UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 20-F
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-14966
CNOOC LIMITED
[Chinese Characters Omitted]
(Exact name of Registrant as specified in its charter)
---------------------
Hong Kong
(Jurisdiction of incorporation or organization)
---------------------
65th Floor, Bank of China Tower
One Garden Road, Central
Hong Kong
(Address of principal executive offices)
---------------------
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
American depositary shares, each representing 100 shares of
par value HK$0.02 per share......................................... New York Stock Exchange, Inc.*
Shares of par value HK$0.02 per share.................................. New York Stock Exchange, Inc.**
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the
close of the period covered by the annual report.
Shares, par value HK$0.02 per share.............................................................41,054,675,375*
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant is required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the Registrant has
elected to follow.
Item 17 |_| Item 18 |X|
--------------------------
* A 5-for-1 stock split went into effect on March 17, 2004 and since then each
American depositary share represents 100 shares. The number of shares
outstanding immediately after the stock split was 41,070,828,275. Due to
buybacks by the registrant and the exercise of certain share options by its
employee, the number of shares outstanding on June 8, 2005 was 41,054,675,375.
** Not for trading, but only in connection with the registration of American
depositary shares.
Table of Contents
Page
----
TERMS AND CONVENTIONS.............................................................................................1
FORWARD-LOOKING STATEMENTS........................................................................................5
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.............................................6
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...........................................................6
ITEM 3. KEY INFORMATION...................................................................................6
A. Selected Financial Data.......................................................................6
B. Capitalization and Indebtedness..............................................................10
C. Reasons for the Offer and Use of Proceeds....................................................10
D. Risk Factors.................................................................................11
ITEM 4. INFORMATION ON THE COMPANY.......................................................................20
A. History and Development......................................................................21
B. Business Overview............................................................................25
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................................................73
A. Operating Results............................................................................73
B. Liquidity and Capital Resources..............................................................87
C. Research and Development, Patents and Licenses, etc..........................................95
D. Trend Information............................................................................95
E. Off-Balance Sheet Arrangements...............................................................95
F. Tabular Disclosure of Contractual Obligations................................................96
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.......................................................96
A. Directors and Senior Management..............................................................96
B. Compensation of Directors and Officers......................................................100
C. Board Practice..............................................................................101
D. Employees...................................................................................103
E. Share Ownership.............................................................................103
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...............................................106
A. Major Shareholders..........................................................................106
B. Related Party Transactions..................................................................106
C. Interests of Experts and Counsel............................................................112
ITEM 8. FINANCIAL INFORMATION...........................................................................112
A. Consolidated Statements and Other Financial Information.....................................112
B. Significant Changes.........................................................................113
ITEM 9. THE OFFER AND LISTING...........................................................................114
ITEM 10. ADDITIONAL INFORMATION..........................................................................115
A. Share Capital...............................................................................115
B. Memorandum and Articles of Association......................................................115
C. Material Contracts..........................................................................118
D. Exchange Controls...........................................................................118
E. Taxation....................................................................................119
F. Dividends and Paying Agents.................................................................122
G. Statement by Experts........................................................................122
H. Documents on Display........................................................................122
I. Subsidiary Information......................................................................122
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK......................................122
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..........................................124
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................................................125
i
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS....................125
A. Material Modifications to the Rights to Security Holders....................................125
B. Use of Proceeds.............................................................................125
ITEM 15. CONTROLS AND PROCEDURES.........................................................................125
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT................................................................125
ITEM 16B. CODE OF ETHICS..................................................................................125
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................................................125
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES......................................126
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS...........................................................................126
PART III
ITEM 17. FINANCIAL STATEMENTS............................................................................128
ITEM 18. FINANCIAL STATEMENTS............................................................................128
ITEM 19. EXHIBITS........................................................................................128
ii
TERMS AND CONVENTIONS
Definitions
Unless the context otherwise requires, references in this annual report
to:
o "CNOOC" are to our controlling shareholder, China National
Offshore Oil Corporation, a PRC state-owned enterprise, and its
affiliates, excluding us and our subsidiaries;
o "CNOOC Limited," "our company," "we," "our" or "us" are to CNOOC
Limited, a Hong Kong limited liability company and the registrant
of this annual report, and its subsidiaries;
o "China" or "PRC" are to the People's Republic of China, excluding
for purposes of geographical reference in this annual report, the
Hong Kong Special Administrative Region, the Macau Special
Administrative Region and Taiwan;
o "Hong Kong Stock Exchange" or "HKSE" are to The Stock Exchange of
Hong Kong Limited;
o "HK$" are to Hong Kong dollar, the legal currency of the Hong
Kong Special Administrative Region;
o "JPY" are to Japanese yen, the legal currency of Japan;
o "Rmb" are to Renminbi, the legal currency of the PRC;
o "Rupiah" are to Indonesian Rupiah, the legal currency of the
Republic of Indonesia; and
o "US$" are to U.S. dollar, the legal currency of the United States
of America.
Conventions
We have translated amounts from Renminbi into U.S. dollars solely for
the convenience of the reader at the noon buying rate in New York for cable
transfers payable in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York on December 31, 2004 of US$1.00=Rmb 8.2765. We
have also translated amounts in Hong Kong dollars solely for the convenience of
the reader at the rate of HK$7.80 to US$1.00, the linked exchange rate between
such currencies under policies of the Hong Kong government in effect on December
31, 2004. We make no representation that the Renminbi amounts or Hong Kong
dollar amounts could have been, or could be, converted into U.S. dollars at
those rates on December 31, 2004, or at all. For further information on exchange
rates, see Item 3 "Key Information--Selected Financial Data."
Totals presented in this annual report may not total correctly due to
rounding of numbers.
Our "average net realized price" for oil and gas in each period is
derived from a numerator divided by a denominator, where:
o the numerator is equal to the sum of (i) revenues from our oil
and gas sales offshore China for the applicable period; (ii) the
30% ownership share of revenues from gas sales for the applicable
period from our associated company, Shanghai Petroleum and
Natural Gas Company Limited; and (iii) the revenues from oil and
gas sales for the applicable period from our overseas interests;
while:
o the denominator is equal to the sum of (i) the volume of oil and
gas sales offshore China for the applicable period; (ii) 30% of
the volume of gas sales for the applicable period from our
associated company; and (iii) the volume of oil and gas sales for
the applicable period from our overseas interests.
1
Our "net proved reserves" are derived from proved reserves less certain
adjustments, where:
o proved reserves is equal to the sum of (i) our 100% interest in
our independent oil and gas properties (excluding the proved
reserves attributable to our associated company); (ii) our
participating interest in the properties covered under our
production sharing contracts in the PRC and overseas; and (iii)
our 30% interest in the proved reserves of our associated
company; while:
o the adjustments equal the sum of (i) an adjustment for our share
of royalties payable to the PRC government and our participating
interest in share oil payable to the PRC government under our
production sharing contracts in the PRC; (ii) an adjustment for
production allocable to foreign partners under our production
sharing contracts in the PRC as reimbursement for exploration
expenses attributable to our working interest; and (iii)
adjustments for share oil payable under our overseas production
sharing contracts for any domestic market obligation under which
the contractor must sell a specified percentage of its crude oil
to the local overseas market (such as in Indonesia) at a reduced
price. In this annual report, we use "share oil" to refer to the
portion of production that must be allocated to the relevant
government entity or company under our production sharing
contracts.
Net proved reserves do not include any deduction for production taxes
payable by us, which are included in our operating expenses. Net production is
calculated in the same way as net proved reserves. Unless otherwise noted, all
information in this annual report relating to oil and natural gas reserves is
based upon estimates prepared by us. In calculating barrels-of-oil equivalent,
or BOE, amounts, we have assumed that 6,000 cubic feet of natural gas equals one
BOE, with the exception of natural gas from certain fields which is converted
using the actual heating value of the natural gas.
Glossary of Technical Terms
Unless otherwise indicated in the context, references to:
o "API gravity" means the American Petroleum Institute's scale for
specific gravity for liquid hydrocarbons, measured in degrees.
The lower the API gravity, the heavier the liquid and, generally,
the lower its commercial value. For example, asphalt has an API
gravity of eight degrees, West Texas Intermediate, a benchmark
crude oil, has an API of 40 degrees, and gasoline has an API
gravity of 50 degrees.
o "appraisal well" means an exploration well drilled after a
successful wildcat well to gain more information on a newly
discovered oil or gas reserve.
o "condensate" means light hydrocarbon liquids separated from
natural gas in the field through condensation when natural gas is
exposed to surface temperature and pressure. This group generally
includes slightly heavier hydrocarbons than natural gas liquids,
such as pentane. It is combined with crude oil production and
reserve figures.
o "crude oil" means crude oil and liquids, including condensate,
natural gas liquids and liquefied petroleum gas.
o "development cost" means, for a given period, costs incurred to
obtain access to proved reserves and to provide facilities for
extracting, treating, gathering and storing the oil and gas.
o "dry hole" means an exploration well that is not commercial
(i.e., economically feasible to develop). Dry hole costs include
the full costs for such drilling and are charged as an expense.
o "exploration well" means a wildcat or appraisal well.
2
o "finding and development cost per BOE" means, for a given period,
the sum of total finding and development cost incurred, divided
by the sum of discoveries, extensions, purchases of reserves, and
revisions of prior estimates of net proved reserves.
o "finding cost" means, for a given period, costs incurred in
identifying areas that may warrant examination and in examining
specific areas that are considered to have prospects of
containing oil and gas reserves, including costs of drilling
exploration wells.
o "lifting cost" means, for a given period, costs incurred to
operate and maintain wells and related equipment and facilities,
including applicable operating costs of support equipment and
facilities and other costs of operating and maintaining those
wells and related equipment and facilities, plus production
taxes. Also known as production cost.
o "natural gas liquids" means light hydrocarbons that can be
extracted in liquid form from natural gas through special
separation plants. This group includes typically lighter liquid
hydrocarbons than condensate, such as butane, propane and ethane.
It is combined with crude oil production but not with crude oil
reserve figures.
o "net wells" means a party's working interest in wells under a
production sharing contract.
o "offshore" means areas under water with a depth of five meters or
greater.
o "onshore" means areas of land and areas under water with a depth
of less than five meters.
o "proved developed reserves" means proved reserves of oil and
natural gas that can be expected to be recovered through existing
wells with existing equipment and operating methods.
o "proved reserves" means estimated quantities of crude oil and
natural gas that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions,
i.e., prices and costs as of the date the estimate is made.
o "proved undeveloped reserves" means proved reserves that are
expected to be recovered from new wells in undrilled areas, or
from existing wells where significant expenditure is required for
completion.
For further definitions relating to reserves:
o "reserve replacement ratio" means, for a given year, total
additions to proved reserves divided by production during the
year.
o "reserve-to-production ratio" means the ratio of proved reserves
to annual production of crude oil or, with respect to natural
gas, to wellhead production excluding flared gas.
o "seismic data" means data recorded in either two-dimensional (2D)
or three-dimensional (3D) form from sound wave reflections off of
subsurface geology. This is used to understand and map geological
structures for exploratory purposes to predict the location of
undiscovered reserves.
o "success" means a discovery of oil or gas by an exploration well.
Such an exploration well is a successful well and is also known
as a discovery. A successful well is commercial, which means
there are enough hydrocarbon deposits discovered for economical
recovery.
o "success rate" means the total number of successful wells divided
by the total number of wells drilled in a given period. Success
rate can be applied to wildcat wells or appraisal wells in
general.
3
o "wildcat well" means an exploration well drilled in an area or
rock formation that has no known reserves or previous
discoveries.
References to:
o bbls means barrels, which is equivalent to approximately 0.134
tons of oil (33 degrees API);
o mmbbls means million barrels;
o BOE means barrels-of-oil equivalent;
o BOE per day means barrels-of-oil equivalent per day;
o million BOE means million barrels-of-oil equivalent;
o mcf means thousand cubic feet;
o mmcf means million cubic feet;
o bcf means billion cubic feet, which is equivalent to
approximately 283.2 million cubic meters;
o BTU means British Thermal Unit, a universal measurement of
energy; and
o km means kilometers, which is equivalent to approximately 0.62
miles.
4
FORWARD-LOOKING STATEMENTS
This annual report includes "forward-looking statements" within the
meaning of the United States Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, included in this
annual report that address activities, events or developments which we expect or
anticipate will or may occur in the future are forward-looking statements. The
words "believe," "intend," "expect," "anticipate," "project," "estimate,"
"predict" and similar expressions are also intended to identify such
forward-looking statements.
These forward-looking statements address, among others, such issues as:
o the amount and nature of future exploration, development and
other capital expenditures,
o wells to be drilled or reworked,
o oil and gas prices and demand,
o future earnings and cash flow,
o development projects,
o exploration prospects,
o estimates of proved oil and gas reserves,
o potential reserves,
o development and drilling potential,
o drilling prospects,
o expansion and other development trends of the oil and gas
industry,
o business strategy,
o production of oil and gas,
o development of undeveloped reserves,
o expansion and growth of our business and operations, and
o our estimated financial information.
These statements are based on assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we believe
are appropriate under the circumstances. However, whether actual results and
developments will meet our expectations and predictions depend on a number of
risks and uncertainties which could cause our actual results, performance and
financial condition to differ materially from our expectation. For a description
of such risks and uncertainties, see "Item 3-Key Information-Risk Factors."
Consequently, all of the forward-looking statements made in this annual
report are qualified by these cautionary statements. We cannot assure you that
the actual results or developments anticipated by us will be realized or, even
if substantially realized, that they will have the expected effect on us or our
business or operations.
5
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable, but see "Item 6--Directors, Senior Management and
Employees--Directors and Senior Management."
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
You should read our selected historical consolidated financial data set
forth below in conjunction with our consolidated financial statements and their
notes under Item 18 "Financial Statements" and "Item 5--Operating and Financial
Review and Prospects" in this annual report. The following selected income
statement data and cash flows data for the three years ended December 31, 2002,
2003 and 2004 and the selected balance sheet data as of December 31, 2003 and
2004 have been derived from our consolidated financial statements audited by
Ernst & Young, our current independent public accountants. The following
selected income statement data and cash flows data for the two years ended
December 31, 2000 and 2001 and the selected balance sheet data as of December
31, 2000 and 2001 have been derived from our consolidated financial statements
audited by Arthur Andersen & Co, our independent public accountants prior to
2002.
On June 6, 2002, Ernst & Young replaced Arthur Andersen & Co as our
independent public accountants. For a discussion on such change of accountants,
see "Item 3--Key Information--Risk Factors--Risks relating to our business--You
may not be able to assert claims against Arthur Andersen, our independent public
accountants for periods prior to 2002, nor may you be able to assert claims
against our current independent public accountants for financial statements
previously audited by Arthur Andersen" and "Item 5--Operating and Financial
Review and Prospects--Change of Accountants."
We have prepared and presented our consolidated financial statements in
accordance with Hong Kong generally accepted accounting principles ("Hong Kong
GAAP"). For an explanation of the reconciliation of our net income and
shareholders' equity to U.S. generally accepted accounting principles ("US
GAAP"), see note 37 to our consolidated financial statements under Item 18
"Financial Statements" in this annual report.
6
Year ended December 31,
------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
------- --------- --------- ---------- ----------- -----------
Rmb Rmb Rmb Rmb Rmb US$
------- --------- --------- ---------- ----------- -----------
(in millions, except per share and per ADS data)
Income Statement Data:
Hong Kong GAAP
Operating revenues:
Oil and gas sales.............................. 18,819 17,561 23,779 28,117 36,886 4,457
Marketing revenues............................. 5,126 2,537 2,377 12,399 18,191 2,198
Other income................................... 279 722 217 434 145 18
------- -------- --------- ----------- ------------ ----------
Total operating revenues....................... 24,224 20,820 26,374 40,950 55,222 6,673
------- -------- --------- ----------- ------------ ----------
Expenses:
Operating expenses............................. (2,124) (2,329) (3,775) (4,513) (5,070) (613)
Production taxes............................... (1,037) (884) (1,023) (1,239) (1,726) (209)
Exploration expenses........................... (553) (1,039) (1,318) (848) (1,316) (159)
Depreciation, depletion and amortization....... (2,578) (2,567) (4,020) (4,643) (5,455) (659)
Dismantlement.................................. (104) (90) (126) (167) (202) (24)
Crude oil and product purchases................ (5,098) (2,453) (2,326) (12,295) (17,963) (2,170)
Selling and administrative expenses............ (456) (616) (1,007) (1,213) (1,058) (128)
Others......................................... (217) (618) (31) (350) (45) (5)
------- -------- --------- ----------- ------------ ----------
(12,167) (10,596) (13,626) (25,268) (32,835) (3,967)
------- -------- --------- ----------- ------------ ----------
Interest income................................... 237 318 148 184 207 25
Interest expenses................................. (475) (117) (295) (355) (442) (53)
Exchange gains (losses), net...................... 381 235 (114) (7) 29 4
Short term investment income...................... -- 221 193 124 72 9
Share of profits of associates................... 218 90 165 220 344 42
Non-operating income (expenses), net.............. (195) 35 (71) 315 519 63
------- -------- --------- ----------- ------------ ----------
Income before tax................................. 12,223 11,006 12,774 16,163 23,117 2,793
Tax............................................... (1,926) (3,048) (3,541) (4,628) (6,931) (837)
------- -------- --------- ----------- ------------ ----------
Net income........................................ 10,297 7,958 9,233 11,535 16,186 1,956
======= ======== ========= =========== ============ ==========
Net income per share (basic)(a)(b)................ 0.33 0.20 0.22 0.28 0.39 0.05
Net income per share (diluted)(a)(c).............. 0.33 0.20 0.22 0.28 0.39 0.05
Net income per ADS (basic)(a)(b).................. 32.53 20.04 22.48 28.09 39.42 4.76
Net income per ADS (diluted)(a)(c)................ 32.53 20.04 22.47 28.06 39.31 4.75
Dividend per share(a)
Special interim dividend declared in place of
2003 final dividend(d)......................... -- -- -- -- 0.060 0.007
Interim........................................ -- 0.022 0.024 0.030 0.030 0.004
Interim (in US$)............................... -- 0.003 0.003 0.004 0.004 --
Special interim................................ -- -- -- 0.038 0.050 0.006
Special interim (in US$)....................... -- -- -- 0.005 0.006 --
Proposed final(d).............................. 0.196 0.032 0.032 0.026 0.030 0.004
Proposed final (in US$)(d)..................... 0.024 0.004 0.004 0.003 0.004 --
Proposed special final(d)...................... -- -- 0.032 0.038 0.050 0.006
Proposed special final (in US$)(d)............. -- -- 0.004 0.005 0.006 --
U.S. GAAP
Operating revenues:
Oil and gas sales................................. 18,819 17,561 23,779 28,117 36,886 4,457
Marketing revenues................................ 5,126 2,537 2,377 12,399 18,191 2,198
Other income...................................... 279 722 217 434 145 18
------- -------- --------- ----------- ------------ ----------
Total operating revenues.......................... 24,224 20,820 26,374 40,950 55,222 6,672
------- -------- --------- ----------- ------------ ----------
Net Income........................................ 10,302 7,920 9,086 11,980 16,176 1,954
Net income per share (basic)(a)(b)................ 0.33 0.20 0.22 0.29 0.39 0.047
Net income per share (diluted)(a)(c).............. 0.33 0.20 0.22 0.29 0.39 0.047
Net income per ADS (basic)(a)(b).................. 32.53 19.95 22.12 29.17 39.40 4.76
7
Year ended December 31,
------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
------- --------- --------- ---------- ----------- -----------
Rmb Rmb Rmb Rmb Rmb US$
------- --------- --------- ---------- ----------- -----------
(in millions, except per share and per ADS data)
Net income per ADS (diluted)(a)(c)................ 32.55 19.95 22.13 29.14 39.28 4.75
----------
(a) On March 17, 2004, our shareholders approved a five-for-one stock split
of our shares. The stock split was effected by dividing each of our
issued and unissued shares of HK$0.10 each into five shares of HK$0.02
each, and to increase the board lot size for trading on the Hong Kong
Stock Exchange from 500 shares of HK$0.10 each to 1,000 subdivided
shares of HK$0.02 each. The ratio of our ADSs listed on the New York
Stock Exchange also changed such that each ADS now represents 100
subdivided shares of HK$0.02 each, as opposed to 20 shares of HK$0.10
each prior to the stock split. As such, per share amounts of our shares
have been adjusted retroactively for the stock split.
(b) Net income per share (basic) and net income per ADS (basic) for 2000
have been computed by dividing net income by the weighted average
number of shares and the weighted average number of ADSs of
31,655,572,105 and 316,555,721 respectively (based on a ratio of 100
shares to one ADS) for the period. Similarly, net income per share
(basic) and net income per ADS (basic) for 2001 have been computed,
without considering the dilutive effect of the shares underlying our
share option scheme, by dividing net income by the weighted average
number of shares and the weighted average number of ADSs of
39,706,916,525 and 397,069,165 respectively (based on a ratio of 100
shares to one ADS) for the period. Net income per share (basic) and
net income per ADS (basic) for 2002 have been computed, without
considering the dilutive effect of the shares underlying our share
option scheme, by dividing net income by the weighted average number
of shares and the weighted average number of ADSs of 41,070,828,275
and 410,708,283 respectively (based on a ratio of 100 shares to one
ADS) for the period. Net income per share (basic) and net income per
ADS (basic) for 2003 have been computed, without considering the
dilutive effect of the shares underlying our share option scheme, by
dividing net income by the weighted average number of shares and the
weighted average number of ADSs of 41,070,828,275 and 410,708,283
respectively (based on a ratio of 100 shares to one ADS) for the
period. Net income per share (basic) and net income per ADS (basic)
for 2004 have been computed, without considering the dilutive effect
of the shares underlying our share option scheme, by dividing net
income by the weighted average number of shares and the weighted
average number of ADSs of 41,060,240,659 and 410,602,407 respectively
(based on a ratio of 100 shares to one ADS) for the period.
(c) Net income per share (diluted) and net income per ADS (diluted) for
2000 have been computed by dividing net income by the weighted
average number of shares and the weighted average number of ADSs of
31,655,572,105 and 316,555,721 respectively (based on a ratio of 100
shares to one ADS) for the period. Similarly, net income per share
(diluted) and net income per ADS (diluted) for 2001 have been
computed, after considering the dilutive effect of the shares
underlying our share option scheme, using 39,711,444,015 and
397,114,440 respectively. Net income per share (diluted) and net
income per ADS (diluted) for 2002 have been computed, after
considering the dilutive effect of the shares underlying our share
option scheme, using 41,096,426,920 and 410,964,269 respectively. Net
income per share (diluted) and net income per ADS (diluted) for 2003
have been computed, after considering the dilutive effect of the
shares underlying our share option scheme, by using 41,110,339,095
and 411,103,391 respectively. Net income per share (diluted) and net
income per ADS (diluted) for 2004 have been computed, after
considering the dilutive effect of the shares underlying our share
option scheme and convertible bonds, by using 41,179,513,436 and
411,795,134 respectively.
(d) The proposed final dividend and special final dividend for 2003 were
cancelled and replaced by the special interim dividend of HK0.06 per
share declared and paid in 2004.
As of December 31,
---------------------------------------------------------------
2000 2001 2002 2003 2004 2004
-------- ---------- --------- -------- ---------- ----------
Rmb Rmb Rmb Rmb Rmb US$
-------- ---------- --------- -------- ---------- ----------
(in millions)
Balance Sheet Data:
Hong Kong GAAP
Cash and cash equivalents......................... 2,797 6,394 7,839 14,400 14,092 1,703
Time deposits with maturities over three months... 3,425 2,050 4,690 2,323 8,603 1,039
Short term investments............................ 300 8,896 6,531 5,684 5,444 658
Current assets.................................... 9,472 20,030 24,487 29,263 35,293 4,264
Property, plant and equipment, net................ 22,654 23,828 36,072 43,124 57,457 6,942
Investment in associates.......................... 471 462 537 1,118 1,327 160
Total assets...................................... 32,597 44,320 61,096 73,504 94,077 11,367
Current liabilities............................... 8,768 4,392 7,134 9,307 10,402 1,257
Long term bank loans, net of current portion...... 4,749 3,256 941 890 865 105
Long term guaranteed notes ....................... -- -- 4,071 8,142 16,313 1,971
Total long term liabilities....................... 7,707 6,617 13,393 17,461 26,957 3,257
Total liabilities................................. 16,475 11,009 20,527 26,768 37,359 4,514
Shareholders' equity.............................. 16,122 33,311 40,568 46,737 56,717 6,853
U.S. GAAP
Total assets...................................... 32,330 44,062 60,444 73,234 93,846 11,339
Total long term liabilities....................... 7,707 6,617 13,393 17,461 26,957 3,257
Shareholders' equity.............................. 15,855 33,053 40,344 46,496 56,487 6,825
8
Year ended December 31,
----------------------------------------------------------------
2000 2001 2002 2003 2004 2004
--------- ---------- --------- ------------ -------- ---------
Rmb Rmb Rmb Rmb Rmb US$
--------- ---------- --------- ------------ -------- ---------
(in millions, except percentages and ratios)
Other Financial Data:
Hong Kong GAAP
Capital expenditures paid......................... 4,404 4,343 6,833 8,272 12,843 1,552
Cash provided by (used for):
Operating activities......................... 13,233 11,759 14,742 17,819 22,328 2,698
Investing activities......................... (7,861) (11,366) (11,724) (9,513) (24,607) (2,973)
Financing activities......................... (3,454) 3,204 (1,573) (1,745) 1,970 238
Other Data
EBITDE(1).................................... 15,315 14,366 18,499 21,998 30,295 3,660
EBITDE margin(2)............................. 63.2% 69.0% 70.1% 53.7% 54.9% 54.9%
Ratio of EBITDE to gross interest expense(3). 32.2x 45.5x 45.7x 43.4x 53.5x 53.4X
Ratio of total debt to EBITDE................ 0.4x 0.3x 0.3x 0.4x 0.6x 0.6x
Ratio of total debt to total
capitalization(4).............................. 27.5% 12.3% 11.6% 16.2% 23.3% 23.3%
U.S. GAAP
Cash provided by (used for):
Operating activities(5)...................... 13,233 11,759 14,742 17,819 22,328 2,698
Investing activities......................... (7,861) (11,366) (11,724) (9,513) (24,607) (2,973)
Financing activities......................... (3,454) 3,204 (1,573) (1,745) 1,970 238
Ratio of cash provided by operating activities to
gross interest expense(3)(5)................... 27.9x 37.2x 36.4x 35.1x 39.4x 39.4x
Ratio of total debt to cash provided by operating
activities(5).................................. 0.4x 0.4x 0.4x 0.5x 0.8x 0.8x
Net income(6)..................................... 10,302 7,920 9,086 11,980 16,176 1,955
Net income margin(6)(7)........................... 42.5% 38.0% 34.5% 29.3% 29.3% 29.3%
Ratio of net income to gross interest expense(3)(6) 21.7x 25.1x 22.4x 23.6x 28.5x 28.5x
Ratio of total debt to net income(6).............. 0.6x 0.6x 0.6x 0.8x 1.1x 1.1x
Other Data
EBITDE(1).................................... 15,315 14,319 18,481 21,998 30,277 3,658
EBITDE margin(2)............................. 63.2% 68.8% 70.1% 53.7% 54.8% 54.8%
Ratio of EBITDE to gross interest expense(3). 32.2x 45.4x 56.6x 43.3x 53.4x 53.4x
Ratio of total debt to EBITDE................ 0.4x 0.3x 0.3x 0.4x 0.6x 0.6x
Ratio of total debt to total
capitalization(4).............................. 27.9% 12.4% 11.8% 16.3% 23.4% 23.4%
----------
(1) We have defined EBITDE to mean earnings before interest income, interest
expense, income taxes, depreciation, depletion, amortization,
dismantlement, exploration expenses, impairment losses related to property,
plant and equipment and exchange gains or losses as computed under Hong
Kong and U.S. GAAP. EBITDE is not a standard measure under either Hong Kong
or U.S. GAAP. You should not consider our definition of EBITDE in isolation
or construe it as an alternative to net income, cash provided by operating
activities or any other measure of performance or as an indicator of
operating performance, liquidity or any other standard measure under either
Hong Kong or U.S. GAAP. We believe net income and cash provided by
operating activities are the most directly comparable financial measures
for EBITDE as an indicator of our operating performance and liquidity,
respectively. For our management's explanation of how we define EBITDE and
why we use it, see "Item 5--Operating and Financial Review and
Prospects--Overview--Non-GAAP Financial Measures."
(2) EBITDE margin represents EBITDE as a percentage of our total operating
revenues, as computed under both Hong Kong and U.S. GAAP. EBITDE margin is
used as an indicator of operating performance. Our EBITDE as a percentage
of oil and gas sales for the five years ended December 31, 2004 were 81.4%,
81.8%, 77.8%, 78.2% and 82.1%, respectively.
(3) Gross interest expense includes capitalized interest.
(4) Total capitalization excludes current portion of long-term debt.
(5) We have included data relating to cash provided by operating activities in
this table because we believe it is the most directly comparable Hong Kong
and U.S. GAAP measure to EBITDE as an indicator of liquidity. EBITDE is not
a standard measure under either Hong Kong or U.S. GAAP.
(6) We have included net income data in this table because we believe it is the
most directly comparable Hong Kong and U.S. GAAP measure to EBITDE as an
indicator of operating performance. EBITDE is not a standard measure under
either Hong Kong or U.S. GAAP.
(7) Net income margin represents net income as a percentage of our total
operating revenues, as computed under U.S. GAAP.
We publish our financial statements in Renminbi. Unless otherwise
indicated, all translations from Renminbi to U.S. dollars have been made at a
rate of Rmb 8.2765 to US$1.00, the noon buying rate as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 2004. We do not
represent that Renminbi or U.S. dollar amounts could be converted into U.S.
dollars or Renminbi, as the case may be, at any particular rate, the rate below
or at all.
The following table sets forth the noon buying rates for U.S. dollars
in New York City for cable transfers in Renminbi as certified for customs
purposes by the Federal Reserve Bank of New York for the periods indicated:
9
Noon Buying Rate
----------------
Period End Average(1) High Low
------ ---- ----------- --------- -----------
(Rmb per US$1.00)
2000.............................................. 8.2774 8.2784 8.2799 8.2768
2001.............................................. 8.2766 8.2772 8.2786 8.2676
2002.............................................. 8.2800 8.2772 8.2800 8.2669
2003.............................................. 8.2767 8.2771 8.2800 8.2765
2004.............................................. 8.2765 8.2768 8.2774 8.2764
December 2004..................................... 8.2765 -- 8.2767 8.2765
January 2005...................................... 8.2765 -- 8.2765 8.2765
February 2005..................................... 8.2765 -- 8.2765 8.2765
March 2005........................................ 8.2765 -- 8.2765 8.2765
April 2005........................................ 8.2765 -- 8.2765 8.2765
May 2005.......................................... 8.2765 -- 8.2765 8.2765
----------
(1) Determined by averaging the noon buying rates on the last business
day of each month during the relevant period.
As of June 8, 2005, the noon buying rate for cable transfers in
Renminbi as certified for customs purposes by the Federal Reserve Bank of New
York was Rmb 8.2765 to US$1.00.
The Hong Kong dollar is freely convertible into the U.S. dollar. Since
1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of
HK$7.80 to US$1.00. The Hong Kong government has also stated that it has no
intention of imposing exchange controls in Hong Kong and that the Hong Kong
dollar will remain freely convertible into other currencies, including the U.S.
dollar. However, we cannot assure you that the Hong Kong government will
maintain the link at HK$7.80 to US$1.00 or at all.
The following table sets forth the noon buying rates for U.S. dollars
in New York City for cable transfers in Hong Kong dollars as certified for
customs purposes by the Federal Reserve Bank of New York for the periods
indicated.
Noon Buying Rate
----------------
Period End Average(1) High Low
------ ---- ---------- ------ ----
(HK$ per US$1.00)
2000.............................................. 7.7999 7.7936 7.8008 7.7765
2001.............................................. 7.7980 7.7996 7.8004 7.7970
2002.............................................. 7.7988 7.7996 7.8095 7.7970
2003.............................................. 7.7640 7.7864 7.8001 7.7285
2004.............................................. 7.7723 7.7891 7.8010 7.7632
December 2004..................................... 7.7723 -- 7.7821 7.7698
January 2005...................................... 7.7993 -- 7.7994 7.7775
February 2005..................................... 7.7992 -- 7.7999 7.7984
March 2005........................................ 7.7990 -- 7.7998 7.7987
April 2005........................................ 7.7946 -- 7.7995 7.7946
May 2005.......................................... 7.7788 -- 7.7995 7.7767
----------
(1) Determined by averaging the noon buying rates on the last business
day of each month during the relevant period.
As of June 8, 2005, the noon buying rate for cable transfers in Hong
Kong dollars as certified for customs purposes by the Federal Reserve Bank of
New York was HK$7.7802 to US$1.00.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
10
D. RISK FACTORS
Risks relating to our business
Our business, revenues and profits fluctuate with changes in oil and
gas prices
Even relatively modest declines in crude oil prices may adversely
affect our business, revenues and profits. Our profitability is determined in
large part by the difference between the prices received for the crude oil we
produce and the costs of exploring for, developing, producing and selling these
products.
Prices for crude oil fluctuate widely in response to relatively minor
changes in the supply and demand for oil, market uncertainty and various other
factors that are beyond our control, including:
o political developments in petroleum producing regions;
o the ability of the Organization of Petroleum Exporting Countries
and other petroleum producing nations to set and maintain
production levels and prices;
o the price and availability of other energy sources, such as coal;
o domestic and foreign government regulation;
o weather conditions; and
o overall economic conditions.
Our revenues and net income have fluctuated significantly in the past
five years, principally due to the volatility of world oil prices. In 2004, oil
prices for West Texas Intermediate, the international benchmark for crude oil,
rose 33.6% from US$32.52 per barrel on January 1, 2004 to US$43.45 per barrel on
December 31, 2004. The conflict and turmoil in Iraq and the Mid-East in 2003 and
2004 raised concerns about the security and availability of ample supplies to
meet growing global demand. West Texas Intermediate reached a high in 2004 of
US$56.17 per barrel on October 22, 2004 and was US$52.54 per barrel on June 8,
2005. For a description of oil prices in recent years, see "Item 4--Information
on the Company--Business Overview--Sales and Marketing--Sales of Offshore Crude
Oil--Pricing" in this annual report. Any future declines in oil and gas prices
would adversely affect our revenues and net income.
The prices for the natural gas we sell in the PRC market are determined
by negotiations between us and the prospective buyers. Our typical contracts
with gas buyers include provisions for annual resets and adjustment formulas
that depend on a basket of crude oil prices and inflation as well as various
other factors. These resets and adjustment formulas can result in natural gas
price fluctuations which may adversely affect our business, results of
operations and financial condition.
Lower oil and gas prices may result in the write-off of higher cost
reserves and other assets and in decreased earnings or losses. Lower oil and
natural gas prices may also reduce the amount of oil and natural gas we can
produce economically and render existing contracts that we have entered into
uneconomical. For further details regarding the effects of oil and gas price
fluctuations on our financial condition and results of operations, see "Item
5--Operating and Financial Review and Prospects."
The oil and gas reserve estimates in this annual report may require
substantial revision as a result of future drilling, testing and production
The reliability of reserves estimates depends on a number of factors,
including:
o the quality and quantity of technical and economic data;
o the prevailing oil and gas prices for our production;
11
o the production performance of reservoirs;
o extensive engineering judgments; and
o consistency in the PRC and Indonesian governments' royalty and
share oil policies.
Many of the factors, assumptions and variables involved in estimating
reserves are beyond our control and may prove to be incorrect over time.
Consequently, the results of drilling, testing and production may require
substantial upward or downward revisions in our initial reserves data. For more
information on our oil and gas reserves data, see "Item 4--Information on the
Company--Business Overview--Oil and Natural Gas Reserves."
Any failure to develop our proved undeveloped reserves and gain
access to additional reserves could impair our ability to achieve certain
growth objectives
Our ability to achieve certain growth objectives depends upon our
success in finding and acquiring or gaining access to additional reserves.
Future drilling, exploration and acquisition activities may not be successful.
If our exploration and development activities or acquisition of properties
containing proved reserves are unsuccessful, our total proved reserves will
decline.
Approximately 51.6% of our proved reserves were undeveloped as of
December 31, 2004. Our future success will depend on our ability to develop
these reserves in a timely and cost-effective manner. There are various risks in
developing reserves, including construction, operational, geophysical,
geological and regulatory risks.
Our future prospects largely depend on our capital expenditure plans,
which are subject to various risks
The oil and gas exploration and production business is capital
intensive. We currently plan to spend US$1,844.8 million to develop our oil and
gas properties and US$220.9 million for exploration in 2005. In addition to
these amounts, we may make additional capital expenditures and investments to
implement our business strategy.
The ability to maintain and increase our revenues, net income and cash
flows depends upon continued capital spending. We adjust our capital expenditure
and investment budget each year. Our capital expenditure plans are subject to a
number of contingencies, some of which are beyond our control. These variables
include:
o our ability to generate sufficient cash flows from operations to
finance our capital expenditures, investments and other
requirements;
o the availability and terms of external financing;
o changes in crude oil and natural gas prices, which may affect
cash flows from operations and capital expenditure and investment
plans;
o the mix of exploration and development activities conducted on an
independent basis and under production sharing contracts;
o new investment opportunities that may be presented to us,
including international investment opportunities and liquefied
and other natural gas projects;
o approvals required from overseas governments for certain capital
expenditures and investments outside the PRC;
o our ability to obtain sufficient foreign currency to finance our
capital expenditures; and
12
o economic, political and other conditions in the PRC and in
overseas countries where we have operations.
Therefore, our actual capital expenditures and investments in the
future may differ significantly from our current planned amounts. There can be
no assurance that we will be able to execute our capital expenditure program on
schedule or as planned.
Any failure to implement our natural gas business strategy may
adversely affect our business and financial position
As part of our business strategy and to meet increasing market demand
in China, we continue to expand our natural gas business. This strategy involves
a number of risks and uncertainties including the following:
o we have limited experience in investing in liquefied natural gas
facilities, gas transmission and distribution systems, and
overseas upstream natural gas properties;
o any additional capital expenditures that are necessary to
implement our natural gas strategy could divert resources from
our core oil and gas exploration and production business and
require us to seek additional financing;
o our new natural gas operations may face additional competition
from a number of international and PRC companies. In particular,
PetroChina Company Limited, or PetroChina, has constructed
natural gas pipelines to link its natural gasfields located in
the western part of China to the eastern coastal regions;
o our new natural gas activities may subject us to additional
government regulation in China and overseas countries;
o our overseas natural gas businesses are subject to economic and
political risks in the relevant countries and regions. See "--We
are exposed to operating risks in some overseas countries as a
result of our acquisition of oil and gas interests located in
these regions;"
o we do not have the same preferential rights or access to natural
gas businesses or overseas natural gas investments that we enjoy
with respect to our upstream natural gas business offshore China;
and
o we are evaluating the options to invest in CNOOC's liquefied
natural gas projects in China. However, we have not decided
whether to exercise these options. The options are subject to
various conditions, including the receipt of certain governmental
approvals.
