basin in northwestern China. The Company commenced its operations in the Xinjiang oil region in 1951. The Xinjiang oil region covers a total area of approximately 901,420 acres. As at 30 September 1999, its proved reserves in the Xinjiang oil region were 1,048.7 million barrels, representing 9.7 per cent. of its total proved crude oil reserves. In the rst nine months of 1999, the Company's oil elds in the Xinjiang oil region produced an average of 183.4 thousand barrels per day. In 1998, the crude oil reserve-to-production ratio in the Xinjiang oil region was 15.9 years. During the rst nine months of 1999, the crude oil the Company produced in the Xinjiang oil region had an average API gravity of 36.8 and an average water cut of 66.2 per cent. Since 1990, the Company's crude oil production in the Xinjiang oil region has increased by an average of approximately 1.8 million barrels per year. The Company's average lifting costs in the Xinjiang oil region increased from 1996 to 1998. The Company plans to decrease its lifting costs in this oil region by means of conserving energy and material consumption and increasing preventive maintenance. Sichuan Gas Region The Sichuan gas region is the largest natural gas region in China. The Company began natural gas exploration and production in Sichuan in the 1950s. The Sichuan gas region covers a total area of approximately 2.3 million acres. The natural gas reserve-to-production ratio in the Sichuan gas region was 24.3 years in 1998. As of 30 September 1999, it had 84 natural gas elds under development in the Sichuan gas region. As at 30 September 1999, the Company's proved natural gas reserves in the Sichuan gas region were 7,019.1 billion cubic feet, representing 28.9 per cent. of its total proved natural gas reserves. In the rst nine months of 1999, the Company's natural gas production for sale in the Sichuan gas region reached 188.6 billion cubic feet, representing 58.1 per cent. and 38.1 per cent. of the Company's total natural gas production for sale and China's natural gas production for sale, respectively. The Company has developed a broad range of technologies relating to natural gas exploration, production, pipeline systems and marketing activities tailored to local conditions in Sichuan. It plans to accelerate its development of proved reserves in the Sichuan gas region and deliver natural gas produced in the Sichuan gas region to major cities in central and eastern China, such as Wuhan and Shanghai. The Company intends to substantially increase its natural gas reserves and annual natural gas production in the Sichuan gas region by adopting advanced technologies and reducing costs. The Company plans to utilise large-scale fracturing techniques to increase per well production for its existing wells and undertake gas reservoir appraisals at earlier stages of development to improve the potential per well production for its development wells. Changqing Oil and Gas Region The Changqing oil and gas region covers parts of Shaanxi and Gansu provinces and the Ningxia and Inner Mongolia Autonomous Regions. The Company commenced operations in the Changqing oil and gas region in 1970. In the rst nine months of 1999, the Company produced 23.8 million barrels of crude oil in the Changqing oil and gas region. The adoption since 1996 of a series of new methods of management and technology in relation to exploration and development of low permeable oil elds has 91

BUSINESS
reduced lifting costs in the Changqing oil and gas region. The Company's lifting costs in the Changqing oil and gas region decreased from 1997 to 1998. The Company expects to continue to decrease lifting costs in the Changqing oil and gas region by: undertaking preventive maintenance to reduce overhaul; shutting down the operation of wells with high water cut and increasing production eciency through hesitation lifting; reducing energy consumption cost through using low cost electricity; and using natural gas injection techniques. In the early 1990s, the Company discovered the Changqing oil and gas eld, which had total estimated proved natural gas reserves of 5,805.0 billion cubic feet as at 30 September 1999, representing 23.9 per cent. of its total proved natural gas reserves. In the rst nine months of 1999, the Company produced 24.3 billion cubic feet of natural gas for sale in the Changqing oil and gas region. The establishment of a natural gas pipeline from Shaanxi to Beijing in 1997 has signicantly expanded the range of target markets for natural gas produced in the Changqing oil and gas region. In the two years following the establishment of the pipeline, the Company increased daily natural gas production for sale in the Changqing oil and gas region by approximately 865.0 per cent.

92

THE REFINING AND MARKETING SEGMENT OF THE COMPANY

22 47
Urumqi

39

37 42 30 41 7 38 20 31 8 2 21 36 32 43 33 48 9 19
Beijing

15
Crude Oil Pipeline

46 10 25 26 14 24 11 44 1 40 12 35
Yangtze River

*
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

The Companys refined product pipelines are generally short-distance local area pipelines, and are not reflected in the map.
Northwest Distribution Company Northeast Distribution Company Southwest Distribution Company East China Distribution Company North China Distribution Company Heilongjiang Distribution Company Jilin Distribution Company Liaoning Distribution Company Dalian Distribution Company Inner Mongolia Distribution Company Ningxia Distribution Company Gansu Distribution Company Sha anxi Distribution Company Qinghai Distribution Company Xinjiang Distribution Company Sichuan Distribution Company Chongqing Distribution Company Tibet Distribution Company Dalian Shipment Company Jilin Oil Field Refinery Liaohe Oil Field Petrochemical Plant Kalamayi Petrochemical Plant Dagang Oil Field Refinery Huhehaote Refinery

5 29 23

34
YELLOW SEA

Yellow River

45 27 13
Zhengzhou

93

18
Lhasa

28 3
Chengdu

4 17
Chongqing

Shanghai

16

EAST CHINA SEA

25 26 27 28 29 30 31 32 33 34 35 36

Germu Refinery Yumen Refining and Petrochemical Plant

Guangzhou

Changqing Xianyang Accessory Plant

Hong Kong

Nanchong Refinery North China Chemical Reagent Plant Harbin Petrochemical Company Qianguo Petrochemical Company Jinzhou Petrochemical Company (Refining) Jinxi Petrochemical Company Dalian Petrochemical Company (Refining) Lanzhou Refining and Chemical Company (Refining) Fushun Petrochemical Company (Refining)

37 38 39 40 41 42 43 44

Daqing Petrochemical Company (Refining) Jilin Chemical Company (Refining)

SOUTH CHINA SEA

Urumqi Petrochemical Company (Refining) Lanzhou Petrochemical Company (Refining) Linyuan Refinery Daqing Oilfield Accessory Plant Liaoyang Chemical Fibers Company Majiatan Refinery

45 46 47 48

Maling Refinery Zepu Petrochemical Plant Dushanzi Petrochemical Company (Refining) Anshan Refinery

BUSINESS
REFINING AND MARKETING The Company engages in rening and marketing operations in China through 29 reneries and 19 regional sales and distribution branch companies. These operations include crude oil rening and the transportation, storage and marketing of rened products including gasoline, diesel, jet fuel and lubricant, in wholesale, retail and export markets. As at 30 September 1999, the annual primary distillation capacity of the Company's reneries totalled 741.1 million barrels of crude oil per year, or 2,030.5 thousand barrels per day. In the rst nine months of 1999, the Company processed 364.0 million barrels of crude oil or 1,329.7 thousand barrels per day. In the rst nine months of 1999, the Company produced approximately 29.6 million tons of gasoline, diesel and jet fuel and sold approximately 34.2 million tons of these products. As at 30 September 1999, the Company's retail distribution network consisted of approximately 1,790 service stations owned and operated by the Company and approximately 3,600 service stations wholly-owned by CNPC or jointlyowned by CNPC and third parties and to which the Company provides supervisory support, and approximately 1,050 franchise service stations owned and operated by third parties with which it has long-term gasoline supply agreements. These service stations are located throughout China. All these service stations sell exclusively gasoline and diesel produced or supplied by the Company. In 1998, these service stations sold approximately 5.2 million tons of gasoline and diesel, representing 14.8 per cent. of the total of these products sold through the Company's marketing operations. In the nine months ended 30 September 1999, the Company's rening and marketing operations had income from operations of RMB2,616 million. Rening The Company's reneries are located in eight provinces, three autonomous regions and one municipality in the northeastern and northwestern regions of China. Rened Products The Company produces a wide range of rened products at its reneries. Some of its rened products are consumed internally as feedstocks for its chemical operations. The table below sets forth production volume for its principal rened products for each of the three years ended 31 December 1998 and for the nine months ended 30 September 1999.
Year ended 31 December 1996 1997 1998 (in thousands of tons) Nine months ended 30 September 1999

Product

Diesel Gasoline Fuel oil Naphtha Jet fuel(1) Lubricants Asphalt Paran Total
(1) Includes lighting kerosene.

16,774.6 11,996.4 9,388.4 3,343.9 1,773.1 1,205.0 1,011.8 589.6 46,082.8

18,957.6 13,003.8 8,814.3 4,462.2 1,786.3 1,291.9 1,362.7 570.8 50,249.6

19,259.4 13,297.0 7,760.0 4,765.6 1,813.0 1,222.0 1,234.6 690.1 50,041.7

17,929.9 10,165.2 5,236.9 3,512.7 1,523.6 1,076.4 1,072.9 614.4 41,132.0

94

BUSINESS
In the past two years, the Company has adjusted its product mix to reect market demand and to focus on the production of high margin products. In 1997 and 1998, this resulted in an overall modest increase in the production of lighter rened products (which generally are higher margin products), such as gasoline, jet fuel and naphtha. At the same time, it has decreased its production of low margin products, such as fuel oil and petroleum coke. In recent years, the Company has made signicant capital investments in facility expansions and upgrades to improve product quality to meet evolving market demand and environmental requirements in China. In each of the three years ended 31 December 1996, 1997 and 1998, the Company's capital expenditures for its rening and marketing segment were RMB15,456 million, RMB8,388 million and RMB9,374 million, respectively. These capital expenditures were incurred primarily in connection with the Company's facility expansions and upgrades. In addition, it has also focused on enhancing its processing technologies and methods. These eorts have enabled it to improve the quality of rened products at its reneries, particularly that of gasoline and diesel. It has reduced gasoline lead and sulphur content and diesel sulphur content. The Directors believe that the Company's rened products generally meet product specication and environmental protection requirements as set by the PRC Government. The PRC Government required that all reneries in China cease producing leaded gasoline by 1 January 2000. The Company's reneries were capable of meeting this requirement without any material impact on production or any additional material expenditure. The Company plans to continue to make capital investments in 2000 in facility upgrades to further improve product quality. The Company intends to invest, among others: approximately RMB1,600 million in 13 renery process upgrading projects, including the completion of the construction of a hydrocracking unit at Daqing Petrochemical with a designed annual capacity of 1.4 million tons and building a catalytic reforming unit at Dalian Petrochemical with a designed annual capacity of 600,000 tons; approximately RMB878 million in six high conversion capacity expansion projects, including the completion of the construction of a heavy oil catalytic cracking unit at Fushun Petrochemical with a designed annual capacity of 1.5 million tons; and approximately RMB1,153 million in various environmental protection, energy conservation and technological improvement projects. In 1998, the Company's rening and marketing operations were aected by widespread gasoline and diesel smuggling. The PRC Government took various anti-smuggling measures to deter smuggling of gasoline and diesel in 1998. In 1999, the PRC Government intensied its anti-smuggling eorts. The Directors believe that those anti-smuggling eorts have resulted in an improved operating environment for the Company's rening and marketing operations. In the past two years, the PRC Government has taken active measures to consolidate reneries in China to improve the eciency and resource allocation and the quality of rened products. In 1998, the PRC Government implemented a number of measures to achieve those goals. Those measures included ordering the closure of many small reneries in China. In May 1999, the State Council issued a document calling for the further consolidation of reneries operated by companies other than the Company and Sinopec. Further, the PRC Government ordered the closure of a number of small reneries that produced low-quality products and were not in compliance with environmental protection laws and regulations. The Directors believe these government eorts have had a positive impact on the Company's wholesale prices and sales volume of gasoline and diesel.

95

BUSINESS
The Company's Reneries The Company wholly owns 27 reneries and currently holds a 67.29 per cent. interest in Jilin Chemical Industrial Company Limited, a company listed on the Stock Exchange and the NYSE since May 1995 and listed on the Shenzhen Stock Exchange since October 1996, and a 80.95 per cent. interest in Jinzhou Petrochemical Company Limited, a company listed on the Shenzhen Stock Exchange since September 1997. Most of these reneries are strategically located close to the Company's crude oil storage facilities, and along its crude oil and rened product transmission pipelines and/or railways. These systems provide the reneries with secure supplies of crude oil and facilitate the distribution of rened products to the domestic markets. In each of the three years ended 31 December 1996, 1997 and 1998 and the rst nine months of 1999, the Company's exploration and production operations supplied 96.0 per cent., 95.8 per cent. and 97.8 per cent. and 95.8 per cent., respectively, of the crude oil processed in its reneries. The table below sets forth certain operating statistics regarding the Company's reneries as at 31 December 1996, 1997 and 1998 and 30 September 1999.
As at 31 December 1996 1997 1998 As at 30 September 1999

Primary Distillation Capacity(1) (thousand barrels per day) Fushun Petrochemical Dalian Petrochemical Daqing Petrochemical Jilin Chemical
(2)

186.2 143.7 121.5 93.1 101.2 111.3 111.3 101.2 783.6

186.2 143.7 121.5 113.4 101.2 121.5 111.3 101.2 927.2 1,927.2

186.2 143.7 121.5 113.4 111.3 111.3 111.3 101.2 1,030.6 2,030.5

186.2 143.7 121.5 113.4 111.3 111.3 111.3 101.2 1,030.6 2,030.5

Jinxi Renery Lanzhou Renery Jinzhou Petrochemical

(3)

Urumqi Petrochemical Other reneries

Total 1,753.1 Rening Throughput(4) (thousand barrels per day) Fushun Petrochemical Dalian Petrochemical Daqing Petrochemical Jilin Chemical
(2)

151.0 104.6 110.0 69.8 78.8 74.1 67.9 54.3 441.3

153.1 106.3 112.3 81.8 83.7 78.3 64.6 57.9 517.8 1,255.8

141.6 100.7 101.8 87.5 81.3 74.3 68.4 68.6 546.2 1,270.4

148.0 104.4 106.2 90.2 85.5 84.0 72.2 64.7 574.5 1,329.7

Jinxi Renery Lanzhou Renery Jinzhou Petrochemical

(3)

Urumqi Petrochemical Other reneries

Total 1,151.8

96

BUSINESS
As at 31 December 1996 1997 1998 As at 30 September 1999

Conversion Equivalent(4)(per cent.) Fushun Petrochemical Dalian Petrochemical Daqing Petrochemical Jilin Chemical
(2)

66.2 26.8 51.3 40.9 48.0 38.2 42.3 48.0 33.3

66.2 46.5 51.3 44.3 48.0 35.0 58.2 48.0 33.3

67.2 46.5 51.3 42.6 69.1 43.6 58.2 48.0 34.2

67.4 46.5 51.3 43.4 69.1 43.6 63.6 48.0 38.1

Jinxi Renery Lanzhou Renery Jinzhou Petrochemical(3) Urumqi Petrochemical Average of other reneries
(1) Represents the primary distillation capacity of crude oil and condensate.

(2) Includes Jilin Chemical Industrial Company Limited, in which the Company held a 70.25 per cent. equity interest in the relevant periods. Data regarding the primary distillation capacity, rening throughput and conversion equivalent of Jilin Chemical includes a 29.75 per cent. minority interest held by unrelated third parties in Jilin Chemical Industrial Company Limited in the relevant periods. (3) Includes a 19.05 per cent. minority interest held by unrelated third parties in Jinzhou Petrochemical Company Limited in the relevant periods. (4) Stated in uid catalytic cracking, delayed coking and hydrocracking equivalent/topping (percentage by weight), based on 100 per cent. of balanced distillation capacity.

In each of the three years ended 31 December 1996, 1997 and 1998 and the rst nine months of 1999, the average utilisation rate of the primary distillation capacity of the Company's reneries was 65.7 per cent., 65.2 per cent., 62.6 per cent. and 65.5 per cent., respectively. Such utilisation rates are consistent with the average utilisation rate in China which are generally low as a result of over capacity of reneries due to the geographically scattered locations of the Company's reneries. The average yield for the Company's four principal rened products (gasoline, jet fuel, diesel and lubricants) at the Company's reneries was 55.6 per cent., 56.3 per cent., 56.2 per cent. and 62.3 per cent., respectively, in the same periods. ""Yield'' represents the number of tons of a rened product expressed as a percentage of the number of tons of crude oil from which that product was processed. In each of the three years ended 31 December 1996, 1997 and 1998, the yield for all rened products at its reneries was 91.2 per cent., 91.4 per cent. and 91.1 per cent., respectively. Fushun Petrochemical, Dalian Petrochemical and Daqing Petrochemical were the Company's leading reneries in terms of both primary distillation capacity and throughput in 1998. They are all located close to the Company's major oil elds in the northeastern region of China and produce a wide range of rened products. Lanzhou Renery has a strategic position in the Company's plan to expand its markets in rened product sales in the southwestern and central regions of China. It is located in the northwestern part of China, providing easy access to markets in the southwestern and central regions in China. As at 30 September 1999, these four reneries had an aggregate primary distillation capacity of 205.4 million barrels per year or 562,778 barrels per day, representing approximately 27.7 per cent. of the total primary distillation capacity of all of the Company's reneries. During the rst nine months of 1999, these four reneries processed 121.2 million barrels of crude oil or 442,545 barrels per day in aggregate, representing approximately 33.3 per cent. of the Company's total throughput. 97

BUSINESS
Fushun Petrochemical Fushun Petrochemical is located in Fushun, Liaoning Province. Fushun Petrochemical has a long operating history and has undergone many major upgrades over the years. Fushun Petrochemical is the Company's largest renery in terms of its primary distillation capacity and its throughput and is the largest paran producer in China. As at 30 September 1999, Fushun Petrochemical had a primary distillation capacity of 68.0 million barrels per year or 186,243 barrels per day. In the nine months ended 30 September 1999, the average throughput of Fushun Petrochemical was 147,996 barrels per day. Approximately 84.3 per cent. and 15.7 per cent. of the crude oil processed at Fushun Petrochemical in 1998 was sourced from the Company's own production in the Daqing oil region and the Liaohe oil region, respectively. Crude oil supplied to Fushun Petrochemical is transported from the Daqing oil region and the Liaohe oil region by pipelines. In the rst nine months of 1999, the primary distillation capacity utilisation rate at Fushun Petrochemical was 79.5 per cent., which is 14.0 per cent. higher than the overall average primary distillation capacity utilization rate of the Company's reneries. Fushun Petrochemical's yield for the Company's four major rened products (gasoline, jet fuel, diesel and lubricants) was 61.3 per cent. in the same period. As at 30 September 1999, the high conversion capacity of Fushun Petrochemical was 45.8 million barrels per year. ""High conversion capacity'' is a measure of a renery's ability to convert residual oil to light oil, such as gasoline, jet fuel and diesel. High conversion involves catalytic cracking, delayed coking and hydrocracking. Fushun Petrochemical produces many high margin products such as gasoline, diesel, jet fuel and lubricants through increasing its high conversion capacity. The Company intends to increase the yield for light oil products through a further increase of Fushun Petrochemical's high conversion capacity. Dalian Petrochemical Dalian Petrochemical is located in the coastal city of Dalian, Liaoning Province. Dalian Petrochemical is one of the largest lubricant producers in China. Dalian Petrochemical has a long operating history. As at 30 September 1999, Dalian Petrochemical had a primary distillation capacity of 52.5 million barrels per year or 143,731 barrels per day. In the nine months ended 30 September 1999, the average daily throughput of Dalian Petrochemical was 104,370 barrels per day. Approximately 90.0 per cent. of the crude oil processed at Dalian Petrochemical comes from the Company's own production in the Daqing oil region, with the remainder from imported sources. Dalian Petrochemical has its own crude oil and rened product jetties. The domestic crude oil supplied to Dalian Petrochemical is transported from the Daqing oil region by pipeline. Imported crude oil is transported to crude oil jetties by oil tankers and then by pipeline to the renery. A large portion of Dalian Petrochemical's rened products is sold to coastal areas in eastern and southern China. In the rst nine months of 1999, the primary distillation capacity utilisation rate at Dalian Petrochemical was 72.6 per cent. which is 7.1 per cent. higher than the average primary distillation capacity utilisation rate of the Company's reneries. Dalian Petrochemical's yield for the Company's four major rened products was 65.5 per cent. in the same period. As at 30 September 1999, the high conversion capacity of Dalian Petrochemical was 24.4 million barrels per year. The Directors believe that Dalian Petrochemical's coastal location and easy access to its oil jetty facilities should enable it to capture markets in both coastal regions in eastern and southern China and overseas. However, Dalian Petrochemical's ability is currently constrained by its limited high conversion capacity as it does not have any delayed coking and hydrocracking capacity. The Company intends to build a hydrocracking facility with a capacity of 7.4 million barrels per year at Dalian Petrochemical. In addition, it intends to increase Dalian Petrochemical's annual catalytic reforming capacity by 4.4 million barrels. The Directors believe 98

BUSINESS
these high conversion capacity expansion projects will enable the Company to increase the production of high-quality gasoline and diesel to meet demand in the eastern and southern regions of China and overseas. Daqing Petrochemical Daqing Petrochemical is located in Daqing, Heilongjiang Province. Daqing Petrochemical commenced operation in the early 1960s. As at 30 September 1999, Daqing Petrochemical had a primary distillation capacity of 44.3 million barrels per year or 121,463 barrels per day. In the nine months ended 30 September 1999, the average throughput of Daqing Petrochemical was 106,163 barrels per day. All of the crude oil processed at Daqing Petrochemical comes from the Company's own production in the Daqing oil region. Crude oil supplied to Daqing Petrochemical is transported from the Daqing oil region by pipelines. Daqing Petrochemical is a leading producer of lubricants, paran and jet fuel in China. In the rst nine months of 1999, the primary distillation capacity utilisation rate at Daqing Petrochemical was 87.4 per cent., which is 21.9 per cent. higher than the average primary distillation capacity utilisation rate of the Company's reneries. Daqing Petrochemical's yield for the Company's four major rened products was 63.2 per cent. in the same period. As at 30 September 1999, the high conversion capacity of Daqing Petrochemical was 22.8 million barrels per year. Lanzhou Renery Lanzhou Renery is located in northwestern China. It commenced operation in the 1950s. As at 30 September 1999, Lanzhou Renery had a primary distillation capacity of 40.6 million barrels per year or 111,341 barrels per day. It is the largest renery in western China. In the nine months ended 30 September 1999, the average throughput of Lanzhou Renery was 84,015 barrels per day. 60.5 per cent. of the crude oil processed at Lanzhou Renery was sourced from the Company's own production in the Xinjiang, Tarim and Tuha oil regions, with the remainder being sourced from its own production in the Qinghai oil region and the Changqing oil region. Crude oil supplied to Lanzhou Renery is transported from these oil regions by train. Lanzhou Renery is the Company's major producer in western China of diesel, gasoline, lubricants and lubricant additives. In the rst nine months of 1999, the primary distillation capacity utilisation rate at Lanzhou Renery was 75.5 per cent., which is 10.0 per cent. higher than the average primary distillation capacity utilisation rate of the Company's reneries. Lanzhou Renery's yield for the Company's four major rened products was 64.1 per cent. in the same period. As at 30 September 1999, the high conversion capacity of Lanzhou Renery was 17.7 million barrels per year. In the year ended 31 December 1998, 27.6 per cent. of Lanzhou Renery's rened products were sold into the southwestern regions of China, particularly Sichuan Province, where demand for rened products signicantly exceeds supply. There are no signicant rening operations in southwestern China, and therefore, Lanzhou Renery is the closest large-scale renery to these regions. The Company intends to increase the primary distillation capacity of Lanzhou Renery by a total of 18.5 million barrels per year or 50,610 barrels per day by 2004 to meet the increasing demand for rened products in that market. This project is the only primary distillation capacity expansion project the Company currently plans to undertake in the near future. The Company expects that this expansion project will not involve signicant capital investment. It also plans to construct a rened product pipeline system from Lanzhou to Chengdu, Sichuan Province with a total length of 960 km and a designed throughput capacity of ve million tons of rened products per year. The Company has obtained preliminary approval from the State Development Planning Commission for this project. The Directors believe that this pipeline system will reduce the cost of the 99

BUSINESS
transportation of its rened products to these regions and further increase the sales of Lanzhou Renery's rened products. Marketing The Company markets a wide range of rened products, including gasoline, diesel, jet fuel and lubricants, through an extensive network of sales personnel and independent distributors and a broad wholesale and retail distribution system across China. As at 30 September 1999, its marketing network consisted of: approximately 430 regional wholesale distribution outlets nationwide. Substantially all of these outlets are located in high demand areas such as economic centres across China, particularly in the coastal areas, along major railways and along the Yangtze River; and approximately 1,790 service stations owned and operated by the Company, approximately 3,600 service stations wholly-owned by CNPC or jointly-owned by CNPC and third parties which exclusively sell rened products produced or supplied by the Company and to which the Company provides supervisory support under contractual arrangements, and approximately 1,050 franchise service stations owned and operated by third parties. These service stations are located across China and sell exclusively gasoline and diesel produced by the Company. In the rst nine months of 1999, the Company sold approximately 32.5 million tons of gasoline and diesel. The PRC Government and other institutional customers, including airlines and railway companies, have been long-term purchasers of the gasoline and diesel produced by the Company. The Company sells gasoline and diesel to those customers at a discount to the Company's average wholesale prices. Sales of gasoline and diesel to those customers accounted for approximately 5.6 per cent. and 17.3 per cent. of the Company's total sales of gasoline and diesel, respectively, in the rst nine months of 1999. The average discount applicable to sales of gasoline and diesel by the Company to these customers from the average wholesale prices in that period was 12.8 per cent. and 14.7 per cent., respectively. The following table sets forth the Company's rened product sales by principal product category for each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999.
Year ended 31 December 1997 1998 (in thousands of tons) Nine months ended 30 September 1999

Product

1996

Diesel Gasoline Fuel oil Naphtha Jet Fuel(1) Asphalt Lubricants Paran Total
(1)

17,750.0 12,790.0 5,500.0 1,582.5 1,780.0 1,133.2 1,020.0 558.7 42,114.4

19,950.0 13,550.0 6,960.0 1,890.0 1,870.0 1,393.4 1,290.0 473.7 47,377.1

21,000.0 14,030.0 5,593.8 2,419.6 1,810.0 1,304.9 1,220.0 704.8 48,083.1

20,177.2 12,312.5 3,695.0 2,750.0 1,758.5 1,248.6 1,055.6 598.7 43,596.1

Includes lighting kerosene.

100

BUSINESS
Wholesale Marketing The Company sells rened products both directly and through independent distributors into various wholesale markets, as well as utility, commercial, petrochemical, aviation, agricultural, shery and transportation companies in China. It sold approximately 28.3 million tons of gasoline and diesel through its wholesale operations in the rst nine months of 1999, including transfers to its retail operations, which represented approximately 87.1 per cent. of its total sales of these products in that period. The Company sold approximately 3.9 million tons of gasoline and diesel through its wholesale operation to Sinopec, representing 12.1 per cent. of its total sales of these products in that period. In the rst nine months of 1999, the Company sold approximately 9.4 million tons of its other principal rened products. Until 1998, the rened product distribution system in China was divided on a geographic basis into provincial, municipal and county levels. The Company's wholesale distribution system was established on the basis of this three-tier system. As a result, its wholesale distribution structure has created ineciency in its marketing operations. In addition, the unnecessary distribution layers increase distribution costs. As part of the Restructuring, the Company completed the implementation of a plan to consolidate its wholesale operations and reduce distribution layers and the number of wholesale outlets. The Company expects that the implementation of this plan will increase the overall eciency of its marketing operations. Retail Marketing For the year ended 31 December 1998, the Company sold approximately 5.2 million tons of gasoline and diesel through its service station network, accounting for 14.8 per cent. of the total of these products sold through its marketing operations. Of the 1,790 service stations owned by itself as at 30 September 1999, the Company was the sole owner of approximately 1,700 service stations, and had controlling interests in the remaining 90 service stations. Average daily sales volumes of gasoline and diesel at the Company's service station network were approximately 2.4 tons and 2.3 tons per service station, respectively, for the year ended 31 December 1998 and in the rst nine months of 1999, although these numbers vary signicantly by geographic region. The Company sells its rened products to service stations owned and operated by CNPC. These service stations sell exclusively rened products produced or supplied by the Company in accordance with contractual arrangements between CNPC and the Company. Under those contractual arrangements, the Company also provides supervisory support to these service stations. For further details see section headed ""Business Relationship with the CNPC Connected Transactions Contract for the Supervision of Certain Sales Enterprises''. The Company currently markets its gasoline and diesel through its service station network under the tradename of ""CNPC''. The Company is in the process of gradually converting the tradename for the existing service stations in its service station network from ""CNPC'' to ""PetroChina''. The Company intends to use ""PetroChina'' as the tradename for the service stations to be acquired or constructed by the Company in the future. Most of the service stations in its service station network are concentrated in the northeastern and northwestern regions of China where the Company has a dominant wholesale market position. However, the eastern and southern regions of China have a higher demand for gasoline and diesel. In 1998, the Company only sold 800 thousand tons of gasoline and diesel through the service stations owned and franchised by it in those regions. The Company intends to expand its sales and market share in those regions through expanding the number of service stations and storage facilities in those regions. 101

BUSINESS
The Company has formulated plans to increase its retail market share and improve the eciency of its retail operations. The Company currently plans to invest RMB10,008 million for the period between 1999 to 2004 to expand its service station network by way of acquisition, joint ventures, new construction and franchising from or with CNPC or other third parties. It currently intends to add 6,000 to 9,000 new service stations between 2000 and 2004. In addition, the Company also plans to improve the eciency and protability of its existing service station network by establishing unied operation systems and procedures and diversifying the line of products sold at its service stations. The Company is in the process of standardising the interior and exterior of its service stations, its service procedures, sta uniforms and the product quality of all its service stations. In addition to selling gasoline and diesel, the Company intends to increase the sale of lubricants and other non-fuel products at its service stations. The Company has entered into a non-binding letter of intent dated 23 March 2000 with BP Amoco p.l.c. that contemplates possible future cooperation in the fuels retail sector, including joint establishment and management of service stations. These arrangements are subject to conclusion of binding agreements and receipt of PRC Government approvals. No assurance can be given that negotiations with BP Amoco p.l.c. will be successful or that the necessary approvals will be obtained. Crude Oil and Rened Product Transportation and Storage Infrastructure The Company has an extensive network for the transportation, storage and distribution of both crude oil and rened products, which covers many regions of China. Its goal is to exploit and optimise its existing infrastructure to further consolidate its presence as the leading integrated oil and gas company in China. As at 30 September 1999, the Company's crude oil transportation and storage infrastructure consisted of: approximately 8,400 km of crude oil pipelines with an average daily throughput capacity of approximately 2.3 million barrels; and crude oil storage facilities with an aggregate storage capacity of approximately 13.4 million cubic metres. The Company delivers its crude oil to customers through its pipeline and storage facility network, through crude oil storage facilities that it leases from third parties and by ships leased by customers. For the year ended 31 December 1998, approximately 55.1 per cent. of its crude oil production was delivered to its reneries through its crude oil pipeline network. The Directors believe that the Company's crude oil pipeline network is sucient for its current and anticipated transportation needs. During the past ve years, it has not experienced any delays in its ability to deliver crude oil due to pipeline capacity constraints. The Company's transportation and storage infrastructure also includes: approximately 1,000 km of rened product pipelines with an average daily throughput of approximately 21,237 tons; and approximately 314 refined product storage facilities with a total storage capacity of approximately 6.9 million cubic metres. Most of the Company's reneries are located in the northeastern and northwestern regions of China. Its ability to distribute products through its own product distribution infrastructure to the eastern and 102

BUSINESS
southern regions will provide it with greater exibility in supplying rened products to the domestic markets across China. The Company plans to enhance its product distribution infrastructure in the northeastern, northwestern, northern and southwestern regions where it already has a signicant market share, and expand its product distribution infrastructure in the eastern and southern regions by acquiring and constructing transportation storage facilities and distribution storage facilities in these regions. The Company's current plans include investing: approximately RMB330 million from 1999 to 2004 to acquire from third parties controlling interests in three transportation storage facilities located in Zhuhai, Guangdong Province, Shishi, Fujian Province and Ningbo, Zhejiang Province, and in another transportation storage facility in southern China, and to jointly operate with third parties another transportation storage facility in Dalian, Liaoning Province. The Directors expect these storage facilities to have an aggregate storage space of approximately 900 thousand cubic metres; approximately RMB2,600 million from 1999 to 2004 to acquire from third parties or to construct distribution storage facilities in the eastern and southern regions. The Directors expect these distribution storage facilities to have an aggregate storage space of approximately 3.6 million cubic metres; and approximately RMB1,300 million from 1999 to 2004 to acquire from third parties or to construct distribution storage facilities in the northeastern, northwestern and southwestern regions. The Directors expect these distribution storage facilities to have an aggregate storage space of approximately 1.7 million cubic metres. The Company is currently planning to construct a rened product pipeline system from Lanzhou, Gansu Province to Chengdu, Sichuan Province. This pipeline will connect Lanzhou Renery directly with the southwestern region of China. In this region, there is a lack of crude oil resources and rening capacity, which has resulted in the demand for rened products signicantly exceeding supply. This pipeline system is designed to have a total length of 960 km and a throughput capacity of ve million tons of rened products per year. The Company has obtained preliminary approval for this project from the relevant governmental authorities. It estimates that the total capital investment for this project will be approximately RMB2,786 million. It expects that it will commence the construction of this project in 2000 and complete the construction in 2001. Together with the expansion of the Company's service stations, it expects that its pipelines, primary storage and secondary distribution storage facilities will greatly enhance its existing distribution infrastructure for rened products. The Directors believe that its enhanced distribution infrastructure will help the Company increase the sales of its rened products.

103

THE CHEMICALS SEGMENT OF THE COMPANY

1
Urumqi

5 15 6

17 10 7 8 9

Beijing

16

11
YELLOW SEA

Yellow River

4 14

12
Zhengzhou

104
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Dushanzi Petrochemical Company (Chemical) Urumqi Petrochemical Company (Chemical) Ningxia Petrochemical Company Lanzhou Petrochemical Company (Chemical) Daqing Petrochemical Company (Chemical) Jilin Chemical Company (Chemical) Fushun Petrochemical Company (Chemical) Liaoyang Petrochemical Company Dalian Petrochemical Company (Chemical) Jinzhou Petrochemical Company (Chemical) Huabei Oilfield Company Chemical Operations Changqing Oilfield Company Chemical Operations Southwest Oil and Gas Field Company Chemical Operations Lanzhou Refining and Chemical Company (Chemical)

Yangtze River

13
Chengdu Chongqing

Shanghai

EAST CHINA SEA

Guangzhou

Hong Kong

SOUTH CHINA SEA

15 16 17

Jilin Oilfield Company Chemical Operations Qinghai Oilfield Company Chemical Operations Tarim Oilfield Company Chemical Operations

BUSINESS
CHEMICALS Through 17 chemical plants, the Company produces basic petrochemical products, derivative petrochemical products, and other chemical products. In the nine months ended 30 September 1999, the Company's loss from chemical operations was RMB2,407 million. The Company's chemical plants are located in eight provinces and three autonomous regions in China. Most of its chemical plants are co-located with its reneries and are also connected with these reneries by pipelines, providing additional production exibility and opportunities for cost competitiveness. Its exploration and production, rening and natural gas operations supply substantially all of the hydrocarbon feedstock requirements for its chemicals operations. The Directors believe that the close proximity of the Company's reneries to its chemical plants promotes eciency in production, secures feedstock supply and minimises the risk of production interruption. The Company's production capacity and market share in China for chemical products allows the Company to solidify its dominant position in the northern and western regions of China. In addition, its stable customer base in the eastern and southern regions of China provides it with the opportunity to expand its market share in these regions. Chemical Products of the Company The table below sets forth the production volumes of the principal chemical products of the Company for each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999.
Year ended 31 December 1997 1998 (in thousands of tons) Nine months ended 30 September 1999

1996

Basic petrochemicals Ethylene Propylene Benzene Derivative petrochemicals Polyolen Polyethylene Polypropylene ABS(1) Fibres Terylene bre Polyacrylic bre(2) Polypropylene bre Rubber Butadiene styrene rubber Polybutadiene rubber(3) Acrylonitrile-butadiene rubber Ethylene-propylene rubber

801.8 436.3 124.7

1,131.1 585.0 248.7

1,272.8 664.1 271.2

916.3 485.4 203.4

474.5 186.5 21.0 83.1 115.3 8.0 128.2 18.8 8.8

714.2 327.2 16.5 149.9 107.1 8.0 138.7 31.3 4.8 3.7

780.7 333.7 97.8 156.5 112.6 9.2 136.1 31.0 9.6 10.9

597.1 315.2 69.3 133.2 49.6 5.1 79.8 33.1 6.6 4.8

105

BUSINESS
Nine months ended 30 September 1999

1996

Year ended 31 December 1997 1998 (in thousands of tons)

Intermediates PTA Glacial acetic acid Alkylbenzene Puried methanol Octanol Synthesised ethanol Butyl alcohol Other chemicals Urea Ammonium nitrate
(1)

95.6 178.9 74.2 64.3 94.4 100.3 47.1 1,853.6 629.5

279.4 175.0 90.2 74.8 88.9 101.0 48.1 2,084.5 613.1

323.0 199.7 107.0 65.5 82.3 106.5 61.0 2,578.6 381.1

257.7 152.4 100.2 84.4 68.1 59.1 24.5 2,257.1 312.9

(2)

(3)

Represents the Company's historical ABS production volumes, including ABS produced by ve chemical production facilities that were not transferred to the Company by CNPC as part of the Restructuring. On a pro forma basis, taking into account the exclusion of the ve chemical production facilities, the Company's ABS production volumes in the year ended 31 December 1998 and the nine months ended 30 September 1999 would have been 76.8 thousand tons and 65.5 thousand tons, respectively. Represents the Company's historical polyacrylic bre production volumes, including polyacrylic bre produced by ve chemical production facilities that were not transferred to the Company by CNPC as part of the Restructuring. On a pro forma basis, taking into account the exclusion of the ve chemical production facilities, the Company's polyacrylic bre production volumes in the years ended 31 December 1996, 1997 and 1998 and in the nine months ended 30 September 1999 would have been 81.1 thousand tons, 77.0 thousand tons, 78.4 thousand tons and 45.2 thousand tons, respectively. Represents the Company's historical polybutadiene rubber production volumes, including polybutadiene rubber produced by ve chemical production facilities that were not transferred to the Company by CNPC as part of the Restructuring. On a pro forma basis, taking into account the exclusion of the ve chemical production facilities, the Company's polybutadiene rubber production volumes in the year ended 31 December 1998 and the nine months ended 30 September 1999 would have been 30.8 thousand tons and 27.7 thousand tons, respectively.

The Company is a major producer of ethylene in China. The Company uses the bulk of the ethylene it produces as a principal feedstock for the production of many chemical products, such as polyethylene. As of 30 September 1999, the Company had a total ethylene production capacity of 1.3 million tons per year. For the year ended 31 December 1998, the average capacity utilisation rate at its ethylene production facilities was 95.6 per cent. The cost of ethylene production is an important component of its overall chemical production costs. Reduction of energy consumption and raw material loss is a key factor in reducing ethylene production costs. Currently, the Company plans to reduce the costs of its production of chemical products primarily by increasing ethylene production eciency. For the year ended 31 December 1998, the Company achieved a 6.6 per cent. reduction in the average energy consumption of its ethylene production facilities from 934 kg of standard oil per ton for the year ended 31 December 1997 to 872.2 kg of standard oil per ton for the year ended 31 December 1998. However, this is signicantly higher than the world average of 500 to 690 kg of standard oil per ton. The Company intends to reduce the average energy consumption for ethylene production to 740 kg of standard oil per ton in 2004. In addition, high ethylene percentage loss has also contributed to the relative high cost of the Company's ethylene production. For the year ended 31 December 1998, the average ethylene percentage loss at its chemical plants was approximately 1.96 per cent. compared to the world average of 1.0 per cent. High ethylene percentage loss is primarily caused by inecient process management. For instance, a temporary interruption for maintenance of crack gas compressors of chemical plants usually results in high ethylene loss. The Company has taken measures to improve its management, such as 106

BUSINESS
requiring that the ethylene facility carry out strict preventive maintenance procedures and monitor them closely. The Company also requires its employees to observe strictly the procedures for the smooth operation of ethylene production facilities to ensure the stable operation of pyrolysis compressors. The Directors believe that these measures will enable the Company to reduce the cost of its ethylene production without signicant capital expenditure. In 1998 and the rst half of 1999, the Company's chemical operations were aected by a signicant increase in imports of chemical products, including smuggled products. The PRC Government took various anti-smuggling measures to deter smuggling of chemical products in the second half of 1998. In 1999, the PRC Government intensied its anti-smuggling eorts. The Directors believe that those antismuggling eorts have resulted in an improved operating environment for the chemical operations. The Company produces a number of polyolen products, including polyethylene, polypropylene and ABS. Since 1996, the Company has signicantly increased the production of these products. As at 31 December 1998, the Company's production capacities for polyethylene, polypropylene and ABS were 759.5 thousand tons, 421.0 thousand tons and 170.0 thousand tons, respectively, representing 30.5 per cent., 16.1 per cent. and 89.5 per cent., respectively, of China's total production capacity for these products. For the nine months ended 30 September 1999, the Company produced 597.1 thousand tons, 315.2 thousand tons and 69.3 thousand tons of polyethylene, polypropylene and ABS, respectively. Currently, China imports signicant volumes of these products to meet the domestic demand due to an inadequate supply of high-quality domestically produced polyethylene, polypropylene and ABS. The Company intends to continue to increase its production of these products. The Company plans to increase the production and improve the quality of these products. It intends to achieve these objectives through renovating and upgrading its production facilities and improving technology for the production of these products in Daqing Petrochemical, Dushanzi Petrochemical and Lanzhou Petrochemical. Principal Chemical Plants Daqing Petrochemical and Jilin Chemical are the Company's top producers of ethylene. Together, they produced 759.2 thousand tons of ethylene for the year ended 31 December 1998, representing 59.6 per cent. of its total ethylene production in that year. Daqing Petrochemical Daqing Petrochemical commenced operation in the 1960s. Daqing Petrochemical is one of China's largest chemical plant in terms of ethylene production, and produces many kinds of chemical products. As at 30 September 1999, the ethylene production capacity at Daqing Petrochemical was 350 thousand tons per year. Daqing Petrochemical rening operations supply a majority of the feedstock for its ethylene production. The Daqing oil region also supplies lighter hydrocarbons for Daqing Petrochemical's ethylene production. For the year ended 31 December 1998, the utilisation rate of the ethylene production facilities at Daqing Petrochemical was 104.8 per cent., which was 9.2 per cent. higher than the Company's average. In November 1999, Daqing Petrochemical completed an expansion project to increase its annual ethylene production capacity from 350 thousand tons to 480 thousand tons. The Directors expect that, after the expanded ethylene facilities commenced full operation by February 2000, Daqing Petrochemical will be able to increase the production capacity of its partial ethylene processing facilities and improve its product mix to achieve economies of scale. Jilin Chemical Jilin Chemical commenced operation in the 1950s. Jilin Chemical, which consists of the chemical production facilities of PetroChina Jilin Chemical Corporation, one of the subsidiaries of the Company, 107

BUSINESS
and Jilin Chemical Industrial Company Limited, was China's largest chemical producer in terms of sales revenue in 1998. The Company currently holds a 67.29 per cent. equity interest in Jilin Chemical Industrial Company Limited. The Company does not hold any interest in Jilin Chemical Group Corporation. Jilin Chemical is located in Jilin City, Jilin Province. As at 30 September 1999, the ethylene production capacity at Jilin Chemical was 450 thousand tons per year. Jilin Chemical's rening operations supply a majority of the feedstock for its ethylene production. However, for the year ended 31 December 1998, the utilisation rate of the ethylene production facilities at Jilin Chemical was 87.2 per cent., which was 8.4 per cent. lower than the Company's average. The Directors believe that this was caused by the oversupply of fatty alcohol, an ethylene derivative product, in the markets close to Jilin Chemical and Jilin Chemical's high costs of production. The Company has taken steps to adjust its product mix at Jilin Chemical by increasing the production of ABS. ABS is a major ethylene derivative product and has a high demand in China. For the year ended 31 December 1998, Jilin Chemical's ABS production accounted for 60.6 per cent. of the Company's total ABS production in that year. The Company has begun the construction of a number of projects at Jilin Chemical to increase its ABS production capacity. The Company has committed RMB 1.6 billion to implement these expansion plans and expect the expansion to be completed in 2002. In addition, Jilin Chemical produces a wide range of rened chemical products, such as dye and fertiliser intermediates, promoters and interfacial active agents. Some of these products are high margin products and were developed by Jilin Chemical through its own research and development technology centre. The Company intends to further improve the quality of these products and reduce production costs at Jilin Chemical. Sales and Marketing The Company's chemical products are distributed to a number of industries that manufacture components used in a wide range of applications, including the automotive, construction, electronics, medical manufacturing, printing, electrical appliances, household products, insulation, packaging, paper, textile, paint, footwear, agriculture and furniture industries. The Company's chemical products are marketed directly or indirectly through a network of sales personnel and agents dedicated to its chemical operations. Currently, the Company has six sales and technical service centres, each responsible for marketing and providing after-sales services in respect of plastics, bres, rubbers, fertilisers, organic chemical feedstock and catalysts and additives, respectively. In each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999, sales, including intersegment sales, of chemical products accounted for RMB 19,851 million, RMB 24,578 million, RMB 21,849 million and RMB 18,953 million, respectively, representing 9.8 per cent., 10.7 per cent., 10.1 per cent. and 10.4 per cent., respectively, of the Company's total revenues in the same periods.

108

BUSINESS
The following table sets forth the Company's chemical product sales by principal product category for each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999.
Year ended 31 December 1997 (in thousands of tons) Nine months ended 30 September 1999

Product

1996

1998

Basic petrochemicals Benzene Propylene Ethylene Derivative petrochemicals Polyolen Polyethylene Polypropylene ABS(1) Fibres Terylene bre Polyacrylic bre(2) Polypropylene bre Rubber Butadiene styrene rubber Polybutadiene rubber(3) Acrylonitrile-butadiene rubber Ethylene-propylene rubber Intermediates Glacial acetic acid Alkylbenzene PTA Puried methanol Butyl alcohol Synthesised ethanol Octanol Other chemicals Urea Ammonium nitrate
(1)

67.6 55.3

130.6 71.8

143.9 77.9

109.8 35.1

480.7 290.5 21.0 72.2 86.9 6.6 123.5 17.9 5.8 126.3 74.2 27.2 35.0 98.0 98.7 47.9 1,799.9 618.4

703.6 317.8 17.0 140.9 122.2 7.2 140.0 31.5 7.7 3.0 111.7 97.2 37.8 34.1 89.8 102.5 51.0 1,881.5 561.2

778.9 335.6 87.9 153.2 84.3 9.0 135.8 32.5 7.8 4.2 148.7 104.7 68.5 51.9 81.8 106.0 62.4 2,565.9 414.0

597.7 315.8 76.5 122.5 73.1 6.1 75.4 51.0 5.6 5.3 120.6 103.3 78.3 71.8 66.8 58.1 24.5 2,136.2 289.2

Represents the Company's historical ABS sales volumes, including sales of ABS produced by ve chemical production facilities that were not transferred to the Company by CNPC as part of the Restructuring. On a pro forma basis, taking into account the exclusion of the ve chemical production facilities, the Company's ABS sales volumes in the year ended 31 December 1998 and the nine months ended 30 September 1999 would have been 67.7 thousand tons and 71.8 thousand tons, respectively. Represents the Company's historical polyacrylic bre sales volumes, including sales of polyacrylic bre produced by ve chemical production facilities that were not transferred to the Company by CNPC as part of the Restructuring. On a pro forma basis, taking into account the exclusion of the ve chemical production facilities, the Company's polyacrylic bre production volumes in the years ended 31 December 1996, 1997 and 1998 and in the nine months ended 30 September 1999 would have been 57.6 thousand tons, 87.3 thousand tons, 55.2 thousand tons and 65.0 thousand tons, respectively. Represents the Company's historical polybutadiene rubber sales volumes, including sales of polybutadiene rubber produced by ve chemical production facilities that were not transferred to the Company by CNPC as part of the Restructuring. On a pro forma basis, taking into account the exclusion of the ve chemical production facilities, the Company's polybutadiene rubber production volumes in the nine months ended 30 September 1999 would have been 45.5 thousand tons.

(2)

(3)

Since August 1999, the Company has taken measures to market its chemical products according to its principal product lines and has established sales and technical service centres for particular lines of 109

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products in the chemical plants that are specialised in producing these products. For instance, the Company has established the following sales and technical service centres: in Daqing Petrochemical and Lanzhou Petrochemical for plastics; in Liaoyang Chemical Fibres for bres; in Jilin Chemical for rubbers; in Urumqi Petrochemical for urea; in Jilin Chemical for organic chemical feedstock; and in Lanzhou Renery and Jinzhou Petrochemical for catalysts and additives. The Directors believe that these measures will allow the Company to increase the eciency of its chemical product marketing operations and enable the Company to expand its market share in markets across China.

110

THE NATURAL GAS SEGMENT OF THE COMPANY

Urumqi Korla Shanshan Xinmin Shenyang Dunhuang Beijing Yinchan Golmud Jingbian Tianjin Cangzhou Zhongyuan Zhengzhou Nanjing Chengdu Chongqing Wuhan Dagang Jinzhou Benxi

Tazhong

Yellow River Xian

YELLOW SEA

111
Yangtze River
Natural Gas Pipeline

Shanghai

EAST CHINA SEA

Guangzhou Hong Kong

SOUTH CHINA SEA

BUSINESS
NATURAL GAS The Company is China's largest natural gas transporter and seller in terms of sales volume, with revenues of RMB4,337 million and total sales volume of 280.4 billion cubic feet in the rst nine months of 1999 of which 257.1 billion cubic feet were sold through its natural gas segment. It sells natural gas primarily to fertiliser and chemical companies, commercial users and municipal utilities owned by local governments. The following table sets forth the length of the Company's natural gas pipelines and the volumes of natural gas sold by the Company as at 31 December 1996, 1997 and 1998 and 30 September 1999 or in each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999.
As at 31 December or year ended 31 December 1996 1997 1998 As at 30 September or nine months ended 30 September 1999

Length of natural gas pipelines used by the natural gas segment (km) Total length of natural gas pipelines (km) Volume of natural gas sold by the natural gas segment (Bcf) Total volume of natural gas sold (Bcf)(1)
(1)

7,746 8,522 294.3 324.2

7,808 8,707 307.5 335.0

10,150 11,099 315.7 347.6

10,150 11,099 257.1 280.4

Represents the aggregate volume of natural gas sold by the Company's exploration and production segment, including sales to its natural gas segment.

Currently, natural gas consumption in China represents 2.1 per cent. of China's total primary energy consumption. The PRC Government has forecast that natural gas consumption in China will represent 7.9 per cent. of China's total primary energy consumption in 2010. The Directors believe this growth will provide the Company with the opportunity to expand its natural gas business. The Company's principal markets for natural gas In 1998, 79.4 per cent., 8.2 per cent., 6.7 per cent. and 5.7 per cent. of the natural gas sales of the Company were to the southwestern, northern, northeastern and northwestern regions of the PRC, respectively. Currently, Sichuan Province and Chongqing Municipality in southwest China are two of the Company's principal markets for natural gas. For the year ended 31 December 1998, the total consumption of natural gas in Sichuan Province and Chongqing Municipality was 280.5 billion cubic feet, representing 14.4 per cent. of the energy consumption in these areas that year. The Company sold 217.8 billion cubic feet of natural gas to these areas for the year ended 31 December 1998, representing approximately 63.0 per cent. of its total natural gas sales. The Company supplies natural gas to Sichuan Province and Chongqing Municipality from its exploration and production operations in the Sichuan oil region. Its natural gas pipelines in these areas are well developed, consisting of a natural gas transmission network with a total length of approximately 6,190 km. As these areas lack adequate supply of alternative energy resources, such as coal, the Directors believe that the Company can further expand its natural gas sales as energy demand increases in these areas. 112

BUSINESS
Beijing, Tianjin, Hebei Province and Shandong Province in northern China also have high energy consumption levels. These areas are also important markets for the Company's natural gas transmission and marketing business. For the year ended 31 December 1998, the total consumption of natural gas in these areas was 61.5 billion cubic feet. The Company sold 27.6 billion cubic feet of natural gas to these areas for the year ended 31 December 1998. It also supplies natural gas to Beijing, Tianjin and Hebei Province primarily from the Changqing oil region through the Shaanxi to Beijing natural gas pipeline, which is one of the Company's natural gas trunk pipelines, and from the Huabei and Dagang oil regions. The Company has approximately 1,600 km of natural gas pipelines in these areas. Shanghai and the Yangtze River Delta, Wuhan City and other areas in Hubei Province, Lanzhou City and other areas in Gansu Province and Qinghai Province are also natural gas markets the Company intends to develop in the near future. It plans to construct several pipelines linking its natural gas elds to those regions. The Directors believe that upon completion of the construction of those pipelines, the Company will be able to increase its market share in those regions. For the year ended 31 December 1998, 83.0 billion cubic feet, or 26.3 per cent. of the natural gas sales of the Company's natural gas segment were to customers not subject to the guidance supply plan such as commercial end users and municipal utilities. The Company estimates that for the year ended 31 December 1999, it sold 125.9 billion cubic feet, or 37.5 per cent. of the estimated natural gas sales of the Company's natural gas segment, to its customers, representing a 51.5 per cent. increase over 1998. The Directors believe that sales of the Company's natural gas to customers not subject to the guidance supply plan as a percentage of its total sales will continue to increase. Currently, the Company does not have long-term take-or-pay contractual arrangements with its natural gas customers. Each year, it must supply natural gas customers subject to the guidance supply plan rst as required by the PRC Government. The Company enters into natural gas supply contracts with those customers on the basis of the amount of natural gas to be supplied according to the guidance supply plan for the following year's supply. Driven by environmental and eciency concerns, the PRC Government is increasingly encouraging industrial and residential use of natural gas to meet primary energy and environmental protection needs. The PRC Government has adopted a number of laws and regulations to require municipal governments to increase the use of clean energy, such as natural gas and liqueed petroleum gas, to replace the use of raw coal. Several municipal governments, including that of Beijing, have adopted policies to facilitate natural gas consumption in order to reduce the air pollution level. The PRC Government has also adopted a preferential value-added tax rate of 13 per cent. for natural gas production as compared to a 17 per cent. value-added tax rate for crude oil production. The Directors believe that these policies have had a positive impact on the development and consumption of natural gas in many municipalities that are the Company's existing or potential markets for natural gas. The Directors believe that these favorable policies will continue to benet the Company's natural gas business. Infrastructure As at 30 September 1999, the Company's natural gas segment owned and operated approximately 10,150 km of natural gas pipelines in China, which represented the vast majority of China's major onshore natural gas pipelines. Since 1990, the length of its natural gas pipelines has grown at a compound annual rate of 6.0 per cent. The Company's existing natural gas pipelines form regional natural gas supply networks in southwestern and northern China. Its experience in the design, construction management and operation of its existing natural gas pipelines has enabled it to develop relatively advanced 113

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technologies and skills in China in long distance pipeline design, construction and automated operational communications. The Directors believe that the Company will benet from those technologies and skills in the future expansion of its natural gas pipeline networks and their ancillary facilities. Expansion of the Company's natural gas transmission and marketing business Based on contracts and letters of intent with the Company's customers and potential customers, the Directors expect the Company's natural gas sales to Beijing in 2000 to grow substantially over 1999. The Company is currently expanding the Shaanxi to Beijing pipeline jointly with the Beijing municipal government by constructing compression stations, underground storage and other ancillary facilities to facilitate the delivery of greater volumes of natural gas. The Directors expect that its capital commitment for this expansion will be RMB1,100 million and this expansion will increase the annual throughput capacity of the pipeline by 70.6 billion cubic feet when the expansion project is completed in 2000. Currently, a signicant portion of natural gas users in its markets are subject to the guidance supply plan. This has limited the Company's ability to achieve a higher margin for its natural gas business. The Company intends to expand its customer base by selling natural gas to customers that are not subject to the guidance supply plan, such as local distribution companies. The central and eastern regions of China are regions where there is signicant demand for natural gas. Currently, the Company does not have any pipeline linking these regions. The Directors expect that the total consumption of natural gas in these regions will continue to grow. The Company is currently undergoing feasibility studies in respect of transporting natural gas produced in its natural gas elds in western and southwestern regions to large potential markets for natural gas in Wuhan City, other areas in Hubei Province, Henan Province, Shanghai and other areas in the Yangtze River Delta. This project is known as the West to East natural gas pipeline project. The Company plans to construct a 695-kilometre pipeline linking the Sichuan gas region with Wuhan City as a section of the West to East natural gas pipeline project. This section is designed to have an annual throughput capacity of 105.9 billion cubic feet of natural gas. At the same time, it plans to complete the construction of a pipeline from its Qinghai oil region to capture the market in the Lanzhou region. The Directors expect that this pipeline project will be completed in 2001. The Company is currently evaluating a plan to accelerate the construction of the Xinjiang to Shanghai pipeline, the main section of the West to East natural gas pipeline project, which contemplates the completion of this pipeline by 2003. The Directors believe that successful completion of these natural gas pipeline and storage facilities will substantially enhance the Company's ability to capitalise on anticipated growth in demand for natural gas in these regions. The Company will not, however, be able to begin construction of any of those major pipeline and storage projects until these projects are approved by the State Development Planning Commission. Further details are contained in the section headed ""Risk Factors Risks Relating to China's Oil and Gas Industry A number of the Company's signicant projects are currently subject to PRC Government approval''. The Company plans to develop most of its natural gas pipeline and storage projects, including the West to East natural gas pipeline project, jointly with foreign natural gas companies to attract foreign capital and learn advanced technology and management skills from them. The Directors expect that those foreign natural gas companies will make substantial capital contributions for the construction of those projects. The Company is currently negotiating with several major international oil and gas companies regarding their potential participation in the development of several of those projects. The Company has signed letters of intent with Enron International China Pipeline Ltd. to construct the Zhong County to Wuhan and Qinghai to Lanzhou natural gas pipelines. The Company has an interest in a production sharing contract with Shell Exploration (China) Limited to jointly develop natural gas 114

BUSINESS
resources in the Changbei gas eld of the Changqing oil and gas region. The Company is currently in the process of negotiating with a subsidiary of a major international oil and gas company to jointly construct natural gas pipelines connecting the gas eld to natural gas markets. The Directors believe that these projects will assist the Company in developing its existing natural gas resources and expanding its natural gas markets. The Company has entered into a non-binding letter of intent dated 23 March 2000 with BP Amoco p.l.c. that contemplates the establishment of a gas marketing joint venture in East China covering Shanghai and the Yangtze River Delta region. The letter of intent also provides BP Amoco p.l.c. the opportunity to cooperate with the Company on potential LNG import facilities in the Yangtze River Delta region. These arrangements are subject to conclusion of binding agreements and receipt of PRC Government approvals. No assurance can be given that negotiations with BP Amoco p.l.c. will be successful or that the necessary approvals will be obtained. COMPETITION As an oil and gas company operating in a competitive industry, the Company competes in each of its business segments in both China and international markets for desirable business prospects and for customers. The Company's principal competitors in China are Sinopec, CNOOC Limited and CNSPC. Exploration and Production Operations The Company is the largest onshore oil and gas company in China in terms of proved crude oil and natural gas reserves as well as crude oil and natural gas production and sales. However, it competes with Sinopec and CNSPC for the acquisition of desirable crude oil and natural gas prospects. The Directors believe that the Company's experience in crude oil and natural gas exploration and production and its advanced exploration technology that are suitable for diverse geological conditions in China will enable it to maintain its dominant position in discovering and acquiring desirable crude oil and natural gas prospects in China. Rening and Marketing and Chemicals Operations The Company competes directly with Sinopec in its rening and marketing and chemicals operations on the basis of price, quality and customer service. Most of its reneries and chemical plants are located in the northeastern, northwestern, and northern regions of China where it has the dominant market share for rened products and chemical products. It also sells the Company's rened products and chemical products in the eastern, southern, southwestern and central-southern regions of China, where its products have a considerable market share. The eastern and southern regions of China, where rened products and chemical products are in higher demand, are important markets for the Company's rened products and chemical products. Sinopec has a strong presence in the eastern and southern regions of China in competition with the Company, and most of Sinopec's reneries, chemical plants and distribution networks are located in these regions in close proximity to these markets. The Directors expect that the Company will face competition from, among other competitors, Sinopec in increasing its rened products and chemical products sales in these regions. Further details are contained in the section headed ""Risk Factors Risks Relating to the Company's Business Expansion of sales of the Company's rened products and chemical products substantially depends on its ability to compete in the eastern and southern regions of China''. The Company also faces competition from imported rened products and chemical products on the basis of price and quality. After China's entry into the WTO, competition from foreign producers of 115

BUSINESS
rened products and chemical products may increase as tari and non-tari barriers for imported rened products and chemical products will be reduced or eliminated over time, including the opening over time of retail and wholesale markets in China for rened products and chemical products to foreign competition. The Company's ability to compete with foreign producers of rened products and chemical products will depend on its ability to reduce costs of production and improve the quality of its products. Further details are contained in the section headed ""Risk Factors Risks relating to the Company's business entry by China into the WTO may increase competition in the Company's businesses within China''. Natural Gas Operations The Company is the largest supplier of natural gas in terms of volume of natural gas supplied. Currently, it faces very limited competition in the supply of natural gas in Beijing, Tianjin, Hebei Province and the northwestern regions of China, its existing principal markets for natural gas. Currently, CNSPC has natural gas elds in Sichuan Province and sells natural gas to users in that province. The Company, therefore, has limited competition from CNSPC in its market in Sichuan Province. Further, the Company intends to expand its markets for natural gas into the coastal regions in eastern China where it may face competition from CNOOC Limited and, to a lesser extent, Sinopec. The Directors believe that the Company's dominant natural gas resources base, its relatively advanced technology and skills in China in managing long distance pipelines will enable the Company to continue to be a dominant player in the natural gas markets in China. RESEARCH AND DEVELOPMENT The Company has a research and development department, directly under which there are two research institutions. Except for the Company's subsidiaries and branch companies in its marketing operation, each of its other subsidiaries and branch companies also has its own research and development department and technology centres. The research and development department is responsible for coordinating research and development activities conducted by the research institutions and the relevant departments and technology centres of its subsidiaries and branch companies. These departments and technology centres of its subsidiaries and branch companies focus on developing specic technology for their respective subsidiaries or branch companies independently or in cooperation with the research and development department. As at 30 September 1999, the Company had 22,808 employees engaged in research and development functions, of which 15,200 were engineering and technical personnel. In each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999, the Company's total expenditures for research and development were approximately RMB983 million, RMB1,117 million, RMB1,238 million and RMB583 million, respectively. Exploration and Production China's major oil and gas elds are characterised by a broad range of geological conditions and a majority of China's oil and gas elds are in sedimentary basins with continental formation. The Company has developed eective exploration and production techniques and methods that are suitable for these geological conditions. The Company's research and development eorts in respect of its exploration and production business focus on geological structures of crude oil and natural gas reserves, oil and gas exploration and development, oil and gas production and pipeline transportation, and monitoring of the environment. 116

BUSINESS
Rening and Marketing The Company's technology centres engaged in research and development with respect to rening carry out research and development regarding new products and improvements to manufacturing processes, particularly through the evaluation of catalysts. Its research and development eorts in respect of its rening business focus on research and development of advanced rening techniques, the implementation of new rening technologies and research and development of catalysts and additives. Chemicals The Company attempts to ensure that its chemical products are competitive through research and development in the application of new products, new technologies and new techniques. It has concentrated its research and development eorts in the areas of applications and products in order to increase its competitiveness in the market. Intellectual Property Rights Details of the Company's intellectual property rights are set out in the section headed ""Appendix X Statutory and General Information Further Information About the Business Intellectual Property Rights of the Company.'' ENVIRONMENTAL MATTERS Together with other companies in the industries in which the Company operates, the Company is subject to numerous national, regional and local environmental laws and regulations concerning its oil and gas exploration and production operations, petroleum and petrochemical products and other activities. In particular, these laws and regulations: require an environmental evaluation report to be submitted and approved prior to the commencement of exploration, production, rening and chemical products; restrict the type, quantities, and concentration of various substances that can be released into the environment in connection with drilling and production activities; limit or prohibit drilling activities on certain lands lying within protected areas; and impose criminal and civil liabilities for pollution resulting from oil, natural gas and petrochemical operations. These laws and regulations may also restrict air emissions and discharges to surface and subsurface water resulting from the operation of natural gas processing plants, chemical plants, reneries, pipeline systems and other facilities that the Company owns. In addition, the Company's operations may be subject to laws and regulations relating to the generation, handling, storage, transportation, disposal and treatment of waste materials. The Company anticipates that the environmental laws and regulations to which it is subject will become increasingly strict and are therefore likely to have an increasing impact on its operations. It is impossible, however, to predict accurately the eect of future developments in such laws and regulations on its future earnings and operations. Some risk of environmental costs and liabilities is inherent in certain of its operations and products, as it is with other companies engaged in similar businesses, and there can be no assurance that material costs and liabilities will not be incurred. However, the Company does not currently expect any material adverse eect on its nancial condition or results of operations as a result of compliance with such laws and regulations. The Company paid pollutant discharge fees of 117

BUSINESS
approximately RMB98.1 million, RMB110.1 million and RMB111.5 million, respectively, for the years ended 31 December 1996, 1997 and 1998, respectively. To meet future environmental obligations, the Company is engaged in a continuing program to develop eective environment protection measures. This program includes research on reducing sulphur levels in heavy fuel oil and diesel fuel, reducing olen and benzene content in gasoline, improving the quality of emissions and euents from its reneries and petrochemical plants, and developing and installing monitoring systems at its facilities and developing environmental impact assessments for major projects. The Company's capital expenditures on environmental programs for the years ended 31 December 1996, 1997 and 1998 totalled approximately RMB577.0 million, RMB953.0 million and RMB728.0 million, respectively. LEGAL PROCEEDINGS The Company is involved in a number of judicial and arbitral proceedings before Chinese courts or arbitral bodies concerning matters arising in connection with the conduct of its businesses. The Directors believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse eect on the Company's nancial condition. PROPERTIES The Company's executive oce is located in Beijing, and is leased from CNPC under a tenancy agreement which will expire in November 2001. The Company owns or leases from CNPC land use rights over 42,659 parcels of land with an aggregate area of approximately 1,148 million square metres. It has ownership rights over approximately 57,482 buildings and structures with an aggregate gross oor area of approximately 17.1 million square metres, and 2,054 unnished buildings and structures under construction. In addition, CNPC has leased to the Company 191 buildings located on land occupied by its businesses retained by it in the Restructuring, with an aggregate gross oor area of approximately 269,770 square metres. CNPC has transferred to the Company land use rights for 183 parcels of land with an aggregate area of approximately 3.5 million square metres. The Company leases from CNPC 42,476 parcels of land for a term of 50 years expiring on 4 November 2049 under the Land Use Rights Leasing Contract. The Land Use Rights Leasing Contract may not be terminated by CNPC unilaterally prior to the expiration of the 50-year term. Of the land under transfer and leasing agreements, CNPC does not have formal land use rights certicates, but only entitlement certicates which are substitute title documents issued by competent PRC Government authorities, for 28,649 parcels of land with an aggregate area of 935.8 million square metres. CNPC has undertaken that it will use its best endeavours to obtain formal land use rights certicates for all such land in the name of the Company or that of CNPC, respectively, within 12 months after August, September and October 1999, when the entitlement certicates were issued, and has agreed to indemnify the Company against damages arising from any failure to obtain such formal land use rights certicates. CNPC has obtained formal approvals from the Ministry of Land and Resources for the above transfer and leasing arrangements. 116 of the Company's service stations are located on land owned by various rural collectives. The Ministry of Land and Resources has granted an approval allowing the Company to continue using such land, provided that CNPC must complete the necessary approval procedures for the Company's use of such land, or requisition such land by CNPC within one year from 5 November 1999. CNPC has undertaken that within the stipulated one-year period, it will complete the requisition of all such 118

BUSINESS
collectively owned land. Upon receipt of land use rights certicates for such land in the name of CNPC and the authorisation by the Ministry of Land and Resources, it will lease such land to the Company for a term equal to the remainder of a 50-year term under the Land Use Rights Leasing Contract. CNPC and the Company are in the process of applying for building ownership certicates in the Company's name for all the 57,482 buildings the Company owns. CNPC has granted an undertaking to the Company that it will at its own costs and expenses complete the procedures for the obtaining of individual building ownership certicates in the Company's name for all such buildings by 5 November 2000, and to indemnify the Company from any losses or claims arising therefrom. The Company leases from CNPC buildings with an aggregate gross oor area of 279,770 square metres under the Buildings Leasing Contract. Of the 279,770 square metres, 269,770 square metres will be leased to the Company for a term of 20 years. Those buildings are mainly oce buildings and sta dormitories. Chesterton Petty Limited, an independent valuer, has valued the Company's property interests (other than those held by 35 unlisted subsidiaries referred to below) as at 30 September 1999 at RMB32,298,162,000. The text of the letter and the valuation certicate issued by Chesterton Petty Limited for this purpose are set out in Appendix V to this prospectus. The Company has not obtained a valuation for the properties, being 1,230 buildings located on dierent parcels of land in various provinces of the PRC, held by 35 unlisted subsidiaries for the purpose of production and business operations. To the knowledge of the Directors, during the one year immediately prior to the Restructuring, CNPC did not appoint any independent surveyors for the purpose of preparing valuation reports for those properties which follow the ""Hong Kong Guidance Notes on the Valuation of Property Assets'' published by The Royal Institution of Chartered Surveyors (Hong Kong Branch) and The Hong Kong Institute of Surveyors. The Directors are of the view that had there been a valuation of those properties as at 30 September 1999, there would not have been any material impact on the Group's nancial position or net asset value as at 30 September 1999 as a result of the revaluation of those properties. USE OF PROCEEDS VERIFICATION Other than a number of trade representative oces in Hong Kong, the United States and Japan operated by China National United Oil Corporation, one of the Company's subsidiaries, the Group does not currently have any assets or operations outside China. CNPC owns equity interests in ten international projects relating to overseas exploration and production of crude oil and natural gas, rening operations and pipelines located in Canada, Kazakhstan, Peru, Sudan, Thailand and Venezuela. Certain countries where the H Shares or ADSs are listed impose sanctions regimes on certain of those countries, which may apply to purchasers or holders of the H Shares or ADSs. In order to ensure that purchasers or holders of the H Shares or ADSs will not violate the relevant laws and regulations of the countries where the H Shares or ADSs are listed, CNPC and the Company have taken the following steps: CNPC and the Company will establish separate accounts into which their respective proceeds from the Global Oering will be deposited; Funds in the Company's separate account will only be disbursed in order to fund its capital expenditures and investments, to reduce short-term borrowings from third party nancial institutions and to provide additional funds for general corporate purposes; and Funds in CNPC's separate account will only be disbursed in order to reduce CNPC's borrowings provided that such use will not result in any violation by the purchasers or holders of H Shares or ADSs of the laws of the countries where H Shares or ADSs are listed and to fund the employee retraining and severance plans established in connection with the Restructuring. 119

BUSINESS
CNPC and the Company will maintain and administer their respective separate account at their respective headquarters in Beijing. The Company and the Underwriters have respectively retained independent US counsel to review the procedures under which the separate accounts will be operated and funds will be disbursed. In addition, the Company intends to retain independent accountants to review the procedures under which the separate accounts will be operated and funds will be disbursed. The independent legal counsel, together with the independent accountants, will assist the Company and CNPC in formulating relevant guidelines and procedures on funds tracing and accounting control, and will render legal opinions. The independent legal counsel will also answer questions that the independent accountants and the Underwriters may raise in the course of implementing these guidelines and procedures. In addition, the independent accountants will periodically verify the procedures and documentation related to all segregated account deposit and disbursement activities to conrm independently that the internal controls required under the relevant guidelines and procedures have been followed. Since the sanctions regimes relate to nationals and residents of the imposing country which prohibits its nationals and residents from, among other things, indirectly participating in nancings of projects in certain of those sanctioned countries, the Company does not believe that there would be any legal consequences to purchasers or holders of the H Shares or ADSs as a result of any failure by CNPC, as the Company's parent company, to operate its account in accordance with the guidelines and procedures. RELATIONSHIP WITH THE CNPC GROUP Prior to the Restructuring in November 1999, CNPC was one of the largest companies in the PRC in terms of sales. In 1998, CNPC's sales revenues were RMB270,310 million with an aggregate asset value of RMB506,930 million. As part of the Restructuring, CNPC transferred to the Company substantially all of its businesses and assets in China relating to the exploration and production of crude oil and natural gas, rening and marketing, chemicals and natural gas sales and transmission. Since the Restructuring, CNPC has engaged in crude oil and natural gas exploration and production business activities outside the PRC and limited chemicals production and retail of rened products. See ""Industry Overview Industry and Corporate Restructurings The Restructuring'' for a more detailed description of the Restructuring. CNPC's primary business activities relate to the provision of various services and products to the Company. CNPC's principal sources of cash ow are service and lease payments and dividends received from the Company. The Company anticipates that CNPC may incur future operating losses arising in part from its obligations to provide supplementary social services to the CNPC Group's employees and a limited number of third parties. Those services include education, hospitals, public transportation services, property management and security services. The Directors believe that subsidies which the Ministry of Finance has committed to provide will enable CNPC to fund substantially all of any future operating shortfalls arising out of CNPC's obligations to provide social services. The Directors believe that these subsidies will substantially reduce CNPC's reliance on dividends from the Company. These subsidies are to be provided until the social services currently provided by CNPC have been fully assumed by the PRC Government. Nevertheless, subject to the relevant provisions of the Company Law and the Articles of Association, CNPC may seek to inuence the Company's determination of dividends with a view to satisfying its cash ow requirements. However, the Directors believe that CNPC's nancial condition will benet from the Company's success and that by supporting a dividend policy intended to enhance the Company's long-term protability and the market value of the Company's securities, CNPC will increase the value of its own interest in the Company. 120

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The Directors believe that CNPC's operating losses are likely to decline signicantly in the future as a result of continued restructuring of CNPC's operations, repayment by CNPC of a signicant portion of its borrowings and the gradual transfer by CNPC to the PRC Government of CNPC's social service functions. The PRC Government has begun implementing a policy of gradually assuming the social service functions historically performed by State-owned enterprises. In recent public pronouncements, senior government ocials have indicated that local governments will be expected to jointly bear the costs of providing such social service functions with State-owned enterprises within their jurisdictions. Ultimately, the full costs of these functions are to be borne by the local governments. Various legislative and regulatory bodies have been charged with the task of implementing this policy. In December 1999, the State Council issued a circular requiring State-owned enterprises to transfer their schools and universities to the PRC Department of Education or to local governments. CNPC has announced that it will comply with this circular by transferring to the government all of its colleges and universities prior to the end of July 2000. The SETC is currently drafting regulations which will establish procedures and timetables for the transfer of government and social services, including hospitals, security services, cafeterias and day care facilities, from State-owned enterprises to local governments. The Directors believe that these government policies and implementing regulations will enable CNPC to substantially reduce, and eventually eliminate, its nancial obligations in respect of the social service functions it retained in the Restructuring. The Company was established on 5 November 1999 with CNPC as its sole promoter. CNPC owned 100 per cent. of the share capital of the Company immediately prior to the Global Oering. Immediately after the completion of the Global Oering, CNPC will hold in aggregate approximately 90.00 per cent. of the share capital of the Company (approximately 88.65 per cent. if the Over-allotment Options are exercised in full) and CNPC will be the controlling shareholder of the Company. Non-Competition Undertaking Core Businesses In the Undertaking, CNPC has undertaken to the Company that, among other matters, at any time during which CNPC and its subsidiaries together hold not less than 30 per cent. of the issued shares of the Company and the Company is listed on the Stock Exchange or any other securities exchange (the ""Undertaking Period''), CNPC shall not, and shall procure that each of its subsidiaries shall not, without the prior written consent of the Company (which consent cannot be given unless reviewed and approved by the independent non-executive directors), solely or jointly, or through representation of any person, company, enterprise or unit other than the Group, develop, carry on or assist in carrying on, participate, engage, or be involved in any businesses within or outside the PRC that are directly or indirectly in competition, or may lead to competition, with the following core businesses of the Company (the ""Core Businesses''): the exploration, production and sale of oil and natural gas; the production and sale of rened products and petrochemical products; the supply and transmission of oil and natural gas; the import and export of crude oil, rened products, natural gas and petrochemical products; and joint venture and co-operative operations in the exploration, production and sale of crude oil, natural gas, rened products and petrochemical products. In addition, if CNPC comes across any business opportunity which is directly or indirectly in, or may lead to, competition with the Core Businesses, CNPC is required to notify the Company of the 121

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business opportunity immediately. CNPC is also obliged to use its best eorts to oer such opportunity to the Company on terms and conditions reasonably acceptable to the Company. In respect of any Core Businesses which the Company consents to CNPC engaging in, CNPC will grant to the Company options to purchase such Core Businesses which shall be analogous to the options described in the section headed ""Business Relationship with the CNPC Group Non-Competition Undertaking Overseas Businesses'' below. Permitted Exceptions The Undertaking further provides that during the Undertaking Period, CNPC is allowed to continue to own an interest in, and carry on the business relating to, the following assets, notwithstanding such assets and their related businesses are directly or indirectly in, or may lead to, competition with the Core Businesses: ve chemical production facilities, namely an advanced alcohol facility, an acrylonitrile facility, a polybutadiene rubber facility, an acrylic bre chemical facility and a facility comprising of four styrene units (the ""CNPC Chemical Production Facilities''), which are wholly-owned by CNPC and which produce, amongst other things, advanced alcohol, acrylonitrile, polybutadiene rubber, acrylic bre, ABS, styrene and polystyrene. The CNPC Chemical Production Facilities are not an integral part of the operating locations in which they reside; the businesses of certain sales enterprises which operate approximately 3,600 service stations located throughout the PRC which are wholly-owned by CNPC or jointly-owned by CNPC and third parties. See further the section headed ""Business Relationship with the CNPC Group Connected Transactions Contract for the Supervision of Certain Sales Enterprises''. These sales enterprises were not transferred to the Group as part of the Restructuring because many of the service stations in such sales enterprises were only recently transferred to CNPC by local government authorities and other entities, were not well managed, and records and title to assets and properties of such service stations are neither complete nor clear; existing projects outside the PRC for the exploration and production of crude oil and natural gas and for the production, storage and transmission of petrochemical and related oil products according to agreements already entered into by CNPC with foreign counterparties (and as referred to in the section headed ""Industry Overview Industry and Corporate Restructurings The Restructuring''). The Group currently intends to focus, though not exclusively, on its business operations in the PRC where its greatest strengths lie. Hence, CNPC's existing overseas projects were not transferred to the Group as part of the Restructuring; and the three existing projects of CNPC (Hong Kong) Limited as more particularly described under the section headed ""Business Relationship with the CNPC Group Non-Competition Undertaking CNPC (Hong Kong) Limited'' below. Options to Purchase CNPC has granted to the Company the following options: an option to purchase any one or more of three CNPC Chemical Production Facilities, namely, the polybutadiene rubber facility, the acrylic bre chemical facility and a facility comprised of four styrene units, which must be exercised within two years from the eective date of the Undertaking. The other two CNPC Chemical Production Facilities, namely, the advanced alcohol facility and the acrylonitrile facility, were prior to the Restructuring and continue to be subject to an option to purchase granted in favour of Jilin Chemical Industrial Company Limited, 122

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now a subsidiary of the Company, which is exercisable at any time prior to the later of 31 December 2002 and ve years after successful completion and acceptance of the last of the Additional Seven Facilities as dened in the prospectus of Jilin Chemical Industrial Company Limited dated 15 May 1995 issued in relation to the public oering of its H shares; and an option to purchase the whole or any part of the business of any one or more of certain sales enterprises which operate approximately 3,600 service stations in the PRC which are whollyowned by CNPC or jointly-owned by CNPC and third parties (being the subject of the Contract for the Supervision of Certain Sales Enterprises), at any time and from time to time. The failure to exercise any of such options granted to the Company prior to their expiry will be subject to review by the independent non-executive Directors and such decisions will be made known to the Company's shareholders by way of announcements and disclosure in the Company's annual report. Overseas Businesses In the Undertaking, CNPC has also given to the Company an option to purchase at any time and from time to time all of CNPC's interests in any one or more existing projects outside the PRC which relate to crude oil and natural gas exploration and production (the ""Overseas Businesses''). The Overseas Businesses were not transferred to the Company pursuant to the Restructuring. The Undertaking provides that where and so long as the laws of the countries where the H Shares or ADSs are listed prohibit persons of such countries from, directly or indirectly, nancing or investing in oil and gas related projects in certain countries (the ""Legal Prohibition''), the Company will not purchase, and CNPC will not sell to the Company, any assets, or any interests in any assets, in any such countries until such laws become ineective. In situations where no Legal Prohibition is in eect, this option may lapse if CNPC delivers notice to the Company that CNPC wishes to sell all or part of the Overseas Businesses and the Company elects not to or otherwise fails to exercise its option over such projects at such time. Exercise of Options Should the Company elect to exercise any of the options to purchase contained in the Undertaking, CNPC and the Company will, within a xed time period and in good faith and on the basis of normal commercial terms, negotiate the price and terms and conditions for any such purchase. If any purchase is agreed, the Company will at such time comply with all of its obligations under the Listing Rules and any such sale and purchase will be subject to approval by the relevant PRC authorities. CNPC (Hong Kong) Limited (""CNPC (HK)'') CNPC (HK), a Hong Kong incorporated 53.17 per cent. owned subsidiary of CNPC which is listed on the Stock Exchange, is involved in crude oil exploration and production in China and Thailand. CNPC (HK) currently has interests in three projects (the ""Existing CNPC (HK) Projects''), namely (1) the Karamay Oileld located in the Xinjiang Uygur Autonomous Region of the PRC; (2) the Leng Jiapu Oileld located in Liaohe, Liaoning Province of the PRC; and (3) the Sukothai concession in Thailand. CNPC's interest in CNPC (HK) was not transferred to the Company as part of the Restructuring as CNPC (HK) has businesses and operations both within and outside China and a reorganisation of the overseas businesses of CNPC (HK) could not have taken place as part of the Restructuring without the approval of the independent shareholders of CNPC (HK). The restrictions set out in the Undertaking apply to CNPC's participation, through CNPC (HK), in any projects which are directly or indirectly in competition or which may lead to competition with the Core Businesses. Due to the scale of operations of the Existing CNPC (HK) Projects, both CNPC and 123

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the Company have agreed that the Existing CNPC (HK) Projects do not constitute material competition with the business operations of the Company and/or the Group and therefore, CNPC (HK)'s continued investment in the Existing CNPC (HK) Projects will not constitute a breach of the Undertaking by CNPC. Connected Transactions Upon the listing of the H Shares on the Stock Exchange and as a consequence of the Restructuring, the following transactions will continue or will be entered into between the Group and the CNPC Group. All of these transactions will constitute connected transactions for the Company and the Group under the Listing Rules. The following connected transaction agreements have been entered into between the Company and CNPC as detailed below: Restructuring Agreement; Comprehensive Products and Services Agreement, and after listing, from time to time and as necessary, various Product and Service Implementation Agreements; Land Use Rights Leasing Contract; Buildings Leasing Contract; Intellectual property licensing contracts being the Trademark Licensing Contract, the Patent and Know-how Licensing Contract and the Computer Software Licensing Contract; Contract for the Transfer of Rights under Production Sharing Contracts; Guarantee of Debts Contract; and Contract for the Supervision of Certain Sales Enterprises. Restructuring Agreement To eect the Restructuring, CNPC and the Company entered into the Restructuring Agreement according to which CNPC will indemnify the Company for any claims or costs incurred in connection with or arising from, among other things: assets transferred to the Company in the Restructuring, and arising before 5 November 1999, except for those claims specically assumed by the Company as part of the Restructuring; negligence of the CNPC Group acting for and on behalf of the Company in carrying out any contract that was not transferred to the Company pending third party consents on or after 5 November 1999; the failure of the CNPC Group to transfer assets to the Company in accordance with the Restructuring Agreement; assets, rights and debts retained by the CNPC Group in the Restructuring; taxes and fees associated with the Restructuring that are not payable by the Company; the process of obtaining by CNPC, within one year from August, September and October 1999 when the relevant entitlement certicates were issued, formal land use rights certicates to replace the entitlement certicates in relation to the 28,649 parcels of land which were leased or transferred to the Company from CNPC; 124

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the process of CNPC completing, within one year from 5 November 1999, the necessary governmental procedures for the requisition of the collectively-owned land on which 116 service stations owned by the Company are located; and the process of obtaining individual building ownership certicates in the name of the Company for all of the buildings transferred to the Company by CNPC before 5 November 2000.

