SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of March 2007
PETROCHINA COMPANY LIMITED
16 ANDELU, DONGCHENG DISTRICT
BEIJING, THE PEOPLE'S REPUBLIC OF CHINA, 100011
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F X Form 40-F
---
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes No X
--- ---
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- )
-------
PetroChina Company Limited (the "Registrant") is furnishing under the cover
of Form 6-K the Registrant's announcement of results for the year ended December
31, 2006.
This announcement contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are, by their nature, subject to significant risks and uncertainties. These
forward-looking statements include, without limitation, statements relating to:
- the Registrant's plan to strengthen its oil and gas operation;
- the Registrant's plan to place greater emphasis on modifying and
optimizing its refinery and petrochemical business structure;
- the Registrant's plan to speed up construction of major pipelines and
ancillary facilities; and
- the Registrant's other future plans and prospects.
These forward-looking statements reflect our current views with respect to
future events and are not a guarantee of future performance. Actual results may
differ materially from information contained in these forward-looking statements
as a result of a number of factors, including, without limitation:
- fluctuations in crude oil and natural gas prices;
- failure to achieve continued exploration success;
- failure or delay in achieving production from development projects;
- failure to complete the proposed acquisition of certain overseas
assets as planned;
- change in demand for competing fuels in the target market;
- continued availability of capital and financing;
- general economic, market and business conditions;
- changes in policies, laws or regulations of the PRC and other
jurisdictions in which the Registrant and its subsidiaries conduct
business; and
- other factors beyond the Registrant's control.
We do not intend to update or otherwise revise the forward-looking
statements in this announcement, whether as a result of new information, future
events or otherwise. Because of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this announcement might
not occur in the way we expect, or at all.
You should not place undue reliance on any of these forward-looking
statements.
(PETROCHINA COMPANY LIMITED LOGO)
PETROCHINA COMPANY LIMITED
(a joint stock limited company incorporated in the People's Republic of China
with limited liability)
(Stock Code: 857)
Announcement of the results for the year ended December 31, 2006
--------------------------------------------------------------------------------
-FINANCIAL AND OPERATING SUMMARY-
Output of crude oil for 2006 was 830.7 million barrels, representing an increase
of 0.9% from 2005.
Output of marketable natural gas for 2006 was 1,371.9 billion cubic feet,
representing an increase of 22.5% from 2005.
Total output of crude oil and natural gas for 2006 was 1,059.4 million barrels
of oil equivalent, representing an increase of 4.9% from 2005.
Consolidated turnover for 2006 was RMB688,978 million, representing an increase
of 24.8% from 2005.
Consolidated net profit* for 2006 was RMB142,224 million, representing an
increase of 6.6% from 2005.
Basic and diluted earnings per share attributable to equity holders of the
Company for 2006 were RMB0.79, representing an increase of RMB0.04 from 2005.
The Board of Directors has proposed a final dividend attributable to equity
holders of the Company for 2006 of RMB0.154699 per share.
* Consolidated net profit is profit attributable to the Company's equity
holders.
--------------------------------------------------------------------------------
The Board of Directors (the 'Board') of PetroChina Company Limited (the
'Company') is pleased to announce that the audited consolidated results of the
Company and its subsidiaries (the 'Group") for the year ended December 31, 2006
prepared in accordance with International Financial Reporting Standards ("IFRS')
and the Group's consolidated financial position as of December 31, 2006,
together with the consolidated results and financial position of 2005 for
comparison, are as follows:
1
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Notes 2006 2005
----------- -----------
RMB million RMB million
TURNOVER 3 688,978 552,229
OPERATING EXPENSES
Purchases, services and other (271,123) (200,321)
Employee compensation costs (39,161) (29,675)
Exploration expenses, including exploratory dry holes (18,822) (15,566)
Depreciation, depletion and amortisation (61,388) (51,305)
Selling, general and administrative expenses (43,235) (36,538)
Taxes other than income taxes 5 (56,666) (23,616)
Other expense, net (607) (3,037)
-------- --------
TOTAL OPERATING EXPENSES (491,002) (360,058)
-------- --------
PROFIT FROM OPERATIONS 197,976 192,171
-------- --------
FINANCE COSTS
Exchange gain 1,830 942
Exchange loss (1,756) (854)
Interest income 2,066 1,924
Interest expense (3,220) (2,762)
-------- --------
TOTAL NET FINANCE COSTS (1,080) (750)
-------- --------
SHARE OF PROFIT OF ASSOCIATES AND JOINTLY
CONTROLLED ENTITIES 2,277 2,401
-------- --------
PROFIT BEFORE TAXATION 4 199,173 193,822
TAXATION 6 (49,776) (54,180)
-------- --------
PROFIT FOR THE YEAR 149,397 139,642
======== ========
ATTRIBUTABLE TO:
Equity holders of the Company 142,224 133,362
Minority interest 7,173 6,280
-------- --------
149,397 139,642
======== ========
BASIC AND DILUTED EARNINGS PER SHARE FOR
PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF
THE COMPANY DURING THE YEAR (RMB) 7 0.79 0.75
======== ========
DIVIDENDS ATTRIBUTABLE TO EQUITY HOLDERS
OF THE COMPANY:
Interim dividends 9 36,307 27,731
Final dividends 9 27,694 32,282
-------- --------
64,001 60,013
======== ========
2
CONSOLIDATED BALANCE SHEET
Notes 2006 2005
----------- -----------
RMB million RMB million
----------- -----------
NON CURRENT ASSETS
Property, plant and equipment 645,337 563,890
Investments in associates and jointly controlled entities 32,956 12,378
Available-for-sale investments 2,054 1,230
Advance operating lease payments 20,468 16,235
Intangible and other assets 6,627 5,011
Time deposits with maturities over one year 2,499 3,428
------- -------
709,941 602,172
------- -------
CURRENT ASSETS
Inventories 76,038 62,733
Accounts receivable 10 8,488 4,630
Prepaid expenses and other current assets 23,281 22,673
Notes receivable 2,844 3,028
Investments in collateralised loans -- 235
Time deposits with maturities over three months
but within one year 3,012 1,691
Cash and cash equivalents 48,559 80,905
------- -------
TOTAL CURRENT ASSETS 162,222 175,895
------- -------
CURRENT LIABILITIES
Accounts payable and accrued liabilities 11 120,182 99,758
Income tax payable 17,744 20,567
Other taxes payable 6,190 4,824
Short-term borrowings 35,763 28,689
------- -------
179,879 153,838
------- -------
NET CURRENT (LIABILITIES)/ASSETS (17,657) 22,057
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES 692,284 624,229
======= =======
EQUITY
Equity attributable to equity holders of the Company
Share capital 179,021 179,021
Retained earnings 264,092 203,812
Reserves 143,564 132,556
------- -------
586,677 515,389
Minority interest 30,914 28,278
------- -------
TOTAL EQUITY 617,591 543,667
------- -------
3
Notes 2006 2005
----------- -----------
RMB million RMB million
----------- -----------
NON CURRENT LIABILITIES
Long-term borrowings 35,634 44,570
Other long-term obligations 995 1,046
Asset retirement obligations 18,481 14,187
Deferred taxation 19,583 20,759
------- -------
74,693 80,562
------- -------
692,284 624,229
======= =======
Notes
1. BASIS OF PREPARATION
The consolidated financial statements have been prepared in accordance with
IFRS issued by the International Accounting Standards Board ("IASB").
The preparation of financial statements in conformity with IFRS requires
the use of estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the balance sheet date and the reported amounts of revenues and expenses
during the reporting period. Although these estimates are based on
management's best knowledge of current events and actions, actual results
may ultimately differ from those estimates. The areas involving a higher
degree of judgement or complexity, or areas where assumptions and estimates
are significant to the consolidated financial statements are disclosed in
Note 2.
In 2006, the Group adopted the following amendments and interpretations to
existing standards which are relevant to its operations. The adoption of
these amendments and interpretations did not result currently in changes to
the Group's accounting policies. In summary:
(a) Amendments and interpretations to existing standards effective in 2006
- International Accounting Standard ("IAS") No 39 ("IAS 39') and
IFRS 4 (Amendment) -- Financial Guarantee Contracts; and
- International Financial Reporting Interpretations Committee
("IFRIC') Interpretation 4 -- Determining whether an Arrangement
contains a Lease.
(b) Interpretations to existing standards early adopted by the Group
- IFRIC Interpretation 8 -- Scope of IFRS 2 (effective for annual
periods beginning on or after May 1, 2006).
The following amendments and interpretations are mandatory for accounting
periods beginning on or after January 1, 2006 but are not relevant to the
Group's operations:
- IAS 19 (Amendment) -- Employee Benefits: Actuarial Gains and Losses,
Group Plans and Disclosures;
- IAS 21 (Amendment) -- Net Investment in a Foreign Operation;
- IAS 39 (Amendment) -- Cash Flow Hedge Accounting of Forecast
Intragroup Transactions;
- IAS 39 (Amendment) -- The Fair Value Option;
4
- IFRIC Interpretation 5 -- Rights to Interests arising from
Decommissioning, Restoration and Environmental Rehabilitation Funds;
and
- IFRIC Interpretation 6 -- Liabilities arising from Participating in a
Specific Market -- Waste Electrical and Electronic Equipment.
2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements are continually evaluated and are based on
historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
The matters described below are considered to be the most critical in
understanding the judgements that are involved in preparing the Group's
consolidated financial statements.
(a) Estimation of oil and natural gas reserves
Oil and natural gas reserves are key elements in the Group's
investment decision-making process. They are also an important element
in testing for impairment. Changes in proved oil and natural gas
reserves, particularly proved developed reserves, will affect
unit-of-production depreciation, depletion and amortisation charges to
the consolidated profit and loss account. Proved reserve estimates are
subject to revision, either upward or downward, based on new
information, such as from development drilling and production
activities or from changes in economic factors, including product
prices, contract terms or development plans. In general, changes in
the technical maturity of oil and natural gas reserves resulting from
new information becoming available from development and production
activities have tended to be the most significant cause of annual
revisions. Changes to the Group's estimates of proved reserves,
particularly proved developed reserves, affect the amount of
depreciation, depletion and amortisation recorded in the Group's
consolidated financial statements for property, plant and equipment
related to oil and gas production activities. A reduction in proved
developed reserves will increase depreciation, depletion and
amortisation charges (assuming constant production) and reduce net
profit.
(b) Estimated impairment of property, plant and equipment
Property, plant and equipment, including oil and gas properties, are
reviewed for possible impairment when events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Determination as to whether and how much an asset is
impaired involves management estimates and judgements such as future
prices of crude oil, refined products and chemical products and
production profile. However, the impairment reviews and calculations
are based on assumptions that are consistent with the Group's business
plan. These assumptions also include those relative to the pricing
regulations by the regulatory agencies in China that the policies will
not restrict the profit margins of refined products to levels that
will be insufficient to recover the carrying cost of the related
production assets. Favourable changes to some assumptions may avoid
the need to impair any assets in these years, whereas unfavourable
changes may cause the assets to become impaired.
(c) Estimation of asset retirement obligations
Provisions are recognised for the future decommissioning and
restoration of oil and gas properties. The amounts of the provisions
recognised are the present values of the estimated future
expenditures. The estimation of the future expenditures is based on
current local conditions and requirements, including legal
requirements, technology, price level, etc. In addition to these
factors, the present values of these estimated future expenditures are
also impacted by the
5
estimation of the economic life of oil and gas properties. Changes in
any of these estimates will impact the operating results and the
financial position of the Group over the remaining economic life of
oil and gas properties.