Due to the above factors or other reasons, we may fail to implement our
natural gas strategy successfully.
The infrastructure and demand for natural gas in the PRC may proceed
at a slower pace than our planned increase in production
Our proposed expansion of natural gas production in China is currently
constrained by a lack of natural gas transmission and supply infrastructure and
an underdeveloped natural gas market. Construction of transmission and supply
pipelines and other infrastructure depends on many factors, many of which are
beyond our control, such as government funding, costs of land acquisition,
national and local government approvals, and timely completion of construction.
Development of the natural gas market depends on the establishment of long-term
natural gas supply contracts with natural gas utilities or large end-users, such
as power and chemical plants. The demand of these buyers for natural gas could
be affected by a number of regulatory and market factors, such as regulation of
coal prices, government power and utility policies, chemical commodity cycles,
electricity pricing and demand, and environmental policies.
13
CNOOC largely controls us and we regularly enter into related party
transactions with CNOOC and its affiliates
CNOOC indirectly owned 70.64% of our shares as of June 8, 2005. As a
result, CNOOC is able to control the composition of our board of directors,
determine the timing and amount of our dividend payments and otherwise control
us. Although CNOOC is required to comply with provisions in the Hong Kong Stock
Exchange listing rules relating to protection for minority shareholders, there
can be no assurance that CNOOC will act in a manner that benefits all of our
shareholders. If CNOOC takes actions that favor its interests over ours, our
results of operations and financial position may be adversely affected. We
regularly enter into transactions with CNOOC and its affiliates, including China
Oilfield Services Limited and CNOOC Offshore Oil Engineering Company Limited.
For the year ended December 31, 2004, sales to CNOOC and its affiliates
accounted for 25.3% of our total revenues. For further details, see "Item
7--Major Shareholders and Related Party Transactions." Our transactions with
CNOOC and its affiliates constitute connected transactions under the Hong Kong
Stock Exchange listing rules. We must obtain the prior approval of the Hong Kong
Stock Exchange to engage in some of these transactions and may also be required
to obtain the prior approval of our independent directors and our independent
shareholders. If we do not obtain these approvals, we may not be allowed to
execute these transactions, and our business operations and financial condition
could be adversely affected.
Under current PRC law, CNOOC has the exclusive right to enter into
production sharing contracts with international oil and gas companies for
petroleum exploration and production offshore China. CNOOC has undertaken to us
that it will transfer all of its rights and obligations under any new production
sharing contracts to us, except those relating to its administrative functions.
PRC law restricts us from contracting directly with foreign enterprises for
these purposes without CNOOC. The interests of CNOOC in entering into production
sharing contracts with international oil and gas companies may differ from our
interest, especially with respect to the criteria for determining whether, and
on what terms, to enter into production sharing contracts. Our future business
development may be adversely affected if CNOOC does not enter into new
production sharing contracts on terms that are acceptable to us.
Our business performance relies heavily on our sales to several major
customers and a substantial drop in sales to any of these customers could have
a material adverse effect on our results of operations
We sell a significant proportion of our production to CNOOC and its
affiliates and China Petroleum & Chemical Corporation, or Sinopec. For the years
ended December 31, 2002, 2003 and 2004, sales to CNOOC and its affiliates
accounted for 16.5%, 20.3% and 25.3%, respectively, of our total operating
revenues, while sales to Sinopec accounted for 26.1%, 17.0% and 19.3%,
respectively, of our total operating revenues. CNOOC has a controlling interest
in us. However, our transactions with CNOOC and its affiliates are on commercial
terms and CNOOC does not guarantees our sales volume or profit margin. Sinopec
has its own oil and gas fields and has the right to import crude oil directly
from the international market. We do not have any long-term sales contracts with
CNOOC and its affiliates or Sinopec. Our business, results of operations and
financial condition would be adversely affected if either CNOOC and its
affiliates or Sinopec significantly reduces their crude oil purchases from us
and we cannot find another ready buyer in the international market to purchase
our crude oil at comparable prices.
The PRC petroleum and natural gas industries are highly competitive
and our success depends on several factors
We compete in the PRC and international markets for customers, capital
financing and business opportunities, including desirable oil and gas prospects.
The performance of our competitors may also affect the international market
price for comparable crude oil, which in turn would likely affect the price of
our crude oil. Our principal competitors in the PRC market are PetroChina and
Sinopec. For further details, see "Item 4--Information on the Company--Business
Overview--Competition."
We are the dominant player in the oil and gas industry offshore China.
Currently, we are the only company permitted to engage in oil and gas
exploration offshore China in cooperation with international
14
oil and gas companies. Any change to PRC law that allows new entrants to
conduct oil and gas exploration activities offshore China in cooperation with
international oil and gas companies could increase the competition for new oil
and gas properties offshore China.
CNOOC has undertaken to us that so long as it retains a controlling
interest in us and our securities are listed on the Hong Kong Stock Exchange,
the New York Stock Exchange or other securities trading systems in other parts
of the world, we will have the exclusive right to exercise CNOOC's rights to
engage in offshore oil and gas exploration, development, production and sales in
the PRC and that it will not compete with us in this business. However, CNOOC's
controlling interest in us may not continue in the future and CNOOC's
undertaking may be subject to interpretative challenges. See "Item
4--Information on the Company--History and Development--Corporate Structure" and
"Item 7--Major Shareholders and Related Party Transactions."
Exploration, development and production risks and natural disasters
affect our operations and could result in losses that are not covered by
insurance
Our petroleum exploration, development and production operations are
subject to various risks, including pipeline ruptures and spills, fires,
explosions, encountering formations with abnormal pressures, blowouts, cratering
and natural disasters. Any of these risks could result in loss of hydrocarbons,
environmental pollution and other damage to our properties and the properties of
operators under production sharing contracts. In addition, we face the risk that
we may not discover any economically productive natural gas or oil reservoirs.
The costs of drilling, completing and operating wells also are uncertain and are
subject to numerous factors beyond our control, including:
o weather conditions;
o natural disasters;
o equipment shortages and delays; and
o lack of adequate transportation facilities.
We maintain insurance coverage against some, but not all, potential
losses. We do not maintain business interruption insurance for all of our oil
and gas fields. We may suffer material losses resulting from uninsurable or
uninsured risks or insufficient insurance coverage.
For further information on insurance coverage, see "Item 4--Information
on the Company--Business Overview--Operating Hazards and Uninsured Risks."
Some overseas countries in which we have operations or may have
operations in the future may not have diplomatic or trade relations with other
countries and may be subject to trade or economic sanctions imposed by such
other countries
We currently have overseas operations and assets in Indonesia,
Australia, Canada, Morocco and Myanmar, and may expand our operations into other
countries to further enhance our reserve base and diversify our geographic risk
profile. While these countries in which we have operations or may have
operations in the future may maintain an amicable relationship with China, some
of them may not have diplomatic or trade relations with other countries and may
be subject to trade or economic sanctions imposed from time to time by such
other countries. We will endeavor to limit our investment and scale of
operations in these foreign jurisdictions to minimize our exposure, but we
cannot assure you that the operations and assets that we currently have or in
the future may have in overseas countries will not be affected by trade or
economic sanctions that may be imposed by other countries due to their
deteriorated relations with each other. Our business and results of operations
may be adversely affected if such sanctions are imposed and result in
interruption of our overseas operations or non-accessibility of our overseas
assets for a significant period of time.
15
We are exposed to operating risks in some overseas countries as a
result of our acquisition of oil and gas interests located in these regions
We have acquired interests in oil and gas properties located in various
overseas countries, including Indonesia, Australia, Canada, Morocco and Myanmar.
See "Item 4--Information on the Company--Business Overview--Principal Oil and
Gas Regions--Overseas Activity," "--Natural Gas Business--Overseas Activity" and
"Item 5--Operating and Financial Review and Prospects--Operating
Results--Acquisitions and Overseas Activities." These interests are subject to
operating risks in their respective regions, including economic and political
risks.
Our non-PRC interests are subject to the laws and regulations of these
non-PRC jurisdictions, including those relating to the development, production,
marketing, pricing, transportation and storage of natural gas and crude oil,
taxation and environmental and safety matters. In addition, our overseas
operations generally are subject to production sharing arrangements with
production sharing partners. As we expand to different countries, we may become
exposed to various operating risks in each of these jurisdictions. Our non-PRC
interests may be adversely affected by changes in governmental policies or
social instability or other political, economic or diplomatic developments in or
affecting these foreign nations which are not within our control including,
among other things, a change in crude oil or natural gas pricing policy, the
risks of war and terrorism, expropriation, nationalization, renegotiation or
nullification of existing concessions and contracts, taxation policies, foreign
exchange and repatriation restrictions, changing political conditions, foreign
exchange rate fluctuations and currency controls.
The Tangguh LNG project is a greenfield project and may not be
successful
In January 2003, we paid approximately US$275 million to acquire the
equivalent of a 12.5% equity interest in the Tangguh LNG project in Indonesia.
In May 2004, we acquired from British Gas International Limited a 20.767%
interest in Muturi production sharing contract offshore Indonesia for a
consideration of US$105.1 million. As a result, our interest in Muturi
production sharing contract increased to 64.767% and our interest in the Tangguh
LNG project increased to 16.96%. The Tangguh LNG project is a greenfield project
with a limited operational track record, and is subject to risks associated with
attaining government approvals, delays in the development of LNG facilities
required to process gas, and lower than expected demand for gas reserves from
this project. The partners in the Tangguh LNG project have entered into a
25-year supply contract to provide up to 2.6 million tonnes of liquefied natural
gas per year to a liquefied natural gas terminal being developed by CNOOC and
its partners in Fujian Province of China and a 20-year supply contract to
provide up to 1.35 million tonnes of liquefied natural gas per year to two South
Korean companies, SK Power Company Limited and POSCO. The expected time to begin
supplying liquefied natural gas under these two supply contracts is 2008 and
2005, respectively. The Tangguh LNG partners have also signed contracts to
provide liquefied natural gas to North America. These contracts, however, may
not be sufficient to make the project commercially viable. We cannot assure you
that the parties to the Tangguh LNG project will be able to secure additional
contracts to make the project commercially viable. For further details of our
investment in the Tangguh LNG project, see "Item 4--Information on the
Company--Business Overview--Natural Gas Business--Overseas Activity."
We may not be able to obtain external financing that is acceptable to
us for business development purposes
From time to time, we must secure external debt and equity financing to
implement our development plans and fund our other business requirements.
Our ability to obtain external financing is subject to various
uncertainties, including:
o our results of operations, financial condition and cash flows;
o the amount of capital that other PRC and Hong Kong entities may
seek to raise in the international capital markets;
16
o economic, political and other conditions in the PRC and Hong
Kong;
o the PRC government's policies relating to foreign currency
borrowings; and
o conditions in the PRC, Hong Kong and international capital
markets.
If we are unable to obtain sufficient funding for our operations or
development plans, our business, revenues, net income and cash flows could be
adversely affected. For additional information on our capital expenditure plans
and financing requirements, see "Item 5--Operating and Financial Review and
Prospects--Liquidity and Capital Resources."
Once we issue debt securities or otherwise incur indebtedness, we
become subject to risks that impact the underlying principal of such
indebtedness. While all our current debt securities are rated investment grade
by rating agencies, we cannot assure you that such ratings will not change due
to internal or external factors. These factors may be beyond our control. Even
if there is no default or event of default on our part, a market perception of
an increased likelihood of a default may have a material adverse effect on our
outstanding indebtedness as well as on our business operations.
You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to 2002, nor may you be able
to assert claims against our current independent public accountants for
financial statements previously audited by Arthur Andersen
On June 6, 2002, we terminated the engagement of Arthur Andersen & Co
as our independent public accountants. Prior to that date, Arthur Andersen had
audited our financial statements. Our selected historical financial data for the
years ended, and as of, December 31, 2000 and 2001 set forth in "Item 3--Key
Information--Selected Financial Data" were based on our financial statements
audited by Arthur Andersen. On June 15, 2002, Arthur Andersen was convicted of
federal obstruction of justice charges in connection with the U.S. government's
investigation of Enron Corporation. On August 31, 2002, Arthur Andersen
voluntarily relinquished its licenses to practice public accountancy in all
states of the United States, thereby effectively ceasing to exist as a global
accounting firm. Accordingly, it may be difficult or impossible for you to
assert any claims against, or recover any damages from, Arthur Andersen, in
respect of this annual report, including in respect of the financial statements
previously audited by Arthur Andersen. Moreover, our current independent public
accountants, Ernst & Young, have not reaudited the financial statements
previously audited by Arthur Andersen. Therefore, it is highly unlikely that you
will be able to assert claims against, or recover any damages from, Ernst &
Young, in respect of the financial statements that were previously audited by
Arthur Andersen.
Risks relating to the PRC petroleum industry
A change in PRC petroleum industry regulations could have an adverse
effect on our operations
The PRC government exercises control over the PRC petroleum industry,
including with respect to licensing, exploration, production, distribution,
pricing, exports and allocation of various resources. Since March 2003, the PRC
government has undergone substantial organizational reforms. We cannot assure
you that the legal regime affecting our businesses will remain substantially
unchanged. As of the date of this annual report, the National Development and
Reform Commission has become the primary coordinator for the petroleum industry
and, together with other relevant governmental agencies, provides regulatory
supervision over the petroleum industry. Prior to March 2003, the primary
coordinator for the petroleum industry was the State Economic and Trade
Commission, which has been merged partly into the National Development and
Reform Commission, partly into the Ministry of Commerce and partly into the
State-owned Assets Supervision and Administration Commission.
In the past, we have benefited from various favorable PRC government
policies, laws and regulations that were enacted to encourage the development of
the offshore petroleum industry. See "Item 4--Information on the
Company--Regulatory Framework--Special Policies Applicable to the
17
Offshore Petroleum Industry in China." However, there can be no assurance that
the PRC government will continue existing policies or that it will not adopt
new policies, laws or regulations.
In addition, existing PRC regulations require us to apply for and
obtain various PRC government licenses and other approvals, including in some
cases approvals for amendments and extensions of existing licenses and
approvals, to conduct exploration and development activities offshore China. If
we are unable to obtain any necessary approvals, our reserves and production
would be adversely affected. See "Item 4--Information on the Company--Regulatory
Framework."
Increased competition from foreign companies as a result of China's
entry into the World Trade Organization may adversely affect our business
Effective December 11, 2001, the PRC became a member of the World Trade
Organization, or WTO. China's WTO commitments require it, within five years from
the date of China's accession to the WTO, to lift restrictions that prohibit
foreign companies from directly selling crude and processed oil in China. The
sale of natural and liquefied petroleum gas is not specifically dealt with under
China's market-access commitments relating to distribution services (as is the
case with crude and processed oil). On April 6, 2004, the PRC Ministry of
Commerce promulgated the Measures for the Administration on Foreign Investment
in Commercial Fields, which generally allow foreign companies, through
foreign-invested enterprises, to engage in retail and wholesale businesses other
than those subject to special administration by the PRC government such as
direct sale of crude and processed oil in China. The lifting of the restrictions
on distribution of natural and liquefied petroleum gas and the subsequent
lifting of the restrictions on distribution of crude and processed oil in
accordance with China's WTO commitments will increase competition and may
adversely affect our business.
We may be penalized if we fail to comply with existing or future
environmental laws and regulations
Our business is subject to environmental protection laws and
regulations in the PRC, as well as other jurisdictions, which, among other
things:
o impose fees for the discharge of waste substances;
o require the payment of fines and damages for serious
environmental pollution; and
o provide that the government may, at its discretion, close or
suspend any facility which fails to comply with orders requiring
it to cease or cure operations causing environmental damage.
We believe that all of our facilities and operations are in material
compliance with the requirements of the relevant environmental protection laws
and regulations. However, amendment of existing laws or regulations may impose
additional or more stringent requirements. In addition, our compliance with such
laws or regulations may require us to incur significant capital expenditures or
other obligations or liabilities, which could create a substantial financial
burden on us. For a further discussion of the environmental regulations,
particularly those in the PRC, see "Item 4--Information on the Company--Business
Overview--Environmental Regulation."
Risks relating to the PRC
PRC economic and political conditions may adversely affect our
operations
Most of our businesses, assets and operations are located in the PRC.
The economic system of the PRC differs from the economies of most developed
countries in many respects, including:
o government investment;
o level of development;
18
o control of capital investment;
o control of foreign exchange; and
o allocation of resources.
The economy of the PRC has been undergoing a transformation from a
planned economy to a market-oriented economy. In recent years the PRC government
has implemented economic reform measures emphasizing decentralization,
utilization of market forces in the development of the PRC economy and a higher
level of management autonomy. These economic reform measures have and will
continue to subject our businesses to some uncertainty. In the future, our
operating results could be adversely affected by changes to the laws and
regulations that govern our industry and changes in the PRC political and
economic systems.
The PRC economy has experienced significant growth in the past 25
years, but the growth has been uneven both geographically and among various
sectors of the economy. Economic growth has also been accompanied by periods of
high inflation. The PRC government has implemented various policies from time to
time to restrain the rate of such economic growth, control inflation and
otherwise regulate economic expansion. In addition, the PRC government has
attempted to control inflation by controlling the prices of basic commodities.
Severe measures or other actions by the PRC government, such as placing
additional controls on prices of petroleum and petroleum products, could
restrict our business operations and adversely affect our financial position.
Government control of currency conversion and future movements in
exchange rates may adversely affect our operations and financial condition
A portion of our Renminbi revenue may need to be converted into other
currencies by our wholly owned principal operating subsidiary in the PRC to meet
our foreign currency obligations. We have substantial requirements for foreign
currency, including:
o debt service on foreign currency denominated debt;
o overseas acquisitions of oil and gas properties;
o purchases of imported equipment; and
o payment of dividends declared in respect of shares held by
international investors.
Our wholly owned subsidiary in the PRC may undertake current account
foreign exchange transactions without prior approval from the State
Administration for Foreign Exchange. It has access to current account foreign
exchange so long as it can produce commercial documents evidencing such
transactions and provided that they are processed through certain banks in
China. Foreign exchange transactions under the capital account, including
principal payments with respect to foreign currency denominated obligations,
will be subject to the registration requirements of the State Administration for
Foreign Exchange.
The value of the Renminbi against Hong Kong dollar, U.S. dollar and
other currencies fluctuates and is affected by, among other things, changes in
China's political and economic conditions. Since 1994, the conversion of
Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been
based on rates set by the People's Bank of China. The exchange rate may become
volatile and the Renminbi may be devalued against the Hong Kong dollar, U.S.
dollar or other currencies, or the Renminbi may be permitted to enter into full
or limited free float, which may result in an appreciation in the value of the
Renminbi against the Hong Kong and U.S. dollars, any of which could have an
uncertain effect on our business and operating results.
In 2003, we prepaid most of our loans denominated in Japanese yen. We
also hedged the balance of these loans through currency swaps. For further
information on foreign
19
exchange risks, foreign exchange rates and hedging activities, see "Item
3--Key Information--Selected Financial Data" and "Item 11--Qualitative and
Quantitative Disclosure about Market Risk." However, we may be unable to
hedge our exposure to foreign currencies fully and future Renminbi
exchange rate movements could adversely affect our results of operations and
financial condition. Since we receive substantially all of our revenues and
express our profits in Renminbi, any devaluation of the Renminbi may also
materially and adversely affect the value of, and any dividends payable on our
shares and American depositary shares in foreign currency terms.
Certain legal restrictions on dividend distribution may have a
material adverse effect on our cash flows
We are a holding company. Our exploration, development, production and
sales business is owned and conducted through various wholly owned subsidiaries,
including CNOOC China Limited, our wholly foreign-owned enterprise in the PRC.
Accordingly, our future cash flows will consist principally of dividends from
our subsidiaries. The subsidiaries' ability to pay dividends to us is subject to
PRC regulations, including restriction that companies may pay dividends only out
of net income determined in accordance with PRC accounting standards and
regulations. In addition, under PRC laws, CNOOC China Limited is required to
allocate at least 10% of its net profit to a reserve fund until the balance of
the fund has reach 50% of its registered capital. Such reserve is not
distributable as cash dividends. Therefore, there is a risk that we could not
maintain sufficient cash flows due to these restrictions on dividend
distribution.
The interpretation and enforcement of PRC laws and regulations is
subject to some uncertainty
The PRC legal system is based on statutory law. Under this system,
prior court decisions may be cited as persuasive authority but are not binding.
Since 1979, the PRC government has been developing a comprehensive system of
commercial laws and considerable progress has been made in the promulgation of
laws and regulations dealing with economic matters, such as corporate
organization and governance, foreign investments, commerce, taxation and trade.
Because these laws, regulations and legal requirements are relatively new, and
because of the limited volume of published cases and judicial interpretations
and the non-binding nature of prior court decisions, the interpretation and
enforcement of these laws, regulations and legal requirements involve some
uncertainty.
The PRC government underwent substantial reforms after the National
People's Congress meeting in March 2003. The PRC government has reiterated its
policy of furthering reforms in the socialist market economy. No assurance can
be given that these changes will not have an adverse effect on business
conditions in China generally or on our business in particular.
Risks relating to our ADSs and shares
Additional shares or ADSs eligible for public sale could adversely
affect the price of our shares or ADSs
Sales, or the real or perceived possibility of sales, of a significant
number of additional shares in the public market could adversely affect
prevailing market prices for our ADSs and shares. As of June 8, 2005, CNOOC,
through its wholly owned subsidiaries, CNOOC (BVI) Limited and Overseas Oil &
Gas Corporation Ltd., held approximately 70.64% of our shares and the rest of
our shares were held by public investors, including institutional and corporate
investors. As of June 8, 2005, neither CNOOC (BVI) Limited nor Overseas Oil &
Gas Corporation Ltd. had sold any of their holdings of our shares. We cannot
predict the effect, if any, that sales of our shares, including sales of large
positions held by institutional and corporate investors, or the availability of
our shares for future sale, will have on the market price of our shares or ADSs.
ITEM 4. INFORMATION ON THE COMPANY
20
A. HISTORY AND DEVELOPMENT
Our legal and commercial name is CNOOC Limited. We were incorporated
with limited liability on August 20, 1999 in Hong Kong under the Companies
Ordinance of Hong Kong. Our business registration number in Hong Kong is 685974.
Under the third section of our Memorandum of Association, we may do anything
which we are permitted to do by any enactment or rule of law. Our head office is
located at 65th Floor, Bank of China Tower, One Garden Road, Central, Hong Kong,
and our telephone number is 852-2213-2500. We have appointed CT Corporation
System, 111 Eighth Avenue, New York, New York 10011, as our agent for service of
process.
The PRC government established CNOOC, our controlling shareholder, as
the state-owned offshore petroleum company of China in 1982 under the Regulation
of the People's Republic of China on Exploitation of Offshore Petroleum
Resources in Cooperation with Foreign Enterprises, whereby CNOOC assumed overall
responsibility for the administration and development of PRC offshore petroleum
operations with foreign oil and gas companies. Prior to March 2003, CNOOC was
regulated and supervised by the State Economic and Trade Commission. Since March
2003, the PRC government has undergone substantial reform. The National
Development and Reform Commission has succeeded the State Economic and Trade
Commission as the primary coordinator for the petroleum industry.
Prior to CNOOC's internal business reorganization in 1999, CNOOC
performed both commercial and administrative functions relating to exploration
and development offshore China, including:
o exercising the exclusive right to cooperate with foreign partners
in offshore petroleum exploration, development, production and
sales activities, and taking participating interests in
production sharing contracts;
o organizing international bidding for offshore petroleum
exploitation;
o conducting independent exploration, development, production and
sales activities in independently operated oil and gas fields
offshore China;
o awarding projects to and signing bilateral contracts with foreign
partners for offshore petroleum exploitation;
o reviewing and confirming appraisal reports and overall
development plans required under production sharing contracts;
and
o obtaining from the PRC government all approvals, permits,
licenses, consents and special policies necessary under
production sharing contracts.
Reorganization
Pursuant to CNOOC's internal business reorganization in 1999, CNOOC
transferred all of its then current operational and commercial interests in its
offshore petroleum business to us. As a result, we and our subsidiaries are the
only vehicle through which CNOOC engages in petroleum exploration, development,
production and sales activities both within and outside China.
The assets and liabilities primarily relating to the offshore petroleum
business that were transferred to us in the reorganization included:
o 37 production sharing contracts and one geophysical survey
agreement;
o eight independent development and production projects;
o a 30% interest in Shanghai Petroleum and Natural Gas Company
Limited;
21
o the land use rights to terminal facilities in Nanhai, Weizhou and
the western part of the Bohai Bay; and
o loans from, and swap agreements with, various PRC and foreign
banks.
In addition, CNOOC transferred 917 employees to us to facilitate the
transfer of the oil and natural gas businesses previously operated by CNOOC.
CNOOC retained its commercial interests in operations and projects not
related to oil and gas exploration and production, including:
o a petrochemical project in Huizhou, Guangdong Province;
o a fertilizer plant in Hainan Province; and
o a liquefied natural gas project in Guangdong.
CNOOC also retained all of its administrative functions, which it
performed prior to the reorganization, including:
o organizing international bidding for offshore petroleum
exploitation;
o awarding projects to and signing bilateral contracts with foreign
partners for offshore petroleum exploitation;
o approving any extension of the period for the completion of the
appraisal work on petroleum discovery under the production
sharing contracts; and
o submitting the overall development plans, reports of the oil and
gas fields and the environmental impact statements related to the
production sharing contracts to the PRC governmental authorities.
Undertakings
CNOOC has undertaken to us that:
o we will enjoy the exclusive right to exercise all of CNOOC's
commercial and operational rights under the PRC laws and
regulations relating to the exploration, development, production
and sales of the PRC offshore oil and natural gas;
o it will transfer to us all of CNOOC's rights and obligations
under any new production sharing contracts and geophysical
exploration operations, except those relating to CNOOC's
administrative functions;
o it will not engage or be interested, directly or indirectly, in
oil and natural gas exploration, development, production and
sales in or outside the PRC;
o we will be able to participate jointly with CNOOC in negotiating
new production sharing contracts and to set out our views to
CNOOC on the proposed terms of new production sharing contracts;
o we will have unlimited and unrestricted access to all data,
records, samples and other original data owned by CNOOC relating
to oil and natural gas resources;
o we will have an option to make investment in liquefied natural
gas projects that CNOOC invested or proposed to invest, and CNOOC
will at its own expense help us to procure all necessary
government approvals needed for our participation in these
projects; and
22
o we will have an option to participate in other businesses related
to natural gas in which CNOOC invested or proposed to invest, and
CNOOC will procure all necessary government approvals needed for
our participation in such business.
The undertakings from CNOOC will cease to have any effect:
o if we become a wholly owned subsidiary of CNOOC;
o if our securities cease to be listed on any stock exchange or
automated trading system; or
o 12 months after CNOOC or any other PRC government-controlled
entity ceases to be our controlling shareholder.
Corporate Structure
CNOOC indirectly owned or controlled an aggregate of approximately
70.64% of our shares as of June 8, 2005. There have been no changes to our
corporate structure since such date. Accordingly, CNOOC continues to be able to
exercise all the rights of a controlling shareholder, including electing our
directors and voting to amend our articles of association. Although CNOOC has
retained a controlling interest in us, the management of our business will be
our directors' responsibility.
23
The following chart sets forth our controlling entities and our
principal subsidiaries as of June 8, 2005.
----------------------------
| China National Offshore |
| Oil Corporation |
| (PRC) |
----------------------------
|
| 100%
|
----------------------------
| Overseas Oil & Gas |
| Corporation Ltd. |
| (Bermuda) |
----------------------------
|
| 100%
|
----------------------------
| |
| CNOOC (BVI) Limited |
| (British Virgin Islands) |
| |
--------------------------- ----------------------------
| |\ |
| Public Shareholders and | \ | 70.64%(2)
| Corporate Investors | \ 29.36 % |
| | \ ----------------------------
--------------------------- \ | CNOOC Limited |
\ | (Hong Kong) |
----------------| |
----------------------------
|
|
----------------------------------------------------------------------------------------------------------
| | | |
| 100% | 100% | 100% | 100%
| | | |
---------------------------- ---------------------------- ------------------------------ ----------------------------
| CNOOC | | | | China Offshore Oil | | Finance |
| International | | CNOOC China | | (Singapore) | | Subsidiaries(6) |
| Limited(3) | | Limited(4) | | International Pte. Ltd.(5) | | (British Virgin Islands) |
| (British Virgin Islands) | | (PRC) | | (Singapore) | | |
---------------------------- --------------------------- ------------------------------ ----------------------------
-----------------
(1) Overseas Oil & Gas Corporation Ltd. also directly owns five shares of
our company.
(2) In 2004, we repurchased a total of 18,453,000 shares in the open market
based on the general mandates approved by our shareholders on May 29,
2003 and June 14, 2004. The repurchased shares have been cancelled. Due
to the decrease of our total issued and outstanding shares, CNOOC (BVI)
Limited's interest in us increased from 70.61% to 70.64%. For further
details about our share buybacks, see "Item 16E--Purchases of Equity
Securities by the Issuer and Affiliated Purchasers."
(3) Owner of our overseas interests in petroleum exploration and production
businesses and operations.
(4) Owner of substantially all of our PRC petroleum exploration and
production businesses, operations and properties.
(5) Business vehicle through which we engage in sales and marketing
activities in the international markets.
(6) Include CNOOC Finance (2002) Limited, the financing vehicle through
which we issued our US$500 million 6.375% guaranteed notes due 2012,
CNOOC Finance (2003) Limited, the financing vehicle through which we
issued our US$200 million 4.125% guaranteed notes due 2013 and
US$300 million 5.5% guaranteed notes due 2033, and CNOOC Finance
(2004) Limited, the financing vehicle through which we issued
our US$1 billion zero coupon guaranteed convertible bonds due 2009.
These finance companies are our wholly owned subsidiaries with our
company as their sole corporate director.
Capital Expenditures
Our capital expenditures in 2002, 2003 and 2004 amounted to Rmb
11,566.9 million, Rmb 12,372.5 million and Rmb 18,622.0 million (US$2,250.0
million), respectively. For 2005, we have budgeted approximately US$3.1 billion
for capital expenditures, approximately US$220.9 million of which is budgeted
for general exploration activities offshore China and approximately US$1,624.8
million is budgeted for development activities offshore China. We expect to fund
our capital expenditures with our cash flows from operations and our borrowings.
For further details about our capital expenditures, see "Item 5--Operating and
Financial Review and Prospects--Liquidity and Capital Resources--Capital
Expenditures and Investments."
24
B. BUSINESS OVERVIEW
Overview
We are an oil and gas company engaged in the exploration, development
and production of crude oil and natural gas primarily offshore China. We are the
dominant producer of crude oil and natural gas offshore China and the only
company permitted to conduct exploration and production activities with
international oil and gas companies offshore China. As of December 31, 2004, we
had estimated net proved reserves of 2,230.0 million BOE, comprised of 1,455.6
million barrels of crude oil and condensate and 4,646.6 billion cubic feet of
natural gas. For the year 2004, our net production averaged 319,436 barrels per
day of crude oil, condensate and natural gas liquids and 364.1 million cubic
feet per day of natural gas, which together totaled 382,513 BOE per day.
Our net proved reserves increased from 1,757.4 million BOE as of
December 31, 2000 to 2,230.0 million BOE as of December 31, 2004 which
represents a compound annual growth rate of 6.1%. Based on net proved reserves,
we are one of the largest independent oil and gas exploration and production
companies in the world. In the petroleum industry, an "independent" company owns
oil and gas reserves independently of other downstream assets, such as refining
and marketing assets, whereas an integrated company owns downstream assets in
addition to oil and gas reserves. As of December 31, 2004, approximately 51.6%
of our net proved reserves were classified as net proved undeveloped. We plan to
spend US$1,624.8 million developing our reserves primarily offshore China and
US$220.9 million for exploration primarily offshore China in 2005.
We conduct exploration, development, production and sale activities
through both independent operations and production sharing contracts with
foreign partners. We have added to our reserves in recent years primarily
through our independent operations. As of December 31, 2004, independent
properties accounted for 61.0% of our total net proved reserves and independent
net proved undeveloped reserves accounted for 64.7% of our total net proved
undeveloped reserves. We are the operator of all of our independent producing
properties. For the year ended December 31, 2004, production from our
independent properties accounted for 43.9% of our total net production.
Our controlling shareholder, CNOOC, has the exclusive right to enter
into contracts with international oil and gas companies to conduct exploration
and production activities offshore China. Under these production sharing
contracts, we have the sole right to acquire, at no cost, participating
interests in any successful discovery offshore China made by our foreign
partners. Our foreign partners can recover their exploration costs under the
production sharing contracts only if a commercially viable discovery is made. As
of December 31, 2004, we had approximately 25 foreign partners under our
existing production sharing contracts offshore China, all of which are
international oil and gas companies, including BP, ChevronTexaco,
ConocoPhillips, Unocal, Agip, Burlington Resources, Devon Energy, Husky,
Kerr-McGee, Newfield Exploration and Royal Dutch Shell. As of December 31, 2004,
we were a party to 27 production sharing contracts. We are currently the
operator or joint operator of most of the properties developed under our
production sharing contracts.
Natural gas is becoming an increasingly important part of our business
strategy because of rapidly growing domestic demand. In view of increasing
demand for natural gas, we have continued to develop our natural gas reserves
and invested in liquefied natural gas related upstream projects outside the PRC.
We continue to explore for natural gas and develop natural gas properties. We
have acquired interests in gas reserves located in Tangguh, Indonesia and the
North West Shelf of Australia. In addition, CNOOC, our controlling shareholder,
has granted us an option to invest in liquefied natural gas projects or other
natural gas related business in which CNOOC invested or proposed to invest. The
terms of this option require us, if we exercise the option, to reimburse CNOOC
for any contribution CNOOC has made with respect to the facility together with
interest calculated at the prevailing market rate.
Competitive Strengths
We believe that our historical success and future prospects are
directly related to a combination of our strengths, including the following:
25
o large proved reserve base with significant exploitation
opportunities;
o sizable operating area with demonstrated exploration potential;
o successful independent exploration and development record;
o competitive cost structure;
o reduced risks and access to capital and technology through
production sharing contracts;
o strategic position in China's growing natural gas markets; and
o experienced management team.
Large proved reserve base with significant exploitation opportunities
Based on net proved reserves as of December 31, 2004 and average net
daily production for the year ended December 31, 2004, we had a
reserve-to-production ratio of 15.9 years. As of December 31, 2004,
approximately 51.6% of our net proved reserves were classified as net proved
undeveloped. We expect our production to grow significantly as these undeveloped
properties begin producing.
Sizable operating area with demonstrated exploration potential
The offshore China exploration area is approximately 1.3 million square
kilometers in size, about twice as large as the U.S. Gulf of Mexico exploration
area. Only limited exploration has been conducted in prospective natural gas
regions of the Western South China Sea and the East China Sea. Since CNOOC's
inception in 1982 to the end of 2004, a total of 773 exploration wells have been
drilled offshore China, including 491 wildcat wells with a success rate of
approximately 34%. During the past five years ended December 31, 2004, we made
23 discoveries and foreign parties announced 16 discoveries offshore China.
Successful independent exploration and development record.
From the inception of CNOOC in 1982 to December 31, 2004, we achieved a
success rate of approximately 45% on our 214 offshore China independent wildcat
wells, while our foreign partners achieved a success rate of approximately 27%
on their 277 offshore China wildcat wells. As of December 31, 2004, independent
properties accounted for 61.0% of our total net proved reserves and independent
net proved undeveloped reserves accounted for 64.7% of our total net proved
undeveloped reserves. During the past five years ended December 31, 2004, we
completed seven of our major independent development projects on time and under
budget.
Competitive cost structure
For the year ended December 31, 2004, our total offshore China lifting
costs were US$5.31 per BOE. Total lifting costs for independent operations
offshore China were US$5.28 per BOE during the same period. Lifting costs
consist of operating expenses and production taxes. We have kept our offshore
China lifting costs low through various measures including more efficient use of
existing offshore facilities, the linking of employee bonuses to cost reduction
and the adoption of new technology in our operations. We believe that such cost
structure allows us to compete effectively even in a low crude oil price
environment.
Reduced risks and access to capital and technology through production
sharing contracts
Production sharing contracts help us minimize our offshore China
finding costs, exploration risks and capital requirements because our foreign
partners are responsible for all costs associated with exploration. Our foreign
partners recover their exploration costs only if a commercially viable discovery
is made.
26
Strategic position in China's growing natural gas markets
The proximity of our natural gas reserves to the major demand areas in
the coastal regions of China provides us with a competitive advantage over other
natural gas suppliers in China, whose natural gas reserves are located primarily
in northwest and southwest China. We have natural gasfields near many of China's
rapidly growing coastal areas, including Hong Kong, Shanghai and Tianjin. We
have also acquired interests in gas reserves located in Tangguh, Indonesia and
the North West Shelf of Australia. In addition, CNOOC has granted us an option
to invest in liquefied natural gas projects or other natural gas related
businesses in the PRC in which CNOOC invested or proposed to invest. For further
information, see "--Natural Gas Business."
Experienced management team
Our senior management team has extensive experience in the oil and gas
industry, and most of our executives have been with the CNOOC group since its
inception in 1982. We evolved from a company heavily reliant on production
sharing contracts with foreign partners to a company with a balance of both
independent and production sharing contract operations. Our management team and
staff have had the opportunity to work closely with foreign partners both within
and outside China. We have implemented international management practices
including incentive compensation schemes for our employees. In addition, we have
adopted share option schemes for our employees. See "Item 6--Directors, Senior
Management and Employees--Share Ownership."
Business Strategy
We intend to continue expanding our oil and gas exploration and
production activities and, where appropriate, to continue making strategic
investments in natural gas businesses. While our expansion strategy will
continue to focus primarily on offshore China, we may also consider overseas
acquisition opportunities that may be presented to us. The principal components
of our strategy are as follows:
o increase production primarily through the development of our net
proved undeveloped reserves;
o add to our reserves through independent exploration and
production sharing contracts;
o capitalize on the growing demand for natural gas in China;
o selectively pursue acquisitions to ensure long-term production
growth, geographical reserves risk diversification, and to
further our natural gas strategy;
o maintain operational efficiency and low production costs; and
o maintain financial flexibility through conservative financial
practices.
Increase production primarily through the development of our net
proved undeveloped reserves
As of December 31, 2004, approximately 51.6% of our proved reserves
were classified as net proved undeveloped, which gives us the opportunity to
achieve substantial production growth even without additional reserve
discoveries, assuming that we will be able to develop these reserves more
quickly than we deplete our currently producing reserves. We are currently
undertaking a number of large development projects located primarily in the
Bohai Bay and the Western South China Sea, which will substantially increase
production. We plan to spend approximately US$1,624.0 million in 2005 to develop
our net proved undeveloped reserves offshore China. We also plan to spend
approximately US$207.5 million to develop our overseas net proved undeveloped
reserves.