The Restructuring Agreement contemplates that in respect of (1) any bank loans transferred to the Group pursuant to the Restructuring but for which consents to the transfer have not been obtained from the lenders by 31 December 1999; and (2) any bank loans which the CNPC Group has borrowed from third party lenders on behalf of the Group for the period from the incorporation date of the Company (being 5 November 1999) to 31 December 1999 (the ""Interim Period''), as between the Group and the CNPC Group: the Group shall be liable directly to the relevant lenders in respect of the principal amounts, interest, costs, fees and all other payments to be made to the lenders in respect of such loans (for loans borrowed during the Interim Period, only in respect of amounts which are directly related to the proceeds actually made available to the Group); the CNPC Group shall not be liable to the relevant lenders in respect of such amounts; the Group shall not be required to pay any fees or other charges to the CNPC Group in respect of such loans; and the Company and CNPC agree to, on a best endeavours basis, approach each of these third party lenders with a view to obtaining their respective consents to the transfer of such loans from the CNPC Group to the Group, during the period of three months after the publication of the Company's annual report for the nancial year ended 31 December 1999.

Comprehensive Products and Services Agreement The Company and CNPC have entered into the Comprehensive Products and Services Agreement for the provision (1) by the Group to the CNPC Group and (2) by the CNPC Group to the Group, of a range of products and services which may be required and requested from time to time by either party and/or its subsidiary companies and aliates. The Comprehensive Products and Services Agreement contains the binding principles, guidelines and terms and conditions in accordance with which any and all products and services contemplated therein are to be provided between the Group and the CNPC Group. Its contents are briey summarised below. Products and Services to be provided by the Group to the CNPC Group

Under the Comprehensive Products and Services Agreement, a limited range of products and services are to be provided by the Group to the CNPC Group including those relating to rened products, chemical products, natural gas, crude oil, supply of water, electricity, gas, heating, quantifying and measuring, quality inspection and other products and services as may be requested by the CNPC Group for its own consumption, use or sale from time to time. Products and Services to be provided by the CNPC Group to the Group

The products and services to be provided by the CNPC Group to the Group are expected to be more numerous, both in terms of quantity and variety, than those to be provided by the Group to the CNPC 125

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Group. They have been grouped together and categorised according to the following types of products and services: Construction and technical services (including geological surveying, drilling, well cementing, logging, mud logging, well testing, down hole operation, oileld construction, oil renery construction, engineering and design, project monitoring and management, equipment repairing and maintenance, equipment antiseptic testing, technology research, public construction and information services); Production services (including supply of water, electricity generation and supply, supply of gas, heating, communications, re ghting, security, library information and ling services, asset leasing, environmental protection and sanitation, repair of machinery, manufacture of machinery, transportation and maintenance of roads); Supply of materials services (including purchase of materials, quality inspection, storage of materials and delivery of materials); Social services (including security services, education, hospitals, kindergarten, daycare, cultural propaganda, public transportation, regional facilities, retirement administration, employment training and other miscellaneous social services); Ancillary services (including property management, training centres, guesthouses, canteens and public shower rooms); and Financial services (including making loans, accepting deposits, providing guarantees and clearance and settlement services. Such services are and will be provided by China Petroleum Finance Company Limited, which is a subsidiary of CNPC and a non-bank nancial institution approved by the PBOC).

General Principles, Price and Terms The Comprehensive Products and Services Agreement requires, in general terms that, (1) the quality of products and services to be provided should be satisfactory to the recipient; (2) the price at which such products and services are to be provided must be fair and reasonable; and (3) the terms and conditions on which such products and services are to be provided should be no less favourable than those oered by independent third parties. Price Determination The Comprehensive Products and Services Agreement details specic pricing principles for the products and services to be provided pursuant to the Comprehensive Products and Services Agreement. If, for any reason, the specic pricing principle for a particular product or service ceases to be applicable, whether due to a change in circumstances or otherwise, such product or service must then be provided in accordance with the following general pricing principles: (a) state-prescribed prices (at present, this applies to products and services such as rened oil products, natural gas, oil renery construction, engineering and design and project monitoring and management); where there is no state-prescribed price, then according to relevant market prices, whichever of the following market prices are applicable: (i) the local market price and the market price in nearby areas, at which the same type of products or services are provided by independent third parties in the ordinary course of business; or (ii) the national market price, at which the same type of products or services are provided by independent third parties in the ordinary course of business; 126

(b)

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(at present, this applies to products and services such as asset leasing, repair of machinery, transportation, purchase of materials, daycare and regional facilities); or (c) where neither (a) nor (b) is applicable, then according to: (i) the actual cost incurred (at present, this applies to products and services such as library information and ling, maintenance of roads, retirement administration and re-employment training); or the agreed contractual price, being the actual cost for the provision of such product or service plus an additional margin of not more than: 15 per cent. (which includes nance costs, general and administrative expenses and a prot margin) for certain construction and technical services (at present, this applies to products and services such as geological surveying, drilling, well cementing, logging, mud logging, well testing and oileld construction) provided that such agreed contractual price shall not be higher than the prices available for the provision of such products and services in the international market; and 3 per cent. for all other types of products and services priced in accordance with the agreed contractual price (at present, this applies to products and services such as down hole operations, technology research, equipment repairing and supporting, equipment antiseptic testing, communications, re ghting, quality inspection, storage of materials, delivery of materials and training centres). The denitions of cost price and agreed contractual price include a provision that the aggregate value, in each future nancial year, of all products and services which are required to be priced at cost or at agreed contractual prices to be provided under the Comprehensive Products and Services Agreement, shall not exceed the aggregate value, calculated on a pro-forma adjusted basis as if the Comprehensive Products and Services Agreement had been in eect during the year ended 31 December 1998, of all products and services which were required to be priced at cost or at agreed contractual prices during the year ended 31 December 1998, being RMB36.9 billion (the ""1998 Amount''), subject to any necessary adjustment for ination or deation, as appropriate, for the relevant year. However, if in any future nancial year, the Company, due to any events or factors beyond the control of the Company (e.g. natural disasters) or the development of new projects, is required to purchase additional products and services such that the aggregate value of all such products and services required to be priced at cost or at agreed contractual prices exceeds the 1998 Amount (as adjusted for ination or deation as appropriate), then that decision to purchase such additional products or services should be authorised by the Board of Directors (with armative votes from the independent nonexecutive directors) and the management of the Company on the basis of any revised business plan and comprehensive nancial analysis, to ensure that such purchases will allow for a reasonable return to the Company's shareholders. Coordination of annual demand for products and services Two months prior to the end of each nancial year, both parties are required to prepare and submit to each other an annual plan detailing the estimated demand for products and services to be rendered in accordance with the Comprehensive Products and Services Agreement for the forthcoming nancial year. 127

(ii)

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Rights and Obligations Both the Group and the CNPC Group retain the right to choose to receive products and services, as contemplated under the Comprehensive Products and Services Agreement, from independent third parties where the terms and conditions as to price or quality of products or services oered by such third parties may be superior to those oered by either of the Group or the CNPC Group, as appropriate. In addition, the provision of products and services by either party is on a non-exclusive basis and each party may provide products and services to other third parties, subject always to the obligation that each party must be able to provide those products and services which may be required to be provided in accordance with the Comprehensive Products and Services Agreement and the annual plan then in force. Term and Termination The term of the Comprehensive Products and Services Agreement is 10 years. During the 10-year term of the Comprehensive Products and Services Agreement, termination of the product and service implementation agreements described below may be eected from time to time by the parties to the product and service implementation agreements providing at least six months' written notice of termination in relation to any one or more categories of products or services. Further, in respect of any products or services already contracted to be provided, termination may not take place until after such products and services have been provided. In the event that CNPC proposes to terminate the provision of any products or services, and the Company is unable to nd an alternative product or service provider (which fact shall be communicated by the Company to CNPC from time to time), then unless permitted by the Company, CNPC must continue to provide such products or services in accordance with the terms of the Comprehensive Products and Services Agreement. The following table sets forth the historical revenues and expenditures in relation to the provision of the products and services which are the subject matters of the Comprehensive Products and Services Agreement between the Company and CNPC for the relevant periods disclosed:
1996 RMB HK$ As at 31 December 1997 1998 RMB HK$ RMB HK$ (in millions except percentages) As at 30 September 1999 RMB HK$

Revenues(1) Percentage of total revenues

8,115.13 5.65%

7,630.59 10,351.65 6.58%

9,733.57 12,236.37 8.31%

11,505.75

12,268.55 9.72%

11,536.01

Expenditures(2) Construction and technical services 29,239.57 27,493.72 36,435.82 34,260.29 34,908.01 32,823.70 22,316.33 20,983.85 Production services 11,356.09 10,678.03 13,359.55 12,561.87 14,771.57 13,889.58 10,646.67 10,010.97 Supply of material services 13,694.62 12,876.93 16,263.27 15,292.21 13,869.41 13,041.29 7,578.90 7,126.38 Social and ancillary services 3,953.13 3,717.09 4,967.92 4,671.29 5,606.95 5,272.17 4,192.63 3,942.29 Financial services(3) 252.14 237.08 544.58 512.06 737.74 693.69 404.39 380.24 Total 58,495.55 55,002.85 71,571.14 67,302.72 69,893.68 65,720.43 45,138.92 42,443.74

Percentage of total operating expenses and capital expenditures Construction and technical services 18.84% Production services 7.32% Supply of material services 8.82%

22.32% 8.18% 9.96%

22.33% 9.45% 8.87%

19.40% 9.26% 6.59%

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(1) Historical revenues derived by the Group in respect of the provision of products and services to the CNPC Group. (2) Historical expenditures incurred by the Group in respect of products and services provided by the CNPC Group to the Group. (3) These gures do not include the principal amounts of loans or deposits, but only include the amounts of interest expense in respect of the loans less the amounts of interest received in respect of the deposits. The amounts of interest expense in respect of the loans in the relevant periods set out in the table amounted to RMB284.07 million, RMB679.06 million, RMB761.56 million and RMB428.55 million, respectively, and the amounts of interest received in respect of the deposits amounted to RMB58.23 million, RMB158.92 million, RMB108.03 million and RMB38.00 million, respectively, in the same periods. The principal amounts of loans as at 31 December 1998 and 30 September 1999 were RMB14,986 million and RMB19,231 million, respectively, and the principal amounts of deposits as at the same dates were RMB1,213 million and RMB1,663 million, respectively. These gures in the table also include certain advances provided by wholly-owned marketing and sales subsidiaries of the Company to wholly-owned subsidiaries of CNPC at prevailing PBOC rates. These advances amounted to RMB26.30 million, RMB24.44 million, RMB84.21 million and RMB14.09 million, respectively, in the relevant periods set out in the table. Such advances will be repaid by the CNPC Group to the Group within 30 days after the commencement of dealings in H Shares.

Product and Service Implementation Agreements It is envisaged that from time to time and as required, individual product and service implementation agreements will be entered into between the relevant service companies and aliates of the CNPC Group or the Group, as appropriate, providing the relevant products or services and the relevant members of the Group or the CNPC Group, as appropriate, requiring such products or services. Each product and service implementation agreement will set out the specic products and services requested by the relevant party and any detailed technical and other specications which may be relevant to those products or services. The product and service implementation agreements may only contain provisions which are in all material respects consistent with the binding principles and guidelines and terms and conditions in accordance with which such products and services are required to be provided as contained in the Comprehensive Products and Services Agreement. As the product and service implementation agreements are simply further elaborations on the provision of products and services as contemplated by the Comprehensive Products and Services Agreement, they do not constitute new categories of connected transactions. Land Use Rights Leasing Contract The Company entered into the Land Use Rights Leasing Contract with CNPC under which CNPC has leased a total of 42,476 parcels of land in connection with and for the purposes of all aspects of the operations and business of the Group covering an aggregate area of approximately 1,145 million square metres, located throughout the PRC, to the Company for a term of 50 years at an annual fee of RMB2,000 million. The total fee payable for the lease of all such property may, after the expiration of 10 years from the date of the Land Use Rights Leasing Contract, be adjusted (to reflect market conditions prevalent at such time of adjustment, including current market prices, inflation or deflation, as appropriate, and such other pertinent factors as may be reasonably considered in negotiating and agreeing to any such adjustment) by agreement between the Company and CNPC. In addition, any governmental, legal or other administrative taxes and fees required to be paid in connection with the leased properties will be borne by CNPC. However, any additional amount of such taxes payable as a result of changes in the PRC Government policies after the date of the contract shall be shared proportionately on a reasonable basis between CNPC and the Company. The Land Use Rights Leasing Contract details the particulars of each parcel of land leased by CNPC to the Company. The Land Use Rights Leasing Contract also stipulates that the Company will use 202,346 square metres of collectively-owned land on which 116 service stations are located at no cost for one year. 129

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During this time period, CNPC will apply to competent PRC land administrative authorities for the requisition and conversion of such land to State-owned land and upon issue of formal land use rights certicates in the name of CNPC and authorisation from the Ministry of Land and Resources, CNPC will then lease such land to the Company under the Land Use Rights Leasing Contract. The additional annual fee per square metre payable on such land will be at a rate equal to the rate then payable on each square metre of the above-mentioned approximately 1,145 million square metres of land leased to the Company and the aggregate annual rental payable on the land for the 116 service stations is expected to be approximately RMB353,455. Chesterton Petty Limited, the independent valuer, has reviewed the Land Use Rights Leasing Contract and has conrmed that the current aggregate payment payable by the Company to CNPC is fair and reasonable to the Company. Buildings Leasing Contract The Company entered into the Buildings Leasing Contract with CNPC under which CNPC has leased a total of 191 buildings covering an aggregate area of 269,770 square metres, located throughout the PRC, together with the Company's headquarters, comprising approximately 10,000 square metres, to the Company. The 191 buildings were leased at a price of RMB145 per square metre per year, that is, at an aggregate annual fee of RMB39,116,650, for a term of 20 years. The Company is responsible for the payment of any governmental, legal or other administrative taxes and maintenance charges required to be paid in connection with these 191 leased buildings. The Buildings Leasing Contract details the particulars of the buildings leased by members of the CNPC Group to the Company. Members of the CNPC Group which own one or more of the leased buildings will enter into individual building leasing contracts with the Company. The individual building leasing contracts may only contain provisions which are consistent with the terms and conditions of the Buildings Leasing Contract. One month prior to the end of each nancial year, CNPC and the Company shall make and agree upon a rental fee distribution plan setting out specic prices for the buildings according to their geographical locations and conditions. The Company's headquarters are leased by CNPC to the Company at a price of RMB720 per square metre per year, that is, at an annual fee of RMB7,200,000, for a term of two years. In addition, the Company is responsible for the payment of all maintenance charges in connection with the Company's headquarters. Chesterton Petty Limited, the independent valuer, has reviewed the Buildings Leasing Contract and has conrmed that the current aggregate payment payable by the Company to the CNPC Group is fair and reasonable to the Company. Intellectual Property Licensing Contracts CNPC and the Company entered into three intellectual property licensing agreements, being the Trademark Licensing Contract, the Patent and Know-how Licensing Contract and the Computer Software Licensing Contract. In these licensing contracts, CNPC has granted the Company exclusive rights to use certain trademarks (including the ""CNPC'' trademark), patents (further details are contained in the section headed ""Appendix X Statutory and General Information Further Information about the Business Intellectual Property Rights of the Company), know-how of CNPC and computer software of CNPC (as more particularly detailed in those three contracts) at no cost. These 130

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intellectual property rights relate to the assets and businesses of CNPC which were transferred to the Company in the Restructuring. As provided in these contracts, the Company is responsible for the payment to CNPC and members of the CNPC Group (as appropriate) of certain annual fees relating to patents which CNPC and members of the CNPC Group (as appropriate) have to pay to the relevant PRC Government authorities, in each case payable prior to 31 December each year. The annual fees for patents range from RMB150 to RMB8,000 per year. Computer software and patents which were licensed to the Group by the CNPC Group for consideration prior to the Restructuring will continue to be licensed for consideration under the Computer Software Licensing Contract and the Patent and Know-how Licensing Contract respectively and will be priced in accordance with the pricing principles contained in and otherwise dealt with under the Comprehensive Products and Services Agreement. No other fees are payable by the Group to the CNPC Group pursuant to these contracts. CNPC retains the right to use the intellectual property, detailed in each of the Trademark Licensing Contract, the Patent and Know-how Licensing Contract and the Computer Software Licensing Contract, including any improvement which the Company makes to the computer software, patents and know-how licensed but subject to CNPC reimbursing the Company on the reasonable costs incurred by the Company in developing such improvements, but such reimbursement obligation does not extend to improvements made to the nancial information management software. The patents, know-how and computer software that are listed in the schedules to the Patent and Know-how Licensing Contract and the Computer Software Licensing Contract are licensed to the Company on an exclusive basis, and therefore, CNPC may only license or transfer them to third parties with the prior consent of the Company. Other patents, know-how and computer software are licensed to the Company on a non-exclusive basis. The trademarks contemplated in the Trademark Licensing Contract are licensed to the Company on an exclusive basis. CNPC and the Company may, at any time, terminate any of these intellectual property licensing contracts by mutual consent. The Trademark Licensing Contract is of no xed term. The Company is licensed to use a number of trademarks of CNPC until the registration of such trademark or trademarks expires and they are no longer protected by law. The Patent and Know-how Licensing Contract has no xed term. The Company is licensed to use a number of patents and certain know-how of CNPC until the term of patent rights of such patents expires or such know-how becomes public information, and they are no longer protected by law. The Computer Software Licensing Contract is for a term of 10 years from the date of the Company's business licence. Upon the expiration of the term, the Company can negotiate with CNPC for an extension. Contract for the Transfer of Rights Under Production Sharing Contracts Immediately prior to the Restructuring, CNPC had 23 production sharing contracts with a number of international oil companies. As part of the Restructuring, CNPC transferred to the Company all of its rights and obligations under those contracts, except the rights and obligations relating to CNPC's supervisory functions, under the Contract for the Transfer of Rights under Production Sharing Contracts. The Company does not have the capacity to enter into production sharing contracts directly with foreign oil and gas companies under existing PRC law. Accordingly, CNPC and the Company have agreed under the Undertaking that after signing a production sharing contract, CNPC will, subject to approval of the MOFTEC, assign to the Company all of its commercial and operational rights and 131

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obligations under the production sharing contract on the same terms as reected in the Contract for the Transfer of Rights under Production Sharing Contracts. Guarantee of Debts Contract As part of the Restructuring, all of the debts of CNPC relating to assets transferred to the Company in the Restructuring were also transferred to, and assumed by, the Company. In the Guarantee of Debts Contract entered into between the Company and CNPC, CNPC has agreed to guarantee certain of the debts of the Company totalling approximately RMB63,889 million (including principal and interest) as at 30 September 1999 at no cost to the Group. Contract for the Supervision of Certain Sales Enterprises CNPC entered into the Contract for the Supervision of Certain Sales Enterprises with the Company, under which the Company has agreed to supervise the operations of certain sales enterprises primarily comprising service stations which are wholly-owned by CNPC, as more particularly detailed in the Contract for the Supervision of Certain Sales Enterprises. In return, CNPC has undertaken that those sales enterprises will only sell oil products supplied by the Company and use the Company's brand and logos. It is contemplated that within 90 days of the execution of the Contract for the Supervision of Certain Sales Enterprises, individual contracts for the supervision of certain sales enterprises, with the terms and conditions entirely consistent with the Contract for the Supervision of Certain Sales Enterprises, will be entered into between members of the CNPC Group and members of the Group. Conditions to waiver The Directors consider that the transactions mentioned above have been entered into in the ordinary course of business and on normal commercial terms and are fair and reasonable so far as the shareholders of the Company are concerned. Under the Listing Rules, such transactions are considered to be ""connected transactions'' and would normally require full disclosure and prior independent shareholders' approval on each occasion on which they arise. As the transactions are expected to continue in the normal course of business, the Directors consider that such disclosure and approval would be impractical. Accordingly, the Directors have requested the Stock Exchange to grant a waiver from these requirements. The Stock Exchange has indicated that a waiver would be granted for a period of three nancial years expiring on 31 December 2002 from compliance with the normal approval and disclosure requirements related to connected transactions under the Listing Rules on the following conditions: (a) details of the transactions, including the date, the identity of the parties, a brief description of the transactions and their purposes, the consideration, the nature of the parties' relationship and the extent of interest of the connected persons, as set out in rule 14.25(1)(A) through (D) of the Listing Rules, shall be disclosed in the Company's annual report; the Company's independent non-executive Directors shall review annually the transactions and conrm in the Company's next annual report that: (i) the transactions have been entered into by the Group in the ordinary and usual course of its business; 132

(b)

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(ii) (iii) the transactions have been entered into on terms that are fair and reasonable so far as the shareholders of the Company are concerned; the transactions have been entered into on normal commercial terms and either (1) in accordance with the terms of the agreement governing such transactions or (2) (where there is no such agreement) on terms no less favourable than terms available to third parties; and where applicable, the transactions have been entered into within the proposed limits stated in condition (d) below;

(iv) (c)

the auditors of the Company shall review annually the transactions, details of which shall be set forth in the Company's annual report and accounts and conrm in the Company's next annual report as well as provide the Directors with a letter stating that: (i) (ii) the transactions have received the approval of the Directors; and the transactions have been conducted in the manner as stated in paragraph (b)(iii) and (iv) above;

For the purpose of the above review by the Company's auditors, CNPC has undertaken to the Company that it will provide the auditors with access to its accounting records; and (d) in relation to the products and services contemplated under the Comprehensive Products and Services Agreement, the total annual revenue or expenditure in respect of each category of products and services will not exceed the proposed annual limits set out in the following table:
Category of products and services Proposed annual limit

(i) Products and services to be provided by the Group to the CNPC Group (ii) Products and services to be provided by the CNPC Group to the Group Construction and technical services Production services

12 per cent. of the sales revenue of the Group

27 per cent. of the total of operating expenses and capital expenditure of the Group 10 per cent. of the total of operating expenses and capital expenditure of the Group

133

BUSINESS
Category of products and services Proposed annual limit

Supply of materials services Social and ancillary services Financial services Aggregate of (i) the average daily outstanding principal of loans; and (ii) the total amount of interest paid in respect of these loans Aggregate of (i) the average daily amount of deposits; and (ii) the total amount of interest receipts in respect of these deposits

8 per cent. of the total of operating expenses and capital expenditure of the Group RMB5,607 million

RMB52,500 million

RMB2,500 million

The Company has undertaken to the Stock Exchange that unless otherwise approved by the Stock Exchange, each annual report of the Company issued after dealings in the H Shares commence will disclose the total amount of capital expenditures and operating expenses of the Group. The Stock Exchange has indicated that if any of the material terms of the agreements or arrangements referred to above are altered (unless as provided for under the terms of the relevant agreement or arrangement) or if the Group enters into any new agreements or arrangements with any connected persons (within the meaning of the Listing Rules) in the future under which the aggregate consideration paid or payable by the Group in each year exceeds the limits referred to above, the Company must comply with the provisions of the Listing Rules dealing with connected transactions unless it applies for and obtains a separate waiver from the Stock Exchange. Based on the documents and information provided by the Company and relying upon the conrmation by the Directors, the Sponsors are of the view that the transactions described above are conducted in the usual and ordinary course of business of the Group and are on normal commercial terms and are fair and reasonable to the Group and to the shareholders of the Company. Connected Transactions with CNPC(HK) and Jilin Chemical Industrial Company Limited (""Jilin Chemical'') Prior to the Restructuring, the CNPC Group had entered into various connected transactions with CNPC(HK) and with Jilin Chemical. As a result of the Restructuring, some of the then existing connected transactions between the CNPC Group and CNPC(HK) became connected transactions between the Group and CNPC(HK), and some of the then existing connected transactions between the CNPC Group and Jilin Chemical became connected transactions between the Group and Jilin Chemical. To the greatest extent practicable, the terms of these existing connected transactions have been carried over to any new agreements to be entered by the relevant parties in order to preserve the positions of CNPC(HK) and Jilin Chemical. Given that CNPC(HK) and Jilin Chemical are companies listed on the Stock Exchange, these connected transactions have been dealt with separately and have not been incorporated into the waiver granted by the Stock Exchange as described in the section headed ""Business Relationship with the 134

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CNPC Group Connected Transactions Conditions to waiver'' above. The Company has applied to the Stock Exchange that corresponding connected transaction waivers be granted to the Company at the same time as CNPC(HK) and Jilin Chemical are granted waivers by the Stock Exchange from strict compliance with the requirements of the Listing Rules in respect of any such amended connected transactions arising from the Restructuring.

135

DIRECTORS, SUPERVISORS, MANAGEMENT AND EMPLOYEES

The Board of Directors consists of 12 Directors, two of which are independent non-executive Directors. The Directors are elected at a meeting of the shareholders of the Company for a term of three years, renewable upon re-election and re-appointment. The functions and duties conferred on the Board of Directors include: convening shareholders' meetings and reporting its work to the shareholders' meetings, implementing the resolutions of the shareholders' meetings, determining the Company's business plans and investment plans, formulating the Company's annual budget and nal accounts, formulating the Company's proposals for dividend and bonus distributions and for the increase or reduction of capital as well as exercising other powers, functions and duties as conferred by the Articles of Association. Five of the Directors currently are aliated with CNPC or an aliate of CNPC. Four of the remaining directors resigned their aliation with CNPC as of 5 November 1999 in connection with their appointments to executive positions at the Company. One of the remaining directors left CNPC to join another institute in January 2000. None of the Directors or Supervisors has entered or proposes to enter into a service contract with the Company or its subsidiaries (other than contracts expiring or determinable by the employee within one year without payment of compensation, other than statutory compensation). The Company expects to appoint an additional independent non-executive director after the completion of the Global Oering. The Company Law requires a joint stock company with limited liability to establish a supervisory committee and this requirement is reected in the Articles of Association. The supervisory committee is responsible for monitoring the Company's nancial matters and overseeing the actions of the Board of Directors and the management personnel of the Company. The supervisory committee consists of seven Supervisors, six of whom are shareholders' representatives who are elected, including two who are independent Supervisors, and may be removed, by the shareholders in a general meeting and one of whom is an employees' representative who is elected by the sta of the Company. In addition, the Company has two independent Supervisors. Four of the Supervisors are aliated with CNPC. The term of oce of the Supervisors is three years, renewable upon re-election and re-appointment. An elected Supervisor cannot concurrently hold the position of a director, manager or nancial controller. The functions and powers conferred on the supervisory committee include: attending board meetings, examining the nancial aairs, examining balance sheets, prot and loss accounts, business reports, dividend distribution proposals and other nancial information proposed at shareholders' general meetings by the Directors from time to time and overseeing the actions of the Board of Directors and other senior management personnel of the Company in carrying out their duties. In the case of any conict of interest between the Company and any of its Directors, the Supervisors shall confer with or initiate legal proceedings against such Directors on behalf of the Company. A resolution proposed at any meeting of the supervisory committee shall be adopted only if it is approved by two-thirds or more of the Supervisors. The following table sets forth certain information concerning the Directors, Supervisors and executive ocers of the Company. All of its Directors and ve Supervisors were elected on 25 October 1999. The two independent Supervisors were elected on 3 December 1999.
Name Ma Fucai Yan Sanzhong Huang Yan Wu Yaowen Ren Chuanjun Jiang Jinchu Age 53 58 58 56 55 59 Position Chairman Vice Chairman Vice Chairman and President Director Director and Senior Vice President Director

136

DIRECTORS, SUPERVISORS, MANAGEMENT AND EMPLOYEES

Name Zhang Hong Gong Huazhang Jiang Jiemin Zou Haifeng Chee-Chen Tung Wu Jinglian Shou Xuancheng Luo Yingjun Shi Xingquan Su Shulin Wang Guoliang Lin Qingshan Zhang Xinzhi Li Kecheng Lin Jingao Chen Weizhong Bai Xinhe Sun Chongren Liu Hongru Wu Zhipan Age 62 53 45 53 57 69 50 58 57 37 47 55 55 56 55 55 56 49 69 43 Position Director Director Director and Vice President Director Independent Non-executive Director Independent Non-executive Director Secretary to the Board of Directors Vice President in charge of exploration and production Vice President in charge of natural gas Vice President Chief Financial Ocer and Director of the Finance Department General Manager in charge of rening and marketing General Manager in charge of chemicals Supervisor Supervisor Supervisor Supervisor Supervisor Independent Supervisor Independent Supervisor

Executive Directors Ma Fucai, aged 53, is Chairman of the Board of Directors. Mr. Ma is also President of CNPC. Mr. Ma is a senior engineer. Mr. Ma graduated from Beijing Petroleum Institute, and has over 30 years' experience in China's oil and gas industry. From February 1990 to December 1996, Mr. Ma worked as a Deputy Director, Standing Deputy Director, and Director of Shengli Petroleum Administration Bureau, a subsidiary of CNPC. He worked as an Assistant President from November 1996 to December 1996 and Vice President of CNPC from December 1996 to April 1998 as well as Director of Daqing Petroleum Administration Bureau from June 1997 to November 1998. Mr. Ma has been President of CNPC since April 1998. Huang Yan, aged 58, is a Vice Chairman of the Board of Directors and President of the Company. Mr. Huang is a senior engineer. Mr. Huang graduated from Nanjing Industry Institute and has over 30 years' experience in China's oil and gas industry. From 1984 to 1993, Mr. Huang worked as a Deputy Director and director of Huabei Petroleum Administration Bureau. Mr. Huang had been an Assistant President of CNPC since 1993 and a Vice President of CNPC since 1996 until 5 November 1999 when he was appointed President of the Company. Ren Chuanjun, aged 55, is a Director and a Senior Vice President of the Company. Mr. Ren is a senior economist. Mr. Ren graduated from Hefei Industry University and has over 30 years' experience in China's oil and gas and chemical bres industries. Mr. Ren became a Deputy General Manager and 137

DIRECTORS, SUPERVISORS, MANAGEMENT AND EMPLOYEES

General Manager of China Yizheng Fibre Industrial United Corporation in 1983. From 1994, he worked as a Vice Minister of China National Textile Council as well as a Vice Chairman of the board of directors of Yizheng Fibre United Corporation and Yizheng Fibre Company Limited. Mr. Ren had been a Vice President of CNPC since April 1998 until 5 November 1999 when he was appointed Senior Vice President of the Company. Jiang Jiemin, aged 45, is a Director and a Vice President of the Company. Mr. Jiang is a senior economist. Mr. Jiang graduated from Shandong University and has 27 years' experience in China's oil and gas industry. Mr. Jiang was a Deputy Director of Shengli Petroleum Administration Bureau from 1993 and Director of Qinghai Petroleum Administration Bureau from 1994. Mr. Jiang had been an Assistant President of CNPC since February 1999 until 5 November 1999 when he was appointed Vice President of the Company. Non-executive Directors Yan Sanzhong, aged 58, is a Vice Chairman of the Board of Directors. Mr. Yan is also a Vice President of CNPC. Mr. Yan is a senior engineer. Mr. Yan graduated from the Science and Technology University of China and has over 30 years' experience in China's oil and gas industry and chemical industry. From 1983 to 1988, Mr. Yan was a senior executive of Lanzhou Renery. From 1988 to 1998, Mr. Yan worked as a Vice President of China Petrochemical Corporation. In April 1998, Mr. Yan was appointed a Deputy Director of the State Petroleum and Chemical Industry Bureau. Mr. Yan has been a Vice President of CNPC since July 1999. Wu Yaowen, aged 56, is a Director of the Company. Mr. Wu is a Vice President of CNPC. Mr. Wu is a senior engineer. Mr. Wu graduated from Beijing Petroleum Institute, and has over 30 years' experience in China's oil and gas industry. From 1988 to 1994, Mr. Wu worked as chief petroleum engineer of the Ministry of Energy, Head of the Energy Industry Department and Vice Director of the Preparatory Committee of the Communications and Energy Department under the State Planning Committee. He was appointed Director of International Cooperation Bureau of CNPC in May 1994 and an Assistant President in March 1996 and a Vice President of CNPC in December 1996. Jiang Jinchu, aged 59, is a Director of the Company. Mr. Jiang is a Vice President of CNPC. Mr. Jiang is a senior engineer. Mr. Jiang has over 30 years' experience in industrial economic matters. Mr. Jiang was appointed Chief Engineer and a Deputy Director of the General Economic Bureau of the State Economic Committee in 1984, and a Deputy Director of the General Division of National Economy under the State Planning Committee in October 1988. In 1993, he was appointed Director and a Deputy Secretary of the State Economic and Trade Commission. Mr. Jiang has been a Vice President of CNPC since October 1998. Zhang Hong, aged 62, is a Director of the Company. Mr. Zhang is a senior engineer. Mr. Zhang graduated from Beijing Petroleum Institute and has 36 years' experience in China's oil and gas industry. From 1984 to 1991, Mr. Zhang worked as a senior executive of Daqing Petroleum Administration Bureau and then a senior executive of Henan Petroleum Exploration Bureau. Mr. Zhang became a Vice President of CNPC in October 1991 and Director of Inspection and Discipline Group of CNPC in April 1998. Gong Huazhang, aged 53, is a Director of the Company. Mr. Gong is General Accountant of CNPC. Mr. Gong is a senior accountant. Mr. Gong graduated from Yangzhou Business School and has over 30 years' experience in China's oil and gas industry. In 1991, Mr. Gong was appointed Chief Accountant, Deputy Director and Director of Finance Bureau of CNPC. Mr. Gong has been Director of 138

DIRECTORS, SUPERVISORS, MANAGEMENT AND EMPLOYEES

Finance and Assets Department of CNPC since October 1998 and has been General Accountant of CNPC since February 1999. Zou Haifeng, aged 53, is a Director of the Company. Mr. Zou is a Deputy Manager of Jilin Chemical Industrial Corporation and a Director and Deputy Manager of Jilin Chemical Industrial Company Limited. Mr. Zou is a senior engineer. Mr. Zou graduated from Northeastern Industry Institute and has 30 years' experience in the chemical industry. Since 1994, Mr. Zou has been a Deputy Manager of Jilin Chemical Group Corporation and a Director and Deputy Manager of Jilin Chemical Industrial Company Limited. Mr. Zou has been a Deputy Manager of Jilin Chemical Industrial Company Limited, a subsidiary of the Company, since July 1999. Independent Non-executive Directors Chee-Chen Tung, aged 57, is an independent non-executive director of the Company. Mr. Tung is the Chairman and Chief Executive Ocer of Orient Overseas (International) Limited. Mr. Tung was educated at the University of Liverpool, England, where he received his Bachelor of Science degree. He later acquired a Master's degree in Mechanical Engineering at the Massachusetts Institute of Technology in the United States. He served as Chairman of Hong Kong Shipowner's Association between 1993 and 1995. He currently holds the positions of Chairman of the Hong Kong General Chamber of Commerce, a non-executive director of Sing Tao Holdings Ltd. and Zhejiang Expressway Company Ltd, a member of the Port Development Board, a Council member of the Hong Kong Trade Development Council and an International Councillor of the Centre for Strategic & International Studies. Mr. Tung is also the Chairman of the Hong Kong-America Centre, Chairman of the Institute for Shipboard Education Foundation, Chairman of the Court and a member of the Council of the Hong Kong Polytechnic University, a member of the Board of Trustees of the University of Pittsburgh and a member of Board of Visitors of the School of Foreign Service, Georgetown University. Wu Jinglian, aged 69, is an independent non-executive director of the Company. Mr. Wu is a senior researcher at the Development Research Center of the State Council and a professor at the Graduate School of Chinese Academy of Social Sciences. Mr. Wu graduated from Fudan University, and was previously a Deputy Director of the Programming Oce for Economic Reform of the State Council. Mr. Wu was also a visiting scholar at Yale University, a visiting professor at the Asia-Pacic Research Center of Stanford University and a visiting researcher at the Massachusetts Institute of Technology. Secretary to the Board of Directors Shou Xuancheng, aged 50, is the Secretary of the Company. Mr. Shou is a senior economist. He holds a Master's Degree from China Petroleum University. From 1994 to 1999, Mr. Shou worked as a Deputy General Manager of China National Oil & Gas Exploration and Development Corporation. Mr. Shou worked concurrently as General Manager of CNPC International (Kazakhstan) Co. Ltd. from 1998 to 1999. Other Senior Management Personnel Luo Yingjun, aged 58, is a Vice President of the Company in charge of exploration and production. Mr. Luo is a senior engineer. Mr. Luo graduated from Southwestern Petroleum Institute and has 35 years' experience in China's oil and gas industry. Mr. Luo was a Deputy Director of CNPC Development and Production Bureau from 1991 and Director of CNPC Tuha Petroleum Exploration and Development Directing Department from 1995. Since October 1998, Mr. Luo was appointed an Assistant President of CNPC until 5 November 1999 when he was appointed to an executive position at the Company. 139

DIRECTORS, SUPERVISORS, MANAGEMENT AND EMPLOYEES

Shi Xingquan, aged 57, is a Vice President of the Company in charge of natural gas. Mr. Shi is a senior engineer. Mr. Shi graduated from Northeastern Petroleum Institute and has over 30 years' experience in China's oil and gas industry. Since 1983, Mr. Shi had worked as a Director of Sichuan Petroleum Administration and a Director of Changqing Petroleum Exploration Bureau. Since February 1999, Mr. Shi had been an Assistant President of CNPC until 5 November 1999 when he was appointed to an executive position at the Company. Su Shulin, aged 37, is a Vice President of the Company and General Manager of PetroChina Daqing Oileld Company. Mr. Su is a senior engineer. Mr. Su graduated from Daqing Petroleum Institute and has many years' experience in China's oil and gas industry. Since 1996, Mr. Su had worked as a Director Assistant, Director of the First Oil and Natural Gas Development Department, a Standing Deputy Director, and Director of Daqing Petroleum Administration Bureau until 5 November 1999 when he was appointed to an executive position at the Company. Wang Guoliang, aged 47, is Chief Financial Ocer and Director of the Financial Department of the Company. Mr. Wang graduated from Heilongjiang Business College and has over 20 years' experience in China's oil and gas industry. Mr. Wang worked as a Vice President of CNPC Finance Co. Ltd. from 1995 to 1997 and a Deputy General Manager and General Accountant of China National Oil & Gas Exploration and Development Corporation from 1998 to 1999 until his appointment as Chief Financial Ocer of the Company on 5 November 1999. Lin Qingshan, aged 55, is a General Manager of the Company in charge of rening and marketing. Mr. Lin is a senior engineer. Mr. Lin graduated from Beijing Petroleum Institute and has 30 years' experience in China's oil and gas industry. In 1990, Mr. Lin was appointed a Deputy Director of Liaohe Petroleum Exploration Bureau. In 1996, Mr. Lin became General Manager of the China United Petroleum Corporation. Mr. Lin was appointed General Manager of the Sales Department of CNPC in 1998. On 5 November 1999, he was appointed to an executive position at the Company. Zhang Xinzhi, aged 55, is a General Manager of the Company in charge of chemicals. Mr. Zhang is a senior engineer and has 31 years' experience in China's petrochemical industry. Mr. Zhang graduated from China Science and Technology University. Mr. Zhang was appointed a deputy general engineer in 1990, worked as a Deputy Manager in 1992, and served as Manager in 1995 of Fushun Petrochemical Industrial Corporation. Mr. Zhang was Director of the Rening and Chemical Department of CNPC in 1999. On 5 November 1999, he was appointed to an executive position at the Company. Supervisors Li Kecheng, aged 56, is Chairman of the Company's supervisory committee. Mr. Li is a senior engineer. Mr. Li graduated from Beijing Technology Institute, and has over 30 years' experience in China's oil and gas industry. From 1986 to 1992, Mr. Li was a senior executive of Northeastern Oil Transmission Administration Bureau. Prior to 5 November 1999, Mr. Li held several senior administrative positions at CNPC. Lin Jingao, aged 55, is a supervisor of the Company. Mr. Lin is a senior accountant. Mr. Lin graduated from Beijing Petroleum Institute and has over 30 years' experience in China's oil and gas industry. From 1994 to 1998, Mr. Lin was General Accountant and a Deputy Director of the Finance Department of CNPC. Since October 1998, Mr. Lin has been a Deputy Director and Director of the Finance and Capital Department of CNPC. Chen Weizhong, aged 55, is a supervisor of the Company. Mr. Chen is a senior auditor. Mr. Chen graduated from Anhui Finance and Trade Institute and has over 30 years' experience in China's oil and gas industry. He was a Deputy Director of the Auditing Oce of CNPC from 1993 to 1998, and a 140

DIRECTORS, SUPERVISORS, MANAGEMENT AND EMPLOYEES

Deputy Director of the Auditing Bureau of CNPC. Mr. Chen has been a Deputy Director of the Auditing Department of CNPC since October 1998. Bai Xinhe, aged 56, is a supervisor and a Deputy Director of the Auditing Department of the Company. Mr. Bai is a senior auditor. Mr. Bai graduated from Central Finance Institute and has 30 years' experience in China's oil and gas industry. Mr. Bai has been Chief Auditor of the Auditing Department of CNPC since October 1988. Sun Chongren, aged 49, is a supervisor of the Company and an employee representative of the Company's supervisory committee. Mr. Sun graduated from Huadong Petroleum Institute and has 30 years' experience in China's oil and gas industry. Mr. Sun has been working at Liaohe Petroleum Administration Bureau for 30 years. Since 1996, he has been a senior executive of Liaohe Petroleum Administration Bureau as well as Chairman of its Trade Union. Liu Hongru, aged 69, is an independent supervisor of the Company. Mr. Liu graduated from the Economics Department of University of Moscow in 1959 with an associate doctor's degree. Mr. Liu worked as President of China Institute of Finance and Banking, a Vice Governor of the PBOC, a Deputy Director of the State Economic Restructuring Committee, First Deputy Director of the Securities Commission and Chairman of the CSRC. Mr. Liu is currently a Deputy Director of the Economic Committee under the Chinese People's Political Consultative Conference, and concurrently serves as a Vice President of China Finance and Banking Society, a Vice President of China National Debt Association and a Honorary Director of two Chinese insurance companies. Wu Zhipan, aged 43, is an independent supervisor of the Company. Mr. Wu acquired a Doctor in Laws from Beijing University School of Law in 1988, and was a visiting scholar at Harvard Law School from 1991 to 1992. Mr. Wu is Dean of Beijing University School of Law and Assistant to President of Beijing University. He is concurrently an expert consultant of the Supreme People's Court, an arbitrator on the Arbitrator Panel of China International Economic and Trade Arbitration Commission and a Deputy Director of China Civil and Economic Law Society. Mr. Wu is the author of a number of legal publications. Audit and Other Committees The Company intends to establish an audit committee after the completion of the Global Oering in compliance with the Code of Best Practice as set out in Appendix 14 of the Listing Rules. The primary duties of the audit committee will be to review and supervise the nancial reporting process of the Group. The audit committee is intended to be comprised of 3 or more non-executive Directors, the majority of which will be independent non-executive Directors. After the completion of the Global Oering, the Company also intends to establish an evaluation and remuneration committee, a strategy and investment committee and a health, safety and environment committee. Senior Management Compensation System The Company's senior management compensation system links its senior management members' nancial interests, including those of its executive Directors and Supervisors, with the results of operations and the performance of the Company's shares. Most of the senior management members have entered into performance contracts with the Company. Under this system, the senior management members' compensations have three components, namely, basic salaries, performance bonuses and stock options. The variable components in their compensation account for approximately 70 per cent. to 75 per cent. of senior management ocers' total potential compensation, including approximately 15 per cent. 141

DIRECTORS, SUPERVISORS, MANAGEMENT AND EMPLOYEES

to 25 per cent. forming the performance bonus component and approximately 50 per cent. to 60 per cent. forming the stock option component. Variable compensation rewards are linked to the attainment of specic performance targets, such as net prot, return on capital and cost reduction targets. The chart below sets forth the components of the total potential compensation for key ocers.
% Basic Salary % Stock Options % Performance Bonus

Chairman President Vice President Department General Manager

30 25 25 25

70 60 60 50

0 15 15 25

The Company has granted stock options to approximately 300 persons, including members of the Board of Directors and the supervisory committee, president, vice presidents and departmental managers, general managers and deputy general managers of specialised companies and local subsidiaries. Since companies are not permitted to repurchase and hold their own shares for oering stock options under current PRC law, the Company expects to calculate its book gains and losses on the basis of share prices and in accordance with stock option measures and make cash payment of such compensations. In addition, the Company is in the process of designing an incentive plan for junior managers. Directors' and Supervisors' Compensation The Company was incorporated on 5 November 1999. The Directors and Supervisors receive compensation in the form of salaries, housing allowances, other allowances and benets in kind, including the Company's contribution to the pension scheme for its Directors and Supervisors. It is estimated that an aggregate amount of approximately RMB1,068,000, including benets and contributions, will be paid to the Directors and the Supervisors as remuneration by the Company in respect of the year ending 31 December 1999 according to the present arrangements. The aggregate amount of salaries, housing allowances, other allowances and benets in kind paid by the Company to the ve highest paid individuals of the Company during the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999 was approximately RMB257,604, RMB274,020, RMB279,636 and RMB300,933, respectively. Approximately RMB9,696, RMB10,776, RMB9,828 and RMB9,297 were paid by the Company as its contribution to the pension schemes in respect of such individuals in the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999, respectively. The aggregate amount of salaries, housing allowances, other allowances and benets in kind paid by the Company to its Directors (not including its independent non-executive Directors) during the three years ended 31 December 1996, 1997, 1998 and the nine months ended 30 September 1999 was approximately RMB496,356, RMB524,436, RMB535,776 and RMB570,231, respectively. Save as disclosed above, no other payments have been paid or are payable, in respect of the three years ended 31 December 1998 and the nine months ended 30 September 1999, by the Company or any of its subsidiaries to the Directors. Under the arrangements currently in force, the aggregate remuneration of the Directors payable for the year ended 31 December 1999 and year ending 31 December 2000 is estimated to be approximately RMB768,000 and RMB809,000, respectively. The aggregate amount of salaries, housing allowances, other allowances and benets in kind paid by the Company to its Supervisors (not including the two independent Supervisors) during the three years 142

DIRECTORS, SUPERVISORS, MANAGEMENT AND EMPLOYEES

ended 31 December 1996, 1997, 1998 and the nine months ended 30 September 1999 was approximately RMB226,812, RMB234,252, RMB237,192 and RMB230,772, respectively. Employees As at 30 September 1999, the Company had 480,012 employees. The table below sets forth the number of the Company's employees by principal business segment.
Employees Percentage of Total

Exploration and production Rening and marketing Chemicals Natural gas Other(1) Total
(1) Including research and development, planning and management.

207,423 161,153 66,337 12,605 32,494 480,012

43.2 33.6 13.8 2.6 6.8 100.0

The employees of the Company participate in various retirement benet plans organised by municipal and provincial governments whereby the Company is required to make monthly contributions to these plans at rates ranging from 20 per cent. to 25 per cent. of the employees' basic salary. The Company has no obligation for the payment of retirement and other post-retirement benets of employees other than the monthly contributions described above. The Company also has no obligation to provide benets for employees or ex-employees of CNPC, its parent. Expenses incurred by the Company in connection with the retirement benet plans were approximately RMB1,182 million, RMB1,278 million, RMB1,377 million and RMB1,238 million, respectively, for the years ended 31 December 1996, 1997 and 1998 and for the nine months ended 30 September 1999, respectively. The Company has not experienced any strikes, work stoppages, labour disputes or actions which aected the operation of any of the Company's business and the Directors consider the Company's relationship with its employees to be good.

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SUBSTANTIAL SHAREHOLDERS
The following table sets forth certain information, so far as the Directors are aware, regarding ownership of the Company's share capital by all persons who own 10 per cent. or more of the Company's issued and outstanding share capital immediately prior to and after the Global Oering.
Number of Domestic Shares owned Before After Global Oering Global Oering Percentage of issued and outstanding share capital Before After Global Oering Global Oering(1)

Shareholder

CNPC

160,000,000,000

158,241,758,000

100.00%

90.00%

(1) Assumes that the Over-allotment Options are not exercised and takes no account of any H Shares which may be repurchased by the Company pursuant to the mandate referred to in the section headed ""Share Capital General Mandate to Repurchase H Shares''. The number of Domestic Shares owned by CNPC after the Global Oering assuming that the Over-allotment Options are exercised in full will be 157,978,022,000 Domestic Shares representing approximately 88.65 per cent. of the Company's issued and outstanding share capital.

None of the Directors or ocers of the Company is a legal or benecial owner of any Shares in the Company's share capital. The Directors are not aware of any arrangement which may at a subsequent date result in a change of control of the Company.

144

SHARE CAPITAL
The following is a description of the share capital of the Company in issue and to be issued as fully paid or credited as fully paid immediately before and after the completion of the Global Oering:
Approximate percentage of total registered capital after the Approximate Global Oering percentage of assuming no total registered exercise of capital before Over-allotment the Global Oering Options (per cent.) (per cent.) Approximate percentage of total registered capital after the Global Oering assuming full exercise of Over-allotment Options (per cent.)

Number of Shares

Description of Shares and Shareholders

Aggregate Amount of Capital (RMB)

Existing Issued Shares: 160,000,000,000 Domestic Shares held by CNPC 158,241,758,000(1) (157,978,022,000 assuming the Over-allotment Options are exercised in full) 100.00 90.00(1) 88.65(1)

H Shares to be oered for sale: 17,582,418,000 (20,219,780,000 assuming the Overallotment Options are exercised in full) Foreign Shares to be issued or oered for sale in the form of H Shares under the Global Oering 17,582,418,000 (20,219,780,000 assuming the Over-allotment Options are exercised in full) 175,824,176,000 (178,197,802,000 assuming the Over-allotment Options are exercised in full)
(1)

10.00(1)

11.35(1)

100.00

100.00

100.00

H Shares which will be converted from Domestic Shares and oered by CNPC in the Global Oering have been included in the number of Foreign Shares and the number of Domestic Shares has been correspondingly reduced.

Assumption The table above assumes that the Global Oering becomes unconditional and is completed and takes no account of any H Shares which may be repurchased by the Company pursuant to the mandate referred to in the section headed ""Share Capital General Mandate to Repurchase H Shares''. Ranking Domestic Shares and Foreign Shares are both ordinary shares in the share capital of the Company. However, Foreign Shares, in the form of H Shares, may only be subscribed for by, and traded in Hong 145

SHARE CAPITAL
Kong dollars between, legal or natural persons of Hong Kong, Macau, Taiwan or any country other than the PRC. Domestic Shares, on the other hand, may only be subscribed for by, and traded between, legal or natural persons of the PRC (other than Hong Kong, Macau and Taiwan) and must be subscribed for and traded in Renminbi. All dividends in respect of H Shares are to be paid by the Company in Hong Kong dollars whereas all dividends in respect of Domestic Shares are to be paid by the Company in Renminbi. All the existing Domestic Shares are held by CNPC as promoter shares (as dened in the Company Law). Promoter shares may not be sold within a period of three years from the date of incorporation of the Company. This period will expire on 4 November 2002. Pursuant to the approval issued by the CSRC on 14 February 2000, CNPC was exempted from this prohibition and may sell up to a total of 23,000,000,000 of the Domestic Shares owned by it in the form of H Shares pursuant to the Global Oering. The Domestic Shares are not admitted for listing on any stock exchange and no arrangement has been made for the Domestic Shares to be traded or dealt with on any other authorised trading facility in the PRC. Except as described above and in relation to the despatch of notices and nancial reports to shareholders, dispute resolution, registration of shares on dierent parts of the register of shareholders, the method of share transfer and the appointment of dividend receiving agents, which are all provided for in the Articles of Association and summarised in Appendix IX to this prospectus, the Domestic Shares and the H Shares will rank pari passu with each other in all respects and, in particular, will rank equally for all dividends or distributions declared, paid or made after the date of this prospectus. However, the transfer of Domestic Shares is subject to such restrictions as PRC law may impose from time to time. GENERAL MANDATE TO REPURCHASE H SHARES CNPC, the sole shareholder of the Company as at the date of this prospectus, has granted the Directors a general unconditional mandate (the ""Repurchase Mandate'') to exercise all the powers of the Company to repurchase H Shares up to 10 per cent. of the total amount of H Shares to be sold in the Global Oering (including the H Shares which may be issued under the Over-allotment Options). The Repurchase Mandate only relates to repurchases made on the Stock Exchange, or on any other stock exchange on which the H Shares are listed (and which is recognised by the Securities and Futures Commission of Hong Kong and the Stock Exchange for this purpose), and which are in accordance with the Listing Rules. Further details are set out in the section headed ""Appendix X Repurchase by the Company of Its H Shares''. The Repurchase Mandate will expire: at the end of the Company's next annual general meeting; or at the end of the period within which the Company is required by any applicable laws or the Articles of Association to hold its next annual general meeting; or when varied or revoked by special resolutions of the Company's shareholders in general meeting and of the holders of H Shares and Domestic Shares at separate meetings of such holders, whichever occurs rst.

146

FINANCIAL INFORMATION
INDEBTEDNESS At the close of business on 30 November 1999, being the latest practicable date for the purpose of this indebtedness statement, the Group had the following outstanding borrowings:
As at 30 November 1999 (in RMB millions)

Short term debts Bank loans Secured Unsecured Loans from related parties Secured Unsecured Other loans Secured Unsecured Long term debts Bank loans Secured Unsecured Loans from related parties Secured Unsecured Other loans unsecured Debenture Obligation under nance lease

1,434 31,836 17 13,459 3 1,123

41 75,365 2,378 7,881 2,409 3,866 413 140,225

Existing Indebtedness As part of the Restructuring, the Company and CNPC agreed to the transfer of related debts from CNPC to the Company. All of the debts transferred from CNPC to the Company have been included in the Company's summary of combined net assets as at 30 September 1999. Of the total bank borrowings of RMB108,676 million outstanding as at 30 November 1999, consents from the banks to transfer borrowings from CNPC to the Company totaling RMB103,044 million have been obtained. The Company is in the process of transferring the remaining balance of the borrowings transferred from CNPC. The Company and CNPC further agreed that in respect of any loan transferred to the Company as part of the Restructuring, but for which consent to the transfer from the relevant lender has not been obtained by 31 December 1999, the Company will be directly liable to the relevant lenders in respect of the principal amounts, interest, costs, fees and all other payments in respect of such loans. In addition, the Company will not be required to pay any fees or other charges to CNPC. Of the Group's outstanding borrowings as at 30 November 1999, approximately RMB1,484 million were secured by xed assets of the Group and approximately RMB2,388 million were secured by inventories of the Group. Certain unsecured borrowings totalling approximately RMB58,732 million were guaranteed by CNPC and its subsidiaries. Of such amount, RMB8,861 million will be repaid using the net proceeds of the Global Oering. Taking into account such repayment, the remaining amount of 147

FINANCIAL INFORMATION
borrowings guaranteed by CNPC and its subsidiaries as at 30 November 1999 would have been approximately RMB49,871 million. CNPC and the Company have undertaken to the Stock Exchange that they will, on a best endeavours basis, approach each lender with a view to obtaining the unconditional release of such guarantees during the period of three months after the publication of the Company's annual report for the nancial year ended 31 December 1999. The Directors have conrmed that, as at 30 November 1999, they were not aware of any circumstances which, had the Company been required to comply with Practice Note 19 of the Listing Rules, would give rise to a disclosure requirement under that Practice Note. Contingent Liabilities As at 30 November 1999, the Group had contingent liabilities of approximately RMB11 million and RMB2 million representing the guarantees given to banks in respect of banking facilities granted to CNPC and its subsidiaries and third parties. Capital Expenditures and Investments The Group's net cash used for investing activities includes capital expenditures and investments, oset by proceeds from the sale of assets and dividends received. The table below sets forth the Group's capital expenditures (including non-dry hole exploration expenses) by business segment for each of the years ended 31 December 1996, 1997 and 1998 as well as those anticipated for the period from 1999 to 2004. Actual capital expenditures for periods after 30 September 1999 may dier materially from the amounts indicated below.
1996 (in RMB per millions) cent. 1997 (in RMB per millions) cent. 1998 (in RMB per millions) cent. Average annual anticipated 1999 to 2004 (in RMB per millions) cent.

Exploration and production Rening and marketing Chemicals Natural gas Corporate and other Total

29,702 15,456 13,816 1,311 817 61,102

48.6 25.3 22.6 2.2 1.3 100.0

33,726 8,388 12,484 1,623 718 56,939

59.2 14.7 21.9 2.9 1.3 100.0

31,161 9,374 5,064 905 407 46,911

66.4 20.0 10.8 1.9 0.9 100.0

34,233 6,167 2,867 2,717 2,950 48,934

70.0 12.6 5.9 5.5 6.0 100.0

Exploration & Production A majority of the Group's capital expenditures relate to the exploration and production segment. Capital expenditure of the Group for the year ended 31 December 1998 totalled RMB31,161 million, including RMB8,705 million for exploration activities and RMB19,612 million for development activities. The capital expenditures for the year ended 31 December 1997 totalled RMB33,726 million, including RMB8,689 million for exploration activities and RMB23,070 million for development expenditures, representing an increase in exploration expenditure by RMB1,558 million and an increase in development expenditures by RMB2,358 million from 1996. The decrease in the Group's capital expenditure from 1997 to 1998 was due primarily to a decrease in the Group's development expenditures by RMB3,458 million, partially oset by an increase in other xed assets. This reduction in the Group's development expenditures largely reected the lower crude oil price level in 1998 and the Company's cost reduction strategy. The increase in the Group's capital expenditures between 1996 and 1997 resulted primarily from its drive to increase its reserves and production in light of a higher crude oil price in 1997. 148

FINANCIAL INFORMATION
The Group's anticipated capital expenditures and investments for the exploration and production segment for the period from 1999 to 2004 are set forth below:
Year 1999 2000 2001 2002 (in RMB millions) 2003 2004

Capital expenditures and investments

37,700

36,000

34,600

33,500

31,500

32,100

The Group's anticipated capital expenditures and investments for its exploration and production segment for the period from 1999 to 2004 amount to RMB205,400 million, or an average of RMB34,233 million per year. Approximately RMB65,700 million is expected to be used for oil and gas exploration activities and approximately RMB139,700 million for oil and gas development activities. The China Development Bank has committed to providing the Company with a standby non-revolving credit facility of RMB10,000 million to fund its oil and gas exploration and production activities for 2000. The Group plans to focus its exploration eorts on the Shanganning, Bohai Bay, Junggar, Tarim, Songliao, Sichuan and Qaiddam basins, where its nding costs have been signicantly lower and which the Directors believe hold greater potential for new discoveries. Rening and Marketing The Group's capital expenditures and investments for its rening and marketing segment for each of the three years ended 31 December, 1996, 1997 and 1998 were RMB15,456 million, RMB8,388 million and RMB9,374 million, respectively. The gradual reduction in the Group's capital expenditures and investments reected excessive rening capacity in China in general and the Group's strategy of increasing its capacity utilization rates and reducing processing and xed costs per unit produced. On the other hand, the Group has over recent years invested in facility expansions and upgrades to improve product quality and optimize product mix. Specically, the Group has completed the upgrade of its reneries to produce low sulphur gasoline and diesel in compliance with the PRC Government requirement that by 1 January 2000, all reneries should stop producing leaded gasoline. The Group's anticipated capital expenditures and investments for its rening and marketing segment for the period from 1999 to 2004 amount to RMB37,000 million, or an average of RMB6,167 million per year, which include: approximately RMB19,000 million for the construction and expansion of rening facilities, including the construction of hydrocracking and catalytic reforming units at Dalian Petrochemical, diesel hydrogenation rening units at Jinxi Renery and Fushun Petrochemical, and the expansion of Lanzhou Renery's annual diesel hydrogenation capacity from 600,000 tons to one million tons; approximately RMB13,900 million for investment in storage facilities and service stations in order to increase the Company's storage capacity by approximately 3.5 million cubic metres and add 6,000 to 9,000 more service stations, including approximately 1,500 franchised service stations; and approximately RMB4,000 million for investments in crude oil and rened product pipelines. Chemicals The Group's capital expenditures and investments for its chemicals segment, excluding capital expenditures for assets to be retained by CNPC, for each of the three years ended 31 December 1996, 1997 and 1998 were RMB13,816 million, RMB12,484 million and RMB5,064 million, respectively. In the three years ended 31 December 1998, the Group has signicantly decreased its capital expenditures 149

FINANCIAL INFORMATION
in its chemical segment as it moved to a more rigorous return-based evaluation system for its capital expenditures. The Group's anticipated capital expenditures and investments for its chemical segment for the period from 1999 to 2004 amount to RMB17,200 million, or an average of RMB2,867 million per year, which include: approximately RMB14,000 million for reduction of energy and materials consumption and readjustment of product structure in relation to the Group's eort to de-bottleneck the production process and to increase production capacity. The Group's eorts to de-bottleneck include technical renovations of ethylene production facilities located at Daqing Petrochemical, Dushanzi Petrochemical and Liaoyang Chemical Fibres, and technical renovation of the ABS facilities of Jilin Chemical; and approximately RMB3,200 million for safety, quality control, environmental protection, energy conservation and minor technical renovations. Natural Gas The Group's capital expenditures and investments for its natural gas segment for each of the three years ended 31 December 1996, 1997 and 1998 were RMB1,311 million, RMB1,623 million and RMB905 million. Capital expenditures and investments consist primarily of expansion and maintenance of the Group's pipelines, and, in particular, the investment in construction of the Group's Shaanxi to Beijing pipeline which was completed and commenced operation at the end of 1997. The total cost of this pipeline was approximately RMB3,390 million, or approximately RMB3.7 million per km. The time required for the PRC Government to approve this project was approximately 30 months. The Group's anticipated capital expenditures and investments for its natural gas segment for the period from 1999 to 2004 amount to RMB16,300 million or an average of RMB2,717 million per year. Of this amount, approximately RMB14,600 million is expected to be invested in the West to East natural gas pipeline project. The Group expects to invest the remaining approximately RMB1,700 million in other natural gas pipelines and ancillary facilities. Please refer to the section headed ""Business Natural gas Expansion of the Company's natural gas transmission and marketing business'' for a more detailed discussion of the expansion plans of the natural gas segment of the Group. Corporate and Other The Group's non segment-specic capital expenditures and investments for each of the three years ended 31 December 1996, 1997 and 1998 were RMB817 million, RMB718 million and RMB407 million, respectively. Historically, the Group's non segment-specic capital expenditures and investments related primarily to purchase of equipment and construction work for research and development activities. The Group's anticipated non segment-specic capital expenditures and investments for the period from 1999 to 2004 amount to RMB17,700 million, or an average of RMB2,950 million per year. These planned capital expenditures and investments relate primarily to the construction of water and electricity supply systems, roads and telecommunication systems. Prior to the incorporation of the Company, it allocated similar capital expenditures and investments directly to specic business segments. Consistent with the Company's move towards a return-based business strategy, it has adopted more stringent return criteria for determining segment-specic capital expenditure plans. In order to better assess the return on capital expenditures and investments in each individual business segment, it has decided to bear at its headquarter level the cost of expenditures and investments which benet multiple business segments. As 150

FINANCIAL INFORMATION
a result, its non segment-specic capital expenditures and investments are expected to increase signicantly for the period from 1999 to 2004, as compared to historical levels. The Group's anticipated non segment-specic capital expenditures and investments for the period from 1999 to 2004 include: approximately RMB13,000 million for the construction of water and electricity supply systems, roads and telecommunication systems; and approximately RMB4,000 million for purchase of equipment and other capital expenditures required by its non segment-specic research and development. Ination According to the China Statistical Bureau, China's overall national ination rate, as represented by the general consumer price index, was approximately 8.3 per cent. and 2.8 per cent. in 1996 and 1997, respectively. In 1998, China experienced deation at the rate of 0.8 per cent. Ination or deation have not had a signicant impact on the Company's results of operations in recent years. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In its normal course of business, the Group holds or issues various nancial instruments which expose the Group to interest rate and foreign exchange rate risks. In addition, the Group's operations are aected by certain commodity price movements. The Group historically has not used derivative instruments for hedging or trading purposes. Such activities are subject to policies approved by the Group's senior management. Substantially all of the nancial instruments that the Group holds are for purposes other than trading. The Group regards an eective market risk system as an important element of its treasury function and is currently enhancing its systems. A primary objective is to implement certain methodologies to better measure and monitor risk exposures. The following discussions and tables, which constitute ""forward-looking statements'' that involve risk and uncertainties, summarize the Group's market-sensitive nancial instruments including fair value, maturity and contract terms. Such discussions address market risk only and do not present other risks which the Group faces in the normal course of business. Interest Rate Risk The Group's major market risk exposure arises from changing interest rates. The following tables provide information about the Group's nancial instruments, including various debt obligations that are sensitive to changes in interest rates. The tables present principal cash ows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on eective rates as of 30 September 1999 and 31 December 1998. The information is presented in Renminbi equivalents, the Group's reporting currency. Foreign Exchange Rate Risk The Group's business is primarily conducted in Renminbi. However, a portion of its Renminbi revenues are converted into other currencies to meet foreign currency nancial instrument obligations 151

FINANCIAL INFORMATION
and to pay for imported equipment and materials. Foreign currency payments for imported equipment represented 11.0 per cent., 10.6 per cent. and 10.1 per cent. of the Company's total payments for equipment in 1996, 1997 and 1998, respectively. Foreign currency payments for imported materials represented 10.8 per cent., 10.4 per cent. and 10.1 per cent. of the Company's total payments for materials in 1996, 1997 and 1998, respectively. The Renminbi is not a freely convertible currency. Limitations in foreign exchange transactions imposed by the PRC Government could cause future exchange rates to vary signicantly from current or historical exchange rates. The tables below provide information about the Company's nancial instruments including foreign currency denominated debt instruments that are sensitive to foreign currency exchange rates. The tables summarize such information by presenting principal cash ows and related weighted average interest rates by expected maturity dates in Renminbi equivalents, using the exchange rates in eect as of 30 September 1999 and 31 December 1998, respectively. As at 30 September 1999
2000 % to total Expected maturity date long-term 2001 2002 2003 2004 Thereafter Total debt (RMB equivalent in millions, except percentages) (%) Fair value

Long Term Debt Loans in RMB Fixed rate Average interest rate Variable rate(1) Average interest rate Loans in Deutsche Mark Fixed rate Average interest rate Loans in United States Dollar Fixed rate Average interest rate Variable rate Average interest rate Loans in French Franc Fixed rate Average interest rate Loans in British Pound Fixed rate Average interest rate Loans in Japanese Yen Fixed rate Average interest rate Variable rate Average interest rate 1,787 1,797 1,378 579 539 7.42% 6.07% 5.81% 5.06% 4.91% 5,269 7,689 6,780 4,468 6,282 7.68% 7.76% 7.78% 7.68% 6.93% 29 8.17% 29 8.17% 36 8.19% 59 8.23% 59 8.23% 587 6.49% 967 5.93% 22 8.30% 214 3.58% 1,635 7,715 4.48% 8,404 38,892 7.67% 91 8.23% 4,642 6.24% 1,420 6.27% 636 5.41% 1,071 4.06% 303 8.27 41.69 7,438 38,892

0.32

325

1,150 1,132 1,046 813 7.01% 7.09% 6.72% 6.45% 1,799 1,629 1,495 1,502 5.97% 5.99% 5.90% 5.90% 14 8.30% 214 3.58% 17 8.30% 214 3.58% 22 8.30% 214 3.58% 22 8.30% 214 3.58%

9,370 8,812

10.04 9.45

7,417 8,812

733

0.78

673

2,141

2.30

1,750

1,702 2,096 2,194 2,077 2,077 3.93% 3.93% 3.93% 3.93% 3.93% 719 780 667 553 162 2.02% 2.02% 2.02% 2.02% 2.02%

8,482 18,628 3.93% 23 2,904 2.20%

19.97 3.11

20,794 2,904

152

FINANCIAL INFORMATION
% to total Expected maturity date long-term 2001 2002 2003 2004 Thereafter Total debt (RMB equivalent in millions, except percentages) (%)

2000

Fair value

Loans in Spanish Peso Fixed rate Average interest rate Debentures in RMB Fixed rate Average interest rate Total

168 7.40%

148 1.50% 26,552

316

0.34

322

1,950 1,233 300 10.15% 7.86% 9.00% 14,633 16,616 13,832 10,587 11,077

3,483 93,297

3.73 100.00

3,555 92,882

As at 31 December 1998
1999 % to total Expected maturity date long-term 2000 2001 2002 2003 Thereafter Total debt (RMB equivalent in millions, except percentages) (%) Fair value

Long Term Debt Loans in RMB Fixed rate Average interest rate Variable rate(1) Average interest rate Loans in Deutsche Mark Fixed rate Average interest rate Loans in United States Dollar Fixed rate Average interest rate Variable rate Average interest rate Loans in French Franc Fixed rate Average interest rate Loans in British Pound Fixed rate Average interest rate Loans in Japanese Yen Fixed rate Average interest rate Variable rate Average interest rate Loans in Spanish Peso Fixed rate Average interest rate

2,437 803 949 1,471 337 2,027 8.27% 7.67% 6.59% 6.72% 5.96% 5.93% 5,242 5,487 7,696 2,850 4,187 30,275 10.48% 11.19% 11.30% 11.17% 10.67% 9.95% 94 8.26% 58 8.24% 55 8.23% 45 45 8.22% 8.22% 202 8.23% 5,035 6.25% 3,397 7.36% 691 5.49% 1,155 4.06% 9,986 3.97% 71 2.20%

8,024 55,737

6.51 45.21

6,042 55,737

499

0.40

558

3,379 2,014 1,566 1,655 844 6.88% 6.72% 6.91% 6.89% 6.53% 2,770 1,825 1,803 1,602 1,517 7.01% 6.63% 6.67% 6.64% 6.66% 15 8.30% 225 3.54% 15 8.30% 225 3.54% 21 8.30% 225 3.54% 21 21 8.30% 8.30% 225 225 3.54% 3.54%

14,493 12,914

11.76 10.48

13,165 12,914

784

0.64

709

2,280

1.85

2,008

2,661 2,918 2,655 2,484 2,299 4.42% 4.25% 4.35% 4.20% 4.24% 27 54 64 37 10 4.00% 4.00% 3.72% 3.51% 2.20% 478 423 7.40% 1.50%

23,003 263

18.66 0.21

25,640 263

901

0.73

931

153

FINANCIAL INFORMATION
% to total Expected maturity date long-term 2000 2001 2002 2003 Thereafter Total debt (RMB equivalent in millions, except percentages) (%)

1999

Fair value

Debentures in RMB Fixed rate Average interest rate Total

(1)

1,394 1,980 700 300 10.03% 11.00% 8.00% 9.00% 18,244 15,379 15,734 10,868 10,208 52,839

4,374 123,272

3.55 100.00

4,474 122,441

Due to the declining interest rates in recent years in China, the PRC Government has implemented a program to adjust interest rates on certain xed Renminbi loans periodically to reect the market rates in eect published by the central bank from time to time. As a result, these previously xed Renminbi loans are categorized as variable rate loans at 30 September 1999 and 31 December 1998. The newly adjusted rates usually become eective one year after the announcement by the central bank. The average interest rates on these loans are calculated based on the then eective rates at 30 September 1999 and 31 December 1998, respectively.