3. TURNOVER
Turnover represents revenues from the sale of crude oil, natural gas,
refined products and petrochemical products and from the transportation of
crude oil and natural gas. Analysis of turnover by segment is shown in Note
12.
4. PROFIT BEFORE TAXATION
2006 2005
----------- -----------
RMB million RMB million
----------- -----------
Profit before taxation is arrived at after crediting and charging of
the following items:
Crediting:
----------
Dividend income from available-for-sale investments 208 109
Reversal of provision for impairment of receivables 460 538
Reversal of impairment of available-for-sale investments 4 54
Reversal of write down in inventories 180 293
Charging:
---------
Amortisation on intangible and other assets 1,250 888
Auditors' remuneration 140 50
Cost of inventories (approximates cost of goods sold) recognised
as expense 341,456 257,957
Depreciation on property, plant and equipment, including
impairment provision
-- owned assets 58,669 49,198
-- assets under finance leases 6 13
Impairment of available-for-sale investments 36 31
Provision for impairment of receivables 144 83
Interest expense (Note (a)) 3,220 2,762
Loss on disposal of property, plant and equipment 1,753 2,026
Operating lease expenses 5,378 4,850
Repair and maintenance 9,233 7,880
Research and development expenses 4,260 3,195
Transportation expenses 17,872 13,707
Write down in inventories 320 154
Note (a) Interest expense
Interest expense 4,535 3,827
Less: Capitalisation of interest (1,315) (1,065)
------- -------
3,220 2,762
======= =======
6
5. TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes include RMB28,914 million for the year ended
December 31, 2006 (2005 : RMB Nil) of special levy which is paid or payable
on the portion of income realised by petroleum exploration enterprises from
the sales of domestic crude oil at prices higher than a specific level.
This levy was imposed by the PRC government and became effective from March
26, 2006.
6. TAXATION
2006 2005
----------- -----------
RMB million RMB million
----------- -----------
Income tax 50,972 50,221
Deferred tax (1,196) 3,959
------ ------
49,776 54,180
====== ======
In accordance with the relevant PRC income tax rules and regulations, the
PRC income tax rate applicable to the Group is principally 33% (2005 :
33%). Operations of the Group in certain regions in China have qualified
for certain tax incentives in the form of reduced income tax rate to 15%
through the year 2010 and accelerated depreciation of certain property,
plant and equipment.
The tax on the Group's profit before taxation differs from the theoretical
amount that would arise using the statutory tax rate in the PRC applicable
to the Group as follows:
2006 2005
----------- -----------
RMB million RMB million
----------- -----------
Profit before taxation 199,173 193,822
------- -------
Tax calculated at a tax rate of 33% 65,727 63,961
Prior year tax return adjustment 243 364
Effect of preferential tax rate (14,169) (10,744)
Tax effect of income not subject to tax (1,602) (427)
Tax effect of expenses not deductible for tax purposes 2,466 1,026
Effect of income taxes from international operations
in excess of taxes at the PRC statutory tax rate 1,512 --
Tax effect of temporary differences in relation to
certain crude oil sales which no longer existed at
year end (4,401) --
------- -------
Tax charge 49,776 54,180
======= =======
7. BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share for the year ended December 31, 2006
have been computed by dividing profit for the year attributable to equity
holders of the Company by the number of 179,021 million shares issued and
outstanding for the year.
Basic and diluted earnings per share for the year ended December 31, 2005
have been computed by dividing profit for the year attributable to equity
holders of the Company by the weighted average number of 176,770 million
shares issued and outstanding for the year.
There are no potential dilutive ordinary shares.
7
8. CHANGES IN EQUITY
Minority Total
Attributable to equity holders of the Company Interest Equity
--------------------------------------------- -------- -------
Share Retained
Capital Earnings Reserves Subtotal
------- -------- -------- --------
RMB RMB RMB RMB RMB RMB
million million million million million million
------- -------- -------- -------- ------- -------
Balance at January 1, 2005 175,824 143,115 108,834 427,773 15,199 442,972
------- ------- ------- ------- ------ -------
Currency translation
differences -- -- (268) (268) (465) (733)
------- ------- ------- ------- ------ -------
Net loss recognised
directly in equity -- -- (268) (268) (465) (733)
Profit for the year ended
December 31, 2005 -- 133,362 -- 133,362 6,280 139,642
------- ------- ------- ------- ------ -------
Total recognised income/
(loss) for 2005 -- 133,362 (268) 133,094 5,815 138,909
------- ------- ------- ------- ------ -------
Issue of H shares 3,197 -- 16,495 19,692 -- 19,692
Transfer to reserves -- (18,998) 18,998 -- -- --
Final dividends for 2004
(Note 9) -- (25,936) -- (25,936) -- (25,936)
Interim dividends for 2005
(Note 9) -- (27,731) -- (27,731) -- (27,731)
Payment to CNPC for the
acquisition of the
refinery and
petrochemical businesses -- -- (9) (9) -- (9)
Dividends to minority
interest -- -- -- -- (1,568) (1,568)
Return of capital to
minority interest due to
liquidations of
subsidiaries -- -- -- -- (935) (935)
Purchase from minority
interest of listed
subsidiaries -- -- (1,438) (1,438) (581) (2,019)
Other movement in
minority interest -- -- -- -- 242 242
Capital contribution to
CNPC Exploration and
Development Company
Limited -- -- (10,056) (10,056) 10,106 50
------- ------- ------- ------- ------ -------
Balance at December 31,
2005 179,021 203,812 132,556 515,389 28,278 543,667
======= ======= ======= ======= ====== =======
8
Minority Total
Attributable to equity holders of the Company Interest Equity
--------------------------------------------- -------- -------
Share Retained
Capital Earnings Reserves Subtotal
------- -------- -------- --------
RMB RMB RMB RMB RMB RMB
million million million million million million
------- -------- -------- -------- ------- -------
Currency translation
differences -- -- (191) (191) (204) (395)
------- ------- ------- ------- ------ -------
Net loss recognised
directly in equity -- -- (191) (191) (204) (395)
Profit for the year ended
December 31, 2006 -- 142,224 -- 142,224 7,173 149,397
------- ------- ------- ------- ------ -------
Total recognised income/
(loss) for 2006 -- 142,224 (191) 142,033 6,969 149,002
------- ------- ------- ------- ------ -------
Transfer to reserves -- (13,355) 13,355 -- -- --
Final dividends for 2005
(Note 9) -- (32,282) -- (32,282) -- (32,282)
Interim dividends for 2006
(Note 9) -- (36,307) -- (36,307) -- (36,307)
Dividends to minority
interest -- -- -- -- (3,000) (3,000)
Purchase from minority
interest of subsidiaries -- -- (2,156) (2,156) (2,579) (4,735)
Other movement in
minority interest -- -- -- -- (246) (246)
Minority interest paid-in
capital -- -- -- -- 1,492 1,492
------- ------- ------- ------- ------ -------
Balance at December 31,
2006 179,021 264,092 143,564 586,677 30,914 617,591
======= ======= ======= ======= ====== =======
9
9. DIVIDENDS ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
2006 2005
----------- -----------
RMB million RMB million
----------- -----------
Final dividends attributable to equity holders of the Company
for 2004 (Note (i)) -- 25,936
Interim dividends attributable to equity holders of the Company
for 2005 (Note (ii)) -- 27,731
Final dividends attributable to equity holders of the Company
for 2005 (Note (iii)) 32,282 --
Interim dividends attributable to equity holders of the Company
for 2006 (Note (iv)) 36,307 --
------ ------
68,589 53,667
====== ======
(i) Final dividends attributable to equity holders of the Company in
respect of 2004 of RMB0.147511 per share amounting to a total of
RMB25,936 million were paid on June 10, 2005, and were accounted for
in equity as an appropriation of retained earnings in the year ended
December 31, 2005.
(ii) Interim dividends attributable to equity holders of the Company in
respect of 2005 of RMB0.157719 per share amounting to a total of
RMB27,731 million were paid on September 30, 2005, and were accounted
for in equity as an appropriation of retained earnings in the year
ended December 31, 2005.
(iii) Final dividends attributable to equity holders of the Company in
respect of 2005 of RMB0.180325 per share amounting to a total of
RMB32,282 million were paid on June 9, 2006, and were accounted for
in equity as an appropriation of retained earnings in the year ended
December 31, 2006.
(iv) Interim dividends attributable to equity holders of the Company in
respect of 2006 of RMB0.202806 per share amounting to a total of
RMB36,307 million were paid on September 26, 2006 and were accounted
for in equity as an appropriation of retained earnings in the year
ended December 31, 2006.
(v) At the meeting on March 19, 2007, the Board proposed final dividends
attributable to equity holders of the Company in respect of 2006 of
RMB0.154699 per share amounting to a total of RMB27,694 million.
These consolidated financial statements do not reflect this dividend
payable as the final dividends were proposed after the balance sheet
date and will be accounted for in equity as an appropriation of
retained earnings in the year ending December 31, 2007 when approved
at the forthcoming annual general meeting.
10
10. ACCOUNTS RECEIVABLE
December 31, December 31,
2006 2005
------------ ------------
RMB million RMB million
------------ ------------
Accounts receivable due from third parties 9,498 6,483
Accounts receivable due from related parties 2,247 2,145
Less: Provision for impairment of receivables (3,257) (3,998)
------ ------
8,488 4,630
====== ======
Amounts due from related parties are interest free and unsecured.
The aging analysis of accounts receivable at December 31, 2006 and December
31, 2005 is as follows:
December 31, December 31,
2006 2005
------------ ------------
RMB million RMB million
------------ ------------
Within 1 year 8,299 4,280
Between 1 to 2 years 33 70
Between 2 to 3 years 59 46
Over 3 years 3,354 4,232
------ -----
11,745 8,628
====== =====
The Group offers its customers credit terms up to 180 days, except for
certain selected customers.
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31, December 31,
2006 2005
------------ ------------
RMB million RMB million
------------ ------------
Trade payable 22,490 13,749
Advances from customers 9,310 7,698
Salaries and welfare payable 8,844 7,353
Accrued expenses 10 4
Dividends payable by subsidiaries to minority shareholders 60 93
Interest payable 3 27
Construction fee and equipment cost payables 28,349 16,420
One-time employee housing remedial payment payable 933 1,174
Other payables 14,910 12,158
Amounts due to related parties 35,273 41,082
------- ------
120,182 99,758
======= ======
Other payables consist primarily of customer deposits.
Amounts due to related parties are interest-free, unsecured and with no
fixed terms of repayment.
11
The aging analysis of trade payable at December 31, 2006 and December 31,
2005 is as follows:
December 31, December 31,
2006 2005
------------ ------------
RMB million RMB million
------------ ------------
Within 1 year 19,994 12,876
Between 1 to 2 years 1,966 434
Between 2 to 3 years 196 85
Over 3 years 334 354
------ ------
22,490 13,749
====== ======
12. SEGMENT INFORMATION
The Group is engaged in a broad range of petroleum related activities
through its four major business segments: Exploration and Production,
Refining and Marketing, Chemicals and Marketing and Natural Gas and
Pipeline.
The Exploration and Production segment is engaged in the exploration,
development, production and sales of crude oil and natural gas.
The Refining and Marketing segment is engaged in the refining,
transportation, storage and marketing of crude oil and petroleum products.
The Chemicals and Marketing segment is engaged in the production and sale
of basic petrochemical products, derivative petrochemical products, and
other chemical products.
The Natural Gas and Pipeline segment is engaged in the sale of natural gas
and the transmission of natural gas, crude oil and refined products.
In addition to these four major business segments, the Other segment
includes the assets, income and expenses relating to cash management,
financing activities, the corporate center, research and development, and
other business services to the operating business segments of the Group.