Add to our reserves through independent exploration and production
sharing contracts
27
We plan to concentrate our independent exploration efforts in existing
operating areas with a particular emphasis on natural gas. We plan to spend
approximately US$212.1 million in 2005 on independent exploration activities. We
plan to augment independent exploration efforts while continuing to enter into
production sharing contracts with foreign partners to lower capital requirements
and exploration risks. We currently have identified 43 drilling prospects. In
2005, we plan to drill approximately 48 exploration wells, and acquire
independently approximately 9,500 kilometers and 2,675 square kilometers of 2D
seismic data and 3D seismic data, respectively. Our foreign partners under
existing production sharing contracts plan to drill approximately 28 exploration
wells, and acquire approximately 5,350 kilometers and 1,650 square kilometers of
2D seismic data and 3D seismic data, respectively, in 2005.
Capitalize on the growing demand for natural gas in China
We plan to capitalize on the growth potential of the PRC natural gas
market through the following initiatives:
o continue to develop natural gas fields and focus independent
exploration efforts on natural gas;
o evaluate whether to exercise the options to invest in CNOOC's
liquefied natural gas projects in China; and
o evaluate investment opportunities in related natural gas
businesses that will help develop markets for our natural gas
production.
To the extent we invest in businesses and geographic areas where we
have limited experience and expertise, we plan to structure our investments as
alliances or partnerships with parties possessing the relevant experience and
expertise.
Selectively pursue acquisitions to ensure long-term production
growth, geographical reserves risk diversification, and to further our natural
gas strategy
We plan to make selective acquisitions that will meet one or more of
our strategic objectives of enhancing our production profile, diversifying our
reserve base and geographic risk profile and furthering our natural gas
strategy. In addition, we evaluate acquisition opportunities based on our
expected economic return criteria. At the end of 2004, we and Golden Aaron Pte.
Ltd. and China Global Construction Limited formed a joint venture in Myanmar and
had entered into six production sharing contracts as of June 8, 2005. We will
act as the operator under these production sharing contracts. In early 2005,
through our wholly owned subsidiary CNOOC Belgium BVBA, we acquired a 16.69%
interest in MEG Energy Corp., a Canada based oil sand company, at a
consideration of 150 million Canadian dollars. We have also made significant
progresses implementing our natural gas strategy. In October 2003, we entered
into an agreement with the participants in the Gorgon Joint Venture in Australia
to purchase certain equity stake in the Gorgon gas development, and our
controlling shareholder, CNOOC, will arrange to purchase LNG directly from
Gorgon. In May 2004, we increased our interest in Indonesia's Tangguh LNG
project from 12.5% to 16.96%. In addition, in December 2004, we completed the
acquisition of a 5.3% interest in the upstream production and reserves of the
North West Shelf project. We believe these upstream acquisitions of gas reserves
will enhance our natural gas strategy by facilitating the supply of LNG to
China's rapidly growing coastal markets as well as provide us with access to
other gas-rich basins for further growth opportunities.
Maintain operational efficiency and low production costs
We will continue to maintain our low cost structure and operational
efficiency through the following initiatives:
o Apply up-to-date drilling, production and offshore engineering
technology to our operations through our oilfield service
providers; this technology includes long-range extension wells,
28
multilateral wells, advanced formation testing, multi-phase
transmission, monolayer pipeline and subsea technology, minimal
structure techniques and suction foundation technology;
o Proactively manage service contracts and cooperate with our
oilfield service providers to improve exploration efficiency and
reduce exploration costs; this measure includes using operational
techniques such as cluster drilling, which reduces drilling time
by one-third and lowers the related costs by up to 40%; and
o Maintain high production volume levels on an individual well
basis and increase the productivity of producing wells.
Maintain financial flexibility through conservative financial
practices
Currently, we have a strong financial profile with a low leverage
ratio. We intend to maintain our financial strength by managing key measures
such as capital expenditures, cash flows and fixed charge coverage. We intend to
actively manage our accounts receivable and inventory positions to enhance
liquidity and improve profitability. We will continue to monitor our foreign
currency denominated debt and to minimize our exposure to foreign exchange rate
fluctuations.
Selected Operating and Reserves Data
The following table sets forth our operating data and our net proved
reserves as of the time and for the periods indicated.
Year ended December 31,
-------------------------------------------------
2002 2003 2004
----------- -------------- --------------------
Net Production:
Oil (daily average bbls/day)............................. 298,625 306,464 319,436
Gas (daily average mmcf/day)............................. 272.6 291.0 364.1
Oil equivalent (BOE/day)................................. 346,639 356,729 382,513
Average net realized prices:
Oil (per bbl)....................................... US$24.35 US$28.11 US$35.41
Gas (per mcf)....................................... 2.98 2.87 2.75
Offshore China lifting costs (per BOE)................... 3.92 4.66 5.31
Overseas lifting costs (per BOE)(1)...................... 9.06 9.27 10.72
Net Proved Reserves (end of period):
Oil (mmbbls)............................................. 1,424.4 1,436.1 1,455.6
Gas (bcf)................................................ 3,547.9 4,154.4 4,646.6
Total (million BOE)...................................... 2,015.8 2,128.5 2,230.0
Proved developed reserves (million BOE).................. 794.3 914.6 1,080.7
Annual reserves replacement ratio........................ 281% 187% 173%
Estimated reserves life (years).......................... 15.9 16.3 15.9
Present value of estimated future net revenues before
income taxes (discounted at 10%) (million Rmb)......... 140,798 152,450 172,933
Standardized measure of discounted future net cash
flow (million Rmb)..................................... 100,141 109,800 125,387
----------
(1) Overseas lifting costs reflect lifting costs associated with our operations
in Indonesia and are calculated using the net entitlement method.
Our finding and development costs per BOE reported in prior years was
calculated by dividing the net reserve change for each reporting period
(excluding production and sales) into the costs incurred for the period, as
reported in the "Costs Incurred" disclosure required by Statement of Financial
accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." Due to the timing of the related costs incurred to find and develop
such proved reserves, this often includes quantities of proved reserves for
which a majority of the costs of development have not yet been incurred.
Conversely, it also often includes costs to develop proved reserves that had
been added in earlier years. Because it may not necessarily represent total
finding and development costs for projects under way or may not be indicative of
expected future finding and development costs, we discontinued reporting it in
our filings with the Securities and Exchange Commission.
29
At our request, Ryder Scott Company, independent petroleum engineering
consultants, carried out an independent evaluation of the reserves of selected
properties as of December 31, 2002, 2003 and 2004. For further information
regarding our reserves, see "Item 3--Key Information--Risk Factors--Risks
relating to our business--The oil and gas reserve estimates in this annual
report may require substantial revision as a result of future drilling, testing
and production" and "--Oil and Natural Gas Reserves."
The following table sets forth summary information with respect to our
estimated net proved reserves of crude oil and natural gas as at the dates
indicated.
Net proved reserves Net proved reserves
at December 31, at December 31, 2004
-------------------------- --------------------------------------
2002 2003 Developed Undeveloped Total
--------- --------------- ------------- ------------- ---------
Bohai Bay:
Crude oil (mmbbls).............................. 992.5 990.4 446.1 528.4 974.6
Natural gas (bcf)............................... 598.6 566.6 268.1 438.1 706.2
--------- --------------- ------------- ------------- ---------
Total (million BOE).......................... 1,092.3 1,084.8 490.8 601.5 1,092.3
========= =============== ============= ============= =========
Independent (million BOE).................. 595.1 556.3 335.6 269.9 605.5
Production sharing contracts
(million BOE).............................. 497.2 528.5 155.2 331.6 486.8
Western South China Sea:
Crude oil (mmbbls).............................. 160.4 173.7 71.5 118.2 189.7
Natural gas (bcf)............................... 2,511.2 2,564.0 1,832.8 652.0 2,484.8
--------- --------------- ------------- ------------- ---------
Total (million BOE):......................... 578.9 601.0 376.9 226.9 603.8
========= =============== ============= ============= =========
Independent (million BOE).................. 434.2 476.7 260.2 222.4 482.6
Production sharing contracts (million BOE). 144.7 124.3 116.7 4.5 121.2
Eastern South China Sea:
Crude oil (mmbbls).............................. 120.3 154.8 96.1 71.9 168.0
Natural gas (bcf)............................... 42.8 548.2 -- 730.8 730.8
--------- --------------- ------------- ------------- ---------
Total (million BOE):......................... 127.5 246.1 96.1 193.7 289.8
========= =============== ============= ============= =========
Independent (million BOE).................. -- 141.1 11.4 172.4 183.8
Production sharing contracts (million BOE). 127.5 105.0 84.7 21.3 106.0
East China Sea:
Crude oil (mmbbls).............................. 12.5 13.9 3.1 18.4 21.5
Natural gas (bcf)............................... 179.4 275.3 32.9 370.5 403.4
--------- --------------- ------------- ------------- ---------
Total (million BOE):......................... 42.4 59.8 8.6 80.1 88.7
========= =============== ============= ============= =========
Independent (million BOE).................. 42.4 12.7 8.6 80.1 88.7
Production sharing contracts (million BOE). -- 47.1 -- -- --
Overseas:
Crude oil (mmbbls).............................. 138.7 103.4 84.6 17.3 101.9
Natural gas (bcf)............................... 215.9 200.3 138.5 182.9 321.4
--------- --------------- ------------- ------------- ---------
Total (million BOE):......................... 174.7 136.8 107.7 47.8 155.5
========= =============== ============= ============= =========
Independent (million BOE).................. -- -- -- -- --
Production sharing contracts (million BOE). 174.7 136.8 107.7 47.8 155.5
Total:
Total crude oil (mmbbls)........................ 1,424.4 1,436.1 701.5 754.1 1,455.6
Total natural gas (bcf)......................... 3,547.9 4,154.3 2,272.3 2,374.3 4,646.6
--------- --------------- ------------- ------------- ---------
Total (million BOE):......................... 2,015.8 2,128.5 1,080.2 1,149.8 2,230.0
========= =============== ============= ============= =========
Independent (million BOE).................. 1,071.7 1,186.9 615.8 744.7 1360.5
Production sharing contracts (million BOE). 944.1 941.6 464.3 405.2 869.5
30
New Contracts Signed in 2004
In 2004, our controlling shareholder, CNOOC, signed one petroleum
contract as follows:
Interest Date of
No. Basin Block Partner of Agreement Area (km(2))
Partner(s)
(%)
------------------------------------------------------------------------------------------------------------
1 Eastern South 29/26 Husky Oil China 100 08/16/2004 3,965
China Sea
In 2004, we signed four petroleum contracts as follows:
Interest Date of
No. Basin Block Partners of Agreement Area (km(2))
Partner(s)
(%)
------------------------------------------------------------------------------------------------------------
1 Myanmar M Golden Aaron Pte Limited 13.75 10/21/04 7,788.13
HQCEC 5.0
2 Myanmar A-4 Golden Aaron Pte Limited 13.75 10/21/04 7,479.92
HQCEC 5.0
3 Myanmar M-10 Golden Aaron Pte Limited 13.75 10/21/04 13,778.8
HQCEC 5.0
4 Tangguh, N/A BP 37.1 01/30/04 N/A
Indonesia(1) MI Berau BV 16.3
Others 29.6
----------
(1) We increase our interest in this project from 12.5% to 16.96 % in 2004.
31
Exploration and Production
Summary
We currently conduct exploration, development and production activities
primarily in four areas offshore China:
o the Bohai Bay;
o the Western South China Sea;
o the Eastern South China Sea; and
o the East China Sea.
[GRAPHIC OMITTED]
In addition, we hold several equity interests in oil and gas
properties in overseas countries including Indonesia, Australia, Canada,
Morocco and Myanmar. See "--Overseas Activity," "--Natural Gas
Business--Overseas Activity" and "Item 5--Operating and Financial Review and
Prospects--Operating Results--Acquisitions and Overseas Activities."
32
As of December 31, 2004, we had estimated net proved reserves of
2,230 million BOE, comprised of 1,455.6 million barrels of crude oil and
condensate and 4,646.6 billion cubic feet of natural gas. As of December 31,
2004, we had interests in 36 producing properties and 37 properties under
development and appraisal offshore China. We are the operator or joint
operator of 21 oil and gas properties under production. In 2004, seven
properties offshore China commenced production. For the year 2004, net
production averaged 319,436 barrels per day of crude oil, condensate and
natural gas liquids and 364 million cubic feet per day of natural gas, which
together totaled 382,513 BOE per day, representing a 7.5% increase over the
annual average daily production for the year 2003.
We conduct our exploration, development and production activities
independently as well as through production sharing contracts and geophysical
survey agreements with foreign partners. A production sharing contract
contains provisions regarding the exploration, development, production and
operation of an oil and gas field and the formula through which foreign
partners may recover exploration, development and production costs and share
in the production after the successful development of petroleum reserves. See
"--Production Sharing Contracts--Offshore China" for a detailed discussion of
these arrangements.
We also conduct exploration efforts through geophysical survey
agreements with foreign companies. These geophysical survey agreements allow
international oil and gas companies to conduct geophysical studies before
deciding whether to negotiate a production sharing contract with CNOOC. If a
foreign partner decides to enter into a production sharing contract with
CNOOC, the costs and expenses that the foreign partner incurs in conducting
geophysical exploration may be recovered during the production period by the
foreign partner, subject to our confirmation. See "--Geophysical Survey
Agreements" for a detailed discussion of these arrangements. As of December
31, 2004, we were not a party to any geophysical survey agreements, although
we may enter into such agreements in the future.
The offshore China exploration area is approximately 1.3 million
square kilometers in size. We currently have rights to operate independently
or in conjunction with international oil and gas companies in 134 exploration
blocks covering approximately 627,271 square kilometers. We have access to
873,355 kilometers of 2D seismic data and 41,584 square kilometers of 3D
seismic data. From the beginning of CNOOC's operations in 1982 to December 31,
2004, a total of 773 exploration wells have been drilled, including 491
wildcat wells, with a success rate of approximately 34%. During this period we
achieved a success rate of approximately 45% on 214 independent exploration
wildcat wells, while our foreign partners achieved a success rate of
approximately 27% on their 277 exploration wildcat wells.
Oil and Natural Gas Reserves
We have a large base of net proved undeveloped reserves as a result
of our exploration successes. As of December 31, 2004, approximately 51.6% of
our net proved reserves were classified as net proved undeveloped. We are
undertaking a number of large development projects located primarily in the
Bohai Bay and the Western South China Sea and expect these projects to
substantially increase our production.
Our net proved reserves consist of our percentage interest in total
reserves, comprised of (i) our 100% interest in our independent oil and gas
properties (excluding the proved reserves attributable to our associated
company), (ii) our participating interest in the properties covered under our
production sharing contracts in the PRC and overseas, and (iii) our 30%
interest in the proved reserves of our associated company, less (i) an
adjustment for our share of royalties payable to the PRC government under our
production sharing contracts in the PRC, (ii) an adjustment for production
allocable to foreign partners under our production sharing contracts in the
PRC as reimbursement for exploration expenses attributable to our working
interest, and (iii) adjustments for share oil payable under our overseas
production sharing contracts to foreign governmental designees, and for any
domestic market obligation under which the contractor must sell a specified
percentage of its crude oil to the local overseas market at a reduced price.
Net proved reserves do not include any deduction for production taxes, which
are included in our operating expenses. Net production is calculated in the
same way as net proved reserves.
33
We explore for and develop our reserves offshore China under
exploration and production licenses granted by the PRC government. The PRC
government generally grants exploration licenses for individual blocks while
production licenses generally are granted for individual fields. All of our
proved reserves are under production licenses granted by the PRC government.
At our request, Ryder Scott Company, an independent petroleum
engineering consultant, evaluated our selected properties as of December 31,
2002, 2003 and 2004. For further information regarding our reserves, see "Item
3--Key Information--Risk Factors--Risks relating to our business--The oil and
gas reserves data in this annual report may require substantial revisions as a
result of future drilling, testing and production."
The following tables set forth net proved crude oil reserves, net
proved natural gas reserves and total net proved reserves, as of the dates
indicated, for our independent and production sharing contract operations in
each of our operating areas.
Total Net Proved Crude Oil Reserves
(mmbbls)
As of December 31, As of December 31, 2004
------------------------- ----------------------------------------
2002 2003 Developed Undeveloped Total
---------- ------------ ------------ --------------- -----------
Offshore China
Independent
Bohai Bay.............................. 507.8 474.3 291.0 196.8 487.8
Western South China Sea................ 108.4 135.2 29.6 118.0 147.6
Eastern South China Sea................ -- 56.6 11.4 57.7 69.1
East China Sea......................... 12.5 4.6 3.1 18.4 21.5
--------- ------------ ------------ --------------- -----------
Total.............................. 628.7 670.8 335.1 390.9 726.0
Production Sharing Contracts
Bohai Bay.............................. 484.7 516.1 155.2 331.6 486.8
Western South China Sea................ 52.0 38.5 41.9 0.1 42.0
Eastern South China Sea................ 120.3 98.1 84.7 14.1 98.8
East China Sea......................... -- 9.3 -- -- --
--------- ------------ ------------ --------------- -----------
Total.............................. 657.0 662.0 281.8 345.8 627.6
Combined
Bohai Bay.............................. 992.5 990.4 446.2 528.4 974.6
Western South China Sea................ 160.4 173.7 71.5 118.2 189.7
Eastern South China Sea................ 120.3 154.8 96.1 71.9 168.0
East China Sea......................... 12.5 13.9 3.1 18.4 21.5
--------- ------------ ------------ --------------- -----------
Total.............................. 1,285.7 1,332.7 616.9 736.9 1,353.8
Overseas(1)
Indonesia.............................. 138.7 103.4 84.6 17.3 101.9
--------- ------------ ------------ --------------- -----------
Total.............................. 138.7 103.4 84.6 17.3 101.9
--------- ------------ ------------ --------------- -----------
Total....................................... 1,424.4 1,436.1 701.5 754.1 1,455.6
========= ============ ============ =============== ===========
----------
(1) As of December 31, 2004, our net proved reserves attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
34
Total Net Proved Natural Gas Reserves
(bcf)
As of December 31, As of December 31, 2004
---------------------------- ---------------------------------------
2002 2003 Developed Undeveloped Total
------------ ------------- ------------ --------------- ---------
Offshore China
Independent
Bohai Bay.............................. 524.2 491.9 268.1 438.1 706.2
Western South China Sea................ 1,954.2 2,049.3 1383.9 625.8 2009.7
Eastern South China Sea................ -- 506.9 -- 687.7 687.7
East China Sea......................... 179.4 48.7 32.9 370.5 403.4
------------ ------------- ------------ --------------- ---------
Total.............................. 2,657.7 3,096.8 1,684.9 2,122.1 3,807.0
Production Sharing Contracts
Bohai Bay.............................. 74.5 74.7 -- -- --
Western South China Sea................ 557.0 514.7 448.9 26.2 475.1
Eastern South China Sea................ 42.8 41.2 -- 43.0 43.0
East China Sea......................... -- 226.7 -- -- --
------------ ------------- ------------ --------------- ---------
Total.............................. 674.2 857.3 448.9 69.2 518.1
Combined
Bohai Bay 598.6 566.6 268.1 438.1 706.2
Western South China Sea................ 2,511.2 2,564.0 1,832.8 652.0 2,484.8
Eastern South China Sea................ 42.8 548.2 -- 730.8 730.8
East China Sea......................... 179.4 275.3 32.9 370.5 403.4
------------ ------------- ------------ --------------- ---------
Total.............................. 3,332.0 3,954.1 2,133.8 2,191.4 4,325.2
Overseas(1)
Indonesia................................... 216.0 200.3 138.5 182.9 321.4
------------ ------------- ------------ --------------- ---------
Total.............................. 216.0 200.3 138.5 182.9 321.4
------------ ------------- ------------ --------------- ---------
Total....................................... 3,547.9 4,154.4 2,272.3 2,374.3 4,646.6
============ ============= ============ =============== =========
----------------
(1) As of December 31, 2004, our net proved reserves attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
35
Total Net Proved Reserves
(million BOE)
As of December 31, As of December 31, 2004
------------------------- ----------------------------------------
2002 2003 Developed Undeveloped Total
----------- ------------ ------------ ------------ -----------
Offshore China
Independent
Bohai Bay.............................. 595.2 556.3 335.6 269.9 605.5
Western South China Sea................ 434.1 476.7 260.2 222.4 482.6
Eastern South China Sea................ -- 141.1 11.4 172.3 183.7
East China Sea......................... 42.4 12.7 8.6 80.1 88.7
----------- ----------- ----------- ------------ -----------
Total.............................. 1,071.7 1,186.9 615.8 744.7 1,360.5
Production Sharing Contracts
Bohai Bay.............................. 497.1 528.5 155.2 331.6 486.8
Western South China Sea................ 144.8 124.3 116.7 4.5 121.2
Eastern South China Sea................ 127.5 105.0 84.7 21.3 106.0
East China Sea......................... -- 47.1 -- -- --
----------- ----------- ----------- ------------ -----------
Total.............................. 769.4 804.9 356.6 357.4 714.0
Combined
Bohai Bay.............................. 1,092.3 1,084.8 490.8 601.5 1,092.3
Western South China Sea................ 578.9 601.0 376.9 226.9 603.8
Eastern South China Sea................ 127.5 246.1 96.1 193.7 289.8
East China Sea......................... 42.4 59.8 8.6 80.1 88.7
----------- ----------- ----------- ------------ -----------
Total.............................. 1,841.0 1,991.7 972.5 1,102.1 2,074.6
Overseas(1)
Indonesia.............................. 174.7 136.7 107.7 47.8 155.5
----------- ----------- ----------- ------------ -----------
Total.............................. 174.7 136.7 107.7 47.8 155.5
----------- ----------- ----------- ------------ -----------
Total....................................... 2,015.8 2,128.5 1,080.2 1,149.8 2,230.0
=========== =========== =========== ============ ===========
----------
(1) As of December 31, 2004, our net proved reserves attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
36
Oil and Natural Gas Production
The following tables show average daily net oil production, net
natural gas production, and average net total production for the periods
indicated. Oil production comprises crude oil, condensate and natural gas
liquids.
Average Daily Net Production of Crude Oil
(bbls per day)
Year ended December 31,
-----------------------------------------------------------
2002 2003 2004
------------------ ---------------------- ---------------
Offshore China
Independent
Bohai Bay.............................. 110,989 98,790 94,769
Western South China Sea................ 35,724 27,547 26,737
Eastern South China Sea................ -- 13,708 19,497
East China Sea......................... 3,223 2,536 2,121
------------------ ---------------------- ---------------
Total.............................. 149,936 142,581 143,123
Production Sharing Contracts
Bohai Bay.............................. 16,767 30,716 39,744
Western South China Sea................ 21,186 33,397 29,136
Eastern South China Sea................ 73,792 59,273 77,492
East China Sea......................... -- -- --
------------------ ---------------------- ---------------
Total.............................. 111,745 123,386 146,372
Combined
Bohai Bay.............................. 127,756 129,506 134,512
Western South China Sea................ 56,910 60,944 55,873
Eastern South China Sea................ 73,792 72,981 96,989
East China Sea......................... 3,223 2,536 2,121
------------------ ---------------------- ---------------
Total.............................. 261,681 265,967 289,495
Overseas(1)
Indonesia.............................. 36,944 40,497 29,941
------------------ ---------------------- ---------------
Total.............................. 36,944 40,497 29,941
------------------ ---------------------- ---------------
Total....................................... 298,625 306,464 319,436
================== ====================== ===============
----------
(1) As of December 31, 2004, our net production attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
37
Average Daily Net Production of Natural Gas
(mmcf per day)
Year ended December 31,
---------------------------------------------------------
2002 2003 2004
--------------- ------------------- -------------------
Offshore China
Independent
Bohai Bay.............................. 47.1 47.1 47.7
Western South China Sea................ 4.4 29.1 83.7
Eastern South China Sea................ -- -- --
East China Sea......................... 12.4 14.2 17.1
------------------ ---------------------- ---------------
Total.............................. 64.0 90.4 148.5
Production Sharing Contracts
Bohai Bay.............................. -- -- --
Western South China Sea................ 137.9 98.7 131.6
Eastern South China Sea................ -- -- --
East China Sea......................... -- -- --
------------------ ---------------------- ---------------
Total.............................. 137.9 98.7 131.6
Combined
Bohai Bay.............................. 47.1 47.1 47.7
Western South China Sea................ 142.3 127.8 215.2
Eastern South China Sea................ -- -- --
East China Sea......................... 12.4 14.2 17.1
------------------ ---------------------- ---------------
Total.............................. 201.8 189.1 280.0
Overseas(1)
Indonesia.............................. 70.8 101.9 84.1
------------------ ---------------------- ---------------
Total.............................. 70.8 101.9 84.1
------------------ ---------------------- ---------------
Total....................................... 272.6 291.0 364.1
================== ====================== ===============
----------
(1) As of December 31, 2004, our net production attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
38
Average Daily Net Production
(BOE per day)
Year ended December 31,
----------------------------------------------------------------
2002 2003 2004
---------------------- -------------------- -------------------
Offshore China
Independent
Bohai Bay.............................. 118,845 106,637 102,725
Western South China Sea................ 36,456 32,391 40,683
Eastern South China Sea................ -- 13,708 19,497
East China Sea......................... 5,283 4,908 4,963
---------------------- -------------------- -------------------
Total.............................. 160,584 157,644 167,868
Production Sharing Contracts
Bohai Bay.............................. 16,767 30,716 39,744
Western South China Sea................ 46,747 51,619 53,454
Eastern South China Sea................ 73,792 59,274 77,492
East China Sea......................... -- -- --
---------------------- -------------------- -------------------
Total.............................. 137,306 141,609 170,690
Combined
Bohai Bay.............................. 135,612 137,353 142,469
Western South China Sea................ 83,203 84,010 94,137
Eastern South China Sea................ 73,792 72,981 96,989
East China Sea......................... 5,283 4,908 4,963
---------------------- -------------------- -------------------
Total.............................. 297,890 299,252 338,558
Overseas(1)
Indonesia.............................. 48,749 57,477 43,955
---------------------- -------------------- -------------------
Total.............................. 48,749 57,477 43,955
---------------------- -------------------- -------------------
Total....................................... 346,639 356,729 382,513
====================== ==================== ===================
----------
(1) As of December 31, 2004, our net production attributable to overseas
operations were derived entirely from our operations in Indonesia. We
conduct our operations in Indonesia through production sharing contracts
and technical assistance contracts.
Principal Oil and Gas Regions
Bohai Bay
The Bohai Bay holds our largest net proved reserves and, for the year
ended December 31, 2004, was our largest producing area for crude oil and
natural gas. The Bohai Bay exploration area is located in the northeastern
part of China, approximately 200 kilometers east of Beijing and is
approximately 58,100 square kilometers in size. As of December 31, 2004, we
had rights to operate, independently or in conjunction with international oil
and gas companies, in 15 blocks covering approximately 43,244 square
kilometers of the total Bohai Bay exploration area. Our operating area
contains numerous oil and gas fields in shallow waters with typical depths
ranging from 10 to 30 meters. The crude oil is generally of heavy gravity
ranging from 15 to 20 degrees API. As of December 31, 2004, net proved
reserves in this region were 974.6 million barrels of crude oil and condensate
and 706.2 billion cubic feet of natural gas, totaling 1,092.3 million BOE and
representing approximately 49.0% of our total net proved reserves.
The Bohai Bay has been a prolific area with significant oil
discoveries in recent years and will continue to be one of our principal areas
for exploration in the near future. Four discoveries were made in this area in
2004, including three by us and one by our foreign partners.
39
The following table sets forth principal exploration blocks under an
exploration license for both our independent operations and our production
sharing contracts in the Bohai Bay as of December 31, 2004. All exploration
licenses expiring prior to June 8, 2005 are being renewed.
Exploration License
Approximate -----------------------------------------
block area Commencement Expiration
Block (km(2)) Partner(s) date date
------------------------------ ----------------- ------------------ ---------------------- -----------------
Independent
-----------------------------------------------------------------------------------------------------------------
Middle of Bohai Bay 4,974 -- 04/26/04 04/26/06
-----------------------------------------------------------------------------------------------------------------
Southern Bohai Bay 3,679 -- 08/06/04 08/06/06
-----------------------------------------------------------------------------------------------------------------
Western Bohai Bay 1,895 -- 06/08/04 06/08/06
-----------------------------------------------------------------------------------------------------------------
Western Liaodong Bay 3,344 -- 03/31/00 04/08/06
-----------------------------------------------------------------------------------------------------------------
Eastern Liaodong Bay 2,829 -- 07/02/01 07/02/06
-----------------------------------------------------------------------------------------------------------------
Eastern Bozhong 1,861 -- 05/30/04 05/30/06
-----------------------------------------------------------------------------------------------------------------
06/17 2,586 -- 02/20/05 02/20/07
-----------------------------------------------------------------------------------------------------------------
02/31 4,990 -- 05/29/03 05/29/05
-----------------------------------------------------------------------------------------------------------------
Bohai 09/11 843 -- 04/05/04 04/05/06
-----------------------------------------------------------------------------------------------------------------
PSC
-----------------------------------------------------------------------------------------------------------------
05/36 2,766 Kerr-McGee, Newfield, 04/07/05 02/10/07
Sino-American Energy
-----------------------------------------------------------------------------------------------------------------
Eastern Bohai 11/05 3,601 ConocoPhillips 08/16/04 08/16/06
-----------------------------------------------------------------------------------------------------------------
Western Bohai 11/05 2,897 ConocoPhillips 02/10/04 02/10/06
-----------------------------------------------------------------------------------------------------------------
11/19 3,068 ChevronTexaco 05/29/04 05/29/05
-----------------------------------------------------------------------------------------------------------------
09/18 2,218 Kerr-McGee 04/02/05 04/02/07
-----------------------------------------------------------------------------------------------------------------
04/36 1,694 Kerr-McGee, 04/02/05 04/02/07
Sino-American Energy
-----------------------------------------------------------------------------------------------------------------
During the year ended December 31, 2004, we independently acquired
1,764 square kilometers of 3D seismic data and our foreign partners acquired
390 square kilometers of 3D seismic data in the Bohai Bay. We have an
aggregate of approximately 178,893 kilometers and 9,755 square kilometers of
independent 2D and 3D seismic data, respectively, in the Bohai Bay. We also
have access through our production sharing contract partners to approximately
66,903 kilometers and 9,176 square kilometers of additional 2D and 3D seismic
data, respectively, in this area. During the year of 2004, we drilled eight
wildcat wells, three of which were successful, and 11 appraisal wells, all of
which were successful. During the same period, our production sharing contract
partners drilled seven wildcat wells, one of which was successful, and one
appraisal well, which was successful. Our exploration capital expenditures for
2004 were US$74.4 million. In 2005, we plan to drill 25 exploration wells in
the Bohai Bay.
For 2004, net production in this region averaged 134,512 barrels per
day of crude oil, condensate and natural gas liquids and 47.7 million cubic
feet per day of natural gas, representing approximately 37.2% of our total
daily net production. Our development capital expenditures for the Bohai Bay
for 2004 were US$762.2 million.
40
The following table sets forth our principal oil and gas properties
under production in the Bohai Bay as of December 31, 2004.
Average net
production for Net proved reserves
year as of December 31,
Our 2004 2004
Block/Field Operator(s) Partner(s) interest (BOE per day) (million BOE)
--------------------- -------------------- ------------- ------------- ------------------ ----------------------
Liaoxi
-----------------------------------------------------------------------------------------------------------------
Suizhong 36-1 CNOOC Limited -- 100% 60,475 178.9
-----------------------------------------------------------------------------------------------------------------
Jinzhou 9-3 CNOOC Limited -- 100% 13,225 27.1
-----------------------------------------------------------------------------------------------------------------
Jinzhou 20-2 CNOOC Limited -- 100% 7,710 41.0
-----------------------------------------------------------------------------------------------------------------
Boxi
-----------------------------------------------------------------------------------------------------------------
Boxi Oilfields(1) CNOOC Limited -- 100% 12,800 15.3
-----------------------------------------------------------------------------------------------------------------
Chengbei
-----------------------------------------------------------------------------------------------------------------
Chengbei Oilfield CNOOC Limited -- 100% 4,523 5.7
-----------------------------------------------------------------------------------------------------------------
Qinhuangdao
-----------------------------------------------------------------------------------------------------------------
Qinhuangdao 32-6 CNOOC Limited ChevronTexaco 75.5% 22,429 99.7
-----------------------------------------------------------------------------------------------------------------
Bonan
-----------------------------------------------------------------------------------------------------------------
Bozhong 34-2/4 CNOOC Limited -- 100% 1,886 3.2
-----------------------------------------------------------------------------------------------------------------
Bonan fields CNOOC Limited -- 100% 2,107 31.7
-----------------------------------------------------------------------------------------------------------------
Bozhong 25-1/1S CNOOC Limited ChevronTexaco 83.8% 4,073 190.5
-----------------------------------------------------------------------------------------------------------------
11/05
-----------------------------------------------------------------------------------------------------------------
Penglai 19-3 ConocoPhillips Phillips Bohai 51% 8,871 131.8
-----------------------------------------------------------------------------------------------------------------
04/36
-----------------------------------------------------------------------------------------------------------------
Caofeidian 11-1/2 Kerr-McGee Sino-American 51% 4,371 39.8
Energy
-----------------------------------------------------------------------------------------------------------------
(1) The production and reserves data of Boxi Oilfields includes the production
and reserves of Qikou 18-2, which commenced operations in 2004.
41
The following table sets forth our principal oil and gas properties
under development in the Bohai Bay as of December 31, 2004.
Net proved reserves as of
Our December 31, 2004
Block/Field Operator(s) Partner(s) interest (million BOE)
------------------------- ----------------- --------------------- ----------------- ------------------------------
Liaoxi
--------------------------------------------------------------------------------------------------------------------
Luda 4-2/5-2/10-1 CNOOC Limited -- 100% 92.7
--------------------------------------------------------------------------------------------------------------------
Jinzhou 21-1 CNOOC Limited -- 100% 13.8
--------------------------------------------------------------------------------------------------------------------
JZ 25-18 CNOOC Limited -- 100% 74.2
--------------------------------------------------------------------------------------------------------------------
Boxi
--------------------------------------------------------------------------------------------------------------------
Qikou 18-9 CNOOC Limited -- 100% 3.5
--------------------------------------------------------------------------------------------------------------------
Caofeidian 18-1 CNOOC Limited -- 100% 1.7
--------------------------------------------------------------------------------------------------------------------
Caofeidian 18-2 CNOOC Limited -- 100% 12.5
--------------------------------------------------------------------------------------------------------------------
Qinhuangdao
--------------------------------------------------------------------------------------------------------------------
Qinhuangdao 33-1 CNOOC Limited -- 100% 3.6
--------------------------------------------------------------------------------------------------------------------
Bozhong
--------------------------------------------------------------------------------------------------------------------
Nanbao 35-2 CNOOC Limited -- 100% 75.7
--------------------------------------------------------------------------------------------------------------------
Bonan
--------------------------------------------------------------------------------------------------------------------
Bozhong 34-1/34-1s CNOOC Limited -- 100% 24.8
--------------------------------------------------------------------------------------------------------------------
11/05
--------------------------------------------------------------------------------------------------------------------
Penglai 25-6 ConocoPhillips Phillips Bohai 51% 10.7
--------------------------------------------------------------------------------------------------------------------
04/36 &05/36
--------------------------------------------------------------------------------------------------------------------
Caofeidian 12-1/12-1S Kerr-McGee Sino-American Energy, 51% 12.8
New Field
--------------------------------------------------------------------------------------------------------------------
Caofeidian 11-3/11-5 Kerr-McGee Sino-American Energy 51% 1.5
--------------------------------------------------------------------------------------------------------------------
Western South China Sea
The Western South China Sea has been our most important natural gas
producing area. The Western South China Sea is located in the southern part of
China southwest of Hong Kong and is approximately 712,480 square kilometers in
area. As of December 31, 2004, we had rights to operate, independently or in
conjunction with international oil and gas companies, in 34 blocks covering
approximately 180,507 square kilometers of the Western South China Sea
exploration area. Typical water depths in this region range from 40 meters to
120 meters. The crude oil produced is of medium to light gravity, ranging from
27 to 41 degrees API. As of December 31, 2004, we had net proved reserves of
189.7 million barrels of crude oil and condensate and 2,484.8 billion cubic
feet of natural gas in this region, totaling 603.8 million BOE and
representing 27.1% of our total net proved reserves.
The Western South China Sea is one of our least explored areas but
will become increasingly important as the markets for natural gas in the
southern part of China develop. During the year ended December 31, 2004, we
drilled five wildcat wells, and three appraisal wells. All three of the
appraisal wells we drilled were successful. Our production sharing contract
partners drilled two wildcat wells and two appraisal wells. One of the two
appraisal wells our production sharing contract partners drilled was
successful.
42
The following table sets forth the principal exploration blocks under
an exploration license for both our independent operations and our production
sharing contracts in the Western South China Sea as of December 31, 2004.
Exploration License
Approximate ---------------------------------------------
block area Commencement Expiration
Block (km(2)) Partner(s) date date
----------------------- ------------------ --------------------- ---------------------- ---------------------
Independent
-------------------------------------------------------------------------------------------------------------------
Ledong 01 6,543 -- 12/03/03 12/03/05
-------------------------------------------------------------------------------------------------------------------
Lingsui 18 7,738 -- 08/06/02 08/06/07
-------------------------------------------------------------------------------------------------------------------
Weizhou 12 6,980 -- 05/11/01 11/05/06
-------------------------------------------------------------------------------------------------------------------
Weizhou 26 4,358 -- 11/05/03 05/11/06
-------------------------------------------------------------------------------------------------------------------
Yulin 35 6,050 -- 05/11/01 05/11/06
-------------------------------------------------------------------------------------------------------------------
Qionghai 28 5,208 -- 05/11/01 05/11/06
-------------------------------------------------------------------------------------------------------------------
Lingtou 20 2,684 -- 08/30/00 08/30/05
-------------------------------------------------------------------------------------------------------------------
Lingao 11 4,117 -- 05/11/01 05/11/06
-------------------------------------------------------------------------------------------------------------------
Songtao 22 4,063 -- 05/11/01 05/11/06
-------------------------------------------------------------------------------------------------------------------
Songtao 31 5,264 -- 05/11/01 05/11/06
-------------------------------------------------------------------------------------------------------------------
Yangjiang 31 6,003 -- 12/03/03 12/03/05
-------------------------------------------------------------------------------------------------------------------
Wenchang 11 4,901 -- 05/11/01 05/11/06
-------------------------------------------------------------------------------------------------------------------
PSC
-------------------------------------------------------------------------------------------------------------------
Wanan North 21A 6,801 Benton Offshore China 09/30/03 09/30/05
Company
-------------------------------------------------------------------------------------------------------------------
Wanan North 21B 6,118 Benton Offshore China 09/30/03 09/30/05
Company
-------------------------------------------------------------------------------------------------------------------
Wanan North 21C 6,372 Benton Offshore China 09/30/03 09/30/05
Company
-------------------------------------------------------------------------------------------------------------------
Wanan North 21D 6,126 Benton Offshore China 09/30/03 09/30/05
Company
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
During the year ended December 31, 2004, we independently acquired
13,827 kilometers of 2D seismic data and 1,047 square kilometers of 3D seismic
data in the Western South China Sea. We have an aggregate of approximately
180,840 kilometers and 8,057 square kilometers of independent 2D and 3D
seismic data, respectively, in the Western South China Sea. We also have
access through our production sharing contract partners to approximately
106,907 kilometers and 4,656 square kilometers of additional 2D and 3D seismic
data, respectively, in this area. Our exploration capital expenditures for the
Western South China Sea for 2004 were US$68.9 million. In 2005, we plan to
drill 13 exploration wells in the Western South China Sea area.