Commodity Price Risk The Group is engaged in a broad range of petroleum related activities. The hydrocarbon commodity markets are inuenced by global as well as regional supply and demand conditions. The PRC Government currently publishes prices for onshore crude oil, gasoline and diesel according to international benchmark prices. A decline in prices of crude oil and rened products could adversely aect the Group's nancial performance. The Group historically has not used commodity derivative instruments to hedge the potential price uctuations of crude oil and other rened products. Therefore, as at 30 September 1999 and 31 December 1998, the Group was exposed to the general price uctuations of broadly traded oil and gas commodities. INFORMATION TECHNOLOGY SYSTEMS The Group's information technology systems were largely developed for use by individual departments, subsidiaries, branches, plants or oilelds on a stand-alone basis and are in need of further development. In addition, the Group has yet to construct an integrated information technology system, the absence of which has resulted in the following problems: a lack of integrated application sub-systems to process and control dierent categories of nancial and operating data; a lack of support within the Group's existing systems for analysis of nancial and operating data; limited use of automated data importing among the Group; and inecient movement of nancial and operating information within the Group resulting in excessive processing time for reports of nancial and operating information. The Group intends to improve the level of integration of its information technology systems to ensure the timeliness, completeness and reliability of its combined nancial and operating data. In order to achieve this objective, the Group plans to: improve the current nancial information system to implement stricter internal control processes, and to ensure the timeliness, completeness, and reliability of nancial data on an IAS basis; establish a more ecient business information system so as to produce relevant key performance indicator data, to give the Company's management timely access to nancial and non-nancial information and to improve the Company's information sharing level; and 154

FINANCIAL INFORMATION
endeavour to improve its shareholders' return on investment by implementing an enterprise resources planning system. The Group's planned expenditure on its information technology systems in year 2000 is approximately RMB2.1 billion, which includes both the amount to be expensed and the amount to be capitalized. Environmental Expenses and Capital Expenditures The Group paid pollutant discharge fees of approximately RMB98.1 million, RMB110.1 million, RMB111.5 million and RMB95.4 million, respectively, in 1996, 1997, 1998 and the rst nine months of 1999. The Group's capital expenditures on environmental programs in 1996, 1997, 1998 and the rst nine months of 1999 aggregated approximately RMB577.0 million, RMB953.0 million, RMB728.0 million and RMB532.0 million, respectively. There were no material environmental liabilities accrued as of 30 September 1999. Year 2000 Compliance The Group and third parties with whom the Group does business rely on numerous computer systems, equipment and facilities in their operations. As at the date of this prospectus, the Group has not experienced any material problems caused by the failure of the computer systems, equipment and facilities used in its operations or those of any third parties due to year 2000 related problems. The Group believe that year 2000 problems will not have a material impact on the future operations of the Company. However, the Company has not yet conrmed with all third parties with whom it does business that their operations have not been aected by any year 2000 related problems. Disclaimer Except as described above, the Group did not have outstanding, at the close of business on 30 November 1999, any loan capital, bank overdrafts and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits or hire purchase commitments, guarantees, indemnities or other material contingent liabilities. The Directors have conrmed that there has not been any material change in the indebtedness and contingent liabilities of the Group since 30 November 1999. All amounts referred to in this indebtedness statement which are denominated in foreign currencies have been translated into Renminbi at the applicable PBOC Rate prevailing on 30 November 1999. LIQUIDITY AND CAPITAL RESOURCES The Group's primary sources of funding are cash provided by operating activities, short-term and long-term borrowings, cash and cash equivalents and capital contributions from CNPC. Historically, the Group's primary uses of funds were for capital expenditures, repayment of short-term and long-term borrowings and distributions to CNPC. Future payments by the Group to CNPC will be limited to dividends and payments for services provided by CNPC to the Group. The Company currently expects that it will distribute as dividends approximately 40 per cent. to 50 per cent. of its reported net prot for all years commencing on or after 1 January 2000. Please see the section headed ""Financial Information Prot Estimate and Dividend Policy'' for a discussion of factors which may aect the determination by the Board of Directors of the appropriate level of dividends. 155

FINANCIAL INFORMATION
In accordance with the Restructuring Agreement entered into between the Company and CNPC in connection with the Restructuring, the Company distributed RMB 3,600 million to CNPC in respect of estimated net prot during the period from 1 October 1999 to 4 November 1999, the date before the incorporation date of the Company. This distribution will be reduced by the amount, if any, by which RMB 3,600 million exceeds the net prot of the Group during the period from 1 October 1999 to 4 November 1999 determined in accordance with PRC accounting standards. Any such reduction will be eected by a cash payment to the Company by CNPC within 30 days following the date on which the Company publishes its audited 1999 nancial statements, but in any event no later than 30 June 2000. The Directors do not believe that this distribution will have a material impact on the liquidity of the Company or its ability to fund planned capital expenditures. This distribution was made in respect of a period prior to the formation of the Company and was therefore not determined in accordance with its dividend policy as described in the section headed ""Financial Information Prot Estimate and Dividend Policy Dividend Policy''. This distribution is approximately twice the amount that could have been distributed in accordance with the dividend policy of the Company. The Company anticipates that CNPC may incur future operating losses arising in part from its obligation to provide supplementary social services to the CNPC Group's employees and a limited number of third parties. Dividends received from the Company are likely to be one of CNPC's principal means of funding those losses. The Directors believe that subsidies which the Ministry of Finance has committed to provide will enable CNPC to fund substantially all of any future operating shortfalls arising out of CNPC's obligations to provide social services. The Directors believe that these subsidies will substantially reduce CNPC's reliance on dividends from the Company. These subsidies are to be provided until the social services currently provided by CNPC have been fully assumed by the PRC Government, Nevertheless, because CNPC will be able to elect the entire Board of Directors, subject to the relevant provisions of the Company Law and the Articles of Association as described in the sections headed ""Financial Information Prot Estimate and Dividend Policy Dividend Policy'' and ""Appendix IX Summary of Principal Legal and Regulatory Provisions and the Articles of Association'', CNPC may seek to inuence the Company's determination of dividends with a view to satisfying its cash ow requirements. Any resulting increase in the Company's dividend payout would reduce its funds available to satisfy the capital expenditure requirements discussed below. The Group nances a signicant portion of its business operations with short-term borrowings, including short-term debt obtained from the PRC State-owned banks. As at 30 September 1999, shortterm debt comprised approximately 18 per cent. of the Group's capital employed. Its ability to obtain adequate nancing to satisfy its capital expenditure and debt servicing requirements may be limited by its nancial condition and results of operations and the liquidity of international and domestic capital markets. Any failure by it to achieve timely rollover, extension or renancing of its short-term liabilities may result in its inability to meet its obligations in connection with debt servicing, accounts payable and/or other liabilities when they become due and payable. In addition, prior to accessing international capital markets, the Company must obtain approval from various PRC Government authorities. In general, the Company must obtain PRC Government approval for any project involving signicant capital investment for its rening and marketing, chemicals and natural gas segments. For a more detailed discussion of factors which may aect its ability to satisfy its nancing requirements, see ""Risk Factors Risks relating to the Company's business Expansion of sales of natural gas and rened products of the Company will require signicant capital expenditures for which it may be unable to provide sucient nancing'' and ""Risk Factors Risks relating to China's oil and gas industry PRC Government regulations may limit the Company's activities and adversely aect its business operations''.

156

FINANCIAL INFORMATION
The Group plans to fund the capital and related expenditures described in this prospectus principally through cash provided by operating activities, short-term and long-term debt, cash and cash equivalents and approximately RMB13,040 million of the net proceeds it receives from the Global Oering. Net cash provided by operating activities during the rst nine months of 1999 was RMB41,693 million. As at 30 September 1999, the Group had cash and cash equivalents of RMB15,424 million. While each of the projects described in this prospectus for which signicant capital expenditures will be required is important to the Group's future development, the Company does not believe that the failure to implement any one of these projects would have a material adverse impact on its nancial condition or results of operations. If the price of crude oil undergoes a steep decline in the future, it is likely that the Company would delay or reduce the scale of the capital expenditures for its exploration and development segment. The Group currently does not have any outstanding options, warrants or other rights for any persons to require it to issue any common stock at a price below its market value. The Group does not currently intend to issue any such rights or to otherwise issue any common stock for a price below its market value. The table below sets forth cash ows for each of the three years ended 31 December 1996, 1997 and 1998 and for the nine months ended 30 September 1998 and 1999 and cash equivalents at the end of each period. (See Appendix II ""Additional Financial Information'' for the combined statements of cash ows). In the table, the net cash used for investing activities and net cash provided by (used for) nancing activities includes capital expenditures for assets to be retained by CNPC and contributions from CNPC for assets to be retained by CNPC of RMB3,992 million, RMB1,692 million, RMB1,687 million, RMB785 million and RMB111 million, respectively, in each year and period presented.
Year ended 31 December 1996 1997 1998 (in RMB millions) Nine months ended 30 September 1998 1999

Net cash provided by operating activities Net cash used for investing activities Net cash provided by (used for) nancing activities Cash and cash equivalents at the end of period

47,400 (59,884) 15,445 16,179

54,809 (52,469) (2,063) 16,456

37,651 (38,832) (166) 15,109

28,487 (21,560) (10,595) 12,788

41,693 (23,589) (17,789) 15,424

The Group's cash and cash equivalents increased by RMB277 million from RMB16,179 million as at 31 December 1996 to RMB16,456 million as at 31 December 1997, decreased by RMB1,347 million to RMB15,109 million as at 31 December 1998, and increased by RMB315 million to RMB15,424 million as at 30 September 1999. Cash Provided by Operating Activities Net cash provided by operating activities increased 46.4 per cent. from RMB28,487 million for the nine months ended 30 September 1998 to RMB41,693 million for the nine months ended 30 September 1999. This increase was primarily due to an increase in prot before taxation. A decrease in inventory of RMB1,957 million and an increase of RMB3,454 million in depreciation, depletion and amortisation and an increase in payables and accrued liabilities also contributed to the increase of net cash provided by operating activities. The increase in net cash was partially oset by increases in tax paid. Net cash provided by operating activities in 1998 decreased 31.3 per cent. from RMB54,809 million for the year ended 31 December 1997 to RMB37,651 million for the same period of 1998. This decrease 157

FINANCIAL INFORMATION
was primarily due to a decrease in prot before taxation as well as an increase in net interest paid of RMB2,541 million. The decrease in net cash was oset by the following factors: an increase in depreciation, depletion and amortisation of RMB1,223 million, and a decrease in tax paid of RMB1,269 million. Net cash provided by operating activities in 1997 increased 15.6 per cent. from RMB47,400 million for the year ended 31 December 1996 to RMB54,809 million for the year ended 31 December 1997. This increase was due primarily to the increase in prot before taxation as well as an increase in depreciation, depletion and amortisation. The Group had a working capital decit of RMB25,105 million as of 31 December 1997, RMB34,228 million as of 31 December 1998 and RMB27,220 million as of 30 September 1999. The primary cause of these decits was the fact that the Group has typically taken advantage of signicantly lower interest rates on short-term debt and nanced long-term projects with short-term debt. Interest rates on short-term debt in China have generally been approximately 1 per cent. to 2 per cent. lower than those on long-term debt. The Company intends to use RMB8,861 million of the net proceeds it receives from the Global Oering and its internally generated cash ow to repay its short-term debt. In order to ensure that the prole of its liabilities better matches the long-term nature of its assets, the Company intends to extend the maturity prole of its debt by replacing short-term debt at maturity with long-term debt in the form of domestic bank loans or domestic bonds. As at 14 February 2000, the Group had undrawn credit facilities in an aggregate amount of approximately RMB42,629 million from The Bank of China, Industrial and Commercial Bank of China, China Construction Bank and China Petroleum Finance Company Limited, a subsidiary of CNPC and a non-bank nancial institution approved by the PBOC. On 22 February 2000, the China Development Bank signed a letter of commitment to provide the Company with a standby non-revolving credit facility of RMB10,000 million to fund the Company's oil and gas exploration and production activities for 2000. The Company can draw down a majority portion of the funds available under these credit facilities in the form of medium- or long-term loans. The Company intends to use the funds available under these credit facilities for medium- or long-term borrowings that will be used to repay a signicant portion of its short-term debts. The Company expects to use the balance of the available funds to rollover or renance its remaining short-term debts. In addition, the Company will initiate discussions with the relevant PRC Government agencies regarding accessing the international debt capital markets. The Company's objective is to reduce short-term debt as a proportion of the Company's total debt in the next 12 to 18 months. In August 1999, the Company began the implementation of a centralized cash management system on a trial basis at its headquarters. In January 2000, most of the Company's subsidiaries and branches began implementing this system. This system has the following principal components: requiring its subsidiaries and branches to remit their sales revenues to bank accounts designated by its headquarters; utilizing excess bank deposits to reduce bank borrowings; and centralising and simplifying internal clearing and settlement procedures. The implementation of this centralized cash management system has resulted in the inter-segment accounts receivable collection cycle being shortened by three to four days on average. 158

FINANCIAL INFORMATION
The Company's notes and other receivables include notes receivable from customers. Other receivables represent advances to employees, non-trade related receivables from other companies, and receivables from government agencies. Allowance for doubtful accounts were primarily related to other receivables which the Company estimated to be uncollectible. The Company's notes receivable do not include past due customer amounts and, as a majority portion of its notes receivable are approved by banks, the Company does not have special arrangements with respect to extended payment terms on notes receivable. Cash Provided by (Used for) Financing Activities Total and net debt for the years ended 31 December 1997 and 1998 and for the nine months ended 30 September 1999 were as follows:
Year ended 31 December 1997 1998 (in RMB millions) Nine months ended 30 September 1999

Short-term debt (including current portion of long-term debt) Long-term debt Total debt Less: Cash and cash equivalents Short-term investments Long-term investments Net debt

55,195 105,522 160,717 16,456 16 3,152 141,093

63,474 105,354 168,828 15,109 53 3,579 150,087

59,145 78,971 138,116 15,424 2,545 3,618 116,529

The debts which were guaranteed by CNPC amounted to RMB62,460 million, RMB60,006 million and RMB63,889 million for the two years ended 31 December 1997 and 1998 and for the nine months ended 30 September 1999, respectively. Out of such guaranteed debts, the amount of short-term debts were RMB4,235 million, RMB5,629 million and RMB14,361 million and the amount of long-term debts were RMB58,225 million, RMB54,377 million and RMB49,528 million, in the same respective periods. CNPC and the Company have undertaken to the Stock Exchange that they will, on a best endeavours basis, approach each lender in respect of these guaranteed debts with a view to obtaining the unconditioned release of such guarantees during the period of three months after the publication of the Company's annual report for the nancial year ended 31 December 1999. The amount of short-term debts owed to connected parties as at 31 December 1997 and 1998 and 30 September 1999 were RMB3,638 million, RMB7,437 million and RMB11,341 million, respectively. Out of such short-term debts owed to connected parties, the amount of guaranteed debts were RMB227 million, RMB82 million and RMB1,039 million and the amount of non-guaranteed debts were RMB3,411 million, RMB7,355 million and RMB10,302 million, as at the same respective dates. The amount of long-term debts owed to connected parties as at the same dates were RMB9,086 million, RMB7,873 million and RMB9,066 million, respectively. Out of such long-term debts owed to connected parties, the amount of guaranteed debts were RMB791 million, RMB488 million and RMB172 million and the amount of non-guaranteed debts were RMB8,295 million, RMB7,385 million and RMB8,894 million, as at the same respective dates. Included in the Company's debts were short-term and long-term debts owed to China Petroleum Finance Company Limited of RMB11,298 million, RMB14,986 million and RMB19,231 million as at 159

FINANCIAL INFORMATION
31 December 1997 and 1998 and 30 September 1999, respectively. These debts were unsecured with interest bearing at below market rates. The Company also maintains a signicant portion of its deposits at China Petroleum Finance Company Limited. Net cash used for nancing activities for the nine months ended 30 September 1999 increased 67.9 per cent. over the nine months ended 30 September 1998. This increase was primarily due to the increase in repayment of short-term and long-term debt, partially oset by the assumption by CNPC of RMB30,500 million of the Company's debt. Net cash used for nancing activities for the year ended 31 December 1998 decreased 91.9 per cent. compared to the year ended 31 December 1997. The decrease primarily resulted from the following: a decrease of RMB8,765 million in distributions to CNPC; and an increase of RMB8,178 million in additional short-term debts. This decrease was oset by: a decrease of RMB7,070 million in additional long-term debt; and an increase of RMB4,734 million in repayment of long-term debt. Net cash provided by nancing activities for the year ended 31 December 1996 was RMB15,445 million, while the Company's net cash used for nancing activities for the year ended 31 December 1997 was RMB2,063 million. This change primarily resulted from: an RMB5,586 million increase in distributions to CNPC; an RMB7,357 million decrease in additional long-term obligations; an RMB4,518 million increase in repayment of long-term obligations; and an RMB2,300 million decrease in contribution from CNPC for assets to be retained by CNPC. Working Capital Taking into account the net proceeds of the Global Oering (see the section headed ""Future Plans and Use of Proceeds Use of Proceeds''), nancing that has been arranged, banking facilities and loans and net operating cash inow, the Directors are of the opinion that the Company has sucient working capital for its present requirements.

160

FINANCIAL INFORMATION
SELECTED HISTORICAL COMBINED FINANCIAL INFORMATION The table below sets out a selected historical combined nancial information of the Group for the three years ended 31 December 1998 and the nine months ended 30 September 1999, based on the information included in ""Appendix I Accountants' Report'' to this prospectus. The selected historical combined nancial information of the Group has been prepared and presented in accordance with IAS.
Year ended 31 December 1996 1997 1998 RMB RMB RMB millions millions millions Nine months ended 30 September 1999 RMB millions

Notes

TURNOVER AND TOTAL REVENUE Sales and other operating revenues OPERATING EXPENSES Depreciation, depletion and amortisation Employee compensation costs Exploration expenses, including exploratory dry holes Impairment loss on assets to be retained by CNPC Other (expenses)/income Purchases, services and other Revaluation loss Selling, general and administrative expenses Taxes other than income tax TOTAL OPERATING EXPENSES PROFIT FROM OPERATIONS FINANCE COSTS Exchange gain Exchange loss Interest expense Interest income TOTAL FINANCE COSTS SHARE OF PROFIT OF ASSOCIATED COMPANIES PROFIT BEFORE TAXATION TAXATION PROFIT BEFORE MINORITY INTERESTS MINORITY INTERESTS NET PROFIT BASIC AND DILUTED NET PROFIT PER SHARE (in RMB) NUMBER OF SHARES (in millions)

143,677 (13,059) (7,996) (4,725) (248) (51,860) (9,727) (8,471) (96,086) 47,591 2,998 (449) (9,839) 1,033 (6,257) 42 41,376 (9,833) 31,543 (87) 31,456 0.20 160,000

157,381 (16,450) (8,826) (6,830) (557) (56,980) (9,827) (9,279) (108,749) 48,632 3,291 (165) (10,928) 1,048 (6,754) 331 42,209 (12,200) 30,009 (161) 29,848 0.19 160,000

147,287 (17,803) (9,752) (5,990) (310) (336) (58,190) (9,838) (9,579) (111,798) 35,489 44 (1,916) (12,276) 1,326 (12,822) 88 22,755 (7,537) 15,218 57 15,275 0.10 160,000

126,181 (16,138) (6,822) (3,538) (2,007) 130 (42,457) (1,122) (9,564) (7,851) (89,369) 36,812 227 (1,781) (7,588) 433 (8,709) 158 28,261 (7,455) 20,806 (27) 20,779 0.13 160,000

161

FINANCIAL INFORMATION
According to paragraph 31 of the Third Schedule to the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) and Rule 4.04 of the Listing Rules, the Company is required to include its nancial results for the year ended 31 December 1999 in the Accountants' Report set out in Appendix I to this prospectus. The Securities and Futures Commission and the Stock Exchange have granted waivers from this requirement in relation to paragraph 31 of the Third Schedule to the Companies Ordinance and Rule 4.04 of the Listing Rules, respectively. Instead, results for the three years ended 31 December 1998 and for the nine months ended 30 September 1999 have been included in the Accountants' Report.

162

FINANCIAL INFORMATION
SELECTED PRO FORMA FINANCIAL INFORMATION The table below sets out selected pro forma nancial information of the Group for the year ended 31 December 1998 and the nine months ended 30 September 1999, based on the information included in ""Appendix III Unaudited Pro Forma Financial Information'' to this prospectus. The selected pro forma nancial information of the Group was prepared by the Company to illustrate the estimated eects of the transactions and other changes in connection with the Restructuring described in the notes on description of pro forma adjustments contained in Appendix III to this prospectus as if these transactions and other changes had occurred as of 1 January 1998. The selected pro forma nancial information does not purport to represent the results of the Group would have been attained if such transactions and other changes had in fact occurred on such date.
Year ended 31 December 1998 Historical RMB Pro forma as adjusted Pro forma combined Nine months ended 30 September 1999 Historical Pro forma as adjusted Pro forma combined

RMB RMB RMB RMB RMB (Amounts in millions except for number of Shares and per Share data)

TURNOVER AND TOTAL REVENUE Sales and other operating revenues 147,287 OPERATING EXPENSES Depreciation, depletion, and amortisation Employee compensation costs Exploration expenses, including exploratory dry holes Impairment loss on assets to be retained by CNPC Other (expenses)/income Purchases, services and other Revaluation loss Selling, general and administrative expenses Taxes other than income taxes TOTAL OPERATING EXPENSES PROFIT FROM OPERATIONS FINANCE COSTS Exchange gain/(loss) Interest expense Interest income TOTAL FINANCE COSTS SHARE OF PROFIT OF ASSOCIATED COMPANIES 146,711 146,711 126,181 125,901 125,901

(17,803) (9,752) (5,990) (310) (336) (58,190) (9,838) (9,579)

(27,181) (9,720) (6,791) (325) (57,681) (11,826) (9,576)

(27,181) (9,720) (6,791) (325) (57,681) (11,826) (9,576)

(16,138) (6,822) (3,538) (2,007) 130 (42,457) (1,122) (9,564) (7,851)

(20,001) (6,800) (3,983) 193 (42,229) (1,122) (11,066) (7,850)

(20,001) (6,800) (3,983) 193 (42,229) (1,122) (11,066) (7,850)

(111,798) 35,489 (1,872) (12,276) 1,326 (12,822)

(123,100) 23,611 (1,863) (10,326) 1,326 (10,863)

(123,100) 23,611 (1,863) (9,652) 1,326 (10,189)

(89,369) 36,812 (1,554) (7,588) 433 (8,709)

(92,858) 33,043 (1,553) (6,596) 433 (7,716)

(92,858) 33,043 (1,553) (6,092) 433 (7,212)

88

88

88

158

158

158

163

FINANCIAL INFORMATION
Year ended 31 December 1998 Historical RMB Pro forma as adjusted Pro forma combined Nine months ended 30 September 1999 Historical Pro forma as adjusted Pro forma combined

RMB RMB RMB RMB RMB (Amounts in millions except for number of Shares and per Share data)

PROFIT BEFORE TAXATION TAXATION PROFIT BEFORE MINORITY INTERESTS MINORITY INTERESTS NET PROFIT BASIC AND DILUTED NET PROFIT PER SHARE

22,755 (7,537)

12,836 (4,317)

13,510 (4,539)

28,261 (7,455)

25,485 (8,814)

25,989 (8,980)

15,218 57 15,275

8,519 57 8,576

8,971 57 9,028

20,806 (27) 20,779

16,671 (27) 16,644

17,009 (27) 16,982

0.10

0.05

0.05

0.13

0.10

0.10

SUMMARY RESERVE AND OPERATING DATA The table below sets forth certain information with respect to the Company's proved reserves of crude oil and natural gas as at 31 December 1996, 1997 and 1998 and as at 30 September 1999, as well as other operating data as at or for the three years ended 31 December 1996, 1997 and 1998 and as at or for the nine months ended 30 September 1999. The Company prepared its reserve estimates as at 30 September 1999 on the basis of a report prepared by DeGolyer and MacNaughton, independent engineering consultants, in accordance with Statement of Financial Accounting Standards No. 69 (""SFAS No. 69''). The Company's reserve estimates include only crude oil and natural gas which it believes can be reasonably produced within the current terms of its production licences. Please refer to the section headed ""Industry Overview Regulatory Matters Exploration Licences and Production Licences'' for a discussion of the Company's production licences. Prior to 30 September 1999, the Company did not keep records of operating costs on a eld-by-eld basis. For the purpose of estimating the reserve information, operating costs were allocated from the region level to the eld level based primarily on the number of producing wells in each eld. In preparing the proved reserve estimates as at and for the years ended 31 December 1996, 1997 and 1998, the economic tests specied in SFAS No. 69 were applied on a regional basis. The Company does not believe that this method of calculation materially aects its reserve estimates.
Nine months ended 30 September 1999

Year ended 31 December 1996 1997 1998

Proved reserves Crude oil (million barrels) Natural gas (Bcf) Total (million BOE) Standardised measure of discounted future net cash ows (in millions RMB)

10,420.9 12,869.7 12,565.9 156,034

10,540.0 17,134.2 13,395.8 206,605

10,865.0 22,336.5 14,587.7 191,698

10,766.0 24,284.2 14,813.3 381,485

164

FINANCIAL INFORMATION
Nine months ended 30 September 1999

Year ended 31 December 1996 1997 1998

Annual oil and gas production Crude oil (million barrels) Natural gas(1) (Bcf) Total production (million BOE) Average daily oil and gas production Crude oil (thousand barrels) Natural gas(1) (MMcf) Total production (thousand BOE) Average sales price (RMB) Crude oil (per barrel) Natural gas (per Mcf) Proved reserve replacement ratio (%) Crude oil Natural gas Weighted average ratio based on BOE Reserve-to-production ratio (years) Crude oil Natural gas Weighted average ratio based on BOE Lifting cost Crude oil and natural gas (RMB/BOE) Three year average nding and development cost(2) Crude oil and natural gas (RMB/BOE) Finding cost(3) Crude oil and natural gas (RMB/BOE) Primary distillation capacity(4) (thousand barrels/day) Rening throughput(4) (thousand barrels/day) Primary distillation capacity utilisation(4)(%) Rened product production(4) (thousand tons) Diesel Gasoline Jet fuel(5) Lubricants Other principal rened products(6) Marketing operations Principal rened product sales(4) (thousand tons) Diesel Gasoline Jet fuel(5) Lubricants Other principal rened products(6) Total number of service stations as of period end Owned Supported(7) Franchised

759.6 368.9 821.1 2,081.1 1,010.7 2,249.6 106.16 14.98 122.4 359.1 150.2 13.7 21.3 14.6 36.56 8.26 1,753.1 1,151.8 65.7 16,774.6 11,996.4 1,773.1 1,205.0 14,333.7

783.7 379.8 847.0 2,147.2 1,040.5 2,320.6 119.20 16.08 115.2 784.6 193.5 13.4 27.5 15.1 42.88 6.89 1,927.2 1,255.8 65.2 18,957.6 13,003.8 1,786.3 1,291.9 15,210.0

780.2 409.2 848.4 2,137.4 1,121.0 2,324.2 112.44 16.34 141.6 930.6 234.7 13.9 35.7 16.5 41.77 17.29 5.26 2,030.5 1,270.4 62.6 19,259.4 13,297.0 1,813.0 1,222.0 14,450.3

583.3 324.7 637.5 2,130.9 1,186.0 2,328.6 126.57 15.50 83.0 504.3 134.0 18.5 50.4 22.3 34.09 6.98 2,030.5 1,329.7 65.5 17,929.9 10,165.2 1,523.6 1,076.4 10,436.9

17,750.0 12,790.0 1,780.0 1,020.0 8,774.4 920 1,990 400

19,950.0 13,550.0 1,870.0 1,290.0 10,717.1 1,280 2,840 600

21,000.0 14,030.0 1,810.0 1,220.0 10,023.1 1,630 3,600 770

20,177.2 12,312.5 1,758.5 1,055.6 8,292.3 1,790 3,600 1,050

165

FINANCIAL INFORMATION
Nine months ended 30 September 1999

Year ended 31 December 1996 1997 1998

Principal chemical product sales(4) (thousand tons) Basic petrochemicals(8) Derivative petrochemicals(9)(10) Other chemicals(11) Natural gas operations Length of natural gas pipelines(12)(km) Volume of natural gas sold(13)(Bcf) Total employees
(1) (2) Represents production of sales gas.

122.9 1,612.3 2,418.3 8,522 324.2 498,283

202.3 2,015.1 2,442.8 8,707 335.0 490,921

221.9 2,253.2 2,979.9 11,099 347.6 485,576

144.9 1,852.3 2,425.4 11,099 280.4 480,012

Represents aggregate weighted average nding and development cost for 1996, 1997 and 1998. On a pro forma basis, the Company's weighted average nding and development cost for the three-year period ended 31 December 1998 would have been RMB25.00 per barrel-of-oil equivalent. Historically, the Company's nding and development cost included only direct cost, excluding nance cost and general and administrative expenses attributable to service providers in connection with the services provided to the Company. On a pro forma basis, taking into account certain changes, arrangements and transactions in connection with the Restructuring, the Company's nding cost would have been RMB7.30 and RMB9.86 per barrel-of-oil equivalent, respectively, for the year ended 31 December 1998 and the nine months ended 30 September 1999. Includes third parties' minority interests in Jilin Chemical Industrial Company Limited and Jinzhou Petrochemical Company Limited. Includes lighting kerosene. Represents fuel oil, naphtha, paran and asphalt. Represents service stations wholly-owned by CNPC or jointly-owned by CNPC with third parties which purchase and sell to third parties exclusively products produced or supplied by the Group and to which the Company provides supervisory support under contracts for the supervision of those service stations. The Company did not historically supervise those service stations. Represents ethylene, benzene and propylene. Represents polyethylene, polypropylene, ABS, terylene bre, polyacrylic bre, polypropylene bre, butadiene styrene rubber, polybutadiene rubber, ethylene-propylene rubber, acrylonitrile-butadiene rubber and seven intermediates. Represents the Company's historical sales volumes of derivative petrochemicals, including sales of those products produced by ve chemical production facilities that were not transferred to the Company by CNPC as part of the Restructuring. On a pro forma basis, taking into account the exclusion of the ve chemical production facilities, the Company's sales volumes of derivative petrochemicals in the years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999 would have been 1,583.0 thousand tons, 1,980.2 thousand tons, 2,203.8 thousand tons and 1,833.9 thousand tons, respectively. Represents urea and ammonium nitrate. Represents the aggregate length of natural gas pipelines used by the Company's natural gas segment as well as its exploration and production segment. Represents the aggregate volume of natural gas sold by the Company's exploration and production segment, including sales to the Company's natural gas segment.

(3)

(4) (5) (6) (7)

(8) (9) (10)

(11) (12) (13)

RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the audited nancial information of the Group set out in ""Appendix I Accountants' Report'', the unaudited selected pro forma nancial information and the assumptions on which such information is based set out in ""Appendix III Unaudited Pro Forma Financial Information'' and with the information set out in ""Business''. The selected pro forma nancial information has been prepared and presented on the basis set forth in ""Appendix III Unaudited Pro Forma Financial Information''. For the purposes of this discussion, unless the context otherwise requires, references to ""1996'', ""1997'' and ""1998'' refer to the Company's nancial year ended on 31 December of each such year. 166

FINANCIAL INFORMATION
The summary of the combined results and combined net assets and operating data of the Group present, and the discussion and analysis in this prospectus pertain to, the results of operations of the businesses transferred to the Company by CNPC and are based on the historical nancial information of CNPC. Specically, in connection with the 1998 restructuring of China's oil and gas industry, CNPC transferred to Sinopec six crude oil and natural gas production enterprises located in the eastern and coastal regions of China and Sinopec transferred to CNPC 15 reneries and petrochemical plants located in the northeastern, northern and western regions of China. In addition, local governments in the northeastern, northern and western regions of China transferred to CNPC 15 provincial and municipal petroleum distribution companies. The nancial and operating information gives eect to these transactions for all periods presented. A signicant portion of revenues generated prior to the asset transfer represented sales from the Company's exploration and production segment to Sinopec. This prospectus contains forward-looking statements that are, by their nature, subject to signicant risks and uncertainties. These forward-looking statements include, without limitation, statements relating to: the business strategy of the Company; the amount and nature of future exploration, development and other capital expenditures; wells to be drilled or reworked; future prices and demand for crude oil, natural gas, rened products and chemical products; future earnings and cash ow; development projects; exploration prospects; reserves potential; development and drilling potential; drilling prospects; expansion and other development trends of the oil and gas industry; the planned development of the natural gas operations of the Company; the planned expansion of the rened product and chemical product marketing network of the Company; the planned expansion of the natural gas infrastructure of the Company; the future overall business development and economic performance of the Company; estimated nancial information of the Company regarding, and the future development and economic performance of, its business; and the Company's dividend policy. The forward-looking statements reect the Company's current views with respect to future events and are not a guarantee of future performance. Actual results may dier materially from information contained in the forward-looking statements as a result of a number of factors, including: uctuations in crude oil and natural gas prices; failure to achieve continued exploration success; 167

FINANCIAL INFORMATION
failures or delays in achieving production from development projects; continued availability of capital and nancing; acquisitions and other business opportunities that the Company may pursue; general economic, market and business conditions; liability for remedial actions under environmental regulations; impact of China's admission to the WTO; changes in PRC policies, laws or regulations; and the other risk factors discussed in this prospectus, and other factors beyond the Company's control. Shareholders of the Company should not place undue reliance on any forward-looking statement. Overview The Company is engaged in a broad range of petroleum related business, including: the exploration, development and production of crude oil and natural gas; the rening, transportation, storage and marketing, including import and export, of crude oil and petroleum products; the production and sale of chemicals; and the transmission, marketing and sale of natural gas. The Company is China's largest producer of crude oil and natural gas and one of the largest companies in China in terms of sales. In the nine months ended 30 September 1999, the Company produced approximately 583.3 million barrels of crude oil and approximately 324.7 billion cubic feet of natural gas for sale. The Company's reneries also processed approximately 364.0 million barrels of crude oil in the nine months ended 30 September 1999. In the nine months ended 30 September 1999, the Company had total revenues of RMB126,181 million and net prot of RMB20,779 million. Factors Aecting Results of Operations Results of operations and the period-to-period comparability of nancial results of the Company are aected by a number of external factors, including changes in the prices of crude oil, natural gas, rened products and chemical products and uctuations in exchange rates and interest rates. Crude Oil Prices Results of operation of the Company are substantially inuenced by crude oil prices. Until 1 June 1998, the State Development Planning Commission set crude oil prices in China at levels generally signicantly lower than those prevailing in international crude oil markets. In setting crude oil prices, the State Development Planning Commission weighed a range of factors, including the identity of the customer, the volume and grade of crude oil purchased and the producer's costs of production. The Company sold crude oil at a xed price to customers purchasing under the PRC Government's annual crude oil allocation plan and charged a premium to customers purchasing outside the plan. Volatility in international crude oil prices in 1996, 1997 and 1998 often resulted in substantial discrepancies between international crude oil prices and domestic crude oil prices, which were not frequently adjusted during 168

FINANCIAL INFORMATION
that period. During the period from 1 January 1996 to 1 June 1998, the State Development Planning Commission raised the prices of crude oil twice. Since 1 June 1998, the PRC Government has published benchmark prices for crude oil in China which are adjusted on a monthly basis to equal Singapore market FOB prices for similar grades of crude oil, supplemented by an amount equal to the customs duty payable on the import of crude oil. The Company's actual realised crude oil prices include a premium on, or discount from, the applicable benchmark prices which primarily reects transportation costs, dierences in oil quality and market supply and demand conditions. Prior to 1 September 1999, the premiums and discounts applied to the Company's crude oil sales were largely determined through negotiations between CNPC and Sinopec, the Company's largest customer. Since 1 September 1999, these discounts and premiums have been determined in accordance with a crude oil premium and discount calculation agreement between the CNPC and Sinopec, which was assigned to the Company under the agreement for transfer of rights and interests under the crude oil premium and discount calculation agreement between CNPC and the Company. This agreement establishes premiums and discounts which eect adjustments to the benchmark prices. These adjustments are inversely proportional to the changes in the benchmark prices and so mitigate the impact of uctuations in the Singapore market FOB prices. The agreement between the CNPC and Sinopec, which was assigned to the Company, does not obligate either party to purchase or sell any crude oil and is thus subject to renegotiation. Under this agreement, the State Development Planning Commission will mediate if the Company and Sinopec cannot agree on the premium or discount applicable to a particular crude oil purchase, and will determine the appropriate premium or discount if mediation fails. The table below sets forth the benchmark prices for the Company's principal grades of crude oil and the negotiated premiums and discounts applicable to those grades during 1998 and 1999.
Average price published by PRC Government (RMB/barrel) January June 1998 1999 to to December September 1998 average 1999 average

Grade of crude oil

Percentage of total third party sales

Benchmark

October 1999 to December 1999 average

Premium/(discount) (RMB/barrel) June 1998 to Since August 1999 September 1999

Daqing Jidong Huabei Dagang Tarim Tuha

72.6 1.5 5.6 5.9 3.1 2.7

Minas Minas Minas Cinta Minas Tapis

103.9 103.9 103.9 100.1 103.9 124.0

122.1 122.1 122.1 117.3 122.1 137.6

188.5 188.5 188.5 183.6 188.5 213.1

8.4 8.4 8.4 5.5 (14.2) (18.4)

0-16.8 0-16.8 0-16.8 0-11.1 (5.8)-(22.6) (9.6)-(27.2)

169

FINANCIAL INFORMATION
The table below sets forth the published prices for the Company's principal grades of crude oil by the PRC government from June 1998 to December 1999.
Daqing June 1998 July 1998 August 1998 September 1998 October 1998 November 1998 December 1998 January 1999 February 1999 March 1999 April 1999 May 1999 June 1999 July 1999 August 1999 September 1999 October 1999 November 1999 December 1999 109.6 101.4 106.5 104.8 97.2 108.0 99.5 84.4 92.7 91.8 101.4 130.3 141.8 140.3 153.9 162.5 178.8 189.7 196.9 Grades of crude oil (RMB/barrel) Jidong Huabei Dagang Tarim 109.6 101.4 106.5 104.8 97.2 108.0 99.5 84.4 92.7 91.8 101.4 130.3 141.8 140.3 153.9 162.5 178.8 189.7 196.9 109.6 101.4 106.5 104.8 97.2 108.0 99.5 84.4 92.7 91.8 101.4 130.3 141.8 140.3 153.9 162.5 178.8 189.7 196.9 106.6 98.0 101.4 100.6 94.5 103.0 96.6 80.0 88.4 88.4 97.7 125.2 135.9 135.6 148.9 156.0 172.4 184.9 193.4 109.6 101.4 106.5 104.8 97.2 108.0 99.5 84.4 92.7 91.8 101.4 130.3 141.8 140.3 153.9 162.5 178.8 189.7 196.9 Tuha 131.9 122.5 123.3 120.6 119.1 130.9 119.5 98.7 110.3 104.2 117.3 143.7 150.2 151.2 171.3 191.2 206.8 213.5 219.0

Increases or decreases in the price of crude oil in China have a signicant impact on the revenues from the Company's exploration and production segment as well as the amount of exploration expenses that the Company is willing to incur each year. Domestic crude oil prices declined during the period from June 1998 through the end of 1998, but began to recover in March 1999. Further details on the PRC crude oil pricing regulations are contained in the section headed ""Industry Overview Regulatory Matters Pricing Crude Oil''. Rened Product Prices Prior to 5 June 1998, the State Development Planning Commission set wholesale and retail prices for the Company's major rened products (gasoline, diesel and jet fuel). However, during the rst six months of 1998, due to then prevailing market conditions and increased smuggling of rened products, actual wholesale prices in the rened products market were lower than the wholesale prices set by the PRC Government. Since 5 June 1998, the State Development Planning Commission has pegged the prices of rened products of gasoline and diesel to the FOB Singapore trading prices, supplemented by transportation costs, customs duties, insurance charges, taxes and retail margins. The State Development Planning Commission publishes from time to time retail median gasoline and diesel guidance prices for major cities and provinces. Once published, the retail median prices remain unchanged until either the Company or Sinopec request an adjustment and demonstrate that the cumulative change of the FOB Singapore gasoline or diesel trading price from the then applicable retail median guidance price has exceeded 5 per cent. Further details on current PRC rened products pricing regulations are contained in the section headed ""Industry Overview Regulatory Matters Pricing Rened Products''. Based on the published median gasoline and diesel guidance prices, the Company and Sinopec set their respective retail prices with an allowable upward or downward adjustment of up to 5 per cent. in individual markets. The Company determines the prices of other rened products with reference to the published median guidance prices of gasoline and diesel. The Company's retail prices may dier from 170

FINANCIAL INFORMATION
those of Sinopec within a given market. The Company's average realised selling prices tend to be higher in the western and northern regions of China, where it dominates the market, as compared to its average realized selling prices in the eastern and southern regions, where Sinopec has a stronger presence. On 5 November 1999, the State Development Planning Commission increased retail median gasoline and diesel guidance prices by RMB120 per ton and RMB103 per ton, respectively, to more closely reect Singapore FOB prices. At the same time, the State Development Planning Commission published a guideline requiring at least a 5.5 per cent. price dierential between the wholesale and retail prices. Chemical Product Prices The Company determines the prices of all chemical products produced by its chemicals business segment other than fertilizer and materials used for the production of agricultural lm for which guidance prices are set by the State Development Planning Commission. Natural Gas Prices The Company's natural gas price is comprised of the following three components: Wellhead Price The Company sets its wellhead price within a 10 per cent. oating range of the median wellhead price published by the State Development Planning Commission, except for natural gas sold within the PRC Government's natural gas supply plan, which must be sold at prices determined by the State Development Planning Commission. Sales subject to these price controls accounted for approximately 60 per cent. of the Company's total sales of natural gas in the rst nine months of 1999. This pricing mechanism may be subject to change in the near future. Further details are contained in the section headed ""Industry Overview Regulatory Matters Pricing Natural Gas''; Pipeline Transportation Tari The Company prepares a tari schedule based on its actual cost plus a prot margin and submit it to the State Development Planning Commission for approval; and Purication Fee The Company sets the purication price based on its actual costs, subject to approval by the State Development Planning Commission. The Company sells its natural gas at prices which exceed its production and transportation costs. The results of operations of these segments will be impacted to the extent that the Company's prices do not vary to reect increases or decreases in its costs. Further details on pricing controls are contained in the section headed ""Industry Overview Regulatory Matters Pricing.'' Foreign Currency Exposure Details on the eect of exchange rate uctuations on the results of operations of the Company are contained in the section headed ""Financial Information Quantitative and Qualitative Disclosure About Market Risk Foreign Exchange Rate Risk''. Interest Rate Exposure Details on the eect of interest rate changes on the Company's results of operations are contained in the section headed ""Financial Information Quantitative and Qualitative Disclosure About Market Risk Interest Rate Risk''. 171

FINANCIAL INFORMATION
The Restructuring of the CNPC Group Eective as of 5 November 1999, CNPC transferred to the Company its domestic assets and operations relating to the exploration, development and production of crude oil and natural gas, the rening, transportation, storage and marketing of crude oil and petroleum products, the production and sale of chemicals, and the transmission, marketing and sale of natural gas. CNPC retained the remaining assets and operations. As part of the Restructuring, the Company has made arrangements with CNPC for the provision to the Company of certain essential products and services. In addition, the Company has eected transactions to transfer a portion of the debt obligations of the subsidiaries of its predecessor to CNPC, resulting in a decrease in debt of RMB30,500 million, primarily long-term debt, and a corresponding increase in owner's equity as of 30 September 1999. The Directors expect that such changes, arrangements and transactions will have a material impact on the overall results of operations and nancial condition of the Company. Specically, the Directors expect a decrease in interest expense relating to the decrease in debt, as well as the items detailed in the section headed ""Financial Information Results of Operations Pro Forma Adjustments and Their Financial Impact''. The Company is currently evaluating options to close certain rening facilities and units and implement other cost-cutting measures within the next several years. The Company has not approved any signicant actions to be taken to complete such plans. While the Company cannot estimate the ultimate outcome of such plans at present, such plans could result in a reduction in its prot in the year in which such plans are implemented, but would not have a material impact on its cash ow. The Directors believe that such plans could, if implemented, have a positive impact on the nancial position and results of operations of the Company in the long run. Pro Forma Adjustments and Their Financial Impact Pro forma adjustments have been made to reect certain changes, arrangements and transactions in connection with the Restructuring and the incorporation of the Company, including the following: the Company's arrangements with CNPC for the provision to the Company of certain products and services essential to its operations, such as the supply of electricity and water and other exploration and production related services and leases to the Company by CNPC of a large number of parcels of land and buildings; the exclusion of ve chemical production facilities included in the Company's historical nancial statements but retained by CNPC upon the incorporation of the Company; the revaluation of the Company's xed assets other than crude oil and natural gas reserves as at 30 June 1999; the transfer to CNPC of RMB30,500 million in debt; the elimination of a special tax deduction relating to the Company's exploration and production activities upon the incorporation of the Company; and the distribution of RMB3,600 million to CNPC in respect of net prot for the period from 1 October 1999 to 4 November 1999. The Company expects that these changes, arrangements and transactions will have a material adverse impact on the overall results of operations, but will not have a material impact on the Company's cash ow. The Directors therefore believe that the presentation of pro forma information is necessary to supplement its historical nancial information. The unaudited pro forma nancial information does not purport to represent the results of the Company that would have been attained if those changes, arrangements and transactions had in fact occurred on those dates. 172

FINANCIAL INFORMATION
Implementation of the Comprehensive Products and Services Agreement, the Land Use Rights Leasing Contract and the Buildings Leasing Contract Details on the Comprehensive Products and Services Agreement, the Land Use Rights Leasing Contract and the Buildings Leasing Contract are contained in the section headed ""Business Relationship with the CNPC Group Connected Transactions''. If these agreements had been in eect from 1 January 1998, the Company would have incurred the following additional costs and expenses for the year ended 1998 and the nine months ended 30 September 1999: RMB2,000 million and RMB1,500 million, respectively, in additional rent for approximately 1,145 million square metres of land; RMB801 million and RMB445 million, respectively, in additional exploration expense; and RMB35 million and RMB26 million, respectively, in additional rent for buildings and properties. Revaluation of the Company's Fixed Assets; Revaluation Loss; Increase in Depreciation Expense As part of the Restructuring and as required by the relevant PRC regulations, a valuation of the contributed xed assets, excluding oil and gas reserves, was carried out as at 30 June 1999 by China Enterprise Appraisal, a rm of independent valuers registered in the PRC. The valuation was performed in order to determine the fair value of such contributed xed assets and establish amounts for share capital and capital reserve. The value of the above contributed xed assets has been determined in Renminbi, which resulted in RMB80,549 million in excess of the prior carrying value of the xed assets and a revaluation loss of RMB 1,122 million as of 30 June 1999. For the purpose of the preparation of the Group's nancial statements, the eect of this revaluation was recognised in the combined nancial statements of the Group on 30 June 1999. The eect of the revaluation is to increase future annual depreciation, depletion and amortisation for contributed xed assets. Under IAS, on a pro forma basis, the revaluation would have resulted in depreciation increasing by an additional RMB4,059 million for the nine months ended 30 September 1999 and by RMB9,604 million for the year ended 31 December 1998. Summary Impact of the Pro Forma Adjustments As a result of the foregoing pro forma adjustments, for the year ended 31 December 1998 and the nine months ended 30 September 1999, prot from operations would have decreased by 33.5 per cent. and 10.2 per cent., respectively, from RMB35,489 million and RMB36,812 million, respectively, on a historical basis to RMB23,611 million and RMB33,043 million, respectively, on a pro forma basis; prot from operations for exploration and production segment would have decreased by 18.9 per cent. and 8.7 per cent., respectively, from RMB35,509 million and RMB38,167 million, respectively, on a historical basis to RMB28,797 million and RMB34,842 million, respectively, on a pro forma basis; prot from operations for rening and marketing business segment would have decreased by 75.5 per cent. and 51.2 per cent., respectively from RMB3,589 million and RMB2,616 million, respectively, on a historical basis to RMB879 million and RMB1,277 million, respectively, on a pro forma basis; loss from operations for chemicals segment would have increased/(decreased) by 113.0 per cent. and (46.6) per cent., respectively, from RMB(1,808) million and RMB(2,407) million, respec173

FINANCIAL INFORMATION
tively, on a historical basis to RMB(3,851) million and RMB(1,286) million, respectively, on a pro forma basis; loss from operations for natural gas segment would have increased by 95.1 per cent. and 56.0 per cent., respectively, from RMB(226) million and RMB(257) million, respectively, on a historical basis to RMB(441) million and RMB(401) million, respectively, on a pro forma basis; and net prot would have decreased by 43.9 per cent. and 20.0 per cent., respectively, from RMB15,275 million and RMB20,779 million, respectively, on a historical basis to RMB8,576 million and RMB16,644 million, respectively, on a pro forma basis. Review of Historical Performance and Results of Operations by Business Segment The following discussion is based on the Company's historical results of operations. As a result of the factors discussed above, such results of operations may not be indicative of the future operating performance of the Company. The Company's statement of combined results for each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1998 and 1999 is summarised in the table below.
Year ended 31 December 1996 1997 1998 (RMB millions) Nine months ended 30 September 1998 (unaudited) 1999 (RMB millions)

Total revenues Operating expenses Prot from operations Exchange gain/(loss), net Interest expense, net Share of prot from associated companies Prot before taxation Taxation Net prot

143,677 157,381 147,287 (96,086) (108,749) (111,798) 47,591 2,549 (8,806) 42 41,376 (9,833) 31,456 48,632 35,489 3,126 (1,872) (9,880) (10,950) 331 88 42,209 22,755 (12,200) (7,537) 29,848 15,275

107,425 (79,745) 27,680 566 (8,077) 54 20,223 (5,450) 14,879

126,181 (89,369) 36,812 (1,554) (7,155) 158 28,261 (7,455) 20,779

174

FINANCIAL INFORMATION
The table below sets forth the Company's revenues by business segment for each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1998 and 1999, as well as the percentage changes in revenues for the periods shown.
First nine months 1999 compared to rst nine months 1998

1996

1997

Nine months 1997 1998 ended 30 September compared compared to to 1998 1996 1998 1997 (unaudited) 1999 (RMB millions, except percentages)

Sales and Other Operating Revenues Exploration and production Rening and marketing Chemicals Natural gas Other Total Less intersegment sales Consolidated net sales from operations

83,081 94,486 94,631 105,331 19,851 24,578 4,502 5,103 160 263 202,225 229,761 (58,548) (72,380) 143,677 157,381

13.7% 11.3 23.8 13.3 64.4 13.6% 23.6 9.5%

89,626 100,105 21,849 5,320 309 217,209 (69,922) 147,287

(5.1)% (5.0) (11.1) 4.3 17.5 (5.5)% (3.4) (6.4)%

68,308 67,301 16,915 3,798 139 156,461 (49,036) 107,425

74,573 83,561 18,953 4,337 146 181,570 (55,389) 126,181

9.2% 24.2 12.0 14.2 5.0 16.0% 13.0 17.5%

The table below sets forth the Company's operating prot by business segment for each of the three years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1998 and 1999, as well as the percentage changes in operating prot for the periods shown. Other income from operations shown below consists of research and development, business services and infrastructure support to the Company's operating business segments.
First nine months 1999 compared to rst nine months 1998

1996

1997

Nine months ended 1997 1998 30 September compared compared to to 1998 1996 1998 1997 (unaudited) 1999 (in RMB millions, except percentages)

Income From Operations Exploration and production 36,930 38,765 Rening and marketing 11,603 11,622 Chemicals 499 (151) Natural gas (184) (224) Other (1,257) (1,380) Total 47,591 48,632

5.0% 0.2 (130.3) 21.7 9.8 2.2%

35,509 3,589 (1,808) (226) (1,575) 35,489

(8.4)% 31,097 (69.1) (465) 1,097.4 (1,654) 0.9 (219) 14.1 (1,079) (27)% 27,680

38,167 2,616 (2,407) (257) (1,307) 36,812

22.7% 662.6 45.5 17.4 21.1 33.0%

Nine Months Ended 30 September 1999 Compared to Nine Months Ended 30 September 1998 Combined Results of Operation Total Revenue Total revenue increased 17.5 per cent. from RMB107,425 million in the nine months ended 30 September 1998 to RMB126,181 million in the nine months ended 30 September 1999. This increase reected an increase in revenues in each of the Company's business segments due primarily to increases 175

FINANCIAL INFORMATION
in the prices of crude oil, rened products and chemical products as well as increased sales volume in its rening and marketing, chemicals and natural gas segments. Operating Expenses Operating expenses increased 12.1 per cent. from RMB79,745 million in the nine months ended 30 September 1998 to RMB89,369 million in the nine months ended 30 September 1999. This increase resulted primarily from increases in selling, general and administrative expenses, revaluation loss, impairment loss on assets to be retained by CNPC, taxes other than income taxes, and purchases, services and other expenses associated with increased sales volume in the Company's rening and marketing, chemicals and natural gas segments, partially oset by decreases in exploration expenses and employee compensation costs. Purchases, Services and Other Purchases, services and other expenses decreased 0.1 per cent. from RMB42,487 million in the nine months ended 30 September 1998 to RMB42,457 million in the nine months ended 30 September 1999. This decrease reected a decrease in purchases, services and other expenses in the Company's exploration and production segment resulting from the implementation of cost-cutting measures beginning in the second half of 1998, largely oset by an increase in purchases, services and other expenses in the Company's rening and marketing, chemicals and natural gas segments. The cost-cutting measures in the Company's exploration and production segment included reducing expenditures on materials, electricity, down hole operations and thermal recovery. Employee Compensation Costs Employee compensation costs decreased 3.5 per cent. from RMB7,067 million in the nine months ended 30 September 1998 to RMB6,822 million in the nine months ended 30 September 1999. This decrease reected reductions in employee compensation costs in the Company's exploration and production and chemicals business segments, oset in part by increases in employee compensation costs in its rening and marketing and natural gas business segments. The decrease in employee compensation costs in the Company's exploration and production segment primarily reected the elimination of housing subsidies from 31 December 1998. The decrease in employee compensation costs in the Company's chemicals segment resulted primarily from a reduction in salaries paid to employees of underperforming work units. The increases in employee compensation costs in the Company's rening and marketing and natural gas segments primarily reected increased salary levels. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 32.0 per cent. from RMB7,245 million in the nine months ended 30 September 1998 to RMB9,564 million in the nine months ended 30 September 1999. This increase was due primarily to an increase in the number of the Company's sales branches and expansion in southern China of its marketing activities in its rening and marketing segment beginning in the second half of 1998 and continuing throughout the rst nine months of 1999. Depreciation, Depletion and Amortisation Depreciation, depletion and amortisation increased 27.4 per cent. from RMB12,663 million in the nine months ended 30 September 1998 to RMB16,138 million in the nine months ended 30 September 1999. This increase was due primarily to increases in xed assets in each of the Company's business segments and the eect of revaluation on 30 June 1999. 176

FINANCIAL INFORMATION
Revaluation Loss As a result of the xed assets revaluation on 30 June 1999, a revaluation loss of RMB1,122 million was recognised for the nine months ended 30 September 1999. Impairment Loss on Assets to be Retained by CNPC Impairment loss on certain chemical production facilities included in the Company's historical nancial statements but retained by CNPC for the nine months ended 30 September 1999 was RMB2,007 million. The impairment charge relates to the high carbon alcohol facility which, in the Company's estimation, will not generate sucient positive cash ows in the future to recover its carrying value primarily due to the low price of high carbon alcohol and the high operating cost of the facility. State-owned assets such as the high carbon alcohol facility cannot be disposed of without the approval of the PRC Government and CNPC continues to operate the facility. Accordingly, the carrying value of the high carbon alcohol facility was written down to fair value. Taxes Other than Income Taxes Taxes other than income taxes increased 12.8 per cent. from RMB6,961 million in the nine months ended 30 September 1998 to RMB7,851 million in the nine months ended 30 September 1999. This increase was due primarily to increases in sales volume in the Company's rening and marketing, chemicals and natural gas segments. Prot From Operations Prot from operations increased 33.0 per cent. from RMB27,680 million in the nine months ended 30 September 1998 to RMB36,812 million in the nine months ended 30 September 1999. Net Exchange Gain (Loss) Net exchange gain (loss) decreased from a gain of RMB566 million in the nine months ended 30 September 1998 to a loss of RMB1,554 million in the nine months ended 30 September 1999. The net exchange loss was due to the impact on the Company's Japanese Yen denominated debt of a 9.2 per cent. appreciation of the Japanese Yen against the Renminbi. Net Interest Expense Net interest expense decreased 11.4 per cent. from RMB8,077 million in the nine months ended 30 September 1998 to RMB7,155 million in the nine months ended 30 September 1999. This decrease was due primarily to reduced total debt as a result of the assumption of RMB30,500 million of the Company's long-term debt by CNPC on 30 June 1999 and a decrease in the weighted average eective interest rate of the Company's total debt, oset in part by a decline in interest income. Prot Before Taxation Prot before taxation increased 39.7 per cent. from RMB20,223 million in the nine months ended 30 September 1998 to RMB28,261 million in the nine months ended 30 September 1999. Taxation Taxation increased 36.8 per cent. from RMB5,450 million in the nine months ended 30 September, 1998 to RMB7,455 million in the nine months ended 30 September 1999 due primarily to an increase in prot before taxation. Commencing 1 January 2000, the Company will no longer be permitted to deduct from its prot before taxation certain amounts in relation to exploration and production activities. These amounts aggregated RMB12,158 million for the nine months ended 30 September 1999. As a result, the 177

FINANCIAL INFORMATION
Company expects that its taxation will be signicantly higher for all periods subsequent to 1 January 2000. However, such increase in the Company's taxation may be partially oset by its consolidated tax reporting status, which was not available to the Company prior to the incorporation of the Company. See Notes 4(f) and 5(l) to the Accountants' Report contained in Appendix I for additional information regarding income tax applicable to the Company. Net Prot Net prot increased 39.7 per cent. from RMB14,879 million in the nine months ended 30 September 1998 to RMB20,779 million in the nine months ended 30 September 1999. See the section headed ""Financial Information Results of Operations Pro Forma Adjustments and their Financial Impact'' for a discussion of the pro forma impact on the net prot for the nine months ended 30 September 1999 from certain changes, arrangements and transactions in connection with the Restructuring. Exploration and Production Sales and Other Operating Revenue Sales and other operating revenue increased 9.2 per cent. from RMB68,308 million in the nine months ended 30 September 1998 to RMB74,573 million in the nine months ended 30 September 1999. This increase was due primarily to a 10.9 per cent. increase in the Company's average realised selling price of crude oil (excluding condensate) from RMB113.57 per barrel in the nine months ended 30 September 1998 to RMB126.11 per barrel in the nine months ended 30 September 1999. Intersegment sales increased 14.2 per cent. from RMB43,726 million in the nine months ended 30 September 1998 to RMB49,954 million in the nine months ended 30 September 1999. This increase was due primarily to a 9.6 per cent. increase in intersegment crude oil sales volume and a 7.0 per cent. increase in the average realised selling price of crude oil sold to other business segments. Sales of crude oil to Sinopec increased 12.9 per cent. from RMB13,925 million in the nine months ended 30 September 1998 to RMB15,727 million in the nine months ended 30 September 1999, primarily due to a 11.3 per cent. increase in the average realised selling price of crude oil sold to Sinopec and a 1.5 per cent. increase in sales volume of crude oil sold to Sinopec. Operating Expenses Operating expenses decreased 2.2 per cent. from RMB37,211 million in the nine months ended 30 September 1998 to RMB36,406 million in the nine months ended 30 September 1999. This decrease was due primarily to a 13.3 per cent. decrease in purchases, services and other expenses resulting from the adoption of more stringent cost control measures starting in the second half of 1998 that reduced crude oil and natural gas production costs and other related expenses, partially oset by an increase in depreciation, depletion and amortisation resulting from an increase in xed assets and production volumes and an increase in revaluation loss. The decrease in purchases, services and other expenses reected decreases in expenses relating to oil eld maintenance and thermal injection. The Company estimates that these expenses increased during the fourth quarter of 1999 as a result of increased preventive maintenance and utilisation of thermal injection techniques. Monthly expenses relating to oil eld maintenance and thermal injection increased by approximately 300 per cent. in the fourth quarter of 1999 as compared to the quarterly average for the rst three quarters of 1999. See ""Financial Information Results of Operations Pro Forma Adjustments and Their Financial Impact Implementation of the Comprehensive Products and Services Agreement, the Land Use Rights Leasing Contract and the Buildings Leasing Contract'' for a discussion of the pro forma impact on the Company's 178

FINANCIAL INFORMATION
exploration expenses for the nine months ended 30 September 1999 from certain changes, arrangements and transactions in connection with the Restructuring. Prot From Operations Prot from operations increased 22.7 per cent. from RMB31,097 million in the nine months ended 30 September 1998 to RMB38,167 million in the nine months ended 30 September 1999. See the section headed ""Financial Information Results of Operations Pro Forma Adjustments and Their Financial Impact'' for a discussion of the pro forma impact on the prot from operations for the nine months ended 30 September 1999 from certain changes, arrangements and transactions in connection with the Restructuring. Rening and Marketing Sales and Other Operating Revenue Sales and other operating revenue increased 24.2 per cent. from RMB67,301 million in the nine months ended 30 September 1998 to RMB83,561 million in the nine months ended 30 September 1999. This increase resulted primarily from increases in sales volume of gasoline, jet fuel, diesel and lubricants, the Company's four principal rened products, and an increase in the average realised gasoline, jet fuel and diesel prices. Intersegment sales increased 1.9 per cent. from RMB5,018 million in the nine months ended 30 September 1998 to RMB5,114 million in the nine months ended 30 September 1999. This increase was due primarily to an increase in sales volume of naphtha and heavy oil, partially oset by a decrease in average realised prices for those products. Sales of rened products to Sinopec increased 293.4 per cent. from RMB3,000 million in the nine months ended 30 September 1998 to RMB11,803 million in the nine months ended 30 September 1999. This increase resulted primarily from increases in the average rened product prices paid by Sinopec and the volume of the Company's rened products sold to Sinopec. The increase in the volume of the Company's rened product sales to Sinopec resulted from substantially increased sales to Sinopec following the industry reorganization in June 1998 and the PRC Government's designation in June 1998 of CNPC and Sinopec as the exclusive wholesalers of gasoline and diesel. This designation had the eect of prohibiting the sale of rened products by the trading companies from which Sinopec had formerly purchased substantial volumes of rened products. The Company expects sales to Sinopec to decline in future periods as a percentage of the Company's total sales of rened products as the Company expands its retail marketing network. Operating Expenses Operating expenses increased 19.4 per cent. from RMB67,766 million in the nine months ended 30 September 1998 to RMB80,945 million in the nine months ended 30 September 1999. This increase was due primarily to increases in purchases, services and other expenses, selling, general and administrative expenses, taxes other than income taxes, revaluation loss and depreciation, depletion and amortisation. Purchases, services and other expenses increased 15.6 per cent. primarily as a result of an increase in the volume of crude oil processed by the Company. Selling, general and administrative expenses increased 52.6 per cent. as a result of an increase in sales volume of rened products, an increase in selling expenses related to the establishment of additional sales branches and the Company's assumption of transportation costs starting from the second half of 1998 as part of the Company's eorts to counter the eects of increased competition. Taxes other than income taxes increased 17.6 per cent. due primarily to its increased sales volume of rened products. Depreciation, depletion and amortisation 179

FINANCIAL INFORMATION
increased as a result of the commissioning of new rening facilities, including heavy oil catalytic cracking and lubricant production facilities in the Daqing oil region. Prot From Operations Prot from operations increased from a loss of RMB465 million in the nine months ended 30 September 1998 to a gain of RMB2,616 million in the nine months ended 30 September 1999. See the section headed ""Financial Information Results of Operations Pro Forma Adjustments and Their Financial Impact'' for a discussion of the pro forma impact on the prot from operations for the nine months ended 30 September 1999 from certain changes, arrangements and transactions in connection with the Restructuring. Chemicals Sales and Other Operating Revenue Sales and other operating revenue increased 12.0 per cent. from RMB16,915 million in the nine months ended 30 September 1998 to RMB18,953 million in the nine months ended 30 September 1999. This increase was due primarily to substantial increases in sales volume as well as a general increase in the prices of the Company's principal chemical products. However, sales and other operating revenue received by a limited number of the Company's chemical production facilities, including those retained by CNPC in the Restructuring, continued to be adversely aected by illegal smuggling activities during the nine months ended 30 September 1999. Operating Expenses Operating expenses increased 15.0 per cent. from RMB18,569 million in the nine months ended 30 September 1998 to RMB21,360 million in the nine months ended 30 September 1999. This increase resulted primarily from a 2.4 per cent. increase in purchases, services and other expenses, a revaluation loss of RMB1,122 million and an impairment loss on assets to be retained by CNPC of RMB2,007 million, partially oset by a 14.8 per cent. decrease in employee compensation costs resulting from workforce reductions. Prot from Operations Loss from operations increased from a loss of RMB1,654 million in the nine months ended 30 September 1998 to a loss of RMB2,407 million in the nine months ended 30 September 1999. See the section headed ""Financial Information Results of Operations Pro Forma Adjustments and their Financial Impact'' for a discussion of the pro forma impact on the prot from operations for the nine months ended 30 September 1999 from certain changes, arrangements and transactions in connection with the Restructuring. Natural Gas Sales and Other Operating Revenue Sales and other operating revenue increased 14.2 per cent. from RMB3,798 million in the nine months ended 30 September 1998 to RMB4,337 million in the nine months ended 30 September 1999. This increase was due primarily to a 12.0 per cent. increase in the Company's sales volume. Operating Expenses Operating expenses increased 14.4 per cent. from RMB4,017 million in the nine months ended 30 September 1998 to RMB4,594 million in the nine months ended 30 September 1999. This increase 180

FINANCIAL INFORMATION
was due primarily to a 9.2 per cent. increase in purchases, services and other expenses as a result of increased sales volume and a 103.8 per cent. increase in depreciation, depletion and amortisation. Prot From Operations Loss from operations increased from a loss of RMB219 million in the nine months ended 30 September 1998 to a loss of RMB257 million in the nine months ended 30 September 1999. See the section headed ""Financial Information Results of Operations Pro Forma Adjustments and Their Financial Impact'' for a discussion of the pro forma impact on the prot from operations for the nine months ended 30 September 1999 from certain changes, arrangements and transactions in connection with the Restructuring. Year Ended 31 December 1998 Compared to Year Ended 31 December 1997 Combined Results of Operation Total Revenue Total revenue decreased 6.4 per cent. from RMB157,381 million in the year ended 31 December 1997 to RMB147,287 million in the year ended 31 December 1998. This decrease reected a decrease in revenues in the Company's exploration and production, rening and marketing and chemicals business segments due primarily to a decrease in the international market prices of crude oil and rened products in 1998. This decrease in prices was partially oset by an increase in sales volume of approximately 1.4 million tons of the Company's four principal rened products. Rened products prices decreased primarily because of increased competition from smugglers. Operating Expenses Operating expenses increased 2.8 per cent. from RMB108,749 million in the year ended 31 December 1997 to RMB111,798 million in the year ended 31 December 1998. This increase was due primarily to increases in purchases, services and other expenses, depreciation, depletion and amortisation, employee compensation costs and selling, general and administrative expenses. The increase was partially oset by a decrease in exploration expenses resulting from the Company's implementation of cost control measures in 1998. Purchases, Services and Other Purchases, services and other expenses increased 2.1 per cent. from RMB56,980 million in the year ended 31 December 1997 to RMB58,190 million in the year ended 31 December 1998. The primary reason for this increase was the increase in purchases, services and other expenses of the Company's rening and marketing segment, partially oset by decreases in purchases, services and other expenses of the Company's exploration and production and chemicals segments. Employee Compensation Costs Employee compensation costs increased 10.5 per cent. from RMB8,826 million in the year ended 31 December 1997 to RMB9,752 million in the year ended 31 December 1998. This increase was due to an increase in wages in the Company's exploration and production segment. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 0.1 per cent. from RMB9,827 million in the year ended 31 December 1997 to RMB9,838 million in the year ended 31 December 1998. As a part of the Company's marketing eorts to diminish the eects of smuggling on its sales of rened products, in the rst half of 1998 the Company assumed the cost of transporting its rened products from its plant to 181

FINANCIAL INFORMATION
the purchasers. The Company's prices were not adjusted to cover the assumed transportation costs. As a result, the eective realised prices for the Company's rened products decreased. Depreciation, Depletion and Amortisation Depreciation, depletion and amortisation increased 8.2 per cent. from RMB16,450 million in the year ended 31 December 1997 to RMB17,803 million in the year ended 31 December 1998. This increase was due primarily to increases of 11.2 per cent. and 15.8 per cent. in depreciation in the Company's chemicals and rening and marketing segments, respectively, relating to the expansion of its chemicals and rening facilities in 1998 and a 143.8 per cent. increase in depreciation in its natural gas segment related to its Shaanxi to Beijing natural gas pipeline which was commissioned in 1998. Impairment loss on assets to be retained by CNPC Impairment loss on ve chemical production facilities included in the Company's historical nancial statements but retained by CNPC amounted to RMB310 million for the year ended 31 December 1998. Taxes Other than Income Taxes Taxes other than income taxes increased 3.2 per cent. from RMB9,279 million in the year ended 31 December 1997 to RMB9,579 million in the year ended 31 December 1998. This increase was due to an increase in consumption taxes for the Company's rening and marketing segment which are based on sales volumes. Prot From Operations Prot from operations decreased 27.0 per cent. from RMB48,632 million in the year ended 31 December 1997 to RMB35,489 million in the year ended 31 December 1998. Net Exchange Gain (Loss) Net exchange gain (loss) decreased from a gain of RMB3,126 million in the year ended 31 December 1997 to a loss of RMB1,872 million in the year ended 31 December 1998. This decrease was due to the impact on the Company's Japanese Yen denominated debt of an 12.7 per cent. appreciation of the Yen against the Renminbi. Net Interest Expense Net interest expense increased 10.8 per cent. from RMB9,880 million in the year ended 31 December 1997 to RMB10,950 million in the year ended 31 December 1998. This increase was due primarily to interest expense related to a 15.0 per cent. increase in short-term debt. The increased short-term debt was incurred in connection with capital expenditures and working capital needs for the Company's rening and marketing and chemicals segments. Prot Before Taxation Prot before taxation decreased 46.1 per cent. from RMB42,209 million in the year ended 31 December 1997 to RMB22,755 million in the year ended 31 December 1998. Taxation Taxation decreased 38.2 per cent. from RMB12,200 million in the year ended 31 December 1997 to RMB7,537 million in the year ended 31 December 1998. This decrease was due primarily to decreased prot before taxation. 182

FINANCIAL INFORMATION
Net Prot Net prot decreased 48.8 per cent. from RMB29,848 million in the year ended 31 December 1997 to RMB15,275 million in the year ended 31 December 1998. Exploration and Production Sales and Other Operating Revenue Sales and other operating revenue decreased 5.1 per cent. from RMB94,486 million in the year ended 31 December 1997 to RMB89,626 million in the year ended 31 December 1998. The primary reason for this decrease was the decrease in the Company's average realised price of crude oil (excluding condensate) from RMB118.65 per barrel in 1997 to RMB112.29 per barrel in 1998. This decrease is consistent with the decrease in the international market prices of crude oil following the pegging on 1 June 1998 of the domestic prices for crude oil to the Singapore market FOB prices. Intersegment sales decreased 3.1 per cent. from RMB63,193 million in the year ended 31 December 1997 to RMB61,216 million in the year ended 31 December 1998, due primarily to a 5.1 per cent. decrease in average prices paid by the Company's rening and marketing segment, partially oset by a 2.0 per cent. increase in intersegment sales volume. Sales of crude oil to Sinopec increased 5.4 per cent. from RMB17,867 million in the year ended 31 December 1997 to RMB18,837 million in the year ended 31 December 1998. The primary reason for this increase was a 11.8 per cent. increase in sales volume of crude oil, partially oset by a 5.7 per cent. decrease in the average price of crude oil paid by Sinopec. Operating Expenses Operating expenses decreased 2.9 per cent. from RMB55,721 million in the year ended 31 December 1997 to RMB54,117 million in the year ended 31 December 1998. This decrease was due primarily to decreased purchases, services and other expenses and exploration expenses, oset by an increase in employee compensation costs. The decrease in purchases, services and other expenses reected decreases in oileld maintenance costs and materials costs. Exploration expenses decreased 12.3 per cent. primarily as a result of a decrease in dry hole expenses resulting from a higher success rate in the Company's exploration activities. The decrease was partially oset by an increase in depreciation, depletion and amortisation due to an increase in xed assets. Prot From Operations Prot from operations decreased 8.4 per cent. from RMB38,765 million in the year ended 31 December 1997 to RMB35,509 million in the year ended 31 December 1998. Rening and Marketing Sales and Other Operating Revenue Sales and other operating revenue decreased 5.0 per cent. from RMB105,331 million in the year ended 31 December 1997 to RMB100,105 million in the year ended 31 December 1998. The primary reason for this decrease was a decrease in the selling prices of the Company's major rened products (gasoline, diesel, jet fuel and lubricants) caused by increased competition from smuggled products prior to 1 June 1998, partially oset by an increase in sales volume of gasoline and diesel. Intersegment sales decreased 6.1 per cent. from RMB8,847 million in the year ended 31 December 1997 to RMB8,308 million in the year ended 31 December 1998. Intersegment sales decreased in 1998 183

FINANCIAL INFORMATION
because of a decrease in the Company's sales prices charged to the chemicals segment reecting the decrease in crude oil prices. Sales to Sinopec increased 65.1 per cent. from RMB3,746 million for the year ended 31 December 1997 to RMB6,184 million for the year ended in 31 December 1998. The increase was due primarily to an increase in sales volume of rened products to Sinopec following the industry reorganisation in June 1998 and the PRC Government's designation in June 1998 of CNPC and Sinopec as the exclusive wholesalers of gasoline and diesel. This designation had the eect of prohibiting the sale of rened products by the trading companies from which Sinopec had formerly purchased substantial volumes of rened products. Operating Expenses Operating expenses increased 3.0 per cent. from RMB93,709 million in the year ended 31 December 1997 to RMB96,516 million in the year ended 31 December 1998. This increase was due primarily to a 1.6 per cent. increase in purchases, services and other expenses, a 7.1 per cent. increase in selling, general and administrative expenses and a 15.8 per cent. increase in depreciation and amortisation expenses. The Company's purchases increased primarily due to increased sales volume. In addition, selling, general and administrative expenses increased due in part to increased transportation costs assumed by the Company in the rst half of 1998 and in part to increased sales volume. Depreciation increased because of an increase in xed assets. Prot From Operations Prot from operations decreased 69.1 per cent. from RMB11,622 million in the year ended 31 December 1997 to RMB3,589 million in the year ended 31 December 1998. Chemicals Sales and Other Operating Revenue Sales and other operating revenue decreased 11.1 per cent. from RMB24,578 million in the year ended 31 December 1997 to RMB21,849 million in the year ended 31 December 1998. The primary reason for this decrease was a decline in the average selling price for the Company's products caused in part by increased competition from smuggled products during the rst half of 1998, oset by an increase in sales volume of the Company's major chemical products. Operating Expenses Operating expenses decreased 4.3 per cent. from RMB24,729 million in the year ended 31 December 1997 to RMB23,657 million in the year ended 31 December 1998. This decrease was due primarily to an 8.9 per cent. decrease in purchases, services and other expenses because of the decline in crude oil prices in 1998 and a decrease of 12.4 per cent. in selling, general and administrative expenses. The decrease was partially oset by an impairment loss on assets included in the Company's historical nancial statements but retained by CNPC of RMB310 million and a 11.2 per cent. increase in depreciation and amortisation resulting from an increase in xed assets. Prot From Operations Prot from operations decreased from a loss of RMB151 million in the year ended 31 December 1997 to a loss of RMB1,808 million in the year ended 31 December 1998. 184

FINANCIAL INFORMATION
Natural Gas Sales and Other Operating Revenue Sales and other operating revenue increased 4.3 per cent. from RMB5,103 million in the year ended 31 December 1997 to RMB5,320 million in the year ended 31 December 1998. This increase was due primarily to a 1.5 per cent. increase in price, as well as a 2.7 per cent. increase in sales volume. The increased sales volume resulted primarily from the commencement of sales through the Company's Shaanxi to Beijing pipeline commissioned in 1998. Operating Expenses Operating expenses increased 4.1 per cent. from RMB5,327 million in the year ended 31 December 1997 to RMB5,546 million in the year ended 31 December 1998. This increase was due to a 1.8 per cent. increase in the purchases, services and other expenses and a 143.8 per cent. increase in depreciation, depletion and amortisation related to the commissioning of the Shaanxi to Beijing pipeline. Prot From Operations Losses from operations increased slightly from RMB224 million in the year ended 31 December 1997 to RMB226 million in the year ended 31 December 1998. Year Ended 31 December 1997 Compared to Year Ended 31 December 1996 Combined Results of Operation Total Revenue Total revenue increased 9.5 per cent. from RMB143,677 million in the year ended 31 December 1996 to RMB157,381 million in the year ended 31 December 1997. This increase was due primarily to the increase in prices of crude oil and rened products implemented by the PRC Government from 25 December 1996, as well as increases in sales volumes of crude oil, rened products and chemical products. Operating Expenses Operating expenses increased 13.2 per cent. from RMB96,086 million in the year ended 31 December 1996 to RMB108,749 million in the year ended 31 December 1997. This increase was due primarily to an increase in purchases, services and other expenses and an increase in depreciation, depletion and amortisation in 1997, as well as increases in all other components of operating expenses except selling, general and administrative expenses. Purchases, Services and Other Purchases, services and other expenses increased 9.9 per cent. from RMB51,860 million in the year ended 31 December 1996 to RMB56,980 million in the year ended 31 December 1997. The primary reason for this increase was an increase in purchases, services and other expenses in the Company's exploration and production segment. Employee Compensation Costs Employee compensation costs increased 10.4 per cent. from RMB7,996 million in the year ended 31 December 1996 to RMB8,826 million in the year ended 31 December 1997. This increase was due primarily to increases in average wages and benets in the exploration and production, rening and marketing and chemicals segments. 185

FINANCIAL INFORMATION
Selling, General and Administrative Expenses Selling, general and administrative expenses increased slightly from RMB9,727 million in the year ended 31 December 1996 to RMB9,827 million in the year ended 31 December 1997. Depreciation, Depletion and Amortisation Depreciation, depletion and amortisation increased 26.0 per cent. from RMB13,059 million in the year ended 31 December 1996 to RMB16,450 million in the year ended 31 December 1997. This increase was due primarily to increased depreciation related to an increase in the Company's xed assets. Taxes Other than Income Taxes Taxes other than income taxes increased 9.5 per cent. from RMB8,471 million in the year ended 31 December 1996 to RMB9,279 million in the year ended 31 December 1997. This increase was due to increased sales volumes of crude oil and rened products. Prot From Operations Prot from operations increased 2.2 per cent. from RMB47,591 million in the year ended 31 December 1996 to RMB48,632 million in the year ended 31 December 1997. Net Exchange Gain (Loss) Net exchange gain (loss) increased from a gain of RMB2,549 million in the year ended 31 December 1996 to a gain of RMB3,126 million in the year ended 31 December 1997. This increase was due primarily to the 10.9 per cent. depreciation of the Japanese Yen against the Renminbi. Net Interest Expense Net interest expense increased 12.2 per cent from RMB8,806 million in the year ended 31 December 1996 to RMB9,880 million in the year ended 31 December 1997. This increase was due primarily to a net increase in the Company's indebtedness and additional interest expense incurred in connection with the nancing of certain facilities in the rening and marketing and chemicals segments. Prot Before Taxation Prot before taxation increased 2.0 per cent. from RMB41,376 million in the year ended 31 December 1996 to RMB42,209 million in the year ended 31 December 1997. Taxation Taxation increased 24.1 per cent. from RMB9,833 million in the year ended 31 December 1996 to RMB12,200 million in the year ended 31 December 1997. This increase was due to an increase in prot before taxation. Net Prot Net prot decreased 5.1 per cent from RMB31,456 million in the year ended 31 December 1996 to RMB29,848 million in the year ended 31 December 1997. Exploration and Production Sales and Other Operating Revenue Sales and other operating revenue increased 13.7 per cent from RMB83,081 million in the year ended 31 December 1996 to RMB94,486 million in the year ended 31 December 1997. The primary 186