Most 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. In addition to its operations in the PRC, the
Group also has overseas operations through subsidiaries engaging in the
exploration and production of crude oil and natural gas.
The accounting policies of the operating segments are the same as the
Group's accounting policies.
12
Operating segment information for the years ended December 31, 2006 and
2005 is presented below:
Primary reporting format -- business segments
Exploration Refining Chemicals Natural
and and and Gas and
Production Marketing Marketing Pipeline Other Total
----------- --------- --------- -------- ------- -------
RMB RMB RMB RMB RMB RMB
Year Ended December 31, 2006 million million million million million million
---------------------------- ----------- --------- --------- -------- ------- -------
Turnover (including
intersegment) 421,340 543,299 82,791 38,917 1,080 1,087,427
Less: Intersegment sales (339,619) (44,806) (7,983) (5,617) (424) (398,449)
-------- ------- ------ ------ ------ ---------
Turnover from external
customers 81,721 498,493 74,808 33,300 656 688,978
======== ======= ====== ====== ====== =========
Depreciation, depletion and
amortisation (37,080) (12,080) (6,417) (5,263) (548) (61,388)
Segment result 232,404 (5,206) 8,208 9,470 (3,058) 241,818
Other costs (12,544) (23,958) (3,150) (484) (3,706) (43,842)
-------- ------- ------ ------ ------ ---------
Profit/(loss) from operations 219,860 (29,164) 5,058 8,986 (6,764) 197,976
======== ======= ====== ====== ====== =========
Exploration Refining Chemicals Natural
and and and Gas and
Production Marketing Marketing Pipeline Other Total
----------- --------- --------- -------- ------- --------
RMB RMB RMB RMB RMB RMB
Year Ended December 31, 2005 million million million million million million
---------------------------- ----------- --------- --------- -------- ------- --------
Turnover (including
intersegment) 337,208 428,494 73,978 26,214 -- 865,894
Less: Intersegment sales (270,943) (33,019) (4,754) (4,949) -- (313,665)
-------- ------- ------ ------ ------ --------
Turnover from external
customers 66,265 395,475 69,224 21,265 -- 552,229
======== ======= ====== ====== ====== =======
Depreciation, depletion and
amortisation (30,896) (8,964) (6,869) (4,478) (98) (51,305)
Segment result 220,452 2,116 6,896 3,639 (1,357) 231,746
Other costs (12,372) (21,926) (3,620) (456) (1,201) (39,575)
-------- ------- ------ ------ ------ --------
Profit/(loss) from operations 208,080 (19,810) 3,276 3,183 (2,558) 192,171
======== ======= ====== ====== ====== =======
Note: Effective January 1, 2006, the results of operations, together with
the corresponding assets and liabilities, of certain research and
development activities of the Group are reclassified from the
Exploration and Production segment, the Refining and Marketing
segment, the Chemicals and Marketing segment and the Natural Gas and
Pipeline segment to the Other segment to reflect the changes in the
manner under which these activities are managed. The results of
operations, together with the corresponding assets and liabilities,
of these research and development
13
activities were included in the previously reported segments in the
segment information for the year ended December 31, 2005. Selected
financial data of these research and development activities for the
year ended December 31, 2005 are as follows:
Exploration Refining Chemicals Natural
and and and Gas and
Production Marketing Marketing Pipeline Total
----------- --------- --------- -------- ---------
RMB RMB RMB RMB RMB
million million million million million
----------- --------- --------- -------- ---------
Turnover (including
intersegment) 543 -- 39 -- 582
Turnover from external
customers 21 -- 29 -- 50
Depreciation, depletion and
amortisation (295) (26) (64) (6) (391)
Segment result (714) (88) (162) (21) (985)
Other costs (664) (96) (81) (42) (883)
Loss from operations (1,378) (184) (243) (63) (1,868)
Secondary reporting format -- geographical segments
Capital
Turnover Total assets expenditures
-------------------- ------------------- ---------------------
Year Ended December 31, 2006 2005 2006 2005 2006 2005
RMB RMB RMB RMB RMB RMB
million million million million million million
------- ------- ------- ------- ------- -------
PRC 665,267 531,520 811,919 717,934 142,371 119,505
Other (Exploration and Production) 23,711 20,709 60,244 60,133 6,375 5,296
------- ------- ------- ------- ------- -------
688,978 552,229 872,163 778,067 148,746 124,801
======= ======= ======= ======= ======= =======
14
13. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP (UNAUDITED)
The consolidated financial statements of the Group appearing in this
announcement have been prepared in accordance with IFRS, which differ in
certain material respects from the accounting principles generally accepted
in the United States of America ("US GAAP'). Such differences involve
methods for measuring the amounts shown in the consolidated financial
statements, as well as additional disclosures required by US GAAP.
Effect on net income of significant differences between IFRS and US GAAP is
as follows:
Year Ended December 31,
------------------------------
2006 2005
----------- -----------
RMB million RMB million
----------- -----------
Profit for the year under IFRS 149,397 139,642
US GAAP adjustments:
Share of profit of jointly controlled entities 2,735 2
Depreciation charges on property, plant and equipment
revaluation gain 3,828 6,528
Depreciation charges on property, plant and equipment
revaluation loss -- (149)
Loss on disposal of revalued property, plant and equipment 287 432
Income tax effect (1,358) (2,248)
Minority interest (8,600) (6,341)
Depreciation charges on property, plant and equipment arising
from purchase from minority interest of subsidiaries (202) --
------- -------
Net income under US GAAP 146,087 137,866
======= =======
Basic and diluted net income per share under US GAAP (RMB) 0.82 0.78
======= =======
15
Effect on equity of significant differences between IFRS and US GAAP is as
follows:
December 31, December 31,
2006 2005
------------ ------------
RMB million RMB million
------------ ------------
Equity under IFRS 617,591 543,667
US GAAP adjustments:
Acquisition of PetroKazakhstan Inc. 22,129 22,129
Share of profit of jointly controlled entities 2,737 2
Deemed distribution to CNPC International Limited (3,044) --
Payment for the acquisition of PetroKazakhstan Inc. (21,376) --
Reversal of property, plant and equipment revaluation gain (80,555) (80,555)
Depreciation charges on property, plant and equipment
revaluation gain 55,799 51,971
Reversal of property, plant and equipment revaluation loss 1,513 1,513
Depreciation charges on property, plant and equipment
revaluation loss (1,459) (1,459)
Loss on disposal of revalued property, plant and equipment 2,033 1,746
Deferred tax assets on revaluation 7,485 8,843
Minority interest (30,953) (39,100)
Effect on the retained earnings from the one-time remedial
payments for staff housing borne by the state shareholder of
the Company (2,553) (2,553)
Effect on the other reserves of the shareholders' equity from the
one-time remedial payments for staff housing borne by the
state shareholder of the Company 2,553 2,553
Purchase from minority interest of subsidiaries 3,594 1,438
Depreciation charges on property, plant and equipment arising
from purchase from minority interest of subsidiaries (202) --
Currency translation differences (822) (54)
------- -------
Shareholders' equity under US GAAP 574,470 510,141
======= =======
16
Changes in shareholders' equity under US GAAP for each of the years ended
December 31, 2006 and 2005 are as follows:
Year Ended December 31,
------------------------------
2006 2005
----------- -----------
RMB million RMB million
----------- -----------
Balance at beginning of year 510,141 405,573
Net income for the year 146,087 137,866
Acquisition of PetroKazakhstan Inc. -- 11,064
Deemed distribution to CNPC International Limited (1,522) --
Payment for the acquisition of PetroKazakhstan Inc. (10,688) --
Final dividends for year 2004 -- (25,936)
Interim dividends for year 2005 -- (27,731)
Final dividends for year 2005 (32,282) --
Interim dividends for year 2006 (36,307) --
Payment to CNPC for acquisition of refinery and petrochemical
businesses -- (9)
Issue of H shares -- 19,692
Capital contribution to CNPC Exploration and Development
Company Limited -- (10,056)
Currency translation differences (959) (322)
------- -------
Balance at end of year 574,470 510,141
======= =======
In preparing the summary of differences between IFRS and US GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the estimates of revenues and expenses.
Accounting estimates have been employed in these consolidated financial
statements to determine reported amounts, including realisability, useful
lives of tangible and intangible assets, income taxes and other factors.
Actual results may differ from those estimates.
A summary of the principal differences and additional disclosures
applicable to the Group is set out below:
(a) Acquisition of PetroKazakhstan Inc.
The Group acquired a 67% equity interest in PetroKazakhstan Inc.
("PKZ") from CNPC International Limited ("CNPCI'), a subsidiary of
China National Petroleum Corporation ("CNPC"), effective on December
28, 2006 for RMB21,376 million.
Pursuant to the shareholders' agreement in relation to the acquisition
of PKZ, each shareholder of PKZ has a veto right relating to certain
financial and operating decisions, and is therefore considered as
having joint control over PKZ. In accordance with the Group's
accounting policy, the Group accounts for its investment in PKZ using
the equity method of accounting under IFRS accounting from December
28, 2006. Under US GAAP accounting, as both CNPCI and the Group are
under common control by CNPC, the acquisition of PKZ has been
accounted for in a manner similar to pooling of interest. Accordingly,
the US GAAP financial data reflects the acquisition of the 67% equity
interest in PKZ since PKZ was first acquired by CNPCI on October 26,
2005.
On December 15, 2006, PKZ paid to CNPCI a dividend amounted to
RMB3,044 million which was recorded as a deemed distribution to CNPCI.
17
The purchase consideration for the acquisition of the 67% equity
interest in PKZ was paid by the Group to CNPCI on December 28, 2006.
(b) Revaluation of property, plant and equipment
The property, plant and equipment, excluding oil and gas reserves,
transferred to the Company by CNPC were appraised during 1999 by a
firm of independent valuers on a depreciated replacement cost basis.
The 1999 revaluation resulted in RMB80,549 million in excess of the
carrying value immediately prior to the revaluation and a revaluation
loss of RMB1,122 million on certain property, plant and equipment.
As at September 30, 2003, a revaluation of the Group's refining and
chemical production equipment was undertaken by a firm of independent
valuers registered in the PRC, China United Assets Appraiser Co., Ltd,
on a depreciated replacement cost basis. The September 2003
revaluation resulted in RMB872 million in excess of the carrying value
immediately prior to the revaluation and a revaluation loss of
RMB1,257 million on certain property, plant and equipment.
As at March 31, 2006, a revaluation of the Group's oil and gas
properties was undertaken by independent valuers, China United Assets
Appraiser Co., Ltd and China Enterprise Appraisals, on a depreciated
replacement cost basis. The revaluation did not result in significant
difference from their carrying value.
The depreciation charge, which includes impairment charge, on the
revaluation surplus from January 1, 2006 to December 31, 2006 was
RMB3,828 million and from January 1, 2005 to December 31, 2005 was
RMB6,528 million respectively.
The depreciation charge, which includes impairment charge, on the
revaluation loss from January 1, 2006 to December 31, 2006 and from
January 1, 2005 to December 31, 2005 was RMB Nil and RMB149 million
respectively.
The loss on disposal of revalued property, plant and equipment from
January 1, 2006 to December 31, 2006 was RMB287 million, and from
January 1, 2005 to December 31, 2005 was RMB432 million which includes
shut down of manufacturing assets.
For purposes of reconciling to the US GAAP financial data, the effect
of the revaluation, the related depreciation charges and loss on
disposal was reversed. A deferred tax asset relating to the reversal
of the effect of revaluation in 1999 was established, together with a
corresponding increase in the equity. Under a special approval granted
by the Ministry of Finance, the effect of the revaluation in 1999 is
available as additional depreciation base for the purposes of
determining taxable income.