For the year ended December 31, 2004, net production averaged 55,873
barrels per day of crude oil, condensate and natural gas liquids and 215.2
million cubic feet per day of natural gas, representing 24.6% of our total
daily net production. Our development capital expenditures for the Western
South China Sea for 2004 were US$91.5 million.
43
The following table sets forth the principal oil and gas properties
in the Western South China Sea area that were under production as of December
31, 2004.
Average net
production for Net proved
year reserves as of
Our 2004 December 31, 2004
Block/Field Operator(s) Partner(s) interest (BOE per day) (million BOE)
----------------------- ------------------ --------------- ------------- ----------------- --------------------
Yinggehai
-----------------------------------------------------------------------------------------------------------------
Yacheng 13-1(1) CNOOC Limited Kufpec BPCEPC 51% 25,403 84.2
-----------------------------------------------------------------------------------------------------------------
Yulin 35
-----------------------------------------------------------------------------------------------------------------
Weizhou Oilfields(2) CNOOC Limited -- 100% 27,832 48.1
-----------------------------------------------------------------------------------------------------------------
Wenchang 13-1/13-2
-----------------------------------------------------------------------------------------------------------------
Wenchang 13-1/13-2 CNOOC Limited Husky 60% 28,051 37.0
-----------------------------------------------------------------------------------------------------------------
Changjiang 25
-----------------------------------------------------------------------------------------------------------------
Dongfang 1-1 CNOOC Limited -- 100% 12,851 233.4
-----------------------------------------------------------------------------------------------------------------
----------
(1) On January 1, 2004, we took over operation of Yacheng 13-1 from BP.
(2) The reserves data of Weizhou Oilfields includes the reserves of Weizhou
12-1N.
The following table sets forth the principal oil and gas properties
in the Western South China Sea area that were under development as of December
31, 2004.
Net proved reserves as of
Our December 31, 2004
Block/Field Operator (s) Partner(s) interest (million BOE)
------------------------- ------------------- ------------------- --------------- -----------------------------
Yulin 35
-------------------------------------------------------------------------------------------------------------------
Weizhou 11-1 CNOOC Limited -- 100% 9.0
-------------------------------------------------------------------------------------------------------------------
Weizhou 11-4N CNOOC Limited -- 100% 3.2
-------------------------------------------------------------------------------------------------------------------
Wenchang 14-3 CNOOC Limited -- 100% 11.0
-------------------------------------------------------------------------------------------------------------------
Weizhou 6-1 CNOOC Limited -- 100% 5.0
-------------------------------------------------------------------------------------------------------------------
Weizhou 11-1N CNOOC Limited -- 100% 6.8
-------------------------------------------------------------------------------------------------------------------
Yangjiang 31 and 32
-------------------------------------------------------------------------------------------------------------------
Wenchang 8-3 CNOOC Limited -- 100% 11.6
-------------------------------------------------------------------------------------------------------------------
Wenchang 19-1 CNOOC Limited -- 100% 26.1
-------------------------------------------------------------------------------------------------------------------
Wenchang 15-1 CNOOC Limited -- 100% 22.9
-------------------------------------------------------------------------------------------------------------------
Yinggehai
-------------------------------------------------------------------------------------------------------------------
Yacheng 13-4 CNOOC Limited -- 100% 22.4
-------------------------------------------------------------------------------------------------------------------
Ledong 01
-------------------------------------------------------------------------------------------------------------------
Ledong CNOOC Limited -- 100% 83.2
-------------------------------------------------------------------------------------------------------------------
Eastern South China Sea
The Eastern South China Sea is currently one of our most important
oil producing areas in terms of its contribution to our total production and
sales. The Eastern South China Sea exploration area is located in the southern
part of China, directly southeast of Hong Kong, and is approximately 174,420
square kilometers in size. As of December 31, 2004, we had rights to operate,
independently or in conjunction with international oil and gas companies, in
38 blocks covering approximately 193,704 square kilometers in the Eastern
South China Sea exploration area. This area includes the important Pearl River
Mouth Basin. Typical water depths in this region range from 100 meters to 120
meters. The crude oil produced is of medium to light gravity, ranging from 30
to 40 degrees API. As of December 31, 2004, we had net proved reserves of
168.0 million barrels of crude oil and condensate and 730.8 billion cubic
44
feet of natural gas in this region, totaling 289.8 million BOE and representing
approximately 13.0% of our total net proved reserves.
During the year ended December 31, 2004, we drilled three wildcat
wells, one of which was successful, and three appraisal wells, all of which
were successful. Our production sharing contract partners drilled two wildcat
wells. We made one new oil and gas discovery in the Eastern South China Sea in
2004.
The following table sets forth the principal exploration blocks that
are under an existing exploration license for both our independent operations
and our production sharing contracts in the Eastern South China Sea as of
December 31, 2004.
Exploration License
Approximate --------------------------------------
block area Commencement Expiration
Block (km(2)) Partner(s) date date
------------------------------- --------------------- ------------------ -------------------- ----------------
Independent
--------------------------------------------------------------------------------------------------------------------
Enping 15 (Pearl River Mouth) 5,833 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Enping 10 (Pearl River Mouth) 6,547 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Panyu 33 (Pearl River Mouth) 4,830 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Liuhua 07 (Pearl River Mouth) 4,172 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Xijiang 04 (Pearl River Mouth) 7,969 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Lufeng 06 (Pearl River Mouth) 4,457 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Huizhou 31 (Pearl River Mouth) 3,074 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Kaiping 14 (Pearl River Mouth) 7,753 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Kaiping 32 (Pearl River Mouth) 8,104 -- 05/11/01 05/11/06
--------------------------------------------------------------------------------------------------------------------
Dongsha 32 (Pearl River Mouth) 7,350 -- 11/05/03 11/05/10
--------------------------------------------------------------------------------------------------------------------
PSC
--------------------------------------------------------------------------------------------------------------------
15/34 4,984 Devon, Burlington 12/24/03 12/24/05
--------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2004, we independently acquired 6,560
kilometers of 2D seismic data and 1,329 square kilometers of 3D seismic data
in the Eastern South China Sea area. We have an aggregate of approximately
66,305 kilometers and 2,658 square kilometers of independent 2D seismic data
and 3D seismic data, respectively, in the Eastern South China Sea. We also
have access through our production sharing contract partners to approximately
109,262 kilometers and 6,431 square kilometers of additional 2D and 3D seismic
data, respectively, in this area. Our exploration capital expenditures for the
Eastern South China Sea for 2004 were US$52.5 million. We plan to drill six
exploration wells in the Eastern South China Sea in 2005.
For the year ended December 31, 2004, net production averaged
approximately 96,989 barrels per day of crude oil, representing approximately
25.4% of our total daily net production. Our development capital expenditures
for this region for 2004 were US$358.6 million.
45
The following table sets forth our principal oil and gas properties
under production in the Eastern South China Sea as of December 31, 2004.
Average net Net proved reserves
production for as of December 31,
Our year 2004 (BOE 2004
Production Block/Field Operator(s) Partner(s) interest per day) (million BOE)
--------------------------- ------------------ -------------- ----------- ---------------- ----------------------
16/08
---------------------------------------------------------------------------------------------------------------------
Huizhou Oilfields CACT Eni, 51% 15,596 27.6
ChevronTexaco
---------------------------------------------------------------------------------------------------------------------
16/19
---------------------------------------------------------------------------------------------------------------------
Huizhou 19-3/2/1 CACT Eni, 51% 247 25.5
ChevronTexaco
---------------------------------------------------------------------------------------------------------------------
15/11
---------------------------------------------------------------------------------------------------------------------
Xijiang 24-3 CNOOC Limited, Pecten 51% 15,979 9.7
ConocoPhillips
---------------------------------------------------------------------------------------------------------------------
15/22
---------------------------------------------------------------------------------------------------------------------
Xijiang 30-2 CNOOC Limited, Pecten 40% 10,968 5.4
ConocoPhillips
---------------------------------------------------------------------------------------------------------------------
29/04
---------------------------------------------------------------------------------------------------------------------
Liuhua 11-1 CNOOC Limited -- 100% 19,497 11.4
---------------------------------------------------------------------------------------------------------------------
16/06
---------------------------------------------------------------------------------------------------------------------
Lufeng 13-1 JHN Japex, New 25% 2,851 3.1
Huanan, NWC
---------------------------------------------------------------------------------------------------------------------
17/22
---------------------------------------------------------------------------------------------------------------------
Lufeng 22-1 CNOOC Limited, Statoil Statoil 25% 536 1.1
---------------------------------------------------------------------------------------------------------------------
15/34
---------------------------------------------------------------------------------------------------------------------
Panyu 4-2/5-1 Devon Burlington 51% 31,315 33.6
---------------------------------------------------------------------------------------------------------------------
The following table sets forth our principal oil and gas properties
under development in the Eastern South China Sea as of December 31, 2004.
Net proved reserves as of
Our December 31, 2004
Block/Field Operator(s) Partner(s) interest (million BOE)
------------------------ --------------------- ------------------ --------------- ------------------------------
Liuhua 07
---------------------------------------------------------------------------------------------------------------------
Panyu 30-1 CNOOC Limited -- 100% 87.2
---------------------------------------------------------------------------------------------------------------------
Panyu 33
---------------------------------------------------------------------------------------------------------------------
Panyu 34-1 CNOOC Limited -- 100% 30.7
---------------------------------------------------------------------------------------------------------------------
Xijiang 04
---------------------------------------------------------------------------------------------------------------------
Xijiang 23-1 CNOOC Limited -- 100% 40.4
---------------------------------------------------------------------------------------------------------------------
16/06
---------------------------------------------------------------------------------------------------------------------
Lufeng 13-2 CNOOC Limited -- 100% 14.0
---------------------------------------------------------------------------------------------------------------------
East China Sea
The East China Sea is the least explored area of our four principal
regions offshore China, and an area that we expect to become an important
natural gas production base in the future. The East China Sea
46
is approximately 339,580 square kilometers in size and is located east of
Shanghai. As of December 31, 2004, we had rights to operate, independently or
in conjunction with international oil and gas companies, in 47 blocks
(excluding the Pinghu block) covering approximately 209,816 square kilometers
of the total East China Sea. On August 19, 2003, CNOOC, Sinopec, Pecten Orient
Company of the United States (a subsidiary company of Shell) and Unocal
reached an agreement to explore, develop and market natural gas, oil and
condensate in Xihu Trough, East China sea. Under the agreement CNOOC owned 30%
of the project and accordingly, we acquired a 30% working interest in the
project from CNOOC. In September 2004, Pecten Orient and Unocal exited the
project and as a result, our working interest in the Xihu Trough project was
increased to 50%. The project comprises three exploration and two development
contract areas of the Xihu Trough covering approximately 22,000 square
kilometers. The first development under the contracts will be in the Chunxiao
development area, which is expected to come on stream in mid 2005. The total
block area of the Xihu Trough is approximately 59,565 square kilometers.
Typical water depths in this region are approximately 90 meters and the crude
oil and condensate are of light gravity. As of December 31, 2004, our net
proved reserves in the Xihu Trough were 17.7 million barrels of crude oil and
condensate and 360.2 billion cubic feet of natural gas, totaling 77.7 million
BOE and representing 3.5% of our total net proved reserves. We are the
operator of the project.
During the year ended December 31, 2004, we drilled three wildcat
wells. Our production sharing contract partners drilled one wildcat well,
which was successful.
The following table sets forth the principal exploration blocks under
an existing exploration license or pending exploration license for both our
independent operations and our production sharing contracts in the East China
Sea as of December 31, 2004. All exploration licenses expiring prior to June
8, 2005 are being renewed.
Approximate Exploration License
-----------------------------------
block area Commencement Expiration
Block (km(2)) Partner(s) date date
----------------------------------------- ---------------- ------------------- --------------- ------------------
Independent
---------------------------------------------------------------------------------------------------------------------
Xihu Tiantai 32 5,400 -- 07/17/01 07/17/06
---------------------------------------------------------------------------------------------------------------------
Xihu Huangyan 04 2,848 -- 08/28/01 08/28/08
---------------------------------------------------------------------------------------------------------------------
Xihu Hangzhou 26 3,642 -- 03/31/03 03/31/05
---------------------------------------------------------------------------------------------------------------------
Xihu Hangzhou 17 4,227 -- 08/28/01 08/28/08
---------------------------------------------------------------------------------------------------------------------
Xihu Zhenhai 01 1,536 -- 08/28/01 08/28/08
---------------------------------------------------------------------------------------------------------------------
Lishui-Jiaojiang 6,767 -- 03/31/00 11/28/05
---------------------------------------------------------------------------------------------------------------------
North Yellow Sea 6,471 -- 05/25/01 05/25/06
---------------------------------------------------------------------------------------------------------------------
Fuzhou 02 3,064 -- 05/11/01 05/11/06
---------------------------------------------------------------------------------------------------------------------
Northern Trough 912 -- 08/30/00 08/30/05
---------------------------------------------------------------------------------------------------------------------
Taibei 27 7,379 -- 07/09/01 07/09/06
---------------------------------------------------------------------------------------------------------------------
Jinhua 12 6,931 -- 05/11/01 05/11/06
---------------------------------------------------------------------------------------------------------------------
Kunshan 02 2,628 -- 05/11/01 05/11/06
---------------------------------------------------------------------------------------------------------------------
Taoyuan 07 6,457 -- 07/09/01 07/09/06
---------------------------------------------------------------------------------------------------------------------
Jilong 25 5,692 -- 07/09/01 07/09/06
---------------------------------------------------------------------------------------------------------------------
PSC
---------------------------------------------------------------------------------------------------------------------
32/32 513 Primeline Petroleum 07/11/02 07/11/04
---------------------------------------------------------------------------------------------------------------------
During the year ended December 31, 2004, we independently acquired
4,058 kilometers of 2D seismic data in this area. We have an aggregate of
approximately 115,990 kilometers and 377 square kilometers of independent 2D
seismic data, respectively, in the East China Sea area. We also have access
through our production sharing contract partners to approximately 48,255
kilometers and 475 square
47
kilometers, respectively, of additional 2D and 3D seismic data in this area.
Our exploration capital expenditures for the East China Sea for 2004 were
US$16.6 million. We plan to drill five exploration wells in this area in 2005.
For the year ended December 31, 2004, our net production in this
region averaged 2,121 barrels per day of crude oil, condensate and natural gas
liquids and 17.1 million cubic feet per day of natural gas, representing 1.3%
of our total daily net production. Our development capital expenditures for
the East China Sea for 2004 were US$161.2 million.
The following table sets forth the principal oil and gas properties
under production or development in the East China Sea as of December 31, 2004.
Average net
production
for year Net proved reserves as
Our 2004 (BOE per of December 31, 2004
Block/Field Operator(s) Partner(s) interest day) (million BOE)
-------------------- --------------------- ------------------- ------------- ---------------- ---------------------
Production
---------------------------------------------------------------------------------------------------------------------
Pinghu
---------------------------------------------------------------------------------------------------------------------
Pinghu CNOOC Limited Sinopec, Shanghai 30% 4,963 11.0
Gasfield(1) Shenneng Corporation
---------------------------------------------------------------------------------------------------------------------
Development
---------------------------------------------------------------------------------------------------------------------
Xihu Trough
---------------------------------------------------------------------------------------------------------------------
Canxue CNOOC Limited Sinopec 50% -- 9.3
---------------------------------------------------------------------------------------------------------------------
Duanqiao CNOOC Limited Sinopec 50% -- 7.7
---------------------------------------------------------------------------------------------------------------------
Chunxiao CNOOC Limited Sinopec 50% -- 31.6
---------------------------------------------------------------------------------------------------------------------
Tianwaitian CNOOC Limited Sinopec 50% -- 5.3
---------------------------------------------------------------------------------------------------------------------
Baoyunting CNOOC Limited Sinopec 50% -- 19.2
---------------------------------------------------------------------------------------------------------------------
Wuyunting CNOOC Limited Sinopec 50% -- 4.7
---------------------------------------------------------------------------------------------------------------------
----------
(1) This field is under license to the Shanghai Petroleum and Natural Gas
Company in which we have a 30% interest.
Overseas Activity
In early 2003 and 2004, we acquired interests in the Tangguh LNG
project located in Indonesia. The Tangguh LNG partners have signed contracts
to provide liquefied natural gas to South Korea and North America. For further
details of these interests, see "--Natural Gas Business--Overseas Activity."
In December 2004, we completed the acquisition of 5.3% interest in
the upstream production and reserves located in the North West Shelf of
Australia and 25% interest in the related China LNG joint venture. See
"--Natural Gas Business--Overseas Activity."
In April 2002, our wholly owned subsidiary, CNOOC Southeast Asia
Limited, acquired subsidiaries in Indonesia formerly owned by Repsol YPF, S.A.
These Indonesian subsidiaries together hold a portfolio of interests in oil
and gas production sharing and technical assistance contracts in areas located
offshore and onshore Indonesia. The main businesses of the Indonesian
subsidiaries are the exploration, development and production of oil and gas
offshore and onshore Indonesia. Their main assets comprise a portfolio of
interests in four production sharing contracts and a technical assistance
contract in that region. We estimate that our net proved reserves of the
assets as of December 31, 2004 were approximately 155.5 million BOE.
The interests owned by the Indonesian subsidiaries comprise the
following assets:
o South East Sumatra Production Sharing Contract. The Indonesian
subsidiaries own a 65.5409% interest in the South East Sumatra
production sharing contract. This contract area covers
approximately 8,100 square kilometers located offshore Sumatra
and is the largest of
48
the assets held by the Indonesian subsidiaries. It is operated and
majority-owned by us. It is also one of the largest offshore oil
developments in Indonesia and has produced more than one billion
barrels of oil in over 20 years of production. The concession
expires in 2018.
o Offshore North West Java Production Sharing Contract. The
Indonesian subsidiaries own a 36.7% interest in the Offshore
North West Java production sharing contract. This contract area
covers approximately 13,800 square kilometers in the Southern
Java Sea, offshore Jakarta and has produced more than one billion
BOE in over 20 years of production. It is operated by a member of
the BP group and currently produces crude oil and natural gas.
Its natural gas is sold to the Indonesia State Electric Company
and the Indonesia State Gas Utility Company. The concession
expires in 2017.
o West Madura Production Sharing Contract and Poleng Technical
Assistance Contract. These subsidiaries own a 25.0% interest in
the West Madura production sharing contract and a 50.0% interest
in the Poleng technical assistance contract. These contract areas
are located offshore Java, near the island of Madura and the Java
city of Surabaya and cover approximately 1,600 square kilometers
combined. Kodeco Energy Company is the operator for the West
Madura production sharing contract and Korea Development Company
is the operator for the Poleng technical assistance contract,
each assisted by certain of the Indonesian subsidiaries. These
contract areas currently produce crude oil and natural gas. Their
natural gas is sold to the Indonesia State Electric Company. The
West Madura production sharing contract expires in May 2011. The
Poleng technical assistance contract expires in December 2013.
Three new oil and gas discoveries were made in this area in 2003.
o Blora Production Sharing Contract. The Indonesian subsidiaries
own a 16.7% interest in the Blora production sharing contract.
This contract area lies entirely onshore Java and covers an area
of approximately 4,800 square kilometers. There has been no
production of crude oil or natural gas from this concession. The
current operator is Coparex Blora. The concession expires in
2026.
The remaining interests in the above assets at the time of our
acquisition were owned by independent third parties, including Lundin
Petroleum, BP, Kodeco, Kalila Energy, BG Group, Pertamina, INPEX, Kanematsu,
Nissho Iwai, Nisseki Mitsubishi, Paladin Resources, C. Itoh and Co. and
Amerada Hess.
In addition to our Indonesian subsidiaries and the acquisition of
interests in the Tangguh LNG project, we have a 39.5% participating interest
in a production sharing contract in the Malacca Strait in Indonesia.
On May 3, 2004, we, through our wholly owned subsidiary CNOOC Morocco
Limited, acquired from Vanco Energy Corporation a 11.25% interest in a
petroleum agreement for Ras Tafelney offshore Morocco.
At the end of 2004, we and Golden Aaron Pte. Ltd. and China Global
Construction Limited formed a joint venture in Myanmar and had entered into
six production sharing contracts as of June 8, 2005. We will act as the
operator under these production sharing contracts.
In early 2005, through our wholly owned subsidiary CNOOC Belgium
BVBA, we acquired a 16.69% interest in MEG Energy Corp., a Canada based oil
sand company, at a consideration of 150 million Canadian dollars.
As of December 31, 2004, our net proved reserves in our overseas
properties were 101.9 million barrels of crude oil and 321.4 billion cubic
feet of natural gas. For 2004, net production from our overseas properties
averaged 29,941 barrels per day of crude oil, condensate and natural gas
liquids and 84.1 million cubic feet of natural gas, representing approximately
9.4% and 23.1%, respectively, of our total daily net production of crude oil
and total daily net production of natural gas. Our interests in the production
sharing contracts are held by our wholly owned subsidiaries.
49
We and our partner Kodeco made one new oil and gas discovery in the
West Madura PSC area within the East Java Sea of Indonesia.
We currently conduct all of our international oil sales through China
Offshore Oil (Singapore) International Pte. Ltd., our wholly owned Singapore
subsidiary. In the past, this subsidiary also engaged in oil trading
activities.
The following table sets forth the principal oil and gas properties
under production in our overseas interests as of December 31, 2004.
Average net Net proved reserves
production for as of December 31,
Our year 2004 2004
PSC Operator(s) Partner(s) interest (BOE per day) (million BOE)
------------------------- --------------------- ------------------ ----------- ----------------- -------------------
---------------------------------------------------------------------------------------------------------------------
INPEX Sumatra 65.3% 21,918 92.3
KNOC Sumatra
MC Oil & Gas Sumatra
South East Sumatra CNOOC SES Limited Paladin Indonesia (Sunda)
Paladin UK (Southeast
Sumatra)
Paladin Resources (Bahamas)
CNOOC SES Limited
---------------------------------------------------------------------------------------------------------------------
CNOOC ONWJ 36.7% 13,078 37.9
INPEX Jaws
Offshore North West Java BP MC Oil and Gas Java
C. ITOH Energy
Paladin Resources (Sunda)
BP West Java
---------------------------------------------------------------------------------------------------------------------
West Madura Kodeco Energy Pertamina 25.0% 1,969 4.4
CNOOC Madura
KODECO Energy
---------------------------------------------------------------------------------------------------------------------
Poleng(1) Korea Development CNOOC Poleng 50.0% 4,974 13.5
Korea Development
---------------------------------------------------------------------------------------------------------------------
CNOOC Blora 16.7% -- --
Blora Lundin Blora Paladin Resources
Amerada Hess
Lundin Blora
---------------------------------------------------------------------------------------------------------------------
OOGC Mallaca 39.5% 2,016 7.4
Mallaca Petroleum
Malacca Strait Kondur Petroleum Imbang Tata Alam
Kondur Petroleum
---------------------------------------------------------------------------------------------------------------------
----------
(1) Our interest in this contract area is in the form of a technical
assistance contract.
50
Other Oil and Gas Data
Production Cost Data
The following table sets forth average sales prices per barrel of
crude oil, condensate and natural gas liquids sold, average sales prices per
thousand cubic feet of natural gas sold and production costs per BOE produced
for each of our independent, production sharing contract and combined
operations for the periods indicated.
Year ended December 31,
------------------------------------
2002 2003 2004
------------- ------------ ---------
(US$) (US$) (US$)
Average Sales Prices of Petroleum Produced
Per Barrel of Crude Oil, Condensate and Natural Gas Liquid Sold............ 24.35 28.11 35.41
Per Thousand Cubic Feet of Natural Gas Sold................................ 2.98 2.87 2.75
Offshore China Average Lifting Costs per BOE Produced
Independent................................................................ 3.89 4.78 5.28
Production Sharing Contracts............................................... 3.95 4.53 5.35
Offshore China Average..................................................... 3.92 4.66 5.31
Overseas Average Lifting Costs per BOE Produced
Net Entitlement............................................................ 9.06 9.27 10.72
Drilling and Productive Wells
The following table sets forth our exploratory and productive wells
drilled offshore China as of December 31, 2004 by independent and production
sharing contract operations in each of our operating areas. It includes
exploratory and productive wells drilled offshore China prior to our inception
in 1982.
As of December 31, 2004
--------------------------------------------------------------------------
Western Eastern
South China South China East
Total Bohai Bay Sea Sea China Sea Overseas
---------- ------------ ------------- ------------ ----------- ----------
Independent
Net Exploratory Wells................... 494 297 161 20 16 --
Net Productive Wells.................... 490.4 382 78 25 5.4 --
Crude Oil............................... 463.7 370 66 25 2.7 --
Natural Gas............................. 26.7 12 12 -- 2.7 --
Production Sharing Contracts
Net Exploratory Wells................... 14 -- -- 0.5 2.6 10.9
Net Productive Wells.................... 1,074.4 203.3 20 75 -- 776.1
Crude Oil............................... 821.7 203.3 14.4 74 -- 530
Natural Gas............................. 252.7 -- 5.6 1 -- 246.1
Totals
Net Exploratory Wells................... 508 297 161 20.5 18.6 10.9
Net Productive Wells.................... 1,564.8 585.3 98 100 5.4 776.1
Crude Oil............................... 1,285.4 573.3 80.4 99 2.7 530
Natural Gas............................. 279.4 12 17.6 1 2.7 246.1
51
Drilling Activity
The following tables set forth our net exploratory and development
wells broken down by independent and production sharing contract operations in
each of our operating areas for the years ended December 31, 2004, 2003 and
2002.
Year ended December 31, 2004
--------------------------------------------------------------
Western Eastern
Bohai South South East
Total Bay China Sea China Sea China Sea Overseas
------ -------- ---------- ----------- ---------- ----------
Independent
Net Exploratory Wells Drilled.................. 36 19 8 6 3 --
Successful.................................. 21 14 3 4 -- --
Dry......................................... 15 5 5 2 3 --
Net Development Wells Drilled.................. 40 34 4 2 2 --
Successful.................................. 40 34 4 2 2 --
Dry......................................... -- -- -- -- -- --
Production Sharing Contracts
Net Exploratory Wells Drilled.................. 4.6 -- -- -- 0.6 4
Successful.................................. 3.3 -- -- -- 0.3 3
Dry......................................... 1.3 -- -- -- 0.3 1
Net Development Wells Drilled.................. 73 62 -- 11 -- --
Successful.................................. 73 62 -- 11 -- --
Dry......................................... -- -- -- -- -- --
Year ended December 31, 2003
--------------------------------------------------------------
Western Eastern
Bohai South South East
Total Bay China Sea China Sea China Sea Overseas
------- --------- ----------- ---------- ----------- ---------
Independent
Net Exploratory Wells Drilled.................. 28.0 16.0 5.0 7.0 -- --
Successful.................................. 14.0 6.0 3.0 5.0 -- --
Dry......................................... 14.0 10.0 2.0 2.0 -- --
Net Development Wells Drilled.................. 20.1 11.1 9.0 -- -- --
Successful.................................. 20.1 11.1 9.0 -- -- --
Dry......................................... -- -- -- -- -- --
Production Sharing Contracts
Net Exploratory Wells Drilled.................. 3.5 -- -- 0.5 -- 3.0
Successful.................................. -- -- -- -- -- --
Dry......................................... 3.5 -- -- 0.5 -- 3.0
Net Development Wells Drilled.................. 78.0 42.9 -- 3.1 -- 32.0
Successful.................................. 72.0 42.9 -- 3.1 -- 26.0
Dry......................................... 6.0 -- -- -- -- 6.0
52
Year ended December 31, 2002
---------------------------------------------------------------
Western Eastern
Bohai South South East
Total Bay China Sea China Sea China Sea Overseas
-------- --------- ---------- ---------- ----------- ----------
Independent
Net Exploratory Wells Drilled.................. 41.5 15.0 20.0 5.0 1.5 --
Successful.................................. 19.0 12.0 3.0 3.0 1.0 --
Dry......................................... 22.5 3.0 17.0 2.0 0.5 --
Net Development Wells Drilled.................. 14.0 2.0 12.0 -- -- --
Successful.................................. 14.0 2.0 12.0 -- -- --
Dry......................................... -- -- -- -- -- --
Production Sharing Contracts
Net Exploratory Wells Drilled.................. 3.1 -- -- -- -- 3.1
Successful.................................. 1.9 -- -- -- -- 1.9
Dry......................................... 1.2 -- -- -- -- 1.2
Net Development Wells Drilled.................. 65.0 20.2 3.6 3.1 -- 38.1
Successful.................................. 60.7 20.2 3.6 3.1 -- 33.8
Dry......................................... 4.3 -- -- -- -- 4.3
53
Natural Gas Business
Natural gas is becoming an increasingly important part of our
business strategy. We intend to exploit our natural gas reserves to meet
rapidly growing demand in the PRC for natural gas. In light of increasing
demand for natural gas in the PRC, we have made strategic investments in
liquefied natural gas projects outside the PRC and may continue to do so in
the future.
PRC Activity
CNOOC, our controlling shareholder, has granted us an option to
invest in liquefied natural gas projects or other natural gas related business
in which CNOOC invested or proposed to invest. The terms of this option
require us, if we exercise the option, to reimburse CNOOC for any contribution
CNOOC has made with respect to the facility together with interest calculated
at the prevailing market rate. CNOOC's major liquefied natural gas projects in
the PRC include:
Guangdong LNG Facility. CNOOC is currently engaged in a project to
build China's first proposed liquefied natural gas import facility in
Guangdong Province in southern China. We have not entered into any
negotiations with CNOOC on the detailed terms under which we may exercise our
option to acquire CNOOC's interest in this facility. CNOOC has committed to
take a 33% ownership interest in the project. Other partners include Hongkong
Electric Holding Company and Hong Kong & China Gas Company Limited, each
committed to 3% ownership interests, and five customers of the proposed
facility who have collectively committed to a 31% ownership interest. Through
a competitive selection process, BP Global Investment Limited was selected as
the foreign partner to take the remaining 30% interest in the project.
The project involves the construction of a receiving terminal with
capacity of 3.7 million tonnes per year and a 380-kilometer trunkline. Project
construction began in the third quarter of 2003. The facility is scheduled to
commence operations in 2006.
Fujian Development. In October 2001, CNOOC signed an agreement with
the Fujian provincial government on natural gas market development in Fujian
Province. The agreement provides for a joint investment commitment to increase
natural gas supply and gas market development in Fujian Province. Both parties
are committed to sourcing gas, including liquefied natural gas, from all
viable sources, including from offshore production and overseas. The parties
also agreed to invest in gas-fired power plants and related infrastructure.
The parties contemplate that the Tangguh LNG project in Indonesia will supply
liquefied natural gas to this project. In August 2002, CNOOC announced that
China's second LNG terminal would be built in Fujian by CNOOC and its
partners. CNOOC owns a 60% interest in the project. Construction for the
project began in the third quarter of 2003. The project is scheduled to
commence operations in 2008.
Zhejiang Development. In March 2004, CNOOC signed an agreement with
Zhejiang provincial government to jointly develop China's third LNG terminal
in Zhejiang. The joint development will include construction of an LNG
re-gasification terminal, a gas trunkline and a gas-fired power plant. CNOOC
will take a 51% interest in the project, with a Zhejiang government affiliate
and a Ningbo city government affiliate taking a 29% interest and a 20%
interest, respectively, in the project. Based on current plan and estimate,
phase one construction of the project will be completed in 2008.
Shandong Pipeline. In September 2001, CNOOC signed an agreement with
Shandong provincial government to participate in the planning of a Shandong
natural gas pipeline network for LNG imports. In July 2002, a joint venture
was established to develop this natural gas pipeline network, which consists
of two trunklines of 156 kilometer in aggregate and a branch trunkline of 36
kilometer. CNOOC, a Shandong government affiliate and a Hong Kong company each
own 25%, 50% and 25%, respectively, of the joint venture. Natural gas from the
Bohai Bay landed in Longkou of Shandong Province in October 2004. Natural gas
can be further transported to other cities in Shandong Province by pipeline.
54
Shanghai LNG Project. In September 2004, CNOOC signed an agreement
with a Shanghai municipal government affiliate to build a liquefied natural
gas import facility in Shanghai. This project involves the construction of a
receiving terminal and a submarine trunkline. Based on current arrangements,
CNOOC will take a 45% equity interest in the project, with the Shanghai
partner taking the remaining 55% interest. Based on current plan and estimate,
phase one construction of the project will be completed in 2008.
Overseas Activity
On January 1, 2003, we acquired BP Muturi Limited, which owned a
44.0% interest in the Muturi production sharing contract offshore Indonesia,
and BP Wiriagar Limited's 42.4% interest in the Wiriagar production sharing
contract offshore Indonesia for a considerations of approximately US$275
million. The Muturi production sharing contract and Wiriagar production
sharing contract, together with the Berau production sharing contract, make up
the Tangguh LNG project. The Tangguh LNG project is a greenfield project
located offshore Indonesia and is one of the largest natural gas projects in
Asia. On May 12, 2004, we completed our acquisition of an additional 20.767%
interest in the Muturi production sharing contract from British Gas
International Limited for a consideration of US$105.1 million. As a result,
our interest in the Muturi production sharing contract increased to 64.767%.
Our interests in these production sharing contracts represent 16.96%
of the total reserves and upstream production of the Tangguh LNG project. The
remaining interests in the Tangguh LNG project are held by BP Berau, BP
Muturi, BP Wiriagar, MI Berau, Nippon, KG Berau, KG Wiriagar and Indonesia
Natural Gas Resources Muturi. The partners in the Tangguh LNG project have
applied to the Indonesia government to consolidate the three production
sharing contracts and expect that BP will serve as the operator for the
project.
In connection with our acquisition of interests in the Tangguh LNG
project, the partners in the Tangguh LNG project entered into a conditional
25-year supply contract to provide up to 2.6 million tonnes of liquefied
natural gas per year to a liquefied natural gas terminal project in Fujian
Province, China. Supply of liquefied natural gas under this supply contract is
expected to begin in 2008. In May 2003, two large South Korean companies
selected the Tangguh LNG project as their preferred supplier of up to 1.35
million tonnes per year of liquefied natural gas. The Tangguh LNG partners
have also signed contracts to provide liquefied natural gas to North America.
In addition, we entered into a repurchase agreement whereby put options and
call options were granted to us and the sellers, respectively, to sell or
repurchase, as the case may be, the interests in these production sharing
contracts. The exercise prices of the options are determined based on the
original consideration plus interest and additional investment and draw down
made during the interim period. The options are exercisable if on or before
December 31, 2004:
o the LNG supply contract is terminated due to the non-satisfaction
of the conditions precedent to the LNG supply contract; or
o the LNG supply contract is otherwise legally ineffective.
These put options and call options have lapsed since neither of the
above circumstances occurred on or before December 31, 2004.
Given the proximity of the Tangguh LNG project to many major
industrial and commercial areas, we expect the project to secure additional
LNG supply contracts in the near future.
In May 2003, we signed an agreement with the original North West
Shelf project partners to acquire an aggregate interest of 5.3% in the
reserves and upstream production of Australia's North West Shelf project for a
consideration of US$348 million. We completed this acquisition in December
2004. Our estimated share of reserves from this project would be approximately
1.2 trillion cubic feet of natural gas. Our share of natural gas together with
associated liquids is expected to be approximately 227 million BOE. Woodside
Petroleum is the operator for the project.
55
Pursuant to the agreement, we also acquired a 25% interest in the
China LNG Joint Venture established by the six original partners to supply
liquefied natural gas from the North West Shelf project to a liquefied natural
gas terminal currently being developed by CNOOC, our controlling shareholder,
and various partners in Guangdong Province, China. The terms of this
transaction require us to pay the other partners in the North West Shelf
project for gas production and processing services provided over the term of
the China LNG Joint Venture. We are also required to make an upfront tariff
payment of approximately US$180 million in relation to liquefied natural gas
processing facilities. The partners of the project signed a 25-year LNG supply
agreement in December 2004 to provide liquefied natural gas to the Guangdong
liquefied natural gas terminal starting 2006.
On October 24, 2003, we entered into an agreement with the joint
venture participants of the Gorgon natural gas project in Australia based on a
memorandum of understanding previously entered into with them, under which we
agreed to acquire certain interest in the upstream production and reserves of
the Gorgon natural gas project.
To the extent we invest in businesses and geographic areas where we
have limited experience and expertise, we plan to structure our investments as
alliances and partnerships with parties possessing the relevant experience and
expertise.
Segment Information
The following table shows the breakdown of our total consolidated
operating revenues for each of the periods indicated and the percentage
contribution of each revenue component to our total operating revenues:
Year ended December 31,
-----------------------------------------------------------------------------
2002 2003 2004
------------------------ -------------------------- ------------------------
Rmb'000 % Rmb'000 % Rmb'000 %
-------------- -------- -------------- ---------- ------------ ----------
Independent operations............. 10,362,062 39.3 12,049,054 29.4 16,104,429 29.2
Production sharing contracts....... 14,617,400 55.4 20,231,534 49.4 24,396,521 44.2
Trading businesses................. 2,377,469 9.0 12,398,661 30.3 18,191,353 32.9
Unallocated and elimination........ (983,116) (3.7) (3,728,976) (9.1) (3,470,240) (6.3)
-------------- -------- -------------- ---------- ------------ ----------
Total operating revenues........... 26,373,815 100.0 40,950,273 100.0 55,222,063 100.0
-------------- -------- -------------- ---------- ------------ ----------
We are mainly engaged in the exploration, development and production
of crude oil and natural gas primarily offshore China. For the year ended
December 31, 2004, approximately 55.1% of our total revenue was contributed by
PRC customers. Our overseas activities are mainly conducted in Indonesia and
Singapore.
Sales and Marketing
Sales of Offshore Crude Oil
We sell crude oil and natural gas to the PRC market through our
wholly owned PRC subsidiary, CNOOC China Limited, and sell to the
international market through our wholly owned subsidiary, China Offshore Oil
(Singapore) International Pte. Ltd., located in Singapore.
We submit production and sales plans to the National Development and
Reform Commission each year. Based on information provided by China's three
crude oil producers, PetroChina, Sinopec and us, the National Development and
Reform Commission compiles an overall national plan to coordinate sales. We
have been allowed to determine where we sell our products, both domestically
and internationally. Our sales of crude oil to the international market also
require us to obtain export licenses issued by the PRC Ministry of Commerce.
Historically, we have been able to obtain all required export licenses.
56
Pricing
We price our crude oil with reference to prices for crude oil of
comparable quality in the international market, including a premium or
discount mutually agreed upon by us and our customers according to market
conditions at the time of the sale. Prices are quoted in U.S. dollars, but
domestic sales are billed and paid in Renminbi. We currently produce three
types of crude oil: Nanhai Light, Medium Grade and Heavy Crude. The table
below sets forth the sales and marketing volumes, pricing benchmarks and
average realized prices for each of these three types of crude oil for the
periods indicated.