FINANCIAL INFORMATION
reason for this increase was the 12.2 per cent. increase in the Company's average realised price of crude oil (excluding condensate) from RMB105.80 per barrel in 1996 to RMB118.65 per barrel in 1997. Intersegment sales increased 18.7 per cent. from RMB53,234 million in the year ended 31 December 1996 to RMB63,193 million in the year ended 31 December 1997 due primarily to a 14.3 per cent. increase in crude oil prices as well as a 4.3 per cent. increase in sales volume. Sales of crude oil to Sinopec decreased 1.8 per cent. from RMB18,199 million in the year ended 31 December 1996 to RMB17,867 million in the year ended 31 December 1997. The primary reason for this decrease was an 11.5 per cent. decrease in sales volume, largely oset by an 11.0 per cent. increase in the average price of crude oil paid by Sinopec. Operating Expenses Operating expenses increased 20.7 per cent. from RMB46,151 million in the year ended 31 December 1996 to RMB55,721 million in the year ended 31 December 1997. This increase was due primarily to increased purchases, services and other expenses associated with increases in the use of enhanced recovery techniques, and oil eld maintenance costs when the price of crude oil was high in China. In addition, we recorded a 44.6 per cent. increase in exploration expenses due primarily to additional dry hole expenses resulting from increased exploration activity. Depreciation, depletion and amortisation increased 29.7 per cent. due to increases in production volume and xed assets. Prot From Operations Prot from operations increased 5.0 per cent. from RMB36,930 million in the year ended 31 December 1996 to RMB38,765 million in the year ended 31 December 1997. Rening and Marketing Sales and Other Operating Revenue Sales and other operating revenue increased 11.3 per cent. from RMB94,631 million in the year ended 31 December 1996 to RMB105,331 million in the year ended 31 December 1997. The primary reason for this increase was an increase in the average prices of gasoline, diesel, jet fuel and lubricants as well as an increase in sales volume. Intersegment sales increased 68.8 per cent. from RMB5,241 million in the year ended 31 December 1996 to RMB8,847 million in the year ended 31 December 1997. The increase in intersegment sales was due to an increase in sales volume and an increase in the prices of rened products sold to the Company's chemicals segment resulting from an increase in the price of crude oil in China. Operating Expenses Operating expenses increased 12.9 per cent. from RMB83,028 million in the year ended 31 December 1996 to RMB93,709 million in the year ended 31 December 1997. This increase was due primarily to the 13.9 per cent. increase in purchases, services and other expenses due to the increase in the processing volume of crude oil, and the 8.8 per cent. increase in taxes other than income taxes, partially oset by a decrease in selling, general and administrative expenses. Depreciation, depletion and amortisation expenses increased 20.6 per cent. due to an increase in the Company's xed assets. Prot From Operations Prot from operations increased 0.2 per cent. from RMB11,603 million in the year ended 31 December 1996 to RMB11,622 million in the year ended 31 December 1997. 187

FINANCIAL INFORMATION
Chemicals Sales and Other Operating Revenue Sales and other operating revenue increased 23.8 per cent. from RMB19,851 million in the year ended 31 December 1996 to RMB24,578 million in the year ended 31 December 1997. This increase was due primarily to a substantial increase in sales volume of the Company's principal chemical products partially oset by a decrease in the average price of the Company's principal chemical products due to decreasing market prices. Operating Expenses Operating expenses increased 27.8 per cent. from RMB19,352 million in the year ended 31 December 1996 to RMB24,729 million in the year ended 31 December 1997. This increase was due primarily to an increase in purchases, services and other expenses, and depreciation, depletion and amortisation expenses. Purchases, services and other expenses increased primarily because of the increase in the price and volume of raw materials purchased. The depreciation and amortisation expenses increase resulted from an increase in xed assets. Prot From Operations Prot from operations decreased 130.3 per cent. from prot of RMB499 million in the year ended 31 December 1996 to a loss of RMB151 million in the year ended 31 December 1997. Natural Gas Sales and Other Operating Revenue Sales and other operating revenue increased 13.3 per cent. from RMB4,502 million in the year ended 31 December 1996 to RMB5,103 million in the year ended 31 December 1997. The reason for this increase was a 4.5 per cent. increase in sales volume and a 8.5 per cent. increase in average realised price of natural gas sales. The increased average realised price of the Company's natural gas sales resulted primarily from an increase in wellhead prices. Operating Expenses Operating expenses increased 13.7 per cent. from RMB4,686 million in the year ended 31 December 1996 to RMB5,327 million in the year ended 31 December 1997. This increase was due primarily to an increase in purchases, services and other expenses, reecting increases in the volume and price of natural gas purchases. Prot From Operations Losses from operations increased 21.7 per cent. from RMB184 million in the year ended 31 December 1996 to RMB224 million in the year ended 31 December 1997. PROPERTY AND OTHER ASSETS According to paragraph 34 (""Paragraph 34'') of the Third Schedule to the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) and Rule 5.01 of the Listing Rules, the Company is required to include in this prospectus a valuation report (the ""Report'') with respect to all the Group's interests in land and buildings; according to Paragraph 34 and Rule 5.06(1) of the Listing Rules, the Report shall include the particulars respectively prescribed thereby; and according to Rule 5.07 of the Listing Rules, the eective date as at which such property interests were valued must be not more than three months before the date of this prospectus. The Securities and Futures Commission and the Stock 188

FINANCIAL INFORMATION
Exchange have granted waivers from the requirements under Paragraph 34 and Rules 5.01, 5.06(1) and 5.07 of the Listing Rules, respectively. As permitted by such waivers, certain property interests of 35 unlisted subsidiaries of the Company (""Excluded Properties'') with a total net book value of approximately RMB870 million as at 30 September 1999 have not been included in the Report; the Report includes the abbreviated particulars that appear in Appendix V; and the eective date as at which the Group's property interests were valued is 30 September 1999 notwithstanding the date of this prospectus. The Excluded Properties excluded from the Report comprise approximately 1,230 buildings situated in several provinces in China and are held for the purposes of the businesses of the 35 unlisted subsidiaries of the Company, a great majority of whom are engaged in the storage, transportation and marketing of oil and petrochemical products. The Excluded Properties were not required to be valued by the PRC authorities for the purpose of the Restructuring; and in view of their relative insignicance to the Company, and on account of the irrelevance to potential investors and the undue burden on the Company to have them valued, the Excluded Properties have not been valued by Chesterton Petty Limited, independent property valuers. The Directors conrm that, had the Excluded Properties been valued as at 30 September 1999, there would not be any material impact on the Group's nancial position or net asset value as at that date as a result of the revaluation of those properties, in the context of the Global Oering. The remaining property interests of the Group, comprising over 57,000 buildings situated on more than 42,000 parcels of land in a number of provinces in China, have been valued by Chesterton Petty Limited as of 30 September 1999 at RMB32,298,162,000. The text of the letter and the valuation certicate issued by Chesterton Petty Limited for this purpose (being the Report as referred to in the preceding paragraphs and setting out summaries of the full valuation report prepared by Chesterton Petty Limited) is set out in ""Appendix V Property Valuation.'' PROFIT ESTIMATE AND DIVIDEND POLICY Prot Estimate The Directors believe that, in the absence of unforeseen circumstances and on the bases set out in ""Appendix IV Prot Estimate'', the consolidated prot after taxation and minority interests but before extraordinary items of the Company and its subsidiaries for the year ended 31 December 1999 is unlikely to be less than RMB26,899 million based on IAS. The Directors are not aware of any extraordinary items which have arisen or are likely to arise in respect of the year ended 31 December 1999. On a fully diluted basis and on the assumption that the Company had been listed since 1 January 1999 and a total of 175,824,176,000 Shares were in issue on 1 January 1999 (taking no account of any H Shares which may be issued upon exercise of the Over-allotment Options and taking no account of any H Shares which may be repurchased by the Company pursuant to the mandate referred to in the section headed ""Share Capital General Mandate to Repurchase H Shares'') the estimated earnings per Share for the year ended 31 December 1999 is RMB0.15 representing (upon conversion into Hong Kong dollars at the PBOC Rate of HK$1.00 to RMB1.0635 prevailing on 10 March 2000) a price/earnings multiple of 8.8 times and 10.6 times if the Oer Price is HK$1.23 per Oer Share and HK$1.49 per Oer Share, respectively. Please refer to ""Industry Overview Industry and Corporate Restructurings The Restructuring'' for a discussion of the Company's distribution to CNPC of RMB3,600 million in respect of the Company's net prot for the period from 1 October 1999 to 4 November 1999. The texts of letters from the auditors and reporting accountants, PricewaterhouseCoopers, and from the Sponsors in respect of the prot estimate are set out in ""Appendix IV Prot Estimate''. 189

FINANCIAL INFORMATION
Dividend Policy The holders of the H Shares will share proportionately, on a per Share basis, all dividends and other distributions declared by the Board of Directors. The Board of Directors will declare dividends semiannually, if any, in Renminbi, with respect to H Shares on a per Share basis and will pay dividends in Hong Kong dollars. The declaration of dividends is subject to the discretion of the Board of Directors. The Board of Directors will take into account factors including general business conditions, the Company's nancial results, capital requirements, contractual restrictions on the payment of dividends by the Company to its shareholders or by the Company's subsidiaries to the Company, interests of the Company's shareholders, the eect on the Company's debt ratings and other factors as the Board of Directors may deem relevant. The Company may only distribute dividends after it has made allowance for recovery of losses, if any, allocations to the statutory common reserve fund, allocations to the statutory common welfare fund, and allocations to a discretionary common reserve fund if approved by the shareholders of the Company. The minimum and maximum aggregate allocations to the statutory funds are 15 per cent. and 20 per cent., respectively, of the Company's net prot determined in accordance with PRC accounting rules. Under PRC law, the distributable earnings of the Company will be equal to its net prot determined in accordance with PRC accounting rules or IAS, whichever is lower, less allocations to the statutory and discretionary funds. Any nal dividend for a nancial year shall be subject to shareholder's approval. Subject to the above and to ensure that the Company's dividend policy is consistent with that of major international oil and gas companies, the Company currently expects that it will distribute as dividends approximately 40 per cent. to 50 per cent. of its reported net prot for all years commencing on or after 1 January 2000. The Directors believe that the dividend policy of the Company strikes a balance between two important goals: (1) providing its shareholders with a competitive return on investment; and (2) assuring sucient reinvestment of prots to enable the Company to achieve its strategic objectives. The Directors anticipate that CNPC may incur future operating losses arising in part from its obligations to provide supplementary social services to the employees of the CNPC Group and a limited number of third parties. These services include education, hospitals, public transportation services, property management and security services. Dividends received from the Company are likely to be one of CNPC's principal means of funding these losses. The Directors believe that subsidies which the Ministry of Finance has committed to provide will enable CNPC to fund substantially all of any future operating shortfalls arising out of CNPC's obligations to provide social services. The Directors believe that these subsidies will substantially reduce CNPC's reliance on dividends from the Company. These subsidies are to be provided until the social services currently provided by CNPC have been fully assumed by the PRC Government. Nevertheless, subject to the relevant provisions of the Company Law and the Articles of Association, CNPC may seek to inuence the Company's determination of dividends with a view to satisfying its cash ow requirements. However, the Directors believe that CNPC's nancial condition will benet from the Company's success and that by supporting a dividend policy intended to enhance the Company's long-term protability and the market value of its securities, CNPC will increase the value of its own interest in the Company. The Directors believe that CNPC's operating losses are likely to decline signicantly in the future as a result of continued restructuring of CNPC's operations, repayment by CNPC of a signicant portion of its borrowings and the gradual transfer by CNPC to the PRC Government of CNPC's social service functions. The PRC Government has begun implementing a policy of gradually assuming the social service functions historically performed by State-owned enterprises. As a result, the Directors believe 190

FINANCIAL INFORMATION
that CNPC will be able gradually to reduce, and eventually eliminate, its nancial obligations in respect of these social service functions. However, the PRC Government is still in the process of establishing a precise timetable for completing the assumption of these nancial obligations. DISTRIBUTABLE RESERVES Since the Company had not been incorporated as at 30 September 1999, there were no distributable reserves available for distribution to shareholders. ADJUSTED NET TANGIBLE ASSETS The following statement of adjusted net tangible assets of the Group is based on the net tangible assets of the Group as at 30 September 1999 as set out in ""Appendix I Accountants' Report'', adjusted as described below:
RMB millions

Combined net tangible assets of the Group as at 30 September 1999 as set out in the Accountants' Report in Appendix I Net prot of the Company for the two months ended 30 November 1999 based on its unaudited management accounts Distribution to CNPC(1) Estimated net proceeds from the Global Oering(2) Adjusted net tangible assets Adjusted net tangible asset value per Share (based on 175,824,176,000 Shares in issue immediately after the Global Oering)(3)
(1)

194,166 5,700 (3,600) 21,901 218,167 RMB1.24

In accordance with the Restructuring Agreement entered into between the Company and CNPC in connection with the Restructuring, the Company will distribute RMB 3,600 million to CNPC in respect of estimated net prot during the period from 1 October 1999 to 4 November 1999. This distribution will be reduced by the amount, if any, by which RMB 3,600 million exceeds the prot of the Group during the period from 1 October 1999 to 4 November 1999 determined in accordance with PRC accounting standards. Any such reduction will be eected by a cash payment to the Company by CNPC within 30 days following the date on which the Company publishes its audited 1999 nancial statements, but in any event no later than 30 June 2000. No account has been taken of the H Shares which may be issued pursuant to the Over-allotment Options. The estimated net proceeds from the Global Oering assume an Oer Price of HK$1.36 per H Share being the midpoint of the proposed range of Oer Prices of HK$1.23 to HK$1.49 per H Share. If the Over-allotment Options are exercised in full, the adjusted net tangible asset value per Share will be increased, while the earnings per Share will be diluted correspondingly. However, the Directors believe that this will not have any material eect on the shareholders.

(2)

(3)

NO MATERIAL CHANGE Save as disclosed in this prospectus, the Directors believe that there has been no material adverse change in the nancial or trading position or prospects of the Group since 30 September 1999.

191

FUTURE PLANS AND USE OF PROCEEDS

FUTURE PLANS AND PROSPECTS The Company's strategy is to continue to address the opportunities and ongoing challenges arising from the Company's recent creation and transformation into an ecient, prot-oriented, competitive integrated oil and gas company. This will be accomplished by enhancing the operating and nancial performance of each of its business segments, improving its technology platform and reducing costs through the ongoing restructuring and rationalisation of its operations. Specically, the Company intends to build upon its strengths to implement its integrated and return-on-capital strategy. To do so it will focus on the following strategic initiatives. Improve performance of exploration and production As the dominant state-owned producer of oil and gas in a planned economy, the Company had historically sought primarily to meet production targets provided by the PRC Government without focusing on protability and return on capital. The Company intends to enhance its nancial performance and boost return of capital by a combination of: improved integration between exploration, development and production; prioritisation or ""high-grading'' of exploration and development projects leading to a higher success rate and reecting more ecient capital expenditures; shutting down or discontinuing uneconomic programs, projects and production; and a reduction in lifting and other cash costs. This change in approach may lead to a reduction of production of crude oil in the near term but should result in an increase in prot from operations and a sharper increase in return on capital. Implement an integrated approach to rening and marketing to improve eciency and performance The rening and marketing segment has only recently been created through the transfer into the segment of separate businesses. These include reneries owned by the Company, reneries received in 1998 through the asset swap with Sinopec and marketing assets previously owned by various local governments. It aims to improve the nancial and operating performance of this segment by implementing a new organisational structure designed to foster integration, adhering to rigorous capital return requirements and undertaking a variety of signicant cost-cutting measures. The Company intends to achieve these goals through: reducing processing capacity through selected plant and facility closures, thereby improving capacity utilisation and exploiting economies of scale; redening the product slate to better t the needs of the market and undertaking selective debottlenecking projects; capitalising on its wholesale strength to expand retail marketing operations through improved logistics for the production, transportation and storage of rened products; and reducing costs of processing, transportation and sales, thereby enhancing protability. In the past, the Company's reneries were operated with the principal goal of achieving production targets with little regard to the demand in the marketplace for its rened products. As a result, the Company sometimes produced certain products that did not have ready buyers, or did not produce certain products that were in short supply. Going forward, the Company intends to adjust its product portfolio according to market demand through its marketing operation's active involvement in monitoring 192

FUTURE PLANS AND USE OF PROCEEDS

market demand, evaluating market trends and guiding its reneries to produce the appropriate products to satisfy the market needs. Undertake a turnaround of the chemicals segment The Company's chemicals segment is currently experiencing losses as a result of high costs, poor investments and expenditures in uneconomic projects, plants and facilities and a lack of product focus and eective marketing strategy. The Company's lack of product focus resulted in its maintaining a very diversied product portfolio comprising some unprotable or marginally protable products. The Company intends to focus on key products, improve investment discipline and selectively increase production output of certain value-added products to meet market demand. The Company also plans to implement cost reduction measures, including reducing processing costs and overhead costs. Over the longer term and subject to strict return criteria, the Company may also undertake related new investment to capitalise on the growth in demand for chemical products in China. Capitalise on growing demand for natural gas and supportive regulations of the industry Driven by environmental and eciency concerns, the PRC Government is increasingly encouraging the use of natural gas to meet primary energy needs and is expected to foster supportive regulations for the industry. The Directors expect that natural gas will be the fastest growing primary energy source in China in the coming years. Based on the Company's market studies, demand for natural gas is expected to increase from 967.6 billion cubic feet in 2000 to 2,210.7 billion cubic feet by 2005. The Company is currently the largest natural gas producer in the country with a market share of more than 60 per cent. and holds a majority of China's natural gas transmission assets. The Company intends to capitalise on its dominant position and the trend toward cleaner fuels by: intensifying its marketing eorts to further increase its market penetration; focusing its exploration and development eorts on its large natural gas discoveries in the Sichuan Shanganning, Tarim and Qaiddam basins; and expanding its transmission infrastructure to transport natural gas from its major gas elds to major demand centres in northwestern China (such as Lanzhou and Xian) as well as in northern China (such as Beijing, Tianjin, Shandong Province and Hebei Province) and in eastern China (such as Shanghai and the Yangtze River Delta region). Additionally, it aims to increase the protability of its existing business by: reducing its production and operating costs; and increasing the sales price of its natural gas. Establish centralised nancial management focused on boosting returns and capital eciency The Company intends to continue building on the performance improvements and eciency gains it has achieved as a result of its restructuring. It has established explicit nancial targets for each business segment focusing on enhancing returns through earnings and cash ow growth and higher capital eciency to be achieved through more targeted capital expenditures. The Company has also put in place an incentive system for management based on achieving these targets. It is in the process of upgrading its management information system to t its new return-based strategy. In this context, the Company aims to signicantly reduce its leverage while maintaining a competitive dividend policy. Currently, the Company intends to use approximately 40 per cent. of the 193

FUTURE PLANS AND USE OF PROCEEDS

proceeds the Company receives from the Global Oering to repay its short-term debt. It plans to further reduce nancial leverage through internally generated cash ow and a signicant reduction of capital expenditures. The Company is targeting a capital structure and nancial ratios in line with international standards for the industry. Its goal is to achieve these targets within three to ve years. In terms of capital structure, its ratio of total debt to total capital as at 31 December 1998 was 68 per cent. The corresponding ratio as at 30 September 1999 was 41 per cent. The Company intends to further reduce this ratio in the future. The Directors believe this would allow the Company to minimise its cost of capital and allow it to access the capital markets on a cost-eective basis. The Directors also believe this will allow the Company to take advantage of future development opportunities at a cost acceptable to it and to increase dividends at a rate consistent with industry practice. EXPLORATION AND PRODUCTION The Company plans to continue to shift the focus of its exploration and development activities from increasing crude oil production to maximising its return on capital employed. The Company anticipates that this shift may result in a moderate decline in its annual crude oil production. The Directors believe, however, that its overall hydrocarbon production will experience moderate growth over the next few years as a result of planned increases in its natural gas production. Reduce nding and development costs The Company intends to reduce nding and development costs by: focusing exploration eorts in the Shanganning, Bohai Bay, Junggar, Tarim, Songliao, Sichuan and Qaiddam basins, where its nding costs have been signicantly lower and which the Directors believe hold greater potential for future discoveries; terminating unprotable or marginally protable exploration activities; utilising advanced technology to improve its exploration success rate; closely coordinating its research and development and production operations to enable it to adjust its exploration plans on a timely basis; reducing exploration and development costs through improved geological research and better planning; and closely coordinating its exploration and development operations to ensure that its exploration eorts are focused on economically recoverable reserves. Reducing lifting costs The Company intends to reduce lifting costs by: lengthening workover interval from an average of 600 days to 800 days; terminating unprotable or marginally protable production activities; utilising advanced technology to improve its production per well; undertaking more preventive maintenance to reduce unplanned stoppages and production disruption; reducing fuel and electricity costs by using new energy-saving technology; eliminating unnecessary ground facilities; and increasing the use of information technology. 194

FUTURE PLANS AND USE OF PROCEEDS

Increase focus on natural gas The Company intends to increase substantially its natural gas exploration and development activities to capitalise on anticipated growth in demand for natural gas in the PRC. Elements of this strategy include: expanding its exploration activities in the Sichuan basin in southwestern China and in the Shanganning basin in northwestern China to facilitate increased production of natural gas when construction of the West to East pipeline is completed; increasing its exploration eorts in the Qaiddam and Tarim basins; and achieving signicant natural gas production gains through accelerated recovery of proved reserves located in the Sichuan and Shanganning basins. REFINING AND MARKETING The Company intends to create value by maximising eciency and return on capital through the integration of rening and marketing and various other cost-reduction measures and adhering to rigorous return on capital requirements. It was not until very recently that rening and marketing were combined as one segment and, prior to the combination, there was little coordination between the two. Partially as a result of this inecient separation, the Company's costs have been high and returns low. It plans to achieve its goal of increasing return on capital through the following measures: create a better balance between processing capacity and marketing (wholesale and retail) capacity. Currently, it has overcapacity on the rening side and insucient retail capacity. The Company intends to: reduce primary distillation capacity by 110.8 million barrels per year, or 303,657 barrels per day, by eliminating, merging or shutting down inecient or small distillation facilities and units and increasing crude processing volume, which will increase the capacity utilisation rate and reduce processing and xed costs per unit produced; and expand its marketing network nationwide. The Company intends to expand its market presence in southern China and increase retail sales by constructing, acquiring, franchising and renovating an additional 6,000 to 9,000 service stations prior to the end of 2004. It also plans to increase its per-station sales volume. It intends to establish strong brand names for its rened products throughout its nationwide marketing network and will increase its co-operation with international companies from whom it hopes to learn advanced marketing, managerial and technological skills; redesign the existing transportation, storage and distribution logistics, which is necessary for the Company's integration of rening and marketing activities and is expected to reduce costs and maximise eciency. For example, the Company plans to: improve the existing distribution infrastructure by shutting down old, distant and under-utilised oil storage facilities, investing in or otherwise acquiring oil storage facilities in strategic locations and building a rened product pipeline between Lanzhou and Chengdu; and reduce transportation costs through better geographical allocation of production and economies of scale. The Company plans to maximise production at reneries that are close to the market or bulk transportation facilities; 195

FUTURE PLANS AND USE OF PROCEEDS

optimise the quantity and quality of its product mix according to market needs. For example, the Company plans to: improve product quality to enhance competitiveness by increasing its secondary rening capacity; adjust product slate consistent with market needs to maximise margins. The Company plans to increase production of high margin products such as high-grade gasoline, diesel and jet fuel, lubricants, asphalt for high-grade highways, catalytic agents and lubricant additives; and selectively increase production capacity at a limited number of facilities through debottlenecking. It plans to selectively undertake capacity expansion projects at a limited number of its reneries to enable it to increase its production of products for which it has historically enjoyed higher margins and where there is a perceived market opportunity. The Directors expect to achieve capacity increases through debottlenecking and do not expect this to require signicant capital expenditures. The Company's planned capacity expansion projects include the following: building hydrocracking and heavy oil catalytic reforming units at Daqing Petrochemical with designed annual capacities of 10.3 million barrels and 7.4 million barrels, respectively; expanding Lanzhou Renery's annual primary distillation capacity by 18.5 million barrels; building hydrocracking and heavy oil catalytic reforming units at Dalian Petrochemical with designed annual capacities of 7.4 million barrels and 4.4 million barrels, respectively; increasing Lanzhou Renery's annual diesel hydrogenation production capacity from 4.4 million barrels to 7.4 million barrels; building a diesel hydrogenation rening unit at Jinxi Renery with a designed annual production capacity of 7.4 million barrels; and building a diesel hydrogenation rening unit at Fushun Petrochemical with a designed annual production capacity of 8.9 million barrels; and reduce processing costs and increase capital eciency: The Company intends to reduce the processing costs and increase the capital eciency for the segment through: reducing crude oil losses through the strict management of raw material process ow; increasing catalyst and additive eciency; reducing energy consumption through the utilisation of appropriate software to control energy use; lowering maintenance costs by adjusting maintenance schedules to reect the requirements of individual items of equipment, performing more preventive maintenance and improving maintenance quality; reducing direct labour costs through increasing automation and simplication of production processes; reducing management costs by introducing an incentive-based management system; and adhering to strict return criteria in planning and executing capital expenditures. 196

FUTURE PLANS AND USE OF PROCEEDS

CHEMICALS The Company's main strategic objective is to signicantly turn around the performance of its chemical segment and, at a later stage, to target selective expansion opportunities. Key measures to achieve this objective include: reducing processing costs through a reduction of energy consumption and loss rates of raw materials as well as implementing a program of preventive maintenance to reduce unplanned stoppages; focusing on a reduced range of high-value products; reducing xed overhead costs such as management expenses through the introduction of incentive-based management contracts; implementing a new marketing organisation comprising six regional marketing centres covering the key markets in China and improving the after sales service to its customers; imposing a rigorous return-based evaluation of its capital expenditures; and undertaking debottlenecking principally of its ethylene production capacity and in the longer term evaluating selective expansion projects to take advantage of growth opportunities in China. NATURAL GAS The Company plans to capitalise on the growing consumption of natural gas in China as a result of the PRC Government's environmental protection policies to expand its natural gas business. The Company plans to accomplish this goal by implementing the following strategies: Expand transmissions infrastructure The Company intends to: intensify its marketing eorts to further increase its market penetration; and expand its transmission infrastructure to transport natural gas from its major gas elds to major demand centres in northwestern China (such as Lanzhou and Xian) as well as in northern China (such as Beijing, Tianjin, Shandong Province and Hebei Province) and in eastern China (such as Shanghai and the Yangtze River Delta region) by: expanding the Shaanxi to Beijing pipeline jointly with the Beijing municipal government by constructing compression stations, underground storage facilities and other ancillary facilities to facilitate the delivery of greater volumes of natural gas: constructing new natural gas transmission pipelines, such as the West to East natural gas pipeline; utilising foreign investment and imported advanced technology in the West to East natural gas pipeline project; and eectively controlling costs of projects and the scale of investment to achieve the projected returns on capital investments. 197

FUTURE PLANS AND USE OF PROCEEDS

Reduce operating costs and increase capital eciency The Company intends to improve its operating eciency and reduce pipeline transmission costs by enhancing pipeline transmission management and enhancing pipeline maintenance and inspection in order to reduce its operating costs, such as material expenses and maintenance fees. USE OF PROCEEDS The net proceeds of the Global Oering accruing to the Company (after deduction of underwriting fees and estimated expenses payable by the Company in relation to the Global Oering, assuming the Over-allotment Options are not exercised and assuming an Oer Price of HK$1.36 per H Share, being the midpoint of the proposed Oer Price range of HK$1.23 to HK$1.49 per H Share) are estimated to be approximately HK$20,593 million (HK$23,722 million, if the Over-allotment Options are exercised in full). The Company currently intends to use the net proceeds from the Global Oering as follows: use RMB13,040 million (HK$12,261 million) to fund the Company's capital expenditures and investments and to provide additional funds for general corporate purposes; and repay RMB8,861 million (HK$8,832 million of its short-term borrowing from third party nancial institutions. The following table sets forth the interest rate and maturity of the borrowings that the Company intends to repay by using RMB8,861 million (HK$8,832 million) of the net proceeds:
Amount (RMB in millions) Interest rate (per cent. per annum) Maturity

463 7,071 1,124 88 115

6.01 7.01 8.01 10.01 12.01

7.00 8.00 10.00 12.00 15.00

within within within within within

one one one one one

year year year year year

To the extent, if any, that the net proceeds of the Global Oering are not immediately used for the above purposes, the Company intends to place the net proceeds on short-term deposit. Following PRC Government accounting rules applicable to joint stock companies with limited liability, the net proceeds from the Global Oering received by the Company in US dollars and Hong Kong dollars will be accounted for in the Company's nancial statements at the PBOC Rate in eect at the time the net proceeds are rst received. The net proceeds from the Global Oering accruing to CNPC (after deduction of underwriting fees and estimated expenses payable by CNPC in relation to the Global Oering, assuming the Overallotment Options are not exercised and assuming an Oer Price of HK$1.36 per H Share, being the midpoint of the proposed Oer Price range of HK$1.23 to HK$1.49 per H Share) are estimated to be approximately HK$2,319 million (HK$2,667 million, if the Over-allotment Options are exercised in full). Out of the net proceeds it receives from the Global Oering, CNPC will: reduce RMB1,497 million (HK$1,408 million) of borrowings; and repay RMB969 million (HK$911 million) to fund the employee retraining and severance plans established in connection with the Restructuring. CNPC and the Company will establish separate accounts into which their respective proceeds will be deposited. Funds in the separate accounts of the Company and CNPC will only be disbursed for the purposes stated above. See the section headed ""Business Use of Proceeds Verication'' for a more 198

FUTURE PLANS AND USE OF PROCEEDS

detailed discussion of use of proceeds verication in respect of funds in the separate accounts of the Company and CNPC. In the event of any material modication to the use of proceeds as described above, the Company and/or CNPC, as appropriate, will issue an announcement in respect of the change. The Hong Kong dollar : Renminbi exchange rate for the purpose of presenting the amounts for use of proceeds under this section is based on the PBOC Rate prevailing on 10 March 2000, of HK$1.00 RMB1.0635.

199

UNDERWRITING
UNDERWRITERS Hong Kong Underwriters China International Capital Corporation (Hong Kong) Limited Goldman Sachs (Asia) L.L.C. BOCI Asia Limited HSBC Investment Bank Asia Limited Celestial Capital Limited Core Pacic-Yamaichi International (H.K.) Limited Hang Seng Securities Limited ICEA Capital Limited Ka Wah Capital Limited Tai Fook Securities Company Limited Vickers Ballas Capital Limited Worldsec Corporate Finance Limited Corporate Placing Underwriters China International Capital Corporation Limited Goldman Sachs (Asia) L.L.C. UNDERWRITING ARRANGEMENTS AND EXPENSES Hong Kong Public Oering Hong Kong Underwriting Agreement Pursuant to the Hong Kong Underwriting Agreement, the Company is oering initially 791,208,000 H Shares for subscription by, and CNPC is oering initially 87,914,000 H Shares for sale to, the public in Hong Kong on and subject to the terms and conditions of this prospectus and the application forms relating thereto. Subject to the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the H Shares to be oered as mentioned herein and to certain other conditions set out in the Underwriting Agreements, the 879,122,000 H Shares initially comprised in the Hong Kong Public Oering will be oered through the Hong Kong Underwriters on the terms and conditions of this prospectus and application forms. Grounds for termination The obligations of the Hong Kong Underwriters under the Hong Kong Underwriting Agreement are subject to termination in the event of: (a) a breach of any of the representations, warranties, undertakings or other provisions of the Hong Kong Underwriting Agreement by the Company or CNPC which is material in the context of the Hong Kong Public Oering; (b) any event, series of events, matter or circumstance occurring or arising on or after the date of the Hong Kong Underwriting Agreement which, if it had occurred before the date of the Hong Kong Underwriting Agreement, would have rendered any of the representations, warranties or undertakings given by the Company or CNPC under the Hong Kong Underwriting Agreement untrue or incorrect in any respect which is material in the context of the Hong Kong Public Oering; 200

UNDERWRITING
(c) any material statement contained in this prospectus becoming or having been discovered to be untrue, incorrect or misleading in any material respect; (d) matters arising or having been discovered which would, if this prospectus was to be issued at that time, constitute a material omission therefrom; or (e) the occurrence or coming into eect of: (i) a suspension or material limitation in trading in securities generally on the NYSE or the Stock Exchange; (ii) a general moratorium on commercial banking activities in New York, Hong Kong or the PRC declared by the relevant authorities; (iii) a change or development involving a prospective change in the United States, Hong Kong or PRC taxation aecting the Company, the Shares or the ADSs or the transfer thereof or the imposition of, or adverse change or development involving a prospective change in, exchange controls by the United States, Hong Kong or the PRC; (iv) the outbreak or escalation of hostilities involving the United States, Hong Kong or the PRC or the declaration by the United States, Hong Kong or the PRC of a national emergency or war; or (v) the occurrence of any material adverse change in the existing nancial, political or economic conditions in the United States, Hong Kong, the PRC or elsewhere, and which would in the judgment of the Global Coordinators (on behalf of the Underwriters) be materially adverse to or prejudicially and materially aect the business or nancial position of the Company or the Group or make it impracticable or inadvisable to proceed with the Global Oering or the delivery of H Shares on the terms and in the manner contemplated by this prospectus or would materially and adversely aect the nancial markets or the market for the H Shares, the ADSs or other equity securities, occurring at any time prior to 6:00 a.m. on the morning trading in the H Shares is expected to commence on the Stock Exchange. Undertakings The Company has undertaken to the Stock Exchange that (i) except pursuant to the Global Oering or the Over-allotment Options, at any time during the period of six months from the date on which dealings in the H Shares commence on the Stock Exchange (the ""First Six-month Period''), it will not without the prior consent of the Stock Exchange and unless in compliance with the requirements of the Listing Rules, allot or issue or agree to allot or issue any Shares or other securities of the Company (including warrants or other convertible securities) or grant or agree to grant any options or rights over any Shares or other securities of the Company or enter into any swap or other arrangements that transfers, in whole or in part, any of the economic consequence of ownership of any Shares or oer to or agree to do any of the foregoing or have any intention to do so; and (ii) within a period of six months commencing from the expiry of the First Six-month Period (the ""Second Six-month Period''), it will not allot or issue any Shares or other securities of the Company (including warrants or other convertible securities) or grant or agree to grant any options or rights over any Shares or other securities of the Company or enter into any swap or other arrangement that transfers, in whole or in part, any of the economic consequence of ownership of any Shares or oer to or agree to do any of the foregoing or announce any intention to do so to the extent that such action would result in CNPC ceasing to be a controlling shareholder (as dened in the Listing Rules) of the Company. 201

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CNPC has undertaken to the Stock Exchange that except pursuant to the Global Oering or the Over-allotment Options,(i) it will not, without the prior written consent of the Company and the Stock Exchange and unless in compliance with the requirements of the Listing Rules, during the First Sixmonth Period, dispose of any of the Shares in respect of which CNPC is shown by this prospectus to be the benecial owner (the ""CNPC Shares''); (ii) it will not, without the prior written consent of the Company and the Stock Exchange, in the Second Six-month Period dispose of any of the CNPC Shares if, immediately following such disposal, CNPC would cease to be a controlling shareholder (as dened in the Listing Rules) of the Company; and (iii) it will, on any disposal of such CNPC Shares during the Second Six-month Period, take all reasonable steps to ensure that any such disposal will not create a disorderly or false market. CNPC has further undertaken to the Stock Exchange that it will, at any time after the date of this prospectus up to and including the date falling 12 months after the date on which dealings in the H Shares commence on the Stock Exchange (i) immediately inform the Company and the Sponsors of any pledges or charges of any Shares or other securities benecially owned by it and the number of such H Shares or other securities so pledged or charged; and (ii) immediately inform the Company and the Sponsors of any indication received by it, either verbal or written, from any pledgee or chargee of any Shares or other securities pledged or charged that such Shares or other securities will be disposed of. The Company will also inform the Stock Exchange as soon as it has been informed of the above matters (if any) by CNPC and disclose such matters by way of a press notice which is published in the newspapers as soon as possible after being so informed by CNPC. Pursuant to the Hong Kong Underwriting Agreement, CNPC has undertaken to the Company, the Global Coordinators and the Hong Kong Underwriters that, except as provided thereunder or pursuant to the Global Oering (including pursuant to the Over-allotment Options), it will not without the prior written consent of the Global Coordinators (such consent not to be unreasonably withheld or delayed) and unless in compliance with the requirements of the Listing Rules, at any time after the date of this prospectus up to and including the date falling 12 months after the date on which dealings in the H Shares on the Stock Exchange commence: (a) pledge, charge, oer, sell, contract to sell, sell any option or otherwise transfer or dispose of any Shares or other securities of the Company held by it that are convertible into or exchangeable for, or that represent the right to receive, Shares or any such substantially similar securities (""Other Securities''), grant any option, right or warrant to purchase any such Shares or Other Securities; or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such Shares or Other Securities. CNPC has further undertaken to the Company, the Global Coordinators and the Hong Kong Underwriters that it will, at any time after the date of this prospectus up to and including the date falling 12 months after the date on which dealings in the H Shares on the Stock Exchange commence: (a) immediately inform the Company and the Global Coordinators of any pledges or charges of any Shares or Other Securities by it and the number of such Shares or Other Securities so pledged or charged; and (b) immediately inform the Company and the Global Coordinators of any indication received by it, either verbal or written, from any pledgee or chargee of any Shares or Other Securities pledged or charged that such Shares or Other Securities will be disposed of. 202

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Pursuant to the Hong Kong Underwriting Agreement, the Company has undertaken to the Global Coordinators and the Hong Kong Underwriters that it will not, and CNPC has undertaken to the Global Coordinators and the Hong Kong Underwriters to procure that the Company will not, issue or agree to issue any Shares (other than pursuant to the Over-allotment Options) or Other Securities or grant or agree to grant any options, warrants or other rights to subscribe for Shares or Other Securities on or before the date falling 12 months after the date of the rst dealings in the H Shares on the Stock Exchange without rst having obtained the prior written consent of the Global Coordinators on behalf of the Hong Kong Underwriters (such consent not to be unreasonably withheld or delayed). Commission The Hong Kong Underwriters will receive an underwriting commission of 2.5 per cent. on the Oer Price of the Hong Kong Public Oering Shares initially oered under the Hong Kong Public Oering, out of which they will pay any sub-underwriting commission. For unsubscribed Hong Kong Public Oering Shares reallocated to the Asia Oering, the US Oering or the Europe Oering, the Company and CNPC will pay an underwriting commission at the rate applicable to the Asia Oering, the US Oering or the Europe Oering and such commission will be divided among the Underwriters. The Asia Oering, the US Oering and the Europe Oering In connection with the Asia Oering, the US Oering and the Europe Oering, it is expected that the Company and CNPC will enter into the Asia Underwriting Agreement, the US Underwriting Agreement and the Europe Underwriting Agreement with the Asia Underwriters, the US Underwriters and the Europe Underwriters, respectively. Under the Asia Underwriting Agreement, the US Underwriting Agreement and the Europe Underwriting Agreement, the Underwriters to be named therein would severally agree to purchase 61,538,460 ADSs representing 6,153,846,000 H Shares (inclusive of US$350 million of Corporate Placing Shares, and the H Shares or ADSs to be placed to BP Amoco p.l.c. under the Corporate Placing which are underwritten solely by the Global Coordinators) in the case of the Asia Underwriting Agreement, 43,956,040 ADSs representing 4,395,604,000 H Shares in the case of the US Underwriting Agreement and 61,538,460 ADSs representing 6,153,846,000 H Shares in the case of the Europe Underwriting Agreement. The Company and CNPC have granted to the Asia Underwriters, the US Underwriters and the Europe Underwriters, respectively, Over-allotment Options, exercisable by the Global Coordinators up to 30 days after the Price Determination Date, to require (i) the Company to allot and issue up to an aggregate of 2,373,626,000 additional H Shares and (ii) CNPC to sell up to an aggregate of 263,736,000 additional H Shares (all or a portion of which may be deliverable in the form of ADSs) at the same price per H Share under the Asia Oering, the US Oering and the Europe Oering, solely to cover overallocations in the Asia Oering, the US Oering and the Europe Oering, if any (including H Shares or ADSs to be issued or sold to BP Amoco p.l.c. pursuant to any and all exercises of the Over-allotment Options as described in the section headed ""Structure of the Global Oering The Corporate Placing''). The Company and CNPC have entered into the Corporate Placing Agreements with the Corporate Placing Underwriters and each of the Corporate Investors. Under the Corporate Placing Agreements, each of the Corporate Investors has agreed to purchase the Corporate Placing Shares at the same price as is payable by other investors which acquire ADSs or H Shares under the Asia Oering.

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Total Expenses and Underwriters' Interest The aggregate commissions and fees, together with listing fees, Stock Exchange transaction levy, legal and other professional fees and printing and other expenses relating to the Global Oering are estimated to amount to approximately US$141 million (HK$1,101 million) in total and are payable by the Company and CNPC. The Underwriters have no interests in the Company.

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THE GLOBAL OFFERING The Global Oering comprises: (i) the Hong Kong Public Oering of 879,122,000 H Shares (subject to adjustment as mentioned below) in Hong Kong as described below in the section headed ""The Hong Kong Public Oering''; the Asia Oering of 61,538,460 ADSs (which may, at the request of the purchasers be delivered in the form of H Shares)(subject to adjustment as mentioned below) to professional and institutional investors in Hong Kong (other than to members of the public in Hong Kong) and to investors outside Hong Kong in Asia and Australasia (including the Corporate Placing); the US Oering of 43,956,040 ADSs (which may, at the request of the purchasers be delivered in the form of H Shares)(subject to adjustment as mentioned below) to the public in the United States and on a private placement basis in Canada; and the Europe Oering of 61,538,460 ADSs (which may, at the request of the purchasers be delivered in the form of H Shares)(subject to adjustment as mentioned below) to investors outside the United States, Canada, Asia and Australasia.

(ii)

(iii)

(iv)

Of the total of 17,582,418,000 H Shares comprised in the Global Oering, 15,824,176,000 Shares are oered by the Company and 1,758,242,000 Shares are oered by CNPC, respectively. Investors may apply for H Shares under the Hong Kong Public Oering or apply for or indicate an interest for ADSs and/or H Shares under the Asia Oering, the US Oering and the Europe Oering, but may not do both. The Hong Kong Public Oering is open to members of the public in Hong Kong as well as to institutional and professional investors. The Asia Oering, the US Oering and the Europe Oering will include selective marketing of ADSs to institutional and professional investors and other investors anticipated to have a sizable demand for such ADSs. Professional investors generally include brokers, dealers, companies (including fund managers) whose ordinary business involves dealing in shares and other securities and corporate entities which regularly invest in shares and other securities. Allocation of ADSs and/or H Shares pursuant to the Asia Oering, the US Oering and the Europe Oering (as referred to below under ""The Asia Oering, the US Oering and the Europe Oering'') to placees will be based on a number of factors including the level and timing of demand, the total size of the relevant investor's invested assets or equity assets in the relevant sector and whether or not it is expected that the relevant investor is likely to buy further ADSs and/or H Shares, and/or hold or sell its ADSs and/or H Shares, after the listing of the H Shares on the Stock Exchange. Such allocation is intended to result in a distribution of the H Shares or ADSs on a basis which would lead to the establishment of a solid shareholder base to the benet of the Company and its shareholders as a whole. Prospective professional and institutional investors will be required to specify the number of ADSs and/or H Shares under the Asia Oering, the US Oering and the Europe Oering they would be prepared to acquire either at dierent prices or at a particular price. This process, known as ""bookbuilding'', is expected to continue up to, and to cease on or before, the latest day for lodging applications under the Hong Kong Public Oering. The Corporate Placing Shares will be allocated in their entirety to the Corporate Investors. Allocation of Hong Kong Public Oering Shares to investors under the Hong Kong Public Oering will be based solely on the level of valid applications received under the Hong Kong Public Oering. The 205

STRUCTURE OF THE GLOBAL OFFERING

basis of allocation may vary, depending on the number of Hong Kong Public Oering Shares validly applied for by applicants, but, subject to that, will be made strictly on a pro-rata basis, although the allocation of Hong Kong Public Oering Shares could, where appropriate, consist of balloting, which would mean that some applicants may receive a higher allocation than others who have applied for the same number of Hong Kong Public Oering Shares, and those applicants who are not successful in the ballot may not receive any Hong Kong Public Oering Shares. In connection with the Global Oering, each of the Company and CNPC have granted Overallotment Options to the Asia Underwriters, the US Underwriters and the Europe Underwriters exercisable by the Global Coordinators. Pursuant to the Over-allotment Options, the Global Coordinators have the right exercisable up to 30 days after the Price Determination Date, to require (i) the Company to allot and issue up to an aggregate of 2,373,626,000 additional H Shares and (ii) CNPC to sell up to an aggregate of 263,736,000 additional H Shares (all or a portion of which may be deliverable in the form of ADSs) at the same price per H Share under the Asia Oering, the US Oering and the Europe Oering, solely to cover over-allocations in the Asia Oering, the US Oering and the Europe Oering, if any. The Global Coordinators may also cover such over-allocations by purchasing H Shares in the secondary market or by a combination of purchases in the secondary market and exercise of the Over-allotment Options, either in part or in full. Any such secondary market purchase will be made in compliance with all applicable laws, rules and regulations. If the Over-allotment Options are exercised in full, the additional H Shares will represent approximately 1.48 per cent. of the Company's enlarged share capital immediately following the completion of the Global Oering and the exercise of the Overallotment Options. In the event that the Over-allotment Options are exercised, a press announcement will be made. The 17,582,418,000 H Shares initially being oered in the Global Oering will represent approximately 10.00 per cent. of the Company's enlarged share capital immediately after completion of the Global Oering, without taking into account the exercise of the Over-allotment Options. If the Overallotment Options are exercised in full, the H Shares will represent approximately 11.35 per cent. of the enlarged share capital of the Company immediately after completion of the Global Oering and the exercise of the Over-allotment Options. The requisite PRC governmental approvals, including the approval of the CSRC, in respect of the Global Oering have been obtained. THE HONG KONG PUBLIC OFFERING The Hong Kong Public Oering comprises the oering by the Company, of initially 791,208,000 H Shares for subscription by, and the oering by CNPC of initially 87,914,000 H Shares for sale to, the public in Hong Kong in each case at the Oer Price, representing approximately 5 per cent. of the total number of H Shares initially available under the Global Oering. The 879,122,000 H Shares initially comprised in the Hong Kong Public Oering will (subject to agreement as to pricing and the other conditions described in the section headed ""Conditions of the Global Oering'') be oered through the Hong Kong Underwriters. Subject to the reallocation of H Shares between (i) the Asia Oering, the US Oering and the Europe Oering and (ii) the Hong Kong Public Oering, the Hong Kong Public Oering Shares will represent approximately 0.5 per cent. of the Company's issued share capital immediately after completion of the Global Oering, assuming that the Over-allotment Options are not exercised. The total number of H Shares available under the Hong Kong Public Oering (after taking account of any reallocation referred to below) is to be divided into two pools for allocation purposes: pool A and 206

STRUCTURE OF THE GLOBAL OFFERING

pool B. The H Shares in pool A will be allocated on an equitable basis to applicants who have applied for H Shares with an aggregate price of HK$5 million (excluding the brokerage and the Stock Exchange transaction levy payable) or less. The H Shares in pool B will be allocated on an equitable basis to applicants who have applied for H Shares with an aggregate price of more than HK$5 million (excluding the brokerage and the Stock Exchange transaction levy payable). Investors should be aware that applications in pool A and applications in pool B may receive dierent allocation ratios. If H Shares in one (but not both) of the pools are undersubscribed, the surplus H Shares will be transferred to the other pool to satisfy demand in the pool and be allocated accordingly. For the purpose of this paragraph only, the ""price'' for H Shares means the price payable on application therefor (without regard to the Oer Price as nally determined). Applicants can only receive an allocation of H Shares from either pool A or pool B but not from both pools. Multiple or suspected multiple applications and any application for more than 50 per cent. of the 879,122,000 H Shares initially comprised in the Hong Kong Public Oering (that is, 439,561,000 H Shares) are liable to be rejected. Each applicant under the Hong Kong Public Oering will also be required to give an undertaking and conrmation in the application form submitted by him that he and any person(s) for whose benet he is making the application have not applied for or indicated and will not apply for or indicate an interest for any ADSs and/or H Shares under the Asia Oering, the US Oering and the Europe Oering, and such applicant's application is liable to be rejected if the said undertaking and/or conrmation is breached and/or untrue (as the case may be). The listing of the H Shares on the Stock Exchange is sponsored by the Sponsors. Applicants under the Hong Kong Public Oering are required to pay, on application, the maximum price of HK$1.49 per H Share in addition to any brokerage or Stock Exchange transaction levy payable on each H Share. If the Oer Price, as nally determined in the manner described in ""Structure of the Global Oering Pricing of the Global Oering'' below, is less than the maximum price of HK$1.49, appropriate refund payments (including the brokerage and the Stock Exchange transaction levy attributable to the surplus application monies) will be made to successful applicants, without interest. Further details are set out below in the section headed ""How to Apply For Hong Kong Public Oering Shares'' in this prospectus. The allocation of the H Shares between (i) the Hong Kong Public Oering and (ii) the Asia Oering, the US Oering and the Europe Oering is subject to adjustment. If the number of H Shares validly applied for under the Hong Kong Public Oering represents (i)3 times or more but less than 8 times, (ii)8 times or more but less than 10 times, (iii)10 times or more but less than 12 times, (iv)12 times or more but less than 14 times, (v)14 times or more but less than 16 times or (vi)16 times or more of the number of H Shares initially available under the Hong Kong Public Oering, then H Shares will be reallocated to the Hong Kong Public Oering from the Asia Oering, the US Oering and the Europe Oering, so that the total number of H Shares available under the Hong Kong Public Oering will be 1,318,684,000 H Shares (in the case of (i)), 1,758,244,000 H Shares (in the case of (ii)), 2,197,804,000 H Shares (in the case of (iii)), 2,637,364,000 H Shares (in the case of (iv)), 3,076,926,000 H Shares (in the case of (v)) and 3,516,486,000 H shares (in the case of (vi)) representing approximately 7.5 per cent., 10 per cent., 12.5 per cent., 15 per cent., 17.5 per cent. and 20 per cent. of the H Shares initially available under the Global Oering, respectively. In each case, the additional H Shares reallocated to the Hong Kong Public Oering will be allocated between pool A and pool B and the number of H Shares allocated to the Asia Oering, the US Oering and the Europe Oering will be correspondingly reduced. The Corporate Placing Shares will not be aected by such reallocations. References in this prospectus to applications, application forms, application monies or the procedure for application relate solely to the Hong Kong Public Oering.

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THE ASIA OFFERING, THE US OFFERING AND THE EUROPE OFFERING Subject to reallocation as described in ""Structure of the Global Oering The Hong Kong Public Oering'' above, the Asia Oering, the US Oering and the Europe Oering will consist of an aggregate of 167,032,960 ADSs, representing 16,703,296,000 H Shares. The 61,538,460 ADSs (which may, at the option of the investors, be delivered in the form of H Shares) being oered under the Asia Oering include the Corporate Placing Shares which are being placed with the Corporate Investors and BP Amoco p.l.c. pursuant to the Corporate Placing. The US Oering includes a public oering in the United States registered under the US Securities Act and the prospectus with respect to the US Oering is part of a registration statement led with the United States Securities and Exchange Commission under the US Securities Act. Allocation of ADSs and/or H Shares to placees under the Asia Oering, the US Oering and the Europe Oering will be eected in accordance with the ""book-building'' process described below in the section headed ""Structure of the Global Oering Pricing of the Global Oering''. The Over-allotment Options (which have been granted in respect of a total 26,373,620 ADSs, representing 2,637,362,000 H Shares) have been granted to the Asia Underwriters, as to 9,670,340 ADSs, representing 967,034,000 H Shares, to the US Underwriters, as to 7,032,940 ADSs, representing 703,294,000 H Shares, and to the Europe Underwriters, as to the remaining 9,670,340 ADSs, representing 967,034,000 H Shares, in each case to cover over-allocations, if any, under the relevant oering (including H Shares or ADSs to be issued or sold to BP Amoco p.l.c. pursuant to any and all exercises of the Over-allotment Options described in the section headed ""Structure of the Global Oering The Corporate Placing'' below) and for other transactions. ADSs being oered in the Asia Oering, the US Oering and the Europe Oering may, however, be reallocated between such oerings at the discretion of the Global Coordinators. With respect to the Asia Oering, the US Oering and the Europe Oering, H Shares may, at the option of investors, be delivered in lieu of ADSs (including with respect to ADSs issued upon exercise of the Over-allotment Options). Completion of each of the Hong Kong Public Oering, the Asia Oering, the US Oering and the Europe Oering is subject to the conditions as set out in the section headed ""Structure of the Global Oering Conditions of the Global Oering''. THE CORPORATE PLACING As part of the Asia Oering, the Company and CNPC have entered into the Corporate Placing Agreements pursuant to which the Corporate Investors have severally and conditionally agreed to purchase an aggregate of US$350 million of Corporate Placing Shares. The closing of the purchases contemplated by the Corporate Placing Agreements will occur as part of the closing of the Asia Oering. The Corporate Investors will purchase the Corporate Placing Shares under the Corporate Placing at the same price as is payable by other investors which acquire H Shares or ADSs (as the case may be) under the Asia Oering, subject (except as set forth below) to the same terms and conditions as are generally applicable to the Asia Oering. The sale of H Shares or ADSs to the Corporate Investors will be underwritten solely by the Global Coordinators and will not be aected by any reallocation of H Shares from the Asia Oering to the Hong Kong Public Oering. Each of the Corporate Investors has also undertaken to the Company and the Global Coordinators, that it will not, except with the prior written consent of the Global Coordinators, at any time during the period of six months following the date of commencement of dealings in the Corporate Placing Shares on the Stock Exchange (the ""lock-up period''), sell, mortgage, create, transfer or otherwise dispose of any legal or benecial interest (including by the creation of an option) in the H Shares purchased by it 208

STRUCTURE OF THE GLOBAL OFFERING

pursuant to the Corporate Placing, and any shares or other securities of the Company which are derived therefrom (pursuant to any rights issue, capitalisation issue or other form of capital reorganisation) (collectively, ""the relevant shares''), provided that a Corporate Investor may transfer the relevant shares to a wholly-owned subsidiary bound by the same restrictions on disposal, and on condition that such subsidiary must transfer the relevant shares back to that Corporate Investor or another wholly-owned subsidiary of that Corporate Investor, before it ceases to be a wholly-owned subsidiary of that Corporate Investor. Since the Corporate Placing Shares do not constitute a substantial percentage of the share capital of the Company, the lock-up arrangements will not have any negative impact on the ability of the Company to maintain the public oat required under the Listing Rules. After the expiration of the lockup period, the Corporate Investors are not contractually bound to follow any particular arrangements as to how the Corporate Placing Shares may be disposed of. The Asia Oering also includes the issue or sale by the Company and CNPC of 3,516,484,000 H Shares, representing 20 per cent. of all of the H Shares oered in the Global Oering, to BP Amoco p.l.c. or a wholly-owned subsidiary of BP Amoco p.l.c. (either or both together, ""BP Amoco'') under the Asia Oering (except for BP Amoco Over-allotment Shares (as dened below) which shall be sold or issued as the case may be, under the Asia Oering and/or the Europe Oering). BP Amoco may elect to receive ADSs instead of H Shares. BP Amoco will purchase such H Shares (or the ADSs representing such H Shares) at the same price as is payable by other investors which acquire ADSs or H Shares under the Asia Oering or the Europe Oering, as the case may be. BP Amoco has also agreed to purchase the number of H Shares which would constitute 20 per cent. of all of the H Shares issued or sold, as the case may be, pursuant to any and all exercises of the Overallotment Options (for greater certainty, including all of such H Shares issued to BP Amoco (the ""BP Amoco Over-allotment Shares'')). The maximum value of ADSs or H Shares to be purchased by BP Amoco is US$1,000 million. The ADSs or H Shares issued and sold to BP Amoco will be underwritten solely by the Global Coordinators. In connection with any subsequent issue for cash consideration of H Shares, or other securities convertible, exchangeable into or representing H Shares by the Company, for a period of ve years following the commencement of dealings of the H Shares on the Stock Exchange, BP Amoco has, subject to certain restrictions, the right to purchase the number of these H Shares or other securities that would allow BP Amoco to maintain a certain percentage shareholding in the capital of the Company which is based on the number of H Shares it acquires in this Global Oering. The ADSs or H Shares to be issued or sold to BP Amoco will not be aected by any reallocation of H Shares to the Hong Kong Public Oering. BP Amoco p.l.c. has agreed that without the consents of the Company and the Global Coordinators, it will not sell, transfer or otherwise dispose of such ADSs or H Shares for 12 months following the commencement of dealings of H Shares on the Stock Exchange and, after the expiry of such 12-month period, BP Amoco shall rst consult with the Company before the disposal of any such ADSs or H Shares and BP Amoco shall use all reasonable endeavours to ensure that any such disposal will not create a disorderly or false market. The Corporate Placing is subject to a number of conditions including those conditions as set out in the section headed ""Structure of the Global Oering Conditions of the Global Oering''.

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CORPORATE INVESTORS Set out below is a brief description of BP Amoco p.l.c. and the Corporate Investors and the value of H Shares or ADSs to be purchased by each of them pursuant to the Corporate Placing: BP Amoco p.l.c. has agreed to purchase (either directly or through a wholly-owned subsidiary incorporated outside of the United States and with its principal place of business outside of the United States) 3,516,484,000 H Shares and the number of H Shares which would constitute 20 per cent. of all of the H Shares issued or sold, as the case may be, pursuant to any and all exercises of the Over-allotment Options (including all of such H Shares issued or sold to BP Amoco p.l.c.). BP Amoco p.l.c. is the parent company of an integrated petroleum and petrochemical group whose main businesses are exploration and production, rening and marketing, chemicals and gas and power. Cheung Kong (Holdings) Limited (""Cheung Kong'') has agreed to purchase (either directly or through a wholly-owned subsidiary) US$66,666,667 of Corporate Placing Shares. The principal activities of Cheung Kong are investment holding and project management. Its subsidiaries are active in the eld of development and investment, real estate agency and management and investment in securities. Hutchison Whampoa Limited (""Hutchison'') has agreed to purchase (either directly or through a wholly-owned subsidiary) US$133,333,333 of Corporate Placing Shares. Hutchison is a holding company with diversied operations in property development and holdings, ports and related services, retail and manufacturing, telecommunications, energy, nance, investment and other services. Chow Tai Fook Nominee Limited (""Chow Tai Fook'') has agreed to purchase (either directly or through a wholly-owned subsidiary) US$50,000,000 of Corporate Placing Shares. Chow Tai Fook is an investment holding company controlled by the Cheng family. Chow Tai Fook is the controlling shareholder of New World Development Co. Ltd. Sun Hung Kai Properties Limited (""Sun Hung Kai'') has agreed to purchase (either directly or through a wholly-owned subsidiary) US$100,000,000 of Corporate Placing Shares. Sun Hung Kai is principally engaged in property development and investment. It also engages in property-related businesses, including construction, property management, hotel ownership and management and cinemas. In addition, Sun Hung Kai engages in information technology, e-commerce businesses, nancial services, insurance, telecommunications, infrastructure development and transportation. SELLING SHAREHOLDER CNPC is oering a total of 1,758,242,000 H Shares for sale in the Global Oering, to be allocated to the Hong Kong Public Oering, the Asia Oering, the US Oering and the Europe Oering as to 87,914,000 H Shares, 615,384,000 H Shares, 439,560,000 H Shares and 615,384,000 H Shares, respectively. Such H Shares may be deposited with the Depositary and represented by ADSs. The sale of all such H Shares and ADSs by CNPC has been approved by the SETC and the CSRC in accordance with the consent of the State Council. In addition, CNPC has also granted the Over-allotment Options to the Asia Underwriters, the US Underwriters and the Europe Underwriters to require CNPC to sell, up to an aggregate of 263,736,000 additional H Shares in the Global Oering, solely for the purposes of covering over-allocations in the Asia Oering, the US Oering and the Europe Oering, if any (including H Shares or ADSs to be issued or sold to BP Amoco p.l.c. pursuant to any and all exercises of the Over-allotment Options as described in the section headed ""Structure of the Global Oering The Corporate Placing''). As the granting of the Over-allotment Option by CNPC is an integral part of the Global Oering and in order to cover over-allocations in the Asia Oering, the US Oering and the Europe Oering, the Stock Exchange has granted a waiver from compliance with Rule 10.07(1) of the 210

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Listing Rules in relation to the sale of H Shares by CNPC in the event that the Over-allotment Options are exercised. CNPC is the sole promoter and the controlling shareholder of the Company. As of 5 November 1999, the date of incorporation of the Company, CNPC held 160,000,000,000 Domestic Shares, representing the entire issued share capital of the Company. Pursuant to an approval issued by the CSRC on 14 February 2000, CNPC was exempted from the provision under the Company Law requiring promoters to hold their shares for at least three years from the date on which those shares were issued. Immediately following the completion of the Global Oering (but without taking into account the exercise of the Over-Allotment Options), CNPC will hold 90.00 per cent. of the issued share capital of the Company. PRICING OF THE GLOBAL OFFERING The oer price of the ADSs and the Oer Price are expected to be xed by agreement between the Global Coordinators, on behalf of the Underwriters, the Company and CNPC on the Price Determination Date, when market demand for the H Shares and the ADSs will be determined. The Price Determination Date is expected to be on or around 30 March 2000, and in any event, no later than 5 April 2000. The Oer Price per H Share under the Hong Kong Public Oering will be based on the Hong Kong dollar price per H Share under the Asia Oering, the US Oering and the Europe Oering, as determined by the Global Coordinators on behalf of the Underwriters, the Company and CNPC. The Oer Price per H Share under the Hong Kong Public Oering will be xed at the Hong Kong dollar amount which, when increased by the 1 per cent. brokerage and 0.011 per cent. Stock Exchange transaction levy payable thereon, is (subject to any necessary rounding) eectively equivalent to the Hong Kong dollar price per H Share under the Asia Oering, the US Oering and the Europe Oering. The transaction levy otherwise payable by investors in the Asia Oering, the US Oering and the Europe Oering on H Shares purchased by them will be paid by the Company and CNPC. The Oer Price will not be more than HK$1.49 per H Share and is expected to be not less than HK$1.23 per H Share. The Oer Price will fall within the Oer Price range as stated in this prospectus unless otherwise announced, as further explained below, not later than the morning of the last day for lodging applications under the Hong Kong Public Oering. The Global Coordinators, on behalf of the Underwriters, may, where considered appropriate, based on the level of interest expressed by prospective professional and institutional investors during the book-building process, and with the consent of the Company and CNPC, reduce the indicative Oer Price range below that stated in this prospectus at any time on or prior to the morning of the last day for lodging applications under the Hong Kong Public Oering. In such a case, the Company and CNPC will, as soon as practicable following the decision to make such reduction, and in any event not later than the morning of the day which is the last day for lodging applications under the Hong Kong Public Oering, cause there to be published in the South China Morning Post and the Hong Kong Economic Times notices of the reduction in the indicative Oer Price range. Upon issue of such a notice, the revised Oer Price range will be nal and conclusive and the Oer Price, if agreed upon with the Company and CNPC, will be xed within such revised Oer Price range. Such notice will also include conrmation or revision, as appropriate, of the working capital statement and the prot estimate for the year ended 31 December 1999 and the issue statistics as currently set out in the section headed ""Summary'' in this prospectus, and any other nancial information which may change as a result of such reduction. If applications for Hong Kong Public Oering Shares have been submitted prior to the day which is the last day for lodging applications under the Hong Kong Public Oering, then even if the Oer Price range is so reduced, such 211

STRUCTURE OF THE GLOBAL OFFERING

applications cannot be subsequently withdrawn. In the absence of any notice being published in the South China Morning Post and the Hong Kong Economic Times of a reduction in the indicative Oer Price range stated in this prospectus on or before the morning of the last day for lodging applications under the Hong Kong Public Oering, the Oer Price, if agreed upon with the Company and CNPC, will under no circumstances be set outside the Oer Price range as stated in this prospectus. The net proceeds from the Global Oering accruing to the Company (after deduction of underwriting fees and estimated expenses payable by the Company in relation to the Global Oering, assuming that the Over-allotment Options are not exercised and an Oer Price of HK$1.36 per H Share, being the mid-point of the proposed Oer Price range of HK$1.23 to HK$1.49), are estimated to be approximately HK$20,593 million (HK$23,722 million, if the Over-allotment Options are exercised in full). The net proceeds from the Global Oering accruing to CNPC (after deduction of underwriting fees and estimated expenses payable by CNPC in relation to the Global Oering, assuming that the Overallotment Options are not exercised and an Oer Price of HK$1.36 per H Share, being the mid-point of the proposed Oer Price range of HK$1.23 to HK$1.49), are estimated to be approximately HK$2,319 million (HK$2,667 million, if the Over-allotment Options are exercised in full). Price payable on application Investors under the Hong Kong Public Oering have to pay the Oer Price of HK$1.49 (being the maximum price in the proposed Oer Price range) plus 1 per cent. brokerage and a 0.011 per cent. Stock Exchange transaction levy, constituting a total of HK$3,010.13 per board lot of 2,000 H Shares. If the Oer Price as nally determined is less than HK$1.49 per H Share, appropriate refund payments (including the brokerage and the Stock Exchange transaction levy attributable to the surplus application monies) will be made to successful applicants, without interest. Details of the procedure for refund are set out in the section headed ""How to Apply for Hong Kong Public Oering Shares Despatch/Collection of Share Certicates and Refund Cheques''. CONDITIONS OF THE GLOBAL OFFERING Acceptance of all applications for H Shares pursuant to the Global Oering will be conditional on: (i) the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the H Shares being oered pursuant to the Global Oering (including the additional H Shares which may be made available pursuant to the exercise of the Over-allotment Options) (subject only to allotment); and the obligations of the Underwriters under each of the respective Underwriting Agreements becoming and remaining unconditional which requires, amongst others, that the Oer Price be agreed and the Price Determination Agreement be entered into and becoming unconditional (including, if relevant, following the waiver of any conditions by the Global Coordinators on behalf of the Underwriters) and such obligations not having been terminated in accordance with the terms of the respective agreements prior to 6:00 a.m. on the date on which dealings in the H Shares in the Stock Exchange are to commence,

(ii)

in each case on or before the dates and times specied in the respective Underwriting Agreements (unless and to the extent such conditions are validly waived on or before such dates and times) and in any event not later than 26 April 2000. 212

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If, for any reason, the Price Determination Agreement is not entered into, the Global Oering will not proceed. The consummation of each of the Hong Kong Public Oering, the Asia Oering, the US Oering and the Europe Oering is conditional upon, among other things, the other oerings becoming unconditional and not having been terminated in accordance with their respective terms. If the above conditions are not fullled or waived prior to the times and dates specied, the Global Oering will lapse and the Stock Exchange will be notied immediately. Notice of the lapse of the Hong Kong Public Oering will be caused to be published by the Company in the South China Morning Post and the Hong Kong Economic Times on the next day following such lapse. In such eventuality, all application monies will be returned, without interest, on the terms set out in the section headed ""How to Apply for Hong Kong Public Oering Shares Despatch/Collection of Share Certicates and Refund Cheques''. In the meantime, all application monies will be held in (a) separate bank account(s) with the receiving bankers or other licensed bank(s) in Hong Kong.

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WHICH APPLICATION FORM TO USE Use a white application form if you want the H Shares issued in your own name. Use a yellow application form if you want the H Shares issued in the name of HKSCC Nominees Limited and deposited directly into CCASS for credit to your investor participant stock account or your designated CCASS participant's stock account.
Note: The H Shares are not available to existing benecial owners of Shares in the Company, the Directors, Supervisors or chief executive of the Company, or associates of any of them (as ""associates'' is dened in the Listing Rules) or to legal or natural persons of the PRC (other than Hong Kong, Macau and Taiwan) or United States persons (as dened in the Regulation S under the US Securities Act).

WHERE TO COLLECT THE APPLICATION FORMS You can collect a white application form and a prospectus from: Any member of The Stock Exchange of Hong Kong Limited
Goldman Sachs (Asia) L.L.C. 68th Floor, Cheung Kong Centre 2 Queen's Road Central Central Hong Kong BOCI Asia Limited 10th Floor Bank of China Building 1 Garden Road Hong Kong Celestial Capital Limited 22nd Floor The Center 99 Queen's Road Central Hong Kong Hang Seng Securities Limited Room 1601 Hang Seng Building 77 Des Voeux Road Central Hong Kong Ka Wah Capital Limited 8th Floor Ka Wah Bank Centre 232 Des Voeux Road Central Hong Kong China International Capital Corporation (Hong Kong) Limited Room 4302 Central Plaza 18 Harbour Road Wanchai, Hong Kong HSBC Investment Bank Asia Limited Level 15 HSBC Building 1 Queen's Road Central Hong Kong Core Pacic-Yamaichi International (H.K.) Limited 30th Floor Two Pacic Place 88 Queensway Hong Kong ICEA Capital Limited 42nd Floor Jardine House 1 Connaught Place Central Hong Kong Tai Fook Securities Company Limited 25th Floor New World Tower 16-18 Queen's Road Central Hong Kong

214

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Vickers Ballas Capital Limited 19th Floor Far East Finance Centre 16 Harcourt Road Admiralty Hong Kong Worldsec Corporate Finance Limited 11th Floor Bank of America Tower 12 Harcourt Road Central Hong Kong

or any of the following branches and sub-branches of Bank of China, Hang Seng Bank Limited and Standard Chartered Bank: Bank of China Hong Kong Island: Hong Kong Branch Central Sub-branch Wanchai Sub-branch North Point Sub-branch Kowloon: Tsim Sha Tsui Sub-branch Yaumatei Sub-branch Kwun Tong Sub-branch Lai Chi Kok Sub-branch New Territories: Tsuen Wan Sub-branch Shatin Sub-branch 3rd Floor, 1 Garden Road, Central Li Po Chun Chambers, 189 Des Voeux Road Central 395 Hennessy Road, Wanchai Ground Floor, Roca Centre, 464 King's Road, North Point Ground Floor, Houston Centre, 63 Mody Road, Tsim Sha Tsui 471 Nathan Road, Yaumatei 55 Hoi Yuen Road, Kwun Tong Unit 1, Ground Floor, Kowloon Plaza, 485 Castle Peak Road 167 Castle Peak Road, Tsuen Wan Ground Floor, Lucky Plaza, Wang Pok Street, Shatin

Hang Seng Bank Limited Hong Kong Island: Head Oce Central District Branch Causeway Bay Branch Wanchai Branch United Centre Branch Kowloon Main Branch Tsimshatsui Branch Kwun Tong Branch Chung On Street Branch Shatin Branch 83 Des Voeux Road, Central 2 D'Aguilar Street 28 Yee Wo Street 200 Hennessy Road Shop 1028 First Floor, United Centre 618 Nathan Road 18 Carnarvon Road 70 Yue Man Square 38 Chung On Street Shop No. 18 Lucky Plaza

Kowloon:

New Territories:

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HOW TO APPLY FOR HONG KONG PUBLIC OFFERING SHARES

Standard Chartered Bank Hong Kong Island: The Landmark Branch Des Voeux Road Branch CIG Building Branch Causeway Bay Branch Taikoo Place Branch Hennessy Road Branch Kowloon: Mongkok Bank Centre Branch Tsimshatsui Branch Cheung Sha Wan Branch Kwun Tong Branch New Territories: Tsuen Wan Branch The Landmark, 15 Queen's Road, Central Standard Chartered Bank Building, 4-4a Des Voeux Road, Central Shop B, Ground Floor CIG Building, 141 Des Voeux Road, Central 1 Sugar Street, Causeway Bay Ground Floor, 969 King's Road, Quarry Bay 399, Hennessy Road, Wanchal Bank Centre, 630-636 Nathan Road, Mongkok 10 Granville Road, Tsimshatsui 828 Cheung Sha Wan Road, Cheung Sha Wan 88-90 Fu Yan Street, Kwun Tong Basement First Floor, Emperor Plaza, 263 Sha Tsui Road, Tsuen Wan

You can collect a yellow application form and a prospectus from: The service counter of Hongkong Clearing at 2nd Floor, Vicwood Plaza, 199 Des Voeux Road Central, Hong Kong, or The Investor Service Centre of Hongkong Clearing at Room 1901, Chinachem Exchange Square, 1 Hoi Wan Street, Quarry Bay, Hong Kong. HOW TO COMPLETE THE APPLICATION FORM There are detailed instructions on each application form. You should read these instructions carefully. If you do not follow the instructions your application may be rejected and returned by ordinary post together with the accompanying cheque(s) or banker's cashier order(s) to you (or the rst-named applicant in the case of joint applicants) at your own risk at the address stated in the application form. You should note that by signing on the application form: (i) you agree with the Company and each shareholder of the Company, and the Company agrees with each shareholder, to observe and comply with the Company Law, the Special Regulations, and the Articles of Association;

(ii) you agree with the Company, each shareholder, Director, Supervisor, manager and officer of the Company, and the Company acting for itself and for each Director, Supervisor, manager and officer of the Company agrees with each shareholder to refer all differences and claims arising from the Articles of Association or any rights or obligations conferred or imposed by the Company Law or other relevant laws and administrative regulations concerning the affairs of the Company to arbitration in accordance with the Articles of Association, and any reference to arbitration shall be deemed to authorise the arbitration tribunal to conduct hearings in open session and to publish its award, which arbitration shall be final and conclusive; (iii) you agree with the Company and each shareholder of the Company that H Shares in the Company are freely transferable by the holder thereof; and 216

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(iv) you authorise the Company to enter into a contract on your behalf with each Director and ocer of the Company whereby such Directors and ocers undertake to observe and comply with their obligations to shareholders as stipulated in the Articles of Association. If your application is made through a duly authorised attorney, the Company and the Global Coordinators as its agent may accept it at their discretion, and subject to any conditions they think t, including evidence of the authority of your attorney. HOW MANY APPLICATIONS MAY YOU MAKE You may make more than one application for the H Shares only if: You are a nominee, in which case you may lodge more than one application in your own name on behalf of dierent owners. In the box on the application form marked ""For nominees'' you must include:

an account number; or some other identication code

for each benecial owner. If you do not include this information, the application will be treated as being for your benet. Otherwise, multiple applications are not allowed. All of your applications will be rejected as multiple applications if you, or you and your joint applicant(s) together:

make more than one application on a white or yellow application form; or apply on one white or yellow application form for more than 50 per cent. of the H Shares initially being oered for public subscription under the Hong Kong Public Oering.

All of your applications will also be rejected as multiple applications if more than one application is made for your benet. If an application is made by an unlisted company and

the only business of that company is dealing in securities; and you exercise statutory control over that company,

then the application will be treated as being for your benet. Unlisted company means a company with no equity securities listed on the Stock Exchange. Statutory control means you:

control the composition of the board of directors of the company; or control more than half of the voting power of the company; or hold more than half of the issued share capital of the company (not counting any part of it which carries no right to participate beyond a specied amount in a distribution of either prots or capital).

HOW MUCH ARE THE HONG KONG PUBLIC OFFERING SHARES The maximum Oer Price is HK$1.49 per H Share. You must also pay brokerage of 1 per cent. and the Stock Exchange transaction levy of 0.011 per cent. This means that for every 2,000 H Shares you will 217

HOW TO APPLY FOR HONG KONG PUBLIC OFFERING SHARES

pay HK$3,010.13. The application forms have tables showing the exact amount payable for multiples of H Shares. You must pay the maximum Oer Price, brokerage and the transaction levy in full when you apply for the H Shares. You must pay the amount payable upon application for H Shares by a cheque or a banker's cashier order in accordance with the terms set out in the application form. If your application is successful, brokerage is paid to members of the Stock Exchange, and the transaction levy is paid to the Stock Exchange. If the Oer Price as nally determined is less than HK$1.49 per H Share, appropriate refund payments (including the brokerage and the Stock Exchange transaction levy attributable to the surplus application monies) will be made to successful applicants, without interest. Details of the procedure for refund are set out below in the section headed ""How to Apply for Hong Kong Public Oering Shares Despatch/Collection of Share Certicates and Refund Cheques''. MEMBERS OF THE PUBLIC TIME FOR APPLYING FOR HONG KONG PUBLIC OFFERING SHARES Completed white or yellow application forms, with payment attached, must be lodged by 12 noon on Thursday, 30 March 2000, or, if the application lists are not open on that day, then by 12 noon on the next day the lists are open. Your completed application form, with payment attached, should be deposited in the special collection boxes provided at any of the branches or sub-branches of Bank of China, Hang Seng Bank Limited and Standard Chartered Bank listed under the section headed ""How to Apply for Hong Kong Public Oering Shares Where to Collect The Application Forms'' at the following times:
Monday, Tuesday, Wednesday, Thursday, 27 28 29 30 March March March March 2000 2000 2000 2000 9 9 9 9 a.m. a.m. a.m. a.m. to to to to 4 p.m. 4 p.m. 4 p.m. 12 noon

The application lists will be open from 11:45 a.m. to 12 noon on Thursday, 30 March 2000. No proceedings will be taken on applications for the H Shares and no allotment of any such H Shares will be made until the closing of the application lists. No allotment of any of the H Shares will be made later than 26 April 2000. EFFECT OF BAD WEATHER ON THE OPENING OF THE APPLICATION LISTS The application lists will not open if there is:

a tropical cyclone warning signal number 8 or above, or a ""black'' rainstorm warning

in force at any time between 9 a.m. and 12 noon on Thursday, 30 March 2000. Instead they will open between 11:45 a.m. and 12 noon on the next business day which does not have either of those warnings in force at any time between 9 a.m. and 12 noon. Business day means a day that is not a Saturday, Sunday or a public holiday in Hong Kong. 218

HOW TO APPLY FOR HONG KONG PUBLIC OFFERING SHARES

CIRCUMSTANCES IN WHICH YOU WILL NOT BE ALLOTTED HONG KONG PUBLIC OFFERING SHARES Full details of the circumstances in which you will not be allotted H Shares are set out in the notes attached to the application forms, and you should read them carefully. You should note in particular the following two situations in which H Shares will not be allotted to you:

If your application is revoked: By completing an application form you agree that you cannot revoke your application on or before Wednesday, 26 April 2000. This agreement will take eect as a collateral contract with the Company, and will become binding when you lodge your application form. This collateral contract will be in consideration of the Company agreeing that it will not oer any H Shares to any person on or before Wednesday, 26 April 2000 except by means of one of the procedures referred to in this prospectus. For this purpose, acceptance of applications which are not rejected will be constituted by notication in the press of the results of allocation, and where such basis of allocation is subject to certain conditions or provides for allocation by ballot, such acceptance will be subject to the satisfaction of such conditions or results of the ballot respectively.

You may only revoke your application on or before Wednesday, 26 April 2000 if a person responsible for this prospectus under section 40 of the Companies Ordinance gives a public notice under that section which excludes or limits the responsibility of that person for this prospectus. If any supplement to the prospectus is issued, applicant(s) who have already submitted an application may or may not (depending on the information contained in the supplement) be notied that they can withdraw their applications. If applicant(s) have not been so notied, or if applicant(s) have been notied but have not withdrawn their applications in accordance with the procedure to be notied, all applications that have been submitted remain valid and may be accepted. Subject to the above, an application once made is irrevocable and applicants shall be deemed to have applied on the basis of the prospectus as supplemented. If your application has been accepted, it cannot be revoked.

If the allotment of Hong Kong Public Oering Shares is void: Your allotment of Hong Kong Public Oering Shares will be void if the Listing Committee of the Stock Exchange does not grant permission to list the H Shares either:

within 3 weeks from the closing of the application lists; or within a longer period of up to 6 weeks if the Listing Committee of the Stock Exchange noties the Company of that longer period within 3 weeks of the closing date of the application lists.