(c) One-time remedial payments for staff housing
The Ministry of Finance of the PRC issued several public notices and
regulations during the years ended December 31, 2000 and 2001 with
respect to the one-time remedial payments for staff housing payable to
certain employees who joined the workforce prior to December 31, 1998
and have housing conditions below local standards as determined in
accordance with government regulations and guidelines. These Ministry
of Finance notices and regulations also provided that the portion of
remedial payments attributable to the periods prior to a restructuring
of the employer enterprise from a wholly state-owned status to a less
than wholly state-owned status is to be borne by the state shareholder
of the enterprise.
The restructuring that resulted in the formation of the Group took
place in November 1999. As such, the one-time remedial housing
payments payable to the eligible employees of the Group are to be
borne by the state shareholder of the Company.
18
Under IFRS, such direct payments to employees or reimbursements will
not be recorded through the consolidated profit and loss account of
the Group. US GAAP does not contain such exemption and requires this
principal shareholder's action on behalf of the Company to be recorded
in the consolidated profit and loss account. In the last quarter of
year 2002, the Group and CNPC completed the process of estimating the
amount payable to qualified employees of the Group. This amount,
RMB2,553 million, was reflected in determining net income of the Group
for the year ended December 31, 2002, under US GAAP. Since this amount
was borne by CNPC, a corresponding amount was included as an addition
to the other reserves in the equity of the Group. There were no
significant changes in this estimate during 2005 and 2006.
(d) Minority interest
In accordance with the revised IFRS 1 'Presentation of Financial
Statements" and IAS 27 "Consolidated and Separate Financial
Statements', minority interest becomes part of the profit for the year
and total equity of the Group respectively, whereas under US GAAP, it
is respectively excluded from the net income and equity of the Group.
This reconciling item includes the impact of minority interest's share
of the revaluation gain and loss on the property, plant and equipment
of non-wholly owned subsidiaries and the impact of minority interest
arising from the acquisition of the 67% equity interest in PKZ by a
non-wholly owned subsidiary of the Group to net income and equity
under US GAAP.
(e) Purchase from minority interest of subsidiaries
The Company acquired certain outstanding A shares from the minority
interest of Jinzhou Petrochemical Company Limited ('JPCL') and Liaohe
Jinma Oilfield Company Limited ("LJOCL') and A shares and H shares
(including ADS) from the minority interest of Jilin Chemical
Industrial Company Limited ('JCIC'). Under IFRS, the Company applies a
policy of treating transactions with minority interest as transactions
with equity participants of the Group. Therefore, the assets and
liabilities of JPCL, LJOCL and JCIC additionally acquired by the
Company from minority interest were recorded by the Company at cost.
The difference between the Company's purchase cost and the book value
of the interests in JPCL, LJOCL and JCIC acquired by the Company from
minority interest was recorded in equity. Under US GAAP, the
acquisition of additional minority interest is accounted for under
purchase method. Assets and liabilities additionally acquired were
restated to fair value and the difference of purchase cost over fair
value of the minority interest acquired and identified intangible
assets was recorded as goodwill. Additional depreciation charges were
provided for the assets which were restated to fair value.
(f) Recent US accounting pronouncements
In September 2005, the Emerging Issues Task Force ('EITF') reached
consensus on Issue No. 04-13, 'Accounting for Purchases and Sales of
Inventory with the Same Counterparty" ("EITF 04-13') which requires
two or more inventory purchases and sales transactions with the same
counterparty that are entered into in contemplation of one another
should be combined for purposes of applying Opinion 29, 'Accounting
for Nonmonetary Transactions". The Task Force also agreed that an
entity should disclose the amount of revenue and costs (or gains and
losses) associated with inventory exchanges recognised at fair value.
This Issue should be applied to new arrangements entered into, or
modifications or renegotiations of existing arrangements, beginning in
the first interim or annual reporting period beginning after March 15,
2006 and early application is permitted in periods for which financial
statements have not been issued. The Group did not early adopt EITF
04-13 and does not expect the adoption of EITF 04-13 to have a
material impact on the Group's financial position or results of
operations.
19
In June 2006, EITF issued No. 06-3, 'How Sales Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented
in the Income Statement" ("EITF 06-3"). EITF 06-3 requires disclosure
of the presentation of taxes on either a gross or a net basis as an
accounting policy decision. The provisions of EITF 06-3 are effective
for interim and annual reporting periods beginning after December 15,
2006, and early application is permitted. The Group did not early
adopt EITF 06-3 and does not expect the adoption of EITF 06-3 to have
a material impact on the presentation of the Group's financial
statements.
In July 2006, the Financial Accounting Standards Board ("FASB') issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109" ("FIN 48'). FIN 48
prescribes a comprehensive model for recognising, measuring,
presenting and disclosing in the financial statements uncertain tax
positions that the Group has taken or expects to take in its tax
returns. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006. Earlier adoption is permitted as of
the beginning of an enterprise's fiscal year, provided the enterprise
has not yet issued financial statements, including financial
statements for any interim period, for that fiscal year. The
cumulative effect of applying the provisions of this Interpretation
should be reported as an adjustment to the opening balance of retained
earnings for that fiscal year. The Group is currently evaluating the
impact of adopting FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No.157, 'Fair Value Measurements" ('FAS 157"), which defines
fair value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements. FAS 157 does
not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements. FAS 157 will be effective for fiscal years beginning
after November 15, 2007, and all interim periods within those fiscal
years. Earlier application is permitted if the entity has not issued
interim or annual financial statements for that fiscal year. The Group
is currently evaluating the impact of adopting FAS 157 but does not
expect to have a material effect on the Group's consolidated financial
position and results of operations.
In September 2006, the U.S. Securities and Exchange Commission ('SEC")
released SAB No. 108, 'Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108'). SAB 108 provides interpretive guidance on the
SEC's views on the consideration of effects of prior year
misstatements in quantifying current year misstatements for the
purpose of determining whether the current year's financial statements
are materially misstated. The provisions of SAB 108 are effective for
fiscal years ending after November 15, 2006. The application of SAB
108 did not have any material effect on the Group's consolidated
financial position and results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of the Group and the notes thereto, proposed to be
submitted by the Company to The Stock Exchange of Hong Kong Limited (the 'HKSE')
and published on the website of the HKSE on or before April 30, 2007, which
contains information required under Appendix 16 of the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited (the 'Listing
Rules') applicable to this reporting period.
20
Overview
For the twelve months ended December 31, 2006, profit before taxation of the
Group was RMB199,173 million, representing an increase of 2.8% compared with the
previous year. Net profit was RMB142,224 million, representing an increase of
6.6% compared with the previous year. The performance of the Group has again
reached a record high and the overall competitiveness of the Group was further
enhanced. The Group achieved fruitful results in oil and gas exploration and the
oil and gas output hit another historical high. In relation to the refinery and
petrochemical operations, the Group continues to optimise resource allocation
and has been able to continue to meet market demands. Natural gas and pipeline
operations grew quickly with the construction of major natural gas pipelines.
Development of international operations accelerated, paving the way for gradual
expansion in the scale of the Group's international operations.
For the twelve months ended December 31, 2006, the basic and diluted earnings
per share attributable to equity holders of the Company were RMB0.79 (2005 :
RMB0.75).
Comparison between the twelve months ended December 31, 2006 and the twelve
months ended December 31, 2005
Consolidated Operating Results
Turnover Turnover increased 24.8% from RMB552,229 million for the twelve months
ended December 31, 2005 to RMB688,978 million for the twelve months ended
December 31, 2006. This was primarily due to the increases in the selling prices
and sales volume of major products including crude oil, natural gas and certain
refined products.
Operating Expenses Operating expenses increased 36.4% from RMB360,058 million
for the twelve months ended December 31, 2005 to RMB491,002 million for the
twelve months ended December 31, 2006. This was primarily due to an increase in
the purchase costs of crude oil, feedstock oil and refined products from
external suppliers and an increase in taxes other than income taxes,
depreciation, depletion and amortisation and the employee compensation costs.
Purchases, Services and Other Expenses Purchases, services and other expenses
increased 35.3% from RMB200,321 million for the twelve months ended December 31,
2005 to RMB271,123 million for the twelve months ended December 31, 2006. This
was primarily due to (1) an increase in the purchase prices and purchase volume
of crude oil and feedstock oil from external suppliers that resulted in the
increase in the purchase costs; (2) an increase in the purchase prices and
purchase volume of refined products from external suppliers that resulted in the
increase in the purchase costs; and (3) an increase in the lifting costs of oil
and gas operations and the processing cost of the Group's refineries that
resulted from the increase in prices of raw materials, fuel, energy and other
production materials in the PRC as well as an expansion of the production scale
of the Group. In addition, the increase in the purchase expenses was also
resulted from an increase in the refined product supply operation in 2006.
Employee Compensation Costs Employee compensation costs rose 32.0% from
RMB29,675 million for the twelve months ended December 31, 2005 to RMB39,161
million for the twelve months ended December 31, 2006. This was primarily due to
(1) an increase in the employees' salaries as a result of continuous growth in
the performance of the Group achieved in the twelve months ended December 31,
2006; (2) an increase in the employees' salaries that resulted from the
expansion of the scale of operations and the retail network of the Group; and
(3) a sequential increase in the welfare expenses as a result of an increase in
the salaries.
Exploration Expenses Exploration expenses increased 20.9% from RMB15,566 million
for the twelve months ended December 31, 2005 to RMB18,822 million for the
twelve months ended December 31, 2006. To further boost crude oil and natural
gas resources, the Group undertook more exploration activities for crude oil and
natural gas in the twelve months ended December 31, 2006. There was also an
increase in the expensing of exploratory well costs.
21
Depreciation, Depletion and Amortisation Depreciation, depletion and
amortisation increased 19.7% from RMB51,305 million for the twelve months ended
December 31, 2005 to RMB61,388 million for the twelve months ended December 31,
2006. This was primarily due to an increase in the provision for depreciation,
depletion and amortisation that resulted from an increase in the average amount
of property, plant and equipment and the average net value of oil and gas
properties during 2006.
Selling, General and Administrative Expenses Selling, general and administrative
expenses increased 18.3% from RMB36,538 million for the twelve months ended
December 31, 2005 to RMB43,235 million for the twelve months ended December 31,
2006. This was primarily due to an increase in transportation and other related
costs that resulted from an increase in freights for railway transportation,
rises in marine fuel prices and an increase in the sales volume of refined and
petrochemical products of the Group during the twelve months ended December 31,
2006. In addition, there was an increase in research and development expenses
resulting from intensified technological development efforts in the current
year.
Taxes other than Income Taxes Taxes other than income taxes increased 139.9%
from RMB23,616 million for the twelve months ended December 31, 2005 to
RMB56,666 million for the twelve months ended December 31, 2006. The increase
was primarily due to (1) the imposition by the PRC government of a special levy
on the petroleum exploration enterprises since March 26, 2006 which is payable
on the portion of the income realised from the sale of domestic crude oil prices
exceeding US$40 per barrel; (2) an increase in consumption tax and surcharges as
a result of an increase in the output volume of gasoline and diesel by the
Group's refineries and an expansion of the scope of consumption tax in the PRC
in 2006; and (3) an increase in resource tax resulting from an increase in
resource tax rates by the PRC government in the second half of 2005 and an
increase in the Group's production volume of oil and natural gas.
Profit from Operations As a result of the factors discussed above, profit from
operations increased 3.0% from RMB192,171 million for the twelve months ended
December 31, 2005 to RMB197,976 million for the twelve months ended December 31,
2006.