Year ended December 31,
------------------------------------------------------
2002 2003 2004
-------------- -------------------- -----------------
Sales and Marketing Volumes (benchmark)
(mmbbls)(1)
Nanhai Light (APPI(2) Tapis(3))..................... 26.4 20.4 13.1
Medium Grade (Daqing OSP(4))........................ 64.7 69.6 91.8
Heavy Crude (APPI(2) Duri(5))....................... 52.7 60.2 63.9
Average Realized Prices (US$/bbl)(6)
Nanhai Light........................................ US$24.79 US$30.27 US$41.24
Medium Grade........................................ 25.92 29.45 37.57
Heavy Crude......................................... 22.79 26.56 31.78
Benchmark Prices (US$/bbl)
APPI(2) Tapis(3) ................................... US$25.49 US$29.59 US$40.68
Daqing OSP(4) ...................................... 24.95 28.94 36.55
APPI(2) Duri(5) .................................... 21.94 25.46 31.92
ICP(7) Cinta(8)..................................... 24.08 28.04 35.62
ICP Widuri(9)....................................... 24.08 28.05 35.65
West Texas Intermediate (US$/bbl)................... US$26.16 US$31.07 US$41.44
----------
(1) Includes the sales volumes of us and our foreign partners under
production sharing contracts.
(2) Asia petroleum price index.
(3) Tapis is a light crude oil produced in Malaysia.
(4) Daqing official selling price. Daqing is a medium crude oil produced
in northeast China.
(5) Duri is a heavy crude oil produced in Indonesia.
(6) Includes the average realized prices of us and our
foreign partners under production sharing contracts.
(7) Indonesian crude price.
(8) Cinta is a medium crude oil produced in Indonesia and was not a
relevant benchmark for our crude oil sales prior to the acquisition
of the Indonesian subsidiaries in 2002.
(9) Widuri is a medium crude oil produced in Indonesia and was not a
relevant benchmark for our crude oil sales prior to the acquisition
of the Indonesian subsidiaries in 2002.
The international benchmark crude oil price, West Texas Intermediate,
was US$43.45 per barrel as of December 31, 2004 and US$52.54 per barrel as of
June 8, 2005.
Markets and Customers
We sell most of our crude oil production in the PRC domestic market.
We also sell to customers in South Korea, Japan, the United States and
Australia, as well as to crude oil traders in the spot market. For the years
ended December 31, 2002, 2003 and 2004, we sold approximately 85.1%, 73.5% and
81.2%, respectively, of our crude oil in the PRC, and exported approximately
14.9%, 26.5% and 18.8%, respectively.
Most of our crude oil production sales in the PRC domestic market are
to refineries and petrochemical companies that are affiliates of Sinopec,
PetroChina and CNOOC, our controlling shareholder. Sales volume to Sinopec has
been high historically because most of the PRC refineries and petrochemical
companies were affiliates of Sinopec. After the restructuring of the PRC
petroleum
57
industry in July 1998, some refineries and petrochemical companies
were transferred to PetroChina from Sinopec. For the years ended December 31,
2002, 2003 and 2004, sales to Sinopec were approximately 44.7%, 36.8% and
38.4%, respectively, and sales to PetroChina were approximately 7.7%, 7.7% and
7.0%, respectively, of total crude oil sales in the PRC domestic market.
Together these two customers accounted for approximately 52.4%, 44.5% and
45.4%, respectively, of our total crude oil sales in the PRC domestic market.
For further information about our sales to CNOOC-affiliated companies, please
see note 26 to our consolidated financial statements attached to this annual
report.
The following table presents, for the periods indicated, our revenues
sourced in the PRC and outside the PRC:
Year ended December 31,
-------------------------------------------------
2002 2003 2004
------------- ------------------- -------------
(Rmb in millions, except percentages)
Revenues sourced in the PRC......................... 22,781 25,416 30,453
Revenues sourced outside the PRC.................... 3,593 15,534 24,769
------------- ------------------- --------------
Total revenues...................................... 26,374 40,950 55,222
============= =================== ==============
% of revenues sourced outside the PRC............... 13.6% 37.9% 44.9%
Sales Contracts
We sign sales contracts with customers for each shipment. Sales
contracts are standard form contracts containing ordinary commercial terms
such as quality, quantity, price, delivery and payment. All sales are made on
free-on-board terms. Our customers are required to make payments within 30
days after the shipper takes possession of the crude oil cargo at our delivery
points. As of December 31, 2002, 2003 and 2004, substantially all of our
account receivables were aged within six months. During the years ended
December 31, 2002, 2003 and 2004, the accounts receivable turnover were
approximately 32.7 days, 47.5 days and 42.3 days, respectively. Doubtful
accounts provision during the years ended December 31, 2002, 2003 and 2004
were nil, Rmb 1.5 million and nil, respectively.
We have a credit control policy, including credit investigation of
customers and periodic assessment of credit terms. Sales clerks are directly
responsible for liaising with customers on the collection of receivables
within the credit terms.
We price our crude oil in U.S. dollars. PRC customers are billed and
make actual payments in Renminbi based on the exchange rate prevailing at the
bill of lading date, while overseas customers are billed and are required to
make payments in U.S. dollars within 30 days of the bill of lading date.
Sales of Natural Gas from Offshore China
Driven by environmental and efficiency concerns, the PRC government
is increasingly encouraging residential and industrial use of natural gas to
meet primary energy needs. In 1989, in order to encourage natural gas
production, the PRC government adopted a favorable royalty treatment, which
provides a royalty exemption for natural gas production up to two billion
cubic meters (70.6 billion cubic feet or 11.8 million BOE) per year as
compared to a royalty exemption available for crude oil production of up to
one million tons or approximately seven million BOE per year. The favorable
treatment also includes lower royalty rates on incremental increases in
natural gas production as compared with the royalty rates for crude oil
production.
Since 1989, the PRC government has adopted the following sliding
scale of royalty payments of up to 3% of the annual gross production of
natural gas:
Annual gross production Royalty rate
--------------------------- ------------
Less than 2 billion cubic meters........................................................... 0.0%
2-3.5 billion cubic meters................................................................. 1.0%
58
3.5-5 billion cubic meters................................................................. 2.0%
Above 5 billion cubic meters............................................................... 3.0%
We sell a large portion of our offshore China natural gas production
to Hong Kong. The remaining offshore China natural gas production is sold to
customers in mainland China. Of the 102.5 billion cubic feet of natural gas
that we produced offshore China in the year ended December 31, 2004, 48.2
billion cubic feet was produced from the Yacheng 13-1 gasfield in the Western
South China Sea. This field is governed by a production sharing contract we
entered into with BP and Kufpec. We hold a 51% participating interest in this
field. In December 1992, Castle Peak Power in Hong Kong signed a long-term gas
supply contract under which it agreed to buy from the partners approximately
102.4 billion cubic feet of natural gas per year on a take-or-pay basis until
2015. Gas prices are quoted and paid in U.S. dollars. The payments are made in
U.S. dollars on a monthly basis and are reconciled annually. Castle Peak Power
purchased approximately 37.8% of our total offshore China natural gas
production for the year ended December 31, 2004. Castle Peak Power is a 60/40
joint venture between ExxonMobil Energy Limited and CLP Power Hong Kong
Limited, a public utility company in Hong Kong. We sold the remaining 62.2% of
our total offshore China natural gas production in 2004 to PRC customers,
including Hainan Fertilizer, Hainan Minsheng Gas, Hainan Yangpu Power,
Shanghai Gas, Jingxi Chemical, Xinao Gas, Tianjin Binhai Power, Tianjin Binhai
Gas and Shandong Yantai Zhongshi Gas.
The price of gas sold to the PRC market is determined by negotiations
between us and the buyers based on market conditions. Contracts typically
consist of a base price with provisions for annual resets and adjustment
formulas which depend on a basket of crude oil prices, inflation and various
other factors.
Procurement of Services
We usually outsource work in connection with the acquisition and
processing of seismic data, reservoir studies, well drilling services, wire
logging and perforating services and well control and completion service to
independent third parties or our affiliates.
In the development stage, we normally employ independent third
parties for mooring and oil tanker transportation services and both
independent third parties and CNOOC affiliates for other services by entering
into contracts with them. We conduct a bidding process to determine who we
employ to construct platforms, terminals and pipelines, to drill production
wells and to transport offshore production facilities. Both independent third
parties and CNOOC affiliates participate in the bidding process. We are
closely involved in the design and management of services by contractors and
exercise extensive control over their performance, including their costs,
schedule and quality.
Competition
Domestic Competition
The petroleum industry is highly competitive. We compete in the PRC
and in international markets for customers as well as capital to finance our
exploration, development and production activities. Our principal competitors
in the PRC market are PetroChina and Sinopec.
We price our crude oil on the basis of comparable crude oil prices in
the international market. The majority of our customers for crude oil are
refineries affiliated with Sinopec and PetroChina to which we have been
selling crude oil, from time to time, since 1982. Based on our dealings with
these refineries, we believe that we have established a stable business
relationship with them. In 1998, the PRC government restructured PetroChina
and Sinopec into vertically integrated companies with each having both
upstream and downstream petroleum businesses and operations.
We are the dominant player in the oil and gas industry offshore China
and are the only company permitted to engage in oil and gas exploration and
production offshore China in cooperation with foreign parties. We may face
increased competition in the future from other petroleum companies in
obtaining new PRC offshore oil and gas properties, or, as a result of changes
in current PRC laws or regulations permitting an expansion of existing
companies' activities or new entrants into the industry.
59
As part of our business strategy, we intend to expand our natural gas
business to meet rapidly increasing domestic demand. Our competitors in the
PRC natural gas market are PetroChina and, to a lesser extent, Sinopec. Our
principal competitor, PetroChina, is the largest supplier of natural gas in
China in terms of volume of natural gas supplied. PetroChina's natural gas
business benefits from strong market positions in Beijing, Tianjin, Hebei
Province and northern China. We intend to develop related natural gas
businesses in China's coastal provinces, where we may face competition from
PetroChina and, to a lesser extent, Sinopec. We believe that our extensive
natural gas resources base, the proximity of these resources to the markets in
China, our relatively advanced technologies and our experienced management
team will enable us to compete effectively in the domestic natural gas market.
Foreign Competition and the World Trade Organization
Imports of crude oil are subject to tariffs, import quotas, handling
fees and other restrictions. The PRC government also restricts the
availability of foreign exchange with which the imports must be purchased. The
combination of tariffs, quotas and restrictions on foreign exchange has, to
some extent, limited the competition from imported crude oil.
In line with the general progress of its economic reform programs,
the PRC government has agreed to reduce import barriers as part of its WTO
commitments. As a result of China joining the World Trade Organization as a
full member on December 11, 2001, it is required to further reduce its import
tariffs and other trade barriers over time, including with respect to certain
categories of petroleum and crude oil. Notwithstanding China's WTO related
concessions, crude and processed oil remain, for the time being, subject to
restrictions on import rights and only certain designated state-owned
enterprises may import crude and processed oil. Sinopec, PetroChina and
several other domestic companies have received permission to import crude oil
on their own. At present, foreign owned or foreign invested entities and other
none-state-owned enterprises are subject to certain import quotas.
PRC Fiscal Regimes for Offshore Crude Oil and Natural Gas Activities
We conduct exploration and production operations either independently
or jointly with foreign partners under our production sharing contracts. The
PRC government has established different fiscal regimes for crude oil and
natural gas production from our independent operations and from our production
sharing contracts.
Royalties paid to the PRC government are based on our gross
production from both independent operations and oil and gas fields under
production sharing contracts. The amount of the royalties varies up to 12.5%
based on the annual production of the relevant property. The PRC government
has provided companies such as ours with a royalty exemption for up to one
million tons, or seven million BOE, per year for our crude oil production and
for up to 70.6 billion cubic feet, or 11.8 million BOE, per year for our
natural gas production. The limits in these exemptions apply to our total
production from both independent properties and properties under production
sharing contracts. In addition, we pay production taxes to the PRC government
equal to 5% of our crude oil and gas produced independently and 5% of our
crude oil and gas produced under production sharing contracts.
Under our production sharing contracts, production of crude oil and
gas is allocated among us, the foreign partners and the PRC government
according to a formula contained in the contracts. Under this formula, a
percentage of production under our production sharing contracts is allocated
to the PRC government as its share oil. For more information about the
allocation of production under the production sharing contracts, see
"--Production Sharing Contracts--Offshore China--Production Sharing Formula."
We cannot give any assurance that the fiscal regime outlined above
will not change significantly in the future.
Production Sharing Contracts
60
Offshore China
When exploration and production operations offshore China are
conducted through a production sharing contract, the operator of the oil or
gas field must submit a detailed evaluation report and an overall development
plan to CNOOC upon discovery of petroleum reserves. The overall development
plan must also be submitted to a joint management committee established under
the production sharing contract. After CNOOC confirms the overall development
plan, CNOOC submits it to the National Development and Reform Commission for
approval. After receiving the governmental approval, the parties to the
production sharing contract may begin the commercial development of the
petroleum field.
As part of the reorganization in 1999, CNOOC transferred all of its
economic interests and obligations under its then existing production sharing
contracts to us and our subsidiaries. It also undertook to transfer its future
production sharing contracts to us and our subsidiaries. As of December 31,
2004, we had 27 production sharing contracts.
Under PRC law, the negotiation of a production sharing contract is a
function that only a state-owned national company, such as CNOOC, may perform.
This function cannot be transferred to us because we are a pure commercial
entity. Since the reorganization, under the terms of its undertaking with us,
CNOOC, after entering into production sharing contracts with international oil
and gas companies, is required to assign immediately to us all of its economic
interests and obligations under the production sharing contracts. For further
details, see "Item 4--Information on the Company--History and Development" and
"Item 7--Major Shareholders and Related Party Transactions--Related Party
Transactions."
New production sharing contracts are entered into between CNOOC and
foreign partners primarily through bidding organized by CNOOC and, to a lesser
extent, through direct negotiation.
Bidding Process
The bidding process typically involves the following steps:
o CNOOC, with the approvals of the PRC government, determines which
blocks are open for bidding and prepares geological information
packages and bidding documentation for these blocks;
o CNOOC invites foreign enterprises to bid;
o potential bidders are required to provide information, including
estimates of minimum work commitments, exploration costs and
percentage of share oil payable to the PRC government; and
o CNOOC evaluates each bid and negotiates a production sharing
contract with the successful bidder.
Under CNOOC's undertaking with us, we may participate with CNOOC in
all negotiations of new production sharing contracts.
The term of a production sharing contract typically lasts for less
than 30 years and has three distinct phases:
o Exploration. The exploration period generally lasts for seven
consecutive years depending on the size of the contract area, and
may be extended with the consent of CNOOC. During this period,
exploratory and appraisal work on the exploration block is
conducted in order to discover petroleum and to enable the
parties to determine the commercial viability of any petroleum
discovery.
61
o Development. The development period begins on the date that the
overall development plan, which outlines the recoverable reserves
and schedule for developing the discovered petroleum reserves, is
approved by the relevant PRC regulatory authorities. The
development phase ends when the design, construction,
installation, drilling and related research work for the
realization of petroleum production have been completed.
o Production. The production period begins when commercial
operations start and usually lasts for 15 years. The production
period may be extended upon approval of the PRC government.
Minimum Work Commitment
Under production sharing contracts that involve exploration
activities, the foreign partners must complete a minimum amount of work during
the exploration period, generally including:
o drilling a minimum number of exploration wells;
o producing a fixed amount of seismic data; and
o incurring a minimum amount of exploration expenditures.
Foreign partners are required to bear all exploration costs during
the exploration period. However, such exploration costs can be recovered
according to the production sharing formula after commercial discoveries are
made and production begins. During the exploration period, foreign partners
are required to return 25% of the contract area, excluding the development and
production area, to CNOOC at the end of each of the third year and fifth year
of the exploration period. At the end of the exploration period, all areas,
excluding the development areas, production areas and areas under evaluation,
must be returned to CNOOC.
Participating Interests
Pursuant to production sharing contracts, we have the right to take
participating interests in any oil or gas field discovered in the contract
area and may exercise this right after the foreign partners have made
commercially viable discoveries. The foreign partners retain the remaining
participating interests.
Production Sharing Formula
A chart illustrating the production sharing formula under our
production sharing contracts is shown below.
Percentage of annual
gross production Allocation
--------------------- -----------------------------------------------------------------------------------------
5.0% Production tax payable to the PRC government
0.0% -- 12.5%(1) Royalty oil payable to the PRC government
50.0% -- 62.5%(1) Cost recovery oil allocated according to the following priority:
recovery of current year operating costs by us and foreign partner(s);
recovery of earlier exploration costs by foreign partner(s);
recovery of development costs by us and foreign partner(s) based on participating
interests;(3) and
any excess, distributed according to each partner's participating interest.(3)
32.5%(2) Remainder oil allocated according to the following formula:
(1-X) multiplied by 32.5% represents share
oil payable to the PRC government; and
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X multiplied by 32.5% represents remainder oil distributed according to
each partner's participating interest.(3)
----------
(1) Assumes annual gross production of more than four million metric tons,
approximately 30 million barrels of oil. For lower amounts of production,
the royalty rate will be lower and the cost recovery will be greater than
50.0% by the amount that the royalty rate is less than 12.5%.
(2) The ratio "X" is agreed in each production sharing contract based on
commercial considerations and ranges from 8% to 100%.
(3) See "--Principal Oil and Gas Regions" for our participating interest
percentage in each production sharing contract.
The first 5.0% of the annual gross production is paid to the PRC
government as production tax. The PRC government is also entitled to a royalty
payment equal to the next 0% to 12.5% of the annual gross production based on
the following sliding scale:
Annual gross production of oil(1) Royalty rate
----------------------------------------------------------------------------------------- ----------------
Less than 1 million tons.................................................................. 0.0%
1-1.5 million tons........................................................................ 4.0%
1.5-2.0 million tons...................................................................... 6.0%
2.0-3.0 million tons...................................................................... 8.0%
3.0-4.0 million tons...................................................................... 10.0%
Above 4 million tons...................................................................... 12.5%
----------
(1) The sliding scale royalty for natural gas reaches a maximum at 3.0%.
Depending on the percentage of the PRC government's royalty payment,
an amount equal to the next 50.0% to 62.5% of the annual gross production is
allocated to the partners for cost recovery purposes. This amount is allocated
according to the following priority schedule:
o recovery of operating costs incurred by the partners during the
year;
o recovery of exploration costs, excluding interest accrued
thereon, incurred but not yet recovered by foreign partners
during the exploration period; and
o recovery of development investments incurred but not yet
recovered, and interest accrued in the current year, according to
each partner's participating interest.
The remaining 32.5% of the annual gross production, which is referred
to as the remainder oil, is distributed to each of the PRC government, us and
the foreign partners according to a "ratio X" agreed to by CNOOC and the
foreign partners in the production sharing contract. An amount of oil and gas
equal to the product of the remainder oil and one minus the "ratio X" is first
distributed to the PRC government as share oil. The balance of the remainder
oil, which is referred to as the allocable remainder oil, is then distributed
to us and the foreign partners based on each party's participating interest.
We pay an estimated production tax and royalty to the PRC government
each time we ship crude oil production, or on a monthly basis for natural gas
production. At the end of each annual period, we calculate the production tax
and royalty payable for the year and file this information with the PRC tax
bureau. We make adjustments for any overpayment or underpayment of production
tax and royalty at the end of the year.
The foreign partners have the right to either take possession of
their allocable remainder oil for sale in the international market, or sell
such crude oil to us for resale in the PRC market.
Management and Operator
Under each production sharing contract, a party will be designated as
an operator to undertake the execution of the production sharing contract
which includes:
o preparing work programs and budgets;
63
o procuring equipment and materials relating to operations;
o establishing insurance programs; and
o issuing cash-call notices to the parties to the production
sharing contract to raise funds.
A joint management committee, which usually consists of six or eight
persons, is set up under each production sharing contract to perform
supervisory functions, and each of us and the foreign partners as a group has
the right to appoint an equal number of representatives to form the joint
management committee. The chairman of the joint management committee is the
chief representative designated by us and the vice chairman is the chief
representative designated by the foreign partners as a group. The joint
management committee has the authority to make decisions on matters including:
o reviewing and approving operational and budgetary plans;
o determining the commercial viability of each petroleum discovery;
o reviewing and adopting the overall development plan; and
o approving significant procurements and expenditures, and
insurance coverage.
Daily operations of a property subject to the respective production
sharing contract are carried out by the designated operator. The operator is
typically responsible for determining and executing operational and budgetary
plans and all routine operational matters. Upon discovery of petroleum
reserves, the operator is required to submit a detailed overall development
plan to the joint management committee.
After the foreign partner has fully recovered its exploration and
development costs under production sharing contracts in which the foreign
partner is the operator, we have the exclusive right to take over the
operation of the particular oil or gas field. With the consent of the foreign
partner, we may also take over the operation before the foreign partner has
fully recovered its exploration and development costs.
Ownership of Data and Assets
All data, records, samples, vouchers and other original information
obtained by foreign partners in the process of exploring, developing and
producing offshore petroleum become the property of CNOOC as a state-owned
national oil company under PRC law. Through CNOOC, we have unlimited and
unrestricted access to the data.
Our foreign partners and us have joint ownership in all of the assets
purchased, installed or constructed under the production sharing contract
until either:
o the foreign partners have fully recovered their development
costs, or
o upon the expiration of the production sharing contract.
After that, as a state-owned national oil company under PRC law,
CNOOC will assume ownership of all of the assets under the production sharing
contracts, our foreign partners and us retain the exclusive right to use the
assets during the production period.
Abandonment Costs
Any party to our production sharing contracts must give prior written
notice to the other party or parties if it plans to abandon production of the
oil or gas field within the contracted area. If the other party or parties
agree to abandon production from the oil or gas field, all parties pay
abandonment costs in proportion to their respective percentage of
participating interests in the field. If we decide not to abandon
64
production upon notice from a foreign partner, all of such foreign partner's
rights and obligations under the production sharing contract in respect of the
oil or gasfield, including the responsibilities for payment of abandonment
costs, terminate automatically. We bear the abandonment costs if we decide to
abandon production after an initial decision to proceed with production. In
2004, we provided for dismantlement costs of approximately Rmb 201.6 million.
Production Tax
The PRC production tax rate on the oil and natural gas produced under
production sharing contracts is currently 5%.
Overseas
In addition to our production sharing arrangements in the PRC, we
have made production sharing arrangements in several overseas countries,
including Indonesia, Australia, Morocco and Myanmar.
We have interests in production sharing contracts and a technical
assistance contract in Indonesia. Indonesian oil and gas activities are
currently supervised and controlled by BP MIGAS, the executive agency for
upstream oil and gas activities in Indonesia. Under current Indonesian law, BP
MIGAS is the sole entity authorized to manage Indonesia's oil and gas
resources on behalf of the Indonesian government and to enter into agreements
with foreign and domestic companies, functions previously conducted by
Pertamina.
BP MIGAS enters into production sharing arrangements with private
energy companies whereby such companies explore and develop oil and gas in
specified areas in exchange for a percentage interest in the production from
the fields in the applicable production sharing area. These production sharing
arrangements are mainly governed by production sharing contracts, as well as
by technical assistance contracts, each of which is described further below.
Upon entering into a production sharing arrangement, the operator commits to
spending a specified sum of capital to implement an agreed work program.
Production sharing arrangements in Indonesia are based on the
following principles:
o contractors are responsible for all investments (exploration,
development and production);
o a contractor's investment and production costs are recovered
against production;
o the profit split between the Indonesian government and
contractors is based on production after the cost recovery
portion;
o ownership of tangible assets remains with the Indonesian
government; and
o overall control lies with BP MIGAS on behalf of the Indonesian
government.
An original production sharing contract is awarded to explore for and
to establish commercial hydrocarbon reserves in a specified area prior to
commercial production. The contract is generally awarded for a number of years
depending on the contract terms, subject to discovery of commercial quantities
of oil and gas within a certain period. The term of the exploration period can
generally be extended by agreement between the contractor and BP MIGAS. The
contractor is generally required to relinquish specified percentages of the
contract area by specified dates unless such designated areas correspond to
the surface area of any field in which oil and gas has been discovered.
BP MIGAS is typically responsible for managing all production sharing
contract operations, assuming and discharging the contractor from all taxes
(other than Indonesian corporate taxes, taxes on interest, dividends and
royalties and others as set forth in the production sharing contract),
obtaining approvals and permits needed by the project and approving the
contractor's work program and budget. The responsibilities of a contractor
under a production sharing contract generally include advancing necessary
funds, furnishing technical aid and preparing and executing the work program
and budget. In
65
return, the contractor may freely lift, dispose of and export
its share of crude oil and retain the proceeds obtained from its share.
The contractor generally has the right to recover all finding and
developing costs, as well as operating costs, in each production sharing
contract against available revenues generated after deduction of first tranche
production of oil and gas, or FTP. Under FTP terms, the parties are entitled
to take and receive an annually agreed percentage of production from each
production zone or formation each year, prior to any deduction for recovery of
operating costs, investment credits and handling of production. FTP for each
year is generally shared between the Indonesian government and the contractor
in accordance with the standard sharing splits. The balance is available for
cost recovery. Post-cost recovery, the Indonesian government is entitled to a
specified profit share of crude oil production and of natural gas production.
Under each production sharing arrangement, the contractor is obligated to pay
Indonesian corporate taxes on its specified profit share at the Indonesian
corporate tax rate in effect at the time the agreement is executed.
Production sharing contracts in Indonesia have long included a
provision known as the domestic market obligation, or DMO, under which a
contractor must sell a specified percentage of its crude oil to the local
market at a reduced price. After the first five years of a field's production,
the contractor is required to supply, the lesser of (i) 25% of the
contractor's before-tax share of total crude oil production or (ii) the
contractor's share of profit oil. This reduced price varies from contract to
contract and is calculated at the point of export.
The new Indonesian Oil and Gas Law, which came into force on November
23, 2001, stipulates a gas DMO, under which the contractor must sell up to 25%
of its gas entitlement to the domestic market, although it is not clear at
what price this gas must be sold. Production sharing contract parties have
stated that they would prefer that this price be determined on the open
market, and that it be recognized that if there are pre-existing gas sale
agreements, or if the project produces LNG for export, the obligation to sell
gas into the local market may not be feasible.
Technical assistance contracts are awarded when a field has prior or
existing production. The oil or gas production is divided into non-shareable
and shareable portions. The non-shareable portion represents the expected
production from the field at the time the technical assistance contract is
signed and is retained by Pertamina. The shareable portion represents the
additional production resulting from the operator's investment in the field
and is split in the same way as for an original production sharing contract as
described above.
We also have interests in production sharing contracts in Morocco and
Myanmar. On May 3, 2004, we, through our wholly owned subsidiary CNOOC Morocco
Limited, acquired from Vanco Energy Corporation a 11.25% interest in a
petroleum agreement for Ras Tafelney offshore Morocco. At the end of 2004, we
and Golden Aaron Pte. Ltd. and China Global Construction Limited formed a
joint venture in Myanmar and had entered into six production sharing contracts
as of June 8, 2005. We will act as the operator under these production sharing
contracts.
Geophysical Survey Agreements
Historically, we conducted our exploration operations through
geophysical survey agreements with leading international oil and gas companies
as well as independently and through production sharing contracts. As of
December 31, 2004, we were not a party to any geophysical survey agreements,
but may enter such agreements in the future.
Geophysical survey agreements are designed for foreign petroleum
companies to conduct certain geophysical exploration before they decide
whether to enter into production sharing contract negotiations with CNOOC.
Geophysical survey agreements usually have a term of less than two years.
International oil and gas companies must complete all of the work confirmed by
both parties in the agreements and bear all the costs and expenses. If a
foreign partner decides to enter into a production sharing contract with
CNOOC, the costs and expenses that the foreign partner incurs in conducting
geophysical survey may be recovered by the foreign partner in the production
period subject to our confirmation. CNOOC
66
has the sole ownership of all data and information obtained by the foreign
partner during the geophysical survey, and, through CNOOC, we have access to
all such data.
Under PRC law, the negotiation of a geophysical survey agreement is a
function that only a state-owned national company, such as CNOOC, can perform.
As part of its reorganization in 1999, CNOOC transferred to us all its
commercial rights under a geophysical survey agreement, which has since been
completed. In the future, CNOOC has agreed to assign to us all of its
commercial rights under any geophysical survey agreements it enters into with
international oil and gas companies.
Operating Hazards and Uninsured Risks
Our operations are subject to hazards and risks inherent in the
drilling, production and transportation of crude oil and natural gas,
including pipeline ruptures and spills, fires, explosions, encountering
formations with abnormal pressures, blowouts, cratering and natural disasters,
any of which can result in loss of hydrocarbons, environmental pollution and
other damage to our properties and the properties of operators under
production sharing contracts. In addition, certain of our crude oil and
natural gas operations are located in areas that are subject to tropical
weather disturbances, some of which can be severe enough to cause substantial
damage to facilities and interrupt production.
As protection against operating hazards, we maintain insurance
coverage against some, but not all, potential losses, including the loss of
wells, blowouts, pipeline leakage or other damage, certain costs of pollution
control and physical damages on certain assets. Our insurance coverage
`includes oil and gas field properties and construction insurance, marine hull
insurance, protection and indemnity insurance, drilling equipment insurance,
marine cargo insurance and third party and comprehensive general liability
insurance. We also carry business interruption insurance for Pinghu Field. In
Indonesia, the operators of the production sharing contracts in which we
participate are required by local law to purchase insurance policies
customarily taken out by international petroleum companies. As of December 31,
2004, we paid an annual insurance premium of approximately Rmb 132 million to
maintain our insurance coverage. We believe that our level of insurance is
adequate and customary for the PRC petroleum industry and international
practices. However, we may not have sufficient coverage for some of the risks
we face, either because insurance is not available or because of high premium
costs. See "Item 3--Key Information--Risk Factors--Risks relating to our
business--Exploration, development and production risks and natural disasters
affect our operations and could result in losses that are not covered by
insurance."
For the year ended December 31, 2004, we did not have any uninsured
losses.
Research and Development
Historically, we used research and development services provided by
CNOOC's affiliates, including CNOOC Research Center, as well as other
international research entities. In July 2003, we established our own research
center, CNOOC (China) Limited Research Center, to undertake most of our
research and development activities. During the three years ended December 31,
2002, 2003 and 2004, we paid approximately Rmb 110 million, Rmb 56 million and
Rmb 8 million, respectively, to CNOOC Research Center for its provision of
general research and development services.
Our research efforts have focused on:
o advanced resolution enhancement technology;
o building up exploration and development data bases to improve the
efficiency of our research efforts; and
o consolidating multi-discipline data to optimize the selection of
exploration sites.
We are also studying various ways of utilizing our existing reserves
including:
67
o building more accurate reservoir models;
o re-processing existing seismic and log data to locate potential
areas near existing fields to be integrated into existing
production facilities; and
o researching ways to reduce development risks for marginal fields
and to group fields into joint developments to share common
facilities.
For further information regarding our agreement with CNOOC Research
Center, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions--Categories of Connected
Transactions--Research and development services."
Regulatory Framework
Government Control
The PRC government owns all of China's petroleum resources and
exercises regulatory control over petroleum exploration and production
activities in China. We are required to obtain various governmental approvals,
including those from the Ministry of Land and Resources, the State
Administration for Environmental Protection, the National Development and
Reform Commission and the Ministry of Commerce before we are permitted to
conduct production activities. For joint exploration and production with
foreign enterprises, we are required to obtain various governmental approvals,
through CNOOC, including those from:
o the Ministry of Land and Resources, for a permit for exploration
blocks, an approval of a geological reserve report submitted
through CNOOC and an exploration permit for the approved blocks;
o the Ministry of Land and Resources or the National Development
and Reform Commission to designate such blocks as an area for
foreign cooperation;
o the Ministry of Commerce for the production sharing contracts
between CNOOC and the foreign enterprises;
o the State Administration for Environmental Protection for an
environmental impact report submitted through CNOOC;
o the National Development and Reform Commission for an overall
development plan submitted through CNOOC; and
o the Ministry of Land and Resources, for an extraction permit.
Although our sales are coordinated by the National Development and
Reform Commission, historically we have been given flexibility to sell our
crude oil based on the international spot price and to determine where we sell
our crude oil.
Since the conclusion of the meeting of the National People's Congress
in March 2003, the PRC government has undergone substantial reform. It is
believed that market-oriented reforms will continue.
Special Policies Applicable to the Offshore Petroleum Industry in China
Since the early 1980s, the PRC government has adopted policies and
measures to encourage the development of the offshore petroleum industry.
These policies and measures, which were applicable to CNOOC's operations prior
to the reorganization, became applicable to our operations in accordance with
an undertaking agreement between us and CNOOC. As approved by the relevant PRC
government authorities, including the Ministry of Land and Resources and the
Ministry of Commerce, these policies and measures have provided us with the
following benefits:
68
o the exclusive right to explore for, develop and produce petroleum
offshore China in cooperation with international oil and gas
companies and to sell this petroleum in China;
o the flexibility to set our prices in accordance with
international market prices and determine where to sell our crude
oil, with only minimal supervision from the PRC government;
o a favorable 5% production tax on the crude oil and natural gas we
produce both independently and under production sharing
contracts, rather than the 17% rate generally applicable to the
independent production of domestic petroleum companies in China;
and
o production from one of our major gasfields, Yacheng 13-1, is
exempt from the PRC royalties under an approval by the State Tax
Bureau in May 1989 and the 5% production tax applicable to the
oil and gas produced under other production sharing contracts in
accordance with an approval by the Ministry of Finance in August
1985. Our natural gas revenues from Yacheng 13-1 for the five
years ended December 31, 2004 represented approximately 6.7%,
7.3%, 5.6%, 3.6% and 3.2%, respectively, of our total oil and
natural gas sales in those years.
Although we historically have benefited from the foregoing special
policies, we cannot assure you that such policies will continue in the future.
We are also regulated by the PRC government in various other aspects of our
business and operations, including required government approvals for new
independent exploration and production projects and new production sharing
contracts. For a further discussion of ways in which we are regulated by the
PRC government, see "--Government Control."
Policies Applicable to International Oil and Gas Companies Operating
Offshore China
The PRC government encourages foreign participation in offshore
petroleum exploration and production through exclusive cooperation with CNOOC.
In 1982, the State Council promulgated the Regulation of the People's Republic
of China on Exploitation of Offshore Petroleum Resources in Cooperation with
Foreign Enterprises, which grants to CNOOC the exclusive right to enter into
joint cooperation arrangements with foreign enterprises for offshore petroleum
exploration and production. From 1982 to 2000, CNOOC successfully completed
several rounds of bidding for offshore petroleum exploration and production
projects, and many international oil and gas companies have been involved and
awarded exploration blocks for joint exploration, development and production
with CNOOC.
In October 2001, the State Council amended the regulation referred to
above as a part of the comprehensive review of all business laws and
regulations by the Chinese government to ensure their compliance with its WTO
commitments. The amendment revised such terms in the law governing offshore
exploration as restrictive provisions on technology transfers and domestic
components requirements in procurement. The removal of these restrictions will
provide a level playing field for all oilfield service contractors, domestic
or international. These amendments are expected to benefit CNOOC's businesses
as well as our exploration and production business and further increase
production sharing contract activities offshore China. CNOOC will continue to
enjoy the exclusive right to conduct production sharing contract activities
with foreign contractors and is entitled to all rights and privileges under
the previous regulation. The regulation also states that CNOOC, as a
state-owned enterprise, is to be in charge of all efforts to exploit petroleum
resources with contractors in Chinese waters. Currently, international oil and
gas companies can only undertake offshore petroleum exploration and production
activities in China after they have entered into a production sharing contract
with CNOOC.
69
Environmental Regulation
Our operations are required to comply with various applicable
environmental laws and regulations, including PRC laws and regulations
administered by the central and local government environmental protection
bureaus for our operations in China. We are also subject to the environmental
rules introduced by the local PRC governments in whose jurisdictions our
onshore logistical support facilities are located. The State Administration
for Environmental Protection sets national environmental protection standards
and local environmental protection bureaus may set stricter local standards.
The relevant environment protection bureau must approve or review
each stage of a project. We must file an environmental impact statement or, in
some cases, an environmental impact assessment outline before an approval can
be issued. The filing must demonstrate that the project conforms to applicable
environmental standards. The relevant environmental protection bureau
generally issues approvals and permits for projects using modern pollution
control measurement technology.
The PRC national and local environmental laws and regulations impose
fees for the discharge of waste substances above prescribed levels, require
the payment of fines for serious violations and provide that the PRC national
and local governments may at their own discretion close or suspend any
facility which fails to comply with orders requiring it to cease or cure
operations causing environmental damage.
For the year ended December 31, 2004, we did not experience any
incident of crude oil discharge.
The PRC environmental laws do not currently require offshore
petroleum developers to pay abandonment costs. Our financial statements
include provisions for costs associated with the dismantlement of oil and gas
fields during the years ended December 31, 2002, 2003 and 2004 of
approximately Rmb 126.1 million, Rmb 167.3 million and Rmb 201.6 million,
respectively.
Environmental protection and prevention costs and expenses in
connection with the operation of offshore petroleum exploitation are covered
under each individual production sharing contract. Environmental protection
and prevention costs and expenses represented on average approximately 4% of
our annual operating costs relating to projects constructed offshore China
during the three years ended December 31, 2004. Each platform has its own
environmental protection and safety staff responsible for monitoring and
operating the environmental protection equipment. However, no assurance can be
given that the PRC government will not impose new or stricter regulations
which would require additional environmental protection expenditures.
We are not currently involved in any environmental claims and believe
that our environmental protection systems and facilities are adequate for us
to comply with applicable national and local environmental protection
regulations.
Legal Proceedings
We are not a defendant in any material litigation, claim or
arbitration, and know of no pending or threatened proceeding which would have
a material adverse effect on our financial condition.
Patents and Trademarks
We own or have licenses to use two trademarks which are of value in
the conduct of our business. CNOOC is the owner of the "CNOOC" trademark.
Under two non-exclusive license agreements between CNOOC and us, we have
obtained the right to use this trademark for a nominal consideration.
Real Properties
Our corporate headquarters is located in Hong Kong. We also lease
several other properties from CNOOC in China and Singapore. The rental
payments under these lease agreements are determined with reference to market
rates. For further details regarding the terms of these leases, see "Item
7--Major Shareholders and Related Party Transactions--Related Party
Transactions--Categories of Connected
70
Transactions--Lease agreement in respect of the Nanshan Terminal," and
"--Lease and property management services."