COMMENCEMENT OF DEALINGS IN THE HONG KONG PUBLIC OFFERING SHARES Dealings in the H Shares are expected to commence on Friday, 7 April 2000. The H Shares will be traded in board lots of 2,000 each. H SHARES WILL BE ELIGIBLE FOR CCASS If the Stock Exchange grants the listing of and permission to deal in the H Shares and the Company complies with the stock admission requirements of Hongkong Clearing, the H Shares will be accepted as eligible securities by Hongkong Clearing for deposit, clearance and settlement in CCASS with eect from the date of commencement of dealings in the H Shares on the Stock Exchange or on any other date 219

HOW TO APPLY FOR HONG KONG PUBLIC OFFERING SHARES

Hongkong Clearing chooses. Settlement of transactions between members of the Stock Exchange is required to take place in CCASS on the second business day after any trading day. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in eect from time to time. All necessary arrangements have been made for the H Shares to be admitted into CCASS. If you apply for Hong Kong Public Oering Shares using a yellow application form and your application is wholly or partially successful, your H Share certicates will be issued in the name of HKSCC Nominees Limited and deposited into CCASS for credit to your investor participant stock account or the stock account of your designated CCASS participant as instructed by you in your application form at the close of business on Wednesday, 5 April 2000, or under contingent situation, on any other date as shall be determined by Hongkong Clearing or HKSCC Nominees Limited. If you are applying through a designated CCASS participant (other than an investor participant):

for Hong Kong Public Oering Shares credited to the stock account of your designated CCASS participant (other than an investor participant), you can check the number of Hong Kong Public Oering Shares allotted to you with that CCASS participant.

If you are applying as an investor participant:

the Company expects to publish the results of investor participants' applications together with the results of the Hong Kong Public Oering in the newspapers on Wednesday, 5 April 2000. You should check against the announcement published by the Company and report any discrepancies to Hongkong Clearing before 5:00 p.m. on Wednesday, 5 April 2000 or such other date as shall be determined by Hongkong Clearing or HKSCC Nominees Limited. On Thursday, 6 April 2000 (the next day following the credit of the Hong Kong Public Oering Shares to your stock account), you can check your new account balance via the CCASS Phone System (under the procedures contained in Hongkong Clearing's ""An Operating Guide for Investor Participants'' in eect from time to time). Hongkong Clearing will also mail to you an Activity Statement showing the number of Hong Kong Public Oering Shares credited to your stock account.

DESPATCH/COLLECTION OF SHARE CERTIFICATES AND REFUND CHEQUES If an application is rejected, not accepted or accepted in part only, or if the Oer Price as nally determined is less than the initial price per H Share (excluding brokerage and Stock Exchange transaction levy thereon) paid on application, or if the conditions of the Global Oering are not fullled in accordance with the section headed ""Structure of the Global Oering Conditions of the Global Oering'' or if any application is revoked or any allotment pursuant thereto has become void, the application monies, or the appropriate portion thereof, together with the related brokerage and Stock Exchange transaction levy, will be refunded, without interest. It is intended that special eorts will be made to avoid any undue delay in refunding application monies where appropriate. No temporary document of title will be issued in respect of the H Shares. No receipt will be issued for sums paid on application but, subject as mentioned below, in due course there will be sent to you (or, in the case of joint applicants, to the rst-named applicant) by ordinary post, at your own risk, to the address specied on the application form: (a) (i) share certicate(s) for all the Hong Kong Public Oering Shares applied for, if the application is wholly successful; or (ii) share certicate(s) for the number of Hong Kong Public Oering Shares successfully applied for, if the application is partially successful 220

HOW TO APPLY FOR HONG KONG PUBLIC OFFERING SHARES

(except for wholly successful and partially successful applicants on yellow application forms whose share certicates will be deposited into CCASS as described above); and/or (b) refund cheque(s) crossed ""Account Payee Only'' in favour of the applicant (or, in the case of joint applicants, the rst-named applicant) for (i) the surplus application monies for the Hong Kong Public Oering Shares unsuccessfully applied for, if the application is partially unsuccessful; or (ii) all the application monies, if the application is wholly unsuccessful; and/or (iii) the dierence between the Oer Price and the initial price per H Share paid on application in the event that the Oer Price is less than the initial price per H Share paid on application, in each case including brokerage at the rate of 1 per cent. and a Stock Exchange transaction levy of 0.011 per cent. but without interest. Subject as mentioned below, refund cheques for surplus application monies (if any) in respect of wholly and partially unsuccessful applications and share certicates for successful applicants under white application forms are expected to be posted on or before Wednesday, 5 April 2000. The right is reserved to retain any share certicates and any surplus application monies pending clearance of cheque(s). If you apply for 500,000 H Shares or more, you may collect your refund cheque(s) (where applicable) and share certicate(s) (where applicable) from HKSCC Registrars Limited at 2nd Floor, Vicwood Plaza, 199 Des Voeux Road Central, Hong Kong from 9:00 a.m. to 1:00 p.m. on Wednesday, 5 April 2000. If you are an individual, you must not authorise any other person to make collection on your behalf. If you are a corporate applicant, you must attend by your authorised representative bearing a letter of authorisation from your corporation stamped with your company's chop. Both individuals and authorised representatives (if applicable) must produce, at the time of collection, evidence of identity acceptable to HKSCC Registrars Limited. If you do not collect your refund cheque(s) and share certicate(s), they will be despatched promptly thereafter to you by ordinary post to the address as specied in your application form at your own risk. If you apply for less than 500,000 H Shares, your H Shares certicate(s) will be sent to the address on your application form on Wednesday, 5 April 2000 by ordinary post and at your own risk.

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APPENDIX I

ACCOUNTANTS' REPORT

The following is the text of a report, prepared for the purpose of incorporation in this prospectus, received from the independent reporting accountants, PricewaterhouseCoopers, Certied Public Accountants, Hong Kong. As described in the section headed ""Documents Available for Inspection'' in Appendix XI, a copy of the accountants' report is available for inspection.

27 March 2000 The Directors PetroChina Company Limited Goldman Sachs (Asia) L.L.C. China International Capital Corporation (Hong Kong) Limited Dear Sirs We set out below our report on the nancial information relating to PetroChina Company Limited (the ""Company'') and its subsidiaries (hereinafter collectively referred to as the ""Group'') for inclusion in the prospectus of the Company dated 27 March 2000 (the ""Prospectus'') in connection with the placing and new issues of the shares of the Company. The Company was established in the People's Republic of China (the ""PRC'' or ""China'') on 5 November 1999 as a joint stock company with limited liability as a result of group restructuring (the ""Restructuring'') of China National Petroleum Corporation (""CNPC'') as described in section 1. As state-owned enterprises, CNPC and the companies now comprising the Group were not required to have their nancial statements audited by independent auditors except those indicated in section 2. The management accounts of these companies were prepared in accordance with the relevant accounting principles and nancial regulations applicable to PRC enterprises. For the purpose of this report, we have audited the nancial statements of the companies now comprising the Group for the three years ended 31 December 1998 and the nine months ended 30 September 1999 or from their respective dates of incorporation to 30 September 1999 where this is a shorter period (the ""Relevant Period''), in accordance with the Auditing Standards and Guidelines issued by the Hong Kong Society of Accountants. Our report has been prepared in accordance with the Auditing Guideline ""Prospectuses and the Reporting Accountant'' issued by the Hong Kong Society of Accountants. The summary of the combined results of the Group for the Relevant Period and the summary of the combined net assets of the Group as at 30 September 1999 set out below have been prepared based on the management accounts of the companies now comprising the Group, on the basis set out in section 2 below. Adjustments have been made, for the purpose of this report, to restate these management I-1

APPENDIX I

ACCOUNTANTS' REPORT

accounts to comply with International Accounting Standards (""IAS'') issued by the International Accounting Standards Committee. The directors of the Company are responsible for preparing the summaries of combined results of the Group for the Relevant Period and of the combined net assets of the Group as at 30 September 1999, which give a true and fair view. In preparing these summaries, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on these summaries. In our opinion, the summaries together with the notes thereon, for the purpose of this report, and prepared on the basis set out in section 2 below, give a true and fair view, in all material respects, of the combined results of the Group for the three years ended 31 December 1998 and for the nine months ended 30 September 1999 and of the combined net assets of the Group as at 30 September 1999. 1. ORGANISATION AND PRINCIPAL ACTIVITIES

PetroChina Company Limited was established in the PRC on 5 November 1999 as a joint stock company with limited liability as a result of a group restructuring of CNPC in preparation for the listing of the Company's shares on the New York Stock Exchange and the Hong Kong Stock Exchange. CNPC was established in 1988 to take over the onshore oil and gas exploration and production entities formerly under the administration of the Ministry of Petroleum Industry. In 1998, in accordance with the decisions made at the Ninth Session of the National People's Congress, the State Council approved a comprehensive restructuring plan for China's oil and gas industry to form two group companies. The principal goal of this restructuring was to eventually create two nationwide vertically integrated oil and gas companies. As part of the restructuring, which became eective on 1 June 1998, CNPC transferred to China Petrochemical Corporation (""Sinopec'') certain crude oil and natural gas production enterprises located in the eastern and coastal regions of China, and Sinopec transferred to CNPC certain reneries and petrochemical plants located in the northeastern, northern and western regions of China. In accordance with the restructuring agreement between CNPC and the Company eective as of 5 November 1999, the Company issued 160 billion shares in exchange for the assets and liabilities transferred to the Company by CNPC. The 160 billion shares were the initial registered capital of the Company with a par value of RMB 1.00 per share. Shareholder's rights are governed by the PRC Company Law which requires an increase in registered capital to be approved by the shareholder in general meeting and the relevant PRC Government and regulatory authorities. CNPC transferred to the Company certain of its assets, liabilities, and interests in China related to (i) the exploration, development and production of crude oil and natural gas, (ii) the rening, transportation, storage and marketing of crude oil and petroleum products, (iii) the production and sale of chemicals, and (iv) the transmission, marketing and sale of natural gas. The assets, liabilities and interests transferred by CNPC to the Company include (i) 13 crude oil and natural gas exploration and production enterprises and one exploration unit, (ii) 15 rening and petrochemical production enterprises, (iii) 21 marketing companies, (iv) one pipeline transmission company, (v) two research institutions, and (vi) production sharing contracts (collectively the ""Core Units''). CNPC retained ve chemical production facilities and certain other assets, liabilities and interests relating to its remaining business and operations, including units providing ancillary and support services, as well as certain domestic and all foreign subsidiaries and joint ventures. I-2

APPENDIX I
2. BASIS OF PREPARATION

ACCOUNTANTS' REPORT

The summaries of combined results and combined net assets present the results of the Group as if the Group had been in existence throughout the Relevant Period and as if the predecessor operations and businesses of the Core Units and the ve chemical production facilities retained by CNPC were transferred to the Company from CNPC as of the earliest period presented. The accompanying summaries of combined results and combined net assets reect assets, liabilities, revenues and expenses that were directly applicable to the businesses and operations transferred to the Group by CNPC including those for which the management may restructure or close although no specic plans have been approved. Management believes that all historical costs of operations, including those that were and are expected to be disposed of or eliminated, have been included in the summaries of combined results and combined net assets. Expenses that could be specically identied include the following: purchases, services and other eld employee compensation costs exploration expenses depreciation, depletion and amortisation taxes other than income taxes exchange gains and losses interest expense For those expenses for which a specic identication method was not practical, the allocation was made for each business segment as a percentage of the historical employee numbers, revenues or respective assets which existed during the period for which they are being used to allocate costs. Costs allocated to the Group from CNPC include two expense categories, employee compensation costs and selling, general and administrative expenses. Employee compensation costs related to housing subsidies and wages, salaries and social security costs of administration departments were allocated to the Group based on the percentage of number of employees of the Group to the total historical number of employees of CNPC. Selling, general and administrative expenses not specically identiable to the carved-out operations were allocated to the Group based on the total historical revenues, assets or employee numbers as follows: (i) transportation expenses were allocated to the Group based on the percentage of revenues of the Group to total historical revenues of CNPC (ii) land use fees, property taxes and vehicle taxes were allocated to the Group based on the percentage of respective assets of the Group to total historical respective assets of CNPC (iii) other selling, general and administrative expenses primarily including advertising, water, power, travel and oce expenses were allocated to the Group based on the percentage of number of employees of the Group to the total historical number of employees of CNPC. The allocation methodology used for each business segment is the same as that used to allocate costs from CNPC to the Group. Management believes that the foregoing presents a reasonable basis of estimating what the Group's expenses would have been on a historical basis. The Group is part of a larger group of companies under CNPC and has conducted a portion of its operations through arrangements with related parties. Based on the management's best estimates and the new margin on certain construction and technical services set in accordance with the Comprehensive Products and Services Agreement entered into between CNPC and the Group upon the formation of the I-3

APPENDIX I

ACCOUNTANTS' REPORT

Company, the Group would have incurred approximately RMB 1 billion additional operating expenses on an annual basis. The preparation of the summaries of combined results and combined net assets in accordance with IAS requires management to make estimates and assumptions that aect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could dier from these estimates. As at the date of this report, the Company had interests in principal subsidiaries which principally aected the results or assets of the Group and details of which are as follows:
Paid-up/ registered capital Attributable equity interest per cent. Direct Indirect

Company name

Notes

Place and date of establishment

Principal activities

Daqing Oileld Company Limited

People's Republic of China 1 January 2000

RMB 47,500 100.00 million

Jinzhou Petrochemical Co., Ltd Jilin Chemical Industry Company Limited Gansu Tristar Petrochemical (Group) Co., Ltd Heilongjiang Yu Shu Lin Oileld Company Limited Liaohe Jinma Oileld Company Limited

(1) People's Republic of China 29 August 1997 (2) People's Republic of China 13 December 1994 (3) People's Republic of China 1 April 1993 (4) People's Republic of China 4 September 1998 (5) People's Republic of China 6 May 1998

RMB 720 million RMB 3,561 million RMB 141 million

80.95 67.29 51.60

Exploration production and sale of crude oil and natural gas; production and sale of chemical products Production and sale of chemical products Production and sale of chemical products Trading of chemical products, electronic products, metal and construction materials Exploration and production of crude oil and natural gas Exploration, production, transportation and sale of crude oil and natural gas

RMB 1,272 million RMB 1,100 million

81.82

88.16

Notes:
(1) The nancial year end of this company is 31 December. The statutory nancial statements for the period from 29 August 1997 (date of incorporation) to 31 December 1997 and the year ended 31 December 1998 were audited by . (2) The nancial year end of this company is 31 December. The statutory nancial statements for the three years ended 31 December 1998 were audited by Ernst & Young Certied Public Accountants. (3) The nancial year end of this company is 31 December. The statutory nancial statements for the three years ended 31 December , and , respectively. 1996, 1997 and 1998 were audited by (4) As a state-owned enterprise, no audited nancial statements were required to be prepared during the Relevant Period. (5) The nancial year end of this company is 31 December. The statutory nancial statements for the period from 6 May 1998 to 31 December 1998 were audited by .

I-4

APPENDIX I
3. PRINCIPAL ACCOUNTING POLICIES

ACCOUNTANTS' REPORT

The principal accounting policies adopted in the preparation of the nancial information set out in this report, which conform with IAS, are as follows: (a) Basis of combination

The combined summaries include the nancial statements of the Company and the subsidiaries in which the Company directly or indirectly owns more than 50% voting interest and has power to exercise control over their operations. The results of operations of subsidiaries are included in the summary of combined results of the Group, and the share attributable to minority interests is excluded from the combined net prot. Intercompany balances and transactions have been eliminated. A listing of the Group's principal subsidiaries is set out in section 2. (b) Investments in associated companies

Amounts representing the Group's percentage interest in the underlying net assets of associated companies in which the Group has signicant inuence are accounted for using the equity method. Such equity interests are carried on the summary of combined net assets at amounts that reect its share of the net assets of the associated companies and include goodwill on acquisition. Equity accounting involves recognising in the summary of combined results the Group's share of the prot or loss for the period of the associated companies. A listing of the Group's principal associated companies is shown in Note (c) of section 5. (c) Foreign currencies

Foreign currency transactions of the Group are accounted for at the exchange rates prevailing at the date of the transactions; gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the summary of combined results. No foreign currency exchange gains or losses were capitalised for any periods presented. Such balances are translated at balance sheet date exchange rates unless hedged by forward foreign exchange contracts, in which case, the rates specied in such forward contracts are used. The Group did not enter into any hedge contracts during any of the periods presented. (d) Financial instruments

Financial instruments carried at the balance sheet date include cash and bank balances, investments, receivables, accounts payable, leases and borrowings. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. During the Relevant Period, the Group did not use any derivative nancial instruments. (e) Investments

Long term investments other than marketable securities, investments in subsidiaries and associated companies are shown at cost and provision is only made where, in the opinion of the directors, there is a permanent diminution in the value of an investment, and it is recognised as an expense in the period in which the diminution is identied. Marketable securities are carried at market value, which is based on quoted market prices, where available, at the close of business on the balance sheet date. Increases in the carrying amount of marketable securities classied as long-term assets are credited to revaluation and other reserves in I-5

APPENDIX I

ACCOUNTANTS' REPORT

owner's equity. Decreases that oset previous increase of the same marketable security are charged against revaluation and other reserves; all other decreases are charged to the summary of combined results. Increases/decreases in the carrying amount of marketable securities classied as current assets are credited/charged to the summary of combined results. On disposal of an investment other than marketable securities classied as long-term, the dierence between the net disposal proceeds and the carrying amount is charged or credited to the summary of combined results. On disposal of a marketable security classied as a long-term asset, amounts in revaluation and other reserves relating to that marketable security are transferred to retained earnings. (f) Property, plant and equipment

Property, plant and equipment are initially recorded at cost less accumulated depreciation, depletion and amortisation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into existing use less discounts. Subsequent to their initial recognition, property, plant and equipment are carried at a revalued amount. Revaluations are performed by qualied valuers on a regular basis. As disclosed in Note (a) of section 5, xed assets, excluding oil and gas reserves, were revalued as of 30 June 1999. Depreciation, depletion and amortisation to write o the cost of each asset, other than oil and gas properties, to their residual values over their estimated useful lives is calculated using the straight-line method. The Group uses the following useful lives for depreciation, depletion and amortisation purposes: Land use rights Buildings Plant and machinery Equipment and motor vehicles over the land use right period of 30-50 25-40 10-15 3-16 years years years years

Long-lived assets are reviewed periodically for impairment. Prior to IAS 36, eective for nancial periods beginning on or after 1 July 1999, IAS did not prescribe any specic methodology for recognising an impairment loss. Management has therefore chosen to use the criteria in Statement of Financial Accounting Standards No. 121, ""Accounting for the Impairment of Long-Lived Assets and for LongLived Assets to Be Disposed of'' (""FAS 121'') to recognise impairment on long-lived assets. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. An impairment is recognised when the sum of the future undiscounted cash ows expected to be generated from the use of the asset is insucient to recover its related carrying value. The carrying value of such asset is written down to fair value which is generally determined from estimated discounted future net cash ows. Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining net prot. On disposal of revalued assets, amounts in revaluation reserve relating to these assets are transferred to retained earnings. Interest costs on borrowings to nance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the property for its intended use. Repair and maintenance costs are expensed as incurred. (g) Oil and gas properties

The successful eorts method of accounting is used for oil and gas exploration and production activities. Under this method, all costs for development wells, support equipment and facilities, and proved mineral interests in oil and gas properties are capitalised. Costs of exploration wells are capitalised I-6

APPENDIX I

ACCOUNTANTS' REPORT

pending determination of whether the wells nd proved reserves. Costs of wells with proved reserves remain capitalised. All other exploratory wells and geological and geophysical costs are expensed. The Ministry of Land and Resources in China issues production licences to applicants on the basis of the reserve reports approved by relevant authorities. Administrative rules issued by the State Council provide that the maximum term of a production licence is 30 years. However, in accordance with a special approval from the State Council, the Ministry of Land and Resources has issued production licences eective March 2000 to the Company for all of its crude oil and natural gas reservoirs with terms coextensive with the projected productive life of those reservoirs, ranging up to 55 years. Production licences to be issued to the Company in the future will be subject to the 30 years maximum unless additional special approvals can be obtained from the State Council. Each of the Group's production licences are renewable upon application by the Company 30 days prior to expiration. Future oil and gas price increases may extend the productive lives of crude oil and natural gas reservoirs beyond the current terms of the relevant production licences. Payments on such licences are made annually and are expensed as incurred. The costs of oil and gas properties are amortised at the eld level on a unit-ofproduction method. Unit-of-production rates are based on oil and gas reserve estimated to be recoverable from existing facilities as the Company's production licences do not carry specic limitations. The Group has no costs of unproved properties. The Company did not incur and does not anticipate to incur any material dismantlement, restoration and abandonment costs given the nature of its onshore producing activities and current PRC regulations surrounding such activities. (h) Intangible assets

Expenditure on acquired patents, trademarks, technical know-hows and licences is capitalised and amortised using the straight-line method over their useful lives, generally over 14 to 20 years. Intangible assets are not revalued. The Group does not capitalise internally generated intangible assets. The carrying amount of each intangible asset is reviewed annually and adjusted for impairment where it is considered necessary. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. The impairment loss is recognised in the summary of combined results. The recoverable amount is measured as the higher of net selling price and value in use which is the present value of estimated future cash ows to be derived from continuing use of the asset and from its ultimate disposal. (i) Leases

Leases of property, plant and equipment where the Group assumes substantially all the benets and risks of ownership are classied as nance leases. Finance leases are capitalised at the estimated present value of the underlying lease payments. Each lease payment is allocated between the liability and nance charges so as to achieve a constant rate on the nance balance outstanding. Property, plant and equipment acquired under nance leases are generally depreciated over the useful life of the asset as the Group usually obtains ownership of such leased assets by the end of the leased term. Leases of assets under which all the risks and benets of ownership are eectively retained by the lessor are classied as operating leases. Payments made under operating leases are expensed on a straight-line basis over the lease term unless another systematic basis is more appropriate. (j) Inventories

Inventories are stated at the lower of cost or net realisable value. Cost is determined by the weighted average cost method. The cost of nished goods comprises raw materials, direct labour, other direct costs and related production overheads, but excludes interest expense. Net realisable value is the estimate of I-7

APPENDIX I

ACCOUNTANTS' REPORT

the selling price in the ordinary course of business, less the cost of completion and selling expenses. Inventories of materials and supplies are valued at the lower of cost or net realisable value. (k) Trade receivables

Trade receivables are carried at estimated realisable value. An estimate is made for doubtful debts based on a review of the outstanding amounts at the balance sheet dates. (l) Cash and cash equivalents

Cash equivalents comprise cash in hand and investments with maturities of three months or less from the time of purchase. (m) Taxation

Current taxation is provided on the taxable income of each of the individual Core Units which le separate tax returns for the year that is chargeable to tax. Deferred income tax is provided, using the liability method, for temporary dierences arising between the tax bases of assets and liabilities and their carrying values for nancial reporting purposes. Currently enacted tax rates are used to determine deferred income tax. The principal temporary dierences arise from depreciation on, and revaluation of, property, plant and equipment and provisions for doubtful debts, inventories, and permanent diminution in value of investments. Deferred tax assets relating to the carry forward of unused tax losses are recognised to the extent that it is probable that future taxable prot will be available against which the unused tax losses can be utilised. (n) Revenue recognition

Sales are recognised upon delivery of products and customer acceptance, if any, or performance of services, net of sales taxes and discounts. Revenues are recognised only when the Company has transferred to the buyer the signicant risks and rewards of ownership of the goods, and when the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be measured reliably. (o) Research and development

Research and development expenditure is recognised as expense to the extent that such expenditure is not expected to have future benet. (p) Retirement benet plans

The Group contributes to various employee retirement benet plans organised by municipal and provincial governments. The municipal and provincial governments undertake to assume the retirement benet obligations of all existing and future retired employees of the Group. Contributions to these plans are charged to expense as incurred. (q) New accounting developments

The International Accounting Standard Committee (the ""IASC'') has recently issued IAS 14 ""Segment Reporting'' which is eective for nancial statements covering periods beginning on or after 1 July 1998, IAS 17 ""Leases'' and IAS 19 ""Employee Benets'' which are eective for nancial statements covering periods beginning on or after 1 January 1999. The Group has implemented these I-8

APPENDIX I

ACCOUNTANTS' REPORT

standards and the adoption of these new standards did not have a material impact on the reported nancial position or results of the Group. The Group has also early adopted IAS 12 ""Income Taxes'' in 1996 and the adoption of this standard did not result in any adjustments relating to prior periods. In addition, the IASC has recently issued IAS 22 ""Business Combinations'', IAS 36 ""Impairment of Assets'', IAS 37 ""Provision, Contingent Liabilities and Contingent Assets'' and IAS 38 ""Intangible Assets'' which are eective for nancial statements covering periods beginning on or after 1 July 1999 and IAS 39 ""Financial Instruments'' which is eective for nancial statements covering periods beginning on or after 1 January 2001. The Group is currently evaluating the requirements of these standards and the potential impact on the Group's summaries of combined results and combined net assets could be material.

I-9

APPENDIX I
4.

ACCOUNTANTS' REPORT

COMBINED RESULTS The following is a summary of the combined results of the Group for the Relevant Period, prepared on the basis set out in section 2 above:
Nine months ended 30 September 1999 RMB millions

Year ended 31 December Notes 1996 RMB millions 1997 RMB millions 1998 RMB millions

TURNOVER AND REVENUES Sales and other operating revenues OPERATING EXPENSES Depreciation, depletion and amortisation Employee compensation costs Exploration expenses, including exploratory dry holes Impairment loss on assets to be retained by CNPC Other (expenses)/income Purchases, services and other Revaluation loss Selling, general and administrative expenses Taxes other than income taxes TOTAL OPERATING EXPENSES PROFIT FROM OPERATIONS FINANCE COSTS Exchange gain Exchange loss Interest expense Interest income TOTAL FINANCE COSTS SHARE OF PROFIT OF ASSOCIATED COMPANIES PROFIT BEFORE TAXATION TAXATION PROFIT BEFORE MINORITY INTERESTS MINORITY INTERESTS NET PROFIT BASIC AND DILUTED NET PROFIT PER SHARE (in RMB) NUMBER OF SHARES (in millions)

143,677

157,381

147,287

126,181

(b)

(13,059) (7,996) (4,725) (248) (51,860) (9,727) (8,471) (96,086) 47,591 2,998 (449) (9,839) 1,033 (6,257) 42 41,376 (9,833) 31,543 (87) 31,456

(16,450) (8,826) (6,830) (557) (56,980) (9,827) (9,279) (108,749) 48,632 3,291 (165) (10,928) 1,048 (6,754) 331 42,209 (12,200) 30,009 (161) 29,848 0.19 160,000

(17,803) (9,752) (5,990) (310) (336) (58,190) (9,838) (9,579) (111,798) 35,489 44 (1,916) (12,276) 1,326 (12,822) 88 22,755 (7,537) 15,218 57 15,275 0.10 160,000

(16,138) (6,822) (3,538) (2,007) 130 (42,457) (1,122) (9,564) (7,851) (89,369) 36,812 227 (1,781) (7,588) 433 (8,709) 158 28,261 (7,455) 20,806 (27) 20,779 0.13 160,000

(c)

(a) (f)

(g)

0.20 160,000 I-10

APPENDIX I
(a) Prot before taxation

ACCOUNTANTS' REPORT

Year ended 31 December 1996 RMB millions 1997 RMB millions 1998 RMB millions

Nine months ended 30 September 1999 RMB millions

Prot before taxation is arrived at after crediting and charging of the following items: Crediting Dividend income from other investments Charging Amortisation on intangible assets Auditors' remuneration Cost of inventory recognised as expense(1) Depreciation on property, plant and equipment owned assets assets under nance leases Interest expense (Note (c)) Loss on disposal of property, plant and equipment Net loss of ve chemical production facilities retained by CNPC (Note 5(e)) Operating lease rentals Provision for asset impairment Provision for doubtful debts Provision for stock obsolescence Repair and maintenance Research and development expenditure
(1)

102 160 3 69,074 12,811 2 9,839 415 36 91 2,172 297 110 983

54 214 3 77,918 16,120 20 10,928 519 303 91 31 1,198 122 116 1,117

139 129 4 80,139 17,403 45 12,276 339 571 106 26 878 128 143 1,238

15 191 2 61,878 15,729 22 7,588 45 2,262 25 488 74 583

Cost of inventory recognised as expense includes purchases, direct employee compensation costs, and depreciation, depletion and amortisation. Employee compensation costs
Year ended 31 December 1996 RMB millions 1997 RMB millions 1998 RMB millions Nine months ended 30 September 1999 RMB millions

(b)

Housing subsidies Social security costs Wages and salaries

1,213 1,300 5,483 7,996

1,208 1,412 6,206 8,826

1,190 1,686 6,876 9,752

1,434 5,388 6,822

Prior to 31 December 1998, state-owned enterprises often had arrangements to provide living quarters to employees below construction cost. The dierence between the cost and amounts paid by

I-11

APPENDIX I

ACCOUNTANTS' REPORT

employees on transfer of such housing gave rise to the housing subsidy. In accordance with relevant PRC regulations, such arrangements were no longer provided after 31 December 1998. (c) Interest expense
Nine months ended 30 September 1999 RMB millions

Year ended 31 December 1996 RMB millions 1997 RMB millions 1998 RMB millions

Interest on loans Interest on nance leases Less: interest capitalised in xed assets

11,673 7 (1,841) 9,839

12,098 19 (1,189) 10,928

13,220 26 (970) 12,276

8,229 12 (653) 7,588

Amounts capitalised are borrowing costs related to funds borrowed specically for the purpose of obtaining a qualifying asset. Interest rates on such capitalised borrowings ranged from 5.60% to 15.30%. (d) Pension

The employees of the Group participate in various retirement benet plans organised by municipal and provincial governments whereby the Group is required to make monthly contributions to these plans at rates ranging from 16% to 21% of the employees' basic salary for the relevant periods. The Group has no obligation for the payment of retirement and other post-retirement benets of employees other than the monthly contributions described above. Expenses incurred by the Group in connection with the retirement benet plans were RMB 1,182 million, RMB 1,278 million, RMB 1,377 million and RMB 1,238 million for the years ended 31 December 1996, 1997 and 1998 and for the nine months ended 30 September 1999, respectively. (e) Emoluments of directors, supervisors and senior management Details of the directors' emoluments are as follows:
Nine months ended 30 September 1999 RMB'000

Year ended 31 December 1996 RMB'000 1997 RMB'000 1998 RMB'000

Salaries, allowances and other benets Contribution to retirement benet scheme

478 18 496

504 20 524

517 19 536

552 18 570

The emoluments of the directors fall within the following bands:

Year ended 31 December 1996 1997 1998 Number Number Number Nine months ended 30 September 1999 Number

Nil RMB 1,000,000 I-12

10

10

10

10

APPENDIX I

ACCOUNTANTS' REPORT

The ve highest paid individuals in the Group for the three years ended 31 December 1998 and nine months ended 30 September 1999 are included above. (f) Taxation
Year ended 31 December 1997 RMB millions Nine months ended 30 September 1999 RMB millions

1996 RMB millions

1998 RMB millions

Current tax Deferred tax (Note 5(l)) Share of tax of associated companies

7,151 2,656 26 9,833

7,673 4,417 110 12,200

6,848 612 77 7,537

8,038 (630) 47 7,455

The tax on the Group's prot before tax diers from the theoretical amount that would arise using the basic tax rate in the PRC applicable to the Company as follows:
Year ended 31 December 1997 RMB millions Nine months ended 30 September 1999 RMB millions

1996 RMB millions

1998 RMB millions

Prot before taxation Tax calculated at a tax rate of 33% Special deductions relating to exploration and production activities (note (i)) Deferred tax benet arising from tax losses not recognised (note (ii)) Income not subject to tax Expenses not deductible for tax purposes Other (note (iii)) Tax charge (i)

41,376 13,654

42,209 13,929

22,755 7,509

28,261 9,326

(4,084) 860 (156) 451 (892) 9,833

(3,406) 2,032 (120) 470 (705) 12,200

(3,392) 3,028 (32) 542 (118) 7,537

(4,012) 2,351 (53) 378 (535) 7,455

Special deductions relating to exploration and production activities represent tax deductions in excess of the actual expenses with respect to exploration and production activities. Accordingly, these deductions represent permanent dierences between the tax and accounting bases. Such special deductions will cease upon the formation of the Company.

(ii) Prior to the Restructuring, the Core Units now comprising the Group were separate independent entities for tax reporting and ling purposes. Certain of these Core Units had incurred tax losses in prior years totalling RMB 9,650 million at 30 September 1999. As a result of the Restructuring, the recoverability of these tax losses is uncertain pending regulatory approval of the ability of the Company to utilise such losses in future periods. Accordingly the resulting deferred tax benet arising from these tax losses has not been recognised in the summaries of combined results and combined net assets. I-13

APPENDIX I

ACCOUNTANTS' REPORT

(iii) Other primarily represents depreciation on asset base adjustment under PRC accounting regulations not recognised in the summary of combined results but deductible for tax purposes. (g) Basic and diluted net prot per share Basic and diluted net prot per share for the years ended 31 December 1996, 1997 and 1998 and for the nine months ended 30 September 1999 have been computed by dividing net prot by the 160 billion state-owned shares issued and outstanding upon the establishment of the Company on 5 November 1999 as if such shares had been outstanding for all relevant periods. (h) Dividends No dividend has been paid or declared by the Company since its incorporation. (i) Related party transactions

The Group is part of a larger group of companies under CNPC and has extensive transactions and relationships with members of the group. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. Related parties refer to corporations in which CNPC is a major shareholder and is able to exercise signicant inuence. CNPC itself is owned by the PRC Government. Since the adoption of reform and open door policies in 1978, the PRC Government has been reforming the PRC economic system and the PRC Government structure. However, the PRC Government still owns a signicant portion of the productive assets in the PRC. In accordance with a specic exemption in IAS, the Group does not accumulate or disclose transactions with other PRC Government owned or controlled enterprises as related party transactions, other than those with other CNPC group companies and signicant customers as described in Note (j) of section 4. The presence of the PRC Government in the economy is pervasive. Substantially all of the Group's business activities are conducted with enterprises directly or indirectly owned or controlled by the PRC Government. Further, the PRC Government itself represents a signicant customer of the Group both directly through its numerous authorities and indirectly through its numerous aliates and other organisations, such as the Ministry of Defense. Sales of certain products to PRC Government authorities and aliates and other PRC controlled enterprises are at discounted prices. The Group considers that these sales are activities in the ordinary course of business and has not accumulated or disclosed such as related party transactions. For the periods presented below, allocation of costs from companies and operating units retained by CNPC primarily represented direct costs of exploration, drilling, production, construction, maintenance, procurement and other services. Future costs will be based on the terms of the agreements with CNPC as discussed in section 9.

I-14

APPENDIX I

ACCOUNTANTS' REPORT

In addition to the related party information shown elsewhere in the summaries, the following is a summary of signicant related party transactions entered into in the ordinary course of business between the Group and entities controlled by CNPC during the periods indicated:
Nine months ended 30 September 1999 RMB millions

Year ended 31 December Notes 1996 RMB millions 1997 RMB millions 1998 RMB millions

Sale of goods Fees paid for construction and technical services Exploration and development services Other construction and technical services Fees for production services Purchase of materials Social services charge Ancillary service charges Interest income Interest expense
Notes: (i)

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix)

8,115 18,533 10,706 11,356 13,695 2,329 1,624 58 284

10,352 23,552 12,884 13,360 16,263 2,653 2,314 159 679

12,236 21,001 13,907 14,772 13,869 3,139 2,468 108 762

12,269 11,323 10,993 10,647 7,579 2,149 2,044 38 429

Represents sale of crude oil, rened and chemical products at various prices including market prices, rates xed by the government or prices determined by CNPC. Direct cost for exploration and development services, comprise geophysical survey, drilling, well cementing, logging, mud logging and well testing. The fees paid for other construction and technical services, comprise fees for construction of reneries and chemical plants and technical services in connection with oil and gas exploration and production activities such as downhole operation, oileld construction, technology research, engineering and design etc. The fees paid for production services, comprise fees for the repair of machinery, supply of water, electricity and gas, provision of services such as communications, transportation, re ghting, asset leasing, environmental protection and sanitation, maintenance of roads, manufacture of replacement parts and machinery. These transactions represent procurement of materials and related services for operations directly related to the Company. These represent expenditures for social welfare and support services apportioned between CNPC and the Group on the basis of number of employees, total revenue or total assets. Ancillary service charges represent mainly fees for property management, the provision of training centres, guesthouses, canteens, public shower rooms, etc. The Group had deposits placed with China Petroleum Finance Company Limited (""CP Finance''), a subsidiary of CNPC and a non-bank nancial institution approved by the People's Bank of China, amounting to RMB 1,663 million as of 30 September 1999. The deposits yield interest at prevailing saving deposit rates. The Group had short-term and long-term loans from CP Finance amounting to RMB 19,231 million as of 30 September 1999, included under loans from related parties. The loans were unsecured, interest bearing at below market rates. The Group has a 5.19% equity interest in CP Finance at a book value of RMB 83 million as of 30 September 1999.

(ii)

(iii)

(iv)

(v) (vi) (vii) (viii)

(ix) (x)

I-15

APPENDIX I
(j) Major customers The Group's major customers are as follows:

ACCOUNTANTS' REPORT

Year ended 31 December 1996 % to total revenue % 15 4 19 1997 % to total revenue % 14 4 18 1998 % to total revenue % 18 2 20

Nine months ended 30 September 1999 % to total revenue % 22 1 23

Revenue RMB millions Sinopec China Chemical Corporation 20,685 6,294 26,979

Revenue RMB millions 22,336 5,970 28,306

Revenue RMB millions 25,880 3,509 29,389

Revenue RMB millions 28,177 1,112 29,289

5.

COMBINED NET ASSETS

The following is a summary of the combined net assets of the Group as at 30 September 1999 prepared on the basis set out in section 2 above:
Notes RMB millions

FIXED ASSETS INTANGIBLE AND OTHER ASSETS ASSOCIATED COMPANIES OTHER INVESTMENTS NET ASSETS TO BE RETAINED BY CNPC CURRENT ASSETS Cash and cash equivalents Short-term investments Accounts receivable Inventories Prepayments and other current assets

(a) (b) (c) (d) (e) (f) (g) (h) (i)

311,585 2,075 2,902 716 6,665 15,424 2,545 20,070 17,593 27,308 82,940

CURRENT LIABILITIES Short-term loans Accounts payable and accruals Taxation payable NET CURRENT LIABILITIES PAYABLE TO CNPC LONG-TERM BORROWINGS OTHER LONG TERM LIABILITIES DEFERRED TAXATION MINORITY INTERESTS NET ASSETS I-16

(k) (j)

(59,145) (45,421) (5,594) (110,160) (27,220) (6,665) (78,971) (1,373) (9,751) (4,475) 195,488

(e) (k) (l)

APPENDIX I
(a) Fixed assets
Exploration and Production RMB millions Rening and Marketing RMB millions

ACCOUNTANTS' REPORT

By function:

Chemicals RMB millions

Other RMB millions

Total RMB millions

Cost or revaluation At beginning of the period Revaluation surplus Revaluation loss Additions Disposals At end of the period Accumulated depreciation At beginning of the period Revaluation surplus Revaluation loss Charge for the period Disposals At end of the period Net book value At end of the period
Land and Buildings RMB millions

183,417 102,770 (468) 17,504 (5,512) 297,711 (63,125) (49,003) 94 (7,801) 464 (119,371) 178,340
Proved Oil and Gas Property RMB millions

68,591 23,040 (265) 4,284 (1,327) 94,323 (20,287) (5,647) 44 (3,957) 347 (29,500) 64,823
Plant and Equipment RMB millions Motor Vehicles RMB millions

70,340 14,522 (471) 3,290 (227) 87,454 (17,724) (8,213) 126 (3,303) 313 (28,801) 58,653

10,210 4,120 (218) 563 (666) 14,009 (2,712) (1,040) 36 (690) 166 (4,240) 9,769
Construction in Progress RMB millions

332,558 144,452 (1,422) 25,641 (7,732) 493,497 (103,848) (63,903) 300 (15,751) 1,290 (181,912) 311,585

By asset class:

Other RMB millions

Total RMB millions

Cost or revaluation At beginning of the period 24,000 Revaluation surplus 6,129 Revaluation loss (37) Additions 1,670 Disposals (1,801) At end of the period 29,961 Accumulated depreciation At beginning of the period (5,146) Revaluation surplus 343 Revaluation loss 3 Charge for the period (740) Disposals 386 At end of the period Net book value At end of the period (5,154) 24,807

146,539 84,564 (512) 3,059 (1,892) 231,758 (53,778) (49,119) 210 (6,382) 157 (108,912) 122,846

127,499 49,974 (310) 8,258 (1,650) 183,771 (42,144) (14,242) 67 (8,017) 548 (63,788) 119,983

4,515 1,803 (11) 541 (331) 6,517 (1,618) (505) 6 (363) 172 (2,308) 4,209

3,430 1,343 (28) 102 (57) 4,790 (1,162) (380) 14 (249) 27 (1,750) 3,040

26,575 639 (524) 12,011 (2,001) 36,700 36,700

332,558 144,452 (1,422) 25,641 (7,732) 493,497 (103,848) (63,903) 300 (15,751) 1,290 (181,912) 311,585

I-17

APPENDIX I
Finance leases at the end of period are as follows:

ACCOUNTANTS' REPORT

RMB millions

Rening and marketing Chemicals Accumulated amortisation Total nance leases

250 996 (281) 965

All nance leases are related to plant and equipment and generally contain purchase options at the end of the lease term. Impairment charges of RMB 31 million and RMB 26 million on certain chemical and renery plants to be transferred to the Company were recognised for the years ended 31 December 1997 and 1998, respectively. Bank borrowings are secured on properties at net book value of RMB 1,057 million at 30 September 1999. As part of the Restructuring and as required by the relevant PRC regulations, a valuation of the contributed xed assets on the asset class level by business segment, excluding oil and gas reserves, was carried out as of 30 June 1999 by China Enterprises Appraisal, a rm of independent valuers registered in the PRC. The valuation was performed in order to determine the fair value of such contributed xed assets and establish amounts for share capital and capital reserve. The valuation was based on depreciated replacement costs, which will be carried out periodically in the future. The value of the above contributed xed assets has been determined at RMB 309,254 million, which resulted in RMB 80,549 million in excess of the prior carrying value of the xed assets as of 30 June 1999. The amount of revaluation reserve of RMB 79,945 million appearing in the combined statements of owner's equity at 30 September 1999 represents this excess amount, net of RMB 604 million allocated to minority interests. The total increase in the carrying value of xed assets was recorded as an increase in the carrying value of gross xed assets of RMB 144,452 million and an increase in accumulated depreciation of RMB 63,903 million at 30 June 1999. The revaluation also identied certain xed assets with a net carrying value in excess of the appraised value of RMB 1,122 million, which was recorded as an expense for the nine months ended 30 September 1999. In connection with the planned application for listing of the Company's shares on the Hong Kong Stock Exchange, the Company engaged Chesterton Petty Limited, independent valuers in Hong Kong, to value certain of the Company's properties as of 30 September 1999. The valuation of such assets is not materially dierent from that arrived at by China Enterprise Appraisal as of 30 June 1999. For the purpose of the preparation of the summaries of combined results and combined net assets, the above revaluation was recognised in the Company's summaries of combined results and combined net assets as of 30 June 1999. The eect of the revaluation is to increase future depreciation, depletion and amortisation of the contributed xed assets by approximately RMB 9,600 million on an annual basis. Had the revaluation occurred on 1 January 1996, the depreciation, depletion and amortisation would have been increased to RMB 19,269 million, RMB 23,337 million, RMB 27,181 million and RMB 20,001 million for the three years ended 31 December 1998 and nine months ended 30 September 1999, respectively.

I-18

APPENDIX I
(b) Intangible and other assets Intangible and other assets consist of the following:

ACCOUNTANTS' REPORT

Cost RMB millions

Accumulated Amortisation RMB millions

Net RMB millions

Patent Technical know-hows Other assets

1,478 294 1,772 753 2,525

(374) (76) (450) (450)

1,104 218 1,322 753 2,075

Technical know-hows are amounts attributable to operational technology acquired in connection with purchase of equipment. The costs of technical know-hows are included as part of the purchase price by contracts and are distinguishable. Other assets primarily consisted of long-term prepared expense to service providers. (c) Associated companies
RMB millions

Share of net assets at end of period The principal associated companies accounted for under equity method are:
Place and date of establishment Paid-up/ registered capital Attributable equity interest per cent.

2,902

Name

Principal activities

Petroleum Long Champ (Group) Co., Ltd.*

People's Republic of China 29 March 1993

RMB 2,270 million

37.9

West Pacic Petrochemical Co., Ltd

People's Republic of China 7 December 1990

US$ 258 million

22.9

Designing, constructing oil pipelines and provision of consulting services Rening crude oil and selling of petrochemical products

* A company listed on the Shanghai Stock Exchange. The market value of the shares of this associated company is RMB 1,419 million as of 30 September 1999.

I-19

APPENDIX I
(d) Other investments

ACCOUNTANTS' REPORT

RMB millions

Unlisted investments, at cost Provision for diminution in value of investments

978 (262) 716

(e)

Assets to be retained by CNPC

The summaries of combined results and combined net assets of the Group include the nancial position and results of operations of ve chemical production facilities, which will be retained by CNPC. Accordingly, these assets and the related operations will not be included in the Company's operations subsequent to 5 November 1999, the date of the formation of the Company. The net assets to be retained by CNPC and the payable to CNPC in the accompanying combined net assets relate to these ve chemical production facilities. The accompanying summary of combined results include the revenues and operating expenses of the ve chemical production facilities. The table below reects the combined nancial position and results of operations of the ve chemical production facilities. Financial position:
At 30 September 1999 RMB millions

Current assets Non current assets Current liabilities Non current liabilities Net assets

910 6,669 (914) 6,665

Non current assets primarily includes plant and equipment related to the ve chemical production facilities, net of accumulated depreciation and amortisation, of RMB 7,458 million, RMB 8,609 million and RMB 6,516 million at 31 December 1997, 1998 and 30 September 1999. Results of operations:
Year Ended 31 December 1997 RMB millions Nine Months Ended 30 September 1999 RMB millions

1996 RMB millions

1998 RMB millions

Sales and other operating revenues Loss from operations Net loss

477 (36) (36)

635 (304) (303)

576 (562) (571)

280 (2,261) (2,262)

Loss from operations and net loss for the year ended 31 December 1998 and the nine months ended 30 September 1999 include impairment charges of RMB 310 million and RMB 2,007 million, respectively. The impairment charges relate to the plant and equipment related to the butadiene rubber and high carbon alcohol facilities. At each balance sheet date, CNPC management identied impairment indicators at these two facilities and in accordance with FAS 121 and compared the carrying I-20

APPENDIX I

ACCOUNTANTS' REPORT

amount of each facility to the estimated undiscounted future cash ows for each facility based on the best available evidence. CNPC management determined that after a relatively short period of operations that the facilities would not generate sucient positive cash ows in the future to recover their related carrying values primarily due to the low utilisation at the butadiene rubber facility, the low price of high carbon alcohol and high operating cost of both facilities. These facilities are assets held for use since in the PRC, assets cannot be disposed of without the approval of the central government and CNPC continues to operate these facilities. Accordingly, the carrying values of these facilities were written down to fair value which is based on the asset held for use model using the present value of estimated cash ows. For the other three facilities, CNPC management determined, at each balance sheet date, that based on the best available evidence, the estimated undiscounted future cash ows for each of such facilities were in excess of each of such facility's carrying amount and, consequently, no impairment was necessary under FAS 121. The depreciation charges on these facilities amount to RMB 86 million, RMB 96 million and RMB 226 million for the three years ended 31 December 1996, 1997 and 1998 and RMB 196 million for the nine months ended 30 September 1999. (f) Cash and cash equivalents
RMB millions

Cash at bank and in hand Short-term bank deposits

14,198 1,226 15,424

The weighted average eective interest rate on short-term bank deposits was 2.3% during the nine months ended 30 September 1999. (g) Accounts receivable
RMB millions

Accounts receivable due from third parties Accounts receivable due from related parties CNPC and its subsidiaries associated companies Less: Provision for doubtful debts

23,275 1,854 376 25,505 (5,435) 20,070

Amounts due from related parties are interest free, unsecured and repayable in accordance with normal commercial terms.

I-21

APPENDIX I
(h) Inventories

ACCOUNTANTS' REPORT

RMB millions

Oil products Chemical products Materials and supplies Less: Provision for diminution in value of inventories

14,209 3,842 150 18,201 (608) 17,593

Provision for diminution in value of inventories relates primarily to chemical products and materials and supplies. At 30 September 1999, the carrying amount of inventories that are carried at net realisable value amounted to RMB 149 million. Inventories of RMB 2,715 million at 30 September 1999 were pledged as security for borrowings. (i) Prepayments and other current assets
RMB millions

Notes and other receivables Provision Amounts due from CNPC and its subsidiaries Advances to suppliers Prepaid expenses

16,310 (4,496) 11,814 12,894 2,141 459 27,308

Notes and other receivables consist primarily of interest receivable and notes receivable from customers. Amounts due from CNPC and its subsidiaries are interest-free, unsecured and repayable in accordance with normal commercial terms.

I-22

APPENDIX I
(j) Accounts payable and accruals

ACCOUNTANTS' REPORT

RMB millions

Trade payables Advances from customers Salaries and welfare payable Accrued expenses Dividends payable by subsidiaries Interest payable Construction fee and equipment cost payables Contributions to Sinopec Advances from Sinopec Government levy payable Other payables Amounts due to related parties CNPC and its subsidiaries associated companies

5,483 4,282 2,120 2,989 35 1,751 3,796 645 1,778 2,044 3,437 14,661 2,400 45,421

Amounts due to related parties are interest free, unsecured and repayable in accordance with normal commercial terms. (k) Borrowings (i) Short-term loans
RMB millions

Bank loans secured unsecured Loans from CNPC and its subsidiaries Other loans Current portion of long-term borrowings

1,495 30,359 11,341 1,122 44,317 14,828 59,145

I-23

APPENDIX I
(ii) Long-term borrowings

ACCOUNTANTS' REPORT

RMB millions

Bank loans Loans from related parties Debentures Other loans Finance lease obligations Less: current portion of long-term borrowings

76,254 9,066 3,483 4,494 502 93,799 (14,828) 78,971

Debentures were issued at xed interest rates ranging from 6.80% to 11.00% per annum with maturities through 2003. Other loans represent loans from independent third parties other than banks including Sinopec with xed interest rates ranging from 5.33% to 12.10% per annum. Other loans are primarily used for working capital, construction and purchase of equipment. Interest free loans amounted to RMB 953 million, RMB 912 million and RMB 854 million at 31 December 1997 and 1998 and 30 September 1999, respectively. Interest free loans were treated as government assistance and no imputation of interest expense on such loans was recognised in the Company's summary of combined results. In connection with the Restructuring, CNPC assumed approximately RMB 30,500 million of the Group's borrowings on 30 June 1999, the eect of which is included in the net contribution by owner as disclosed in section 7. At 30 September 1999, bank loans of RMB 3,791 million were secured by certain of the inventories and properties, plant and equipment of the Group (see Notes (a) and (h) of section 5). Lease liabilities are eectively secured as the rights to the leased assets revert to the lessor in the event of default. At 30 September 1999, short-term and long-term borrowings of RMB14,361 million and RMB 49,528 million respectively were guaranteed by CNPC and its subsidiaries. As part of the Restructuring, the Company and CNPC agreed to the transfer of related borrowings from CNPC to the Company. All of the debts transferred from CNPC to the Company have been included in the Company's summary of combined net assets as at 30 September 1999. Of the total bank borrowings of RMB 108,108 million outstanding as at 30 September 1999, consents from the banks to transfer borrowings from CNPC to the Company totaling RMB 106,980 million have been obtained. The Company is in the process of transferring the remaining balance of the borrowings transferred from CNPC. The Company and CNPC further agreed that in respect of any loan transferred to the Company as part of the Restructuring but for which consent to the transfer from the relevant lender has not been obtained by 31 December 1999, the Company will be directly liable to the relevant lenders in respect of the principal amounts, interest, costs, fees and all other payments in respect of such loans. In addition, the Company will not be required to pay any fees or other charges to CNPC.

I-24

APPENDIX I

ACCOUNTANTS' REPORT
RMB millions

Total borrowings: at xed rates at oating rates

62,000 76,116 138,116

Weighted average eective interest rates: bank loans loans from related parties other debentures nance lease obligations

6.56% 6.31% 4.05% 10.02% 6.91%

The carrying amounts and fair values, of long-term borrowings (excluding nance lease obligations) are as follows:
Carrying amounts RMB millions Fair values RMB millions

Bank loans Loans from related parties Debentures Other

76,254 9,066 3,483 4,494 93,297

76,198 9,066 3,555 4,063 92,882

The fair values are based on discounted cash ows using applicable discount rates based upon the prevailing market rates of interest available to the Group for nancial instruments with substantially the same terms and characteristics as at the balance sheet dates. Such discount rates ranged from 1.04% to 7.68% as of 30 September 1999 depending on the type of the debt. The carrying amounts of short-term borrowings and nance lease obligations approximate their fair value.

I-25

APPENDIX I
Details of loan balances are analysed as follows:

ACCOUNTANTS' REPORT

Interest rate and nal maturity

RMB millions

Renminbi-denominated loans: Bank loans for the development of oil elds and construction of rening plants Bank loans for working capital

Working capital loans from related parties

Working capital loans

Majority variable interest rates ranging from interest free to 15.00% per annum as of 30 September 1999, with maturities through 2017 Majority variable interest rates ranging from 4.20% to 12.06% per annum as of 30 September 1999, with maturities through 2008 Majority variable interest rates ranging from 3.60% to 9.07% per annum as of 30 September 1999, with maturities through 2006 Fixed interest rates ranging from interest free to 15.77% per annum as of 30 September 1999, with maturities through 2001, including a loan with no xed repayment term Fixed interest rates ranging from interest free to 8.42% per annum as of 30 September 1999, with maturities through 2038 Floating interest rates ranging from LIBOR to LIBOR plus 1.03% per annum as of 30 September 1999, with maturities through 2015 Fixed interest rates ranging from interest free to 2.30% per annum as of 30 September 1999, with maturities through 2022 Majority xed interest rates ranging from 2.38% to 5.50% per annum as of 30 September 1999, with maturities through 2022 Fixed interest rate at 3.00% per annum as of 30 September 1999, with maturities through 2012

34,166

2,708

9,066

667

US dollar-denominated loans: Bank loans for the development of oil elds and construction of rening plants

8,556

8,812

Working capital loans

814

Japanese Yen-denominated loans: Bank loans for the development of oil elds and construction of rening plants Working capital loan

19,637

1,895

I-26

APPENDIX I

ACCOUNTANTS' REPORT
Interest rates and nal maturity RMB millions

Deutsche Markdenominated loans: Bank loans for the development of oil elds and construction of rening plants French Francsdenominated loans: Bank loans for the development of oil elds and construction of rening plants Spanish PTASdenominated loans: Bank loans for the development of oil elds and construction of rening plants British Pounddenominated loans: Bank loans for the development of oil elds and construction of rening plants Working capital loan

Fixed interest rates ranging from 8.17% to 8.30% per annum as of 30 September 1999, with maturities through 2007

303

Fixed interest rates ranging from 5.00% to 8.30% per annum as of 30 September 1999, with maturities through 2019

733

Fixed interest rates ranging from 1.50% to 7.40% per annum as of 30 September 1999, with maturities through 2003

316

Fixed interest rate at 2.60% per annum as of 30 September 1999, with maturities through 2008 Fixed interest rate at 4.92% per annum as of 30 September 1999, with maturities through 2011

1,023

1,118

Debentures Finance lease obligations Total Less: current portion of long-term borrowings

89,814 3,483 502 93,799

(14,828) 78,971

I-27

APPENDIX I

ACCOUNTANTS' REPORT

Maturities of long-term borrowings (excluding nance lease obligations) are set out below:
RMB millions

Within one year Between one to two years Between two to ve years After ve years

14,633 16,616 35,496 26,552 93,297

RMB millions

Future minimum payments on nance lease obligations at 30 September 1999 are as follows: Within one year Between one to two years Between two to ve years Total minimum lease payments Less: future nance charges on nance leases Present value of nance lease obligations The present value of nance lease obligations can be analysed as follows: Within one year Between one to two years Between two to ve years

204 182 153 539 (37) 502

195 163 144 502

On 22 February 2000, the China Development Bank signed a letter of commitment to provide the Company with a standby non-revolving credit facility of RMB 10 billion to fund the Company's oil and gas exploration and production activities for 2000. (l) Deferred taxation

Deferred income tax is calculated on temporary dierences under the liability method using a principal tax rate of 33%. The movement in the deferred income tax account is as follows:
RMB millions

At beginning of period Transfer to the summary of combined results (Note 4 (f)) At end of period I-28

10,381 (630) 9,751

APPENDIX I
Deferred tax balances are attributable to the following items:

ACCOUNTANTS' REPORT

RMB millions

Deferred tax assets: Current Provisions, primarily for receivables and inventories Non current Other Total deferred tax assets Deferred tax liabilities: Current Exchange dierences Sales(i) Non current Accelerated depreciation Total deferred tax liabilities Net deferred tax liabilities

(3,444) (86) (3,530)

347 4,401 4,748 8,533 13,281 9,751

(i) Core units in the Exploration and Production segment are required to remit to the headquarter a portion of the proceeds arising from crude oil sales. These remittances are deductible for income tax purposes. The amounts received by the headquarter are taxable to the extent recorded as income. A portion of the remittances received by the headquarter may be deferred for determination of income tax, thus generating temporary dierences between the tax and accounting bases. (ii) No valuation allowances were recognised on deferred tax assets as the Company anticipated to fully realise such assets.

I-29

APPENDIX I
(m) Commitments (i) Capital commitments Capital commitments as of 30 September 1999 are as follows:

ACCOUNTANTS' REPORT

RMB millions

Authorised but not contracted Oil and gas properties Plant and equipment Others Contracted but not provided for Oil and gas properties Plant and equipment Others

13,956 2,592 580 17,128 6,634 8,494 1,137 16,265 33,393

(ii)

Operating lease commitments

Operating lease commitments of the Group are mainly for leasing of building and equipment. Leases range from one to six years and usually do not contain renewal options. Future minimum lease payments as of 30 September 1999 under non-cancellable operating leases are as follows:
RMB millions

First year Second year Third year Fourth year Fifth year Thereafter

246 51 14 13 10 8 342

I-30

APPENDIX I
(iii) Exploration and production licences

ACCOUNTANTS' REPORT

The Company is obliged to make annual payments with respect to its exploration and production licences to the Ministry of Land and Resources. Payments incurred were approximately RMB 6 million for the year ended 31 December 1998 and RMB 55 million for the nine months ended 30 September 1999. Estimated annual payments in the future are as follows:
RMB millions

2000 2001 2002 2003 2004 and thereafter

111 183 256 328 401

(iv)

Dividends

Dividends received from the Company are likely to be one of the principal sources of funding for CNPC. Subject to the relevant provisions of the PRC Company Law and the articles of association of the Company, CNPC, as the majority shareholder of the Company, may seek to inuence the determination of the amount of dividends paid by the Company with a view to satisfying its cash ow requirements including those relating to its obligations to provide supplementary social services to its employees and a limited number of third parties. (n) (i) Financial instruments Credit risk

The carrying amounts of accounts receivable included in the summary of combined net assets represent the Company's maximum exposure to credit risk in relation to its nancial assets. No other nancial assets carry a signicant exposure to credit risk. The Company and the Group have no signicant concentration of credit risk. Cash is placed with state-owned banks and nancial institutions. (ii) Fair values

The carrying amounts of the following nancial assets and nancial liabilities approximate their fair value: cash, short-term investments, trade receivables and payables, other receivables and payables, lease obligations, short-term loans and oating rate long-term borrowings. (o) Contingent liabilities

(i) Bank and other guarantees At 30 September 1999, the Group had contingent liabilities in respect of bank and other guarantees and other matters arising in the ordinary course of business from which it is anticipated that no material liabilities will arise. (ii) Environmental liabilities CNPC and the Group have operated in China for many years and certain environmental problems have developed. China has adopted extensive environmental laws and regulations that aect the operation of the oil and gas industry and the Group is evaluating its obligations related thereto. The I-31

APPENDIX I

ACCOUNTANTS' REPORT

outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material. Under existing legislation, however, management believes that there are no probable liabilities, that are in addition to amounts which have already been accrued in the summaries of combined results and combined net assets, that will have a materially adverse eect on the nancial position of the Group. (iii) Legal contingencies The Group is the named defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have a materially adverse eect on the nancial position of the Group. (iv) Leasing of land, roads and buildings The Company entered into a land leasing agreement with CNPC in connection with the Restructuring. However, CNPC holds only entitlement certicates to certain leased land. CNPC will apply to the Ministry of Land and Resources for formal land use rights certicates within the time periods stipulated in the relevant entitlement certicates. In addition, a number of service stations owned by the Company are located on land owned by various rural collectives. The Company is authorised to use such land at no cost for one year. During this period of time, CNPC will apply to the Ministry of Land and Resources for the requisition and conversion of such land to state-owned land. Upon the issue of formal land use rights certicates, CNPC will lease such land to the Company. In management's opinion, the outcome of the above events, although uncertain at present, will not have a material impact on the Group's summaries of combined results and combined net assets. (v) Group insurance Except for limited insurance coverage for vehicles and certain assets subject to signicant operating risks, the Group does not carry any other insurance for property, facilities or equipment in respect of its business operations. In addition, the Group does not carry any third-party liability insurance against claims relating to personal injury, property and environmental damages or business interruption insurance since such insurance coverage is not customary in China. While the eect of under-insurance cannot be reasonably estimated at present, management believes it could have a material impact on the operating results or nancial position of the Group. (vi) The Company is currently evaluating options to close certain renery plants and implement other cost-cutting measures within the next several years. Management has not approved all signicant actions to be taken to complete such plan. Whereas the ultimate outcome of such plan cannot be estimated at present, management does not believe it will have a material adverse impact on the nancial position of the Group, but it could have a material adverse eect on the Group's results of operations. 6. SEGMENT INFORMATION

The Group is engaged in a broad range of petroleum related activities through its four major business segments: Exploration and Production, Rening and Marketing, Chemicals and Natural Gas. The Exploration and Production segment is engaged in the exploration, development and production of crude oil and natural gas. The Rening and Marketing segment is engaged in the rening, transportation, storage and marketing of crude oil and petroleum products. I-32

APPENDIX I

ACCOUNTANTS' REPORT

The Chemicals segment is engaged in the production and sale of basic petrochemical products, derivative petrochemical products, and other chemical products. The Natural Gas segment is engaged in the transmission, marketing and sale of natural gas. In addition to these four major business segments, the Other segment provides research and development, business services and infrastructure support to the operating business segments of the Group. All assets and operations of the Group are located in the PRC, which is considered as one geographic location in an economic environment with similar risks and returns. The accounting policies of the operating segments are the same as those described in section 3 ""Principal Accounting Policies''. Intersegment sales are made at prices with reference to benchmark or guidance prices published by the State Development Planning Commission.

I-33

APPENDIX I

ACCOUNTANTS' REPORT

Operating segment information for the years ended 31 December 1996, 1997 and 1998 and the nine months ended 30 September 1999 is presented below:
Exploration and Production RMB millions Rening and Marketing RMB millions Natural Gas RMB millions

Nine months ended 30 September 1999

Chemicals RMB millions

Other RMB millions

Total RMB millions

Sales and other operating revenues (including intersegment) Less: Intersegment sales Total sales and other operating revenues from external customers Depreciation, depletion and amortisation Segment result Other costs Prot from operations Finance costs Equity in prot/(loss) of associated companies accounted for by equity method Prot before taxation Taxation Minority interests Net prot Interest income Interest expense Impairment loss on assets to be retained by CNPC Segment assets Investment in associated companies Total assets Segment capital expenditure for property, plant and equipment for assets to be retained by CNPC Segment liabilities Other liabilities Total liabilities

74,573 (49,954) 24,619 (7,829) 39,538 (1,371) 38,167

83,561 (5,114) 78,447 (3,992) 8,952 (6,336) 2,616

18,953 (296) 18,657 (3,625) (1,209) (1,198) (2,407)

4,337 (25) 4,312 (424) (240) (17) (257)

146 146

181,570 (55,389) 126,181

(268) (16,138) (795) 46,246 (512) (9,434) (1,307) 36,812 (8,709)

53

156

(51)

158 28,261 (7,455) (27) 20,779

98 (2,738) 211,776 1,160 212,936

228 (1,813) 99,218 1,121 100,339

22 (2,824) (2,007) 79,411 621 80,032

3 (161) 8,588 8,588

82 (52) 4,988 4,988

433 (7,588) (2,007) 403,981 2,902 406,883

17,504 65,260

4,284 63,134

3,290 111 56,953

430 3,780

133 2,448

25,641 111 191,575 15,345 206,920

I-34

APPENDIX I
Exploration and Rening and Production Marketing RMB millions RMB millions

ACCOUNTANTS' REPORT

Year ended 31 December 1998

Chemicals RMB millions

Natural Gas RMB millions

Other RMB millions

Total RMB millions

Sales and other operating revenues (including intersegment) Less: Intersegment sales Total sales and other operating revenues from external customers Depreciation, depletion and amortisation Segment result Other costs Prot from operations Finance costs Equity in prot/(loss) of associated companies accounted for by equity method Prot before taxation Taxation Minority interests Net prot Interest income Interest expense Provision for asset impairment Impairment loss on assets to be retained by CNPC Segment assets Investment in associated companies Total assets Segment capital expenditure for property, plant and equipment for assets to be retained by CNPC Segment liabilities Other liabilities Total liabilities

89,626 (61,216) 28,410 (8,824) 37,126 (1,617) 35,509

100,105 (8,308) 91,797 (4,171) 10,009 (6,420) 3,589

21,849 (360) 21,489 (4,178) (447) (1,361) (1,808)

5,320 (38) 5,282 (317) (199) (27) (226)

309 309 (313) (826) (749) (1,575)

217,209 (69,922) 147,287 (17,803) 45,663 (10,174) 35,489 (12,822)

96

18

(26)

88 22,755 (7,537) 57 15,275

398 (4,327) 134,973 1,247 136,220

633 (2,932) (26) 87,175 961 88,136

149 (4,858) (310) 75,230 629 75,859

(106) 5,431 5,431

146 (53) 9,437 9,437

1,326 (12,276) (26) (310) 312,246 2,837 315,083

28,801 68,480

9,374 56,337

5,064 1,687 87,537

905 2,797

407 3,736

44,551 1,687 218,887 14,265 233,152

I-35

APPENDIX I
Exploration and Production RMB millions

ACCOUNTANTS' REPORT

Year ended 31 December 1997

Rening and Marketing RMB millions

Chemicals RMB millions

Natural Gas RMB millions

Other RMB millions

Total RMB millions

Sales and other operating revenues (including intersegment) Less: Intersegment sales Total sales and other operating revenues from external customers Depreciation, depletion and amortisation Segment result Other costs Prot from operations Finance costs Equity in prot/(loss) of associated companies accounted for by equity method Prot before taxation Taxation Minority interests Net prot Interest income Interest expense Provision for asset impairment Segment assets Investment in associated companies Total assets Segment capital expenditure for property, plant and equipment for assets to be retained by CNPC Segment liabilities Other liabilities Total liabilities

94,486 (63,193) 31,293 (8,704) 40,361 (1,596) 38,765

105,331 (8,847) 96,484 (3,601) 17,913 (6,291) 11,622

24,578 (279) 24,299 (3,757) 1,555 (1,706) (151)

5,103 (61) 5,042 (130) (148) (76) (224)

263 263

229,761 (72,380) 157,381

(258) (16,450) (686) 58,995 (694) (10,363) (1,380) 48,632 (6,754) 331 42,209 (12,200) (161) 29,848

124

208

(1)

379 (4,705) 123,205 679 123,884

492 (2,351) (31) 78,601 1,142 79,743

122 (3,838) 75,028 588 75,616

3 (29) 4,604 4,604

52 (5) 12,451 12,451

1,048 (10,928) (31) 293,889 2,409 296,298

31,312 65,810

8,388 48,689

12,484 1,692 83,865

1,623 2,005

718 5,677

54,525 1,692 206,046 14,094 220,140

I-36

APPENDIX I
Exploration and Production RMB millions

ACCOUNTANTS' REPORT

Year ended 31 December 1996

Rening and Marketing RMB millions

Chemicals RMB millions

Natural Gas RMB millions

Other RMB millions

Total RMB millions

Sales and other operating revenues (including intersegment) Less: Intersegment sales Total sales and other operating revenues from external customers Depreciation, depletion and amortisation Segment result Other costs Prot from operations Finance costs Equity in profit/(loss) of associated companies accounted for by equity method Prot before taxation Taxation Minority interests Net prot Interest income Interest expense Segment assets Investment in associated companies Total assets Segment capital expenditure for property, plant and equipment for assets to be retained by CNPC Segment liabilities Other liabilities Total liabilities

83,081 (53,234) 29,847 (6,713) 38,968 (2,038) 36,930

94,631 (5,241) 89,390 (2,987) 17,754 (6,151) 11,603

19,851 (4) 19,847 (2,957) 1,630 (1,131) 499

4,502 (69) 4,433 (71) (128) (56) (184)

160 160 (331) (659) (598) (1,257)

202,225 (58,548) 143,677 (13,059) 57,565 (9,974) 47,591 (6,257) 42 41,376 (9,833) (87) 31,456

44

(12)

10

366 (4,638) 112,126 644 112,770

517 (2,260) 65,213 1,080 66,293

97 (2,918) 65,745 581 66,326

2 (18) 2,984 2,984

51 (5) 11,618 11,618

1,033 (9,839) 257,686 2,305 259,991

27,736 67,276

15,456 44,686

13,816 3,992 67,131

1,311 966

817 4,454

59,136 3,992 184,513 10,559 195,072

Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, receivables and operating cash, and mainly exclude investments. Segment liabilities comprise operating liabilities and exclude items such as taxation and certain corporate borrowings. Capital expenditure comprises additions to property, plant and equipment, and intangible assets. All long-term assets of the Group are located in the PRC.

I-37

APPENDIX I
7. RESERVES

ACCOUNTANTS' REPORT

Movements in reserves for the three years ended 31 December 1998 and for the nine months ended 30 September 1999 are as follows:
Nine months ended 30 September 1999 RMB millions

Year ended 31 December 1996 RMB millions 1997 RMB millions 1998 RMB millions

(i) Retained earnings Balance brought forward Net prot (Distribution to)/Contribution from CNPC Balance carried forward (ii) Revaluation reserve Revaluation surplus

44,759 31,456 (13,970) 62,245

62,245 29,848 (19,226) 72,867

72,867 15,275 (10,009) 78,133

78,133 20,779 16,631 115,543 79,945

8.

DISTRIBUTION TO CNPC

In accordance with the restructuring agreement entered into between the Company and CNPC in connection with the Restructuring, the Company will distribute RMB 3,600 million to CNPC in respect of estimated net prot during the period from 1 October 1999 to 4 November 1999. This distribution will be reduced by the amount, if any, by which RMB 3,600 million exceeds the net prot of the Group during the period from 1 October 1999 to 4 November 1999 determined in accordance with PRC accounting standards. Any such reduction will be eected by a cash payment to the Company by CNPC within 30 days following the date on which the Company publishes its audited 1999 nancial statements, but in any event no later than 30 June 2000. 9. SUBSEQUENT EVENTS (i) Eective with the formation of the Company on 5 November 1999, CNPC and the Company entered into a number of agreements under which CNPC will provide a range of services and products to the Company, where there are no state-prescribed or market prices, at cost plus an additional margin of no more than 15% for certain construction and technical services and 3% for all other types of services. CNPC and the Company have entered into an agreement under which CNPC provides joint and irrevocable guarantees on certain debts transferred to the Company in the Restructuring. The Company and CNPC entered into a property lease agreement under which the Company leases from CNPC commencing from 5 November 1999 certain land and buildings from CNPC for a period of 2 to 50 years. Annual rental is at RMB 2,046 million, payable on a quarterly basis. The Company and CNPC entered into an agreement under which the Company provides supervision services for certain sales enterprises primarily comprising service stations owned by CNPC. There is no management fee to be paid. The service stations will only sell oil products supplied by the Company. I-38

(ii) (iii)

(iv)

APPENDIX I
(v)

ACCOUNTANTS' REPORT

The Company and CNPC have agreed that the Company will be granted rights to use certain patents, technology and certain computer software developed by CNPC with eect from 5 November 1999.

10.