Net Exchange Gain Net exchange gain decreased 15.9% from RMB88 million for the
twelve months ended December 31, 2005 to RMB74 million for the twelve months
ended December 31, 2006. The decrease in the net exchange gain was primarily due
to a combination effect of the appreciation of Renminbi against both the United
States Dollar and the Japanese Yen and the depreciation in Renminbi against both
the Euro and the Pound Sterling.
Net Interest Expenses Net interest expenses increased 37.7% from RMB838 million
for the twelve months ended December 31, 2005 to RMB1,154 million for the twelve
months ended December 31, 2006. This increase reflects an increase in interest
expenses recognised as a result of the accretion expense in relation to asset
retirement obligations.
Profit Before Taxation Profit before taxation rose by 2.8% from RMB193,822
million for the twelve months ended December 31, 2005 to RMB199,173 million for
the twelve months ended December 31, 2006.
Taxation Taxation decreased 8.1% from RMB54,180 million for the twelve months
ended December 31, 2005 to RMB49,776 million for the twelve months ended
December 31, 2006. The decrease was primarily due to the reversal of temporary
differences (in relation to certain crude oil sales that were exempted from tax
prior to the establishment of the Company in November 1999) that no longer
existed as at December 31, 2006.
Net Profit As a result of the factors discussed above, net profit increased 6.6%
from RMB133,362 million for the twelve months ended December 31, 2005 to
RMB142,224 million for the twelve months ended December 31, 2006.
22
Segment Information
Exploration and Production
Turnover Turnover increased 24.9% from RMB337,208 million for the twelve months
ended December 31, 2005 to RMB421,340 million for the twelve months ended
December 31, 2006. The increase was primarily due to an increase in the prices
and sales volume of crude oil and natural gas. The average realised crude oil
price of the Group in 2006 was US$59.81 per barrel, representing an increase of
US$11.44 per barrel or 23.7% from US$48.37 per barrel compared with the previous
year.
Intersegment sales revenue increased 25.3% from RMB270,943 million for the
twelve months ended December 31, 2005 to RMB339,619 million for the twelve
months ended December 31, 2006. The increase was mainly due to an increase in
the prices of crude oil and natural gas and an increase in the intersegment
sales volume.
Operating Expenses Operating expenses increased 56.0% from RMB129,128 million
for the twelve months ended December 31, 2005 to RMB201,480 million for the
twelve months ended December 31, 2006. The increase was primarily due to
increases in taxes other than income taxes, purchase expenses and depreciation,
depletion and amoritsation.
Profit from Operations Profit from operations increased 5.7% from RMB208,080
million for the twelve months ended December 31, 2005 to RMB219,860 million for
the twelve months ended December 31, 2006.
Refining and Marketing
Turnover Turnover rose 26.8% from RMB428,494 million for the twelve months ended
December 31, 2005 to RMB543,299 million for the twelve months ended December 31,
2006. The increase was due to an increase in the selling prices and the sales
volume of key products, of which:
Sales revenue from gasoline increased 9.4% from RMB110,438 million for the
twelve months ended December 31, 2005 to RMB120,771 million for the twelve
months ended December 31, 2006. The average realised selling price of gasoline
surged 19.3% from RMB4,221 per ton for the twelve months ended December 31, 2005
to RMB5,034 per ton for the twelve months ended December 31, 2006, resulting in
an increase in revenue by RMB19,504 million. The sales volume of gasoline
decreased 8.3% from 26.16 million tons for the twelve months ended December 31,
2005 to 23.99 million tons for the twelve months ended December 31, 2006,
resulting in a decrease in revenue by RMB9,171 million.
Sales revenue from diesel increased 21.7% from RMB176,999 million for the twelve
months ended December 31, 2005 to RMB215,459 million for the twelve months ended
December 31, 2006. The average realised selling price of diesel increased 19.1%
from RMB3,702 per ton for the twelve months ended December 31, 2005 to RMB4,409
per ton for the twelve months ended December 31, 2006, resulting in an increase
in revenue by RMB34,544 million. The sales volume of diesel increased 2.2% from
47.81 million tons for the twelve months ended December 31, 2005 to 48.86
million tons for the twelve months ended December 31, 2006, resulting in an
increase in revenue by RMB3,916 million.
Sales revenue from kerosene increased 23.2% from RMB7,480 million for the twelve
months ended December 31, 2005 to RMB9,219 million for the twelve months ended
December 31, 2006.
Intersegment sales revenue increased 35.7% from RMB33,019 million for the twelve
months ended December 31, 2005 to RMB44,806 million for the twelve months ended
December 31, 2006. The increase was primarily due to a rise in the selling
prices of key refined products and changes in their sales volume.
Operating Expenses Operating expenses increased 27.7% from RMB448,304 million
for the twelve months ended December 31, 2005 to RMB572,463 million for the
twelve months ended December 31, 2006. The increase was primarily due to an
increase in the purchase costs of crude oil, feedstock oil and
23
refined products from external suppliers, and an increase in the selling,
general and administrative expenses. In addition, the increase in the operating
expenses also resulted from an increase in the level of refined product supply
operations in 2006.
Loss from Operations Loss from operations amounted to RMB29,164 million for the
twelve months ended December 31, 2006, compared to loss from operations amounted
to RMB19,810 million for the twelve months ended December 31, 2005. The increase
in the loss primarily resulted from the domestic prices of refined products in
the PRC not being in line with that of the international market. Meanwhile, the
purchase cost of crude oil and the processing cost of the Group's refineries
increased resulting from the rises in international crude oil prices and other
production materials.
Chemicals and Marketing
Turnover Turnover rose 11.9% from RMB73,978 million for the twelve months ended
December 31, 2005 to RMB82,791 million for the twelve months ended December 31,
2006. The growth in turnover was primarily due to an increase in the sales
volume and selling prices of certain chemical products.
Operating Expenses Operating expenses increased 9.9% from RMB70,702 million for
the twelve months ended December 31, 2005 to RMB77,733 million for the twelve
months ended December 31, 2006. The increase was primarily due to an increase in
the purchase costs for direct materials.
Profit from Operations Profit from operations increased 54.4% from RMB3,276
million for the twelve months ended December 31, 2005 to RMB5,058 million for
the twelve months ended December 31, 2006.
Natural Gas and Pipeline
Turnover Turnover increased 48.5% from RMB26,214 million for the twelve months
ended December 31, 2005 to RMB38,917 million for the twelve months ended
December 31, 2006. The increase was primarily due to an increase in the sales
volume and selling prices of natural gas, and an increase in the volume of
natural gas from pipeline transmission and the average price for pipeline
transmission of natural gas.
Operating Expenses Operating expenses increased 30.0% from RMB23,031 million for
the twelve months ended December 31, 2005 to RMB29,931 million for the twelve
months ended December 31, 2006. The increase was primarily due to an increase in
the purchase costs of natural gas and an increase in depreciation charges.
Profit from Operations Profit from operations increased 182.3% from RMB3,183
million for the twelve months ended December 31, 2005 to RMB8,986 million for
the twelve months ended December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
For the twelve months ended December 31, 2006, the Group's primary sources of
funds were cash generated from operating activities, and short-term and
long-term borrowings. The Group's funds were primarily used for operating
activities, capital expenditures, a major acquisition, repayment of short-term
and long-term borrowings and distribution of dividends to equity holders of the
Company.
As at December 31, 2006, short-term borrowings made up approximately 5.2% of the
Group's capital employed as compared with approximately 4.7% as at December 31,
2005. The Group's ability to obtain adequate financing may be affected by the
financial position, the operating results and the conditions of the domestic and
foreign capital markets. The Group must seek approvals from the relevant PRC
government authorities before raising capital in the domestic and foreign
capital markets. In general, the Group must obtain the PRC government's
approvals for any project involving significant capital investments in the
Refining and Marketing segment, the Chemicals and Marketing segment and the
Natural Gas and Pipeline segment.
The Group plans to fund its capital expenditures and related investments
principally from cash flows generated from operating activities and short-term
and long-term borrowings. For the twelve months ended December 31, 2006, net
cash flows generated from operating activities was RMB198,102 million. As at
24
December 31, 2006, the Group had RMB48,559 million in cash and cash equivalents.
Cash and cash equivalents were primarily denominated in Renminbi (with Renminbi
and United States Dollar accounting for approximately 82.5% and 17.5%,
respectively).
The table below sets forth the cash flows of the Group for the twelve months
ended December 31, 2006 and 2005, respectively and the amounts of cash and cash
equivalents as at the end of each year.
Year Ended December 31,
---------------------------
2006 2005
----------- -----------
RMB million RMB million
----------- -----------
Net cash flows from operating activities 198,102 203,885
Net cash flows used for investing activities (158,451) (91,576)
Net cash flows used for financing activities (71,739) (42,634)
Currency translation differences (258) (458)
Cash and cash equivalents as at the end of year 48,559 80,905
Cash Flows from Operating Activities
The net cash flows of the Group generated from operating activities for the
twelve months ended December 31, 2006 was RMB198,102 million, representing a
decrease of 2.8% compared with RMB203,885 million generated for the twelve
months ended December 31, 2005. This decrease was primarily due to the cash
flows generated from the increased profits during 2006 being offset by the
increased cash outflows resulted from the reduction in working capital related
to the operating activities of the Group during 2006 and the increase in the
income tax payments.
For the twelve months ended December 31, 2006, the Group had current liabilities
in excess of current assets of RMB17,657 million compared with the net current
assets of RMB22,057 million for the twelve months ended December 31, 2005. The
change was primarily due to the payment of approximately RMB21,376 million for
the acquisition of a 67% equity interest in PKZ on December 28, 2006 and an
increase in the amounts of dividends paid in the twelve months ended December
31, 2006.
Cash Flows Used for Financing Activities
The net borrowings of the Group as at December 31, 2006 and December 31, 2005,
respectively, are as follows:
As at December 31,
----------------------------------
2006 2005
----------- -----------
RMB million RMB million
----------- -----------
Short-term borrowings (including current portion
of long-term borrowings) 35,763 28,689
Long-term borrowings 35,634 44,570
------- -------
Total borrowings 71,397 73,259
------- -------
Less: Cash and cash equivalents (48,559) (80,905)
------- -------
Net borrowings 22,838 (7,646)
======= =======
25
Maturities of long-term borrowings of the Group are as follows:
Principal as at Principal as at
December 31, December 31,
2006 2005
--------------- ---------------
RMB million RMB million
--------------- ---------------
To be repaid within one year 20,607 15,325
To be repaid within one to two years 11,797 18,373
To be repaid within two to five years 10,449 14,942
To be repaid after five years 13,388 11,255
------ ------
56,241 59,895
====== ======
Of the total borrowings of the Group as at December 31, 2006, approximately
29.3% were fixed-rate loans and approximately 70.7% were floating-rate loans. Of
the borrowings as at December 31, 2006, approximately 74.0% were denominated in
Renminbi, approximately 24.8% were denominated in United States Dollar,
approximately 0.6% were denominated in Singapore Dollar, approximately 0.4% were
denominated in Euro, approximately 0.1% were denominated in Pound Sterling and
approximately 0.1% were denominated in Japanese Yen.
As at December 31, 2006, the amount of borrowings owed by the Group to China
Petroleum Finance Company Limited ("CP Finance') was RMB27,184 million, the
amount of borrowings owed to state-owned banks and other state-owned
non-banking financial institutions was RMB32,810 million and the amount of
borrowings owed to other related parties was RMB5 million.