We own the following property interests in the PRC:
o land, various buildings and structures at Xingcheng JZ 20-2
Natural Gas Separating Plant, Dongyao Village, Shuangsu Township,
Xingcheng City, Liaoning Province;
o land, various buildings and structures located at Boxi Processing
Plant, South of Jintang Subway, Tanggu District, Tianjin City;
o land, various buildings and structures at Weizhou Terminal
Processing Plant, Weizhou Island, Weizhou Town, Beihai City,
Guangxi Zhuang Autonomous Region; and
o a parcel of land at Suizhong 36-1 Base, Xiaolihuang Village,
Gaoling Town, Suizhong County, Liaoning Province.
o land, various buildings and structures located at Bonan
Processing Plant, Jimu Island, Longgang Development Zone, Longkou
city, Shandong Province.
o land, various buildings and structures located at Dongfang 1-1
Processing Plant, Shugang Road, Dongfang City, Hainan Province.
Employees and Employee Benefits
During the years ended December 31, 2002, 2003 and 2004, we employed
2,047 persons, 2,447 persons and 2,524 persons, respectively. Our number of
employees increased in 2003 mainly due to the establishment of our research
center, CNOOC (China) Limited Research Center, in July 2003. Of the 2,524
employees we employed as of December 31, 2004, approximately 69.8% were
involved in petroleum exploration, development and production activities,
approximately 7.3% were involved in accounts and finance work and the
remainder were senior management, coordinators of production sharing contracts
and safety and environmental supervisors. Workers for the operation of the oil
and gas fields, maintenance personnel and ancillary service workers are hired
on a contract basis.
We have a trade union that:
o protects employees' rights;
o organizes educational programs;
o assists in the fulfillment of economic objectives;
o encourages employee participation in management decisions; and
o assists in mediating disputes between us and individual
employees.
We have not been subjected to any strikes or other labor disturbances
and believe that relations with our employees are good.
The total remuneration of employees includes salary, bonuses and
allowances. Bonus for any given period is based primarily on individual and
our performance. Employees also receive subsidized housing, health benefits
and other miscellaneous subsidies.
We have implemented an occupational health and safety program similar
to that employed by other international oil and gas companies. Under this
program, we closely monitor and record health and safety incidents and
promptly report them to government agencies and organizations. On March 15,
2000, we finalized and implemented our occupational health and safety program.
We believe this program is
71
broadly in line with the United States government's Occupational Safety &
Health Administration guidelines.
All full-time employees in the PRC are covered by a
government-regulated pension. The PRC government is responsible for the
pension of these retired employees. We are required to contribute monthly
approximately 9% to 22% of our employees' salaries, with each employee
contributing 4% to 8% of his or her salary for retirement. The contributions
vary from region to region.
Our Indonesian subsidiaries employ approximately 900 employees,
including approximately 50 expatriates. We provide benefits to expatriates
that we believe to be in line with customary international practices. Our
local staff in Indonesia enjoy welfare benefits mandated by Indonesia labor
laws.
For further details regarding retirement benefits, see note 30 to our
consolidated financial statements attached to this annual report.
Health, Safety and Environmental Policy
We place much importance on our health, safety and environmental, or
HSE, policy. In 2002, we implemented an overall HSE management system in each
of our production divisions offshore China and established an HSE policy for
our overseas operations. We review the management performance of each of our
production divisions every other year to improve our HSE management. The HSE
policy for our operations offshore China focuses on increasing our employees'
awareness of health, safety and environmental issues in the workplace. The HSE
policy for our overseas operations includes setting annual safety targets,
conducting year-end evaluations, creating emergency contact lists, recording
incidents accurately. We regularly organize training courses and conduct
environmental and safety drills. We also closely monitor weather forecasts and
track hazardous weather conditions that may affect our production facilities.
In 2002, we established a "System for Determining Accountability in
the Event of a Major Production Accident," and implemented an "Evaluation
System for Health, Safety and Environmental Protection." We also launched a
"Safety Activity of the Month" program and, together with our production
sharing contract partners, hired a foreign professional to conduct safety
inspections on the helicopters used in our operations offshore China.
In 2003, we established health management systems for our offshore
crew members, developed our crisis management procedures, and launched the
International Association of Oil & Gas Producers (OGP) HSE management system
as a commitment to the safety of our contractors.
In 2004, we improved our crisis management procedures and further
strengthened general on-site safety management as well as safety procedures
for high risk activities such as those involving helicopter, diving and
loading operations. We have also developed a computerized healthcare
management system, which allows us to assign duties based on the health
conditions of our employees in a more efficient manner.
We seek to align our operations with international standards and have
been applying for the ISO14000 environmental management qualification for our
oilfields. By the end of 2004, our Qinhuangdao 32-6 oilfield and Wenchang
oilfields were certified under the ISO14000 environmental management system.
We are a member of the "National Offshore Oil Spillage Awareness
Plan" organized by the State Oceanic Administration. In 2004, we continued to
conduct researches and participated in discussions on issues relating to
resources sharing and risk assessment in the event of oil spillage offshore
China. We also continued to cooperate with the Bohai Bay Oil Spillage
Awareness Center and facilitated the establishment of the oil spillage
awareness organizations in the South China Sea.
In accordance with changes to the statistical requirements of the
U.S. Occupational Safety and Health Administration, or OSHA, we revised our
internal documentation procedures to keep abreast with
72
OSHA's standard, which uses OGP reporting methods to record the differences
and standards of particular incidents. We have also adopted new OSHA and
incident reporting forms in order to better meet the requirements of
international associations such as OGP and API. We deliver working hour
statistics and incident reports to investors and API on a quarterly basis. In
2004, as the only OGP member in China, we assisted OGP in organizing its
thirtieth anniversary seminar in China.
In 2004, we recorded no major fatalities, contaminations or any
safety related liabilities that exceeded US$120,000 per incident. According to
our OSHA statistics, we achieved an above-average rating as compared with
other major international oil companies.
Human Resources Development
As an oil and gas exploration and production company operating in
highly competitive markets, we depend in large part on our employees for
effective and efficient operations. We devote significant resources to train
our technical employees. During 2004, we held 641 training workshops, which
were attended by 8,816 participants. To ensure smooth implementation of our
overseas strategy, we have established an international human resources system
to attract and retain talents in the international market. We have established
an employee performance evaluation system. In 2004, we also introduced a
performance-based appraisal system for our branch offices. These evaluation
systems aim at linking the development objectives of the individual employees
and branch offices with our overall operating targets.
We have adopted three stock option schemes for our senior management
since February 4, 2001, and granted options under each of the schemes.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
You should read the following discussion and analysis in conjunction
with our consolidated financial statements, selected historical consolidated
financial data and operating and reserves data, in each case together with the
accompanying notes, contained in this annual report. Our consolidated
financial statements have been prepared in accordance with Hong Kong GAAP,
which differ in certain material respects from U.S. GAAP. Note 37 to our
consolidated financial statements attached to this annual report provides an
explanation of our reconciliation to U.S. GAAP of net income and shareholders'
equity. Certain statements set forth below constitute "forward-looking
statements" within the meaning of the United States Private Securities
Litigation Reform Act of 1995. See "Forward-Looking Statements." On June 6,
2002, we terminated our engagement with Arthur Andersen & Co, our independent
public accountants prior to such date. For a discussion of the change of
accountants, see "--Change of Accountants" and "Item 3--Key Information--Risk
Factors-- Risks relating to our business--You may not be able to assert claims
against Arthur Andersen, our independent public accountants for periods prior
to 2002, nor may you be able to assert claims against our current independent
public accountants for financial statements previously audited by Arthur
Andersen."
Overview
We are an oil and gas company engaged in the exploration, development
and production of crude oil and natural gas primarily offshore China. We are
the dominant producer of crude oil and natural gas offshore China and the only
company permitted to conduct exploration production activities with
international oil and gas companies offshore China. As of December 31, 2004,
we had estimated net proved reserves of 2,230.0 million BOE, comprised of
1,455.6 million barrels of crude oil and condensate and 4,646.6 billion cubic
feet of natural gas. For the year 2004, our net production averaged 319,436
barrels per day of crude oil, condensate and natural gas liquids and 364.1
million cubic feet per day of natural gas, which together totaled 382,513 BOE
per day.
Our revenues and profitability are largely determined by our
production volume and the prices we realize for our crude oil and natural gas,
as well as the costs of our exploration and development activities.
73
Although crude oil prices depend on various market factors and have been
volatile historically, our production volume has increased steadily over the
past few years.
The following table sets forth our net production of crude oil,
condensate and natural gas liquids and net income for the periods indicated.
Year ended December 31,
----------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- --------- ---------- ----------
Net production of crude oil, condensate and
natural gas liquids (BOE/day)................... 206,347 228,874 298,625 306,464 319,436
Net production of natural gas (mmcf/day)............ 197.9 195.0 272.6 291.0 364.1
Net income (Rmb in millions)........................ 10,296.6 7,957.6 9,232.8 11,535.5 16,185.8
We sell 45.4% of our crude oil production in 2004 to customers
affiliated with Sinopec or PetroChina in the PRC domestic market. We sell
37.8% of our natural gas production offshore China in 2004 to Castle Peak
Power Company Limited under a long-term take-or-pay contract.
For a further description of these factors and certain other factors
affecting our financial performance, see "Item 3--Key Information--Risk
Factors."
Relationship with CNOOC
Prior to the October 1999 reorganization of CNOOC, we did not exist
as a separate legal entity and our business and operations were conducted by
CNOOC and its various affiliates. In connection with the reorganization,
CNOOC's oil and gas exploration, development, production and sales business
and operations conducted both inside and outside China were transferred to us.
See "Item 4--Information on the Company--History and Development--Corporate
Structure," "Item 7--Major Shareholders and Related Party Transactions" and
note 26 to our consolidated financial statements attached to this annual
report.
Before the reorganization, certain PRC subsidiaries of CNOOC provided
various materials, utilities and ancillary services for CNOOC's exploration
and production activities. In connection with the reorganization, we entered
into various agreements under which we continued to use various services and
properties provided by these CNOOC subsidiaries. These agreements include: (i)
a materials, utilities and ancillary services supply agreement; (ii) technical
service agreements; (iii) agreements for the sale of crude oil, condensate oil
and liquefied petroleum gas; (iv) various lease agreements with other
affiliates of CNOOC for office and residential premises used by us; and (v) a
research and development services agreement with CNOOC Research Center for the
provision of general geophysical exploration services, comprehensive
exploration research services, information technology services and seismic
study. We have renewed these agreements on substantially the same terms. In
2002, CNOOC consolidated most of its oilfield services operations and
established China Oilfield Services Limited. This CNOOC affiliate now provides
most of the technical services to us.
For a description of the services provided under these agreements,
see "Item 7--Major Shareholders and Related Party Transactions."
Acquisitions and Overseas Activities
On January 1, 2003, we acquired BP Muturi Limited, which owned a
44.0% interest in the Muturi production sharing contract offshore Indonesia,
and BP Wiriagar Limited's 42.4% interest in the Wiriagar production sharing
contract offshore Indonesia for a total consideration of approximately US$275
million. The Muturi production sharing contract and Wiriagar production
sharing contract, together with the Berau production sharing contract, make up
the Tangguh LNG project. Our interests in these production sharing contracts
represented approximately 12.5% of the total reserves and upstream production
of the Tangguh LNG project. On May 12, 2004, we completed our acquisition of
an additional 20.767% interest in the Muturi production sharing contract from
the BG Group. As a result, our interests in these production
74
sharing contracts now represent 16.96% of the total reserves and upstream
production of the Tangguh LNG project. The remaining interests are held by BP
Berau, BP Muturi, BP Wiriagar, MI Berau, Nippon, BG, KG Berau, KG Wiriagar and
Indonesia Natural Gas Resources Muturi. The Tangguh LNG project is a
greenfield project located offshore Indonesia and represents one of the
largest natural gas projects in Asia.
In connection with our acquisition of interests in the Tangguh LNG
project, the partners in the Tangguh LNG project entered into a conditional
25-year supply contract to provide up to 2.6 million tonnes of liquefied
natural gas per year to a liquefied natural gas terminal project in Fujian
Province, China. Supply of liquefied natural gas under this supply contract is
expected to begin in 2008. In addition, we entered into a repurchase agreement
whereby put options and call options are granted to us and the sellers,
respectively, to sell or to repurchase the interests in the above-mentioned
PSCs. The options are exercisable if:
o the LNG supply contract is terminated due to the non-satisfaction
of the conditions precedent to the LNG supply contract on or
before December 31, 2004; or
o the LNG supply contract is otherwise legally ineffective on or
before December 31, 2004.
These put options and call options have lapsed since neither of the
above circumstances occurred on or before December 31, 2004.
In July 2003, we increased our interest in Qinhuangdao 32-6, a PSC
oilfield in Bohai Bay, from 51% to 75.5% by acquiring a 24.5% interest in the
oilfield from BP China Exploration and Production Company for a cash
consideration of US$150 million, plus working capital adjustments.
In July 2003, we acquired the remaining 49% interest in Liuhua 11-1,
a PSC oilfield in Eastern South China Sea, from BP China Exploration and
Production Company and Kerr-McGee China Petroleum Limited, for a total cash
consideration of US$40 million, plus working capital adjustments.
In 2003, we invested Rmb 450 million in the equity interest of CNOOC
Finance Corporation Limited, or CNOOC Finance, a subsidiary of our controlling
shareholder, CNOOC. Our investment represented 31.8% of the registered capital
of CNOOC Finance.
In May 2003, we signed an agreement with the original North West
Shelf project partners to acquire an aggregate interest of 5.3% in the
upstream production and reserves of the North West Shelf project for a
consideration of US$348 million, plus an upfront tariff payment relating to
certain LNG processing facilities amounting to US$180 million. We also agreed
to acquire a 25% interest in the China LNG joint venture established by the
North West Shelf project partners to supply liquefied natural gas from the
North West Shelf project to a liquefied natural gas terminal currently being
developed by CNOOC, our controlling shareholder, and various partners in
Guangdong Province, China. We completed the acquisition in December 2004. Our
share of reserves from this project is expected to be approximately 1.2
trillion cubic feet of natural gas. Our share of natural gas together with
associated liquids is expected to be approximately 210 million BOE. The
partners of the project signed a 25-year LNG supply agreement in December 2004
to provide liquefied natural gas to the Guangdong liquefied natural gas
terminal starting 2006. Woodside Petroleum is the operator for the project.
See "Item 4--Information on the Company--Business Overview--Natural Gas
Business--Overseas Activity."
On October 24, 2003, we entered into an agreement with the joint
venture participants of the Gorgon natural gas project in Australia based on a
memorandum of understanding previously entered into with them, under which we
agreed to acquire certain interest in the upstream production and reserves of
the Gorgon natural gas project.
On May 3, 2004, we, through our wholly owned subsidiary CNOOC Morocco
Limited, acquired from Vanco Energy Corporation a 11.25% interest in a
petroleum agreement for Ras Tafelney offshore Morocco.
75
At the end of 2004, we and Golden Aaron Pte. Ltd. and China Global
Construction Limited formed a joint venture in Myanmar and had entered into
six production sharing contracts as of June 8, 2005. We will act as the
operator under these production sharing contracts.
In early 2005, through our wholly owned subsidiary CNOOC Belgium
BVBA, we acquired a 16.69% interest in MEG Energy Corp., a Canada based oil
sand company, at a consideration of 150 million Canadian dollars.
Production Sharing Contracts Offshore China
We conduct a significant amount of our offshore China oil and gas
activities through production sharing contracts with international oil and gas
companies. Under these production sharing contracts, our foreign partners are
required to bear all exploration costs during the exploration period. The
parties to the contracts may recover exploration costs after commercial
discoveries are made and production begins. The amount of exploration costs
recoverable is derived from a production sharing formula set forth in each
contract. Our production sharing contracts provide us with the option to take
participating interests in properties covered by the production sharing
contracts which we may exercise after the foreign partners have made viable
commercial discoveries. The foreign partners retain the remaining
participating interests. We and the foreign partners fund our development and
operating costs according to our respective participating interests. Based on
a formula contained in the applicable contract, we are entitled to allocate
specified amounts of the annual gross production of petroleum from those
producing fields. See "Item 4--Information on the Company--Business
Overview--Production Sharing Contracts--Offshore China--Production Sharing
Formula."
Before we exercise our option to take a participating interest in a
production sharing contract, we do not account for the exploration costs
incurred, as these costs were incurred by our foreign partners. After we
exercise the option to take a participating interest in a production sharing
contract, we account for the oil and gas properties using the "proportional
method" under which we recognize our share of development costs, revenues and
expenses from such operations based on our participating interest in the
production sharing contracts. See note 5 to our consolidated financial
statements attached to this annual report.
The foreign partners have the right to either take possession of
their petroleum for sale in the international market or sell their petroleum
to us for resale in the PRC market. See "Item 4--Information on the
Company--Business Overview--Production Sharing Contracts--Offshore China." For
the years ended December 31, 2002, 2003 and 2004, the percentage of foreign
partners' oil that was resold by us in the PRC market amounted to
approximately 50%, 69% and 70%, respectively. The foreign partners sold the
remaining portion of their oil in the international markets.
As described above, production of crude oil and natural gas is
allocated among us, our foreign partners and the PRC government according to a
formula contained in the production sharing contracts. We have excluded the
government's share oil from net sales in our historical consolidated financial
statements. Since our historical consolidated financial statements already
exclude the government's share oil from our net sales figure, we do not expect
any future share oil payments to affect our results of operations or operating
cash flows differently than the effects reflected in our historical
consolidated financial statement. For information regarding the historical
amounts of government share oil payable to the government, see note 7 to our
consolidated financial statements attached to this annual report. For
information regarding treatment of the PRC government's share oil, see "Item
4--Information on the Company--Business Overview--Production Sharing
Contracts--Offshore China--Production Sharing Formula."
Shanghai Petroleum and Natural Gas Company Limited, which owns the
Pinghu field, in our associated company. Our 30% equity interest in this
company is accounted for using the equity method, under which our
proportionate share of the net income or loss of Shanghai Petroleum and
Natural Gas Company Limited is included in our consolidated statements of
income as a share of income or loss of the associated company.
76
Our cost structures for production sharing contracts and for
independent operations are different. The total expenses per unit of
production under production sharing contracts are generally higher due to our
foreign partners' use of expatriate staff, who generally command higher wages,
as well as administrative and overhead costs that may be allocated by the
operators, a higher percentage of capital expenditures and larger proportion
of imported equipment.
Production from Independent Operations offshore China versus
Production from Production Sharing Contracts offshore China
Historically we have cooperated with foreign partners under
production sharing contracts, which have provided us with the expertise to
undertake our independent operations more effectively. The percentage of our
net production arising from independent operations offshore China was 53.9%,
52.7% and 49.6%, respectively, for the years ended December 31, 2002, 2003 and
2004, respectively. Although we will continue to focus on independent
operations, we plan to continue seeking appropriate opportunities to cooperate
with foreign partners under production sharing contracts.
Provision for dismantlement
Prior to 2002, we estimated future dismantlement costs for our oil
and gas properties and accrued the costs over the economic lives of the assets
using the unit-of-production method. We estimated future dismantlement costs
for oil and gas properties with reference to the estimates provided from
either internal and external engineers after taking into consideration the
anticipated method of dismantlement required in accordance with then current
legislation and industry practice. In 2002, we changed the method of
accounting for the provision for dismantlement in compliance with Hong Kong
Statement of Standard Accounting Practice or HK SSAP 28, "Provisions,
contingent liabilities and contingent assets." HK SSAP 28 requires the
provision to be recorded for a present obligation whether that obligation is
legal or constructive. The associated cost is capitalized and the liability is
discounted and accretion expense is recognized using the credit adjusted
risk-free rate in effect when the liability is initially recognized. The
dismantlement costs for the years ended December 31, 2002, 2003 and 2004 were
Rmb 26.1 million, Rmb 167.3 million and Rmb 201.6 million, respectively. The
accrued liability is reflected in our consolidated balance sheet under
"provision for dismantlement." See note 27 to our consolidated financial
statements attached to this annual report.
Production Imbalance
We account for oil overlifts and underlifts using the entitlement
method, under which we record overlifts as liabilities and underlifts as
assets. An overlift occurs when we sell more than our percentage interest of
oil from a property subject to a production sharing contract. An underlift
occurs when we sell less than our participating interest of oil from a
property under a production sharing contract. During the historical periods
presented in our consolidated financial statements attached to this annual
report, we had no gas imbalances. We believe that production imbalance has not
had a significant effect on our operations, liquidity or capital resources.
Allowances for Doubtful Accounts
We evaluate our accounts receivable by considering the financial
condition of our customers, their past payment history and credit standing and
other specific factors, including whether the accounts receivable in question
are under dispute. We make provisions for accounts receivable when they are
overdue for six months and we are concerned about our ability to collect them.
For the years ended December 31, 2002, 2003 and 2004, allowances for doubtful
accounts were not material in the context of total operating expenses and did
not have a material effect on our results of operations or financial
condition.
Non-GAAP Financial Measures
We use a financial measure that we define as EBITDE to provide
additional information about our operating performance and our liquidity.
EBITDE refers to our earnings before the following items:
77
o interest income and interest expense;
o income taxes;
o depreciation, depletion and amortization;
o dismantlement, exploration expenses and impairment losses related
to property, plant and equipment; and
o exchange gains or losses.
EBITDE is not a standard measure under either U.S. or Hong Kong GAAP.
For instance, it excludes our dismantlement and exploration expenses that may
require cash settlement upon occurrence or subject to provisioning. For
dismantlement costs, we are required under Hong Kong GAAP to make provision
for our dismantlement expenses and settle at the time of dismantlement. See
"--Provision for dismantlement" above. For exploration costs, we are required
to expense or accrue such costs on basis of whether the exploration was
successful under our successful efforts method of accounting for exploration.
However, we believe the investor community commonly uses this type of
financial measure to assess the operating performance of oil and gas companies
like us and the ability of such companies to service debt obligations and meet
capital expenditure and working capital requirements.
As a measure of our operating performance, we believe that the most
directly comparable U.S. and Hong Kong GAAP measure to EBITDE is net income.
We operate in a capital intensive industry. We use EBITDE in addition to net
income because net income includes many accounting items associated with
capital expenditures, such as depreciation, exploration expenses and
dismantlement costs. These accounting items may vary between companies
depending on the method of accounting adopted by a company. For example, we
use successful efforts method of accounting whereby we capitalize successful
exploration projects and expense unsuccessful efforts. Other companies may use
the full cost method whereby they capitalize all of their exploration costs
regardless of whether their exploration efforts prove successful. By
minimizing differences in capital expenditures and the associated depreciation
expenses and exploration expenses as well as reported exploratory success
rates, financial leverage and tax positions, EBITDE provides further
information about our operating performance and an additional measure for
comparing our operating performance with other companies' results.
The following table reconciles our net income under U.S. GAAP to our
definition of EBITDE for the periods indicated.
Year ended December 31,
---------------------------------------------------------------
2000 2001 2002 2003 2004 2004
---------- --------- ---------- ---------- --------- ----------
Rmb Rmb Rmb Rmb Rmb US$
(in millions)
Net Income...................................... 10,302 7,920 9,086 11,980 16,176 1,954
Tax .......................................... 1,926 3,048 3,482 4,628 6,931 837
Interest and exchange gain/(loss), net........ (143) (436) 261 178 206 25
Depreciation, depletion and amortization...... 2,573 2,558 4,011 4,634 5,446 658
Dismantlement costs........................... 104 90 323 (270) 202 24
Exploration expenses.......................... 553 1,039 1,318 848 1,316 159
Impairment losses related to property, plant and
equipment.................................. -- 100 -- -- -- --
---------- --------- ---------- ---------- --------- ----------
EBITDE.......................................... 15,315 14,319 18,481 21,998 30,277 3,658
---------- --------- ---------- ---------- --------- ----------
As a measure of our liquidity, we believe that the most directly
comparable U.S. and Hong Kong GAAP measure to EBITDE is cash provided by
operating activities. We use EBITDE in addition to this standard measure
because EBITDE excludes exploration expenses, which depend on a company's
method of accounting for exploration activity and fluctuate based on the
company's reported success rate. EBITDE provides an additional measure for
comparing our cash provided by operating activities before accounting for
exploration expenses with other companies' figures.
78
The following table reconciles our cash provided by operating
activities under U.S. GAAP to our definition of EBITDE for the periods
indicated.
Year ended December 31,
--------------------------------------------------------
2000 2001 2002 2003 2004 2004
--------------------------------------------------------
Rmb Rmb Rmb Rmb Rmb US$
(in millions)
Cash provided by operating activities.................... 13,233 11,759 14,742 17,819 22,328 2,698
plus/(less): movements in working capital.............. 326 (583) (141) (275) (975) (118)
plus/(less): returns on investments and servicing of
finance................................................ 317 (346) (181) (191) (24) (3)
plus: taxation paid.................................... 880 2,611 2,846 3,515 7,402 894
plus: short-term investment income..................... -- 221 193 123 72 9
plus/(less): recovery (provision) for doubtful debts... 58 5 -- (9) 3 0
plus: share of profit of associates.................... 218 90 176 251 344 42
plus/(less): gain on sale/loss on disposals and
write-off of property, plant and equipment............. (220) (457) (437) (40) (156) (19)
other adjustments...................................... (50) 23 -- -- -- --
less: amortization of discount of long-term guaranteed
notes -- -- (6) (11) (16) (2)
plus or less: realized and unrealized holding gains
from available-for-sale marketable securities.......... -- (43) (10) 6 28 3
less: recognition of stock compensation cost under U.S. -- -- (19) (38) (47) (6)
GAAP
plus: exploration expenses............................. 553 1,039 1,318 848 1,316 159
--------------------------------------------------------
EBITDE................................................... 15,315 14,319 18,481 21,998 30,277 3,658
--------------------------------------------------------
You should not consider our definition of EBITDE in isolation or
construe it as an alternative to net income, operating cash flows or any other
measure of performance or as an indicator of operating performance, liquidity
or any other standard measure under either U.S. or Hong Kong GAAP. Our
definition of EBITDE fails to account for taxes, interest expenses, other
non-operating cash expenses and exploration and dismantlement expenses. EBITDE
also does not consider any functional or legal requirements of our business
that may require us to allocate funds for purposes other than debt service or
exploration and development activities. Our EBITDE measures may not be
comparable to similarly titled measures used by other companies.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with
Hong Kong GAAP. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
our assets and liabilities, the disclosure of our contingent assets and
liabilities as of the date of our financial statements and the reported
amounts of our revenues and expenses during the periods reported. Management
makes these estimates and judgments based on historical experience and other
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. We believe that the following significant accounting policies may
involve a higher degree of judgment in the preparation of our consolidated
financial statements. For additional discussion of our significant accounting
policies, see note 3 to our consolidated financial statements attached to this
annual report.
Oil and Gas Properties, Land and Buildings
For oil and gas properties, we have adopted the successful efforts
method of accounting. As a result, we capitalize initial acquisition costs of
oil and gas properties and recognize impairment of initial acquisition costs
based on exploratory experience and management judgment. Upon discovery of
commercial reserves, we transfer acquisition costs to proved properties and
capitalize the costs of drilling and equipping successful exploratory wells,
all development costs, and the borrowing costs arising from borrowings used to
finance the development of oil and gas properties before they are
substantially ready for production. We treat the costs of unsuccessful
exploratory wells and all other related exploration costs as expenses when
incurred. We amortize capitalized acquisition costs of proved properties by
the unit-of-production method on a property-by-property basis based on the
total estimated units of proved reserves. We estimate future dismantlement
costs for oil and gas properties with reference to the estimates provided from
either internal or external engineers after taking into consideration the
79
anticipated method of dismantlement required in accordance with current
legislation and industry practices. The associated cost is capitalized and the
liability is discounted and an accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability is
initially recognized.
Land and buildings represent our onshore buildings and our land use
rights which are stated at valuation less accumulated depreciation and
accumulated impairment losses. Professional valuations are performed
periodically, our last valuation was performed on December 31, 2000. In
intervening years, our directors review the carrying value of land and
buildings and make adjustment where in their opinion there has been a material
change in value. Any increase in land and building valuation is credited to
the revaluation reserves; any decrease is first offset against an increase in
an earlier valuation in respect of the same property and is thereafter charged
to the income statement. Depreciation is calculated on the straight-line basis
at an annual rate estimated to write off the valuation of each asset over its
expected useful life, ranging from 30 to 50 years.
Impairment of Assets
We make an assessment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, or when
there is any indication that an impairment loss previously recognized for an
asset in prior years may no longer exist or may have decreased. In any event,
we would make an estimate of the asset's recoverable amount, which is
calculated as the higher of the asset's value in use or its net selling price.
We recognize an impairment loss only if the carrying amount of an asset
exceeds its recoverable amount. We charge an impairment loss to the income
statement in the period in which it arises unless the asset is carried at a
revalued amount. For a revalued asset, we account for the impairment loss in
accordance with the relevant accounting policy for such revalued asset. A
previously recognized impairment loss is reversed only if there has been a
change in our estimates used to determine the recoverable amount of an asset.
However, no reversal may put the value of the asset higher than the carrying
amount that we would have determined (net of any depreciation/amortization)
had no impairment loss been recognized for the asset in prior years.
A reversal of an impairment loss is credited to the income statement
in the period in which it arises, unless the asset is carried at a revalued
amount, when the reversal of the impairment loss is accounted for in
accordance with the relevant accounting policy for that revalued asset.
Provisions
We recognize a provision when a present obligation (legal or
constructive) has arisen as a result of a past event and it is probable that a
future outflow of resources will be required to settle the obligation so long
as a reliable estimate can be made of the amount of the obligation. When the
effect of discounting is material, the amount recognized for a provision is
the present value at the balance sheet date of the future expenditures
expected to be required to settle the obligation. The increase in the
discounted present value amount arising from the passage of time is included
in finance costs in the income statement. We make provisions for dismantlement
based on the present value of our future costs expected to be incurred, on a
site by site basis, in respect of our expected dismantlement costs at the end
of the related oil exploration and recovery activities.
Deferred Tax
Deferred tax is provided, using the liability method, on all
temporary differences at the balance sheet date between the tax bases of
assets and liabilities and their carrying amounts for financial reporting
purposes.
Recognition of Revenue from Oil and Gas Sales and Marketing
We recognize revenue when it is probable that the economic benefits
will flow to us and when the revenue can be measured reliably. For oil and gas
sales, our revenues represent the invoiced value of sales of oil and gas
attributable to our interests, net of royalties and any government share oil
that is lifted
80
and sold on behalf of the PRC government. Sales are recognized when the
significant risks and rewards of ownership of oil and gas have been
transferred to customers. Oil and gas lifted and sold by us above or below our
participating interests in any production sharing contract result in overlifts
and underlifts. We record these transactions in accordance with the
entitlement method under which overlifts are recorded as liabilities and
underlifts are recorded as assets at year-end oil prices. Settlement will be
in kind when the liftings are equalized or in cash when production ceases. We
enter into gas sales contracts with customers which typically contain
take-or-pay clauses. These clauses require our customers to take a specified
minimum volume of gas each year. If a customer fails to take the minimum
volume of gas, the customer must pay for the gas even though it did not take
the gas. The customer can offset the deficiency payment against any future
purchases in excess of the specified volume. We record any deficiency payment
as deferred revenue which is included in other payables until any make-up gas
is taken by the customer or the expiry of the contract. Our marketing revenues
represent sales of oil purchased from the foreign partners under our
production sharing contracts and revenues from the trading of oil through our
subsidiary in Singapore. The title, together with the risks and rewards of the
ownership of such oil purchased from the foreign partners, are transferred to
us from the foreign partners and other unrelated oil and gas companies before
we sell such oil to our customers. The cost of the oil sold is included in
crude oil and product purchases.
Results of Operations
Overview
The following table summarizes the components of our revenues and net
production as percentages of our total revenues and total net production for
the periods indicated:
Year ended December 31,
-----------------------------------------------------------------
2002 2003 2004
-------------------- ---------------------- -------------------
(Rmb in millions, except percentages, production data and prices)
Revenues:
Oil and gas sales: (1)
Crude oil........................... 21,498 81.5% 25,792 63.0% 34,081 61.7%
Natural gas......................... 2,281 8.7 2,325 5.7 2,805 5.1%
--------- --------- --------- --------- --------- ---------
Total oil and gas sales............. 23,779 90.2% 28,117 68.7% 36,886 66.8%
Marketing revenues..................... 2,377 9.0% 12,398 30.3% 18,191 32.9%
Other income........................... 217 0.8 435 1.1 145 0.3
--------- --------- --------- --------- --------- ---------
Total revenues...................... 26,374 100.0% 40,950 100.0% 55,222 100.0%
========= ========= ========= ========= ========= =========
Net production (million BOE):
Crude oil.............................. 109.0 86.2% 111.9 85.9% 116.9 83.5%
Natural gas............................ 17.5 13.8 18.3 14.1 23.1 16.5
--------- --------- --------- --------- --------- ---------
Total net production................ 126.5 100.0% 130.2 100.0% 140.0 100.0%
========= ========= ========= ========= ========= =========
Average net realized prices:
Crude oil (per bbl)................. US$24.35 US$28.11 US$35.41
Natural Gas (per mcf)............... 2.98 2.87 2.75
---------
(1) These figures do not include our revenues from the Pinghu gasfield.
The following table sets forth, for the periods indicated, certain income
and expense items in our consolidated income statements as a percentage of
total revenues:
Year ended December 31,
------------------------------------------
2002 2003 2004
---------- ---------- ----------
Operating Revenues:
Oil and gas sales....................................... 90.2% 68.7% 66.8%
Marketing revenues...................................... 9.0 30.2 32.9
Other income............................................ 0.8 1.1 0.3
---------- ---------- ----------
Total revenues...................................... 100.0% 100.0% 100.0%
========== ========== ==========
Expenses:
Operating expenses...................................... (14.3)% (11.0)% (9.2)%
81
Production taxes........................................ (3.9) (3.0) (3.1)
Exploration costs....................................... (5.0) (2.1) (2.4)
Depreciation, depletion and amortization................ (15.2) (11.3) (9.9)
Dismantlement .......................................... (0.5) (0.7) (0.4)
Crude oil and product purchases......................... (8.8) (30.0) (32.5)
Selling and administrative expenses..................... (3.8) (3.1) (1.9)
Other................................................... (0.1) (0.9) (0.1)
---------- ---------- ----------
(51.6)% (61.7)% (59.5)%
---------- ---------- ----------
Interest income.............................................. 0.5% 0.4% 0.4%
Interest expenses............................................ (1.1) (0.9) (0.8)
Exchange gain (loss), net.................................... (0.4) (0.0) 0.1
Short term investment income................................. 0.7 0.3 0.1
Share of profit of an associate.............................. 0.6 0.5 0.6
Non-operating profit (loss), net............................. (0.3) 0.8 0.9
---------- ---------- ----------
Income before tax............................................ 48.4 39.5 41.9
Tax.......................................................... (13.4) (11.3) (12.6)
---------- ---------- ----------
Net income................................................... 35.0% 28.2% 29.3%
========== ========== ==========
Calculation of Revenues
China
We report total revenues, which consist of oil and gas sales,
marketing revenues and other income, in our consolidated financial statements
attached to this annual report. With respect to revenues derived from our
offshore China operations, oil and gas sales represent gross oil and gas sales
less royalties and share oil payable to the PRC government. These amounts are
calculated as follows:
o gross oil and gas sales consist of our percentage interest in
total oil and gas sales, comprised of (i) a 100% interest in our
independent oil and gas properties and (ii) our participating
interest in the properties covered under our production sharing
contracts, less an adjustment for production allocable to foreign
partners under our production sharing contracts as reimbursement
for exploration expenses attributable to our participating
interest;
o royalties represent royalties we pay to the PRC government on
production with respect to each of our oil and gas fields. The
amount of royalties varies from 0% up to 12.5% based on the
annual production of the relevant property. We pay royalties on
oil and gas we produce independently and under production sharing
contracts;
o government share oil, which is only paid on oil and gas produced
under production sharing contracts, is calculated as described
under "--Overview--Production Sharing Contracts Offshore China;"
o other income mainly represents project management fees charged to
our foreign partners and handling fees charged to end
customers--both fees are recognized when the services are
rendered; and
o we pay production taxes to the PRC government that are equal to
5% of the oil and gas we produce independently and under
production sharing contracts. This surcharge no longer exists.
Our oil and gas sales are not reduced by production taxes.
Production taxes are included in our expenses under "production
taxes."
Marketing revenues represent our sales of our foreign partners' oil
and gas produced under our production sharing contract and purchased by us
from our foreign partners under such contracts as well as from international
oil and gas companies through our wholly owned subsidiary in Singapore. Net
marketing revenues represent the marketing revenues net of the cost of
purchasing oil and gas from foreign partners and from international oil and
gas companies. Our foreign partners have the right to
82
either take possession of their oil and gas for sale in the international
market or to sell their oil and gas to us for resale in the PRC market.
Our share of the oil and gas sales of our associated company is not
included in our revenues, but our share of the profit or loss of our
associated company is included in our consolidated statements of income under
"share of profit of associates."
Indonesia
The oil and gas sales from our subsidiaries in Indonesia consist of
our participating interest in the properties covered under the relevant
production sharing contracts, less adjustments for share oil payable under our
Indonesian production sharing contracts and for a domestic market obligation
under which the contractor must sell a specified percentage of its crude oil
to the local Indonesian market at a reduced price.
2004 versus 2003
Consolidated Net Profit
Our consolidated net income after tax was Rmb 16,185.8 million
(US$1,955.6 million) in 2004, an increase of Rmb 4,650.3 million (US$561.9
million), or 40.3%, from Rmb 11,535.5 million in 2003.
Revenue
Our oil and gas sales for the year 2004 were Rmb 36,886.0 million
(US$4,456.7 million), an increase of Rmb 8,769.2 million (US$1,059.5 million),
or 31.2%, from Rmb 28,116.8 million in 2003. The increase primarily reflects
the rise in global crude oil prices and our higher production level. Our sales
of crude oil and natural gas in 2004 increased by 5% and 26%, respectively, as
compared to 2003. The average realized price for our crude oil was US$35.41
per barrel in 2004, an increase of US$7.3, or 26.0% from US$28.11 per barrel
in 2003. The average realized price of natural gas was US$2.75 per thousand
cubic feet in 2004, a decrease of US$0.12, or 4.2%, from US$2.87 per thousand
cubic feet in 2003. The decrease was due to the increased weighting of
production of low-priced gasfields.
In 2004, our net marketing profit, which were derived from marketing
revenue less purchase cost of crude oil and oil products, were Rmb 227.9
million (US$27.5 million), an increase of Rmb 124.5 million (US$15.0 million),
or 120.3%, from Rmb 103.4 million in 2003. Since we are one of the three
companies that have the right to sell crude oil in China, upon request by our
production sharing contract partners, we may purchase the oil of these
partners for sale in China. However, the amount of oil we may purchase and
sell in China depends on our foreign partners and, therefore, we cannot
control the amount of crude oil that we are able to sell for any specific
period. In 2004, our marketing profit from our wholly owned subsidiary, China
Offshore Oil (Singapore) International Pte Ltd., was Rmb 71.3 million (US$8.6
million), an increase of 36.1% from Rmb 52.4 million in 2003.
Our other income, reported on a net basis, was derived from our other
income less corresponding costs. In 2004, the total other income was Rmb 98.8
million (US$11.9 million), an increase of Rmb 14.3 million (US$1.7 million)
from Rmb 84.5 million in 2003.