ULTIMATE HOLDING COMPANY

The directors of the Company consider CNPC, established in the People's Republic of China, as being the Company's ultimate holding company. 11. SUBSEQUENT FINANCIAL STATEMENTS

No audited nancial statements have been prepared by any of the companies in the Group in respect of any period subsequent to 30 September 1999. Yours faithfully

PricewaterhouseCoopers Certied Public Accountants

I-39

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

The information set out in this Appendix does not form part of the Accountants' report prepared by PricewaterhouseCoopers, Certied Public Accountants, Hong Kong, the independent reporting accountants of the Company, as set out in Appendix I, and is included for information purposes only. HISTORICAL COMBINED FINANCIAL INFORMATION Set out below is a summary of additional nancial information extracted from the audited Financial Statements prepared in connection with US Oering. These nancial statements were prepared using the same basis of presentation as set out in section 2 of the Accountant's Reports as set out in Appendix I. COMBINED BALANCE SHEET
As of 31 December 1997 RMB millions 1998 RMB millions

ASSETS Current assets Cash and cash equivalents Short-term investments Accounts receivable, less provision for doubtful debts Inventories Prepayments and other current assets TOTAL CURRENT ASSETS Net assets to be retained by CNPC Property, plant and equipment, at cost, less accumulated depreciation, depletion and amortisation Investments Intangible and other assets TOTAL ASSETS

16,456 16 14,676 17,924 22,249 71,321 7,494 212,970 3,152 1,361 296,298

15,109 53 19,355 17,493 20,582 72,592 8,478 228,710 3,579 1,724 315,083

II-1

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

COMBINED BALANCE SHEET
As of 31 December 1997 RMB millions 1998 RMB millions

LIABILITIES AND OWNER'S EQUITY Current liabilities Short-term loans Accounts payable and accruals Taxation payable TOTAL CURRENT LIABILITIES Payable to CNPC Long-term borrowings Other long-term liabilities Deferred taxation TOTAL LIABILITIES Minority interests Owner's equity TOTAL LIABILITIES AND OWNER'S EQUITY

55,195 36,906 4,325 96,426 7,494 105,522 929 9,769 220,140 3,291 72,867 296,298

63,474 39,462 3,884 106,820 8,478 105,354 2,119 10,381 233,152 3,798 78,133 315,083

II-2

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

COMBINED STATEMENTS OF CASH FLOWS
Year ended 31 December 1996 RMB millions 1997 RMB millions 1998 RMB millions

CASH FLOWS FROM OPERATING ACTIVITIES Prot before taxation Adjustments for: Depreciation, depletion and amortisation Dry hole cost Provision for doubtful debts Provision for diminution in value of investments Provision for asset impairment Loss on disposal of property, plant and equipment Net loss from assets to be retained by CNPC Dividend income Interest income Interest expense Changes in working capital: accounts and other receivables inventories payables and accruals CASH GENERATED FROM OPERATIONS Interest received Interest paid Taxation paid NET CASH PROVIDED BY OPERATING ACTIVITIES INVESTING ACTIVITIES Capital expenditures Capital expenditure for assets to be retained by CNPC Acquisition of associated companies Share of prot of associated companies Capital injected into associated companies Repayment of capital by associated companies Acquisition of long-term investments Acquisition of short-term investments Purchase of intangible assets (Purchase)/disposal of other assets Proceeds from disposal of property, plant and equipment Dividends received NET CASH USED FOR INVESTING ACTIVITIES FINANCING ACTIVITIES New short-term loans Repayments of short-term loans New long-term borrowings Repayments of long-term borrowings II-3

41,376 12,973 2,759 2,172 415 36 (730) (1,033) 9,839 (3,736) (479) (950) 62,642 865 (9,884) (6,223) 47,400 (57,241) (3,992) (815) (42) (21) (468) (364) (57) 2,386 730 (59,884) 16,933 (13,879) 34,880 (12,702)

42,209 16,354 4,416 1,198 2 31 519 303 (280) (1,048) 10,928 (1,610) (3,915) 4,461 73,568 1,172 (11,345) (8,586) 54,809 (53,440) (1,692) (81) (331) (4) (192) (16) (500) (107) 3,614 280 (52,469) 19,240 (12,953) 27,523 (17,220)

22,755 17,577 3,630 878 156 26 339 571 (308) (1,326) 12,276 (3,814) 431 4,491 57,682 1,250 (13,964) (7,317) 37,651 (43,420) (1,687) (843) (88) 214 (155) (37) (509) 17 7,368 308 (38,832) 27,418 (18,043) 20,453 (21,954)

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

COMBINED STATEMENTS OF CASH FLOWS
Year ended 31 December 1996 RMB millions 1997 RMB millions 1998 RMB millions

Principal payment on nance lease obligations Dividends paid to minority interests Distributions to owner Contributions from CNPC for assets to be retained by CNPC Change in other long-term liabilities NET CASH PROVIDED BY/(USED FOR) FINANCING ACTIVITIES Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

(2) (14,006) 3,992 229 15,445 2,961 13,218 16,179

(262) (7) (19,592) 1,692 (484) (2,063) 277 16,179 16,456

(48) (42) (10,827) 1,687 1,190 (166) (1,347) 16,456 15,109

Nine months ended 30 September 1998 RMB millions 1999 RMB millions

CASH FLOWS FROM OPERATING ACTIVITIES Prot before taxation Adjustments for: Depreciation, depletion and amortisation Dry hole cost Revaluation loss Provision for doubtful debts Provision for diminution in value of investments (Gain)/loss on disposal of property, plant and equipment Net loss from assets to be retained by CNPC Dividend income Interest income Interest expense Changes in working capital: accounts and other receivables inventories payables and accruals CASH GENERATED FROM OPERATIONS Interest received Interest paid Taxation paid NET CASH PROVIDED BY OPERATING ACTIVITIES II-4

20,223 12,488 2,409 552 163 (61) 197 (38) (694) 8,771 (5,889) (2,057) 2,032 38,096 421 (6,326) (3,704) 28,487

28,261 15,942 2,001 1,122 488 46 45 2,262 (178) (433) 7,588 (7,864) (100) 2,895 52,075 368 (4,422) (6,328) 41,693

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

COMBINED STATEMENTS OF CASH FLOWS
Nine months ended 30 September 1998 RMB millions 1999 RMB millions

INVESTING ACTIVITIES Capital expenditures Capital expenditures for assets to be retained by CNPC Acquisition of associated companies Share of prot of associated companies Capital injected into associated companies Acquisition of long-term investments Acquisition of short-term investments Purchase of intangible assets Purchase of other assets Proceeds from disposal of property, plant and equipment Dividends received NET CASH USED FOR INVESTING ACTIVITIES FINANCING ACTIVITIES New short-term loans Repayments of short-term loans New long-term borrowings Repayments of long-term borrowings Principal payment on nance lease obligations (Distributions to)/contributions by owner Contributions from CNPC for assets to be retained by CNPC Change in other long-term liabilities NET CASH USED FOR FINANCING ACTIVITIES Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

(22,764) (785) (729) (54) (94) (277) (3,132) (306) 6,543 38 (21,560) 21,918 (16,167) 9,331 (9,711) (48) (16,569) 785 (134) (10,595) (3,668) 16,456 12,788

(24,769) (111) (71) (158) (20) (2,492) (188) (354) 4,396 178 (23,589) 20,401 (22,081) 9,842 (39,511) (72) 14,267 111 (746) (17,789) 315 15,109 15,424

II-5

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

COMBINED STATEMENT OF OWNER'S EQUITY
Share Capital RMB millions Share Premium RMB millions Retained Earnings RMB millions Revaluation Reserve RMB millions Total RMB millions

Balance at 1 January 1996 Net prot Distribution to Owner Balance at 31 December 1996 Net prot Distribution to Owner Balance at 31 December 1997 Net prot Distribution to Owner Balance at 31 December 1998 Revaluation surplus Net prot Net contribution by Owner Balance at 30 September 1999 Balance at 30 September 1999 in US$

44,759 31,456 (13,970) 62,245 29,848 (19,226) 72,867 15,275 (10,009) 78,133 20,779 16,631 115,543 13,958

79,945 79,945 9,658

44,759 31,456 (13,970) 62,245 29,848 (19,226) 72,867 15,275 (10,009) 78,133 79,945 20,779 16,631 195,488 23,616

II-6

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

SUPPLEMENTARY INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) Results of Operations
Year Ended 31 December 1996 1997 1998 RMB RMB RMB millions millions millions Nine Months Ended 30 September 1998 1999 RMB RMB millions millions

Sales and other operating revenues Sales to third parties Intersegment sales Production costs excluding taxes Exploration expenses Depreciation, depletion and amortisation Taxes other than income taxes Prot before taxation Taxation Results of operations from producing activities Share of associated companies' results of operations from producing activities

29,847 53,234 83,081 (28,861) (4,725) (5,677) (2,613) 41,205 (9,514) 31,691 44

31,293 63,193 94,486 (34,421) (6,830) (7,218) (2,910) 43,107 (10,819) 32,288 124

28,410 61,216 89,626 (33,566) (5,990) (7,579) (2,927) 39,564 (9,664) 29,900 96

24,582 43,726 68,308 (23,076) (3,867) (4,722) (2,239) 34,404 (7,955) 26,449 100

24,619 49,954 74,573 (20,395) (3,538) (6,382) (2,261) 41,997 (9,847) 32,150 53

Capitalised Costs
Year Ended 31 December 1996 1997 1998 RMB RMB RMB millions millions millions Nine Months Ended 30 September 1998 1999 RMB RMB millions millions

Property costs Producing assets Support facilities Construction-in-progress Total capitalised costs Accumulated depreciation, depletion and amortisation Net capitalised costs Share of associated companies' net capitalised costs

76,919 30,579 11,493 118,991 (41,036) 77,955 141

93,830 35,800 9,823 139,453 (47,727) 91,726 320

105,915 40,624 9,366 155,905 (53,778) 102,127 843

93,954 36,343 16,918 147,215 (51,707) 95,508 805

154,961 76,797 18,095 249,853 (108,912) 140,941 776

II-7

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

Costs Incurred in Property Acquisitions, Exploration and Development Activities

Year Ended 31 December 1996 1997 1998 RMB RMB RMB millions millions millions Nine Months Ended 30 September 1998 1999 RMB RMB millions millions

Property acquisition costs Exploration costs Development costs Total Share of associated companies' cost of property acquisition, exploration and development

7,131 20,712 27,843 105

8,689 23,070 31,759 192

8,705 19,612 28,317 247

4,842 11,608 16,450 171

5,089 11,008 16,097 48

Proved Reserve Estimates (Unaudited) Oil and gas proved reserves cannot be measured exactly. Reserve estimates are based on many factors related to reservoir performance that require evaluation by the engineers interpreting the available data, as well as price and other economic factors. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, and the production performance of the reservoirs as well as engineering judgment. Consequently, reserve estimates are subject to revision as additional data become available during the producing life of a reservoir. When a commercial reservoir is discovered, proved reserves are initially determined based on limited data from the rst well or wells. Subsequent data may better dene the extent of the reservoir and additional production performance, well tests and engineering studies will likely improve the reliability of the reserve estimate. The evolution of technology may also result in the application of improved recovery techniques such as supplemental or enhanced recovery projects, or both, which have the potential to increase reserves beyond those envisioned during the early years of a reservoir's producing life. Proved reserves are those quantities which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under current prices and costs as of the date the estimate is made. Proved developed reserves are those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are those reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required. The Ministry of Land and Resources in China issues production licences to applicants on the basis of the reserve reports approved by relevant authorities. Administrative rules issued by the State Council provide that the maximum term of a production licence is 30 years. However, in accordance with a special approval from the State Council, the Ministry of Land and Resources has issued production licences eective March 2000 to the Company for all of its crude oil and natural gas reservoirs with terms coextensive with the projected productive life of those reservoirs, ranging up to 55 years. Production licences to be issued to the Company in the future will be subject to the 30 year maximum unless additional special approvals can be obtained from the State Council. Each of the Company's production licences are renewable upon application by the Company 30 days prior to expiration. Oil and gas price increases may extend the productive lives of crude oil and natural gas reservoirs beyond the current terms of the relevant production licences. Proved reserve estimates as of 30 September 1999 were based on a report prepared by DeGolyer and MacNaughton, independent engineering consultants. Proved reserve estimates as of, and the changes for II-8

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

the years ended 31 December 1996, 1997 and 1998 were based on prior year proved reserve estimates of the petroleum engineering department of CNPC. These reserve estimates were prepared for each oil and gas region (as opposed to individual elds within a region) and adjusted for the estimated eects of using prices and costs prevailing at the end of each period. The Company's reserve estimates include only crude oil and natural gas which we believe can be reasonably produced within the current terms of production licences. Estimated quantities of net proved oil and condensate and natural gas reserves and of changes in net quantities of proved developed and undeveloped reserves for each of the period indicated were as follows:
Crude Oil and Condensate (millions of barrels) Natural Gas (billions of cubic feet)

Proved Developed and Undeveloped Reserves at 1 January 1996 Changes resulting from: Revisions of previous estimates Improved recovery Extensions and discoveries Production Reserves at 31 December 1996 Changes resulting from: Revisions of previous estimates Improved recovery Extensions and discoveries Production Reserves at 31 December 1997 Changes resulting from: Revisions of previous estimates Improved recovery Extensions and discoveries Production Reserves at 31 December 1998 Changes resulting from: Revisions of previous estimates Improved recovery Extensions and discoveries Production Reserves at 30 September 1999

10,250 (118) 378 671 (760) 10,421 (3) 405 501 (784) 10,540 149 409 547 (780) 10,865 27 154 303 (583) 10,766

11,304 (39) 304 1,905 (604) 12,870 1,441 302 3,144 (623) 17,134 730 82 5,017 (626) 22,337 126 35 2,268 (482) 24,284

II-9

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

Crude Oil and Condensate (millions of barrels) Natural Gas (billions of cubic feet)

Proved Developed Reserves at: 31 December 1996 31 December 1997 31 December 1998 30 September 1999 Proportional interest in proved reserves of associated companies 31 December 1996 31 December 1997 31 December 1998 30 September 1999

9,533 9,517 9,639 9,622 61 59 59 56

7,244 9,289 11,543 12,142 3 3 3 3

Standardised Measure The following disclosures concerning the standardised measure of future cash ows from proved oil and gas reserves are presented in accordance with Statement of Financial Accounting Standards No. 69. The amounts shown are based on prices and costs at the end of each period, currently enacted tax rates and a 10 percent annual discount factor. Since prices and costs do not remain static, and no price or cost changes have been considered, the results are not necessarily indicative of the fair market value of estimated proved reserves, but they do provide a common benchmark which may enhance the users' ability to project future cash ows. The standardised measure of discounted future net cash ows related to proved oil and gas reserves at the end of each of the three years in the period ended 31 December 1998 and 30 September 1999 is as follows (in millions of RMB):
At 31 December 1996 Future cash inows Future production costs Future development costs Future income tax expense Future net cash ows Discount at 10% for estimated timing of cash ows Standardised measure of discounted future net cash ows At 31 December 1997 Future cash inows Future production costs Future development costs Future income tax expense Future net cash ows Discount at 10% for estimated timing of cash ows Standardised measure of discounted future net cash ows 1,357,287 (675,253) (151,716) (160,977) 369,341 (213,307) 156,034 1,542,256 (703,216) (133,702) (214,407) 490,931 (284,326) 206,605

II-10

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

At 31 December 1998 Future cash inows Future production costs Future development costs Future income tax expense Future net cash ows Discount at 10% for estimated timing of cash ows Standardised measure of discounted future net cash ows At 30 September 1999 Future cash inows Future production costs Future development costs Future income tax expense Future net cash ows Discount at 10% for estimated timing of cash ows Standardised measure of discounted future net cash ows Share of associated companies' standardised measure of discounted future net cash ows At 31 December 1996 At 31 December 1997 At 31 December 1998 At 30 September 1999

1,421,611 (673,995) (109,994) (193,285) 444,337 (252,639) 191,698 2,041,969 (712,905) (97,831) (388,939) 842,294 (460,809) 381,485

909 1,157 1,039 1,978

Future net cash ows were estimated using period-end prices and costs, and currently enacted tax rates. Changes in the standardised measure of discounted net cash ows for the combined companies for each of the three years in the period ended 31 December 1998 and the nine-month period ended 30 September 1999 are as follows:
Year Ended 31 December 1996 1997 1998 RMB RMB RMB millions millions millions Nine Months Ended 30 September 1999 RMB millions

CHANGES IN STANDARDISED MEASURE OF DISCOUNTED FUTURE CASH FLOWS Beginning of period Sales and transfers of oil and gas produced, net of production costs Net changes in prices and production costs and other Extensions, discoveries and improved recovery Development costs incurred Revisions of previous quantity estimates Accretion of discount Net change in income taxes End of period

128,517 (55,620)

156,034 (60,220)

206,605 (56,305) (57,161) 35,028 21,728 5,498 29,684 6,621 191,698

191,698 (55,879) 260,483 31,286 18,073 7,720 20,648 (92,544) 381,485

27,860 44,449 31,179 40,374 19,824 23,776 (3,692) 2,012 18,590 22,404 (10,624) (22,224) 156,034 206,605

II-11

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

SIGNIFICANT DIFFERENCES BETWEEN IAS AND US GAAP

Summary of the combined results for the nine months ended 30 September 1999 and summary of the combined net assets as at 30 September 1999 have been prepared in accordance with IAS which may dier in certain material respects from US GAAP. Such dierences involve methods for measuring the amounts shown in the summaries, as well as additional disclosures required by US GAAP. Eect on net prot of signicant dierences between IAS and US GAAP is as follows:
Nine Months Ended September 30, 1999 RMB millions

Net prot under IAS US GAAP adjustments: Depreciation charges on xed asset revaluation Reversal of revaluation loss Income tax eect Net prot under US GAAP Basic and diluted net prot per share

20,779 2,032 1,122 (671) 23,262 0.15

Eect on owner's equity of signicant dierences between IAS and US GAAP is as follows:
At September 30, 1999 RMB millions

Owner's equity under IAS US GAAP adjustments: Reversal of xed asset revaluation Depreciation charges on xed asset revaluation Reversal of revaluation loss Deferred tax assets on revaluation Minority interests Owner's equity under US GAAP

195,488 (80,549) 2,032 1,122 25,540 604 144,237

In preparing the summary of dierences between IAS and US GAAP, management is required to make estimates and assumptions that aect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the estimates of revenue and expenses. Accounting estimates have been employed in these summaries to determine reported amounts, including realisability, useful lives of tangible and intangible assets, income taxes and other areas. Actual results could dier from those estimates. A summary of the principal dierences and additional disclosures applicable to the Group are set out below: Revaluation of xed assets As described in Note (a) of section 5 of Appendix I, the xed assets, excluding oil and gas reserves, transferred to the Company by CNPC were appraised as of 30 June 1999, as required by the relevant PRC regulations, by a rm of independent valuers registered in the PRC, China Enterprise Appraisal. The revaluation of the xed assets transferred resulted in RMB 80,549 million in excess of the prior carrying value and a revaluation loss of RMB 1,122 million on certain xed asset items. The depreciation charge on the revaluation surplus from 1 July 1999 to 30 September 1999 was RMB 2,032 million. II-12

APPENDIX II

ADDITIONAL FINANCIAL INFORMATION

For purposes of reconciling to the US GAAP nancial data, the eect of the revaluation and the related depreciation charges are reversed. A deferred tax asset relating to the reversal of the revaluation eect is established, together with a corresponding increase in the owner's equity. Under a special approval granted by the Ministry of Finance, the eect of the revaluation will be available as additional depreciation base for purposes of determining taxable income. Related party transactions The Group has disclosed in Note (j) of section 4 of Appendix I transactions and balances with signicant customers and in Note (i) of section 4 of Appendix I transactions and balances with its immediate parent CNPC and related companies. CNPC is owned by the PRC Government which also owned a signicant portion of the productive assets in the PRC. IAS exempts state controlled enterprises from disclosing transactions with other state controlled enterprises. IAS also excludes from related parties government departments and agencies to the extent that such dealings are in the normal course of business. US GAAP contains no similar exemptions but requires disclosure of material related party transactions. The Group believes that it has provided meaningful disclosures of related party transactions through the major customer disclosures in Note (j) of section 4 of Appendix I and the transactions with its immediate parent disclosed in Note (i) of section 4 of Appendix I. Although the majority of the Group's activities are with PRC Government authorities and aliates and other PRC controlled enterprises, none individually constitutes a major customer or supplier other than those disclosed. Recent US accounting pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ""Accounting for Derivative Instruments and Hedging Activities'' (""FAS 133''), which establishes a new model for accounting for derivative and hedging activities and supersedes and amends a number of existing standards. FAS 133 is eective for scal years beginning after 15 June 2000. Upon initial application, all derivatives are required to be recognised in the statement of nancial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be reassessed and documented as required by the provisions of FAS 133. The Group is currently in the process of evaluating the requirements of this statement and its potential impact on the Group's combined results and combined net assets.

II-13

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The information set out below does not form part of the accountants' report prepared by PricewaterhouseCoopers, the reporting accountants of the Company, as set out in Appendix I, and is included for reference purpose only. PricewaterhouseCoopers expresses no opinion on the following information. The Company was established in the PRC on 5 November 1999 as a joint stock company with limited liability as a result of the Restructuring of CNPC in preparation for the listing of the Company's shares on the NYSE and the Stock Exchange. In accordance with the Restructuring Agreement eective as of 5 November 1999, the Company issued 160 billion shares in exchange for the assets and liabilities transferred to the Company by CNPC. CNPC transferred to the Company certain of its assets, liabilities and interests in China related to (i) the exploration, development and production of crude oil and natural gas, (ii) the rening, transportation, storage and marketing, including import and export, of crude oil and petroleum products, (iii) the production and sale of chemicals, and (iv) the transmission, marketing and sale of natural gas. The assets, liabilities and interests transferred by CNPC to the Company include (i) 13 crude oil and natural gas exploration and production enterprises and one exploration unit, (ii) 15 rening and petrochemical production enterprises, (iii) 21 marketing companies, (iv) one pipeline transmission company and other supplementary pipelines previously owned by CNPC, (v) two research institutions, and (vi) production sharing contracts (collectively the ""Core Units''). CNPC retained ve chemical production facilities and certain other assets, liabilities and businesses not assumed by the Company, including units providing ancillary and support services, as well as certain domestic and all foreign subsidiaries and joint ventures. As a result of the Restructuring, the Company and CNPC have entered into a Comprehensive Products and Services Agreement for a range of products and services which may be required and requested by either party. After the Restructuring and upon the formation of the Company, the Company operates as a standalone entity. The resulting changes are summarised in the notes to unaudited pro forma nancial information. The unaudited pro forma combined results and the combined balance sheet are prepared based on the historical combined results and combined balance sheet of the Company and its subsidiaries (see the basis of presentation as described in section 2 to the combined nancial statements) after giving eects to the pro forma adjustments described in the notes thereto. The pro forma combined results for the year ended 31 December 1998 and for the nine months ended 30 September 1999 present adjustments as if (1) the formation and the Restructuring and (2) the Global Oering had occurred at the beginning of each period. The pro forma combined balance sheet as of 30 September 1999 presents adjustments as if (1) the formation and the Restructuring and (2) the Global Oering had occurred on 30 September 1999. The unaudited pro forma nancial information does not purport to represent what the results of operations or nancial position would actually have been or would be if the events described above had in fact occurred on the dates assumed or to project the results of operations or nancial position for any future date or period. The unaudited pro forma nancial information should be read in conjunction with the historical combined nancial statements, including the notes thereto, the management's discussion and analysis, and other nancial information included elsewhere in this prospectus. III-1

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Notes Description of pro forma adjustments A description of the pro forma adjustments is as follows: (a) To exclude the eects of ve chemical production facilities to be retained by CNPC upon the formation of the Company. The eect of these chemical facilities are included in the Company's historical nancial statements for all relevant periods. (b) To adjust exploration expenses in accordance with the Comprehensive Products and Services Agreement between CNPC and the Company. Under the agreement, products and services provided by CNPC where there are no state-prescribed or market prices are charged at cost plus an additional margin of no more than 15% for certain construction and technical services, including exploration and development services and oileld construction services, and 3% for all other types of products and services starting from 5 November 1999. Historically, exploration and development services and oileld construction services provided by CNPC were charged primarily at direct cost. The pro forma adjustments are based on the actual exploration and development services and oileld construction service utilisation of which certain costs are capital in nature and an additional margin of 15% for the year ended 31 December 1998 and for the nine months ended 30 September 1999. (c) To adjust selling, general and administrative expenses as if the new operating lease agreements on land and buildings with CNPC had been in eect throughout the year ended 31 December 1998 and the nine months ended 30 September 1999. The pro forma adjustments are to reect the rental expense, less the allocation of historical depreciation expense of the respective properties to the Company by CNPC for the year ended 31 December 1998 and the nine months ended 30 September 1999. The rental expenses are calculated in accordance with the new lease agreements entered into between the Company and CNPC eective on 5 November 1999. According to the new operating lease agreements, the Company will lease the following land and buildings from CNPC at the following rental:
Lease Term Year Ended 31 December 1998 RMB millions Nine Months Ended 30 September 1999 RMB millions

Land (1,144,959,961 square meters) Buildings (269,770 square meters) Headquarters (10,000 square meters) Total adjustment to selling, general and administrative expenses Less: Depreciation charge Net adjustment

50 20 2

2,000 39 7 2,046 (11) 2,035

1,500 29 5 1,534 (8) 1,526

(d) To adjust for additional depreciation and depletion resulting from the revaluation of property, plant and equipment based on revaluation made as of 30 June 1999, performed by China Enterprise Appraisal, an independent valuer in the PRC as if such revaluation had been recognised on 1 January 1998 and 1 January 1999, respectively. The revaluation was performed for the purpose of determining the fair value of the property, plant and equipment contributed III-2

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

by CNPC to the Company as required under PRC regulations upon its formation eective 5 November 1999. For the purpose of the preparation of the Company's combined nancial statements, such revaluation was recognised in the Company's combined balance sheet as of 30 June 1999. (e) To reverse the interest expense related to the RMB 30.5 billion loans assumed by CNPC on 30 June 1999 as if the debt assumption took place on 1 January 1998. For the year ended 31 December 1998 and the nine months ended 30 September 1999 the reversal of interest expense was RMB 1,950 million and RMB 992 million, and the reversal of capitalised interest was RMB 133 million and RMB 92 million, respectively. (f) To adjust for the income tax eects using the statutory rate in eect of 33%. Upon formation of the Company, special deductions relating to exploration and production activities represent tax deductions in excess of the actual expenses with respect to exploration and production activities will cease. (g) To reverse the xed assets revaluation, revaluation loss and related additional depreciation and depletion described in note (d). Under US GAAP, property, plant and equipment are stated at cost. (h) To give eect to the distribution by the Company to CNPC of RMB 3,600 million in respect of the net prot of the Group for the period from 1 October 1999 to 4 November 1999. This distribution will be reduced by the amount, if any, by which RMB 3,600 million exceeds the Group's net prot during the period from 1 October 1999 to 4 November 1999 determined in accordance with PRC accounting standards. (i) The pro forma basic and diluted net prot per Share has been calculated by dividing pro forma net prot by total number of Shares outstanding immediately after the Global Oering as if such Shares had been outstanding for all relevant periods. The pro forma basic and diluted net prot per ADS has been calculated by dividing pro forma net prot by total number of ADS outstanding immediately after the Global Oering assuming a conversion rate of 1 ADS 100 ordinary shares as if such ADSs had been outstanding for all relevant periods. (j) To reect 15,824 million H shares, equivalent to 158 million ADSs, issued and net proceeds of RMB 22,153 million in connection with the Global Oering and the eect of the application of proceeds from the Global Oering to repay secured short-term loan of RMB 8,861 million with a weighted average interest rate of 7.61% and interest reduction and the related tax eects using a statutory tax rate of 33%. (k) To record the deferred tax eect as a result of the reversal of xed asset revaluation eect as described in note (g).

III-3

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

(l) The eect of the pro forma adjustments (a) to (d) above on the prot from operations of each of the operating segments for the year ended 31 December 1998 and the nine months ended 30 September 1999 is as follows:
Year ended 31 December 1998 Pro forma Pro forma, Historical adjustments adjusted RMB RMB RMB millions millions millions Nine months ended 30 September 1999 Pro forma Pro forma, Historical adjustments adjusted RMB RMB RMB millions millions millions

Exploration and production Rening and marketing Chemicals Natural gas Other

35,509 3,589 (1,808) (226) (1,575)

(6,712) (2,710) (2,043) (215) (198)

28,797 879 (3,851) (441) (1,773)

38,167 2,616 (2,407) (257) (1,307)

(3,325) (1,339) 1,121 (144) (82)

34,842 1,277 (1,286) (401) (1,389)

III-4

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Year ended 31 December 1998 Pro Global Pro Forma Forma Oering Adjustments Adjusted Adjustments RMB RMB RMB (Amounts in millions except for per share data) (576)(a) 226 (a) (9,604)(d) 32 (a) (801)(b) 310 (a) 11 (a) 509 (a) 47 (a) (2,035)(c) 3 (a) 146,711 Pro Forma Combined RMB

Historical RMB TURNOVER AND REVENUES Sales and other operating revenues OPERATING EXPENSES Depreciation, depletion and amortisation Employee compensation costs Exploration expenses, including exploratory dry holes Impairment loss on assets to be retained by CNPC Other (expenses)/income Purchases, services and other Selling, general and administrative expenses Taxes other than income taxes TOTAL OPERATING EXPENSES PROFIT FROM OPERATIONS FINANCE COSTS Exchange gain/(loss), net Interest expense Interest income TOTAL FINANCE COSTS SHARE OF PROFIT OF ASSOCIATED COMPANIES PROFIT BEFORE TAXATION TAXATION PROFIT BEFORE MINORITY INTERESTS MINORITY INTERESTS NET PROFIT BASIC AND DILUTED NET PROFIT PER SHARE (in RMB) US GAAP Reversal of additional depreciation and depletion from revaluation of xed assets Tax eect on US GAAP adjustment Pro forma net prot under US GAAP Pro forma basic and diluted net prot per ordinary share under IAS Pro forma basic and diluted net prot per ordinary share under US GAAP Pro forma number of ordinary shares outstanding Pro forma basic and diluted net prot per ADS under IAS Pro forma basic and diluted net prot per ADS under US GAAP Pro forma number of ADSs outstanding (17,803) (9,752) (5,990) (310) (336) (58,190) (9,838) (9,579) (111,798) 35,489 (1,872) (12,276) 1,326 (12,822) 88 22,755 (7,537) 15,218 57 15,275 0.10

147,287

146,711

(27,181) (9,720) (6,791) (325) (57,681) (11,826) (9,576) (123,100) 23,611

(27,181) (9,720) (6,791) (325) (57,681) (11,826) (9,576) (123,100) 23,611 (1,863) (9,652) 1,326 (10,189) 88 (222)(j) 13,510 (4,539) 8,971 57 9,028

9 (a) 1,950 (e)

(1,863) (10,326) 1,326 (10,863) 88

674(j)

3,220 (f)

12,836 (4,317) 8,519 57 8,576

(g)

9,604 (3,169) 15,011

9,604 (3,169) 15,463 0.05 0.09 15,824(j) 175,824 5.14 8.80 158(j) 1,758

(i) (i)

0.05 0.09 160,000

(i) (i)

5.36 9.38 1,600

III-5

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Nine months ended 30 September 1999 Pro Global Pro Forma Forma Oering Adjustments Adjusted Adjustments RMB RMB RMB (Amounts in millions except for per share data) (280)(a) 196(a) (4,059)(d) 22(a) (445)(b) 2,007(a) 63(a) 228(a) 24(a) (1,526)(c) 1(a) 125,901 (20,001) (6,800) (3,983) 193 (42,229) (1,122) (11,066) (7,850) (92,858) 33,043 1(a) 992(e) (1,553) (6,596)(i) 433 (7,716) 158 (1,359)(f) 25,485 (8,814) 16,671 (27) 16,644 (166)(j) Pro Forma Combined RMB

Historical RMB TURNOVER AND REVENUES Sales and other operating revenues OPERATING EXPENSES Depreciation, depletion and amortisation Employee compensation costs Exploration expenses, including exploratory dry holes Impairment loss on assets to be retained by CNPC Other (expenses)/income Purchases, services and other Revaluation loss Selling, general and administrative expenses Taxes other than income taxes TOTAL OPERATING EXPENSES PROFIT FROM OPERATIONS FINANCE COSTS Exchange gain/(loss), net Interest expense Interest income TOTAL FINANCE COSTS SHARE OF PROFIT OF ASSOCIATED COMPANIES PROFIT BEFORE TAXATION TAXATION PROFIT BEFORE MINORITY INTERESTS MINORITY INTERESTS NET PROFIT BASIC AND DILUTED NET PROFIT PER SHARE (in RMB) US GAAP Reversal of additional depreciation and depletion from revaluation of xed assets Reversal of revaluation loss Tax eect on US GAAP adjustment Pro forma net prot under US GAAP Pro forma basic and diluted net profit per ordinary share under IAS Pro forma basic and diluted net profit per ordinary share under US GAAP Pro forma number of ordinary shares outstanding Pro forma basic and diluted net prot per ADS under IAS Pro forma basic and diluted net prot per ADS under US GAAP Pro forma number of ADSs outstanding

126,181 (16,138) (6,822) (3,538) (2,007) 130 (42,457) (1,122) (9,564) (7,851) (89,369) 36,812 (1,554) (7,588) 433 (8,709) 158 28,261 (7,455) 20,806 (27) 20,779 0.13

125,901 (20,001) (6,800) (3,983) 193 (42,229) (1,122) (11,066) (7,850) (92,858) 33,043 (1,553) (6,092) 433 (7,212) 158 25,989 (8,980) 17,009 (27) 16,982

504(j)

(g) (g)

6,091 1,122 (2,010) 21,847

6,091 1,122 (2,010) 22,185 0.10 0.13 15,824(j) 175,824 9.66 12.62 158(j) 1,758

(i) (i)

0.10 0.14 160,000

(i) (i)

10.40 13.65 1,600

III-6

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

As at 30 September 1999 Pro Global Pro Forma Forma Oering Adjustments Adjusted Adjustments RMB RMB RMB (Amounts in millions except for per share data) Pro Forma Combined RMB

Historical RMB ASSETS Current Assets Cash and cash equivalents Short-term investments Accounts receivable, less provision for doubtful debts Inventories Prepayments and other current assets TOTAL CURRENT ASSETS Net assets to be retained by CNPC Property, plant and equipment, at cost, less accumulated depreciation, depletion and amortisation Investments, at net book value Intangible and other assets TOTAL ASSETS LIABILITIES AND OWNER'S EQUITY Current liabilities Short-term loans Accounts payable and accruals Taxation payable Distribution payable to CNPC Total Current Liabilities Payable to CNPC Long-term borrowings Other long-term liabilities Deferred taxation Total Liabilities Minority interests Owner's equity TOTAL LIABILITIES AND OWNER'S EQUITY US GAAP Total pro forma assets under IAS Reversal of remaining xed assets revaluation Reversal of revaluation loss Deferred tax assets Total pro forma assets under US GAAP Total pro forma owner's equity under IAS Reversal of xed assets revaluation Depreciation charges on xed assets revaluation Reversal of revaluation loss Deferred tax assets on revaluation Minority interests Total pro forma owner's equity under US GAAP

15,424 2,545 20,070 17,593 27,308 82,940 6,665 311,585 3,618 2,075 406,883 (6,665)(a) (92)(e)

15,424 2,545 20,070 17,593 27,308 82,940 311,493 3,618 2,075 400,126

22,153 (j) (8,861)(j)

28,716 2,545 20,070 17,593 27,308 96,232 311,493 3,618 2,075 413,418

59,145 45,421 5,594 110,160 6,665 78,971 1,373 9,751 206,920 4,475 195,488 406,883

3,600 (h) (6,665)(a)

59,145 45,421 5,594 3,600 113,760 78,971 1,373 9,751 203,855 4,475 191,796 400,126 400,126 (78,517) 1,122 25,540 348,271

(8,861)(j)

50,284 45,421 5,594 3,600 104,899 78,971 1,373 9,751 194,994 4,475 213,949 413,418 413,418 (78,517) 1,122 25,540 361,563 213,949 (80,549) 2,032 1,122 25,540 604 162,698

(92)(e) (3,600)(h)

22,153 (j)

(g) (g) (k)

(g) (g) (k)

191,796 (80,549) 2,032 1,122 25,540 604 140,545

III-7

APPENDIX IV

PROFIT ESTIMATE

The estimate of the consolidated prot after taxation and minority interests but before extraordinary items of the Group for the year ended 31 December 1999 is set out under ""Prot estimate and dividend policy'' in the ""Financial Information'' section above. BASES The Company was established on 5 November 1999. The Directors have prepared the estimate of the consolidated prot after taxation and minority interests but before extraordinary items of the Company for the year ended 31 December 1999. The estimate has been prepared by the Directors based on the audited nancial results of the Group for the nine months ended 30 September 1999 and an estimate of the results of the Group for the remaining three months of the year ended 31 December 1999. The Directors are not aware of any extraordinary item which has arisen during the year ended 31 December 1999. The estimate has been prepared on the basis of accounting policies consistent in all material respects with those adopted by the Company as set out in the Accountants' Report contained in Appendix I.

IV-1

APPENDIX IV

PROFIT ESTIMATE

27 March 2000

The Directors PetroChina Company Limited Goldman Sachs (Asia) L.L.C. China International Capital Corporation (Hong Kong) Limited Dear Sirs, We have reviewed the accounting policies and calculations adopted in arriving at the estimate of the consolidated prot after taxation and minority interests but before extraordinary items of PetroChina Company Limited (the ""Company'') and its subsidiaries (hereinafter collectively referred to as the ""Group'') for the year ended 31 December 1999 (the ""Estimate'') as set out in the subsection headed ""Prot estimate and dividend policy'' in the section headed ""Financial information'' in the prospectus of the Company dated 27 March 2000 (the ""Prospectus''). The Estimate, for which the directors of the Company are solely responsible, has been prepared by the directors of the Company based on the audited combined results of the Group for the nine months ended 30 September 1999 and an estimate of the results of the Group for the remaining three months ended 31 December 1999 on the basis that the current Group structure had been in existence throughout the whole nancial year ended 31 December 1999. In our opinion, so far as the accounting policies and calculations are concerned, the Estimate is presented on a basis consistent in all material respects with the accounting policies presently adopted by the Group which are summarised in the Accountants' Report dated 27 March 2000, the text of which is set out in Appendix I of the Prospectus. Yours faithfully, PricewaterhouseCoopers Certied Public Accountants Hong Kong

IV-2

APPENDIX IV

PROFIT ESTIMATE China International Capital Corporation (Hong Kong) C I C C Limited

27 March 2000

Goldman Sachs (Asia) L.L.C.

The Directors PetroChina Company Limited Dear Sirs, We refer to the estimate of the consolidated prot after taxation and minority interests but before extraordinary items of PetroChina Company Limited (the ""Company'') and its subsidiaries for the year ended 31 December 1999 as set out in the prospectus issued by the Company dated 27 March 2000. We have discussed with you the bases upon which the prot estimate has been made. We have also considered the letter dated 27 March 2000 addressed to yourselves and ourselves from PricewaterhouseCoopers regarding the accounting policies and calculations upon which the prot estimate has been made. On the basis of the information comprising the prot estimate and on the bases of the accounting policies and calculations adopted by you and reviewed by PricewaterhouseCoopers, we are of the opinion that the prot estimate, for which you as directors of the Company are solely responsible, has been made after due and careful enquiry.

Yours faithfully, For and on behalf of GOLDMAN SACHS (ASIA) L.L.C. Michael Yao Executive Director

Yours faithfully, For and on behalf of CHINA INTERNATIONAL CAPITAL CORPORATION (HONG KONG) LIMITED Li Gang Managing Director

IV-3

APPENDIX V

PROPERTY VALUATION

The following is the text of the letter, summary of values and valuation certicate received from Chesterton Petty Limited, an independent property valuer, prepared for the purpose of inclusion in this prospectus, in connection with their valuation of the property interests held by the Group as at 30 September 1999. As described in the section headed ""Documents Available for Inspection'' in Appendix XI, a copy of the independent property valuer's full report is available for inspection.

International Property Consultants Chesterton Petty Ltd 16/F CITIC Tower 1 Tim Mei Avenue Central Hong Kong

27 March 2000 The Directors PetroChina Company Limited 6-8 Liu Pu Kang Jie Xicheng District Beijing The PRC Dear Sirs: Introduction In accordance with your instructions to value the property interests held by PetroChina Company Limited (the ""Company'') and its subsidiaries, (herein together referred to as the ""Group''), in the People's Republic of China (the ""PRC''), we conrm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the open market values of the property interests as at 30 September 1999. Based on our enquiries and the conrmations received from the Company as we consider necessary, we are of the opinion that there has been no material adverse change in the value of the property interests held by the Group during the period from October 1, 1999 to January 31, 2000. The Group The Company engages in a broad range of petroleum related activities, including: the exploration, development and production of crude oil and natural gas; the rening, transmission, storage and marketing of crude oil and petroleum products; the production and sale of petrochemicals; and the transmission, marketing and sale of natural gas. V-1

APPENDIX V

PROPERTY VALUATION

For the purpose of our valuation, we have categorized the operation of the Group into the following operations: oil exploration, development and production, oil renery and sales, petroleum by-products production and sales, pipeline transmission, natural gas production and transmission and research and development. The Company owns and leases properties spread over 23 Provinces/Cities of the PRC. The Group has land use rights in respect of approximately 42,659 parcels of land with an aggregate area of approximately 1,148,458 thousand sq. m. (12,362,002 thousand sq. ft.) including 183 parcels of the land with an aggregate area of approximately 3,498 thousand sq. m. (37,652 thousand sq. ft.) which have been transferred to the Company from China National Petroleum Corporation (""CNPC'') as part of CNPC's restructuring and 42,476 parcels of the land with an aggregate area of approximately 1,144,960 thousand sq. m. (12,324,349 thousand sq. ft.) which have been leased to the Company from CNPC. The Company also owns majority interests in 4 listed companies which hold 441 parcels of land with an aggregate area of approximately 11,670 thousand sq. m. (125,616 thousand sq. ft.). The Group owns 57,482 buildings and structures with an aggregate gross oor area of 17,073 thousand sq. m. (183,774 thousand sq. ft.), 2,054 buildings & structures which are under construction with an aggregate gross oor area upon completion of 979 thousand sq. m. (10,538 thousand sq. ft.) and 192 leased buildings and structures with an aggregate gross oor area of 279.77 thousand sq. m. (3,011 thousand sq. ft.). In addition, the Company owns majority interests in 4 listed companies which hold 3,496 buildings and structures with an aggregate gross oor area of 1,675 thousand sq. m. (18,030 thousand sq. ft.) and 32 buildings & structures which are under construction with an aggregate gross oor area upon completion of approximately 16 thousand sq. m. (172 thousand sq. ft.) The Company also owns majority interests in 35 unlisted companies which hold 1,230 buildings and structures on various parcels of land situated in several provinces in China. We have not valued, and our full valuation report, summary of values and valuation certicate do not encompass, such properties. Basis of Valuations Our valuation is our opinion of the open market value, which we would dene as intended to mean ""the best price at which the sale of an interest in a property might reasonably be expected to have been completed unconditionally for cash consideration on the date of valuation assuming: (a) a willing seller;

(b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale; (c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;

(d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and (e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion''.

Our valuation has been made on the assumption that the owner sells the property interests on the open market without the benet of a deferred term contract, leaseback, joint venture, management V-2

APPENDIX V

PROPERTY VALUATION

agreement or any similar arrangement, which would serve to increase the value of the property interests. In addition, no account has been taken of any option or right of pre-emption concerning or aecting the sale of the property interests and no forced sale situation in any manner is assumed in our valuation. Valuation Methodology In forming our opinion of the value of the property interests in Group A and Group B, we have valued the property interests by using ""Direct Comparison Approach'' and ""Depreciated Replacement Cost Approach''. Direct comparison approach is the most commonly used method by which we have valued the property by making reference to comparable sales evidence as available on the market. However, due to the specic purpose for which most of the properties have been constructed, there is no readily identiable market comparable, and the buildings and structures of these properties cannot be valued on the basis of direct comparison. They have therefore been valued on the basis of their depreciated replacement cost. We would dene ""depreciated replacement cost'' for these purposes to be our opinion of the land value in its existing use and an estimate of the new replacement costs of the buildings, including professional fees and nance charges, from which deductions are then made to allow for economical, physical and functional obsolescence. The depreciated replacement cost approach generally provides the most reliable indication of value for property in the absence of a known market based on comparable sales. The property interests in Group B, which are under construction, have been valued on the basis of their prevailing cost level and status of construction as at the date of valuation. We have assumed that all consents, approvals and licences from the relevant Government authorities for these developments will be granted without any onerous conditions or undue delay, which might aect their values. The ""Capital value when completed'' represents our opinion of the development assuming that it is completed as at the date of valuation. The property interests in Group C, which are leased by the Company under lease contracts, have no commercial value due to the prohibition against assignment or lack of substantial prot rent. Valuation Assumptions In valuing the property interests in Group A and Group B, we have assumed that (except as otherwise stated) transferable land use rights in respect of the property interests for their respective terms at nominal annual land use fees have been granted and that, unless otherwise stated, any premium payable has already been fully paid. In valuing the property interests in Group A and Group B, which are erected on the leased land (authorised by Ministry of Land and Resources) including those service stations erected on collective land, we have assumed that these property interests are free from encumbrances, restrictions and outgoings of an onerous nature, which could aect their values. Availability of Information We have no reason to doubt the truth and accuracy of the information provided to us by the Group and/or its PRC legal advisers and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenure, leases, particulars of occupancy, identication of the properties, site and oor areas, construction costs and all other relevant information. Dimensions, measurements and areas included in the valuation certicate are based on information contained in the documents and lease contracts provided to us and are therefore only approximations. We have not carried out any on-site V-3

APPENDIX V

PROPERTY VALUATION

measurements to verify the site and oor areas of the properties. Therefore, we have assumed that the areas shown on the documents handed to us are correct. Titles of Properties We have been provided with copies of extracts of title documents relating to the properties. However, we have not inspected the original documents to verify ownership or to verify any amendments, which may not appear on the copies handed to us. In the course of our valuation and the preparation of our valuation report and valuation certicate (including the notes thereto), we have relied to a considerable extent on information given by the Company and the legal opinion of the Company's PRC legal advisers, King & Wood, on the PRC law regarding the titles of the properties in the PRC. Inspections We have inspected the exterior and where possible, the interior of the properties valued. However, no structural survey has been made. In the course of our inspection, we did not note any serious defects. We are not, however, able to report that the properties are free from rot, infestation or any other structural defects. No tests were carried out on any of the services. We have not carried out investigations on site conditions, in respect of the properties under construction to determine the suitability of the ground conditions and the services, etc. for further development. Our valuation is prepared on the assumption that these aspects are satisfactory and no extraordinary expenses or delays will be incurred during the construction period. General Conditions No allowance has been made in our report for any charges, mortgages or amounts owing on any property nor for any expenses or taxation, which may be incurred in aecting a sale. Unless otherwise stated, it is assumed that all properties are free from encumbrances, restrictions and outgoings of an onerous nature, which could aect their values. In preparing our valuation certicate, we have complied with the requirements contained within the provisions of Practice Note 12 of the Listing Rules of The Stock Exchange of Hong Kong Limited. Unless otherwise specied, all amounts are denominated in Renminbi. The exchange rate adopted for conversion is HK$1 RMB1.07, being the prevailing exchange rate quoted by the People's Bank of China on the valuation date. Year 2000 Compliance We have not arranged for any investigation to be carried out to determine whether or not all equipment, plant and machinery and services which form part of, or are contained within the subject properties are year 2000 compliant. We are therefore unable to report that the equipment, plant and machinery and services are year 2000 complaint. For the purposes of this valuation, we have assumed that the values of the subject properties will not be adversely aected by the year 2000 problem.

V-4

APPENDIX V

PROPERTY VALUATION

Valuation Certicate Our summary of values and the valuation certicate are attached herewith. Yours faithfully For and on behalf of Chesterton Petty Limited Charles C K Chan Chartered Estate Surveyor ARICS FHKIS MCIArb RPS(GP) Executive Director

Note:

Mr Charles C K Chan, A.R.I.C.S., F.H.K.I.S., M.C.I.Arb., R.P.S.(G.P.), has been a qualied valuer with Chesterton Petty Limited since June 1987 and has about 15 years' experience in the valuation of properties in Hong Kong and has extensive experience in the valuation of properties in the People's Republic of China.

V-5

APPENDIX V
SUMMARY OF VALUES

PROPERTY VALUATION

Capital Value in existing state as at 30 September 1999 Property RMB'000 HK$'000

Group A : Property interests owned by the Group

Oil exploration, development and production Oil renery and sales Petroleum by-products production and sales Pipeline transmission Natural gas production and transmission Research and development Sub-total : 8,038,743 9,285,182 7,645,286 566,240 67,236 1,306,842 26,909,529 7,512,844 8,677,740 7,145,127 529,196 62,837 1,221,348 25,149,092

Group B : Property interests held by the Group under construction

Oil exploration, development and production Oil renery and sales Petroleum by-products production and sales Pipeline transmission Natural gas production and transmission Research and development Sub-total : 2,306,231 1,511,195 1,503,639 13,897 7,560 46,111 5,388,633 2,155,356 1,412,332 1,405,270 12,988 7,065 43,094 5,036,105

Group C : Property interests leased by the Group

Oil exploration, development and production Oil renery and sales Petroleum by-products production and sales Pipeline transmission Natural gas production and transmission Research and development Sub-total : Grand-total : No No No No No No commercial commercial commercial commercial commercial commercial value value value value value value

No commercial value 32,298,162 30,185,197

V-6

APPENDIX V
VALUATION CERTIFICATE Group A: Property interests owned by the Group

PROPERTY VALUATION

Property

Description and tenure

Particulars of occupancy

Capital Value in existing state as at 30 September 1999 RMB'000 HK$ '000

Various properties in 23 Provinces/ Cities in the PRC

The properties comprise 60,978 production and ancillary buildings and structures, built on various dates from 1960s to 1990s, situated in Beijing, Chongqing, Nei Mongol Zizhiqu, Shanghai, Tianjin, Xizang Zizhiqu, Fujian Province, Gansu Province, Guangdong Province, Hebei Province, Heilongjiang Province, Henan Province, Jilin Province, Jiangsu Province, Liaoning Province, Ningxia Huizu Zizhiqu, Qinghai Province, Shandong Province, Shaanxi Province, Shanxi Province, Sichuan Province, Xinjiang Uygur Zizhiqu and Zhejiang Province in the PRC. The total gross oor area of the properties owned by the Group in their respective business category is summarised as follows:
Business Category Gross Floor Area of buildings sq. m.'000 (sq. ft.'000)

The properties are currently occupied by the Group for production, sales oce, administration and other ancillary facilities purposes.

26,909,529

25,149,092

Oil exploration, development and production Oil renery and sales Petroleum byproducts production and sales Pipeline transmission Natural gas production and transmission Research and development Total

7,436 5,181

(80,041) (55,768)

4,391 535

(47,265) (5,759)

55 1,149 18,747

(592) (12,368) (201,793)

The land use rights of the properties have been granted for a term of 50 years.
Notes:

(1) Subject as mentioned in note 5 below, all the buildings and structures owned by the Group, and all the buildings and structures owned by the Group that are under construction, are located on land whose land use rights are either owned by the Company or leased from CNPC for a term of 50 years.

V-7

APPENDIX V

PROPERTY VALUATION

(2) CNPC has transferred to the Company 183 parcels of land with an aggregate area of approximately 3,498 thousand sq. m. (37,652 thousand sq. ft.). The Ministry of Land and Resources of the PRC (""MLR'') has issued an Ocial Reply to CNPC dated 22 October 1999 (Guo Tu Zi Han (1999) No. 552), approving CNPC to transfer the land use rights of such land to the Company, provided that the Company shall apply for land use rights certicates in its own name after its establishment. Of the 183 parcels of land, 140 parcels of land were originally allocated to CNPC by the State. Approval from the competent land administrative authorities is required for the Company to transfer or lease such allocated land to entities outside the CNPC group. The transfer or lease of the other 43 parcels of land, which are granted land, by the Company to entities outside the CNPC group is not subject to the above restrictions. CNPC and the Company are in the process of applying for land use rights certicates in the Company's name for all 183 parcels of land. CNPC has granted an undertaking to the Company that it will apply to competent land administrative authorities for the issuance of land use rights certicates in the Company's name for all such land before 5 November 2000, and will bear all costs and expenses in relation to the application process, and will indemnify the Company against any losses or claims arising therefrom. According to an opinion issued by the Company's PRC legal adviser, King & Wood, the transfer of the 183 parcels of land by CNPC to the Company has obtained approval from the MLR and is in compliance with PRC laws. The land use rights of the 183 parcels of land are vested in the Company and the land use rights can be transferred, leased or mortgaged subject to the restrictions set forth in the MLR's Ocial Reply (Guo Tu Zi Han (1999) No. 552) and as summarised above. (3) The Company has leased from CNPC a total of 42,476 parcels of land with an aggregate area of approximately 1,144,960 thousand sq. m. (12,324,329 thousand sq. ft.) for a term of 50 years from 5 November 1999 pursuant to a Land Use Rights Leasing Contract dated 10 March 2000 entered into between the Company and CNPC at an aggregate annual fee of RMB2,000 million per year with rent review at market level and mutual agreement between the Company and CNPC. No commercial value has been assigned to all such land under leasing arrangement. In this regard, the MLR has issued an Approval Document dated 4 November 1999 (Guo Tu Zi Han (1999) 577), allowing CNPC to lease the 42,476 parcels of land to the Company. (4) Of the land under transfer or leasing arrangement, CNPC does not have formal land use rights certicates but only entitlement certicates for 28,649 parcels of land with an aggregate area of approximately 935,866 thousand sq. m. (10,073,662 thousand sq. ft.) CNPC has granted an undertaking to the Company that it will, within one year period from August, September and October, 1999 when such certicates were issued, complete the necessary governmental registration procedures for the issuance of formal land use rights certicates for such land in the name of the Company or CNPC as appropriate, and to indemnify the Company against any losses or claims arising therefrom. According to an opinion issued by the Company's PRC legal adviser, King & Wood, (a) each such entitlement certicate is a valid legal title to the land concerned; (b) the land to which the entitlement certicate relates may be disposed of in the manner described in notes 2 and 3 above; and (c) assuming that the required governmental registration procedures are completed within the time limit, there is no legal hindrance to the issue of formal land use rights certicates to replace such entitlement certicates. (5) 116 of the service stations the Company owned are located on land owned by rural collectives with an aggregate area of 202.346 thousand sq. m. (2,178 thousand sq. ft.). In this regard, the MLR has issued an Ocial Reply to CNPC on 8 October 1999 (Guo Tu Zi Han (1999) No. 518), allowing the Company to use such land, provided that CNPC must complete the necessary approval procedures for the Company's use of such land, or requisition such land by CNPC within one year from 5 November 1999. CNPC has granted an undertaking to the Company that within the one year period, it will complete the necessary governmental procedures for the requisition of all such land, and will bear all expenses and costs in relation to the requisition process, and will indemnify the Company from any losses or claims arising therefrom. Upon the issue of formal land use rights

V-8

APPENDIX V

PROPERTY VALUATION

certicates in the name of CNPC and authorization from MLR, CNPC will lease such land to the Company for a term equal to the remainder of the 50 years' term under the Land Use Rights Leasing Contract. (6) For all the 57,482 buildings transferred to the Company by CNPC, CNPC has individual building ownership certicates for approximately 79 per cent. of the buildings, and general ownership certicates for the rest of the buildings. A general building ownership certicate covers all the CNPC-owned buildings located in a municipality or county. By a Notice dated 28 July 1999 (Jian Zhu Fang Shi (1999) No. 018), the Ministry of Construction authorised local building ownership authorities to issue such general ownership certicates for CNPC's buildings. According to an opinion issued by the Company's PRC legal adviser, King & Wood, an individual building ownership certicate and a general ownership certicate have the same legal eect in terms of evidencing the ownership of a building. The only limitation for a general certicate is that the holder of such certicate must apply for a formal building ownership certicate in due course. Failure to do so will not aect the ownership of the building. The Company has the lawful right to use, assign, lease and mortgage all such buildings. CNPC and the Company are in the process of applying for individual building ownership certicates in the Company's name for all the 57,482 buildings. In addition, CNPC has granted an undertaking to the Company that it will at its own costs and expenses complete the procedures for obtaining individual building ownership certicates in the Company's name for all such buildings before 5 November 2000, and to indemnify the Company against any losses or claims arising therefrom. For the buildings comprised in 116 of the Company's service stations located on land owned by rural collectives and being part of the aforesaid 57,482 buildings, the Company's PRC legal adviser, King & Wood, has advised that (a) the Company has lawful ownership of such buildings; and (b) such buildings can be lawfully assigned, leased or mortgaged by the Company upon completion by CNPC of the formalities for the requisition and conversion of such land to state-owned land, the issue of land use rights certicates to CNPC, and obtaining the authorization by MLR for the lease, and the actual leasing of such land by CNPC to the Company.

V-9

APPENDIX V
Group B : Property interests held by the Group under construction

PROPERTY VALUATION

Property

Description and tenure

Particulars of occupancy

Capital Value in existing state as at 30 September 1999 RMB'000 HK$'000

Various properties in 18 Provinces/ Cities in the PRC

The properties comprise 2,086 production and ancillary buildings and structures situated in Beijing, Chongqing, Nei Mongol Zizhiqu, Shanghai, Tianjin, Xizang Zizhiqu, Gansu Province, Hebei Province, Heilongjiang Province, Jilin Province, Liaoning Province, Ningxia Huizu Zizhiqu, Qinghai Province, Shandong Province, Shaanxi Province, Shanxi Province, Sichuan Province and Xinjiang Uygur Zizhiqu in the PRC. Upon completion, the total gross oor area of the properties grouped by their respective business category is summarised as follows:
Business Category Gross Floor Area of Buildings sq. m.'000 (sq. ft.'000)

The properties are currently under construction.

5,388,633

5,036,105

Oil exploration, development and production Oil renery and sales Petroleum byproducts production and sales Pipeline transmission Natural gas production and transmission Research and development Total

200 543

(2,153) (5,845)

207 8

(2,228) (86)

3 34 995

(32) (366) (10,710)

The land use rights have been granted for a term of 50 years. The buildings and structures in Groups A and B are erected on 43,261 parcels of land with an aggregate site area of approximately 1,160,343 thousand sq. m. (12,489,932 thousand sq. ft.))

V-10

APPENDIX V

PROPERTY VALUATION

Notes:

(1) Subject as mentioned in note 5 below, all the buildings and structures owned by the Group, and all the buildings and structures owned by the Group that are under construction, are located on land whose land use rights are either owned by the Company or leased from CNPC for a term of 50 years. (2) CNPC has transferred to the Company 183 parcels of land with an aggregate area of approximately 3,498 thousand sq. m. (37,652 thousand sq. ft.). The Ministry of Land and Resources of the PRC (""MLR'') has issued an Ocial Reply to CNPC dated 22 October 1999 (Guo Tu Zi Han (1999) No. 552), approving CNPC to transfer the land use rights of such land to the Company, provided that the Company shall apply for land use rights certicates in its own name after its establishment. Of the 183 parcels of land, 140 parcels of land were originally allocated to CNPC by the State. Approval from the competent land administrative authorities is required for the Company to transfer or lease such allocated land to entities outside the CNPC group. The transfer or lease of the other 43 parcels of land, which are granted land, by the Company to entities outside the CNPC group is not subject to the above restrictions. CNPC and the Company are in the process of applying for land use rights certicates in the Company's name for all 183 parcels of land. CNPC has granted an undertaking to the Company that it will apply to competent land administrative authorities for the issuance of land use rights certicates in the Company's name for all such land before 5 November 2000, and will bear all costs and expenses in relation to the application process, and will indemnify the Company against any losses or claims arising therefrom. According to an opinion issued by the Company's PRC legal adviser, King & Wood, the transfer of the 183 parcels of land by CNPC to the Company has obtained approval from the MLR and is in compliance with PRC laws. The land use rights of the 183 parcels of land are vested in the Company and the land use rights can be transferred, leased or mortgaged subject to the restrictions set forth in the MLR's Ocial Reply (Gou Tu Zi Han (1999) No. 552) and as summarised above. (3) The Company has leased from CNPC a total of 42,476 parcels of land with an aggregate area of approximately 1,144,960 thousand sq. m. (12,324,349 thousand sq. ft.) for a term of 50 years from 5 November 1999 pursuant to a Land Use Rights Leasing Contract dated 10 March 2000 entered into between the Company and CNPC at an aggregate annual fee of RMB2,000 million per year with rent review at market level and mutual agreement between the Company and CNPC. No commercial value has been assigned to all such land under leasing arrangement. In this regard, the MLR has issued an Approval Document dated 4 November 1999 (Guo Tu Zi Han (1999) 577), allowing CNPC to lease the 42,476 parcels of land to the Company. (4) Of the land under transfer or leasing arrangement, CNPC does not have formal land use rights certicates but only entitlement certicates for 28,649 parcels of land with an aggregate area of approximately 935,866 thousand sq. m. (10,073,662 thousand sq. ft.) CNPC has granted an undertaking to the Company that it will, within one year period from August, September and October, 1999 when such certicates were issued, complete the necessary governmental registration procedures for the issuance of formal land use rights certicates for such land in the name of the Company or CNPC as appropriate, and to indemnify the Company against any losses or claims arising therefrom. According to an opinion issued by the Company's PRC legal adviser, King & Wood, (a) each such entitlement certicate is a valid legal title to the land concerned; (b) the land to which the entitlement certicate relates may be disposed of in the manner described in notes 2 and 3 above; and (c) assuming that the required governmental registration procedures are completed within the time limit, there is no legal hindrance to the issue of formal land use rights certicates to replace such entitlement certicates. (5) 116 of the service stations the Company owned are located on land owned by rural collectives with an aggregate area of 202.346 thousand sq. m. (2,178 thousand sq. ft.). In this regard, the MLR has issued an Ocial Reply to CNPC on 8 October 1999 (Guo Tu Zi Han (1999) No. 518), allowing the Company to use such land,

V-11

APPENDIX V

PROPERTY VALUATION

provided that CNPC must complete the necessary approval procedures for the Company's use of such land, or requisition such land by CNPC within one year from 5 November 1999. CNPC has granted an undertaking to the Company that within the one year period, it will complete the necessary governmental procedures for the requisition of all such land, and will bear all expenses and costs in relation to the requisition process, and will indemnify the Company from any losses or claims arising therefrom. Upon the issue of formal land use rights certicates in the name of CNPC and authorization from MLR, CNPC will lease such land to the Company for a term equal to the remainder of the 50 years' term under the Land Use Rights Leasing Contract. (6) For all the 57,482 buildings transferred to the Company by CNPC, CNPC has individual building ownership certicates for approximately 79 per cent. of the buildings, and general ownership certicates for the rest of the buildings. A general building ownership certicate covers all the CNPC-owned buildings located in a municipality or county. By a Notice dated 28 July 1999 (Jian Zhu Fang Shi (1999) No. 018), the Ministry of Construction authorised local building ownership authorities to issue such general building ownership certicates for CNPC's buildings. According to an opinion issued by the Company's PRC legal adviser, King & Wood, an individual building ownership certicate and a general ownership certicate have the same legal eect in terms of evidencing the ownership of a building. The only limitation for a general certicate is that the holder of such certicate must apply for a formal building ownership certicate in due course. Failure to do so will not aect the ownership of the building. The Company has the lawful right to use, assign, lease and mortgage all such buildings. CNPC and the Company are in the process of applying for individual building ownership certicates in the Company's name for all 57,482 buildings. In addition, CNPC has granted an undertaking to the Company that it will at its own costs and expenses complete the procedures for obtaining individual building ownership certicates in the Company's name for all such buildings before 5 November 2000, and to indemnify the Company against any losses or claims arising therefrom. For the buildings comprised in 116 of the Company's service stations located on land owned by rural collectives and being part of the aforementioned 57,482 buildings, the Company's PRC legal adviser, King & Wood, has advised that (a) the Company has lawful ownership of such buildings; and (b) such buildings can be lawfully assigned, leased or mortgaged by the Company upon completion by CNPC of the formalities for the requisition and conversion of such land to state-owned land, the issue of land use rights certicates to CNPC, and obtaining the authorization by MLR for the lease, and the actual leasing of such land by CNPC to the Company. (7) According to an opinion issued by the Company's PRC legal adviser, King & Wood, (a) the construction of all buildings and structures under construction have received approval documents from competent governmental authorities; and (b) upon completion of the construction, there is no legal hindrance to the issue of the relevant building ownership certicates to the Company. (8) As advised by the Group, the total construction cost expended as at the date of valuation was approximately RMB5,498,728,000. (9) The capital value of the properties when completed as at the date of valuation was in the total sum of RMB6,965,304,000.

V-12

APPENDIX V
Group C: Property interests leased by the Group

PROPERTY VALUATION

Property

Description and tenure

Particulars of occupancy

Capital Value in existing state as at 30 September 1999 RMB'000 HK$'000

Various properties in 17 Provinces/ Cities in the PRC

The properties comprise 192 production, oce, sales oce, ancillary buildings and structures located in Beijing, Chongqing, Nei Mongol Zizhiqu, Shanghai, Tianjin, Xizang Zizhiqu, Hebei Province, Heilongjiang Province, Jilin Province, Jiangsu Province, Liaoning Province, Ningxia Huizu Zizhiqu, Qinghai Province, Shaanxi Province, Shanxi Province, Sichuan Province and Xinjiang Uygur Zizhiqu in the PRC. The total gross oor area of the properties leased by the Group in their respective business category is summarised as follows:
Business Category Gross Floor Area of Buildings sq. m. sq. ft.

Oil exploration, development and production Oil renery and sales Petroleum byproducts production and sales Pipeline transmission Natural gas production and transmission Research and development Total
Notes:

51,909 131,770

(558,748) (1,418,372)

58,659 1,400

(631,405) (15,070)

22,862 13,170 279,770

(246,087) (141,762) (3,011,444)

The Company's headquarters is leased by the Company under a leasing contract for a term of 2 years at an annual rent of RMB7,200,000 exclusive of maintenance charges. The remaining buildings and structures are leased by the Company for a term of 20 years at an annual rent of RMB39,116,650 exclusive of the payment of any governmental, legal or other administrative taxes and maintenance charges.

No commercial value

(1) All the buildings leased by the Company from CNPC are owned by CNPC and its subsidiaries. (2) CNPC has granted an undertaking to the Company in the Building Leasing Contract entered into between the Company and CNPC that CNPC and its subsidiaries are the lawful owners of all such leased buildings and have lawful rights to lease such buildings to the Company. (3) Pursuant to the Building Leasing Contract, the Company may sublet the buildings with consent from CNPC. (4) According to an opinion from the Company's PRC legal adviser, King & Wood, the Building Leasing Contract is lawful and eective.

V-13

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

The following is the text of a report, prepared for the purpose of incorporation in this prospectus, received from DeGolyer and MacNaughton, the independent technical consultant appointed by the Company. DeGolyer and MacNaughton is a Delaware corporation with oces at 4925 Greenville Avenue, Suite 400, Dallas, Texas 75206, U.S.A. The rm has been providing petroleum consulting services throughout the world for more than 60 years. The rm's professional engineers, geologists, geophysicists, petrophysicists, and economists are engaged in the independent appraisal of oil and gas properties, evaluation of hydrocarbon and other mineral prospects, basin evaluations, comprehensive eld studies, equity studies, and studies of supply and economics related to the energy industry. Except for the provision of professional services on a fee basis, DeGolyer and MacNaughton has no commercial arrangement with any other person or company involved in the interests which are the subject of our ""Appraisal Report as of September 30, 1999 on Proved, Reserves of Certain Petroleum Interests owned by PetroChina Company Limited, Executive Summary''. Mr. Ronald M. Shuck, who supervised our ""Appraisal Report as of September 30, 1999 on Proved, Reserves of Certain Petroleum Interests owned by PetroChina Company Limited, Executive Summary'' is a Senior Vice President with DeGolyer and MacNaughton, Manager of the rm's Asia/Pacic Division, a Registered Professional Engineer in the State of Texas, and a member of the Society of Petroleum Engineers. He has 22 years of oil and gas industry experience. As described in the section headed ""Documents Delivered and Available for Inspection Documents Available for Inspection'' in Appendix XI, a copy of the independent technical consultant's report is available for inspection. APPRAISAL REPORT AS OF SEPTEMBER 30, 1999 ON PROVED RESERVES OF CERTAIN PETROLEUM INTERESTS OWNED BY PETROCHINA COMPANY LIMITED, EXECUTIVE SUMMARY FOREWORD Scope of Investigation This report presents an appraisal, as of September 30, 1999, of the extent and value of the proved crude oil, condensate, and natural gas reserves of certain petroleum interests owned by PetroChina Company Limited (PetroChina) in 340 elds operated by PetroChina from 13 geographic areas in the People's Republic of China (China). A complete listing of all elds included in this report is shown in Table 1 and the locations of the 13 geographic areas are shown on Figure 1. Reserves estimated in this report are expressed as gross and net reserves. Gross reserves are dened as the total estimated petroleum to be produced from these properties after September 30, 1999. Net reserves are dened as that portion of the gross reserves attributable to PetroChina after deducting all interests owned by others. For these properties, PetroChina owns 100 percent; therefore, gross reserves are equal to net reserves. This report presents values that were estimated for proved reserves using current prices and costs provided by PetroChina. In this report, the initial prices and costs are held constant for the life of the properties. A detailed explanation of the future price and cost assumptions is included in the Valuation of Reserves section of this report. All values presented in this report are expressed in millions of United States dollars (US$). Values shown in this report are expressed in terms of future gross revenue, future net revenue, and present worth. Future gross revenue is that revenue which will accrue to PetroChina from the production and sale of the estimated net reserves. Future net revenue is calculated by deducting estimated operating expenses, capital costs, and taxes from the future gross revenue. Operating expenses include eld VI-1

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

operating costs and estimated expenses of direct supervision but do not include that portion of general administrative costs sometimes allocated to production. Future Chinese income tax expenses have been taken into account. Future net revenue values in this report are shown after Chinese income tax. Present worth is dened as future net revenue discounted at a specied arbitrary rate compounded monthly over the expected period of realization. Present worth values using a discount rate of 10 per cent. are reported. Estimates of oil, condensate, and gas reserves and future net revenue should be regarded only as estimates that may change as further production history and additional information become available. Not only are such reserves and revenue estimates based on that information which is currently available, but such estimates are also subject to the uncertainties inherent in the application of judgmental factors in interpreting such information. Authority This report was authorized by Mr. Liu Xijian, Member of Restructuring and IPO Preparation Committee of PetroChina. Source of Information Information used in the preparation of this report was obtained from PetroChina. In the preparation of this report we have relied, without independent verication, upon such information furnished by PetroChina with respect to property interests owned, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production, and various other information and data that were accepted as represented. A eld examination of certain of the major elds was conducted but further eld visits were not considered necessary for the purposes of this report. CLASSIFICATION of RESERVES Petroleum reserves included in this report are classied by degree of proof as proved and are judged to be economically producible in future years from known reservoirs under existing economic and operating conditions and assuming continuation of current regulatory practices using conventional production methods and equipment. In the analyses of production-decline curves, reserves were estimated only to the limit of economic rates of production under existing economic and operating conditions using prices and costs as of the date the estimate is made, including consideration of changes in existing prices provided only by contractual arrangements but not including escalations based upon future conditions. Proved reserves classications used in this report are in accordance with the reserves denitions of Rules 4-10(a) (1)-(13) of Regulation S-X of the Securities and Exchange Commission (SEC) of the United States. The petroleum reserves are classied as follows: Proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and dened by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be VI-2

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on uid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves which can be produced economically through application of improved recovery techniques (such as uid injection) are included in the ""proved'' classication when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii) Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classied separately as ""indicated additional reserves''; (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite, and other such sources. Proved developed oil and gas reserves. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of uid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as ""proved developed reserves'' only after testing by a pilot project or after the operation of an installed program has conrmed through production response that increased recovery will be achieved. Proved undeveloped reserves. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units osetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of uid injection or other improved recovery technique is contemplated, unless such techniques have been proved eective by actual tests in the area and in the same reservoir. ESTIMATION of RESERVES Estimates of reserves were prepared by the use of standard geological and engineering methods generally accepted by the petroleum industry. The method or combination of methods used in the analysis of each reservoir was tempered by experience with similar reservoirs, stage of development, quality and completeness of basic data, and production history. When applicable, the volumetric method was used to estimate the original oil in place (OOIP) and original gas in place (OGIP). Structure maps and isopach maps were used to estimate reservoir volumes. Electrical logs, radioactivity logs, core analyses, and other available data were used to prepare these maps as well as to estimate representative values for porosity and water saturation. When adequate data were available and when circumstances justied, material balance and other engineering methods were used to estimate OOIP and OGIP. VI-3

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

For those elds where the volumetric method was applied, estimates of ultimate recovery were obtained by applying recovery factors to OOIP and OGIP. These recovery factors were based on consideration of the type of energy inherent in the reservoirs, analyses of the petroleum, the structural positions of the reservoirs, and the production histories. When applicable, material balance and other engineering methods were used to estimate recovery factors. In such cases, an analysis of reservoir performance, including production rates, reservoir pressures, and gas-oil ratio behavior, was used in the estimation of reserves. For depletion-type reservoirs or those whose performance disclosed a reliable decline in producingrate trends or other diagnostic characteristics, reserves were estimated by the application of appropriate decline curves or other performance relationships. In the analyses of production-decline curves, reserves were estimated only to the limits of economic production based on current economic conditions. In certain cases, when the previously named methods could not be used, reserves were estimated by analogy with similar wells, reservoirs, or elds for which more complete data were available. Data available on the appraised properties through May 31, 1999, were used to prepare the estimates shown herein. Additional wells may have been drilled since then, but we express no opinion on the eect such data would have on the reserves estimated herein. Gross production estimated through September 30, 1999, was deducted from gross ultimate recovery to arrive at estimates of gross reserves shown herein. In general, this required that production rates be estimated for four months since production data were generally available only through May 1999. Gas volumes included herein are separator gas, marketable gas, or sales gas volumes expressed at a temperature base of 20 degrees Centigrade (""C'') and a pressure base of 1 atmosphere. Separator gas is dened as the gas remaining after eld separation for condensate removal. Marketable gas is dened as the separator gas after reduction for are. Sales gas is dened as the separator gas measured at the point of delivery after reduction for fuel usage and are. Condensate reserves estimated herein are those to be recovered by normal eld separation. The reserves estimated herein are terminated at the end of the economic life of the elds evaluated. The end of the economic life of each of the elds evaluated herein occurs prior to the expiration of existing production licenses as represented by PetroChina. The gross proved reserves, as of September 30, 1999, of the properties evaluated in this study are estimated as follows, expressed in thousands of barrels (Mbbl) or millions of cubic feet (MMcf).
Gross Proved Reserves Proved Developed Oil and Condensate (Mbbl) Separator Gas (MMcf) Marketable Gas (MMcf) Sales Gas (MMcf) Oil and Condensate (Mbbl) Total Proved Separator Gas (MMcf) Marketable Gas (MMcf) Sales Gas (MMcf)

9,622,452

12,202,161

12,141,789

9,514,212

10,765,957

24,378,571

24,284,196

20,708,468

VI-4

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

The net proved reserves, as of September 30, 1999, attributable to the interests owned by PetroChina in the properties evaluated herein are estimated below:
Net Proved Reserves Proved Developed Oil and Condensate (Mbbl) Separator Gas (MMcf) Marketable Gas (MMcf) Sales Gas (MMcf) Oil and Condensate (Mbbl) Total Proved Separator Gas (MMcf) Marketable Gas (MMcf) Sales Gas (MMcf)

9,622,452

12,202,161

12,141,789

9,514,212

10,765,957

24,378,571

24,284,196

20,708,468

VALUATION of RESERVES Revenue values in this report were estimated using initial prices and costs provided by PetroChina. Future prices were estimated using guidelines established by the SEC and the Financial Accounting Standards Board (FASB). The assumptions used for estimating future prices and costs are as follows: Oil and Condensate Prices Oil and condensate prices were furnished by PetroChina. These prices were held constant for the life of the properties. Natural Gas Prices Natural gas prices were furnished by PetroChina. These prices were held constant for the life of the properties. Operating and Capital Costs Estimates of operating costs based on current costs were used for the life of the properties with no increases in the future based on ination. In certain cases future costs, either higher or lower than current costs, may have been used because of anticipated changes in operating conditions. Future capital expenditures were estimated using 1999 values and were not adjusted for ination. Forecasts of future operating and capital costs were provided by PetroChina and adjusted accordingly. Taxes Local taxes and value added taxes were applied in addition to the consideration of the national Chinese income tax. Asset bases and capital were depreciated using a six-year straight line basis to arrive at income subject to taxation. A 33 percent income tax rate was applied to taxable income to estimate the applicable tax. There are no royalty provisions in China. The tax provisions provided by PetroChina were assumed to remain unchanged from current legislation. Future oil and gas producing rates estimated for this report are based on production rates considering the most recent gures available or, in certain cases, are based on estimates provided by PetroChina. The rates used for future production are rates that are within the capacity of the well or reservoir to produce, based on available data. PetroChina has provided information on oil and sales gas production and on the anticipated producing rates in certain areas, including gas contracts and letters of intent to purchase. This information has been considered in arriving at the rates projected. VI-5

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

PetroChina's future net revenue to be derived from the proved reserves estimated herein, as of September 30, 1999, and the present worth of that revenue discounted at 10 percent are listed below, expressed in millions of US dollars (MM U.S.$):
Proved Developed Total Proved

Future Gross Revenue, MM U.S.$ Operating Expenses, MM U.S.$ Capital Costs, MM U.S.$ Chinese Income Taxes, MM U.S.$ VAT, MM U.S.$ Other Taxes, MM U.S.$ Future Net Revenue, MM U.S.$ Present Worth at 10 Percent, MM U.S.$

236,117 71,674 5,443 38,352 33,071 4,931 82,646 41,749

286,102 79,971 11,818 46,983 39,437 6,146 101,747 46,083

In our opinion, the information relating to estimated proved reserves, estimated future net revenue from proved reserves, and present worth of estimated future net revenue from proved reserves of oil, condensate, and gas contained in this report has been prepared in accordance with Paragraphs 10-13, 15, and 30(a)-(b) of Statement of Financial Accounting Standards No. 69 (November 1982) of the FASB and Rules 4-10(a) (1)-(13) of Regulation S-X and Rule 302(b) of Regulation S-K of the SEC; provided, however, certain estimated data have not been provided with respect to changes in reserves information. To the extent that the above-enumerated rules, regulations, and statements require determinations of an accounting or legal nature or information beyond the scope of our report, we are necessarily unable to express an opinion as to whether the above-described information is in accordance therewith or sucient therefor. SUMMARY and CONCLUSIONS PetroChina owns certain petroleum interests in 340 elds operated by PetroChina from 13 geographic areas in China. The net proved oil, and condensate, separator gas, marketable gas, and sales gas reserves, as of September 30, 1999, attributable to the interests owned by PetroChina in the elds evaluated are estimated below, expressed in thousands of barrels (Mbbl) and millions of cubic feet (MMcf):
Net Proved Reserves Proved Developed Oil and Condensate (Mbbl) Separator Gas (MMcf) Marketable Gas (MMcf) Sales Gas (MMcf) Oil and Condensate (Mbbl) Total Proved Separator Gas (MMcf) Marketable Gas (MMcf) Sales Gas (MMcf)

9,622,452

12,202,161

12,141,789

9,514,212

10,765,957

24,378,571

24,284,196

20,708,468

Gas volumes estimated herein are expressed at a temperature base of 20C and a pressure base of 1 atmosphere.