As at December 31, 2006, the amounts of short-term and long-term borrowings owed
by the Group to CP Finance were RMB320 million and RMB26,864 million,
respectively.
The net cash flows used for financing activities of the Group for the twelve
months ended December 31, 2006 increased 68.3% compared with that for the twelve
months ended December 31, 2005. The increase was primarily due to an increase in
dividend payments to shareholders of the Company as compared with last year, and
also due to the fact that while the Group raised RMB19,692 million through the
new issue of H shares in 2005, there was no similar financing activities in the
reporting period.
As at December 31, 2006, borrowings of the Group included secured loans (bank
borrowings) totaling RMB359 million (RMB1,108 million as at December 31, 2005).
These bank borrowings are secured mostly over certain of the Group's properties
and time deposits with maturities over one year.
As at December 31, 2006, the gearing ratio of the Group (gearing ratio =
interest-bearing debts/(interest-bearing debts + total equity)) was 10.4%
(11.9% as at December 31, 2005).
26
Capital Expenditures
The table below sets out our capital expenditures by business segments for the
twelve months ended December 31, 2006, the twelve months ended December 31, 2005
and the estimates for 2007 respectively. For the twelve months ended December
31, 2006, capital expenditures of the Group increased 19.2% to RMB148,746
million from RMB124,801 million for the twelve months ended December 31, 2005.
The increase in capital expenditures was primarily due to an increase in
expenditures relating to crude oil and natural gas exploration and exploitation,
development of major petrochemical projects and implementation of safety and
environmental protection in 2006 as well as increases in the prices of steel,
fuel oil, water, electricity and other production materials.
Year Ended December 31,
---------------------------------------------------- Estimates for
2006 2005 2007
----------------------- ---------------------- -----------------------
RMB RMB RMB
million % million % million %
------- ----- ------- ----- ------- -----
Exploration and Production 105,192* 70.72 83,214* 66.68 115,200* 62.04
Refining and Marketing 19,206 12.91 16,454 13.18 28,000 15.08
Chemicals and Marketing 10,681 7.18 13,569 10.87 16,000 8.62
Natural Gas and Pipeline 11,309 7.60 11,137 8.92 18,000 9.69
Other 2,358 1.59 427 0.35 8,500 4.57
------- ----- ------- ----- ------- -----
Total 148,746 100 124,801 100 185,700 100
======= ===== ======= ===== ======= =====
* If investments related to geological and geophysical exploration costs were
included, the capital expenditures and investments for the Exploration and
Production segment for 2005 and 2006, and the estimates for the same in
2007 would be RMB92,233 million, RMB114,520 million and RMB127,200 million,
respectively.
Exploration and Production
The majority of the Group's capital expenditures were related to the Exploration
and Production segment. For the twelve months ended December 31, 2006, capital
expenditures in relation to the Exploration and Production segment amounted to
RMB105,192 million, including RMB20,481 million for exploration activities and
RMB75,050 million for development activities. For the twelve months ended
December 31, 2005, capital expenditures in relation to this segment totaled
RMB83,214 million, including RMB16,499 million for exploration activities and
RMB59,113 million for development activities. The increase in capital
expenditures was primarily due to an increase in expenditures relating to oil
and gas exploration and exploitation which reflects the Group's goal to
stabilise the production of crude oil in eastern China, rapidly develop its
business in western China and accelerate the development of natural gas
business. In addition, the Group also increased the capital expenditures in
relation to the safety and environmental protection for this segment in 2006.
The Group anticipates that capital expenditures for the Exploration and
Production segment for the twelve months ending December 31, 2007 will amount to
RMB115,200 million. Approximately RMB20,000 million will be used for oil and gas
exploration, and RMB95,200 million will be used for oil and gas exploitation.
Exploration and exploitation activities will be mainly carried out in basins
including the Erdos, Junggar, Tarim, Songliao, Sichuan, Bohai Bay and Chaidamu
basins.
Refining and Marketing
Capital expenditures for the Group's Refining and Marketing segment for the
twelve months ended December 31, 2006 amounted to RMB19,206 million, of which
RMB4,923 million was used in the expansion of the retail sales network of
refined products and storage infrastructure facilities for oil products, and
RMB10,923 million was used in the construction and expansion of refining
facilities. The
27
total capital expenditures of this segment for the twelve months ended December
31, 2005 were RMB16,454 million. The increase in these capital expenditures was
primarily due to the construction and expansion of refining facilities. In
addition, the Group also increased the capital expenditures in relation to the
safety and environmental protection for this segment in 2006.
The Group anticipates that capital expenditures for the Refining and Marketing
segment for the twelve months ending December 31, 2007 will amount to RMB28,000
million, which shall include approximately RMB20,000 million for construction
and expansion of refining facilities and approximately RMB8,000 million for
investments in the expansion of the sales network for refined products.
Chemicals and Marketing
Capital expenditures for the Chemicals and Marketing segment for the twelve
months ended December 31, 2006 and 2005 amounted to RMB10,681 million and
RMB13,569 million, respectively. The decrease was primarily due to a decrease in
the investments during the year as a result of the completion of the ethylene
expansion projects in Jilin Petrochemical and Lanzhou Petrochemical which
commenced operations in 2006.
The Group anticipates that capital expenditures for the Chemicals and Marketing
segment for the twelve months ending December 31, 2007 will amount to RMB16,000
million, which are expected to be used primarily for the construction of the
ethylene facilities in Dushanzi Petrochemical and Fushun Petrochemical.
Natural Gas and Pipeline
Capital expenditures in the Natural Gas and Pipeline segment for the twelve
months ended December 31, 2006 amounted to RMB11,309 million. The Group incurred
RMB10,216 million of these expenditures on the construction of long distance
pipelines, of which RMB6,334 million were incured on the West-East Gas Pipeline
project. For the twelve months ended December 31, 2005, capital expenditures in
this segment was RMB11,137 million. The amount of capital expenditures incurred
in 2006 was substantially similar to that incurred in 2005.
The Group anticipates that capital expenditures for the Natural Gas and Pipeline
segment for the twelve months ending December 31, 2007 will amount to RMB18,000
million, which are expected to be used primarily for increasing transmission
capacity by the West-East Gas Pipeline project and for construction of
underground natural gas storage facilities and pipelines for crude oil and
refined products.
Other
Capital expenditures for Other segment (including research and development
activities) for the twelve months ended December 31, 2006 and for the twelve
months ended December 31, 2005 were RMB2,358 million and RMB427 million,
respectively. The increase in capital expenditure was mainly attributable to the
inclusion of capital expenditures for certain research and development
activities under the Other segment with effect from January 1, 2006 as opposed
to the reporting of such capital expenditures under the Exploration and
Production segment, the Refining and Marketing segment, the Chemicals and
Marketing segment and the Natural Gas and Pipeline segment in previous years.
The Group anticipates that capital expenditures for Other segment for the twelve
months ending December 31, 2007 will amount to approximately RMB8,500 million,
which are expected to be used primarily for research and development activities
and for construction of ERP and other information systems.
Material Investment
The Group did not hold any material external investment for the year ended
December 31, 2006.
28
Material Acquisitions or Disposals
On December 28, 2006, the Group acquired a 67% equity interest in PKZ from
CNPCI, a subsidiary of CNPC for a consideration of RMB21,376 million. Pursuant
to the shareholders' agreement in relation to the acquisition of PKZ, each
shareholder of PKZ has a veto right relating to certain financial and operating
decisions, and is therefore considered as having joint control over PKZ. In
accordance with the Group's accounting policy, the Group accounts for its
investment in PKZ, using the equity method of accounting from December 28, 2006.
Events after the Balance Sheet Date
On March 16, 2007, the corporate income tax law was passed at the Fifth Session
of Tenth National People's Congress of PRC whereby all enterprises with
operations in the PRC will be subject to the same statutory income tax rate. The
Group will evaluate the impact of the new tax law on the operating results and
the financial position of the Group when the new tax law is implemented.
Foreign Exchange Rate Risk
From July 21, 2005, the PRC government reformed the Renminbi exchange rate
regime and implemented a regulated floating exchange rate regime based on market
supply and demand with reference to a basket of currencies. However, Renminbi is
still regulated in capital projects. The exchange rates of Renminbi are affected
by domestic and international economic developments and political changes, and
supply and demand for Renminbi. Future exchange rates of Renminbi against other
currencies could vary significantly from the current exchange rates. As Renminbi
is the functional currency of the Company and most of its consolidated
subsidiaries, the fluctuation of the exchange rate of Renminbi may have positive
or negative impacts on the results of operations of the Group. An appreciation
of Renminbi against United States Dollar may decrease the Group's turnover, but
the cost for acquiring imported materials and equipment may be reduced. A
devaluation of Renminbi against United States Dollar may not have a negative
impact on the Group's turnover but may increase the cost for acquiring imported
materials and equipment as well as the debt obligations denominated in foreign
currencies of the Group.
Commodity Price Risk
The Group is engaged in a wide range of petroleum-related activities. The oil
and gas markets are affected by global and regional demands and supplies. Prices
of onshore crude oil are determined with reference to the prices of crude oil on
the international markets. A decline in the prices of crude oil and refined
products could adversely affect the Group's financial position. The Group
historically has not used commodity derivative instruments to hedge against
potential price fluctuations of crude oil and refined products. Therefore, the
Group is exposed to general price fluctuations of oil and gas commodities in
2007 and thereafter.
Industry Risk
Like other oil and gas companies in China, the Group's operating activities are
subject to regulation and control by the PRC government in many aspects. This
regulation and control, such as by way of grant of exploration and production
licences, the imposition of industry-specific taxes and levies and the
implementation of environmental and safety standards etc., is expected to have
an impact on the Group's operating activities. As a result, the Group may be
subject to fairly significant restrictions when implementing its business
strategy, developing and expanding its business or maximising its profitability.
Any future changes in the PRC governmental policies on the oil and gas industry
may also affect the Group's business operations.
29
Employees and Employee Compensation
Number of employees
As at December 31, 2006 and December 31, 2005, the Group had 446,290 and 439,220
employees, respectively (excluding temporary staff). The table below sets out
the number of employees by business segment as at December 31, 2006 :
Number of Percentage of
Employees total (%)
--------- -------------
Exploration and Production 247,442 55.44
Refining and Marketing 118,504 26.55
Chemicals and Marketing 61,152 13.70
Natural Gas and Pipeline 15,496 3.47
Other* 3,696 0.84
------- -----
Total 446,290 100
======= =====
* "Other" includes staff of the Company's headquarters, specialised
subsidiaries, Exploration & Development Research Institute, Planning &
Engineering Institute, Petrochemical Research Institute and other units.
Employee Compensation
The total employee compensation payable by the Group for the twelve months ended
December 31, 2006 was RMB26,629 million, being the total salaries of employees
during the reporting period. Compensation of employees is determined according
to industry practice and actual conditions of the Group, and is based on the
principles of attracting and retaining high-calibre personnel, and motivating
all staff for the realisation of best results.
The Company's senior management remuneration system links senior management
financial interests (including those of executive directors and supervisors)
with the Group's results of operations and the market performance of its shares.