Expenses
Operating expenses. Our operating expenses were Rmb 5,070.3 million
(US$612.6 million) in 2004, an increase of Rmb 557.5 million (US$67.4
million), or 12.4%, from Rmb 4,512.8 million in 2003. The increase primarily
resulted from the increased operating expenses in connection with the
commencement of operations in new properties. Operating expenses were Rmb 36.7
(US$4.4) per BOE in 2004, an increase of 4.2% from Rmb 35.2 (US$4.3) per BOE
in 2003. Operating expenses offshore China in 2004 were Rmb 29.9 (US$3.6) per
BOE, an increase of 10.7% from Rmb 27.0 (US$3.3) per BOE in 2003. Operating
expenses offshore Indonesia were Rmb 88.7 (US$10.7) per BOE, an increase of
15.6% from Rmb 76.7 (US$9.3) per BOE in 2003. The increases were primarily due
to the high
83
international crude oil prices and an increase in operating expenses per
barrel for our Indonesian oilfields due to their lower production volume based
on our profit sharing model. Based on working interest production, operating
expenses offshore Indonesia in 2004 were Rmb 42.0 (US$5.1) per BOE, which were
in line with the operating expenses offshore Indonesia in the previous year.
Production taxes. Our production taxes for the year 2004 were Rmb
1,725.7 million (US$208.5 million), an increase of Rmb 487.1 million, or
39.3%, (US$58.9 million) from Rmb 1,238.6 million in 2003. The increase was
primarily due to increase in oil and gas sales in 2004.
Exploration costs. Our exploration costs for the year 2004 were Rmb
1,316.2 million (US$159.0 million), an increase of Rmb 468.1 million (US$56.6
million), or 55.2%, from Rmb 848.1 million in 2003. The increase was primarily
due to a significant increase in exploration activities. In 2004, some
successful exploration wells were written off because we did not expect to
develop these wells within the next couple years. The write-off amount was Rmb
155.8 million (US$18.8 million).
Depreciation, depletion and amortization expenses. Our depreciation,
depletion and amortization expenses for 2004 were Rmb 5,455.1 million
(US$659.1 million), an increase of Rmb 812.3 million (US$98.1 million), or
17.5%, from Rmb 4,642.8 million in 2003. On a unit of production basis,
depreciation, depletion and amortization expenses for the year 2004 were Rmb
39.5 (US$4.8) per BOE, an increase of 9.2% compared to Rmb 36.2 per BOE in
2003. The primary reason for the increase was the higher amortization costs
for the oilfields that commenced operations in 2004 and the lower production
level of the Indonesian oilfields. Based on our profit sharing model, our
production level of our Indonesian oilfields is directly affected by oil price
fluctuation.
Dismantlement costs. Our dismantlement costs for the year 2004 were
Rmb 201.6 million (US$24.4 million), an increase of Rmb 34.3 million (US$4.1
million), or 20.5%, from Rmb 167.3 million in 2003. The increase was primarily
due to the increased dismantlement costs resulting from the commencement of
production at new oil and gas properties. On a unit production basis, our
dismantlement costs were Rmb 1.5 (US$0.2) per BOE, an increase of 15.3%
compared to Rmb 1.3 per BOE in 2003.
Selling and administrative expenses. Our selling and administrative
expenses for the year 2004 were Rmb 1,057.7 million (US$127.8 million), a
decrease of Rmb 154.8 million (US$18.7 million), or 12.8%, from Rmb 1,212.5
million in 2003. The primary reason for the decrease was a decrease in labor
costs resulting from the direct charge of some labor costs to specific
projects and the replacement of some foreign employees that received higher
salaries with local employees. On a unit of production basis, selling and
administrative expenses were Rmb 7.6 (US$0.9) per BOE in 2004, a decrease of
19.1% from Rmb 9.4 per BOE in 2003. Our selling and administrative expenses in
China in 2004 were Rmb 5.5 (US$0.7) per BOE, a decrease of 17.5% from 2003.
Net interest expenses/income
Our net interest expense for 2004 was Rmb 235.0 million (US$28.4
million), an increase of Rmb 63.6 million (US$7.7 million), or 37.1%, from Rmb
171.4 million in 2003. The increase was primarily due to the interest expenses
on our US$500 million bonds issued in 2003. Rmb 94.8 million (US$11.5 million)
of the increase in interest expense was attributable to our long term
guaranteed notes.
Exchange Gain/Loss, net
Our net exchange gain for 2004 was Rmb 29.3 million (US$3.5 million),
compared with a net exchange loss of Rmb 6.7 million in 2003. The exchange
gain in 2004 was mainly attributable to our foreign currency swaps for our
yen-denominated loans.
Short Term Investment Income
Our short term investment income for 2004 was Rmb 72.4 million
(US$8.7 million), a decrease of Rmb 51.1 million (US$6.2 million), or 41.4%,
from Rmb 123.5 million in 2003. The decrease was
84
primarily due to the structural change to our investment portfolio, where we
disposed of some of our investment in corporate bonds and reinvested the
proceeds in market funds.
Share of Profit of Associates
Our share of profit of associates for the year 2004 was Rmb 344.5
million (US$41.6 million), an increase of Rmb 124.2 million (US$15.0 million),
or 56.4%, from Rmb 220.3 million in 2003. This item reflected our share of
profit generated by Shanghai Petroleum and Natural Gas Company Limited
resulting primarily from increases in production and oil prices and our share
of profit generated by CNOOC Finance Corporation Limited.
Non-operating Income/Expenses, Net
Our net non-operating income for the year 2004 was Rmb 519.2 million
(US$62.7 million), compared to non-operating income of Rmb 315 million for the
year 2003. In 2004, the net non-operating income was mainly due to the tax
refund from re-investment in China.
Tax
Our taxation for the year 2004 was Rmb 6,930.8 million (US$837.4
million), an increase of Rmb 2,303.0 million (US$278.3 million), or 49.8%,
from Rmb 4,627.8 million in 2003. The primary reason for the increase was the
increase in profit before tax. In 2003, we received Rmb 252.0 million tax
rebate for using domestic equipment. The effective tax rate for 2004 was
30.3%, as compared with the effective rate of 28.6% in 2003.
2003 versus 2002
Consolidated Net Profit
Our consolidated net income after tax was Rmb 11,535.5 million in
2003, an increase of Rmb 2,302.7 million, or 24.9%, from Rmb 9,232.8 million
in 2002.
Revenue
Our oil and gas sales for the year 2003 were Rmb 28,116.8 million, an
increase of Rmb 4,337.5 million, or 18.2%, from Rmb 23,779.3 million in 2002.
The increase primarily reflects the rise in global crude oil prices and our
production level. In 2003, as a result of the commencement of production in
our new oil and gas properties as well as our successful acquisition of a
portion of interests in Liuhua 11-1 and Qinhuangdao 32-6, our production
volume increased compared to 2002. The average net production volume per day
was 356,729 barrels in 2003, compared to 346,639 barrels in 2002, an increase
of 3%. In 2003, with the higher-than-expected oil price, our Indonesian oil
and gas operations had a lower-than-expected net production volume based on
the Indonesian oil production sharing contract, which affected the production
volume growth. Our crude oil sales prices are determined in accordance with
international crude oil prices. The international oil price in 2003 rose
sharply compared with 2002. The average realized price for our crude oil was
US$28.11 per barrel in 2003, an increase of US$3.76, or 15.4% from US$24.35
per barrel in 2002. The average realized price of natural gas was US$2.87 per
thousand cubic feet in 2003, a decrease of US$0.11, or 3.7%, from US$2.98 per
thousand cubic feet in 2002. The decrease was due to the lower natural gas
price of our Indonesian properties and the Dongfang gasfield.
In 2003, our net marketing profit, which were derived from marketing
revenue less purchase cost of crude oil and oil products, were Rmb 103.4
million, an increase of Rmb 52.3 million, or 102.3%, from Rmb 51.1 million in
2002. Since we are one of the three companies that have the right to sell
crude oil in China, upon request by our production sharing contract partners,
we may purchase the oil of these partners for sale in China. However, the
amount of oil we may sell in China depends on our foreign partners and,
therefore, we cannot control the amount of crude oil that we are able to sell
for any specific period.
85
Our other income, reported on a net basis, was derived from our other
income less corresponding costs. In 2003, the total other income was Rmb 84.5
million, a decrease of Rmb 101.7 million from Rmb 186.2 million in 2002,
resulting primarily from the decrease in project management fees.
Expenses
Operating expenses. Our operating expenses were Rmb 4,512.8 million
in 2003, an increase of Rmb 737.5 million, or 19.5%, from Rmb 3,775.3 million
in 2002. The increase primarily resulted from operating expenses in connection
with the Indonesian oil and gas properties, which were based on a full year's
consolidated accounts as compared to the nine months contributions in 2002,
and the commencement of operations in new properties. Operating expenses were
Rmb 35.1 per BOE in 2003, which were higher than operating expenses of Rmb
30.3 per BOE in 2002. The increase was, on the one hand, attributable to the
higher operating expenses on a unit of production basis for the Indonesian oil
and gas properties, resulting from the higher-than-expected oil price and
lower net production, and its increased weighting in us on an annual
production basis. On the other hand, the natural diminishing in old oilfield
production and the higher maintenance cost also resulted in the slight
increase in unit cost.
Production taxes. Our production taxes for the year 2003 were Rmb
1,238.6 million, an increase of Rmb 215.6 million, or 21.1%, from Rmb 1,023.0
million in 2002. The increase was due to increase in oil and gas sales in
2003.
Exploration costs. Our exploration costs for the year 2003 were Rmb
848.1 million, a decrease of Rmb 470.2 million, or 35.7%, from Rmb 1,318.3
million in 2002. The decrease primarily resulted from a higher successful rate
of exploration and drilling activities.
Depreciation, depletion and amortization expenses. Our depreciation,
depletion and amortization expenses for 2003 were Rmb 4,642.8 million, an
increase of Rmb 623.3 million, or 15.5%, from Rmb 4,019.5 million in 2002. On
a unit of production basis, depreciation, depletion and amortization expenses
for the year 2003 were Rmb 36.2 per BOE, an increase of 12.0% compared to Rmb
32.3 per BOE in 2002. The primary reason for the increase was the higher
weighting for Indonesian oil and gas properties, which had a higher
amortization cost, and the increase in amortization cost resulted from the
reserve adjustment of some old fields.
Dismantlement costs. Our dismantlement costs for the year 2003 were
Rmb 167.3 million, an increase of Rmb 41.2 million, or 32.7%, from Rmb 126.1
million in 2002. The increase was primarily due to the increased dismantlement
costs resulting from the commencement of production at new oil and gas
properties. On a unit production basis, our dismantlement costs were Rmb 1.3
per BOE, an increase of 30.0% compared to Rmb 1.0 per BOE in 2002. The
increase was primarily due to an upward revision of the estimated
dismantlement costs and the increase in dismantlement costs resulting from the
reserve adjustment of some old fields.
Selling and administrative expenses. Our selling and administrative
expenses for the year 2003 were Rmb 1,212.5 million, an increase of Rmb 206.0
million, or 20.5%, from Rmb 1,006.5 million in 2002. The primary reason for
the increase was the selling and administrative expenses incurred in
connection with the Indonesian oil and gas properties. On a unit of production
basis, selling and administrative expenses were Rmb 9.4 per BOE in 2003, an
increase of 16.0% from Rmb 8.1 per BOE in 2002. The increase was primarily
attributable to the higher selling and administrative expenses on a unit of
production basis for the Indonesian oil and gas properties, resulting from the
higher-than-expected oil price and lower net production, and its increased
weighting in us on an annual production basis. Our selling and administrative
expenses in China in 2003 were Rmb 6.6 per BOE, in line with the previous
year.
Net interest expenses/income
Our net interest expense for 2003 was Rmb 171.4 million, in line with
the net interest expense of Rmb 146.9 million in 2002.
86
Exchange Gain/Loss, net
Our exchange loss for 2003 was Rmb 6.7 million, a decrease of Rmb
107.1 million when compared with an exchange loss of Rmb 113.8 million in
2002. The loss in 2002 was mainly attributable to exchange rate fluctuations
related to our yen-denominated loans. Since we have prepaid a large portion of
yen-denominated loans on December 27, 2002, and the outstanding amount of our
yen-denominated loans is hedged using foreign currency swaps, we do not expect
similar exchange gains or losses for that portion. Therefore, the exchange
gain or loss this year was primarily attributable to the exchange gain
generated from day-to-day operating activities.
Short Term Investment Income
Our short term investment income for 2003 was Rmb 123.5 million, a
decrease of Rmb 69.8 million or 36.1% from Rmb 193.3 million in 2002. The
decrease was primarily due to a decline in short term investment return in
2003.
Share of Profit of an Associate
Our share of profit of an associate for the year 2003 was Rmb 220.3
million, an increase of Rmb 54.9 million, or 33.2%, from Rmb 165.4 million in
2002. This item reflected our share of profit generated by Shanghai Petroleum
and Natural Gas Company Limited. This company experienced an increase of
profit in 2003 resulting from increases in production and oil prices.
Non-operating Income/Expenses, Net
Our net non-operating income for the year 2003 was Rmb 315.0 million,
compared to non-operating expense for the year 2002 of Rmb 71.4 million. In
2003, the net non-operating income was mainly due to the tax refund from
re-investment.
Tax
Our taxation for the year 2003 was Rmb 4,627.8 million, an increase
of Rmb 1,086.4 million, or 30.7%, from Rmb 3,541.4 million in 2002. The
primary reason for the increase was the increase in profit before tax. The
effective tax rate for 2003 was 28.6%, slightly higher than the effective rate
of 27.7% in 2002.
B. LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our cash flows for the periods
presented:
Year ended December 31,
------------------------------------------
2002 2003 2004
--------- --------- --------
(Rmb in millions)
Cash provided by (used for):
Operating activities..................................... 14,742 17,819 22,328
Investing activities..................................... 11,724) (9,513) (24,607)
Financing activities..................................... (1,573) (1,745) 1,970
--------- --------- --------
Net increase/(decrease) in cash and cash equivalents.......... 1,445 6,561 (309)
========= ========= ========
Cash Provided by Operations
Cash provided by operations in 2004 amounted to Rmb 22,327.9 million
(US$2,697.7 million), an increase of Rmb 4,509.1 million (US$544.8 million),
or 25.3%, from Rmb 17,818.7 million in 2003. In addition to an increase in
profit before tax of Rmb 6,953.3 million (US$840.1 million), the increase in
cash provided by operations was also due in part to an increase in
depreciation, depletion and
87
amortization expenses of Rmb 812.3 million (US$98.1 million), an increase in
dismantlement costs of Rmb 34.3 million (US$4.1 million), and an increase in
loss on disposal of fixed assets and write-off of exploration properties
totaling Rmb 116.1 million (US$14.0 million).
The increase was partially offset by a net increase in income taxes
of Rmb 3,887.5 million (US$469.7 million), an increase in our share of income
of associated companies of Rmb 124.2 million (US$15.0 million), an increase in
net interest expenses of Rmb 63.6 million (US$7.7 million), an increase in net
exchange gain of Rmb 36.0 million (US$ 4.3 million), the provision for
inventory obsolescence of Rmb 11.5 million (US$1.4 million), and a decrease in
gains in short term investment and others of Rmb 55.0 million (US$ 6.6
million).
In addition, operating cash flows increased in 2004 due to decreases
in current liabilities from operating activities of Rmb 332.1 million (US$40.1
million) and in current assets excluding cash and bank balances of Rmb 1,031.7
million (US$124.7 million). See note 31 to our consolidated financial
statements attached to this annual report.
Cash provided by operations in 2003 amounted to Rmb 17,818.7 million,
an increase of Rmb 3,076.7 million, or 20.9%, from Rmb 14,742.0 million in
2002. In addition to an increase in profit before tax of Rmb 3,389.1 million,
the increase in cash provided by operations was also due in part to
adjustments related to an increase in depreciation, depletion and amortization
expenses of Rmb 623.2 million, an increase in dismantlement costs of Rmb 41.2
million, provision of inventory obsolescence of Rmb 8.7 million, a decrease in
return on short-term investments and amortization of a discount for long-term
guaranteed notes of Rmb 75.0 million, and an increase in net interest of Rmb
24.4 million.
The increase was partially offset by a net increase in income taxes
of Rmb 668.6 million, the growth in our share of income of associated
companies of Rmb 54.9 million, a decrease in exchange loss of Rmb 107.1
million, and a decrease in loss on disposal and write-off of property, plant
and equipment of Rmb 398.0 million.
In addition, operating cash flows increased in 2003 due to an
increase in current liabilities from operating activities of Rmb 935.0
million, and a simultaneous decrease in current assets excluding cash and bank
balances of Rmb 800.7 million. See note 31 to our consolidated financial
statements attached to this annual report.
Capital Expenditures and Investments
In line with our use of the successful efforts method of accounting,
total capital expenditures and investments primarily include successful
exploration and development expenditures for oil and gas properties. Total
capital expenditures were Rmb 18,622.0 million (US$2,250.0 million) in 2004,
an increase of Rmb 6,249.5 million (US$755.1 million), or 50.5%, from Rmb
12,372.5 million in 2003. The capital expenditure in 2004 included Rmb 783.5
million (US$94.7 million) for capitalized exploration activities, Rmb 12,059.4
million (US$1,457.1 million) for development activities, and Rmb 5,779.1
million (US$698.2 million) for acquiring the Tangguh LNG project, the North
West Shelf project and other oil and gas properties. Our development
expenditures in 2004 related principally to the development of Bozhong
25-1/25-1S, Luda, Bonan and Caofeidian oil and gas fields. In addition, cash
outflow in 2004 was in part attributable to an increase in time deposits with
maturities over three months of Rmb 6,280 million (US$758.8 million), which
was partially offset by cash inflow from net disposal of short-term investment
of Rmb 294.8 million (US$35.6 million).
Total capital expenditures were Rmb 12,372.5 million in 2003, an
increase of Rmb 805.6 million, or 7.3%, from Rmb 11,566.9 million in 2002. The
capital expenditure in 2003 included Rmb 524.0 million for capitalized
exploration activities, Rmb 7,747.6 million for development activities, and
Rmb 4,100.9 million for acquiring the Tangguh LNG project, Qinhuangdao 32-6
and Liuhua 11-1 rights. Our development expenditures in 2003 related
principally to the development of Bozhong 25-1, Bonan, Weizhou 12-1 North,
Dongfang 1-1, CFD11-1, Panyu 4-2/5-1 and Huizhou 19-2/19-3.
Our total capital expenditures for general exploration and
development activities for 2004 were
88
approximately US$1,686.4 million. For the year 2005, we have budgeted
approximately US$2.1 billion for capital expenditures, approximately US$220.9
million of which is budgeted for general exploration activities offshore
China, approximately US$1,624.1 million of which is budgeted for development
activities offshore China and approximately US$207.5 million of which is
budgeted for our exploration and development activities overseas.
The following table sets forth actual or budgeted capital
expenditures on an accrual basis for our key operating areas for the periods
indicated.
Year ended December 31,
-------------------------
2004(1) 2005(2)
-------- -------
Operating Area: (US$ in millions)
Bohai Bay
Development.............................. 762.2 804.5
Exploration.............................. 74.4 79.9
Western South China Sea
Development.............................. 91.5 225.7
Exploration.............................. 68.9 45.4
East China Sea
Development.............................. 161.2 86.3
Exploration.............................. 16.9 19.5
East South China Sea
Development.............................. 358.6 507.6
Exploration.............................. 52.5 62.2
Other Offshore China
Development.............................. -- 21.7
Exploration.............................. 5.6 27.9
Overseas
Development.............................. 78.0 207.5
Exploration.............................. 16.6 43.6
-------- -------
Total................................ 1,686.4 2,131.8
======== =======
---------
(1) Figures for 2004 represent our actual spending for capital expenditure
purposes.
(2) Figures for 2005 represent our budgeted capital expenditures.
In addition to the budgeted development and exploration expenditures
relating to the oil and gas properties described above, we may make additional
capital expenditures and investments in these periods consistent with our
business strategy. For example, the above budgeted amounts do not include any
investments we may make in the liquefied natural gas project located in
Guangdong Province, other natural gas projects and overseas natural gas
properties. See "Item 4--Information on the Company--Business
Overview--Business Strategy."
Our ability to maintain and grow our revenues, net income and cash
flows depends upon continued capital spending. We adjust our capital
expenditure and investment budget on an annual basis. Our capital expenditure
plans are subject to a number of risks, contingencies and other factors, some
of which are beyond our control. Therefore, our actual future capital
expenditures and investments will likely be different from our current planned
amounts, and such differences may be significant. See "Item 3--Key
Information--Risk Factors--Risks relating to our business--Our future
prospects largely depend on our capital expenditure plans, which are subject
to various risks."
Financing Activities
In December 2004, through our wholly owned finance subsidiary, CNOOC
Finance (2004) Limited, we issued US$1 billion zero coupon guaranteed
convertible bonds due 2009. The bonds are guaranteed by us and convertible to
our shares at the holders' choice at an initial conversion price of HK$6.075
per share between January 15, 2005 and November 15, 2009. On June 7, 2005, the
conversion price of was adjusted to HK$5.97 per share pursuant to the terms of
the convertible bonds as a result of
89
our distribution of a final dividend and a special final dividend for the year
ended December 31, 2004. Unless previously converted, redeemed or purchased
and cancelled, the bonds will be redeemed at 105.114% of their principal
amount on December 15, 2009.
We had net cash inflows from financing activities of Rmb 1,970.5
million (US$238.1 million) in 2004, primarily attributable to the convertible
bond issuance which generated cash inflow of approximately Rmb 8,154.1 million
(US$985.2 million). The cash inflows were partially offset by our repayment of
Rmb 21.1 million (US$2.5 million) in bank loans, dividend distributions of Rmb
6,101.4 million (US$737.2 million) and a cash outflow of Rmb 61.2 million
(US$7.4 million) resulting from our share repurchases in 2004.
We have debt service obligations consisting of principal and interest
payments on our outstanding indebtedness. The following table summarizes the
maturities of our long-term debt outstanding as of December 31, 2004. As of
the date this annual report is filed, we have not incurred any material
long-term debt since December 31, 2004.
Debt maturities (principal only)
----------------------------------------------------------
Original currency
------------------------------- Total Rmb Total US$
Due by December 31, US$ JPY Rmb equivalents equivalents
--------- --------- --------- ----------- -----------
(in millions, except percentages)
2005......................................... -- 271.5 -- 24.3 2.9
2006-2008.................................... 100.0 542.9 -- 865.2 104.5
2009-2010.................................... 983.1 -- -- 8,156.4 985.5
2011 and beyond.............................. 981.1 -- -- 8,157.2 985.6
Total................................... 2,064.2 814.4 -- 17,203.1 2,078.5
Percentage of total debt..................... 99.3% 0.7% -- 100.0% 100.0%
As of June 8, 2005, we had a total U.S. dollar debt of US$2,064.2
million and a total foreign currency debt of US$2,078.5 million.
We had net cash outflows from financing activities of Rmb 1,744.9
million in 2003, resulting primarily from our repayment of Rmb 336.9 million
in bank loans, dividend distributions of Rmb 5,403.7 million. This cash
outflow was offset by cash inflow of Rmb 3,995.8 million resulting from our
May 2003 offering of US$200 million in 4.125% guaranteed notes due 2013 and
US$300 million in 5.5% guaranteed notes due 2033.
After we became a separate entity in October 1999, we paid a dividend
of Rmb 1,045.4 million in 1999 and declared and paid a final dividend of Rmb
6,426.4 million in 2000. In 2001, 2002 and 2003, we declared and paid
dividends totaling Rmb 871.1 million, Rmb 2,265.1 million and Rmb 5,403.7
million, respectively. In 2004, we declared dividends totaling Rmb 6,101.4
million (US$737.2 million) and paid dividends totaling Rmb 6,091.4 million
(US$736.0 million). The difference between the amount of dividends declared
and paid in 2004 was because that we repurchased and canceled some of our
shares in 2004. Out of the total dividends declared and paid in 2004, Rmb
2,617.5 million (US$316.3 million) was attributable to a special interim
dividend to replace the 2003 final dividend and final special dividend
proposed by our board of directors in 2003. On May 25, 2005, we declared a
final dividend of Rmb 3,493.4 million (US$422.1 million) for fiscal year 2004,
which was paid in full on June 7, 2005. The payment and the amount of any
dividends in the future will depend on our results of operations, cash flows,
financial condition, the payment by our subsidiaries of cash dividends to us,
future prospects and other factors which our directors may consider relevant.
The amount of dividends we paid historically is not indicative of the
dividends that we will pay in the future.
We believe our future cash flows from operations, borrowing capacity
and funds raised from our debt offerings will be sufficient to fund planned
capital expenditures and investments, debt maturities and working capital
requirements through at least 2005. Several large financial institutions have
expressed an interest in supporting our business development, although we have
not entered into any agreements for additional financing with these
institutions. However, our ability to obtain adequate financing to satisfy
90
our capital expenditure and debt service requirements may be limited by our
financial condition and results of operations and the liquidity of
international and domestic financial markets, including the following factors:
o Any failure by us to achieve timely rollover, extension or
refinancing of our short-term debt may result in our inability to
meet our obligations in connection with debt service, accounts
payable and/or other liabilities when they become due and
payable.
o Our primary operating subsidiary is a PRC incorporated company.
Therefore, prior to accessing the international capital markets
we will be subject to limitations imposed by various PRC
government authorities, including the State Administration for
Foreign Exchange and the People's Bank of China, depending on the
type of international financing raised. We may also need to
obtain PRC government support for any project involving
significant capital investment in the operations of our PRC
subsidiary.
o In addition, financing sources often look to similarly situated
entities when determining whether, and at what rates, to provide
financing. Successful or unsuccessful financing by Hong Kong and
PRC entities similarly situated to us could have an impact on our
ability to obtain external financing.
See "Item 3--Key Information--Risk Factors--Risks relating to our
business--Our future prospects largely depend on our capital expenditure
plans, which are subject to various risks" and "--We may not be able to obtain
external financing that is acceptable to us for business development
purposes."
Employee Benefits
When we became a separate entity as a result of CNOOC's
reorganization in October 1999, CNOOC retained all liabilities for retirement
benefits for its employees, both former and current, who had not been
transferred to us. As compensation for CNOOC's retention of liabilities for
retirement benefits payable to approximately 7,000 retired CNOOC employees who
were previously engaged in the oil and gas business that was transferred to us
in the reorganization, we made a one-time payment to CNOOC of Rmb 1,660.0
million in 2001.
All of our full-time employees in the PRC are covered by a
government-regulated pension plan and are entitled to an annual pension at
their retirement dates. The PRC government is responsible for the pension
liabilities to these retired employees under this government pension plan. The
actual pension payable to each retiree is subject to a formula based on the
status of the individual pension account, general salary and inflation
movements. We are required to make annual contributions to the government
pension plan at rates ranging from 9% to 22% of our employees' salaries. The
related pension costs are expensed as incurred.
The expenses attributable to mandatory contributions under the
current government pension plan are included in our historical consolidated
statements of income under either operating expenses for our production staff
or selling and administrative expenses for our administrative staff. We expect
that, under the current PRC rules and regulations regarding employee
retirement benefits, the future costs of the current government plan will be
comparable to our historical costs, subject to customary increases largely in
line with salary increases of our employees.
We are required to make contributions to a mandatory provident fund
at a rate of 5% of the base salaries for full-time employees in Hong Kong. The
costs are expensed as incurred.
Our Indonesian subsidiaries employ approximately 900 employees,
including approximately 50 expatriates. We provide benefits to expatriates
that we believe to be in line with customary international practices. Our
local staff in Indonesia enjoy welfare benefits mandated by Indonesia labor
laws.
91
For the years ended December 31, 2002, 2003 and 2004, our retirement
expenses attributed to the current government plans were Rmb 7.0 million, Rmb
15.5 million and Rmb 30.3 million (US$3.7 million), respectively.
Holding Company Structure
We are a holding company. Our entire petroleum exploration,
development, production and sales business in the PRC is owned and conducted
by CNOOC China Limited, our wholly foreign-owned enterprise in the PRC. Our
entire petroleum exploration, development and production business outside of
the PRC is owned and conducted by CNOOC International Limited, our wholly
owned subsidiary incorporated in the British Virgin Islands. International
sales of crude oil are conducted by China Offshore Oil (Singapore)
International Pte. Ltd., our wholly owned subsidiary incorporated in
Singapore. Accordingly, our future cash flows will consist principally of
dividends from our subsidiaries. The subsidiaries' ability to pay dividends to
us is subject to various restrictions, including legal restrictions in their
jurisdictions of incorporation. For example, legal restrictions in the PRC
permit payment of dividends only out of net income determined in accordance
with PRC accounting standards and regulations. In addition, under PRC law,
CNOOC China Limited is required to set aside a portion of its net income each
year to fund certain reserve funds. These reserves are not distributable as
cash dividends.
Inflation/Deflation
According to the China Statistical Bureau, China experienced an
overall national inflation rate, as represented by the general consumer price
index, of 0.8% in 2002, an overall deflation rate of 1.2% in 2003 and an
overall inflation rate of 3.9% in 2004. Neither the deflation nor the
inflation have had a significant impact on our results of operations in the
respective years.
U.S. GAAP Reconciliation
Our consolidated financial statements are prepared in accordance with
Hong Kong GAAP, which differ in certain material respects from U.S. GAAP.
These differences relate primarily to the revaluation of properties and land
use rights performed in connection with the reorganization, the treatment of
impairment of long-lived assets, the treatment of stock compensation plans,
the treatment of unrealized holding gains from available-for-sale investments
in marketable securities and the provision for dismantlement liabilities.
Except for the accounting treatment of the property revaluation and the
recognition of stock compensation costs, the unrealized holding gains from
available-for-sale investments in marketable securities and the provision for
dismantlement liabilities, there are no material differences between Hong Kong
GAAP and U.S. GAAP that affect our net income or shareholders' equity. See
note 37 to our consolidated financial statements attached to this annual
report.
Taxation
We are subject to income taxes on an entity basis on income arising
in or derived from the tax jurisdictions in which we and each of our
subsidiaries are domiciled and operate. We are not liable for income taxes in
Hong Kong as we currently do not have any assessable income from Hong Kong
sources. Pursuant to a notice issued by the State Administration of Taxation
in March 2001, we are entitled to all tax benefits conferred by Chinese law on
foreign invested enterprises.
Our PRC subsidiary, absent exemptions, is subject to enterprise
income tax at the rate of 33%. Following the October 1999 reorganization, our
PRC subsidiary became a wholly foreign owned enterprise and accordingly was
exempted from 3% local surcharges, reducing its enterprise income tax rate to
the current rate of 30%. Moreover, entities now comprising our PRC subsidiary
were exempted from enterprise income taxes for two years starting from the
first year of profitable operation in 1996 and were entitled to a 50%
reduction of enterprise income taxes for three years beginning in 1998 and
ending on December 31, 2000. This tax exemption increased our earnings by Rmb
1,920.7 million during the year ended December 31, 2000. Since January 1,
2001, the PRC subsidiary has been subject to the 30% enterprise income tax
rate. The PRC enterprise income tax is levied based on taxable income
including income from operations as well as other components of earnings, as
determined in accordance with the
92
generally accepted accounting principles in the PRC, or PRC GAAP. Besides
income taxes, our PRC subsidiary also pays certain other taxes, including:
o production taxes equal to 5% of independent production and
production under production sharing contracts; and
o business tax of 5% on other income.
Our subsidiary in Singapore, China Offshore Oil (Singapore)
International Pte. Ltd., is subject to income tax at the rate of 10% and 20%
for its oil trading activities and other income-generating activities,
respectively. Our subsidiaries that own interests in oil properties in
Indonesia along the Malacca Strait are subject to corporate and branch profit
tax of 44%. The nine subsidiaries of Repsol-YPF, S.A. in Indonesia acquired by
us during 2002 are all subject to corporate and dividend tax at rates ranging
from 43.125% to 51.875%. None of our other subsidiaries were subject to any
income taxes in their respective jurisdictions for the year presented.
We calculate deferred taxation to account for temporary differences
between our tax bases, which is used for income tax reporting and prepared in
accordance with applicable tax guidelines, and our accounting bases, which is
prepared in accordance with applicable financial reporting requirements. Major
temporary differences include accelerated amortization allowances for oil and
gas properties, which are offset in part by provision for dismantlement and a
provision for impairment of property, plant and equipment and write-off of
unsuccessful exploratory drilling. As of December 31, 2003 and 2004, we had
Rmb 5,783.2 million and Rmb 6,688.5 million (US$808.1 million), respectively,
in net deferred tax liabilities. See note 13 to our consolidated financial
statements attached to this annual report.
Change of Accountants
On June 6, 2002, we terminated the engagement of Arthur Andersen & Co
as our independent public accountants. Prior to such date, Arthur Andersen had
audited our consolidated financial statements, including financial statements
for the year ended December 31, 2001 attached to this annual report. On June
15, 2002, Arthur Andersen was convicted of federal obstruction of justice
charges in connection with the U.S. government's investigation of Enron
Corporation. On August 31, 2002, Arthur Andersen voluntarily relinquished its
licenses to practice public accountancy in all states of the United States
and, accordingly, cannot furnish any written consent to the issue of this
annual report with the inclusion of its reports in the form and context in
which they are included. For a discussion of risks related to Arthur Andersen,
see "Item 3--Key Information--Risk Factors--Risks relating to our
business--You may not be able to assert claims against Arthur Andersen, our
independent public accountants for periods prior to 2002, nor may you be able
to assert claims against our current independent public accountants for
financial statements previously audited by Arthur Andersen."
On June 6, 2002, we appointed Ernst & Young as our independent
accountants. Ernst & Young audited our consolidated financial statements for
the three-year period ended December 31, 2002, 2003 and 2004 included in this
annual report.
Recent Accounting Pronouncements
U.S. GAAP
Statements of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets," were issued
by the Financial Accounting Standards Board in June 2001 and became effective
for us on July 1, 2001 and January 1, 2002, respectively. In 2003, the
Emerging Issues Task Force (EITF) considered the issue of whether FAS 141 and
142 require interests held under oil, gas and mineral leases to be separately
classified as intangible assets on the balance sheets of companies in the
extractive industries. If such interests were deemed to be intangible assets
by the EITF, mineral rights to extract oil and gas for both undeveloped and
developed leaseholds would be classified separately from oil and gas
properties as intangible assets on the corporation's balance sheet.
Historically we have capitalized the acquisition cost of oil and gas
properties interests in accordance with
93
statement of Financial Accounting Standard No. 19, "Financial Accounting and
Reporting by Oil and Gas Producing Companies". In addition, in line with
industry practice, we have reported these assets as part of property, plant
and equipment.
In 2004, the EITF reached a conclusion that mineral rights are
tangible assets and the balance sheet classification and disclosures for
drilling and mineral rights of oil and gas producing entities are within the
scope of Statement of Financial Accounting Standard No.19, OFinancial
Accounting and Reporting by Oil and Gas Producing Companies.O The EITF
conclusion has no implication to us as we currently account for our oil and
gas properties in accordance with the EITF conclusion.
The Financial Accounting Standards Board (FASB) has proposed an
amendment to Statement No. 19, "Financial Accounting and Reporting by Oil and
Gas Producing Companies" (FAS No. 19) that may change the way oil and gas
producers account for deferred exploratory drilling costs. Under the current
rules, there is a presumption that all exploratory drilling costs will be
expensed within one year following completion of drilling if proved reserves
have not been recorded, except for costs related to areas where additional
exploration wells are necessary to justify development plans and such
additional wells are under way or firmly planned for the near future.
The new standard would relax the one-year limitation, so long as oil
and gas reserves have been discovered and an enterprise "is making sufficient
progress assessing the reserves and the economic and operating viability of
the project." The FASB staff has developed indicators to help determine
whether sufficient progress is being made. We believe the adoption of the
proposed amendment (once finalized) will have no impact on our consolidated
financial position or results of operations.
In December 2004, the Financial Accounting standards Board, or FASB,
issued SFAS No. 153, "Exchanges of Non-monetary Assets an amendment of APB
Opinion No. 29." This statement, which addresses the measurement of exchanges
of non-monetary assets, is effective prospectively for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. We
believe the adoption of this statement will have no impact on our consolidated
financial position or results of operations.
In December 2004, the FASB issued Statement No. 123 (revised 2004),
"Share-Based Payment" (FAS No.123R), which replaces FAS No. 123 and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees." FAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their
fair values beginning with the first interim period after June 15, 2005, with
early adoption encouraged. Under the Securities and Exchange Commission's
rules, FAS No. 123R is now effective for us beginning January 1, 2006. The pro
forma disclosures previously permitted under FAS No. 123 will cease to be an
alternative to financial statement recognition. We believe the adoption of the
FAS No. 123 will have no material impact on our consolidated financial
position or results of operations as we currently account for the stock
options under the fair value recognition provision of FAS No. 123.
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Liabilities and Equity," to
address the balance sheet classification of certain financial instruments that
have characteristics of both liabilities and equity. This statement, already
effective for contracts created or modified after May 31, 2003, was originally
intended to become effective July 1, 2003, for all contracts existing on May
31, 2003. However, on November 7, 2003, the FASB issued an indefinite deferral
of certain provisions of FAS No. 150. We will continue to monitor and assess
the FASB's modifications of FAS No. 150, but do not anticipate any material
impact on our financial position and results of operations.
Hong Kong
The Hong Kong Institute of Certified Public Accountants has issued a
number of new Hong Kong Financial Reporting Standards and Hong Kong Accounting
Standards, which we collectively referred to
94
in this annual report as the new HKFRSs. The new HKFRSs are generally
effective for accounting periods beginning on or after January 1, 2005. We
have not early adopted these new HKFRSs in the financial statements for the
year ended December 31, 2004. We have already commenced an assessment of the
impact of these new HKFRSs, but are not yet in a position to state when these
new HKFRSs would have a significant impact on our results of operations and
financial position.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
See "Item 4--Information on the Company--Business Overview--Research
and Development" and "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions--Categories of Connected
Transactions--Research and Development Services."
D. TREND INFORMATION
Crude oil price is a major driver of our results of operation. We
price our crude oil with reference to the international crude oil prices,
which have fluctuated considerably over the years. On January 1, 2004 the
international benchmark crude oil, West Texas Intermediate, was US$32.52 per
barrel. As of June 8, 2005, it was US$52.54 per barrel. In addition, continued
political and economic uncertainties in Iraq and threat of terrorism worldwide
raise concerns about the security and availability of ample supplies to meet
growing demand. It is expected that crude oil price will remain relatively
high in 2005. For more information about crude oil prices, see "Item 3--Key
Information--Risk Factors--Risks Relating to Our Business--Our business,
revenues and profits fluctuate with changes in oil and gas prices," "Item
4--Information on the Company--Business Overview--Sales and Marketing--Sales
of Offshore Crude Oil--Pricing," and "Item 5--Operating and Financial Review
and Prospects--Operating Results--Results of Operations--2004 versus 2003."