VI-6

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

PetroChina's future net revenue to be derived from the proved reserves, as of September 30, 1999, and the present worth of that revenue discounted at 10 per cent. are listed below expressed in million of US dollars (""MM U.S.$''):
Proved Developed Total Proved

Future Net Revenue, MM U.S.$ Present Worth at 10 Percent, MM U.S.$ Submitted,

82,646 41,749

101,747 46,083

DeGOLYER and MacNAUGHTON SIGNED: March 27, 2000 /s/ RONALD M. SHUCK, P.E. Ronald M. Shuck, P.E. Senior Vice President DeGolyer and MacNaughton

VI-7

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

TABLE 1 FIELD LISTING by AREA for CERTAIN PETROLEUM INTERESTS owned by PETROCHINA COMPANY LIMITED

Changqing

Dagang

Daqing

Huabei

An Sai An Wu Ba Zhu Bai Bao Bai Yan Jing Changqing Cheng Hao Da Ban Liang Da Shui Keng Dong Hong Zhuang Fan Jia Chuan Gu Chang Chuan Hong Jing Zi Hu Jian Shan Hu Lu He Hua Chi Jing An Li Zhuang Zi Liu Jia Zhuang Ma Fang Ma Jia Tan Ma Ling Miao Gou Nan Liang Qing Yang Sheng Li Jing Wang Wa Zi Wu Jiao Wu Qi Yan Wu You Fang Zhuang Yuan Cheng Zhen Bei Zhi Luo

Ban Qiao Bei Da Gang Chang Lu Da Zhang Tuo Duan Liu Bo Gao Chen Tou Kong Dian Kou Cun Liu Guan Zhuang Qi Jia Wu She Nu Si Tang Gu Wang Guan Tun Wang Xu Zhuang Wu Ma Ying Xiao Ji Yang Er Zhuang Yang San Mu Ye San Bo Zao Yuan Zhao Dong Zhou Qing Zhuang Zhang Ju He

A La Xin Ao Bao Ta Ao Gu La Bai Yin Nuo Le Chang Chun Ling Chao Yang Gou Er Zhan Gao Tai Zi Gao Xi Jin Teng La Ma Dian La Sa Xing Lao Zhou Long Hu Pao Long Nan Pu Tao Hua Qi Jia San Zhan Sheng Ping Si Zhan Song Fang Tun Song Zhan Tai Ping Tun Tai Ping Zhuang Tou Tai Wu Zhan Xin Dian Xin Zhan Xing Xi Xu Jia Wei Zi Yang Cao Yong Le Yu Shu Lin

A Bei A Er Shan A Nan Ba Li Xi Ba Li Zhuang Bao Er Bao Rao Bie Gu Zhuang Cha He Ji Che Cheng Da Wang Zhuang Feng He Ying Fu Te Gao Jia Bao Gao Yang Gao Yi Gu Xin Zhuang Ha Nan Ha Da Tu He Jian He Xi Wu He Zhuang He Zhuang Xi Hou Shang Cun Ji Ge Sen Ji He Jing Qin Liu Bei Liu Chu Liu Li Zhuang Liu Quan Liu Xi Long Hu Zhuang

VI-8

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

TABLE 1 FIELD LISTING by AREA (Continued)

Huabei Continued Jidong Jilin Liaohe

Meng Gu Lin Mo Zhou Nan Ma Cun Nan Ma Zhuang Nan Meng Nan Xiao Chen Ren Qiu Sai Han Shen Nan Shen Xi Su Ning Su Qiao Tai Jia Zhuang Wen An Wu Lan Nuo Er Wu Qiang Xi Lin Xi Liu Xin Su Mu Xue Zhuang Yan Ling Yong Qing Yu Ke Zha Bu Zhao Zhou Qiao Zhong Cha Kou

Bei Bao Bo Ge Zhuang Da Qing He Gao Shang Bao Lao Ye Miao Liu Zan Tang Hai

Bu Hai Chang Chun Da An Da An Bei Da Lao Ye Fu Fu Yu Gu Dian Hai Tuo Zi He Ting Wo Bao Hong Gang Liang Jing Mo Li Qing Mu Tou Qian An Shuang Tuo Zi Si Fang Tuo Zi Si Wu Jia Zi Xin Bei Xin Li Xin Min Yi Ke Shu Ying Tai

Bi Jia Ling Bian Tai Ci Yu Tuo Da Min Tun Da Ping Fang Da Wa Fa Ha Niu Gao Sheng Guang Fa Hai Wai He Huan Xi Ling Huang Jin Dai Jiao Li Ge Jing An Bao (Pu) Ke Er Kang Ke Er Qin Kui Hua Dao Leng Jia Pu (Bao) Niu Ju Niu Xin Tuo Ou Li Tuo Zi Qian He Qing Long Tai Re He Tai Rong Xing Tun Shu Guang Shuang Nan Shuang Tai Zi Tai Yang Dao Tao Yuan Xiao Wa Xin Kai Xing Long Tai Yu Lou Yue Hai

VI-9

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

TABLE 1 FIELD LISTING by AREA (Continued)

Qinghai Sichuan Tarim

Ga Si E31 Ga Si N1bN2 Hong Liu Quan Hua Tu Gou Jian Ding Shan Kai Te Mi Li Ke Leng Hu #3 Leng Hu #4 Leng Hu #5 Ma Hai Nan Ba Xian Nan Yi Shan Qi Ge Quan Se Bei #1 Se Bei #2 Sha Xi Shi Zi Gou (Shallow) Tai Nan Tuo Feng Shan Wu Nan Xian Shui Quan Yan Hu You Quan Zi You Sha Shan You Yuan Gou Yu Ka Yue Jing #2

Ba Jiao Chang Da Chi Gan Jing Da Ping Ya Du Kou He Feng Jia Wan Fu Cheng Zhai Gao Feng Chang Gui Hua Hu Jia Ba Huang Long Chang Jin Hua Zhen Jiu Long Shan Lian Chi Long Men Mo Xi Ping Luo Ba Pu Xi Sha Guan Ping Sha Ping Chang Shuang Jia Ba Tie Shan Wei Yuan Wen Quan Jing Wo Long He Wu Bai Ti Wu Ling Shan Xiang Guo Si Yun He Zhai Zhang Jia Chang Zhong Ba Zhong Tai Shan Other Minor Fields

Da Wan Qi Dong He No. 12 Dong He Tang He Tian He Hong Qi No. 1 Ji La Ke Ji Nan No. 4 Jie Fang Qu East Lun Nan Sang Ta Mu Ta Zhong No. 4 Ta Zhong No. 6 Ta Zhong No. 10 Ta Zhong No. 16 Ti Er Gen Ya Ha Yang Ta Ke Ying Mai No. 6 Yu Dong No. 2

VI-10

APPENDIX VI

INDEPENDENT TECHNICAL CONSULTANT'S REPORT

TABLE 1 FIELD LISTING by AREA (Continued)

Tuha Xinjiang Yumen

Ba Ka Bei Xiao Hu Hong Nan/Lian Mu Qin Hong Tai Niu Juan Hu Pu Bei Pu Tao Gu Qia Le Kan Qiu Dong Qiu Ling Sa Ke Song Shan Le Shan Shan Sheng Bei Tu Lu Fan/Shen Quan Tu Yu Ke Wen Ji Sang/Mi Deng Yan Mu Xi Yi La Hu Yu Guo

Ba Shi Tuo Pu Bai Kou Quan Bei San Tai Cai Nan Che Pai Zi Du Shan Zi Feng Cheng Gan He Hong Shan Zui Huo Shao Shan Hu Tu Bi Ke Ke Ya Ke La Ma Yi Ma Bei Qi Gu San Tai Sha Nan Shi Nan Shi Xi Wu Er He Xia Zi Jie Xiao Guai Yi Qi Ke Li Ke

Bai Yang He Lao Jun Miao Shan Bei Shi You Gou Qing Xi Ya Er Xia

VI-11

This map is not intended to be an authority on the delineation of international boundaries

VI-12

APPENDIX VII
TAXATION OF SECURITY HOLDERS

TAXATION

The following is a summary of certain PRC and Hong Kong tax consequences of the ownership of H Shares by an investor that purchases such H Shares in connection with the Global Oering and holds the H Shares as capital assets. This summary does not purport to address all material tax consequences of the ownership of H Shares, and does not take into account the specic circumstances of any particular investors (such as tax-exempt entities, certain insurance companies, broker-dealer, investors liable for alternative minimum tax, investors that actually or constructively own 10 per cent. or more of the voting stock of the Company, investors that hold H Shares as part of a straddle or a hedging or conversion transaction whose functional currency is not the US dollar), some of which may be subject to special rules. This summary is based on the tax laws of the PRC as in eect on the date hereof, as well as on the Agreement Between the United States of America and the People's Republic of China for the Avoidance of Double Taxation (the ""Treaty''), all of which are subject to change (or changes in interpretation), possibly with retroactive eect. For purposes of this discussion, a ""US Holder'' is any benecial owner of H Shares that is (i) a citizen or resident of the United States, or (ii) a corporation organised under the laws of the United States which pays federal income taxation on a net income basis in respect of a Share. An ""Eligible US Holder'' is a US Holder that (i) is a resident of the United States for purposes of the Treaty, (ii) does not maintain a permanent establishment or xed base in the PRC to which H Shares are attributable and through which the benecial owner carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services) and (iii) who is not otherwise ineligible for benets under the Treaty with respect to income and gain derived in connection with the H Shares. The discussion does not address any aspects of Hong Kong or PRC taxation other than income taxation, capital taxation, stamp taxation and estate taxation. Prospective investors are urged to consult their tax advisers regarding the PRC, Hong Kong and other tax consequences of owning and disposing of H Shares. Taxation of Dividends PRC Taxation Individual Investors. According to the Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System (the ""Provisional Regulations'') and the Individual Income Tax Law of the PRC, as amended on 31 October 1993 and eective 1 January 1994, dividends paid by PRC companies are ordinarily subject to a PRC withholding tax levied at a at rate of 20 per cent. For a foreign individual who is not resident of the PRC, the receipt of dividends from a company in the PRC is normally subject to a withholding tax of 20 per cent. unless reduced by an applicable tax treaty. However, the PRC State Administration of Taxation (the ""SAT'', the PRC central government tax authority which succeeded the State Tax Bureau) issued, on 21 July 1993, a Notice of the PRC State Administration of Taxation Concerning the Taxation of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals (""Tax Notice'') which states that dividends paid by a PRC company to individuals with respect to shares listed on an overseas stock exchange (""Overseas Shares''), such as H Shares, are not subject to PRC withholding tax. The relevant tax authority has not collected withholding tax on dividend payments on Overseas Shares. VII-1

APPENDIX VII
The Amendments to the

TAXATION

Individual Income Tax Law of the PRC (the ""Amendments'') were promulgated on 31 October 1993 and became eective on 1 January 1994. The Amendments state that they shall supersede the provisions of any contradictory prior administrative regulations concerning individual income tax. Pursuant to the requirements of the Amendments and the amended Individual Income Tax Law, foreign individuals are subject to withholding tax on dividends paid by a PRC company at a rate of 20 per cent. unless specically exempted by the tax authority of the State Council. However, in a letter dated 26 July 1994 to the State Restructuring Commission, the Securities Commission and CSRC, the SAT reiterated the temporary tax exemption stated in the Tax Notice for dividends received from a PRC company listed overseas. In the event that this letter is withdrawn, a 20 per cent. tax may be withheld on dividends in accordance with the Provisional Regulations, the Amendments and the Individual Income Tax Law. Such withholding tax may be reduced pursuant to an applicable double taxation treaty. Enterprises. According to the Income Tax Law of the PRC Concerning Foreign Investment , dividends paid by PRC comEnterprises and Foreign Enterprises panies to enterprises are ordinarily subject to a PRC withholding tax levied at a at rate of 20 per cent.. However, according to the Tax Notice, a foreign enterprise with no permanent establishment in the PRC receiving dividends paid with respect to a PRC company's Overseas Shares will temporarily not be subject to the 20 per cent. withholding tax. If such withholding tax becomes applicable in the future, the rate could be reduced pursuant to an applicable double taxation treaty. Tax Treaties. Investors, who do not reside in the PRC and reside in countries which have entered into double-taxation treaties with the PRC, may be entitled to a reduction of the withholding tax imposed on the payment of dividends to investors of the Company who do not reside in the PRC. The PRC currently has double-taxation treaties with a number of other countries, which include Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States. Under the treaty between the PRC and the United States (the ""PRC-US Treaty''), the PRC may tax a dividend paid by the Company to an Eligible US Holder up to a maximum of 10 per cent. of the gross amount of such dividend. It is arguable that under the PRC-US Treaty the PRC may only tax gains from the sale or disposition by an Eligible US Holder of H Shares representing an interest in the Company of 25 per cent. or more, but this position is uncertain and the PRC authorities may take a dierent position. For the purposes of this discussion, an ""Eligible US Holder'' is a US holder that (i) is a resident of the United States for the purposes of the PRC-US Treaty, (ii) does not maintain a permanent establishment or xed base in the PRC to which H Shares are attributable and through which the benecial owner carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services) and (iii) who is not otherwise ineligible for benets under the PRC-US Treaty with respect to income and gain derived in connection with the H Shares. Hong Kong Taxation No tax will be payable in Hong Kong in respect of dividends paid by the Company. Taxation of Capital Gains PRC Taxation The Tax Notice provides that gains realized by enterprises that are holders of H Shares would, temporarily, not be subject to capital gains taxes. As to individual holders of H Shares, the Provisions for VII-2

APPENDIX VII

TAXATION

Implementation of Individual Income Tax Law of the PRC (the ""Provisions''), issued on 28 January 1994, stipulated that gains realized on the sale of equity shares would be subject to income tax at a rate of 20 per cent. on the gains and empowered the Ministry of Finance to draft detailed tax rules on the mechanism for collecting such tax, as per the ocial publication ""China Securities News'' of 13 April 1994. However, no income tax on gains realized on sale of equity shares has been collected. Gains on the sale of shares by individuals were temporarily exempted from individual income tax pursuant to notices issued by the SAT dated 20 June 1994, 9 February 1996 and 30 March 1998, respectively. In the event such temporary exemption is withdrawn or ceases to be eective, individual holders of H Shares may be subject to capital gains tax at the rate of 20 per cent. unless such tax is reduced or eliminated by an applicable double taxation treaty. If tax on capital gains from the sale of H Shares, become applicable, it is arguable that under the Treaty, the PRC may only tax gains from the sale or disposition by an Eligible US Holder of H Shares representing an interest in the Company of 25 per cent. or more, but this position is uncertain and the PRC authorities may take a dierent position. Hong Kong Taxation No tax is imposed in Hong Kong in respect of capital gains from the sale of property (such as the H Shares). Trading gains from the sale of property by persons carrying on a business in Hong Kong, where such gains are derived from or arise in Hong Kong from such business, will be chargeable to Hong Kong prots tax which is currently imposed at the rate of 16 per cent. on corporations and at a maximum rate of 15 per cent. on individuals. Gains from sales of the H Shares eected on the Stock Exchange will be considered to be derived from or arise in Hong King. Liability for Hong Kong prots tax would thus arise in respect of trading gains from sales of H Shares realised by persons carrying on a business of trading or dealing in securities in Hong Kong. Additional PRC Tax Considerations PRC Stamp Tax PRC stamp tax imposed on the transfer of shares of PRC publicly-traded companies under the Provisional Regulations should not apply to the acquisition and disposal by non-PRC investors of H Shares outside of the PRC by virtue of the Provisional Regulations of the PRC Concerning Stamp Tax which became eective on 1 October 1988 and which provide that PRC stamp tax is imposed only on documents executed or received within the PRC which are legally binding in the PRC and are protected under the PRC law. Estate Tax No liability for estate tax under PRC law will arise from non-PRC nationals holding H Shares. Additional Hong Kong Tax Consideration Stamp Duty Hong Kong stamp duty will be payable by the purchaser on every purchase, and by the seller on every sale, of H Shares. The duty is currently charged at the ad valorem rate of HK$1.25 per HK$1,000 or part thereof of the consideration for, or (if greater) the value of, the H Shares transferred (i.e., a total of HK$2.50 per HK$1,000 or part thereof is currently payable on a typical sale and purchase transaction of H Shares). According to the Hong Kong government budget for 2000/2001 announced on 8 March VII-3

APPENDIX VII

TAXATION

2000, the rate at which stamp duty is levied on every sale and purchase of H shares is proposed to be reduced to HK$2.25 per HK$1,000 or part thereof per transaction (the purchaser and seller each paying half of such stamp duty). The proposal will come into eect once the necessary legislation has been passed. In addition, a xed duty of HK$5 is currently payable on an instrument of transfer of H Shares. Where one of the parties is resident outside of Hong Kong and does not pay the ad valorem duty due by it, the duty not paid will be assessed on the instrument of transfer (if any) and will be payable by the transferee. Estate Duty Estate duty is imposed upon the principal value of property situated in Hong Kong passing on the death of a person. H Shares are regarded as property situated in Hong Kong for estate duty purposes. Hong Kong estate duty is imposed on the principal value of a deceased's estate at graduated rates from 5 per cent. to 15 per cent.. In respect of the estate of persons dying on or after 1 April 1998, no estate duty is payable where the principal value of the dutiable estate does not exceed HK$7.5 million; the maximum rate of 15 per cent. applies where the principal value exceeds HK$10.5 million. TAXATION OF THE COMPANY BY THE PRC Income tax From 1 January 1994, income tax payable by PRC domestic enterprises, including State-owned enterprises and share system enterprises, is governed by the PRC Enterprise Income Tax Provisional (""EIT Regulations'') which took eect as from Regulations 1 January 1994, and which provide for an income tax rate of 33 per cent. unless a lower rate is provided by law, administrative regulations or State Council regulations. The Company is generally subject to tax at a rate of 33 per cent. pursuant to the EIT Regulations. Sino-foreign joint ventures enjoy certain tax benets under the relevant laws and regulations in the PRC. Following the completion of the Global Oering, the Company will remain ineligible to apply for the status of a sino-foreign investment joint stock limited company and does not intend to apply for such status. Nonetheless, pursuant to the applicable laws, rules and regulations in the PRC, no tax benets will accrue to the Company upon acquiring such status. Value-added tax Pursuant to the Provisional Regulations of the PRC Concerning Value Added Tax eective from 1 January 1994 and their implementing rules, the sale of products within the PRC, the importation of products and the provision of processing and/or repair services within the PRC by the Company are subject to value added tax (""VAT''). VAT payable is calculated as ""output VAT'' minus ""input VAT''. Input VAT payable by the Company on purchases is recoverable out of the output VAT collected from its customers, and any excess of output VAT over input VAT paid is payable to the tax authority. The rate of VAT is 17 per cent., or, in certain limited circumstances, 13 per cent., depending on the product type. Business tax Provisional Regulations of the PRC Concerning Business Tax , eective from 1 January 1994 and the implementing rules, business tax is imposed on enterprises which provide taxable services, transfer intangible property or sell real VII-4 Pursuant to the

APPENDIX VII

TAXATION

estate in the PRC. The business tax is levied at a rate from 3 per cent. to 5 per cent. on the provision of taxable services, transfer of intangible property or sale of real estate in the PRC. TAXATION OF THE COMPANY BY HONG KONG The Directors do not consider that any of the Company's income or the income of its subsidiaries is derived from or arises in Hong Kong for the purpose of Hong Kong taxation. The Company will therefore not be subject to Hong Kong taxation.

VII-5

APPENDIX VIII

FOREIGN EXCHANGE

The lawful currency of the PRC is the Renminbi, which is subject to foreign exchange controls and is not freely convertible into foreign exchange at this time. The SAFE, under the authority of the PBOC, is empowered with the functions of administering all matters relating to foreign exchange, including the enforcement of foreign exchange control regulations. Prior to 31 December 1993, a quota system was used for the management of foreign currency. Any enterprise requiring foreign currency was required to obtain a quota from the local SAFE oce before it could convert Renminbi into foreign currency through the PBOC or other designated banks. Such conversion had to be eected at the ocial rate prescribed by the SAFE on a daily basis. Renminbi could also be converted into foreign currency at swap centres. The exchange rates used by swap centres were largely determined by the demand for, and supply of, foreign currencies and the Renminbi requirements of enterprises in the PRC. Any enterprise that wished to buy or sell foreign currency at a swap centre rst had to obtain the approval of the SAFE. On 28 December 1993, the PBOC, under the authority of the State Council, promulgated the Notice of the People's Bank of China Concerning Further Reform of the Foreign Currency Control (the ""Notice''), eective from 1 January System 1994. The Notice announces the abolition of the system of foreign exchange quotas, the implementation of conditional convertibility of Renminbi in current account items, the establishment of the system of settlement and payment of foreign exchange by banks, and the unication of the ocial Renminbi exchange rate and the market rate for Renminbi established at swap centres. On 26 March 1994, the PBOC promulgated the ""Provisional Regulations for the Administration of Settlement, Sale and (the ""Provisional Regulations''). The Payment of Foreign Exchange'' Provisional Regulations set out detailed provisions regulating the sale and purchase of foreign exchange by enterprises, economic organizations and social organizations in the PRC. On 29 January 1996, the State Council promulgated new Regulations of the People's Republic of (""Control of Foreign China for the Control of Foreign Exchange Exchange Regulations'') which was eective from 1 April 1996. The Control of Foreign Exchange Regulations classify all international payments and transfers into current account items and capital account items. Current account items are no longer subject to SAFE approval while capital account items still are. The Control of Foreign Exchange Regulations were subsequently amended on 14 January 1997. This latest amendment armatively states that the State shall not restrict international current account payments and transfers. On 20 June 1996, the PBOC promulgated the ""Regulations for Administration of Settlement, Sale (the ""Settlement Regulations'') and Payment of Foreign Exchange'' which entered into eect on 1 July 1996. The Settlement Regulations supersede the Provisional Regulations and abolish the remaining restrictions on convertibility of foreign exchange in respect of current account items while retaining the existing restrictions on foreign exchange transactions in respect of capital account items. On the basis of the Settlement Regulations, the PBOC also published the ""Announcement on the Implementation of Foreign Exchange Settlement and Sale at Banks by For(the ""Announceeign-invested Enterprises'' ment''). The Announcement permits foreign-invested enterprises to open, on the basis of their needs, foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialised accounts for capital account receipts and payments at designated foreign exchange banks. On 25 October 1998, the PBOC and the SAFE promulgated the Notice Concerning the , pursuant to Discontinuance of Foreign Exchange Swapping Business VIII-1

APPENDIX VIII

FOREIGN EXCHANGE

which and with eect from 1 December 1998, all foreign exchange swapping business in the PRC for foreign-invested enterprises shall be discontinued, while the trading of foreign exchange by foreigninvested enterprise shall come under the banking system for the settlement and sale of foreign exchange. Since 1 January 1994, the former dual exchange rate system for Renminbi has been abolished and replaced by a managed oating exchange rate system, which is determined by demand and supply. The PBOC sets and publishes daily the Renminbi-US dollar base exchange rate. This exchange rate is determined with reference to the transaction price for Renminbi-US dollar in the inter-bank foreign exchange market on the previous day. The PBOC will also, with reference to exchange rates in the international foreign exchange market, announce the exchange rates of Renminbi against other major currencies. In foreign exchange transactions, designated foreign exchange banks may, within a specied range, freely determine the applicable exchange rate in accordance with the exchange rate announced by the PBOC. Save for foreign-invested enterprises or other enterprises which are specially exempted by relevant regulations, all entities in China (with the exception of certain foreign trade companies and productiontype enterprises with import-export operation right, which may be permitted to retain a certain amount of their foreign exchange income from their current account transactions and to use such monies to make foreign exchange payments for their current account transactions and permitted capital account transactions) must sell their foreign exchange income to designated foreign exchange banks. Foreign exchange income from loans issued by organizations outside the territory or from the issuance of bonds and shares (for example foreign exchange income received by the Company from the sale of shares overseas) is not required to be sold to designated foreign exchange banks, but may be deposited in foreign exchange accounts at the designated foreign exchange banks. Chinese enterprises (including foreign-invested enterprises) which require foreign exchange for transactions relating to current account items, may, without the approval of SAFE, eect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks, on the strength of valid receipts and proof. Foreign-invested enterprises which need foreign exchange for the distribution of prots to their shareholders, and Chinese enterprises which in accordance with regulations are required to pay dividends to shareholders in foreign exchange (like the Company), may on the strength of board resolutions on the distribution of prots, eect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks. Convertibility of foreign exchange in respect of capital account items, like direct investment and capital contribution, is still subject to restriction, and prior approval from SAFE and the relevant branch must be sought. Dividends to holders of H Shares are xed in Renminbi but must be paid in Hong Kong dollars.

VIII-2

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

This Appendix sets out summaries of PRC company and securities regulations, certain material dierences between the Company Law and Hong Kong company law, additional regulatory provisions introduced by the Stock Exchange in relation to PRC joint stock limited companies and the Articles of Association. The main objective is to provide investors with an overview of the rights and obligations of shareholders of the Company and the principal legal and regulatory provisions applicable to the Company. 1. (A) PRC LEGAL AND REGULATORY PROVISIONS Company Law

On 29 December 1993, the Standing Committee of the Eighth National People's Congress adopted the Company Law, which came into eect on l July 1994 and was amended on 25 December 1999. Companies established under laws, administrative regulations, local regulations and the Standard Opinion for Limited Liability Companies, and the Standard Opinion for Joint Stock Limited Companies formulated by the relevant departments of the State Council before the implementation of the Company Law will not be aected by the Company Law and shall continue to be recognised. Those companies which have not wholly complied with the provisions of the Company Law shall comply with the relevant requirements within a specied period of time. The State Council will separately promulgate detailed implementing measures. Set out below is a summary of the major provisions of the Company Law, the Special Regulations and the Mandatory Provisions. On 4 July 1994, the Special Regulations were passed at the Second Standing Committee Meeting of the State Council, and they were promulgated and implemented on 4 August 1994. The Special Regulations are formulated according to the provisions of Sections 85 and 155 of the Company Law in respect of the overseas share subscription and listing of joint stock limited companies. The Mandatory Provisions were issued jointly by the Securities Commission and the State Restructuring Commission on 27 August 1994, prescribing provisions which must be incorporated in the articles of association of joint stock limited companies to be listed overseas. Accordingly, the Mandatory Provisions have been incorporated in the Articles of Association (which are summarised in Section 3 of this Appendix). References to a ""company'' are to a joint stock limited company established under the Company Law with overseas listed foreign invested shares. Copies of the Chinese text of the Company Law, the Special Regulations and the Mandatory Provisions together with a copy of an unocial English translations thereof are available for inspection as mentioned in the section headed ""Documents Available for Inspection'' in Appendix XI. General A ""joint stock limited company'' is a corporate legal person incorporated under the Company Law, whose registered capital is divided into shares of equal par value. The liability of its shareholders is limited to the extent of the Shares held by them, and the liability of the company is limited to the full amount of all the assets owned by it. A State-owned enterprise that is restructured into a company must comply with the conditions and requirements specied by law and administrative regulations, for the modication of its operation mechanisms, the systematic handling and evaluation of the company's assets and liabilities and the establishment of internal management organs. A company must conduct its business in accordance with the laws and professional ethics and promote the development of a socialist market economy. IX-1

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

A company may invest in other limited liability companies and joint stock companies. However, apart from investment companies and holding companies specied by the State Council, the amount of a company's aggregate investment in other companies may not exceed 50 per cent. of its net assets and the company's liabilities with respect to such invested companies are limited to the amount invested. Incorporation A company may be incorporated by promotion or public subscription. A company may be incorporated by a minimum of ve promoter, but at least half of the promoter must reside within the PRC. According to the Special Regulations, State-owned enterprises or enterprises with the majority of their assets owned by the PRC Government can be restructured in accordance with the relevant regulations to become joint stock limited companies which may issue shares to overseas investors. These companies, if incorporated by promotion, may have less than ve promoters and can issue new shares once incorporated. Companies incorporated by promotion are companies the entire registered capital of which is subscribed for by the promoter. Where companies are incorporated by public subscription, not less than 35 per cent. of their total shares must be subscribed for by the promoter and the remainder of their shares shall be oered to the public. The registered capital of a company is the amount of its total paid up capital as registered with the relevant administration bureau for industry and commerce. The minimum registered capital of a company is RMB10 million. The total capital of a company which proposes to apply for its shares to be listed on a stock exchange must not be less than RMB50 million. The establishment of a company must be approved by the department authorised by the State Council or by the provincial level people's government. The promoter shall convene an inaugural meeting within 30 days after the issued shares have been fully paid up, and shall give notice to all subscribers or make an announcement of the date of the inaugural meeting 15 days before the meeting. The inaugural meeting may be convened only with the presence of subscribers holding shares representing 50 per cent. and above of the voting rights in the company. At the inaugural meeting, matters including the adoption of draft articles of association proposed by the promoter(s) and the election of the board of directors and the supervisory committee of the company will be dealt with. All resolutions of the meeting require the approval of subscribers with half or more of the voting rights present at the meeting. Within 30 days after the conclusion of the inaugural meeting, the board of directors shall apply to the registration authority for registration of the establishment of the company. A company is formally established and has the status of a legal person after the approval of registration has been given by the relevant administration bureau for industry and commerce and a business licence has been issued. Companies established by the public subscription method shall le a report on the oer of shares with the securities administration department of the State Council for record. A company's promoter shall individually and collectively be liable for: (i) the payment of all expenses and liabilities incurred in the incorporation process if the company cannot be incorporated; (ii) the repayment of subscription moneys to the subscribers together with interest at bank rates for a deposit for the same term if the company cannot be incorporated. A company's promoter are liable for damages caused to the interests of the company arising from the default of the promoter during the process of incorporation. IX-2

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Share capital The promoter may make capital contribution in cash, or in kind or by way of injection of assets, industrial property rights, non-patented technology or land use rights based on their appraised value. The amount of investment made in the form of industrial property rights and non-patented technology may not exceed 20 per cent. of the registered capital of the company. If a capital contribution is made other than in cash, a valuation and verication of the property contributed must be carried out and converted into shares. A company may issue registered or bearer share certicates. However, shares issued to promoter, state-authorised investment organisations and PRC legal persons shall be in the form of registered share certicates, and may not be registered under a dierent name or in the name of an agent. The Special Regulations and the Mandatory Provisions provide that shares issued to foreign investors and listed overseas be issued in registered form and shall be denominated in Renminbi and subscribed for in foreign currency. Under the Special Regulations and the Mandatory Provisions, shares issued to foreign investors and investors from the territories of Hong Kong, Macau and Taiwan and listed overseas are known as overseas listed foreign invested shares, and those shares issued to investors within the PRC other than the territories specied above are known as domestic invested shares. A company may oer its shares to the public overseas with approval by the securities administration department of the State Council. Detailed measures shall be specially formulated by the State Council. Under the Special Regulations, upon approval of the CSRC, a company may agree, in the underwriting agreement in respect of an issue of overseas listed foreign invested shares, to retain not more than 15 per cent. of the aggregate number of overseas listed foreign invested shares proposed to be issued after accounting for the number of underwritten shares. The share oering price may be equal to or greater than the par value, but may not be less than the par value. The transfer by a shareholder of its shares must be carried out through a lawfully established stock exchange. Transfer of registered shares by a shareholder must be made by means of an endorsement or by other means stipulated by a law or by administrative regulations. Bearer share certicates are transferred by delivery of the certicates to the transferee. Shares held by a promoter of a company may not be transferred for three years after the company's establishment. Directors, supervisors and the manager of the company shall not transfer the shares they hold in the company during their term of oce. There is no restriction under the Company Law as to the percentage of shareholding a single shareholder may hold in a company. According to PRC Securities Law which came into eect on 1 July 1999, a shareholder who owns ve per cent. of the issued shares of a listed company is required to report to the Company of such ownership and the Company is required to report to the securities regulatory authorities within three days after receiving the shareholder's report. Additional requirement is mandated by the Securities Law if the share ownership further increases. Transfers of shares may not be entered in the register of shareholders after 30 days before the date of a shareholders' meeting or after ve days before the record date set for the purpose of distribution of dividends. IX-3

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Increase in capital Under the Company Law, an increase in capital in a company by means of an issue of new shares must be approved by shareholders in general meeting and meet the following conditions: (i) the previous issue of shares has been fully subscribed for and at least one year has elapsed since that issue but under the Special Regulations, if a company increases its capital for the issue of overseas listed foreign invested shares, the time period elapsed since the last issue of shares may be less than 12 months; the company has been continuously protable for the last three consecutive years and is able to make dividend payments to its shareholders; there has been no false reporting in the company's nancial and accounting documents during the last three years; and the company's estimated prot rate can match the bank deposit rate for the same term.

(ii) (iii) (iv)

Once the shareholders in general meeting have passed a resolution to issue new shares, the board of directors must apply to the authorised department of the State Council or to the provincial level people's government for approval. Public oers shall require the approval of the securities administration department of the State Council. After payment in full for the new shares issued, the company must change its registration with the relevant administration for industry and commerce bureau and issue a public notice accordingly. Repurchase of shares A company may not purchase its own shares other than for the purpose of reducing its capital by cancelling its shares or merging with another company holding its shares or such other purpose permitted by law and administrative regulations. The Mandatory Provisions provide that upon obtaining approvals in accordance with the articles of association of the company and from the relevant supervisory authorities, the company may repurchase its issued shares for the foregoing purposes by way of a general oer to the shareholders of the company or purchase on the stock exchange or an o-market agreement. Under the Company Law, within 10 days following the purchase of the company's own shares, a company must in accordance with applicable law and administrative regulations cancel the repurchased portion of its shares, change its registration and issue a public notice. Shareholders Shareholders have such rights and obligations as set down in the articles of association of the company. The articles of association of a company are binding on each shareholder. Under the Company Law, the rights of a shareholder include: (i) (ii) to attend in person or appoint a proxy to attend shareholders' general meetings, and to vote in respect of the number of shares held; to transfer his shares at a legally established stock exchange in accordance with the Company Law and the articles of association of the company; IX-4

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

(iii)

to inspect the company's articles of association, minutes of shareholders' general meetings and nancial and accounting reports and to make proposals or enquiries in respect of the company's operations; if a resolution adopted by a shareholders' general meeting or the board of directors violates any law or administrative regulation or infringes the lawful rights and interests of shareholders, to institute an action in People's Court demanding that the illegal infringing action be stopped; to receive dividends in respect of the number of share's held; to receive surplus assets of the company upon its termination in proportion to his shareholding; and

(iv)

(v) (vi)

(vii) any other rights specied in the company's articles of association. The obligations of a shareholder include the obligation to abide by the company's articles of association, to pay the subscription moneys in respect of the shares for which he has subscribed, to be liable for the company's debts and liabilities to the extent of the amount of subscription moneys agreed to be paid in respect of the shares taken up by him and any other obligation specied in the company's articles of association. General meetings The shareholders' general meeting is the organ of authority of the company, which exercises its powers in accordance with the Company Law. The shareholders' general meeting exercises the following powers: (i) (ii) (iii) (iv) (v) (vi) to decide on the company's operational policies and investment plans; to elect and replace directors and decide on matters relating to the remuneration of directors; to elect and replace the supervisors who represent the shareholders and to decide on matters relating to the remuneration of supervisors; to examine and approve the board of directors' reports; to examine and approve the supervisory committee's reports; to examine and approve the company's proposed annual preliminary and nal nancial budgets;

(vii) to examine and approve the company's prot distribution plans and for loss recovery of plans; (viii) to decide on the increase or reduction of the company's registered capital; (ix) (x) (xi) to decide on the issue of debentures by the company; to decide on matters such as merger, division, dissolution and liquidation of the company and other matters; and to amend the company's articles of association. IX-5

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Shareholders' general meetings shall be held once every year. An extraordinary shareholders' general meeting shall be held within two months of the occurrence of any of the following events: (i) (ii) (iii) (iv) (v) where the number of directors is less than the number stipulated in the Company Law or two-thirds of the number specied in the company's articles of association; the unrecovered losses of the company amount to one-third of the company's total share capital; where shareholder(s) holding 10 per cent. or more of the company's issued and outstanding voting shares request(s) in writing the convening of an extraordinary general meeting; whenever the board of directors deems necessary; or the supervisory committee so requests.

Shareholders' general meetings shall be convened by the board of directors, and presided over by the chairman of the board of directors. Notice of the meeting shall be given to all shareholders 30 days before the meeting under the Company Law and 45 days under the Special Regulations and the Mandatory Provisions, stating the matters to be considered at the meeting. Under the Special Regulations and the Mandatory Provisions, shareholders wishing to attend are required to give to the company written conrmation of their attendance. Under the Special Regulations, at an annual general meeting of a company, shareholders holding 5 per cent. or more of the voting rights in the company are entitled to propose to the company in writing new resolutions to be considered at that meeting, which if within the powers of a shareholders' general meeting, are required to be added to the agenda of that meeting. Shareholders present at a shareholders' general meeting have one vote for each share they hold. Resolutions of the shareholders' general meeting must be adopted by half or more than half of the voting rights held by shareholders present at the meeting, with the exception of matters relating to merger, division or dissolution of a company which must be adopted by shareholders with two-thirds or more than two-thirds of the voting rights held by shareholders present at the meeting. According to the Mandatory Provisions, the increase or reduction of share capital, the issue of bonds or debentures, and any other measure in respect of which the shareholders by ordinary resolution so decide, must be approved by special resolutions which require adoption by shareholders holding more than two-thirds of the voting rights of the shareholders present in the general meeting. Amendments to the articles of association of a company must be passed by more than two-thirds of the voting rights represented by shareholders who are present in person or by proxy. Shareholders may appoint representatives to attend shareholders' general meetings by a written appointment document stating the scope of the exercise of the voting rights. There is no specic provision in the Company Law regarding the number of shareholders constituting a quorum in a shareholders' meeting. However, the Special Regulations and the Mandatory Provisions provide that a company's annual general meeting may be convened when replies to the notice of that meeting from shareholders holding shares representing 50 per cent. of the voting rights in the company have been received 20 days before the proposed date, or if that 50 per cent. level is not achieved, the company shall within ve days notify shareholders by public announcement of the matters IX-6

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

to be considered at the meeting and the date and place of the meeting and the annual general meeting may be held thereafter. Directors A company shall have a board of directors, which shall consist of ve to 19 members. Under the Company Law, each term of oce of a director shall not exceed three years. The Mandatory Provisions provide that the term of oce shall be three years. A director may serve consecutive terms if re-elected. Meetings of the board of directors shall be convened at least twice a year. Notice of meeting shall be given to all directors 10 days before the meeting. The board of directors may provide for a dierent method of giving notice and notice period for convening an extraordinary meeting of the board of directors. Under the Company Law, the board of directors exercises the following powers:(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) to convene the shareholders' general meeting and to report on its work to the shareholders; to implement the resolutions passed by the shareholders in general meetings; to decide on the company's business plans and investment proposals; to formulate the company's proposed annual preliminary and nal nancial budgets; to formulate the company's prot distribution proposals and loss recovery proposals; to formulate proposals for the increase or reduction of the company's registered capital and the issuance of the company's debentures; to draw up plans for the merger, division or dissolution of the company; to decide on the company's internal management structure; to appoint or dismiss the company's general manager and to appoint or dismiss the deputy general manager and nancial ocers of the company, based on the general manager's recommendation, and to decide on their remuneration; and to formulate the company's basic management system.

(x)

In addition, the Mandatory Provisions provide that the board is also responsible for formulating the proposals for amendment to the articles of association of a company. Meetings of the board of directors shall be held only if half or more of the directors are present. Resolutions of the board of directors require the approval of more than half of all directors. If a director is unable to attend a board meeting, he may appoint another director by a written power of attorney specifying the scope of the authorisation to attend the meeting on his behalf. If a resolution of the board of directors violates the law, administrative regulations or the company's articles of association as a result of which the company sustains serious losses, the directors participating in the resolution are liable to compensate the company. However, if it can be proven that a director expressly objected to the resolution when the resolution was voted on, and that such objections were recorded in the minutes of the meeting, such director may be relieved from that liability. IX-7

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Under the Company Law, the following persons may not serve as a director of a company: (i) persons without civil capacity or with restricted civil capacity;

(ii) persons who have committed the oence of corruption, bribery, taking of property, misappropriation of property or destruction of the social economic order, and have been sentenced to criminal punishment, where less than ve years have elapsed since the date of completion of the sentence; or persons who have been deprived of their political rights due to criminal oence, where less than ve years have elapsed since the date of the completion of implementation of this deprivation; (iii) persons who are former directors, factory managers or managers of a company or enterprise which has been dissolved or put into liquidation due to mismanagement and who are personally liable for the winding up of such company or enterprise, where less than three years have elapsed since the date of the completion of the insolvent liquidation of the company or enterprise; (iv) persons who were legal representatives of a company or enterprise the business licence of which was revoked due to violation of law and who are personally liable therefor, where less than three years have elapsed since the date of the revocation of the business licence; (v) persons who have a relatively large amount of debts which have become overdue;

(vi) persons who are State civil servants. Other circumstances under which a person is disqualied from acting as a director of a company are set out in the Mandatory Provisions which have been incorporated in the Articles of Association, a summary of which is set out in this Appendix. The board of directors shall have one chairman, who is elected with approval of more than half of all the directors. The chairman of the board of directors is the legal representative of the company and exercises, inter alia, the following powers: (i) (ii) (iii) to preside over shareholders' general meetings and convene and preside over meetings of the board of directors; to check on the implementation of the resolutions of the board of directors; and to sign the company's share certicates and bonds.

The Special Regulations provide that a company's directors, supervisors, managers and other ocers have duciary duties and are under a duty to act diligently. They are required to faithfully perform their duties, protect the interests of the company and not to use their positions for their own benet. The Mandatory Provisions (which are incorporated into the Articles of Association, a summary of which is set out in this Appendix) contains further elaborations of such duties. Supervisors A company shall have a supervisory committee composed of not less than three members. Each term of oce of a supervisor is three years and he may serve consecutive terms if re-elected. The supervisory committee is made up of representatives of the shareholders and an appropriate proportion of representatives of the company's sta and workers. Directors, managers and nancial ocers may not act concurrently as supervisors. IX-8

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

The supervisory committee exercises the following powers: (i) (ii) to review the company's nancial position; to supervise the directors and managers in their performance of their duties and to ascertain whether or not they have violated laws, regulations or the articles of association of the company; to demand any director or manager who acts in a manner which is harmful to the company's interests to rectify such behaviour; to propose the convening of extraordinary shareholders' general meetings; and other powers specied in the company's articles of association.

(iii) (iv) (v)

The circumstances under which a person is disqualied from being a director of a company described above apply mutatis mutandis to supervisors of a company. The Special Regulations provide that a company's directors and supervisors shall have duciary duties. They are required to faithfully perform their duties, protect the interests of the company and not to use their positions for their own benet. Managers and ocers The Special Regulations and Mandatory Provisions provide that the senior management of a company includes the nancial controller, secretary of the board of directors and other executives as specied in the articles of association of the company. The circumstances under which a person is disqualied from being a director of a company described above apply mutatis mutandis to managers and ocers of the company. The articles of association of a company shall have binding eect on the shareholders, directors, supervisors, managers and other executives of the company. Such persons shall be entitled to exercise their rights, apply for arbitration and issue legal proceedings according to the articles of association of the company. The provisions of the Mandatory Provisions regarding the senior management of a company have been incorporated in the Articles of Association (a summary of which is set out in this Appendix). Finance and accounting A company shall establish its nancial and accounting systems according to laws, administrative regulations and the regulations of the responsible nancial department of the State Council and at the end of each nancial year prepare a nancial report at the conclusion of each nancial year which shall be audited and veried as provided by law. A company shall deposit its nancial statements at the company for the inspection by the shareholders at least 20 days before the convening of an annual general meeting of shareholders. A company established by the general subscription must publish its nancial statements. When distributing each year's after-tax prots, the company shall set aside 10 per cent. of its aftertax prots for the company's statutory common reserve fund (except where the fund has reached 50 per cent. of the company's registered capital) and 5 per cent. to 10 per cent. for the company's statutory common welfare fund. IX-9

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When the company's statutory common reserve fund is not sucient to make up for the company's losses of the previous year, current year prots shall be used to make good the losses before allocations are set aside for the statutory common reserve fund or the statutory common welfare fund. The company's statutory common welfare fund is used for the collective welfare of the company's sta and workers. After the company has made good its losses and made allocations to its statutory common reserve fund and statutory common welfare fund, the remaining prots are distributed in proportion to the number of shares held by the shareholders. The company's common reserve fund may be converted into capital provided it is approved by a resolution at a shareholders' general meeting and the balance of the statutory common reserve fund does not fall below 25 per cent. of the registered capital. The company may either distribute new shares in proportion to the number of shares held by shareholders, or increase the par value of each share. Appointment and retirement of auditors The Special Regulations require a company to employ an independent PRC qualied rm of accountants to audit the company's annual report and review and check other nancial reports. The auditors are to be appointed for a term commencing from the close of an annual general meeting and ending at the close of the next following annual general meeting. If a company removes or ceases to continue to appoint the auditors, it is required by the Special Regulations to give prior notice to the auditors and the auditors are entitled to make representations before the shareholders in general meeting. The appointment, removal or non re-appointment of auditors shall be decided by the shareholders and shall be registered with the CSRC. Distribution of prots The Special Regulations provide that the dividends and other distributions to be paid to holders of overseas listed foreign invested shares shall be declared and calculated in Renminbi and paid in foreign currency. Under the Mandatory Provisions, the payment of foreign currency to shareholders shall be made through a receiving agent. Amendment of articles of association Any amendments to the company's articles of association must be made in accordance with the procedures set forth in the company's articles of association. Any amendment of provisions incorporated in the articles of association in accordance with the Mandatory Provisions will only be eective after approval by the companies approval department authorised by the State Council. In relation to matters involving the company's registration, its registration with the companies registration authority must also be changed. Termination and liquidation A company may apply for the declaration of insolvency by reason of its inability to pay debts as they fall due. After the People's Court has made a declaration of the company's insolvency, the shareholders, the relevant authorities and the relevant professionals shall form a liquidation committee to conduct the liquidation of the company. IX-10

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Under the Company Law, a company shall be dissolved if: (i) (ii) (iii) the term of its operations set down in the company's articles of association has expired or events of dissolution specied in the company's articles of association have occurred; the shareholders in general meeting have resolved to dissolve the company; or the company is dissolved by reason of its merger or demerger.

Where the company is dissolved in the circumstances described in (i) or (ii) above, a liquidation committee must be established within 15 days. Members of the liquidation committee shall be appointed by the shareholders in a general meeting. If a liquidation committee is not established within the stipulated period, the company's creditors can apply to the People's Court for the establishment of a liquidation committee. The liquidation committee shall notify the company's creditors within 10 days after its establishment, and issue at least three public notices in the newspapers within 60 days. A creditor shall lodge his claim with the liquidation committee within 30 days after receiving notication, or within 90 days of the rst public notice if he did not receive any notication. The liquidation committee shall exercise the following powers during the liquidation period: (i) (ii) (iii) (iv) (v) (vi) (vii) to sort out the company's assets and to prepare a balance sheet and an inventory of the assets; to notify creditors or issue public notices; to dispose of and liquidate any unnished businesses of the company; to pay all outstanding taxes; to settle the company's nancial claims and liabilities; to deal with the surplus assets of the company after its debts have been paid o; and to represent the company in civil lawsuits.

If the company's assets are sucient to meet its liabilities, they shall be applied towards the payment of the liquidation expenses, wages owed to the employees and labour insurance expenses, tax overdue and debts of the company. Any surplus assets shall be distributed to the shareholders of the company in proportion to the number of shares held by them. A company shall not engage in new business operations during the liquidation period. If the liquidation committee becomes aware that the company does not have sucient assets to meet its liabilities, it must immediately apply to the People's Court for a declaration for bankruptcy. Following such declaration, the liquidation committee shall hand over all aairs of the liquidation to the People's Court. Upon completion of the liquidation, the liquidation committee shall submit a liquidation report to the shareholders' general meeting or the relevant supervisory department for verication. Thereafter, the report shall be submitted to the companies registration authority in order to cancel the company's registration, and a public notice of its termination shall be issued. IX-11

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Overseas listing The shares of a company shall only be listed overseas after obtaining approval from the securities regulatory authority of the State Council and the listing must be arranged in accordance with procedures specied by of the State Council. According to the Special Regulations, a company's plan to issue overseas listed foreign invested shares and domestic invested shares which has been approved by the CSRC may be implemented by the board of directors of a company by way of separate issues, within 15 months after approval is obtained from the CSRC. Loss of share certicates A shareholder may apply, in accordance with the relevant provisions set out in the PRC Civil Procedure Law, to a People's Court in the event that share certicates in registered form are either stolen or lost, for a declaration that such certicates will no longer be valid. After such a declaration has been obtained, the shareholder may apply to the company for the issuance of replacement certicates. The Mandatory Provisions provide for a separate procedure regarding loss of H share certicates (which has been incorporated in the Articles of Association, a summary of which is set out in this Appendix). Suspension and termination of listing The trading of shares of a company on a stock exchange may be suspended if so decided by the securities administration department of the State Council under one of the following circumstances: (i) (ii) (iii) (iv) the registered capital or share holding distribution no longer comply with the necessary requirements for a listed company; the company failed to make public its nancial position in accordance with the requirements or there is false information in the company's nancial report; the company has committed a major breach of the law; the company has incurred losses for each of the preceding three years.

If the trading of a company's shares are suspended under the circumstances referred to in (ii) and (iii) above and investigation has revealed that the consequences are serious, or a company's shares are suspended under the circumstances referred to in (i) and (iv) above and the situation has not been rectied within the time stipulated, the securities administration department of the State Council may decide to terminate the listing of a company's shares. The securities administration department of the State Council may also terminate the listing of a company's shares in the event that the company resolves to cease operation or is so instructed by its government supervisory body, or the company is declared insolvent. Merger and demerger The merger or demerger of a company is to be decided by the shareholders in general meetings subject to the approval of departments authorised by the State Council or the approval of provincial government. IX-12

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Companies may merge through merger by absorption or through the establishment of a newly merged entity. If it merges by absorption, the company which is absorbed shall be dissolved. If it mergers by forming a new corporation, both companies will be dissolved. A merger agreement must be signed in the case of a merging of companies and the relevant companies shall draw up their respective balance sheets and inventory of property. The companies should within 10 days of the resolution of the merger inform their respective creditors and publish a notice to the creditors in newspapers at least 3 times, within 30 days of the resolution to merge. Those creditors who had not received written notice may within 90 days of the rst published notice, or within 30 days after receipt of the written notice, request the company to satisfy any unsatised debt or provide equivalent guarantees in cases of guarantees. Companies unable to repay such debts or provide alternative guarantees will not be allowed to merge. Newly merged entities shall be responsible for the debts and obligations of the companies involved in the merger. When a company demerges into two companies, their respective assets must be separated and separate nancial accounts must be drawn up. When a company's shareholders approve the demerger of the company, the company should notify all its creditors within 10 days of such resolution being passed and advertise the same at least three times in newspapers within 30 days. A creditor may within 30 days after receipt of the written notice or, a creditor who has not received such notice may within 90 days from the rst public advertisement, demand that the company repay any outstanding debts or provide an appropriate guarantee. Changes in registrable particulars of the companies caused by merger or demerger must be registered in accordance with applicable laws. (B) Securities law and supervision

At present, a number of regulations have been promulgated in relation to the issue of and trading in securities and disclosure of information. In early 1993, the State Council established the Securities Commission and the CSRC. The Securities Commission is responsible for coordinating the drafting of securities regulations, formulating securities-related policies, planning the development of securities markets, directing, coordinating and supervising all securities-related institutions in the PRC and administering the CSRC. The CSRC is the regulatory arm of the Securities Commission and is responsible for the drafting of regulatory provisions of securities markets, supervising securities companies, regulating public oers of securities by PRC companies in the PRC or overseas, regulating the trading of securities, compiling securities-related statistics and undertaking research and analysis. In early 1998, the State Council dissolved the Securities Commission and the former functions of the Securities Commission were assumed by the CSRC. On 22 April 1993, the State Council promulgated the Provisional Regulations Concerning the Issue ). These regulations deal with the application and and Trading of Shares ( approval procedures for public oerings of equity securities, trading in equity securities, the acquisition of listed companies, deposit, settlement, and transfer of listed equity securities, the disclosure of information with respect to a listed company, enforcement and penalties and dispute settlement. These regulations specically provide that separate provisions will be promulgated in relation to the issue of and trading in special Renminbi-denominated shares. However, (i) if a PRC joint stock limited company proposes to issue Renminbi-denominated ordinary shares as well as special Renminbi-denominated shares, it has to comply with these regulations in respect of regulations governing Renminbi-denominated ordinary IX-13

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shares; (ii) if a PRC company proposes to oer shares directly or indirectly outside the PRC it will require the approval of the Securities Commission; and (iii) provisions of these regulations in relation to acquisitions of listed companies and disclosure of information are expressed to apply to listed companies in general without being conned to listed companies on any particular stock exchange. Hence it is possible that such provisions may be applicable to joint stock limited companies with shares listed on a stock exchange outside the PRC including, for instance, joint stock limited companies with shares listed on the Stock Exchange, such as the Company. On 12 June 1993, pursuant to the Provisional Regulations Concerning the Issue and Trading of Shares, the CSRC promulgated the Implementation Measures (Provisional) on Disclosure of Informa). Pursuant to these measures, the CSRC is responsition ( ble for supervising the disclosure of information by companies which have oered shares to the public both in the PRC and overseas. These measures contain provisions regarding prospectuses and listing reports to be issued in connection with a public oering of shares in the PRC, publication of interim and nal reports and announcement of material transactions or matters by companies which have oered shares to the public. Material transactions or matters are those the occurrence of which may have a material eect on the share price of a company. They include changes to a company's articles of association or registered capital, removal of auditors, mortgage or disposal of major operating assets or writing down the value of such assets where the amount being written down exceeds 30 per cent. of the total value of such assets, revocation by a court of any resolution passed by the shareholders or the supervisors of a company and the merger or demerger of a company. These measures also contain disclosure provisions in relation to acquisition of listed companies which supplement the requirements contained in the Provisional Regulations Concerning the Issue and Trading of Shares. On 2 September 1993, the Securities Commission promulgated the Provisional Measures Prohibit). The prohibitions imposed ing Fraudulent Conduct relating to Securities ( by these measures include the use of insider information in connection with the issue of or trading in securities (insider information being dened to include undisclosed material information known to any insider, which may aect the market price of securities); the use of funds or information or the abuse of power in creating a false or disorderly market or inuencing the market price of securities or inducing investors to make investment decisions without knowledge of actual circumstances; and the making of any statement in connection with the issue of and trading in securities which is false or materially misleading and in respect of which there is any material omission. Penalties imposed for contravening any of the provisions of the measures include nes, conscation of prots and suspension of trading. In serious cases, criminal liability may be imposed. On 4 July 1994, the State Council promulgated the Special Regulations. These provisions deal mainly with the issue, subscription, trading and declaration of dividends and other distributions of foreign capital stock listed aboard and disclosure of information, articles of association of joint stock limited companies having foreign capital stock listed aboard. On 25 December 1995, the State Council promulgated the Regulations of the State Council Concerning the Domestic Listed Shares of Joint Stock Limited Companies ). These regulations deal mainly with the issue, sub( scription, trading and declaration of dividends and other distributions of domestic listed foreign shares and disclosure of information of joint stock limited companies having domestic listed foreign shares. On 29 December 1998, the Securities Law of the PRC ( Standing Committee of the National People's Congress ( IX-14 ) was passed by the ). The Securities

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Law took eect on 1 July 1999. This is the rst national securities law in the PRC, and it is divided into 12 chapters and 214 articles regulating, among other things, the issue and trading of securities, takeovers by listed companies, securities exchanges, securities companies and the duties and responsibilities of the State Council's securities regulatory authorities. The Securities Law is the fundamental law which comprehensively regulates activities in the PRC securities market. Article 29 of the Securities Law provides that enterprises in the PRC which intend to directly or indirectly issue securities outside the PRC or to list their securities outside the PRC must obtain prior approval from the State Council's regulatory authorities. Article 213 of the Securities Law provides that specic measures in respect of shares of companies in the PRC which are to be subscribed and traded in foreign currencies by person and organisation outside the PRC shall be separately formulated by the State Council. Currently, the issue and trading of foreign issued shares (including H shares and B shares) are still mainly governed by the rules and regulations promulgated by the State Council and the CSRC. In order to further promote strict compliance of ""companies listed outside China'' (""Listed Companies'') with the relevant domestic and foreign laws and regulations, their conscientious performance of their continuing obligations toward investors and their establishment of a good corporate image on domestic and foreign capital markets, the SETC and the CSRC jointly issued the Opinion on the Further Promotion of the Regular Operation and In-Depth Reform of Companies Listed Overseas ) (the ""Opinion'') on 29 March 1999. The ( Opinion sets out regulations governing the relationship between the Listed Companies and their controlling entities (hereafter ""controlling entities'' refers to companies or enterprises with legal person status that have a controlling interest in a Listed Company) and the operations of the administrative organisations of the Listed Companies. The board of directors, management and the nancial and marketing organisations of a Listed Company must be independent from those of the controlling entity. No more than two senior management personnel from the controlling entity (i.e. the chairman of the board, vice-chairman of the board and executive directors) may concurrently hold the position of senior management personnel in the Listed Company. The Opinion also requires a Listed Company to specify its decision-making process, strengthen director responsibility, establish a sound external director and independent director system, strengthen the functions of its supervisory board and secretary of the board of directors, explore methods to motivate its senior management personnel and to intensify its internal reform. 2. (A) HONG KONG LEGAL AND REGULATORY PROVISIONS Hong Kong company law and its comparison with the PRC law applicable to a joint stock limited company incorporated under the Company Law

Hong Kong company law is primarily set out in the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) (the ""Companies Ordinance'') and supplemented by common law. There are material dierences between Hong Kong company law and the PRC law applicable to a joint stock limited company incorporated under the Company Law, to which the Company is and will be subject, particularly in the area of investor protection. Certain of the material dierences between the Company Law and Hong Kong company law are summarised below. This summary, however, is not intended to be an exhaustive comparison. It should also be noted that the summary relates only to joint stock limited companies incorporated under the Company Law.

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Derivative action by minority shareholders Hong Kong law allows minority shareholders to start a derivative action on behalf of the general body of shareholders in cases where, for example, one or more of the directors are in breach of duty and where their actions are shielded by the majority shareholders. The PRC Civil Procedure Law does not provide for such a procedure. Although the Company Law gives (a) shareholder(s) of a company the right to initiate proceedings in the People's Court to restrain any resolution adopted by shareholders in general meeting or at a meeting of the board of directors which is in violation of any law or infringes the lawful rights and interests of the shareholder(s), there is no form of proceedings which is the same as a derivative action under the Company Law. However, each of the Directors and Supervisors (as required by the Listing Rules) has given a written undertaking to the Company (acting as agent for each shareholder) to observe and comply with his obligations to shareholders stipulated in the Articles of Association. This allows minority shareholders to commence actions directly against defaulting Directors. Remedies of the Company Under the Company Law, if a director, supervisor or manager in carrying out his duties infringes any law or administrative regulation or the articles of association of a company, resulting in damage to the company, that director, supervisor or manager should be responsible to the company for such damages. In addition, in compliance with the Listing Rules, the Articles of Association set out remedies of the Company similar to those available under Hong Kong law (including rescission of the relevant contract and recovery of prots made by a Director, Supervisor or ocer). Directors, ocers and supervisors The Company Law provides for the disqualication of directors, supervisors and managers in circumstances where they enter into business contracts with the Company, and for prohibitions of certain unauthorised benets, but contain no provision restricting the authority of the directors to make major dispositions or prohibiting payment to them for loss of oce without shareholders' approval. However, the Mandatory Provisions contain certain restrictions on major dispositions and specify the circumstances under which a director may receive compensation for loss of oce, all of which provisions have been incorporated in the Articles of Association, a summary of which is set out in this Appendix. Under Hong Kong company law, there is no concept of a supervisory committee for a company in addition to its board of directors, but a PRC joint stock limited company must have supervisors whose main duties include ensuring compliance with laws and regulations, and the articles of association of the company, by its directors and managers. Each supervisor owes a duty, in the exercise of his powers, to act in good faith and honestly in what he considers to be the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Minority protection There is no specic provision in the Company Law to guard against oppression by the majority shareholders of minority shareholders but the Company, as required by the Mandatory Provisions and the Listing Rules, has adopted in the Articles of Association minority protection provisions similar to (though not as comprehensive as) those available under Hong Kong law, to the eect that a controlling IX-16

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shareholder may not exercise its voting rights in a manner prejudicial to the interests of other shareholders to achieve certain objectives. Receiving agent Under both PRC and Hong Kong law, dividends once declared become debts payable to shareholders, but the limitation of action period is two years in the PRC as opposed to six years in Hong Kong. The Articles of Association provide for the appointment of an agent in Hong Kong which must be a trust corporation registered under the Trustee Ordinance in Hong Kong to receive all dividends payable to H Share holders on behalf of such shareholders as required by the Listing Rules. Variation of class rights The Company Law makes no specic provision relating to variation of class rights. However, the Company Law states that the State Council can promulgate regulations relating to other kinds of shares. The Mandatory Provisions contain elaborate provisions relating to the circumstances which are deemed to be variations of class rights and the approval procedures required to be followed in respect thereof. These provisions have been incorporated in the Articles of Association, which are summarised in this Appendix. Under the Companies Ordinance, no rights attached to any class of shares can be varied except with the approval of a special resolution of the holders of the relevant class at a separate meeting or the consent in writing of the holders of three fourths in nominal value of the issued shares of the class in question. The Company (as required by the Listing Rules and the Mandatory Provisions) has adopted in the Articles of Association provisions protecting class rights in a similar manner to those found in Hong Kong law. Holders of overseas listed foreign invested shares and domestic invested shares are dened in the Articles of Association as dierent classes, except where the Company issues and allots, in any 12-month period pursuant to a shareholders' mandate, not more than 20 per cent. of each of the issued overseas listed foreign invested shares and the domestic invested shares existing as at the date of the shareholders' mandate. Corporate re-organisations Corporate re-organisations involving compromises with creditors and members in respect of Hong Kong incorporated companies are dealt with under Section 166 of the Companies Ordinance and require court sanction. For PRC companies such reorganisations are administratively considered and sanctioned under the Company Law. Share capital For a joint stock limited company formed under the Company Law, the registered share capital and the issued share capital are the same. For a Hong Kong company, the authorised share capital may be larger than the issued share capital. Hence, the directors of a Hong Kong company may, with the prior approval of the shareholders if required, cause the company to issue new shares. In the case of a PRC company, any increase of the registered capital must be approved by the shareholders in general meeting and the relevant PRC Government and regulatory authorities. After completion of an approved new issue, the company has to register the increase in share capital with the relevant administration for industry and commerce bureau. IX-17

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

The minimum registered capital of a company which has applied for the listing of its shares on a stock exchange is RMB50 million under the Company Law. Hong Kong law does not prescribe any minimum capital requirements for a Hong Kong company. Under the Company Law, the shares subscribed for in the form of intangible assets (excluding land use rights) may not exceed 20 per cent. of a joint stock limited company's registered capital. There is no such restriction under Hong Kong law on a Hong Kong company. Restriction on shareholding and transfer of shares The Company Law makes no reference to the class of shares which may be subscribed for or traded by overseas investors but has provisions that shares of a company to be listed overseas must comply with the Special Regulations. The Special Regulations and the Mandatory Provisions provide, among other things, that H shares must be in registered form and include other matters some of which are referred to below. There is no restriction under Hong Kong law on a person's ability to deal in shares in a Hong Kong company on the basis of his residence or nationality. Under the Company Law, shares in a joint stock limited company held by its promoter, directors or managers may not be transferred within certain periods of time. There is no such restriction under Hong Kong law. Notice of meetings Under the Company Law, shareholders of a joint stock limited company must be given 30 days' notice of a general meeting or in the case of bearer shares such notice should be published 45 days before the meeting. Under the Special Regulations and the Mandatory Provisions (which apply to the Company) written notice of 45 days must be given to all shareholders, and shareholders wishing to attend the meeting must reply in writing to reach the company 20 days before the date of the meeting. For a Hong Kong limited company, the minimum period of notice of a general meeting where convened for the purpose of considering ordinary resolutions is 14 days and where convened for the purpose of considering special resolutions 21 days. The notice period for an annual general meeting is also 21 days. Quorum Under Hong Kong company law, any two shareholders personally present will constitute a quorum for a general meeting, unless the articles of association provide otherwise. The Company Law makes no specic provision as to when a quorum is regarded as being present but the Special Regulations and the Mandatory Provisions provide that a company's annual general meeting can be convened when replies to the notice of that meeting have been received from shareholders whose Shares represent 50 per cent. of the voting rights in the Company at least 20 days before the proposed date, or if that 50 per cent. level is not achieved, that the Company shall within ve days notify shareholders in a public announcement and the annual general meeting may be held thereafter. Voting Under Hong Kong company law, ordinary resolutions are passed by more than one half of the votes cast by those shareholders voting in person or by proxy at a general meeting and special resolutions are passed by not less than three quarters of such votes. Under the Company Law, the passing of any resolution requires the passing by more than half of the votes of the shareholders attending and voting IX-18

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except in cases of proposed amendment to the articles of association, merger, division or dissolution of a company where the approval of a two-thirds majority is required. Dividends The Articles of Association empower the Company to withhold, and pay to the relevant tax authorities, any tax payable under PRC law on any dividends or other distributions payable to a shareholder. Under Hong Kong law, the limitation period for an action to recover a debt (including the recovery of dividends) is six years, whereas under PRC laws the relevant limitation period is two years. Financial disclosure A joint stock limited company is required under the Company Law to make available at its oce for inspection by shareholders its annual balance sheet, prot and loss account, statement of changes in nancial situation and other relevant annexures 20 days before the annual general meeting of shareholders. In addition, a company established by the public subscription method under the Company Law must publish its nancial statements. The annual balance sheet has to be veried by registered accountants. The Companies Ordinance requires a company to send to every shareholder a copy of its balance sheet, auditors' report and directors' report which are to be laid before the company in its annual general meeting not less than 21 days before such meeting. Under the Articles of Association (as required by the Listing Rules and the Mandatory Provisions), in addition to preparing accounts according to PRC accounting standards, the Company must have its accounts prepared and audited in accordance with international accounting standards or Hong Kong accounting standards. The Company is further required to publish its interim and annual accounts within 60 days from the end of the rst six months of a nancial year and within 120 days from the end of a nancial year respectively. The Special Regulations require that there should not be any inconsistency between the information disclosed within and outside the PRC and that, to the extent that there are dierences in the information disclosed in accordance with the relevant PRC and overseas laws, regulations and requirements of the relevant stock exchanges, such dierences should also be disclosed simultaneously. Information on directors and shareholders The Company Law gives shareholders the right to inspect the Company's Articles of Association, minutes of the shareholders' general meetings and nancial and accounting reports. Under the Articles of Association, shareholders have the right to inspect and copy (at reasonable charges) certain information on shareholders and on Directors similar to that available to shareholders of Hong Kong companies under Hong Kong law. Arbitration of disputes In Hong Kong, disputes between shareholders and a company or its directors, managers and other senior ocers can be resolved through the courts. The Articles of Association provide that disputes between a holder of H Shares and the Company and its directors, managers or other senior ocers or a holder of Domestic Shares, arising from the Articles of Association, the Company Law or other relevant law or administrative regulation which concerns the aairs of the Company must, with certain exceptions, be referred to arbitration at either the Hong Kong International Arbitration Centre or the IX-19

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China International Economic and Trade Arbitration Commission. Such arbitration is nal and conclusive. Mandatory Deductions Under the Company Law, after tax prots of a company are subject to deductions of contributions to the statutory common reserve fund and the statutory common welfare fund of the company before they can be distributed to shareholders. There are prescribed limits under the Company Law for such deductions. There are no corresponding provisions under the Companies Ordinance. Fiduciary Duties In Hong Kong, there is the common law concept of the duciary duty of directors. Under the Company Law and the Special Regulations, directors and managers owe a duciary duty towards their company and are not permitted to engage in any activities which compete with or damage the interests of their company. (B) Other legal and regulatory provisions

Upon the listing of the Company on the Stock Exchange, the provisions of the Securities Ordinance, the Securities (Disclosure of Interests) Ordinance, the Securities (Insider Dealing) Ordinance of Hong Kong, the Takeovers Code and the Share Repurchases Code and such other relevant ordinances and regulations as may be applicable to companies listed on the Stock Exchange will apply to the Company. (C) Securities arbitration rules

The Articles of Association provide that certain claims arising under the Articles of Association or the Company Law shall be arbitrated at either the China International Economic and Trade Commission or the Hong Kong International Arbitration Centre in accordance with their respective rules. The Securities Arbitration Rules of the Hong Kong International Arbitration Centre contain provisions allowing an arbitral tribunal to conduct a hearing in Shenzhen for cases involving disputes concerning the aairs of companies listed by Stock Exchange and incorporated in the PRC (other than Hong Kong, Macau and Taiwan) so that PRC parties and witnesses may attend. Where any party applies for a hearing to take place in Shenzhen, the tribunal shall, where satised that such application is based on bona de grounds, order the hearing to take place in Shenzhen conditionally upon all parties including witnesses and the arbitrators being permitted to enter Shenzhen for the purpose of the hearing. Where a party (other than a PRC party) or any of its witnesses or any arbitrator is not permitted to enter Shenzhen, then the tribunal shall order that the hearing be conducted in any practicable manner, including the use of electronic media. For the purpose of the Securities Arbitration Rules, a PRC party means a party domiciled in the PRC other than the territories of Hong Kong, Macau and Taiwan.

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(D)

Listing Rules

The Listing Rules contain certain provisions specically relating to the primary listing of equity securities of companies incorporated or otherwise established in the PRC. Set out below is a summary of the major provisions which apply to the Company: Sponsor The Company is required to retain, for at least one year following its listing or such shorter period as the Stock Exchange may permit, the services of its sponsor or other nancial adviser or professional rm which is acceptable to the Stock Exchange, to provide the Company with professional advice on continuous compliance with the Listing Rules and its listing agreement, and to act at all times as the Company's principal channel of communication with the Stock Exchange, in addition to the two authorised representatives of the Company appointed pursuant to the Listing Rules. The Company must ensure that its sponsor has access at all times to its authorised representatives, Directors and other ocers and is given such information and assistance as it may request in connection with the performance of its duties. The Company must not terminate the services of its sponsor until a replacement acceptable to the Stock Exchange is appointed. If the Stock Exchange is not satised that the sponsor is fullling its responsibilities adequately, it may require the Company to terminate the sponsor's appointment and appoint a replacement as soon as possible. The sponsor must be satised that the Directors and the Supervisors appreciate the nature of their responsibilities and can be expected to honour their obligations under and understand what is required of them under their respective undertakings, the Listing Rules, the listing agreement and applicable laws and regulations. The sponsor must keep the Company informed on a timely basis of changes in the Listing Rules and any new or amended law, regulation or code in Hong Kong applicable to the Company. It must act as the Company's principal channel of communication with the Stock Exchange if the authorised representatives of the Company are expected to be frequently outside Hong Kong. Accountants' reports An accountants' report will not normally be regarded as acceptable by the Stock Exchange unless the relevant accounts have been audited to a standard comparable to that required in Hong Kong which means that it must conform with either Hong Kong accounting standards or IAS. Process agent The Company must appoint and maintain throughout the period its securities are listed on the Stock Exchange the appointment of a person authorised to accept service of process and notices on its behalf in Hong Kong and must notify the Stock Exchange of his or her appointment and any termination of his or her appointment and his or her contact particulars. Restrictions on purchase and subscription The Company may purchase its own Shares on the Stock Exchange in accordance with the Listing Rules. Shareholders' approvals must rst be obtained prior to carrying out a share repurchase, by way of IX-21

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

a special resolution of shareholders in general meeting and of the holders of Domestic Shares and the holders of H Shares at separate class meetings, in accordance with the procedures prescribed by the Articles of Association. When seeking shareholders' approval to make purchases of securities on the Stock Exchange or when reporting such purchases, the Company should provide information to its shareholders on the proposed or actual purchase of any or all of its equity securities, whether or not listed or traded on the Stock Exchange. There should also be a statement as to the consequences of any purchases which will arise under either or both of the Hong Kong Code on Takeovers and Mergers and the Code on Share Repurchases and any similar PRC law of which the Directors are aware, if any. Any special approval or general mandate given to the Directors to repurchase H Shares must not exceed 10 per cent. of the total amount of existing issued H Shares. With a view to increasing the level of protection aorded to investors, the Stock Exchange requires the incorporation, in the articles of association of a PRC company whose primary listing is on the Stock Exchange, of the Mandatory Provisions and provisions relating to the change, removal and resignation of auditors, class meetings and the conduct of the supervisory committee of the Company. Such provisions have been incorporated into the Articles of Association, a summary of which is set out in this Appendix. Closure of register of shareholders The Listing Rules require that the register of shareholders of a company must not generally be closed for the registration of transfers of shares for more than 30 days in a year, whereas the Company's Articles of Association provide, as required by the Company Law, that share transfers may not be registered after 30 days before the date of a shareholders' meeting or after ve days before the record date set for the purpose of distribution of dividends. Listing agreement The Company's listing agreement with the Stock Exchange is in substantially the same form as the listing agreement for an overseas company seeking a listing on the Stock Exchange, subject to certain modications and additional requirements which may be summarised as follows: (1) Redeemable shares

The Company must not issue any redeemable shares unless the Stock Exchange is satised that the relative rights of the holders of the H Shares are adequately protected. (2) Pre-emptive rights

Except in the circumstances mentioned below, the Directors must obtain the approval by special resolution of shareholders of the Company in general meeting and the approvals by special resolutions of holders of Domestic Shares and holders of H Shares (each being otherwise entitled to vote at general meetings) at separate class meetings conducted in accordance with the Articles of Association prior to: (a) authorising, allotting, issuing or granting; (i) (ii) shares; securities convertible into shares; or

(iii) options, warrants or similar rights to subscribe for any shares or such convertible securities. IX-22

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

(b)

a major subsidiary of the Company making any such authorisation, allotment, issue or grant so as materially to dilute the percentage equity interest of the Company and its shareholders in such subsidiary.

No such approval will be required in the case of authorising, allotting or issuing shares if, but only to the extent that, the existing shareholders of the Company have by special resolution in general meeting given a general mandate to the Directors, either unconditionally or subject to such terms and conditions as may be specied in the resolution, to authorise, allot or issue either separately or concurrently once every 12 months, not more than 20 per cent. each of the existing Domestic Shares and H Shares as at the date of the passing of the relevant special resolution or such shares as are part of the Company's plan at the time of its establishment to issue Domestic Shares and H Shares and which plan is implemented within fteen months from the date of approval by the State Council Securities Policy Committee. (3) Changes to Articles of Association

The Company may not at any time permit or cause any amendment to be made to its Articles of Association which would cause them to cease to comply with the mandatory provisions of the Listing Rules relating to such Articles of Association. (4) Documents for inspection

The Company must make available at a place in Hong Kong for inspection by the public and shareholders free of charge, and for copying by shareholders at reasonable charges, the following: (a) (b) (c) (d) (e) a complete duplicate register of shareholders; a report showing the state of the issued share capital of the Company; the Company's latest audited nancial statements and the Directors', auditors and (if any) Supervisors' reports thereon; special resolutions of the Company; reports showing the number and nominal value of securities repurchased by the Company since the end of the last nancial year, the aggregate amount paid for such securities and the maximum and minimum prices paid in respect of each class of securities repurchased (with a breakdown between Domestic Shares and H Shares); a copy of the latest annual return led with the PRC State Administration for Industry and Commerce or other competent PRC authority; and for shareholders only, copies of the minutes of meetings of shareholders.

(f) (g) (5)

Appointment of receiving agents

The Company must appoint one or more receiving agents in Hong Kong to receive on behalf of the shareholders dividends declared and other moneys owing by the Company in respect of H Shares listed on the Stock Exchange to be held, pending payments, in trust for holders of the H Shares. (6) Statements to be made on acquisition of shares

The Company must ensure that all its listing documents and share certicates include the statements stipulated below and must instruct and cause its share registrar not to register the IX-23

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

subscription, purchase or transfer of any of its shares in the name of any particular holder unless and until such holder delivers to such share registrar a signed form in respect of such shares bearing statements to the following eect: (a) The acquirer of shares agrees with the Company and each shareholder of the Company, and the Company agrees with each shareholder, to observe and comply with the Company Law, the Special Regulations and the Articles of Association. The acquirer of shares agrees with the Company, each shareholder, Director, Supervisor, general manager and ocer of the Company and the Company acting for itself and for each Director, Supervisor, general manager and ocer agrees with each shareholder to refer all dierences and claims arising from the Articles of Association or any rights or obligations conferred or imposed by the Company Law or other relevant laws and administrative regulations concerning the aairs of the Company to arbitration in accordance with the Articles of Association. Any reference to arbitration will be deemed to authorise the arbitration tribunal to conduct its hearing in open session and to publish its award. Such arbitration will be nal and conclusive. The acquirer of shares agrees with the Company and each shareholder of the Company that H Shares in the Company are freely transferable by the holder thereof. The acquirer of shares authorises the Company to enter into a contract on his behalf with each Director and ocer whereby such Directors and ocers undertake to observe and comply with their obligations to shareholders stipulated in the Articles of Association.

(b)

(c) (d)

(7)

Compliance with the Company Law, the Special Regulations and the Articles of Association

The Company must observe and comply with the Company Law, the Special Regulations and the Articles of Association. (8) Contract between the Company and every Director and ocer

The Company must enter into a contract in writing with every Director and ocer containing at least the following provisions: (a) an undertaking by the Director or ocer to the Company to observe and comply with the Company Law, the Special Regulations, the Articles of Association, the Hong Kong Code on Takeovers and Mergers and the Code on Share Repurchases and an agreement that the Company will have the remedies provided in the Articles of Association and that neither the contract nor his oce is capable of assignment; an undertaking by the Director or ocer to the Company acting as agent for each shareholder to observe and comply with his obligations to shareholders stipulated in the Articles of Association; and an arbitration clause which provides that whenever any dierences or claims arise from the listing agreement, the Articles of Association or any rights or obligations conferred or imposed by the laws and administrative regulations concerning the aairs of the Company between (1) the Company and its Directors, Supervisors, general managers or ocers or (2) a holder of overseas listed foreign invested shares and a Director, Supervisor, general manager or ocer of the Company, such dierences or claims will be referred to arbitration at either the China International Economic and Trade Arbitration IX-24

(b)

(c)

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Commission in accordance with its rules or the Hong Kong International Arbitration Centre in accordance with its securities arbitration rules, at the election of the party seeking arbitration. The entire dispute or claim shall be resolved through that arbitration; all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, if they are shareholders, Directors, Supervisors, general managers or other ocers of the Company or the Company, shall submit to arbitration. Once the party seeking arbitration submits a dispute or claim to arbitration, the other party must submit to the arbitral body selected by the party seeking the arbitration. If the party seeking arbitration elects to arbitrate the dispute or claim at the Hong Kong International Arbitration Centre, then either party may apply to have such arbitration conducted in Shenzhen according to the Securities Arbitration Rules of the Hong Kong International Arbitration Centre. PRC laws shall govern the arbitration of disputes or claims referred to above, unless otherwise provided by law or administrative regulations. The award of the arbitral body is nal and shall be binding on the parties thereto. Disputes over who is a shareholder and over the share register do not have to be resolved through arbitration. (9) Contract between the Company and every Supervisor

The Company must enter into a contract in writing with every Supervisor containing at least the following provisions: (a) an undertaking by the Supervisor to the Company to observe and comply with the Company Law, the Special Regulations and the Articles of Association and an agreement that the Company will have the remedies provided in the Articles of Association and that neither the contract nor his oce is capable of assignment; an undertaking by the Supervisor to the Company acting as agent for each shareholder to observe and comply with his obligations to shareholders stipulated in the Articles of Association; and the arbitration clause in terms set out in sub-paragraph (8)(c) above subject to necessary modications.

(b)

(c) (10)

Subsequent listing

The Company must not apply for the listing of any of its Foreign Shares on a PRC stock exchange unless the Stock Exchange is satised that the relative rights of the holders of overseas listed Foreign Shares are adequately protected. 3. ARTICLES OF ASSOCIATION

Set out below is a summary of the principal provisions of the Articles of Association. Copies of the full English and Chinese texts of the Articles of Association are available for inspection as mentioned in the section headed ""Documents Available for Inspection'' in Appendix XI. IX-25

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

(A)

Directors and other senior ocers

Power to allot and issue shares There is no provision in the Articles empowering the Directors to allot and issue shares. In order to increase the capital of the Company, the Board must formulate a proposal and submit it for approval at a shareholders' general meeting. Any such increase is subject to the prior approval of the relevant regulatory authorities of the PRC. Power to dispose of the assets of the Company or any subsidiary The Board shall not, without the prior approval of shareholders in a general meeting, dispose or agree to dispose of any xed assets of the Company where the aggregate of the amount or value of the consideration for the proposed disposition, and the amount or value of the consideration for any such disposition of any xed assets of the Company that has been completed in the period of four months immediately preceding the proposed disposition, exceeds 33 per cent. of the value of the Company's xed assets as shown in the last balance sheet placed before the shareholders in general meeting. For the purposes of that Article, disposition includes an act involving the transfer of an interest in assets but does not include the provision of xed asset by way of security. The validity of a disposition by the Company shall not be aected by the breach of that Article. The Board shall carry out its duties in compliance with the laws, regulations, the Articles of Association and resolutions passed by the shareholders in general meetings. Compensation or payments for loss of oce The Company shall, with the prior approval of shareholders in general meeting, enter into a contract in writing with a Director or Supervisor wherein his emoluments are stipulated. The aforesaid emoluments include: (1) (2) (3) (4) emoluments in respect of his service as Director, Supervisor or senior ocer of the Company; emoluments in respect of his service as Director, Supervisor or senior ocer of any subsidiary of the Company; emoluments in respect of the provision of other services in connection with the management of the aairs of the Company and any of its subsidiaries; payment by way of compensation for loss of oce, or as consideration for or in connection with his retirement from oce.

No proceedings may be brought by a Director or Supervisor against the Company for anything due to him in respect of the matters mentioned above except pursuant to a contract which has been entered into in the foregoing manner. The contract concerning the emoluments between the Company and its Directors or Supervisors should provide that in the event that the Company is acquired, the Company's Directors and Supervisors shall, subject to the prior approval of shareholders in general meeting, have the right to receive IX-26

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

compensation or other payment in respect of his loss of oce or retirement. For the purpose of this paragraph, the acquisition of the Company includes any of the following: (1) (2) an oer made by any person to the general body of shareholders; an oer made by any person with a view to the oeror becoming a ""controlling shareholder'' within the meaning set out in the Articles.

If the relevant Director or Supervisor does not comply with the foregoing paragraph, any sum so received by him shall belong to those persons who have sold their shares as a result of such oer. The expenses incurred in distributing that sum pro rata amongst those persons shall be borne by the relevant Director or Supervisor and not paid out of that sum. Loans to Directors, Supervisors and other senior ocers The Company shall not directly or indirectly make a loan to or provide any guarantee in connection with the making of a loan to a Director, Supervisor, president, vice president or other senior ocer of the Company or of the Company's holding company or any of their respective associates. The foregoing prohibition shall not apply to the following circumstances: (1) (2) the provision by the Company of a loan or a guarantee in connection with the making of a loan to its subsidiary; the provision by the Company of a loan or a guarantee in connection with the making of a loan or any other funds available to any of its Directors, Supervisors, president, vice president and other senior ocers to meet expenditure incurred or to be incurred by him for the purposes of the Company or for the purpose of enabling him to perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in general meeting; if the ordinary course of business of the Company includes the lending of money or the giving of guarantees, the Company may make a loan to or provide a guarantee in connection with the making of a loan to any of the relevant Directors, Supervisors, president, vice president and other senior ocers or their respective associates in the ordinary course of its business on normal commercial terms.

(3)

Any person who receives funds from a loan which has been made by the Company acting in breach of the foregoing provisions shall, irrespective of the terms of the loan, forthwith repay such funds. A guarantee for the repayment of a loan which has been provided by the Company acting in breach of the foregoing provisions shall not be enforceable against the Company, save in respect of the following circumstances: (1) the guarantee was provided in connection with a loan which was made to an associate of any of the Directors, Supervisors, president, vice president and other senior ocers of the Company or of the Company's holding company and the lender of such funds did not know of the relevant circumstances at the time of making the loan; or the collateral which has been provided by the Company has already been lawfully disposed of by the lender to a bona de purchaser.

(2)

For the purposes of the foregoing provisions, a ""guarantee'' includes an undertaking or property provided to secure the obligor's performance of his obligations. IX-27

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Financial assistance for the acquisition of shares in the Company The Company and its subsidiaries shall not, at any time, provide any form of nancial assistance to a person who is acquiring or is proposing to acquire shares in the Company. This includes any person who directly or indirectly incurs any obligations as a result of the acquisition of shares in the Company (the ""Obligor''). The Company and its subsidiaries shall not, at any time, provide any form of nancial assistance to the Obligor for the purposes of reducing or discharging the obligations assumed by such person. The following activities are not prohibited: (1) the provision of nancial assistance by the Company where the nancial assistance is given in good faith in the interests of the Company, and the principal purpose of which is not for the acquisition of shares in the Company, or the giving of the nancial assistance is an incidental part of some larger purpose of the Company; the lawful distribution of the Company's assets by way of dividend; the allotment of bonus shares as dividends; a reduction of registered capital, a repurchase of shares of the Company or a reorganisation of the share capital structure of the Company eected in accordance with the Articles of Association; the lending of money by the Company within its scope of business and in the ordinary course of its business, where the lending of money is part of the scope of business of the Company (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the nancial assistance is provided out of distributable prots); contributions made by the Company to the employee share ownership schemes (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the nancial assistance is provided out of distributable prots).