All members of the senior management have entered into performance contracts
with the Company. Under this system, the senior management members' compensation
has three components, namely, fixed salaries, performance bonuses and stock
appreciation rights. The variable components in their compensation account for
approximately 70% to 75% of the senior management officers' total potential
compensation, including approximately 0% to 25% forming the performance bonus
component and approximately 50% to 70% forming the stock appreciation rights
component. Variable compensation rewards are linked to the attainment of
specific performance targets, such as net profit, return on capital and cost
reduction targets. The chart below sets forth the components of the total
potential compensation for key officers:
Stock appreciation Performance
Basic salary (%) rights (%) bonus (%)
---------------- ------------------ -----------
Chairman 30 70 0
President 25 60 15
Vice Presidents 25 60 15
Department General Managers 25 50 25
Details of the directors' and supervisors' emoluments for the twelve months
ended December 31, 2006 and December 31, 2005 were as follows (for remuneration
for each of the directors and supervisors on a named basis, please see the
consolidated financial statements of the Group and notes proposed to be
submitted to the HKSE and published on the website of the HKSE on or before
April 30, 2007):
30
2006 2005
------- -------
RMB'000 RMB'000
------- -------
Subsidies for directors and supervisors 1,473 897
Salaries, allowances and other benefits 3,937 4,031
Contribution to retirement benefit scheme 165 57
----- -----
5,575 4,985
===== =====
The number of directors and supervisors whose emoluments fall within the
following band (including directors and supervisors whose term expired during
the year):
2006 2005
------ ------
Number Number
------ ------
RMB Nil--RMB1,000,000 20 25
== ==
Upon exercise of their stock options, members of the senior management will not
receive any shares in the Company, but will, by way of stock appreciation
rights, receive a monetary sum which is calculated on the basis of the share
price of the H shares listed on the HKSE.
Training Programmes
The training programmes of the Company for 2006 have been geared towards
achieving the development strategy and operating objectives of the Company. In
line with the strategic requirement for "a strong corporation with highly
talented personnel", the Company has targeted senior management officers, senior
professional and technical staff and highly skilled staff in its training
programme with a focus on the training of the "core" and 'backbone" personnel
and strived to build a proficient operating and management team, a technology
innovation team and a skilful operators' team to ensure the supply of talents
required for the continuous, stable and co-ordinated rapid development of the
Company.
Medical Insurance
Since October 1, 2002, the Company's headquarters and its regional branches
based in Beijing have joined the basic medical insurance scheme organised by the
Beijing Municipality, making contributions at 9% of the total basic salaries of
the employees. Other local subsidiaries and branches of the Group have also
participated in their respective local basic medical insurance schemes.
As basic medical insurance is organised by local authorities, the dates of
implementation, rates of contribution and reimbursement methods vary with the
localities. The rate of contribution is generally set at 6% to 10% of the total
basic salaries of the employees.
In accordance with the relevant regulations of the PRC government, the Group has
given permission to local subsidiaries and branches which have participated in
local basic insurance schemes to establish a supplemental medical insurance
scheme from 2002. Contributions to the schemes are set at no more than 4% of the
total salaries and will be booked as cost.
31
CONTINGENT LIABILITIES
Information on the Group's contingent liabilities as at December 31, 2006 is as
follows:
Bank and other guarantees
At December 31, 2006, the Group had contingent liabilities in respect of
guarantees made to CP Finance, a subsidiary of CNPC, and a State-controlled bank
from which it is anticipated that no material liabilities will arise.
December 31, December 31,
2006 2005
------------ ------------
RMB million RMB million
------------ ------------
Guarantee of borrowings of associates from CP Finance 162 187
Guarantee of borrowings of third party from a State-controlled bank 41 --
--- ---
203 187
=== ===
Environmental liabilities
CNPC and the Group have operated in China for many years. China has adopted
extensive environmental laws and regulations that affect the operation of the
oil and gas industry. The 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, except for the amounts which have already
been reflected in the financial statements, that will have a material adverse
effect on the financial position of the Group.
Legal contingencies
The Group is the named defendant in certain insignificant lawsuits as well as
the named party in other proceedings arising in the ordinary course of business.
While the outcome of such contingencies, lawsuits or other proceedings cannot be
determined at present, the management of the Group believes that any resulting
liabilities will not have a material adverse effect on the financial position of
the Group.
Leasing of roads, land and buildings
According to the Restructuring Agreement entered into between the Company and
CNPC in 1999 upon the formation of the Company, CNPC has undertaken to the
Company the following:
- CNPC will use its best endeavours to obtain formal land use right
certificates to replace the entitlement certificates in relation to the
28,649 parcels of land which were leased or transferred to the Company from
CNPC, within one year from August, September and October 1999 when the
relevant entitlement certificates were issued;
- CNPC will complete, within one year from November 5, 1999, the necessary
governmental procedures for the requisition of collectively-owned land on
which 116 service stations owned by the Company are located; and
- CNPC will obtain individual building ownership certificates in the name of
the Company for all of the 57,482 buildings transferred to the Company by
CNPC, before November 5, 2000.
As at December 31, 2006, CNPC had obtained formal land use right certificates in
relation to 27,494 out of the above-mentioned 28,649 parcels of land, some
building ownership certificates for the above-mentioned buildings, but has
completed none of the necessary governmental procedures for the above-mentioned
32
service stations located on collectively-owned land. The Directors of the
Company confirm that the use of and the conduct of the relevant activities at
the above-mentioned parcels of land, service stations and buildings are not
affected by the fact that the relevant land use right certificates or individual
building ownership certificates have not been obtained or the fact that the
relevant governmental procedures have not been completed. In the management's
opinion, the outcome of the above events will not have a material adverse effect
on the operating results or the financial position of the Group.
Group insurance
Except for limited insurance coverage for vehicles and certain assets subject to
significant operating risks, the Group does not carry any other insurance for
property, facilities or equipment with respect to 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 effect of under-insurance on future incidents cannot be
reasonably assessed at present, management believes that it may have a material
impact on the operating results but will not have a material adverse effect on
the financial position of the Group.
Other
On November 13, 2005, explosions occurred at a manufacturing facility of a
branch of the Company located in the Jilin Province. The investigation into the
accident was completed by the PRC government in December 2006. Based on the
results of the investigation, the Company paid a fine of RMB1 million in
settlement of all liabilities related to the accident.
MARKET REVIEW
Crude Oil Market Review
In 2006, there was a huge oil demand but limited increase in oil supply in the
international market. International crude oil prices continued to soar and hit
record high in the course of the year as a result of factors such as limitation
in the oil refining capacity and instabilities in certain oil producing
countries. The annual average prices for WTI, Brent and Minas crude oil were
US$66.04, US$65.15 and US$65.24 per barrel, respectively, representing an
increase of US$9.45, US$10.62 and US$11.05 per barrel, respectively, over the
annual average prices in 2005. Corresponding to the rise in international oil
prices, domestic crude oil prices also increased. The average realised price for
domestic crude oil in 2006 was higher than that of 2005.
Net domestic crude oil imports continued to increase in 2006 by 16.8% to a net
total of 139 million tons compared with the previous year. Domestic crude oil
output and the amount of crude oil processed reached 184 million tons and 288
million tons, respectively.
Refined Products Market Review
International oil product prices rocketed and maintained at a high level
throughout 2006. Domestic refined product prices, however, are not in line with
the prices in the international market. Refineries incurred heavy losses in
processing. There was a drastic reduction in resources supplied by local
refineries. In 2006, transportation of refined products was affected by tight
transportation capacity. Overall, there was a tight supply of refined products,
a balance in the demand and supply of gasoline, and a rather tight supply of
diesel in 2006, and there was a strong pressure for steady supply in the market.
Production resumed in local refineries in the fourth quarter as international
oil prices dropped. As a result, local refineries resumed production and the
tight supply of resources was slightly alleviated. Nominal consumption increased
by 6.1% to 174.40 million tons.
33
Chemical Products Market Review
The PRC economy maintained steady and moderate growth in 2006 with a growth on
the GDP by 10.7%. The growth of the PRC economy has created a constant source of
demand for energy. The domestic demand for chemical products remains buoyant.
Notwithstanding an increase in the production of petrochemical products in 2006
from CNOOC-Shell petrochemical project that commenced production during the
year, Jilin Petrochemical Company commenced production of HDPE, Maoming
Petrochemical Company commenced production of polypropylene and Daqing Refinery
commenced production of polypropylene, the level of increase of petrochemical
products was moderate and limited due to factors such as inspection and
maintenance of production facilities and unscheduled shut down of production
facilities. The overall market condition favours petrochemical products
suppliers. Prices of petrochemical products remained high and certain
petrochemical products hit new record highs under surging crude oil prices. At
the same time, surging crude oil prices throughout the year has increased the
cost of raw materials for petrochemical products. As a result, the cost of
production of petrochemical products increased remarkably in 2006.
Natural Gas Market Review
At the end of 2005, the PRC government introduced a new pricing regulation for
natural gas and increased the ex-factory price of natural gas. To a certain
extent, this measure tempered the runaway increase in the demand for natural
gas. In 2006, domestic supply of natural gas failed to meet demand.
BUSINESS REVIEW
For the twelve months ended December 31, 2006, total crude oil and natural gas
output of the Group was 1,059.4 million barrels of oil equivalent, including
830.7 million barrels of crude oil and 1,371.9 billion cubic feet of marketable
natural gas, representing an average daily output of 2.28 million barrels of
crude oil and 3,760 million cubic feet of marketable natural gas. A total of
832.80 million barrels of crude oil and 1,357.0 billion cubic feet of natural
gas were sold. The Group sold approximately 83% of the crude oil to its
refineries. In 2006, the lifting cost for the oil and gas operations of the
Group was US$6.74 per barrel, representing an increase of 27.7% from US$5.28 per
barrel in 2005. There were two main reasons for the increase in oil and gas
operating costs. Firstly, the Group sped up the utilisation of reserves that
were difficult to explore and undertook more risky operations, leveraging on the
opportunity presented by high crude oil prices. This had led to an increase in
unit lifting cost. Secondly, the expansion of production scale, the increases in
the prices of raw material, electricity and employees' salaries led to an
increase in operating cost, maintenance cost and staff cost. In addition,
fluctuation in exchange rates exerted great impact on the increase of unit
lifting cost during 2006.
For the twelve months ended December 31, 2006, the Group's refineries processed
785 million barrels of crude oil, representing an average of 2.15 million
barrels per day. Approximately 82% of the crude oil processed in the Group's
refineries was supplied by the Exploration and Production segment. The Group
produced approximately 68.32 million tons of gasoline, diesel and kerosene and
sold approximately 74.90 million tons of these products. The Group actively
expanded its sales and distribution networks, in particular the retail sales
network, by capitalising on the complementary value-added effect of the
integration of refining and marketing. As at December 31, 2006, there were
18,207 units of service stations which were either owned, controlled or
franchised by the Group or owned by CNPC but to which the Group provided
supervisory support. The cash processing cost of the Group's refineries
increased from RMB145 per ton to RMB169 per ton.
For the twelve months ended December 31, 2006, the Group produced 2.068 million
tons of ethylene, 3.061 million tons of synthetic resin, 1.232 million tons of
synthetic fiber raw materials and polymer, 0.312 million tons of synthetic
rubber and 3.576 million tons of urea.
34
For the twelve months ended December 31, 2006, the Group sold 1,200.5 billion
cubic feet of marketable natural gas through the Natural Gas and Pipeline
segment. The Group currently owns and operates 20,590 kilometres of regional
natural gas pipeline networks, of which 19,662 kilometres are operated by the
Natural Gas and Pipeline segment. For the twelve months ended December 31, 2006,
the Group owned and operated 9,620 kilometres of crude oil pipeline and 2,413
kilometres of pipeline for refined products.
STANDARDISED OPERATIONS AND BUSINESS PROSPECTS
The Company strictly abides by the laws and regulations of its respective places
of listing and operates prudently and steadily and manages in an efficient
manner within the regulatory framework.
The Group achieved fruitful results in oil and gas exploration and the oil and
gas output reached another historical high. The Group achieved significant
results in exploration of proven geological oil reserves and three-level natural
gas reserves. The oil reserve replacement ratio remained at more than one.