(2) (3) (4)

(5)

(6)

For this purpose: (a) ""Financial Assistance'' includes (without limitation): (1) (2) gift; guarantee (including the assumption of liability by the guarantor or the provision of assets by the guarantor to secure the performance of obligations by the Obligor), compensation (other than compensation in respect of the Company's own default) or release or waiver of any rights; the provision of a loan or any other agreement under which the obligations of the Company are to be fullled before the obligations of another party to the agreement, or a change in the parties to, or the assignment of rights under, such a loan or other agreement; or any other form of nancial assistance given by the Company when the Company is insolvent or has no net assets or when its net assets would thereby be reduced to a material extent. IX-28

(3)

(4)

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

(b)

""Assumption of obligations'' includes the assumption of obligations by way of contract or by way of arrangement (irrespective of whether such contract or arrangement is enforceable or not and respective of whether such obligation is to be borne solely by the Obligor or jointly with other persons) or by any other means which results in a change in his nancial position.

Disclosure of interests in contracts with the Company or any of its subsidiaries Where a Director, Supervisor, president, vice president or other senior ocer is in any way, directly or indirectly, materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with the Company, other than his contract of service, he shall declare the nature and extent of his interest to the Board at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal therefor is otherwise subject to the approval of the Board. Unless the interested ocer has disclosed his interest in accordance with the Articles and the contract, transaction or arrangement has been approved by the Board at a meeting in which the interested ocer is not counted in the quorum and has refrained from voting, any contract, transaction or arrangement in which such ocer is materially interested is voidable at the instance of the Company except as against a bona de party thereto acting without notice of the breach of duty by such ocer. For the purposes of this provision, a Director, Supervisor, president, vice president or other senior ocer is deemed to be interested in any contract, transaction or arrangement in which a person connected to him is interested. Remuneration The remuneration of Directors must be approved by shareholders in general meeting, as referred to under ""Compensation or payments for loss of oce.'' Retirement, appointment and removal Directors shall be elected by shareholders at a general meeting, for a term of three years each. A written notice of the intention to propose a person for election as a director and a notice in writing by that person indicating his acceptance of such election is required to be given to the Company seven days before the date of such shareholders' general meeting. At the expiry of a director's term of oce, the term is renewable upon re-election. The chairman and the vice-chairman shall be elected and removed by more than one-half of all the members of the Board of Directors. The term of oce of each of the chairman and the vice-chairman is three years, which term is renewable upon re-election. There is no provision in the Articles of Association which imposes any age limit for Directors beyond which retirement as a Director is mandatory. The Directors shall not be required to hold qualifying shares. The Company shall have a board of directors. The Board of Directors shall consist of 13 Directors. The Board of Directors shall have one chairman, two vice-chairmen and 10 other Directors. A person may not serve as a Director, Supervisor, president or vice president of the Company if such person is: (1) (2) a person who does not have or who has limited capacity for civil conduct; a person who has been sentenced for corruption, bribery, infringement of property or misappropriation of property or other crimes which destroy the social economic order, where IX-29

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

less than a term of ve years have lapsed since the sentence was served, or a person who has been deprived of his political rights and not more than ve years have lapsed since the sentence was served; (3) a person who is a former director, factory manager or manager of a company or enterprise which has been dissolved or put into liquidation as a result of mismanagement and who was personally liable for the winding up of such company or enterprise, where less than three years have elapsed since the date of completion of the insolvent liquidation of the company or enterprise; a person who is a former legal representative of a company or enterprise the business licence of which was revoked due to violation of the law and who incurred personal liability therefor, where less than three years has elapsed since the date of the revocation of the business licence; a person who has a relatively large amount of debts which have become overdue; a person who is currently under investigation by judicial organs for violation of criminal law; a person who, according to laws and administrative regulations, cannot act as a leader of an enterprise; a person other than a natural person; a person who has been convicted by the competent authority for the violation of relevant securities regulations and such conviction involves a nding that such person has acted fraudulently or dishonestly, where not more than ve years have lapsed from the date of such conviction.

(4)

(5) (6) (7) (8) (9)

The validity of an act carried out by a Director, president, vice president or other senior ocer of the Company on its behalf shall, as against a bona de third party, not be aected by any irregularity in his oce, election or any defect in his qualication. Borrowing powers Subject to compliance with applicable laws and regulations of the PRC, the Company has the power to raise and borrow money which power includes (without limitation) the issue of debentures, the charging or mortgaging of part or whole of the Company's business or properties and to provide guarantees or mortgages for the debts of third parties (including, without limitation, the subsidiaries or associated companies of the Company) in all types of circumstances. The Articles of Association do not contain any specic provision in respect of the manner in which borrowing powers may be exercised by the Directors nor do they contain any specic provision in respect of the manner in which such powers may be varied, other than: (a) provisions which give the Directors the power to formulate proposals for the issuance of debentures by the Company; and (b) provisions which provide that the issuance of debentures must be approved by the shareholders in a general meeting by way of a special resolution. Duties In addition to the obligations imposed by laws, administrative regulations or the listing rules of the stock exchange on which shares of the Company are listed, each of the Company's Directors, IX-30

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Supervisors, president, vice presidents and other senior ocers owes a duty to each shareholder, in the exercise of the functions and powers of the Company entrusted to him: (1) (2) (3) (4) not to cause the Company to exceed the scope of business stipulated in its business licence; to act honestly and in the best interests of the Company; not to expropriate the Company's property in any way, including (without limitation) usurpation of opportunities which benet the Company; not to expropriate the individual rights of shareholders, including (without limitation) rights to distributions and voting rights, save and except according to a restructuring of the Company which has been submitted to the shareholders for approval in accordance with the Articles of Association.

Each of the Company's Directors, Supervisors, president, vice president and other senior ocers owes a duty, in the exercise of his powers and in the discharge of his duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Each of the Company's Directors, Supervisors, president, vice president and other senior ocers shall exercise his powers or perform his duties in accordance with the duciary principle; and shall not put himself in a position where his duty and his interest may conict. This principle includes (without limitation) discharging the following obligations: (1) (2) (3) to act honestly in the best interests of the Company; to act within the scope of his powers and not to exceed such powers; to exercise the discretion vested in him personally and not to allow himself to act under the control of another and, unless and to the extent permitted by laws, administrative regulations or with the informed consent of shareholders given in a general meeting, not to delegate the exercise of his discretion; to treat shareholders of the same class equally and to treat shareholders of dierent classes fairly; unless otherwise provided for in the Articles of Association or except with the informed consent of the shareholders given in a general meeting, not to enter into any contract, transaction or arrangement with the Company; not to use the Company's property for his own benet, without the informed consent of the shareholders given in a general meeting; not to exploit his position to accept bribes or other illegal income or expropriate the Company's property in any way, including (without limitation) opportunities which benet the Company; not to accept commissions in connection with the Company's transactions, without the informed consent of the shareholders given in a general meeting; to comply with the Articles of Association, to perform his ocial duties faithfully, to protect the Company's interests and not to exploit his position and power in the Company to advance his own interests; IX-31

(4) (5)

(6) (7)

(8) (9)

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

(10) not to compete with the Company in any way, save with the informed consent of the shareholders given in a general meeting; (11) not to misappropriate the Company's funds or to lend such funds to any other person, not to use the Company's assets to set up deposit accounts in his own name or in the any other name or to use such assets to guarantee the debts of a shareholder of the Company or any other personal liabilities; (12) not to release any condential information which he has obtained during his term in oce, without the informed consent of the shareholders in a general meeting; nor shall he use such information otherwise than for the Company's benet, save that disclosure of such information to the court or other governmental authorities is permitted if: (i) (ii) (iii) disclosure is made under compulsion of law; public interests so warrants; the interests of the relevant Director, Supervisor, president, vice president or other senior ocer so requires.

Each Director, Supervisor, president, vice president and other senior ocer of the Company shall not direct the following persons or entities (""associates'') to act in a manner which he is prohibited from doing: (1) the spouse or minor child of the Director, Supervisor, president, vice president or other senior ocer; the trustee of the Director, Supervisor, president, vice president or other senior ocer or of any person described in sub-paragraph (1) above; the partner of that Director, Supervisor, president, vice president or other senior ocer or any person referred to in sub-paragraphs (1) and (2) above; a company in which that Director, Supervisor, president, vice president or other senior ocer, whether alone or jointly with one or more of the persons referred to in sub-paragraphs (1), (2) and (3) above and other Directors, Supervisors, president, vice president and other senior ocers, has de facto controlling interest; the Directors, Supervisors, president, vice president and other senior ocers of a company which is being controlled in the manner set out in sub-paragraph (4) above.

(2)

(3)

(4)

(5)

The duciary duties of the Directors, Supervisors, president, vice president and other senior ocers of the Company do not necessarily cease with the termination of their tenure. The duty of condentiality in respect of trade secrets of the Company survives the termination of their tenure. Other duties may continue for such period as the principle of fairness may require depending on the amount of time which has lapsed between the termination and the act concerned and the circumstances and the terms under which the relationship between the relevant Director, Supervisor, president, vice president and the senior ocer on the one hand and the Company on the other hand was terminated. IX-32

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

In addition to any rights and remedies provided by the laws and administrative regulations, where a Director, Supervisor, president, vice president or other senior ocer of the Company breaches the duties which he owes to the Company, the Company has a right: (1) (2) to demand such Director, Supervisor, president, vice president or other senior ocer to compensate it for losses sustained by the Company as a result of such breach; to rescind any contract or transaction which has been entered into between the Company and such Director, Supervisor, president, vice president or other senior ocer or between the Company and a third party (where such third party knows or should have known that such Director, Supervisor, president, vice president or other senior ocer representing the Company has breached his duties owed to the Company); to demand such Director, Supervisor, president, vice president or other senior ocer to account for prots made as a result of the breach of his duties; to recover any monies which should have been received by the Company and which were received by such Director, Supervisor, president, vice president or other senior ocer instead, including (without limitation) commissions; to demand repayment of interest earned or which may have been earned by such Director, Supervisor, president, vice president or other senior ocer on monies that should have been paid to the Company; and to take legal action against such Director, Supervisor, president, vice president and other senior ocer who has obtained property which should belong to the Company by acting in breach of his duties owed to the Company.

(3) (4)

(5)

(6)

Subject to the Articles of Association, a Director, Supervisor, president, vice president or other senior ocer of the Company may be relieved of liability for specic breaches of his duty by the informed consent of the shareholders given at a general meeting. (B) Alterations to constitutional documents

The Company may amend the Articles of Association in accordance with the requirements of laws, administrative regulations and the Articles of Association. The Articles of Association shall be amended in accordance with the following procedures: (1) (2) (3) the Board shall propose an agenda for the amendment of the Articles of Association; the Board shall supply the contents of such an agenda to the shareholders in writing and convene a shareholders' meeting; more than two-thirds of the voting rights held by the shareholders present at the meeting must be exercised in favour of the resolution.

The amendments to the Articles of Association involving the contents of the Mandatory Provisions shall become eective upon approvals by the companies approval department of local governments authorized by the State Economic and Trade Commission and the CSRC. If there is any change relating to the registered particulars of the Company, application shall be made for change in registration in accordance with law. IX-33

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(C)

Variation of rights of existing shares or classes of shares

Any proposal by the Company to vary or abrogate the rights conferred on any class of shareholders (""class rights'') must be approved by a special resolution of shareholders in general meeting and by holders of shares of that class at a separate meeting conducted in accordance with the Articles of Association. The following circumstances shall be deemed to be a variation or abrogation of the class rights of a class: (1) to increase or decrease the number of shares of such class, or increase or decrease the number of shares of a class having voting or equity rights or privileges equal or superior to the shares of that class; to exchange all or part of the shares of that class for shares of another class or to exchange or to create a right to exchange all or part of the shares of another class for shares of that class; to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of that class; to reduce or remove preferential rights to receive dividends or to the distribution of assets in the event that the Company is liquidated attached to shares of that class; to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire securities of the Company attached to shares of that class; to remove or reduce rights to receive payment payable by the Company in particular currencies attached to shares of that class; to create a new class of shares having voting or equity rights or privileges equal or superior to those of the shares of that class; to restrict the transfer or ownership of the shares of that class or to increase the types of restrictions attaching thereto; to allot and issue rights to subscribe for, or to convert the existing shares into, shares in the Company of that class or another class;

(2) (3) (4) (5) (6) (7) (8) (9)

(10) to increase the rights or privileges of shares of another class; (11) to restructure the Company in such a way so as to result in the disproportionate distribution of obligations between the various classes of shareholders; (12) to vary or abrogate the provisions in Chapter 9 of the Articles of Association. Shareholders of the aected class, whether or not otherwise having the right to vote at shareholders general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning (2) to (8) and (11) to (12) above, but Interested Shareholder(s) (as dened below) shall not be entitled to vote at class meetings. Resolutions of a class of shareholders shall be passed by votes representing more than two-thirds of the voting rights of shareholders of that class represented at the relevant meeting who, according to the Articles of Association, are entitled to vote thereat. Written notice of a class meeting shall be given to all shareholders who are registered as holders of that class in the register of shareholders 45 days before the date of the class meeting. Such notice shall give such shareholders notice of the matters to be considered at such meeting, the date and the place of IX-34

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the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply concerning attendance at the class meeting to the Company 20 days before the date of the class meeting. If the shareholders who intend to attend such class meeting represent more than half of the total number of shares of that class which have the right to vote at such meeting, the Company may hold the class meeting; if not, the Company shall within ve days give the shareholders further notice of the matters to be considered, the date and the place for the class meeting by way of public announcement. The Company may then hold the class meeting after such public announcement has been made. Notice of class meetings need only be served on shareholders entitled to vote thereat. Meetings of a class of shareholders shall be conducted in a manner as similar as possible to that of general meetings of shareholders. The provisions of these Articles of Association relating to the manner for the conduct of any shareholders' general meeting shall apply to any meeting of a class of shareholders. The special procedures for approval by a class of shareholders shall not apply in the following circumstances: (1) where the Company issues, upon the approval by special resolution of its shareholders in general meeting, either separately or concurrently once every 12 months, not more than 20 per cent. of each of its existing issued Domestic-Invested Shares (as dened in the Articles of Association) and Overseas-Listed Foreign-Invested Shares (as dened in the Articles of Association); or where the Company's plan to issue Domestic-Invested Shares and Overseas-Listed ForeignInvested Shares at the time of its establishment is carried out within 15 months from the date of approval of the State Council Securities Policy Committee.

(2)

For the purposes of the class rights provisions of the Articles of Association, an ""Interested Shareholder'' is: (1) in the case of a repurchase of shares by way of a general oer to all shareholders of the Company or by way of public dealing on a stock exchange pursuant to the Articles of Association, a ""controlling shareholder'' within the meaning of the Articles of Association; in the case of a repurchase of shares by an o-market agreement pursuant to the Articles of Association, a holder of the shares to which the proposed agreement relates; in the case of a restructuring of the Company, a shareholder who bears a relatively lower proportion of obligation vis-a-vis the obligations imposed on shareholders of that class under the proposed restructuring or who has an interest in the proposed restructuring dierent from the general interests of the shareholders of that class.

(2) (3)

(D)

Resolutions majority required

Resolutions of shareholders' general meetings shall be divided into ordinary resolutions and special resolutions. An ordinary resolution must be passed by votes representing more than one-half of the voting rights represented by the shareholders (including proxies) present at the meeting. A special resolution must be passed by votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting. IX-35

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(E)

Voting rights (generally, on a poll and right to demand a poll)

A shareholder (including a proxy), when voting at a shareholders' general meeting, may exercise such voting rights as are attached to the number of voting shares which he represents. Each share shall have one vote. At any shareholders' general meeting, a resolution shall be decided on a show of hands unless a poll is demanded: (a) (b) (c) by the chairman of the meeting; by at least two shareholders present in person or by proxy entitled to vote thereat; and by one or more shareholders present in person or by proxy and representing 10 per cent. or more of all shares carrying the right to vote at the meeting, before or after a vote is carried out by a show of hands. Unless a poll is demanded, a declaration by the chairman that a resolution has been passed on a show of hands and the record of such in the minutes of the meeting shall be conclusive evidence of the fact such resolution has been passed. There is no need to provide evidence on the number or proportion of votes in favour of or against such resolution. The demand for a poll may be withdrawn by the person who demands the same. A poll demanded on the election of the chairman, or on a question of adjournment, shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs, and any business other than that upon which the poll has been demanded may be proceeded with, pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded. On a poll taken at a meeting, a shareholder (including a proxy) entitled to two or more votes need not cast all his votes in the same way. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall have a casting vote. (F) Requirements for annual general meetings

The Board shall convene a shareholders' annual general meeting once each year within six months of the end of the preceding nancial year. (G) Accounts and audit

The Company shall establish its nancial and accounting system and internal audit system in accordance with applicable laws, administrative regulations and PRC accounting standards formulated by the nance regulatory department of the State Council. The Board of Directors of the Company shall place before the shareholders at every annual general meeting such nancial reports which the relevant laws, administrative regulations and directives promulgated by competent regional and central governmental authorities require the Company to prepare. IX-36

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The Company's nancial reports shall be made available for shareholders' inspection at the Company 20 days before the date of every shareholders' annual general meeting. Each shareholder shall be entitled to obtain a copy of the nancial reports. The nancial statements of the Company shall, in addition to being prepared in accordance with PRC accounting standards and regulations, be prepared in accordance with either IAS, or that of the place outside the PRC where the Company's shares are listed. If there is any material dierence between the nancial statements prepared respectively in accordance with the two accounting standards, such dierence shall be stated in the nancial statements. In distributing its after-tax prots, the lower of the two amounts shown in the nancial statements shall be adopted. Any interim results or nancial information published or disclosed by the Company must also be prepared in accordance with PRC accounting standards and regulations, and also in accordance with IAS or that of the overseas place where the Company's shares are listed. The Company shall publish its nancial reports twice every scal year, that is, the interim nancial report shall be published within 60 days after the expiration of the rst six months of each scal year; the annual nancial report shall be published within 120 days after the expiration of each scal year. (H) Notice of meetings and business to be conducted thereat

The shareholders' general meeting is the organ of authority of the Company and shall exercise its functions and powers according to law. The Company shall not, without the prior approval of shareholders in general meeting, enter into any contract with any person (other than a Director, Supervisor, president, vice president or other senior ocer) pursuant to which such person shall be responsible for the management and administration of the whole or any substantial part of the Company's business. Shareholders' general meetings can be annual general meetings or extraordinary general meetings. Shareholders' meetings shall be convened by the Board. The Board shall convene an extraordinary general meeting within two months of the occurrence of any one of the following circumstances: (1) (2) (3) where the number of Directors is less than the number stipulated in the Company Law or twothirds of the number specied in the Articles of Association; where the unrecovered losses of the Company amount to one-third of the total amount of its share capital; where shareholder(s) holding 10 per cent. or more of the Company's issued and outstanding shares carrying voting rights request(s) in writing for the convening of an extraordinary general meeting; whenever the Board deems necessary or the supervisory committee so requests.

(4)

When the Company convenes a shareholders' general meeting, written notice of the meeting shall be given not less than 45 days before the date of the meeting to notify all of the shareholders whose names appear in the share register of the matters to be considered and the date and the place of the meeting, provided that in the case of holders of Domestic Shares, notice may also be given by way of public notice issued 45 to 50 days prior to the meeting. The Articles which require a written reply to be delivered within 20 days shall not apply. A shareholder who intends to attend the meeting shall deliver to IX-37

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the Company his written reply concerning the attendance at such meeting to the Company 20 days before the date of the meeting. When the Company convenes a shareholders' annual general meeting, shareholder(s) holding 5 per cent. or more of the total voting shares of the Company shall have the right to propose new motions in writing, and the Company shall place such proposed motions on the agenda for such annual general meeting if they are matters falling within the functions and powers of shareholders in general meetings. An extraordinary shareholders' meeting shall not decide on matters not stated in the notice of meeting. The Company shall, based on the written notice which it replies receives 20 days before the date of the shareholders' general meeting from the shareholders, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting amount to more than one-half of the Company's total voting shares, the Company may hold the meeting; if not, then the Company shall within ve days notify the shareholders again by way of public announcement the matters to be considered at, the place and date for, the meeting. The Company may then hold the meeting after such announcement. A notice of meeting of the shareholders of the Company shall satisfy the following criterion: (1) (2) (3) (4) be in writing; specify the place, date and the time of the meeting; state the matters to be discussed at the meeting; provide such information and explanation as are necessary for the shareholders to make an informed decision on the proposals put before them. Without limiting the generality of the foregoing, where a proposal is made to amalgamate the Company with another, to repurchase the shares of the Company, to reorganise its share capital, or to restructure the Company in any other way, the terms of the proposed transaction must be provided in detail together with copies of the proposed agreement, if any, and the cause and eect of such proposal must be properly explained; contain a disclosure of the nature and extent, if any, of the material interests of any Director, Supervisor, president, vice president or other senior ocer in the proposed transaction and the eect which the proposed transaction will have on them in their capacity as shareholders in so far as it is dierent from the eect on the interests of the shareholders of the same class; contain the full text of any special resolution to be proposed at the meeting; contain a conspicuous statement that a shareholder entitled to attend and vote at such meeting is entitled to appoint one or more proxies to attend and vote at such meeting on his behalf and that a proxy need not be a shareholder; specify the time and place for lodging proxy forms for the relevant meeting.

(5)

(6) (7)

(8)

Notice of shareholders' general meeting shall be served on each shareholder (whether or not such shareholder is entitled to vote at the meeting), by personal delivery or prepaid airmail to the address of the shareholder as shown in the register of shareholders. For the holders of Domestic-Invested Shares, notice of the meetings may also be issued by way of public announcement. IX-38

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

The public announcement referred to in the preceding paragraph shall be published in one or more national newspapers designated by the State Council Securities Policy Commission within the interval between 45 days and 50 days before the date of the meeting; after the publication of such announcement, the holders of Domestic-Invested Shares shall be deemed to have received the notice of the relevant shareholders' general meeting. Such public announcement shall be published in Chinese and English in accordance with the Articles of Association. The following matters shall be resolved by way of ordinary resolution of the shareholders' general meeting: (1) (2) (3) (4) (5) work reports of the Board and the supervisory committee; prot distribution plans and loss recovery plans formulated by the Board of Directors; removal of the members of the Board and members of the supervisory committee, their remuneration and manner of payment; annual preliminary and nal budgets, balance sheets and prot and loss accounts and other nancial statements of the Company; matters other than those which are required by the laws and administrative regulations or by the Articles of Association to be adopted by special resolution.

The following matters shall be resolved by way of special resolution of the shareholders' general meeting: (1) (2) (3) (4) (5) increase or reduction in share capital and the issuance of shares of any class, warrants and other similar securities; issuance of debentures by the Company; division, merger, dissolution and liquidation of the Company; amendment of the Articles of Association; and any other matters considered by the shareholders in general meeting, resolved by way of an ordinary resolution, to be of a nature which may have a material impact on the Company and should be adopted by a special resolution.

(I)

Register of shareholders

The Company shall keep a complete register of shareholders which shall contain the following particulars: (1) (2) (3) (4) (5) (6) the name (title) and address (residence), the occupation or nature of each shareholder; the quantity and the class of shares held by each shareholder; the amount paid-up on or agreed to be paid-up on the shares held by each shareholder; the share certicate number(s) of the shares held by each shareholder; the date on which each person was entered in the register as a shareholder; the date on which any shareholder ceased to be a shareholder. IX-39

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Unless there is evidence to the contrary, the register of shareholders shall be sucient evidence of the shareholders' shareholdings in the Company. The register of shareholders shall comprise the following parts: (1) (2) the register of shareholders which is maintained at the Company's residence (other than those share registers which are described in sub-paragraphs (2) and (3) below); the register of shareholders in respect of the holders of Overseas-Listed Foreign-Invested Shares of the Company which is maintained in the same place as the overseas stock exchange on which the shares are listed; and the register of shareholders which are maintained in such other place as the Board may consider necessary for the purposes of listing of the Company's shares.

(3)

The Company may, in accordance with the mutual understanding and agreements made between the State Council Securities Policy Commission and overseas securities regulatory organizations, maintain the register of shareholders of Overseas-Listed Foreign-Invested Shares overseas and appoint overseas agent(s) to manage such share register. The original share register for holders of H Shares shall be maintained in Hong Kong. A duplicate of the register of shareholders for holders of Overseas-Listed Foreign-Invested Shares shall be maintained at the Company's residence. The appointed overseas agent(s) shall ensure consistency between the original and the duplicate register of shareholders at all times. If there is any inconsistency between the original and the duplicate register of shareholders for holders of OverseasListed Foreign-Invested Shares, the original register of shareholders shall prevail. Dierent parts of the register of shareholders shall not overlap. No transfer of any shares registered in any part of the register shall, during the continuance of that registration, be registered in any other part of the register. Amendments or rectication of the register of shareholders shall be made in accordance with the laws of the place where the register of shareholders is maintained. (J) Power of the Company to purchase its own shares Subject to the provisions of the Articles, the Company may reduce its registered capital. The Company may, in accordance with the procedures set out in the Articles of Association and with the approval of the relevant governing authority of the State, repurchase its issued shares under the following circumstances: (1) (2) (3) cancellation of shares for purposes of reducing its capital; merging with another company that holds shares in the Company; other circumstances permitted by laws and administrative regulations.

The Company may repurchase shares in one of the following ways, with the approval of the relevant governing authority of the State: (1) (2) by making a general oer for the repurchase of shares to all its shareholders on a pro rata basis; by repurchasing shares through public dealing on a stock exchange; IX-40

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(3)

by repurchasing shares outside of the stock exchange by means of an o-market agreement.

The Company must obtain the prior approval of the shareholders in a general meeting (in the manner stipulated in the Articles of Association) before it can repurchase shares outside of the stock exchange by means of an o-market agreement. The Company may, by obtaining the prior approval of the shareholders in general meeting (in the same manner), release, vary or waive its rights under an agreement which has been so entered into. An agreement for the repurchase shares referred to in the preceding paragraph includes (without limitation) an agreement to become liable to repurchase shares or an agreement to have the right to repurchase shares. The Company may not assign an agreement for the repurchase of its shares or any right contained in such an agreement. Shares which have been legally repurchased by the Company shall be cancelled within the period prescribed by law and administrative regulation, and the Company shall apply to the original companies registration authority for registration of the change of its registered capital. The aggregate par value of the cancelled shares shall be deducted from the Company's registered share capital. Unless the Company is in the course of liquidation, it must comply with the following provisions in relation to repurchase of its issued shares: (1) where the Company repurchases shares at par value, payment shall be made out of book surplus distributable prots of the Company or out of proceeds of a new issue of shares made for that purpose; where the Company repurchases shares of the Company at a premium to its par value, payment up to the par value may be made out of the book surplus distributable prots of the Company or out of the proceeds of a new issue of shares made for that purpose. Payment of the portion in excess of the par value shall be eected as follows: (i) (ii) if the shares being repurchased were issued at par value, payment shall be made out of the book surplus distributable prots of the Company; if the shares being repurchased were issued at a premium to its par value, payment shall be made out of the book surplus distributable prots of the Company or out of the proceeds of a new issue of shares made for that purpose, provided that the amount paid out of the proceeds of the new issue shall not exceed the aggregate of premiums received by the Company on the issue of the shares repurchased nor shall it exceed the book value of the Company's capital common reserve fund account (including the premiums on the new issue) at the time of the repurchase;

(2)

(3)

the Company shall make the following payments out of the Company's distributable prots: (i) (ii) (iii) payment for the acquisition of the right to repurchase its own shares; payment for variation of any contract for the repurchase of its shares; payment for the release of its obligation(s) under any contract for the repurchase of shares; IX-41

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(4)

after the Company's registered capital has been reduced by the aggregate par value of the cancelled shares in accordance with the relevant provisions, the amount deducted from the distributable prots of the Company for payment of the par value of shares which have been repurchased shall be transferred to the Company's capital common reserve fund account.

(K)

Power for any subsidiary of the Company to own shares in the Company

There are no provisions in the Articles preventing ownership of shares in the Company by a subsidiary. (L) Dividends and other methods of prot distribution The Company may distribute dividends in the following form: (a) (b) cash; or shares.

The Company shall calculate, declare and pay dividends and other amounts which are payable to holders of Domestic-Invested Shares in Renminbi. The Company shall calculate and declare dividends and other payments which are payable to holders of Overseas-Listed Foreign-Invested Shares in Renminbi, and shall pay such amounts in the local currency of the place at which such Overseas-Listed Foreign-Invested Shares are listed (if there is more than one place of listing, then the currency of the principal place of listing as determined by the Board). The Company shall appoint receiving agents for holders of the Overseas-Listed Foreign-Invested Shares. Such receiving agents shall receive dividends which have been declared by the Company and all other amounts which the Company should pay to holders of Overseas-Listed Foreign-Invested Shares on such shareholders' behalf. The receiving agents appointed by the Company shall meet the relevant requirements of the laws of the place at which the stock exchange on which the Company's shares are listed or the relevant regulations of such stock exchange. The receiving agents appointed for holders of H Shares shall each be a company registered as a trust company under the Trustee Ordinance of Hong Kong. (M) Proxies

Any shareholder who is entitled to attend and vote at a general meeting of the Company shall be entitled to appoint one or more other persons (whether such other person is a shareholder or not) as his proxies to attend and vote on his behalf, and a proxy so appointed shall be entitled to exercise the following rights pursuant to the authorisation from that shareholder: (1) (2) (3) the shareholders' right to speak at the meeting; the right to demand or join in demanding a poll; the right to vote by hand or on a poll, but a proxy of a shareholder who has appointed more than one proxy may only vote on a poll.

The instrument appointing a proxy shall be in writing under the hand of the appointor or his attorney duly authorised in writing or, if the appointor is a legal person, either under seal or under the hand of a director or attorney duly authorised. The instrument appointing a proxy and, if such instrument is signed IX-42

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by a person under power of attorney on behalf of the appointor, a notarially certied copy of that power of attorney or other authority, shall be deposited at the residence of the Company or at some other place specied for that purpose in the notice of meeting, not less than 24 hours before the time for holding the meeting at which the proxy proposes to vote or the time appointed for the passing of the resolution. If the appointor is a legal person, its legal representative or such person as is authorised by resolution of its Board of Directors or other governing body may attend at any meeting of shareholders of the Company as a representative of the appointor. Attendance or any action carried out by the appointee for the purposes of these Articles of Association at any meeting shall be regarded as attendance by or, where appropriate, as actions taken by the appointor. Any form issued to a shareholder by the directors for use by him for the appointment of a proxy to attend and vote at meetings of the Company shall be such as to enable the shareholder to freely instruct the proxy to vote in favour of or against the motions, such instructions being given in respect of each individual matter to be voted on at the meeting. Such a form shall contain a statement that, in the absence of specic instructions by the shareholder, the proxy may vote as he thinks t. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the death or loss of capacity of the appointer or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the shares in respect of which the proxy is given, provided that the Company has not received any written notice in respect of such matter before the commencement of the relevant meeting. (N) Calls on shares and forfeiture of shares

There are no provisions in the Articles relating to the making of calls on shares or for the forfeiture of shares. (O) Rights of shareholders (including inspection of register) The ordinary shareholders of the Company shall enjoy the following rights: (1) (2) (3) (4) the right to dividends and other distributions in proportion to the number of shares held; the right to attend or appoint a proxy to attend shareholders' general meetings and to vote thereat; the right of supervisory management over the Company's business operations, and the right to present proposals or to raise enquiries; the right to transfer shares in accordance with laws, administrative regulations and provisions of the Articles of Association;

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(5)

the right to obtain relevant information in accordance with the provisions of the Articles of Association, including: (i) (ii) the right to obtain a copy of the Articles of Association, subject to payment of costs; the right to inspect and copy, subject to payment of a reasonable fee: (a) (b) all parts of the register of shareholders; personal particulars of each of the Company's directors, supervisors, president, vice presidents and other senior ocers, including: (aa) present and former name and alias;

(bb) principal address (place of residence); (cc) nationality;

(dd) primary and all other part-time occupations and duties; (ee) (c) (d) identication documents and their numbers thereof;

report on the state of the Company's share capital; reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of the last accounting year and the aggregate amount paid by the Company for this purpose; minutes of shareholders' general meeting and accountant's report;

(e) (6) (7) (P)

in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held; other rights conferred by laws, administrative regulations and the Articles of Association.

Quorum for meetings

The Company may convene a shareholders' general meeting where the number of voting shares represented by those shareholders from whom the Company has received, 20 days before the meeting, notices of intention to attend the meeting is more than one-half of the Company's total number of voting shares; or, if not, where the Company has within ve days publicly announced to the shareholders, the agenda, the date and venue of the meeting. The Company may convene a class meeting where the number of voting shares represented by those shareholders from whom the Company has received, 20 days before the meeting, notices of intention to attend the meeting is more than one-half of the total number of voting shares of that class; or, if not, where the Company has within ve days publicly announced to the shareholders the agenda, the date and venue of the meeting. (Q) Rights of the minorities in relation to fraud or oppression

In addition to obligations imposed by laws and administrative regulations or required by the listing rules of the stock exchanges on which shares of the Company are listed, a Controlling Shareholder (as IX-44

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SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

dened below) shall not exercise his voting rights in a manner prejudicial to the interests of the shareholders generally or of some part of the shareholders of the Company: (a) (b) to relieve a Director or Supervisor of his duty to act honestly in the best interests of the Company; to approve the expropriation by a Director or Supervisor (for his or her own benet or for the benet of another person) of the Company's assets in any way, including without limitation, opportunities which may benet the Company; or to approve the expropriation by a Director or Supervisor (for his own benet or for the benet of another person) of the individual rights of other shareholders, including, without limitation, rights to distributions and voting rights (save according to a restructuring of the Company which has been submitted for approval by the shareholders in a general meeting in accordance with the Articles of Association).

(c)

A Controlling Shareholder, however, will not be precluded by the Articles of Association or any laws and administrative regulations or the listing rules of the stock exchanges on which the H Shares are listed from voting on these matters. For these purposes, a ""Controlling Shareholder'' means a person who (acting alone or in concert with others): (a) (b) (c) (d) is in a position to and has the power to elect more than half of the Board; has the power to exercise, or to control the exercise of, 30 per cent. or more of the voting rights in the Company; holds 30 per cent. or more of the issued and outstanding shares of the Company; has de facto controls of the Company in any other way.

See also ""Variation of rights of existing shares or classes of shares'' above. (R) Procedures on liquidation The Company shall be dissolved and liquidated upon the occurrence of any of the following events: (1) (2) (3) (4) a resolution for dissolution is passed by shareholders at a general meeting; dissolution is necessary due to a merger or division of the Company; the Company is legally declared insolvent due to its failure to repay debts as they become due; and the Company is ordered to close down because of its violation of laws and administrative regulations.

A liquidation committee shall be set up within 15 days of the Company being dissolved pursuant to sub-paragraph (1) of the preceding paragraph, and the composition of the liquidation group of the Company shall be determined by an ordinary resolution of shareholders in general meeting. Where the Company is dissolved under sub-paragraph (3) of the preceding paragraph, the People's Court shall in accordance with the provisions of relevant laws organise the shareholders, relevant organisations and relevant professional personnel to establish a liquidation committee to carry out the liquidation. IX-45

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Where the Company is dissolved under sub-paragraph (4) of the preceding paragraph the relevant governing authorities shall organise the shareholders, relevant organisations and professional personnel to establish a liquidation committee to carry out the liquidation. Where the Board of Directors proposes to liquidate the Company due to reasons other than where the Company's declaration of its own insolvency, the Board shall include a statement in its notice convening a shareholders' general meeting to consider the proposal to the eect that, after making full inquiry into the aairs of the Company, the Board is of the opinion that the Company will be able to pay its debts in full within 12 months from the commencement of the liquidation. Upon the passing of the resolution by the shareholders in general meeting for the liquidation of the Company, all functions and powers of the Board shall cease. The liquidation committee shall act in accordance with the instructions of the shareholders' general meeting to make a report at least once every year to the shareholders' general meeting on the committee's income and expenses, the business of the Company and the progress of the liquidation; and to present a nal report to the shareholders' general meeting on completion of the liquidation. (S) Other provisions material to the Company or its shareholders The Company is a joint stock limited company which has perpetual existence. The Articles of Association shall take eect from the date of establishment of the Company. From the date on which these Articles of Association come into eect, these Articles of Association shall constitute a legally binding public document regulating the Company's organisation and activities, and the rights and obligations between the Company and each shareholder and among the shareholders inter se. The Company may invest in other limited liability companies or joint stock limited companies. The Company's liabilities to an investee company shall be limited to the amount of its capital contribution to the investee company. Upon approval of the companies approving department authorised by the State Council, the Company may, according to its operating and management needs, operate as a holding company as prescribed in the second paragraph of Article 12 of the Company Law. The Company may, based on its operating and development needs, increase the share capital pursuant to the Company's Articles of Association. The Company may increase its capital in the following ways: (1) (2) (3) (4) by oering new shares for subscription by unspecied investors; by issuing new shares to its existing shareholders; by allotting bonus shares to its existing shareholders; by any other means which is permitted by law and administrative regulation.

General provisions

After the Company's increase of share capital by means of the issuance of new shares has been approved in accordance with the provisions of the Articles of Association, the issuance thereof should be made in accordance with procedures set out in the relevant laws and administrative regulations. IX-46

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Unless otherwise stipulated in the relevant laws or administrative regulations, shares in the Company shall be freely transferable and are not subject to any lien. According to the provisions of these Articles of Association, the Company may reduce its registered capital. When the Company reduces its registered capital, it must prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within 10 days of the date of the Company's resolution for reduction of capital and shall publish an announcement in a newspaper at least three times within 30 days of the date of such resolution. A creditor has the right within 30 days of receipt of the notice from the Company or, in the case of a creditor who does not receive such notice, within 90 days of the date of the rst public announcement, to require the Company to repay its debts or provide a corresponding guarantee for such debt. The Company's registered capital may not, after the reduction in capital, be less than the minimum amount prescribed by law. The ordinary shareholders of the Company shall assume the following obligations: (1) (2) (3) to comply with the Articles of Association; to pay subscription monies according to the number of shares subscribed and the method of subscription; other obligations imposed by laws, administrative regulations and the Articles of Association.

Shareholders are not liable to make any further contribution to the share capital other than as agreed by the subscriber of the relevant shares at the time of subscription. Secretary of the Board of Directors The Company shall have one secretary of the Board. A secretary shall be a senior ocer of the Company. The secretary of the Board shall be a natural person who has the requisite professional knowledge and experience, and shall be appointed by the Board. His primary responsibilities are to ensure that: (1) (2) (3) the Company has complete organisational documents and records; the Company prepares and delivers, in accordance with law, those reports and documents required by competent authorities entitled thereto; the Company's registers of shareholders are properly maintained, and that persons entitled to receive the Company's records and documents are furnished therewith without delay.

Supervisory Committee The Company shall have a supervisory committee. The supervisory committee shall be composed of seven Supervisors. One of the members of the supervisory committee shall be the chairman. Each Supervisor shall serve for a term of three years, which term is renewable upon re-election and re-appointment. IX-47

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

The election or removal of the chairman of the supervisory committee shall be determined by twothirds or more of the members of the supervisory committee. The chairman shall serve for a term of three years, which term is renewable upon re-election and reappointment. The supervisory committee shall be accountable, and will report, to the shareholders in general meeting and shall exercise the following functions and powers in accordance with law: (1) (2) (3) (4) to monitor the Company's nancial matters; to supervise the Directors, president, vice presidents and other senior ocers to ensure that they do not act in contravention of any law, regulation or the Articles of Association; to demand any Director, president, vice president or any other senior ocer who acts in a manner which is harmful to the Company's interest to rectify such behaviour; to verify the nancial information such as the nancial report, business report and plans for distribution of prots to be submitted by the Board to the shareholders' general meetings and to authorise, in the Company's name, publicly certied and practicing accountants to assist in the re-examination of such information should any doubt arise in respect thereof; to propose to convene a shareholders' extraordinary general meeting; to represent the Company in negotiations with or in bringing actions against a director; other functions and powers specied in the Articles of Association.

(5) (6) (7)

President of the Company The president shall be accountable to the Board and shall exercise the following functions and powers: (1) (2) (3) (4) (5) (6) (7) (8) to be in charge of the Company's production, operation and management and to organise the implementation of the resolutions of the Board; to organise the implementation of the Company's annual business plan and investment proposal; to draft plans for the establishment of the Company's internal management structure; to draft the Company's basic management system; to formulate basic rules and regulations for the Company; to propose the appointment or dismissal of the Company's vice president(s) and other senior ocers (including the nancial controller); to appoint or dismiss management personnel other than those required to be appointed or dismissed by the Board of Directors; other powers conferred by the Articles of Association and the Board.

The president may attend meetings of the Board. The president has no voting rights at the Board meetings unless he is also a Director. IX-48

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

The president and vice presidents in performing their functions and powers shall act honestly and diligently and in accordance with laws, administrative regulations and the Articles of Association. Board of Directors The Board of Directors is accountable to the shareholders' general meeting and exercises the following functions and powers: (1) (2) (3) (4) (5) (6) (7) (8) (9) to be responsible for the convening of the shareholders' general meeting and to report on its work to the shareholders' general meeting; to implement the resolutions passed by the shareholders in general meetings. to determine the Company's business plans and investment proposals; to formulate the Company's annual preliminary and nal nancial budgets; to formulate the Company's prot distribution proposal and loss recovery proposal; to formulate proposals for the increase or reduction of the Company's registered capital and for the issuance of the Company's debentures; to draw up plans for the merger, division or dissolution of the Company; to decide on the Company's internal management structure; to appoint or remove the Company's president and to appoint or remove the vice president(s) and other senior ocers (including the nancial controller(s) of the Company) and, based on the recommendations of the president, decide on their remuneration;

(10) to formulate the Company's basic management system; (11) to formulate proposals for any amendment of the Articles of Association; (12) to exercise any other powers conferred by the shareholders in general meeting. Except the Board of Directors' resolutions in respect of the matters specied in sub-paragraphs (6), (7) and (11) above which shall be passed by the armative vote of more than two-thirds of all the Directors, the Boards' resolutions in respect of all other matters may be passed by the armative vote of a simple majority of the Directors. Meetings of the Board shall be held at least twice every year and convened by the Chairman of the Board. Notice of the meeting shall be served on all of the Directors at least ve days prior to the date of the meeting. In case of any urgent-matters, upon requisition by more than one-third of the Directors or the president of the Company, an extraordinary meeting of the Board may be held. Meetings of the Board of Directors shall be held only if more than half of the Directors (including any alternate Director appointed pursuant to the Articles) are present. Each Director shall have one vote. Unless otherwise provided for in the Articles of Association, a resolution of the Board must be passed by more than half of all the Directors. Where there is an equality of votes cast both for and against a resolution, the Chairman of the Board shall have a casting vote. IX-49

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

Auditor (1) Appointment of auditor

The Company shall appoint an independent rm of accountants which is qualied under the relevant regulations of the State to audit the Company's annual report and review the Company's other nancial reports. The rst auditors of the Company may be appointed before the rst annual general meeting of the Company at the inaugural meeting. Auditors so appointed shall hold oce until the conclusion of the rst annual general meeting. If the inaugural meeting does not exercise the powers under the preceding paragraph, those powers shall be exercised by the Board. If there is a vacancy of the position of the auditors of the Company, the Board may appoint an accountancy rm to ll such vacancy before the convening of the shareholders' general meeting. Any other accountancy rm which has been appointed by the Company may continue to act during the period during which a vacancy arises. The shareholders in general meeting may by ordinary resolution remove the Company's auditors before the expiration of its term of oce, irrespective of the provisions in the contract between the Company and the Company's auditors. However, the accountancy rm's right to claim for damages which arise from its removal shall not be aected thereby. The remuneration of an accountancy rm or the manner in which such rm is to be remunerated shall be determined by the shareholders in general meeting. The remuneration of an accountancy rm appointed by the Board shall be determined by the Board. (2) Change and removal of auditor

Where a resolution at a general meeting of shareholders is passed to appoint as auditor a person other than an incumbent auditor, to ll a casual vacancy in the oce of auditor, to reappoint as auditor a retiring auditor who was appointed by the Board to ll a casual vacancy, or to remove an auditor before the expiration of his term of oce, the following provisions shall apply: (1) A copy of the proposal shall be sent before notice of meeting is given to the shareholders to the rm proposed to be appointed or proposing to leave its post or the auditor which has left its post in the relevant scal year (leaving includes leaving by removal, resignation and retirement). If the auditors leaving its post makes representations in writing and requests the Company to notify such representations to the shareholders, the Company shall (unless the representations are received too late) take the following measures: (i) (ii) (3) in any notice of the resolution given to shareholders, state the fact of the representations having been made; and attach a copy of the representations to the notice and deliver it to the shareholders in the manner stipulated in the Articles of Association.

(2)

If the auditor's representations are not sent in accordance with the preceding subparagraph (2), the auditor may (in addition to its right to be heard) require that the representations be read out at the meeting. IX-50

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

(4)

An auditor which is leaving its post shall be entitled to attend: (i) (ii) (iii) the shareholders' general meeting at which its term of oce would otherwise have expired; any shareholders' general meeting at which it is proposed to ll the vacancy caused by its removal; and any shareholders' general meeting convened on its resignation, and to receive all notices of, and other communications relating to, any such meetings, and to speak at any such meeting in relation to matters concerning its role as the former auditor of the Company.

(3)

Resignation of auditors

An accountancy rm may resign its oce by depositing at the Company's legal address a resignation notice which shall become eective on the date of such deposit or on such later date as may be stipulated in such notice. Such notice shall contain the following statements: (1) a statement to the eect that there are no circumstances connected with its resignation which it considers should be brought to the notice of the shareholders or creditors of the Company; or a statement of any such circumstances.

(2)

Where a notice is deposited under the preceding paragraph, the Company shall within 14 days send a copy of the notice to the relevant governing authority. If the notice contains a statement under the preceding sub-paragraph (2) of the preceding paragraph, a copy of such statement shall be placed at the Company for shareholders' inspection. The Company should also send a copy of such statement by prepaid mail to every shareholder of Overseas-Listed Foreign Shares at the address registered in the register of shareholder. Where the auditor's notice of resignation contains a statement in respect of the above, it may require the Board of Directors to convene a shareholders' extraordinary general meeting for the purpose of receiving an explanation of the circumstances connected with its resignation. Dispute resolution The Company shall abide by the following principles for dispute resolution: (1) Whenever any disputes or claims arise between: holders of the Overseas-Listed ForeignInvested Shares and the Company; holders of the Overseas-Listed Foreign-Invested Shares and the Company's Directors, Supervisors, general manager, deputy general managers or other senior ocers; or holders of the Overseas-Listed Foreign-Invested Shares and holders of Domestic-Invested Shares, in respect of any rights or obligations arising from these Articles of Association or any rights or obligations conferred or imposed by the Company Law and special regulations (including other relevant laws) or any other relevant PRC laws and administrative regulations concerning the aairs of the Company, such disputes or claims shall be referred by the relevant parties to arbitration.
Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is

IX-51

APPENDIX IX

SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS AND ARTICLES OF ASSOCIATION

necessary for the resolution of such dispute or claim, shall, where such person is the manager, deputy general managers or other senior ocers of the Company, comply with the arbitration.

Disputes in relation to the denition of shareholders and disputes in relation to the register of shareholders need not be resolved by arbitration. (2) A claimant may elect arbitration at either the China International Economic and Trade Arbitration Commission in accordance with its Rules or the Hong Kong International Arbitration Centre in accordance with its Securities Arbitration Rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant.
If a claimant elects arbitration at Hong Kong International Arbitration Centre, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the Securities Arbitration Rules of the Hong Kong International Arbitration Centre.

(3)

If any disputes or claims of rights are settled by way of arbitration in accordance with subparagraph (1) of this paragraph, the laws of the PRC shall apply, save as otherwise provided in the laws and administrative regulations. The award of an arbitral body shall be nal and conclusive and binding on all parties.

(4) 4.

PRC LEGAL MATTERS

King & Wood, the Company's legal adviser on PRC law, has sent to the Company a letter dated 27 March 2000 conrming that it has reviewed the summaries of PRC company and securities regulations and the summaries of certain material dierences between Hong Kong company law and the Company Law so far as they relate to PRC law as contained in this Appendix, and that, in its opinion, such summaries are correct summaries of relevant PRC laws. This letter is available for inspection as referred to in the section headed ""Documents Available for Inspection'' in Appendix XI. Any person wishing to have detailed advice on PRC laws and the laws of any jurisdiction with which he is more familiar is recommended to seek independent legal advice.

IX-52

APPENDIX X
1.

STATUTORY AND GENERAL INFORMATION

FURTHER INFORMATION ABOUT THE COMPANY A. Incorporation

The Company was established as a joint stock limited company in the PRC by the promotion method under the Company Law on 5 November 1999 with CNPC acting as the promoter pursuant to the Restructuring. The Company has established a place of business in Hong Kong at Unit 1809, Tower One, Lippo Centre, 89 Queensway, Hong Kong, and is registered as an oversea company under Part XI of the Companies Ordinance. Mr. Xu Xiaolu of Flat G, 18th Floor, Willow Mansion, 22 Taikoo Wan Road, Taikoo Shing, Quarry Bay, Hong Kong, the authorised representative of the Company for the purposes of Part XI of the Companies Ordinance, has been appointed as the Company's agent for the acceptance of service of process in Hong Kong. As the Company is established in the PRC, its corporate structure and Articles of Association are subject to the relevant laws and regulations of the PRC. A summary of the relevant laws and regulations of the PRC and of the Articles of Association is set out in Appendix IX. At the time of its establishment, the Company's initial registered capital was RMB160 billion, divided into 160 billion ordinary shares of par value RMB1.00 each. When the Global Oering is completed, the issued share capital of the Company will be RMB175,824,176,000, made up of 158,241,758,000 Domestic Shares and 17,582,418,000 H Shares, fully paid or credited as fully paid, representing approximately 90 per cent. and approximately 10 per cent. of the issued capital, respectively (assuming that the Over-allotment Options are not exercised and taking no account of any H Shares which may be repurchased by the Company pursuant to the mandate referred to in the section headed ""Share Capital General Mandate to Repurchase H Shares''). B. Procedures at the Company's extraordinary shareholders' meetings

At an extraordinary general meeting of the Company held on 3 December 1999, resolutions were passed under which the Company approved, among other things: (a) the conversion of the Company into a ""public subscription company''; (b) the issue and oer for sale of H Shares and the granting of the over-allotment options; (c) the listing of the H Shares on the Stock Exchange and the ADSs on the NYSE; and (d) the adoption of its new Articles of Association and the authorisation to the Directors to amend the new Articles of Association in accordance with any comments from the relevant governing authorities in the PRC and the Stock Exchange. Pursuant to a written resolution passed by the shareholders of the Company on 23 February 2000, the Company approved, among other things, that a general unconditional mandate be given to the Directors authorising any repurchase by the Company of up to 10 per cent. of the total amount of H Shares to be issued (including any H Shares to be issued pursuant to the exercise of the Overallotment Options), such mandate to expire at the conclusion of the next annual general meeting of the Company, the date by which the next annual general meeting of the Company is required by applicable laws or the Articles of Association to be held or when revoked or varied by a special resolution of the Company's shareholders in general meeting and special resolutions of the holders of H Shares and Domestic Shares at separate meetings of such holders, whichever shall rst occur. X-1

APPENDIX X

STATUTORY AND GENERAL INFORMATION

Further information on the share repurchase mandate is contained in the section headed ""Statutory and General Information Repurchase by the Company of its H Shares'' in this appendix. Save as aforesaid, there has been no alteration in the share capital of the Company since its establishment. 2. THE RESTRUCTURING

In preparation for the Global Oering, the Restructuring was eected which involved principally CNPC transferring to the Company most of the assets, liabilities and interests of CNPC relating to its businesses and operations in China including the exploration, development and production of onshore crude oil and natural gas, the rening, transportation, storage and marketing (including import and export) of crude oil and rened products, the production and sale of chemicals, and the transmission, marketing and sale of natural gas. The Restructuring took eect as from 5 November 1999. The Restructuring involved the following procedures and approvals: (a) on 17 September 1999, the Ministry of Land and Resources issued an approval (Guo Tu Zi Han 1999 No. 470) authorising CNPC to set up a subsidiary within the PRC to engage in the businesses of exploration and development of oil and natural gas; (b) on 30 September 1999, the Ministry of Finance issued an approval (Cai Ping Han Zi 1999 No. 613) approving the asset valuation for the purposes of the promotion and establishment of the Company by CNPC and the issue of H Shares; (c) on 9 October 1999, the Ministry of Land and Resources issued an approval (Guo Tu Zi Han 1999 No. 518) regarding the treatment of land for the Restructuring; (d) on 20 October 1999, the Ministry of Finance issued an approval (Cai Ping Zi 1999 No. 490) approving the results of the valuation of the assets transferred from CNPC to the Company; (e) on 25 October 1999, the SETC issued an approval (Guo Jing Mao Qi Gai 1999 No. 1024) approving the establishment of the Company; (f) on 4 November 1999, the Ministry of Land and Resources issued an approval (Guo Tu Zi Han 1999 No. 577) conrming and approving the land valuation results and the arrangements for land use rights; (g) on 5 November 1999, CNPC as the sole promoter, incorporated the Company as a joint stock company with limited liability pursuant to the applicable PRC laws and regulations and a legal person business licence was issued by the State Administration for Industry and Commerce; (h) on 23 December 1999, SETC issued an approval (Guo Jing Mao Qi Gai 1999, No. 1247) approving the Articles of Association adopted on 3 December 1999 and authorising the conversion of the Company into an overseas oering company; (i) pursuant to the Restructuring Agreement eective as of 5 November 1999, CNPC transferred to the Company substantially all of its assets, liabilities and interests in connection with its various businesses and operations in China. The particulars of the various business and operations transferred to the Company are set out under the section headed ""Industry Overview Industry and Corporate Restructurings The Restructuring''; and X-2

APPENDIX X

STATUTORY AND GENERAL INFORMATION

(j) as a result of the Restructuring the Company has entered into a number of agreements with CNPC which govern the provision by the CNPC Group to the Group and by the Group to the CNPC Group of exploration and production services, products and various other services, such as the provision of nancial services, the leasing of land and other real properties, the licence of computer software, trademarks, patents and knowhow and other commercial agreements. Further information is contained in the section headed ""Business Relationship with the CNPC Group Connected Transactions''. Immediately following the completion of the Global Oering, the number of H Shares will constitute approximately 10 per cent. of the issued share capital of the Company (assuming that the Over-allotment Options are not exercised). 3. SUBSIDIARIES AND INTERESTS IN OTHER LISTED COMPANIES

The Company's principal subsidiaries are referred to in the Accountants' Report, the text of which is set out in Appendix I. In February 2000, the paid-up capital of Jilin Chemical Industry Company Limited was increased from RMB 3,411 million to RMB 3,561 million. Save as disclosed in this prospectus, there has been no alteration in the share capital of any of the principal subsidiaries of the Company within the two years preceding the date of this prospectus. The Company owns the following interests in the listed companies as detailed below:
Name Place of listing Attributable equity interest (per cent.)

Jinzhou Petrochemical Co., Ltd. Shenzhen Jilin Chemical Industry Company Limited Shenzhen, Hong Kong and New York Gansu Tristar Petrochemical (Group) Co., Ltd. Shanghai Liaohe Jinma Oileld Company Limited Shenzhen Petroleum Long Champ (Group) Co., Ltd. Shanghai

80.95 67.29 51.60 81.82 37.90

4.

REPURCHASE BY THE COMPANY OF ITS H SHARES

This section includes information relating to the repurchase by the Company of its H Shares, including information required by the Stock Exchange to be included in this prospectus concerning such repurchase. A. Relevant Legal and Regulatory Requirements in Hong Kong and the PRC

The Company Law (to which the Company is subject) provides that a joint stock limited company incorporated in the PRC may not repurchase its shares unless such repurchase is eected for the purpose of reducing its share capital or in connection with a merger between itself and another entity that holds its shares. The Mandatory Provisions which the Company has incorporated into its Articles of Association provide that subject to obtaining the approval of the relevant regulatory authorities and compliance with its articles of association, share repurchases may be eected by a joint stock limited company listed outside the PRC for the purpose of reducing its share capital or in connection with a merger between itself and another entity that holds its shares or in circumstances permitted by law or administrative regulations. X-3

APPENDIX X

STATUTORY AND GENERAL INFORMATION

The Listing Rules permit shareholders of a PRC joint stock limited company to grant a general mandate to the directors to repurchase shares of such company that are listed on the Stock Exchange. Such mandate is required to be given by way of a special resolution passed by shareholders in general meeting and special resolutions passed by holders of domestic shares and overseas listed foreign shares in separate meetings. The repurchase of H Shares by the Company is subject to the approval of the CSRC. Pursuant to an approval issued by the CSRC on 14 January 2000 (the ""Share Repurchase Approval''), which is based on approval granted by the State Council, the CSRC has given its approval for the Company to repurchase its H Shares subject to certain restrictions including shareholder approval and procedural and reporting requirements, and compliance with relevant PRC and non-PRC regulations, including, without limitation, the Listing Rules. (a) Shareholders' approval

All proposed repurchases of H Shares (which must be fully paid up) by the Company must be approved in advance by special resolutions of the shareholders in general meeting and of the holders of H Shares and Domestic Shares at separate meetings of such holders, either by way of general mandate or by specic approval of a particular transaction. Pursuant to a written resolution passed by the shareholders of the Company on 23 February 2000, a general unconditional mandate (the ""Repurchase Mandate'') was given to the Directors authorising any repurchase by the Company of H Shares on the Stock Exchange or on any other stock exchange on which the securities of the Company may be listed and which is recognised by the Securities and Futures Commission of Hong Kong and the Stock Exchange for this purpose, of up to 10 per cent. of the total amount of H Shares of the Company to be sold in the Global Oering (including the H Shares which may be issued under the Over-allotment Options), such mandate to expire at the conclusion of the next annual general meeting of the Company, the date by which the next annual general meeting of the Company is required by applicable laws and the Articles of Association to be held or when revoked or varied by special resolutions of the Company's shareholders in general meeting and of the holders of H Shares and Domestic Shares at separate meetings of such holders, whichever shall rst occur (the ""Relevant Period''). (b) Source of funds

Repurchases by the Company must be funded out of funds legally available for the purpose in accordance with the Articles of Association. A listed company may not repurchase its own securities on the Stock Exchange for a consideration other than cash or for settlement otherwise than in accordance with the trading rules of the Stock Exchange. Subject to the foregoing, any repurchases by the Company may be made out of funds of the Company which would otherwise be available for dividend or distribution or out of an issue of new shares made for the purpose of the repurchase. Pursuant to the Share Repurchase Approval, the Company may, under the supervision of SAFE, retain certain amount of foreign currencies outside the PRC to be deposited with PRC invested banks as a reserve fund for the sole purpose of share repurchases. (c) Trading restrictions

The total amount of H Shares which the Company may repurchase is up to 10 per cent. of the total amount of H Shares to be sold in the Global Oering (including the H Shares which may be issued under the Over-allotment Options). The Company may not issue or announce a proposed issue of X-4

APPENDIX X

STATUTORY AND GENERAL INFORMATION

H Shares for a period of 30 days immediately following a repurchase of H Shares, without the prior approval of the Stock Exchange. In addition, repurchases of H Shares on the Stock Exchange in any calendar month are limited to a maximum of 25 per cent. of the trading volume of H Shares on the Stock Exchange in the immediately preceding calendar month. The Company is also prohibited from repurchasing its H Shares on the Stock Exchange if the repurchase would result in the number of listed H Shares which are in the hands of the public falling below the relevant prescribed minimum percentage as required by the Stock Exchange. The Company is required to procure that the broker appointed by it to eect a repurchase of H Shares discloses to the Stock Exchange such information with respect to the repurchase as the Stock Exchange may require. (d) Status of repurchased H Shares

Pursuant to the Share Repurchase Approval, all repurchased H Shares must be cancelled within 10 days of the relevant repurchase. The registered share capital of the Company will be reduced by an amount equivalent to the aggregate nominal value of the H Shares so cancelled. All repurchased H Shares (whether eected on the Stock Exchange or otherwise) will be automatically delisted and the certicates for those H Shares must be cancelled and destroyed. (e) Suspension of repurchase

Pursuant to the Listing Rules, the Company may not make any repurchase of H Shares after a price sensitive development has occurred or has been the subject of a decision until such time as the price sensitive information has been made publicly available. In particular, during the period of one month immediately preceding either the preliminary announcement of the Company's annual results or the publication of its interim report, the Company may not repurchase its H Shares on the Stock Exchange unless the circumstances are exceptional. In addition, the Stock Exchange may prohibit a repurchase of the H Shares on the Stock Exchange if the Company has breached the Listing Rules. (f) Procedural and reporting requirements

Pursuant to the Repurchase Approval, after the expiry of the Relevant Period, the Company is required to apply for reduction of its registered share capital in connection with the repurchased H Shares which have been cancelled. In addition, the Company is required to report to the relevant authorities details of any repurchase within 15 days after the expiry of the Relevant Period. As required by the Listing Rules, repurchases of H Shares on the Stock Exchange or otherwise must be reported to the Stock Exchange not later than 9:30 a.m. (Hong Kong time) on the following business day. In addition, the Company's annual report is required to disclose details regarding repurchases of H Shares made during the year, including a monthly analysis of the number of H shares repurchased and the aggregate prices paid. (g) Connected parties

A company is prohibited from knowingly repurchasing securities on the Stock Exchange from a ""connected person'', that is, a director, chief executive or substantial shareholder of such company or any of its subsidiaries or any of their associates (as dened in the Listing Rules) and a connected person shall not knowingly sell his securities to the company on the Stock Exchange. X-5

APPENDIX X
B. Reasons for repurchases

STATUTORY AND GENERAL INFORMATION

The Directors believe that it is in the best interests of the Company and its shareholders for the Directors to have general authority from the shareholders to enable the Company to repurchase H Shares in the market. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the net asset value per Share and/or earnings per Share and will only be made where the Directors believe that such repurchases will benet the Company and its shareholders. C. Funding of repurchases

In repurchasing securities, the Company may only apply funds legally available for such purpose in accordance with its Articles of Association and the Listing Rules. On the basis of the current nancial position of the Group as disclosed in this prospectus and taking into account the current working capital position of the Group, the Directors consider that, if the Repurchase Mandate were to be exercised in full, it might have a material adverse eect on the working capital and/or the gearing position of the Group as compared with the position disclosed in this prospectus. However, the Directors do not propose to exercise the Repurchase Mandate to such an extent as would, in the circumstances, have a material adverse eect on the working capital requirements of the Group or the gearing levels which in the opinion of the Directors are from time to time appropriate for the Group. The exercise in full of the Repurchase Mandate, on the basis of 17,582,418,000 H Shares in issue immediately after the Global Oering (and assuming that the Over-allotment Options are not exercised), could accordingly result in up to 1,758,241,800 H Shares being repurchased by the Company during the Relevant Period. If the Over-allotment Options are exercised in full, the exercise in full of the Repurchase Mandate on the basis of 20,219,780,000 H Shares in issue immediately after the Global Oering could result in up to 2,021,978,000 H Shares being repurchased by the Company during the Relevant Period. D. General

None of the Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their associates (as dened in the Listing Rules) currently intends to sell any H Shares to the Company or its subsidiaries. The Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the Repurchase Mandate in accordance with the Listing Rules and the relevant laws of the PRC. If, as a result of any repurchase of H Shares, a shareholder's proportionate interest in the voting rights of the Company is increased, such increase will be treated as an acquisition for the purposes of the Hong Kong Code on Takeovers and Mergers (the ""Takeovers Code''). Accordingly, a shareholder or a group of shareholders acting in concert could obtain or consolidate control of the Company and become obliged to make a mandatory oer in accordance with rule 26 of the Takeovers Code. Save as aforesaid, the Directors are not aware of any consequences which would arise under the Takeovers Code as a consequence of any repurchases pursuant to the Repurchase Mandate. Any repurchase of H Shares which results in the number of H Shares held by the public being reduced to less than 10 per cent. of the H Shares then in issue could only be implemented with the approval of the Stock Exchange to waive the Listing Rules requirements regarding the public X-6

APPENDIX X

STATUTORY AND GENERAL INFORMATION

shareholding referred to above. It is believed that a waiver of this provision would not normally be given other than in exceptional circumstances. No connected person (as dened in the Listing Rules) has notied the Company that he has a present intention to sell H Shares to the Company, or has undertaken not to do so, if the Repurchase Mandate is exercised. 5. FURTHER INFORMATION ABOUT THE BUSINESS A. Material Contracts

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Company or its subsidiaries within the two years preceding the date of this prospectus and are or may be material: (a) the Restructuring Agreement dated 10 March 2000 entered into between CNPC and the Company regarding the Restructuring referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Comprehensive Products and Services Agreement dated 10 March 2000 entered into between CNPC and the Company regarding the provision (1) by the Group to the CNPC Group and (2) by the CNPC Group to the Group, of a range of products and services from time to time referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Land Use Rights Leasing Contract dated 10 March 2000 entered into between CNPC and the Company regarding the leasing of certain properties by CNPC to the Company referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Buildings Leasing Contract dated 10 March 2000 entered into between CNPC and the Company regarding the leasing of certain buildings by CNPC to the Company referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Trademark Licensing Contract dated 10 March 2000 entered into between CNPC and the Company regarding the licensing by CNPC to the Company of the right to use a number of trademarks of CNPC referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Patent and Know-how Licensing Contract dated 10 March 2000 entered into between CNPC and the Company regarding the licensing by CNPC to the Company of the right to use a number of patents and certain know-how of CNPC referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Computer Software Licensing Contract dated 10 March 2000 entered into between CNPC and the Company regarding the licensing by CNPC to the Company to use certain computer software of CNPC referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Contract for the Transfer of Rights under Production Sharing Contracts dated 23 December 1999 entered into between CNPC and the Company regarding the transfer of X-7

(b)

(c)

(d)

(e)

(f)

(g)

(h)

APPENDIX X

STATUTORY AND GENERAL INFORMATION

certain production sharing contracts from CNPC to the Company referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; (i) the Guarantee of Debts Contract dated 10 March 2000 entered into between CNPC and the Company regarding the guarantee of certain debts assumed by the Company pursuant to the Restructuring referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Contract for the Supervision of Certain Sales Enterprises dated 10 March 2000 entered into between CNPC and the Company regarding the supervision of operations by the Company of certain sales enterprises primarily consisting of service stations of CNPC referred to in the section headed ""Business Relationship with the CNPC Group Connected Transactions''; the Non-Competition Agreement dated 10 March 2000 entered into between CNPC and the Company regarding the regulation of competition issues between the Company and the CNPC Group referred to in the section headed ""Business Relationship with the CNPC Group Non-Competition Undertaking''; a crude oil mutual supply framework agreement dated 29 December 1999 between Sinopec and the Company regarding the supply of crude oil to each other's reneries in 2000 referred to in the section headed ""Business Exploration and Development Production''; an assignment of the crude oil premium and discount calculation agreement dated 10 March 2000 entered into between CNPC and the Company referred to in the sections headed ""Business Exploration and Development Production'' and ""Financial Information Results of Operation Factors Aecting Results of Operations Crude Oil Prices''; the four Corporate Placing Agreements all dated 14 March 2000 entered into between the Company, CNPC the Corporate Placing Underwriters and each of the Corporate Investors; the corporate placing agreement dated 23 March 2000 between the Company, CNPC, BP Amoco p.l.c. and the Corporate Placing Underwriters; and the Hong Kong Underwriting Agreement dated 24 March 2000 entered into between the Company, CNPC and the Hong Kong Underwriters. Intellectual Property Rights of the Company

(j)

(k)

(l)

(m)

(n)

(o)

(p)

B.

Pursuant to the Trademark Licensing Contract, the Company has been granted the right to use 59 trademarks which are registered under various classes in the name of members of the CNPC Group. Pursuant to the Patent and Know-how Licensing Contract, the Company has been granted the exclusive right to use 583 patents which are registered in the name of members of the CNPC Group. No intellectual property rights are currently registered in the name of the Company. X-8

APPENDIX X
6. DISCLOSURE OF INTERESTS A. Disclosure of interests (a)

STATUTORY AND GENERAL INFORMATION

The aggregate amount of salaries, housing allowances, other allowances and benets in kind paid by the Company to the Directors (excluding its independent non-executive Directors) and the Supervisors (excluding the two independent Supervisors) for the nine months ended 30 September 1999 was approximately RMB801,003. Under the arrangements currently in force, it is estimated that an aggregate amount of approximately RMB1,068,000 and RMB1,040,000, including such benets and contributions, will be paid by the Company to the Directors and the Supervisors for the years ended 31 December 1999 and 2000. So far as the Directors are aware, CNPC will immediately following completion of the Global Oering and assuming that the Over-allotment Options are not exercised, be interested in 158,241,758,000 Domestic Shares, representing approximately 90.00 per cent. of the Shares carrying rights to vote in all circumstances at general meetings of the Company (or, assuming that the Over-allotment Options are exercised in full, 157,978,022,000 Domestic Shares, representing approximately 88.65 per cent. of the Shares carrying rights to vote in all circumstances at general meetings of the Company). Save as disclosed herein, but not taking into account any Shares which may be taken up under the Global Oering, the Directors are not aware of any legal person or individual (not being a Director or chief executive of the Company) who will, immediately following the completion of the Global Oering, be directly or indirectly interested in 10 per cent. or more of the Shares then in issue, or an equity interest in any principal subsidiaries referred to in the Accountant's Report.

(b)

(c)

B.

Disclaimers Save as disclosed in this prospectus: (i) none of the Directors or Supervisors has any interest in any Shares in or debentures of the Company or any associated company within the meaning of the Securities (Disclosure of Interests) Ordinance (""SDI Ordinance''), which will have to be notied to the Company and the Stock Exchange pursuant to section 28 of SDI Ordinance (including interests which he is deemed to have under section 31 of, or Part 1 of the Schedule to, the SDI Ordinance) or which will be required, pursuant to section 29 of the SDI Ordinance, to be entered in the register referred to therein or which will be required to be notied to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, in each case once the H Shares are listed. For this purpose, the relevant provisions of the SDI Ordinance will be interpreted as if they applied to the Supervisors; none of the Directors or the Supervisors or the Promoter nor any of the parties listed in paragraph 7K of this Appendix is interested in the promotion of the Company, or in any assets which have, within the two years immediately preceding the issue of this prospectus, been acquired or disposed of by or leased to the X-9

(ii)

APPENDIX X

STATUTORY AND GENERAL INFORMATION

Company or its subsidiaries, or are proposed to be acquired or disposed of by or leased to the Company or its subsidiaries;

(iii)

none of the Directors or the Supervisors nor any of the parties listed in paragraph 7K of this Appendix is materially interested in any contract or arrangement subsisting at the date of this prospectus which is signicant in relation to the business of the Company; save in connection with the Underwriting Agreements, none of the parties listed in paragraph 7K of this Appendix: (i) (ii) is interested legally or benecially in any shares in the Company or its subsidiaries; or has any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in the Company or its subsidiaries;

(iv)

(v)

none of the Directors or Supervisors has entered or proposes to enter into a service contract with the Company or its subsidiaries (other than contracts expiring or determinable by the employer within one year without payment of compensation other than statutory compensation); no amount or benet has been paid or given within the two years preceding the date of this prospectus to the Promoter nor is any such amount or benet intended to be paid or given; and none of the Directors or Supervisors or their associates or the Promoter has any interest in the ve largest suppliers and the ve largest customers of the Company.

(vi)

(vii) 7.

OTHER INFORMATION A. Tax and Estate Duty

Pursuant to the Restructuring Agreement referred to in paragraph 5A(a) of this Appendix, CNPC has agreed to pay, and has given indemnities in favour of the Company in connection with, any taxation which might be payable in respect of any assets transferred from CNPC to the Company, which has accrued on or before the date on which the Restructuring becomes eective, including liability for PRC estate duty, and liability for Hong Kong estate duty, which might be payable by any member of the Group by reason of any transfer of property (within the meaning of section 35 of the Estate Duty Ordinance (Chapter 111 of the Laws of Hong Kong)) to any member of the Group. The Directors have been advised that no material liability for estate duty under the laws of the PRC, where all of the assets and businesses of the Group are situated, or Hong Kong, would be likely to fall upon the Company or any member of the Group. B. Litigation

Save as disclosed in this prospectus, neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened by or against the Company that would have an eect on the Company's results of operations or nancial condition. X-10

APPENDIX X
C. Preliminary Expenses

STATUTORY AND GENERAL INFORMATION

The preliminary expenses of the Company are estimated to be approximately RMB 115 million and are payable by the Company. D. Promoter CNPC is the sole promoter and the controlling shareholder of the Company. E. Particulars of the selling shareholder Certain particulars of the selling shareholder are set out as follows: Name: CNPC Address: 6-8, Liu Pu Kang Jie, Xicheng District, Beijing 100724, PRC Description of business: as described in the sections headed ""Industry Overview Industry and Corporate Restructurings The Restructuring'' and ""Business Relationship with the CNPC Group'' Number of H Shares for sale by CNPC in the Global Oering: 1,758,242,000. Up to an aggregate of 263,736,000 additional H Shares will be sold by CNPC if the Over-allotment Options are exercised. F. Sponsors

The Sponsors have made an application on behalf of the Company to the Listing Committee of the Stock Exchange for listing of, and permission to deal in, the H Shares. All necessary arrangements have been made enabling the securities to be admitted into CCASS. G. No Material Adverse Change

Save as disclosed in this prospectus, the Directors believe that there has been no material adverse change in the nancial or trading position or prospects of the Company or its subsidiaries since 30 September 1999. H. Binding Eect

This prospectus shall have the eect, if an application is made in pursuance hereof, of rendering all persons concerned bound by all the provisions (other than the penal provisions) of sections 44A and 44B of the Companies Ordinance of Hong Kong so far as applicable. I. Miscellaneous (a) Save as disclosed in this prospectus: (i) within the two years preceding the date of this prospectus, no share or loan capital of the Company has been issued or agreed to be issued fully or partly paid either for cash or for a consideration other than cash; no share or loan capital of the Company is under option or is agreed conditionally or unconditionally to be put under option; neither the Company nor any of its subsidiaries has issued or agreed to issue any founder shares, management shares or deferred shares; and X-11

(ii) (iii)

APPENDIX X
(iv)

STATUTORY AND GENERAL INFORMATION

since the date two years prior to the date of this prospectus, no commissions, discounts, brokerage or other special terms have been granted in connection with the issue or sale of any shares of the Company or any of its subsidiaries.

(b)

The Company currently does not intend to apply for the status of a sino-foreign investment joint stock limited company and does not expect to be subject to the Sinoforeign Joint Venture Law. Save as disclosed in this prospectus, none of the equity and debt securities of the Company is listed or dealt in any other stock exchange nor is any listing or permission to deal being or proposed to be sought. The Company has no outstanding convertible debt securities.

(c)

(d) J.

Qualication of experts The qualications of the experts who have given opinions in this prospectus are as follows:

Name

Qualication

CICC Goldman Sachs PricewaterhouseCoopers DeGolyer and MacNaughton Chesterton Petty King & Wood

Registered investment adviser Registered investment adviser Certied public accountants Professional technical consultants International property consultants PRC lawyers approved by the relevant authorities in the PRC to advise on securities matters

K.

Consents

CICC and Goldman Sachs, as Sponsors, PricewaterhouseCoopers, as the Company's independent auditors, Chesterton Petty Limited, as the Company's property valuer, King and Wood, as the Company's legal advisers on PRC law, DeGolyer and MacNaughton, as the Company's technical consultant, have given and have not withdrawn their respective written consents to the issue of this prospectus with the inclusion of their reports and/or letters and/or valuation certicates and/or the references to their names included herein in the form and context in which they are respectively included.

X-12

APPENDIX XI
1.

DOCUMENTS DELIVERED AND AVAILABLE FOR INSPECTION

DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES

The documents attached to the copy of this prospectus delivered to the Registrar of Companies in Hong Kong for registration were copies of the WHITE and YELLOW application forms, the written consents referred to in paragraph 7K of Appendix X, details of CNPC, the selling shareholder, including its name, address and description of the selling shareholder as required by Section 342C(3) of the Companies Ordinance and copies of the material contracts referred to in paragraph 5A of Appendix X. 2. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the oces of Linklaters at 10th Floor, Alexandra House, Chater Road, Central, Hong Kong during normal business hours up to and including Sunday, 9 April 2000: (a) the Articles of Association (both English and Chinese versions);

(b) the Accountants' Report on the Company prepared by PricewaterhouseCoopers, the text of which is set out in Appendix I; (c) the letters relating to the prot estimate, the texts of which are set out in Appendix IV;

(d) the letter dated 27 March 2000, with valuation certicate relating to the property interests of the Company prepared by Chesterton Petty Limited, the texts of which are set out in Appendix V, and the full valuation report (in the Chinese language only) of Chesterton Petty Limited referred to in the section headed ""Property and other assets'' in this prospectus; (e) (f) (g) the Independent Technical Consultant's Report prepared by DeGolyer and MacNaughton, the text of which is set out in Appendix VI; the material contracts referred to in paragraph 5A of Appendix X; the written consents referred to in paragraph 7K of Appendix X;

(h) the Company Law together with an unocial English translation; (i) (j) (l) the Special Regulations together with an unocial English translation; the Mandatory Provisions together with an unocial English translation; the Provisional Regulations Concerning the Issue and Trading of Shares (22 April 1993) together with an unocial English translation;

(m) the Implementation Measures (Provisional) on Disclosure of Information (12 June 1993); (n) the Provisional Measures Prohibiting Fraudulent Conduct relating to Securities (2 September 1993) together with an unocial English translation; (o) the Regulations of the State Council Concerning the Domestic Listed Shares of Joint Stock Limited Companies (25 December 1995) together with an unocial English translation; (p) the Securities Law of the PRC promulgated by the Standing Committee of the NPC on 29 December 1998 which became eective on 1 July 1999, together with an unocial English translation; XI-1

APPENDIX XI
(q)

DOCUMENTS DELIVERED AND AVAILABLE FOR INSPECTION

the Opinion on the Further Promotion of the Regular Operation and In-Depth Reform of Companies Listed Overseas issued by the State Economic and Trade Commission and the CSRC on 29 March 1999; the Arbitration Law of the PRC promulgated by the Standing Committee of the NPC on 31 August 1994 and eective on 1 September 1995, together with an unocial English translation; the Civil Procedure Law of the PRC adopted at the fourth meeting of the seventh NPC, promulgated by the premier on 9 April 1991 and eective on 9 April 1991, together with an unocial English translation;

(r)

(s)

(t) Provisional Regulations on Establishment of Foreign Investment Joint Stock Limited Companies issued by MOFTEC on 10 January 1995, together with an unocial English translation; and (u) the PRC legal opinion issued by King & Wood, the legal advisers to the Company on PRC law, dated 27 March 2000, as described in section 4 of Appendix IX.

XI-2