Comprehensive measures were implemented in oil and gas development by enhancing
the recovery rate of mature oilfields and effectively controlling natural
decline and overall decline and the rate of increase of water level. At the same
time, the foundation for steady and increased production was reinforced by
accelerating the increase of production capacity at new oilfields. Crude oil
output set a new record high. Natural gas output grew rapidly. In 2006, output
of marketable natural gas reached 1,371.9 billion cubic feet, representing an
increase of 2.7 times from that of 2000.
The Group achieved efficiency and stability in its refining operations and
continued to increase allocation of resources in this segment. Facing the
growing demand in the market, the Group overcame insufficient processing
capacity in the refining operations, adversities caused by the gap between the
prices on domestic refined products and crude oil, onerous inspection and
maintenance responsibilities and other difficulties by optimising the allocation
of resources and achieving full and steady production capacity at the principal
facilities. The processing load rate of refining facilities hit a historical
high. Key technical and economic indicators were further improved. The Group
maintained its leading position in the production utilisation output of chemical
ethylene in the domestic market. In the marketing of refined products and
chemical products, market analysis and forecast was enhanced. Production,
transportation and distribution were better co-ordinated. Allocation of
resources was improved. Sales were responsive to market demands. The marketing
network was further improved. As a result, stable supply in the market was
achieved.
Constructions of key projects are proceeded on schedule with certain projects
commenced commercial operation as planned. The construction of key projects for
the refinery and petrochemical segments progressed in an orderly manner, easing
off the inadequacy in processing capability in oil refining. The Group's
ethylene production capability was strengthened and the scale of production was
further expanded. The Group made smooth progress in the construction of oil and
gas pipelines. The China-Kazakhstan Pipeline, the refined oil pipeline in
western China, the Ji-Ning Connection Line and the Huai-Wu Connection Line were
completed and came into operation. Construction of the trunk line of the crude
oil pipeline in western China was completed. Construction projects of ancillary
facilities for the West-East Gas Pipeline were implemented smoothly.
Construction of the Dagang-Zaozhuang Refined Oil Pipeline, the Lanzhou-Yinchuan
Gas Transmission Pipeline and the Daqing-Harbin Gas Transmission Pipeline
commenced and made smooth progress.
The Group improved its internal control system and risk management control
capability. Focusing on risk control and management, the Group carried out
comprehensive risk management by strengthening its internal control system,
paying attention to testing and strengthening internal control, and improving
its organisational structure and task network in 2006. Risk management on legal
risks was put in place in a systematic manner and under a set of rules and
procedures. This was conducive to the establishment of systems, construction of
important projects and management of equity rights.
35
The Group paid special emphasis on achieving safety, environmental protection as
well as energy saving and strengthened its efforts in this direction gradually.
The Group established the concept of "prioritising safety, environmental
protection and people-orientation" and pushed forward the establishment of its
Health, Safety and Environmental Protection Management System ("HSE'). The
Group emphasised on achieving safety, environmental protection and energy saving
and strived to build itself up as a balanced and harmonious enterprise.
Looking forward in 2007, global economy may hopefully be able to maintain rapid
growth which will lead to a gradual increase in the demand for energy products.
The rapid development of the Chinese economy will continue to fuel the demand
for oil and natural gas. We believe the Chinese market will open up further in
the post-WTO transitional period. China has been adjusting its financial and tax
policies in view of the potential risk of further appreciation of Renminbi and
the increasing exposure on foreign exchange risk. At the same time, it is
expected that government regulation will be more stringent and the public will
become more concerned about changes in oil prices and steady supply of oil and
gas. The Group shall respond proactively to complicated and ever changing
external conditions and fierce market competition in its future development,
operate steadily, place greater emphasis on and implement the three key
strategies concerning resources, market orientation and internationalisation,
and simultaneously maintain rapid development of its core businesses.
The Group will continue to strengthen its oil and gas exploration and
development and further consolidate and upgrade its resources bases so as to
maintain growth in the production. The Group will carry out oil and gas
exploration at eight basins, including Bohai Bay Basin, Erdos Basin and Sichuan
Basin. Further geological studies will be conducted. Key projects will be
prioritised. In oil and gas exploration, great importance will be placed to the
exploration of mature oilfields and unearthing of potential sources, building up
of key production capability will be adequately completed. Production facilities
in the key areas will be secured. The Group will actively proceed with the large
scale exploration of coalbed gas, develop biomass energy and other new form of
energy, and make greater efforts to assess oil shale, oil sand and other
non-conventional form of resources.
The Group will continue to place greater emphasis on modification and
optimisation of its refinery and petrochemical business structure and to
commence construction of production facilities steadily in order to improve the
operational efficiency. The Group will co-ordinate the optimal allocation of
resources and promote partial optimisation and modification of business
structure. The Group will also continue to improve different economic and
technological indicators in order to ensure the production infrastructure can
operate in the long run. The Group will endeavour to optimise product mix,
improve the quality of oil products and increase the output of high value-added
products. The sale of refined products should be market-oriented with
improvements resulting from better allocation of marketing resources,
transportation and logistics. The Group will also endeavour to improve the sales
and marketing and the retail sales network. In the sales of petrochemical
products, centralised sales will be enhanced and market forecast and the pricing
mechanism will be perfected.
The Group will continue to speed up construction of major pipelines and
ancillary facilities in order to maintain a stable supply of natural gas in the
market. In the sale of natural gas, allocation and striving for an overall
balance of resources will be carried out, management of operation of pipelines
will be enhanced, thereby achieving a safe and steady supply of gas so as to
benefit further from the optimisation attained by improvement in the sales
network nationwide.
The Group will continue to expand the development of international businesses in
order to improve its strength in scale and competitiveness. The Group will
continue to strive for more high quality reserves by strengthening the
sophisticated exploration carried out in its existing overseas oil and gas
businesses and accelerating exploration and development in key areas. The Group
will also work on maintaining steady supplies in mature oilfields and
accelerating the commencement of production for new projects. The Group will
further place emphasis on key segments and regions and promote rapid development
and further expansion of its overseas businesses.
36
The Group will continue to adopt measures to ensure safety, environmental
protection and energy saving and strictly abide by the PRC laws and regulations
on safety, environmental protection and energy saving. The Group will strengthen
the elimination of potential safety and environmental risks, as well as the
reform on energy and water saving, and take more effective measures to
strengthen management of safety, environmental protection and energy saving in
various important domains and key sectors. The Group will promote the effective
operation of the HSE management system and make an effort to build itself up as
a balanced and harmonious enterprise.
In its future development, the Group will place emphasis on two main principles,
namely, relying on efficient and scientific development and building up a
balanced and harmonious enterprise. The Group will continue to conduct its
business in a prudent and steady manner, thereby increasingly enhance its
corporate value and actively fulfills its economic, environmental and social
responsibilities to maximise returns to its equity holders, the society and its
staff.
FINAL DIVIDENDS AND TEMPORARY CLOSURES OF REGISTER OF MEMBERS
The Board recommends to pay final dividends of RMB0.154699 per share (inclusive
of applicable tax) from the balance of 45% of the net profit for the twelve
months ended December 31, 2006 less the interim dividends for 2006 paid on
September 26, 2006. The proposed final dividends are subject to shareholders'
approval at the forthcoming annual general meeting to be held on May 16, 2007.
The final dividends will be paid to shareholders whose names appear on the
register of members of the Company at the close of business on May 16, 2007. The
register of members will be closed from April 16, 2007 to May 16, 2007 (both
days inclusive) during which period no transfer of shares will be registered. In
order to qualify for the final dividends, all transfer documents must be lodged,
together with the relevant share certificates, at the Hong Kong Registrars
Limited no later than 4 p.m. on April 13, 2007.
In accordance with Article 149 of the Company's Articles of Association,
dividends payable to the Company's shareholders shall be declared in Renminbi.
Dividends payable to the holders of state-owned shares shall be paid in Renminbi
while dividends payable to the holders of H shares shall be paid in Hong Kong
Dollars. The amount of Hong Kong Dollars payable shall be calculated on the
basis of the average of the closing exchange rates for Renminbi to Hong Kong
Dollar as announced by the People's Bank of China for the week prior to the
declaration of the dividends at the shareholders' meeting to be held on May 16,
2007.
Final dividends will be paid on or around June 1, 2007.
REPURCHASE, SALE OR REDEMPTION OF SECURITIES
The Company or any of its subsidiaries did not sell any securities of the
Company, nor did it repurchase or redeem any of the securities of the Company
during the twelve months ended December 31, 2006.
COMPLIANCE WITH THE MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF
LISTED ISSUERS
The Company has adopted the Model Code for Securities Transactions for Directors
of Listed Issuers contained in Appendix 10 of the Listing Rules (the 'Model
Code'). The Company has made an inquiry with all its Directors and Supervisors.
Each Director and Supervisor has confirmed to the Company that each of them has
complied with the requirements set out in the Model Code.
37
COMPLIANCE WITH THE CODE OF CORPORATE GOVERNANCE PRACTICES
The Company has fully complied with the code provisions under the Code of
Corporate Governance Practices under the Listing Rules applicable during the
reporting period.
AUDIT COMMITTEE
The members of the audit committee of the Company formed pursuant to Appendix 14
of the Listing Rules include Mr Franco Bernabe, Mr Tung Chee-Chen, Mr Liu
Hongru and Mr Gong Huazhang. The main responsibilities of the audit committee
are the review and monitoring of the form of financial submissions and the
internal control mechanism of the Group and giving advice to the Board of
Directors. The audit committee of the Company has reviewed and confirmed the
final results announcement and the annual report for the twelve months ended
December 31, 2006.
The figures in respect of the preliminary announcement of the Group's results
for the year ended December 31, 2006 have been agreed by the Company's auditors
to the amounts set out in the Group's audited consolidated financial statements
for the twelve months ended December 31, 2006.
PUBLICATION OF RESULTS ON THE WEBSITE OF THE HKSE AND OF THE COMPANY
In accordance with the requirements under the Listing Rules which are applicable
to the reporting period, the 2006 annual report containing all information about
the Company set out in this preliminary announcement of results for the year
ended December 31, 2006 will be posted on the website of the HKSE (website:
http://www.hkex.com.hk) on or before April 30, 2007. This information will also
be published on the website of the Company (website:
http://www.petrochina.com.cn).
By Order of the Board of Directors
PetroChina Company Limited
Chen Geng
Chairman
Beijing, the PRC
March 19, 2007
As at the date of this announcement, the Board comprises Mr. Chen Geng as the
Chairman; Mr. Jiang Jiemin as the Vice-Chairman; Mr. Duan Wende as executive
director; Mr. Zheng Hu, Mr. Zhou Jiping, Mr Wang Yilin, Mr. Zeng Yukang, Mr.
Gong Huazhang and Mr. Jiang Fan as non-executive directors; and Mr. Chee-Chen
Tung, Mr. Liu Hongru and Mr. Franco Bernabe as independent non-executive
directors.
This preliminary results announcement contains certain forward-looking
statements with respect to the financial position, financial results and
business of the Group. These forward-looking statements are, by their nature,
subject to significant risks and uncertainties because they relate to events and
depend on circumstances that may occur in the future and are beyond our control.
The forward-looking statements reflect the Group's current views with respect to
future events and are not a guarantee of future performance. Actual results may
differ materially from information contained in the forward-looking statements.
Please also refer to the published version of this announcement in South China
Morning Post.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PetroChina Company Limited
Dated: March 20, 2007 By: /s/ Li Huaiqi
-------------------------------
Name: Li Huaiqi
Title: Company Secretary