In additional to crude oil, natural gas is becoming an increasingly
important part of our business. The Chinese government promotes the use of
natural gas as a clean and efficient fuel. Demand for natural gas in the PRC
is likely to increase significantly. We have expanded and will continue to
expand our natural gas business and intend to exploit our natural reserves to
meet growing demand for natural gas. For more information about natural gas,
see "Item 3--Key Information--Risk Factors--Risks Relating to Our
Business--Any failure to implement our natural gas business strategy may
adversely affect our business and financial position," "--The infrastructure
and demand for natural gas in the PRC may proceed at a slower pace than our
planned increase in production," "Item 4--Information on the Company--Business
Overview--Competitive Strengths--Strategic Position in China's Growing Natural
Gas Market," and "--Natural Gas Business."
E. OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2004, we had a currency swap contract with a
financial institution to sell United States dollars in exchange for Japanese
Yen in order to hedge certain Japanese Yen denominated loan repayments in the
future. The derivative contract was recorded as "Other payable and accrued
liabilities" in the consolidated balance sheet at fair value. For the year
ended December 31, 2004, we recognized related changes in fair value, a gain
of Rmb 2,581,000 (compared to Rmb 10,038,000 in 2003), and included the amount
in "Exchange (losses)/gains, net" in the consolidated income statement.
During 2003, we also entered into interest rate swap agreements to
partially hedge the fixed-rate debt securities for interest rate risk exposure
management purposes with notional contract amount of US$200 million. The
interest rate swap agreements utilized by us effectively modify our exposure
to interest risk by converting our fixed-rate debt to a floating rate. These
agreements involve the receipt of fixed rate amounts in exchange for floating
rate interest payments over the life of the agreement without an exchange of
the underlying principal amount. The interest rate swap agreements were
settled during the year and the total net gain was Rmb 84,168,000.
95
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth information regarding our contractual
obligations for the periods indicated.
Payments due by period
-------------------------------------------------------------------
Contractual Obligations Less than More than 5
Total 1 year 1-3 years 3-5 years years
---------------------------------------------------- -------------- ------------ ------------ ------------ -------------
Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000
Long-term debt obligations.......................... 17,203,126 24,364 865,212 8,164,025 8,149,525
Operating lease obligations......................... 2,606,198 174,184 299,270 298,721 1,834,023
Other long-term liabilities reflected on our
balance sheet under Hong Kong GAAP ............. 3,089,448 -- -- -- 3,089,448
-------------- ------------ ------------ ------------ -------------
Total...................................... 22,898,772 198,548 1,164,482 8,462,746 13,072,996
============== ============ ============ ============ =============
As of December 31, 2004, we had the following capital commitments,
principally for the construction and purchase of property, plant and
equipment:
Capital Commitments 2004 2003
-------------------------------------------------- ---------- -----------
Rmb'000 Rmb'000
Contracted for.................................... 9,568,971 2,534,468
Authorized, but not contracted for................ 20,331,504 17,489,791
As of December 31, 2004, we had unutilized banking facilities
amounting to approximately Rmb 20,662,120,000 as compared to Rmb
32,455,229,500 in 2003.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
In accordance with Hong Kong law and our articles of association, our
affairs are managed by our board of directors. The board of directors has
eight members, including four independent non-executive directors.
The table below sets forth information about our directors and senior
officers:
Name Year of Birth Position
---------------------------- ------------- ----------------------------------------------------------------
Chengyu Fu.................. 1951 Chairman of Board of Directors and Chief Executive Officer
Han Luo..................... 1953 Director
Longsheng Jiang............. 1945 Director (resigned on June 1, 2005)
Shouwei Zhou................ 1950 Director and President
Guangqi Wu.................. 1957 Director (since June 1, 2005)
Sung Hong Chiu.............. 1947 Independent Non-executive Director
Erwin Schurtenberger........ 1940 Independent Non-executive Director (resigned on April 1, 2005)
Kenneth S. Courtis.......... 1946 Independent Non-executive Director
96
Evert Henkes................ 1944 Independent Non-executive Director
Aloysius Hau Yin Tse 1948 Independent Non-executive Director (since June 8, 2005)
Yunshi Cao.................. 1945 Senior Vice President, Company Secretary and General Counsel
Mark Qiu.................... 1964 Chief Financial Officer and Senior Vice President (resigned
as Chief Financial Officer on January 1, 2005 and as Senior
Vice President on March 25, 2005 )
Hua Yang.................... 1961 Chief Financial Officer (since January 1, 2005) and Senior
Vice President
Wei Chen.................... 1958 Senior Vice President and Director of CNOOC (China) Limited
Research Center
Guohua Zhang................ 1960 Senior Vice President and General Manager of Exploration
Department
Jian Liu.................... 1958 Senior Vice President and General Manager of Development and
Production Department
Ning Li..................... 1964 Senior Vice President and General Manager of Engineering and
Project Department
We have a management team with extensive experience in the oil and
gas industry. As a result of our cooperation with international oil and gas
companies, the management team and staff have had the opportunity to work
closely with foreign partners both within and outside China. Such
opportunities, in conjunction with management exchange programs with foreign
partners, have provided valuable training to our personnel in international
management practices. A description of the business experience and present
position of each director and executive officer is provided below. Our
principal executive offices are located at 65th Floor, Bank of China Tower,
One Garden Road, Central, Hong Kong.
Directors
Chengyu Fu received a B.S. degree in geology from the Northeast
Petroleum Institute in China and a Master's degree in petroleum engineering
from the University of Southern California in the United States. He has over
30 years of experience in the oil industry in the PRC. He previously worked in
China's Daqing, Liaohe and Huabei oilfields. He joined CNOOC in 1982 and has
since been appointed as the Chairman of the Management Committee formed
through a joint venture between CNOOC, BP Amoco, Chevron, Texaco, Phillips
Petroleum, Shell and Agip. From 1994 to 1995, Mr. Fu was the Deputy General
Manager of China Offshore Oil Eastern South China Sea Corporation, a
subsidiary of CNOOC. In December 1995, he was appointed Vice President of
Phillips China Inc. and General Manager of the Xijiang Development Project. In
1999, Mr. Fu was the General Manager of China Offshore Oil Eastern South China
Sea Corporation. In 2000, Mr. Fu was appointed as a Deputy General Manager of
CNOOC. Subsequently, he was appointed as a Director, Executive Vice President,
President and Chief Operating Officer of our company in 2001. In August 2002
he became the Chairman and Chief Executive Officer of our affiliate, China
Oilfield Services Limited. In October 2003, Mr. Fu was appointed President of
CNOOC. He was also appointed as the Chairman of the Board of Directors and
Chief Executive Officer of our company, effective October 16, 2003. In
November 2003, Mr. Fu resigned from his Chief Executive Officer position with
China Oilfield Services Limited.
97
Han Luo received a doctorate degree from China Petroleum University.
He has over 30 years' experience in the oil industry in the PRC. He was
appointed as our executive director in December 2000. From 1993 to 1999, Mr.
Luo served as Vice President of China Offshore Oil Eastern South China Sea
Corporation and concurrently as Chairman of the CACT
(CNOOC-AGIP-ChevronTexaco) operating group, and executive Vice President of
China Offshore Oil East China Sea Corporation, a subsidiary of CNOOC. In 1999,
he was the general manager of CNOOC China, Shanghai Branch. Mr. Luo is a Vice
President of CNOOC, a position he has held since 2000. He joined CNOOC in
1982.
Longsheng Jiang received a B.S. degree from the Beijing Petroleum
Institute in China. He has over 35 years of experience in the oil industry in
the PRC. He was appointed as a Director of our company in December 2000 and
has been the Vice President of CNOOC since 1998. From 1994 to 1998, he was the
General Manager of China Offshore Oil Southern Drilling Company. From 1991 to
1994, Mr. Jiang served as the Deputy Chief Drilling Engineer and was later
appointed as the Chief Drilling Engineer of China Offshore Oil Western South
China Sea Corporation. He joined CNOOC in 1982. Mr. Jiang resigned from our
board of director on June 1, 2005.
Shouwei Zhou received a doctorate degree from the Southwest China
Petroleum Institute and is a senior engineer. He was appointed as a Director
and Executive Vice President of our company in September 1999 and is
responsible for the management and operation of CNOOC China Limited. Mr. Zhou
was appointed President of our company in August 2002. Mr. Zhou was the Deputy
General Manager and later promoted to become General Manager of China Offshore
Oil Bohai Corporation and China Offshore Oil Tianjin Corporation, both
subsidiaries of CNOOC. He also became the Chairman of CNOOC Engineering
Company Limited, a subsidiary of CNOOC, in December 2003. He joined CNOOC in
1982.
Guangqi Wu received a B.S. degree in marine geology from the Ocean
University of China. He also holds a master's degree in Economics and
Management from the Central Communist Party School, the PRC and a master's
degree in Management from the China Petroleum University. Mr. Wu joined CNOOC
in 1982 and worked as a geologist in CNOOC Bohai Corporation, a subsidiary of
CNOOC, and well logging manager for a joint venture under CNOOC. He was then
appointed as manager of CNOOC Bohai Drilling Company and became the Deputy
General Manager of CNOOC Oil Technical Services Company in 1994. Mr. Wu was
appointed as director of the Administration Department of CNOOC in 1995 and as
director of CNOOC Research Center in 1999. In 2001, Mr. Wu became the director
of the Ideology Affairs Department of CNOOC. Mr. Wu was appointed President
and Chief of Discipline and Inspecting Group of CNOOC in 2003, and he has been
Vice President of CNOOC since 2004. Mr. Wu became our director on June 1,
2005. He has also been an independent non-executive director of China Yangtze
Power Limited, a company listed on the Shanghai Stock Exchange since May 2003.
Mr. Wu was appointed as our director with effect from June 1, 2005.
Independent Non-executive Directors
Sung Hong Chiu received an LL.B. degree from the University of
Sydney. He is admitted as a solicitor of the Supreme Court of New South Wales
and the High Court of Australia. He has over 30 years' experience in legal
practice and is a director of a listed company in Australia. Mr. Chiu is the
founding member of the Board of Trustees of Australian Nursing Home Foundation
and served as the General Secretary of the Australian Chinese Community
Association of New South Wales. Mr. Chiu was appointed as an independent
non-executive director of CNOOC in September 1999.
Erwin Schurtenberger is a senior advisor to the China Training Center
for Senior Personnel Management Officials. He received a Ph.D. Degree in
Economics and was trained in political science and philosophy at the
University of Paris. He was the Ambassador of Switzerland to the People's
Republic of China, the Democratic People's public of Korea and the Republic of
Mongolia from 1988 to 1995. He joined the Swiss Foreign Services in 1969. Over
the years, he held various diplomatic positions in Bangkok, Hong Kong, Beijing
and Tokyo. He also served as the Ambassador of Switzerland to Iraq. He has
been an independent business advisor to various European multinationals,
American groups and humanitarian aid organizations. He was the President of
the Swiss-Asia Foundation. He serves on the
98
boards of directors of ROBERT BOSCH RBint, BUHLER GROUP Switzerland,
FIRMENICH-China, TAIKANG Life Insurance and WINTERTHUR Insurances (Asia). Dr.
Schurtenberger resigned from our board of directors on April 1, 2005.
Kenneth S. Courtis is the Managing Director of Goldman Sachs and Vice
Chairman of Goldman Sachs Asia. He specializes in economics and strategy
throughout the Asia-Pacific region as well as in Europe and North America.
After graduating with honors from Glendon College in Toronto, Mr. Courtis
received an M.A. in international economics from Sussex University, England,
an M.B.A. in finance and strategy from the European Institute of Business
Administration and a Ph.D. from the Institute of Economic and Political
Studies in Paris. Prior to joining Goldman Sachs, he served as Chief Asia
Economist and Strategist for Deutsche Bank.
Evert Henkes served as the CEO of Shell global chemical business from
1998 to 2003. Since joining Shell in 1973, he held various executive positions
worldwide, including Managing Director of Shell Chemicals UK Ltd., Managing
Director of Shell UK, President of Billiton Metals, Shell's Metals
Coordinator, Shell's Chemical Coordinator, and Director of Strategy & Business
Services of Shell International Chemicals Ltd. He also served as directors in
regional and global industrial bodies, including CEFIC and ICCA. He is also a
director of Tate & Lyle Plc, BPB Plc, SembCorp Industries Ltd. and
OutokumpuOy.
Aloysius Hau Yin Tse is a fellow of The Institute of Chartered
Accountants in England and Wales, and the Hong Kong Institute of Certified
Public Accountants, or HKICPA. Mr. Tse is a past president of the HKICPA. He
joined KPMG in 1976 and became a partner in 1984 and retired in March 2003.
Mr. Tse was a non-executive Chairman of KPMG's operations in the PRC and a
member of the KPMG China advisory board from 1997 to 2000. Mr. Tse is
currently an independent non-executive director of Wing Hang Bank, Limited and
Linmark Group Limited, companies listed on the Hong Kong Stock Exchange. Mr.
Tse is a graduate of the University of Hong Kong. Mr. Tse was appointed as our
independent non-executive director with effect from June 8, 2005.
Company Secretary
Yunshi Cao is our Company Secretary, General Counsel and a Senior
Vice President. From 1992 to 1999, Mr. Cao was the Director of the Legal
Department of CNOOC. He has been the General Counsel of CNOOC since 1999. Mr.
Cao is a senior economist and licensed lawyer in the PRC. He has extensive
experience in production sharing contracts. He received a B.S. degree from the
Beijing Petroleum Institute and studied law at the Law School of Columbia
University. He joined CNOOC in 1982.
Senior Management
Hua Yang is the Chief Financial Officer (since January 1, 2005) and
Senior Vice President of our company and the President of CNOOC International
Limited. He is a senior engineer. He received his B.S. degree from China
Petroleum Institute. He also received a MBA degree from the Sloan School of
Management at Massachusetts Institute of Technology as a Sloan Fellow. He has
over 22 years of experience in petroleum exploration and production. Mr. Yang
joined CNOOC in 1982 and was the Deputy Director and Acting Director of the
Overseas Development Department of CNOOC.
Mark Qiu was the Chief Financial Officer and Senior Vice President of
our company and resigned from these positions on January 1, 2005 and March 25,
respectively. He previously held several management positions at Atlantic
Richfield Corporation ("ARCO") of United States. He was the Federal Government
Relations Director of ARCO in Washington, D.C. Prior to that, he was a Vice
President of ARCO China Ltd., ARCO's subsidiary in China. He was a consultant
with the leadership succession planning consulting firm of RHR International.
Mr. Qiu received a MBA degree from the Sloan School of Management at
Massachusetts Institute of Technology as a Sloan Fellow. He also has a Master
degree and a Ph.D. degree in Decision Sciences from the University of Texas at
Arlington.
99
Wei Chen is a Senior Vice President of our company and Director of
the CNOOC (China) Limited Research Center. He is a senior engineer and is
responsible for our administration, foreign affairs, human resources and
material procurement. He received his B.S. degree from China Petroleum
University and holds an MBA degree from Tsinghua University. He has over 22
years of experience in petroleum exploration and production. Mr. Chen joined
CNOOC in 1984 and previously served as the Deputy Manager for the Exploration
and Development Department of CNOOC Research Center, the Deputy Manager of the
Overseas Research Department, the Manager of the Information Department, the
Deputy Director of CNOOC Research Center and the General Manager of the Human
Resources Department of CNOOC, and the Senior Vice President and General
Manager of our Administration Department.
Guohua Zhang is a Senior Vice President of our company and General
Manager of our Exploration Department. Mr. Zhang is responsible for our
exploration activities offshore China as well as reserve management. Mr. Zhang
is a geologist. He graduated from Qingdao Oceanographic Institute with a B.S.
degree. He studied in the Business Institute of University of Alberta in
Canada in 2001. He joined CNOOC in 1982 and served as General Manager of the
Exploration Department of China Offshore Oil Western South China Sea
Corporation, Chief Geologist of CNOOC Research Center and Assistant to General
Manager of CNOOC China Limited.
Jian Liu is the Senior Vice President and General Manager of the
Department of Development and Production at CNOOC. He graduated from Huazhong
University of Science and Technology with a B.S. degree and received his MBA
degree from Tianjin University in 2000. He is a senior engineer and is
responsible for the development and production of oil and gas. Mr. Liu joined
CNOOC in 1982. He served as the manager of CNOOC Bohai Corporation, the Vice
President of the Tianjin Branch and the President of the Zhanjiang Branch.
Ning Li is the Senior Vice President and General Manager of the
Engineering and Project Department of our company. He is a senior engineer,
responsible for the project management for oil and gas development. He
received his B.S. degree from Petroleum University of China in 1983 and MBA
degree from Tianjin University in 2000. Mr. Li joined CNOOC Bohai Corporation
in 1983 and is responsible for the design and engineering of oil and gas
fields in Bohai Bay, East China Sea and South China Sea. He has been a Vice
President of Design & Engineering Corporation of CNOOC since 1994 and was
appointed as the Deputy Manager of the Engineering Department of CNOOC in
1998.
B. COMPENSATION OF DIRECTORS AND OFFICERS
Each of the directors entered into a service contract with us for an
initial term of three years, subject to termination by either party by written
notice given not less than three months prior to the expiration of the end of
the initial term or any subsequent calendar month. Particulars of these
contracts are in all material respects identical except as indicated below:
o the annual salaries for Mr. Chengyu Fu and Mr. Shouwei Zhou
during the initial three years are HK$1,880,000 and HK$1,680,000,
respectively, subject to an annual increase as determined by the
board of directors not exceeding 15% of their respective salaries
for the previous year;
o the chairman of our board of director and each other director
(other than independent non-executive directors) shall be
entitled to a maximum annual paid leave of 30 working days and 25
working days, respectively;
o each of the directors (other than independent non-executive
directors) is entitled to the use of an apartment as his
residence and the use of a car provided free of charge by us
together with certain other benefits and reimbursements;
o the annual salary for each of the other directors (other than
independent non-executive directors) during the initial three
years is HK$388,000, subject to an annual increase as determined
by the board of directors not exceeding 15% of his then current
salary; and
100
o we may, at our sole discretion, pay an director (other than
independent non-executive directors) a bonus in such amount as
the board of directors may determine in respect of each completed
financial year.
The salaries for Mr. Chengyu Fu and Mr. Shouwei Zhou were
HK$2,976,000 and HK$2,256,00, respectively, for 2004. The salary for Mr.
Chengyu Fu increased more than 15% from 2003 to 2004 as he took up the
additional position as the chairman of our board of directors in October 2003.
The aggregate amounts of salaries, housing allowances, other allowances and
benefits in kind paid to our directors (other than independent non-executive
directors) during the years ended December 31, 2002, 2003 and 2004 were
approximately Rmb 9.5 million, Rmb 10.7 million and Rmb 7.8 million (US$0.9
million), respectively, while the amounts paid to our executive officers for
the same periods were approximately Rmb 8.0 million, Rmb 11.0 million and Rmb
12.6 million (US$1.5 million), respectively. Under our pension plan for 2004,
we set aside an aggregate amount of Rmb 74,300 (US$8,977) and Rmb 172,000
(US$20,782) for pension and similar benefits in kind for our directors (other
than independent non-executive directors) and our executive officers
respectively. Our directors (other than independent non-executive directors)
and executive officers contributed an additional Rmb 59,700 (US$7,213) and Rmb
159,400 (US$19,259), respectively, to the pension plan for 2004. For further
details regarding employee compensation, see "Item 4--Information on the
Company--Business Overview--Employees and Employee Benefits." For further
details regarding share options granted to our directors, officers and
employees, see "--Share Ownership" below.
C. BOARD PRACTICE
Audit and Other Committees
We have established an audit committee, a remuneration committee and
a nomination committee. Our audit committee meets at least twice a year and is
responsible for reviewing the completeness, accuracy and fairness of the our
accounts, evaluating our auditing scope and procedures, and evaluating
internal control systems. The committee is also responsible for setting up
internal monitoring systems so as to allow our board of directors to monitor
our financial position, protect our assets, and prevent major errors resulting
from financial reporting or loss. Our board of directors is responsible for
these systems and appropriate delegations and guidance have been made. The
audit committee regularly reports to the board of directors. As of June 8,
2005, our audit committee was composed of Mr. Sung Hong Chiu, Dr. Kenneth S.
Courtis and Mr. Aloysius Hau Yin Tse.
The primary responsibilities of our remuneration committee are to
review information in respect of our executives' remuneration, share option
schemes, performance appraisal systems and retirement plans. As of June 8,
2005, our remuneration committee was composed of Mr. Sung Hong Chiu, Mr. Evert
Henkes and Mr. Aloysius Hau Yin Tse.
The primary responsibilities of our nomination committee include
nominating candidates for directors subject to our board of directors'
approval, conducting routine examination of the structure, scale and
composition of our board of directors, and review the leadership capabilities
of our directors in order to ensure that we remain competitive. Because of the
resignation of Dr. Erwin Schurtenberger, as of June 8, 2005, our nomination
committee had two members, namely, Mr. Han Luo and Mr. Sung Hong Chiu.
For information on our audit committee finance expert and our code of
ethics, see "Item 16A--Audit Committee Finance Expert," and "Item 16B--Code of
Ethics."
International Advisory Board
On October 29, 2001, we announced the establishment of an
International Advisory Board with globally well-respected political figures
and corporate leaders as members. The purpose of the International Advisory
Board is to provide the management with strategic advice on world events and
macro issues that may impact our development. Chengyu Fu, Chairman of our
board of director, is the Chairman of the International Advisory Board.
101
Set forth below is information on the current members of our
International Advisory Board.
Name Biographical Information
--------------------- -----------------------------------------------------------------------------------------
Chengyu Fu See "--A. Directors and Senior Management--Directors"
Erwin Schurtenberger The Ambassador of Switzerland to the People's Republic of China, the Democratic People's
Republic of Korea and the Republic of Mongolia from 1988 to 1995. He joined the Swiss
Foreign Services in 1969. Over the years, he held various diplomatic positions in
Bangkok, Hong Kong, Beijing and Tokyo. He also served as the Ambassador of Switzerland
to Iraq. He has been an independent business advisor to various European multinationals,
American groups and humanitarian aid organizations. He was the President of the
Swiss-Asia Foundation. He serves on the Boards of ROBERT BOSCH RBint and its
International Advisory Board, BUHLER GROUP Switzerland, FIRMENICH-China, TAIKANG Life
Insurance, WINTERTHUR Insurances (Asia). Dr. Schurtenberger is also a senior advisor to
the China Training Center for Senior Personnel Management Officials. He received a Ph.D.
Degree in Economics and was trained in political science and philosophy. Dr
Schurtenberger was a director on our board of directors from November 11, 2002 to April
1, 2005.
Cornelius Herkstroter Former Chairman of the Committee of Managing Directors of the Royal Dutch
Shell Group of Companies and President of Royal Dutch Petroleum Company. He spent his
entire career in the mineral and resources industry, primarily with Royal Dutch Shell. He
holds various board and advisory positions with several global corporations and
organizations.
Simon Murray Former Executive Chairman of Asia Pacific for the Deutsche Bank Group. He was the
founder of Davenham Investments, a project advisory company. He became the Group Managing
Director of Hutchison Whampoa in 1984. He is currently a Director of a number of
companies that include Hutchison Whampoa, Cheung Kong Holdings, Tommy Hilfiger in the
United States and Vivendi Universal in France.
Edward S. Steinfeld Assistant professor at the MIT Sloan School of Management. He received both
his undergraduate and doctoral training at Harvard University. As a China specialist, he
has conducted extensive firm-level research in China.
Peter Sutherland Chairman and Managing Director of Goldman Sachs International and
non-executive Chairman of BP plc. He served as Director General of the World Trade
Organization from 1993 to 1995 and is a distinguished leader in world trade and commerce.
He holds various board and advisory positions with several global corporations and
organizations.
Charles Freeman Became Chairman of Projects International, Inc. in 1995, after an extensive career in the
U.S. Government spanning three decades and numerous senior positions, including U.S.
Ambassador to Saudi Arabia and Assistant Secretary of Defense for International Security
Affairs. He is currently president of the Middle East Policy Council, co-chair of the
U.S. China Policy Foundation, vice-chair of the Atlantic Council, and a trustee of the
Institute for Defense Analyses, among other positions. Ambassador Freeman attended the
National Autonomous University of Mexico and received his A.B. from Yale University as
well as a J.D. from the Harvard Law School. He is the author of two widely circulated
books on statecraft and diplomacy: The Diplomat's Dictionary and Arts of Power.
102
D. EMPLOYEES
See "Item 4--Information on the Company--Business Overview--Employees
and Employee Benefits."
E. SHARE OWNERSHIP
We have adopted share option schemes which provide for the grant of
options to our senior management. Under these share option schemes, the
remuneration committee of our board of directors will from time to time
propose for the board's approval for the recipient of and the number of shares
underlying each option. These schemes provide for issuance of options
exercisable for shares granted under these schemes as described below, which
in aggregate shall not exceed 10% of our issued share capital as of the date
of approval by our shareholders of the scheme adopted in June 2002, excluding
shares alloted and issued pursuant to the schemes from time to time.
Discussions below in respect of the number of shares granted under our share
option schemes and relevant per share data have been adjusted to take into
account our 5-for-1 stock split on March 17, 2004.
On February 4, 2001 we adopted a pre-global offering share option
scheme, or the Pre-Global Offering Share Option Scheme. Pursuant to the
Pre-Global Offering Share Option Scheme:
o options for an aggregate of 23,100,000 shares have been granted;
o the subscription price per share is HK$1.19; and
o the period during which an option may be exercised is as follows:
(a) 50% of the shares underlying the option shall vest 18 months
after the date of the grant; and
(b) 50% of the shares underlying the option shall vest 30 months
after the date of the grant.
The exercise period for options granted under the Pre-Global Offering
Share Option Scheme shall end not later than 10 years from March 12, 2001.
On February 4, 2001, we adopted a share option scheme, or the 2001
Share Option Scheme, for the purpose of recognizing the contribution that
certain individuals had made to us and attracting and retaining the best
available personnel.
Pursuant to the 2001 Share Option Scheme:
o options for an aggregate of 44,100,000 shares have been granted;
o the subscription price per share is HK$1.232; and
o the period during which an option may be exercised is as follows:
(a) one-third of the shares underlying the option shall vest on
the first anniversary of the date of the grant;
(b) one-third of the shares underlying the option shall vest on
the second anniversary of the date of the grant; and
(c) one-third of the shares underlying the option shall vest on
the third anniversary of the date of the grant.
The exercise period for options granted under the 2001 Share Option
Scheme shall end not later than 10 years from August 27, 2001. In view of the
amendments to the relevant provisions of the Hong
103
Kong Stock Exchange listing rules regarding the requirements of the share
option schemes of a Hong Kong listed company effective on September 1, 2001,
no further options will be granted under the 2001 Share Option Scheme.
In June 2002, we adopted a new share option scheme, or the 2002 Share
Option Scheme. Under the 2002 Share Option Scheme, our directors may, at their
discretion, invite employees, including executive directors, of our company or
any of our subsidiaries, to take up options to subscribe for shares. The
maximum aggregate number of shares (including those that could be subscribed
for under the Pre-Global Offering Share Option Scheme and the 2001 Share
Option Scheme) which may be granted shall not exceed 10% of our total issued
share capital. The maximum number of shares which may be granted under the
2002 Share Option Scheme to any individual in any 12 months period up to the
next grant shall not exceed 1% of our total issued share capital from time to
time.
According to the 2002 Share Option Scheme, the consideration payable
by a participant for the grant of an option will be HK$1.00. The subscription
price of a share payable by a participant upon the exercise of an option will
be determined by our directors at their discretion at the date of grant,
except that such price may not be set below a minimum price which is the
highest of:
o the nominal value of a share;
o the average closing price of the shares on the HKSE as stated in
the HKSE's quotation sheets for the five trading days immediately
preceding the date of grant of the option; and
o the closing price of our shares on the HKSE as stated in the
HKSE's quotation sheets on the date of grant of the option.
On February 24, 2003, our board of directors approved to grant
options in respect of 42,050,000 shares to our senior management under the
2002 Share Option Scheme. The exercise price for the options is HK$2.108 per
share. On February 5, 2004, our board of directors approved a grant of options
in respect of 50,700,000 shares to our senior management under the 2002 Share
Option Scheme. The exercise price for the options is HK$3.152 per share.
Options granted under the 2002 Share Option Scheme may be exercised, in whole
or in part, in accordance with the following vesting schedule:
o one-third of the shares underlying the option shall vest on the
first anniversary of the date of the grant;
o one-third of the shares underlying the option shall vest on the
second anniversary of the date of the grant; and
o one-third of the shares underlying the option shall vest on the
third anniversary of the date of the grant.
The exercise period for options granted under the 2002 Share Option
Scheme shall end not later than 10 years from the date on which the option is
granted.
As of December 31, 2004, our directors and employees had the
following personal interests in options to subscribe for shares granted under
our share option schemes:
Closing price per share
immediately before the
Number of shares involved in date on which the options
the options outstanding as of were granted
---------------------------------- ----------------------------
Before Adjusted
adjusted as as per
January 1, December 31, per stock stock Exercise
Name of Grantee 2004 2004(1) Date of Grant split split (1) Price(1)
----------------- -------------- ------------- ------------------ ------------ ----------- -------------
(HK$) (HK$) (HK$)
Directors:
Chengyu Fu 350,000 1,750,000 March 12, 2001 -- -- 1.19
104
350,000 1,750,000 August 27, 2001 7.30 1.46 1.232
230,000 1,150,000 February 24, 2003 10.45 2.09 2.108
500,000 2,500,000 February 5, 2004 15.65 3.13 3.152
Han Luo 280,000 1,400,000 March 12, 2001 -- -- 1.19
230,000 1,150,000 August 27, 2001 7.30 1.46 1.232
230,000 1,150,000 February 24, 2003 10.45 2.09 2.108
230,000 1,150,000 February 5, 2004 15.65 3.13 3.152
Longsheng Jiang 280,000 1,400,000 March 12, 2001 -- -- 1.19
230,000 1,150,000 August 27, 2001 7.30 1.46 1.232
230,000 1,150,000 February 24, 2003 10.45 2.09 2.108
230,000 1,150,000 February 4, 2004 15.65 3.13 3.152
Shouwei Zhou 280,000 1,400,000 March 12, 2001 -- -- 1.19
350,000 1,750,000 August 27, 2001 7.30 1.46 1.232
350,000 1,750,000 February 24, 2003 10.45 2.09 2.108
350,000 1,750,000 February 5, 2004 15.65 3.13 3.152
Sunghong Chiu 230,000 1,150,000 February 5, 2004 15.65 3.13 3.152
Evert Henkes 230,000 1,150,000 February 5, 2004 15.65 3.13 3.152
Erwin Schurtenberger 230,000 1,150,000 February 5, 2004 15.65 3.13 3.152
Kenneth S Courtis 230,000 1,150,000 February 5, 2004 15.65 3.13 3.152
Employees:
Other Employees 3,430,000 17,150,000 March 12, 2001 -- -- 1.19
7,660,000 38,300,000 August 27, 2001 7.30 1.46 1.232
7,370,000 36,850,000 February 24, 2003 10.45 2.09 2.108
7,910,000 39,550,000 February 5, 2004 15.65 3.13 3.152
----------
(1) Adjustment has been made to take account of the subdivision of issued and
unissued shares of HK$0.10 each into five shares of HK$0.02 each
effective on March 17, 2004.
As of June 8, 2005, 2,300,100 options granted under our share option
schemes have been exercised.
On April 1, 2005, Dr. Erwin Schurtenberger resigned from our board.
He also surrendered the share options we granted to him upon resignation.
The weighted average fair value of the options granted under the
Pre-Global Offering Share Option Scheme, the 2001 Share Option Scheme and the
2002 Share Option Scheme at the grant dates was HK$0.84. This was estimated
using the Black-Scholes option pricing model under the following assumptions:
risk-free interest rates of 5.25%, expected volatility of 44%, an expected
life of five years and an expected dividend yield of 2.0%. The assumptions on
which the option pricing model is based represent the subjective estimations
of our directors as to the circumstances existing at the time the options were
granted.
For further details about our share option schemes, see notes 3 and
28 to our consolidated financial statements attached to this annual report.
As of June 8, 2005, none of our officers and directors owned 1% or
more of our shares including the shares underlying the stock options granted
as of that date.
105
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information regarding the ownership of
our outstanding shares by major shareholders as of June 8, 2005.
Shareholder Number of Shares Owned Percentage
----------------------------- ---------------------- ----------
CNOOC(1)..................... 29,000,000,000 (2) (3) 70.64%(3)
---------
(1) CNOOC owns our shares indirectly through its wholly owned subsidiaries,
CNOOC (BVI) Limited and Overseas Oil & Gas Corporation Ltd.
(2) On March 17, 2004, our shareholders approved a five-for-one stock split
of our shares. The stock split was effected by dividing our shares of
HK$0.10 each into the shares of HK$0.02 each. Accordingly, the number of
shares owned by CNOOC changed from 5,800,000,000 to 29,000,000,000 as a
result of the stock split.
(3) In 2004, we repurchased a total of 18,453,000 shares in the open market
based on the general mandates approved by our shareholders on May 29,
2003 and June 14, 2004. For further details about our share buybacks, see
"Item 16E--Purchases of Equity Securities by the Issuer and Affiliated
Purchasers."
Our major shareholder listed above does not have different voting
rights. Except as set forth in the above table, we are not aware of any
holders of more than 5% of our shares. Nor are we aware of any significant
changes in the percentage ownership of our major shareholder over the course
of the past three years. To our knowledge, no arrangements are currently in
place that could lead to a change of control of our company.
As of June 8, 2005, 7,463,545 American depositary shares were
outstanding in the United States, representing approximately 1.8% of our then
outstanding shares. At such date, the number of registered American depositary
share holders in the United States was 17.
B. RELATED PARTY TRANSACTIONS
Overview
We regularly enter into transactions with related parties, including
CNOOC and its subsidiaries. Since CNOOC indirectly owns an aggregate of
approximately 70.64% of our issued share capital, some of these transactions
constitute connected transactions under the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited, or the Hong Kong Stock
Exchange Listing Rules, and are regulated by the Hong Kong Stock Exchange.
Under the Hong Kong Stock Exchange Listing Rules, many of these
connected transactions normally would require full disclosure and the prior
approval of our independent shareholders. However, since the connected
transactions are carried out in the ordinary and usual course of business and
occur on a regular basis on normal commercial terms and on terms that are fair
and reasonable as far as our shareholders are concerned, the Hong Kong Stock
Exchange has granted us a waiver from strict compliance with requirements of
the Hong Kong Stock Exchange Listing Rules. The waiver categorizes and limits
the value of our various connected transactions.
We originally obtained a waiver from the Hong Kong Stock Exchange on
April 3, 2001, shortly after our shares were listed on the Hong Kong Stock
Exchange. This waiver expired on December 31, 2002, and we obtained a new
waiver from the Hong Kong Stock Exchange on January 7, 2003. The new waiver
covers the period from January 1, 2003 to December 31, 2005.
The Hong Kong Stock Exchange required us to obtain the approval of
our independent shareholders for the proposed continuing connected
transactions before it would grant us the new waiver. As an interested
shareholder, CNOOC abstained from the shareholder vote on the proposed
continuing connected transactions. We appointed an independent board committee
to advise the independent shareholders on whether the terms of the proposed
continuing connected transactions were in our interest and were fair and
reasonable so far as the independent shareholders were concerned. An
independent financial advisor, Cazenove Asia Limited, advised the independent
board committee on the terms of the
106
continuing connected transactions. Our independent shareholders approved the
proposed connected transactions at an extraordinary general meeting on
December 23, 2002.
Categories of Connected Transactions
Our ongoing connected transactions in respect of which we were
granted a waiver fall into the following eight categories:
o Contracts with foreign petroleum companies;
o Trademark license agreements;
o Lease agreement in respect of the Nanshan terminal;
o Provision of materials, utilities and ancillary services;
o Technical services;
o Research and development services;
o Lease and property management services; and
o Sales of crude oil, condensate oil and liquefied petroleum gas.
Contracts with foreign petroleum companies. In preparation for our
initial public offering, CNOOC transferred to us all of its rights and
obligations under all existing and any future production sharing contracts
with various international oil and gas companies. As required by PRC law,
CNOOC retained certain administrative functions and will remain a party to the
production sharing contracts. PRC law requires a State-run entity, such as
CNOOC, to negotiate and conclude an initial production sharing contract with a
foreign partner offshore China. New production sharing contracts continue to
be entered into between CNOOC and foreign partners, primarily through bidding
organized by CNOOC and, to a lesser extent, through direct negotiation.
Trademark license agreements. CNOOC has licensed to us two "CNOOC"
trademarks under non-exclusive license agreements that will expire on
September 8, 2008. We paid a nominal amount of Rmb 1,000 for each of the
trademarks. The registrations for the two trademarks will expire on December
6, 2008 and April 20, 2009, respectively. CNOOC has undertaken that so long as
it is our controlling shareholder, it will renew the trademark registrations
to enable us to continue using them without any additional consideration.
Lease agreement in respect of the Nanshan Terminal. Under an
agreement dated September 9, 1999, CNOOC has granted us the right to use the
Nanshan Terminal, Yacheng 13-1, free-of-charge for a period of 20 years. We
use the property to process natural gas.
Provision of materials, utilities and ancillary services. Various
subsidiaries of CNOOC provide us with the use of certain facilities and
ancillary services and products, including:
o materials for offshore oil and gas production (including cement,
diesel oil, mud, fuels, barite and paint);
o oil and gas production labor services;
o warehousing and storage;
o road transportation services;
o telecommunication and network services;
107
o wharf services;
o construction services, including the construction of roads,
piers, buildings, plants and embankment;
o major equipment maintenance and repair works;
o medical, child care and social welfare services;
o water, electricity and heat supply;
o security and fire services; technical training; accommodation;
o repair and maintenance of buildings; and
o catering services.
Under agreements between these subsidiaries of CNOOC and us, the
facilities and ancillary products and services are to be provided at:
(i) government-prescribed prices; or
(ii) where there is no government-prescribed price, market prices,
including the local or national market prices; or
(iii) when neither (i) nor (ii) is applicable, the cost to CNOOC's
associates of providing the relevant materials, utilities and
ancillary services, including the cost of sourcing or purchasing
from third parties, plus a margin of not more than 5%, before
any applicable taxes.
The prices, volumes and other terms of the agreements are reviewed by
the parties annually. If any of the terms are amended, the parties must enter
into a supplemental agreement no later than 60 days prior to the end of the
financial year preceding the financial year in which the amendment takes
effect. If the parties fail to reach an agreement by then, the existing terms
of the supply agreement will continue to apply until the parties agree on the
terms of the supplemental agreement. We have undertaken to the Hong Kong Stock
Exchange that we will comply with the provisions of the Hong Kong Stock
Exchange Listing Rules with respect to any supplemental agreements.
For the three years ended December 31, 2004, the amounts we paid to
subsidiaries of CNOOC for these services were approximately Rmb 789 million,
Rmb 1,018 million and Rmb 1,296 million, respectively, representing 3.0%, 2.5%
and 2.3%, respectively, of our total revenues in that year.
Technical services. Various subsidiaries of CNOOC, including China
Oilfield Services Limited and CNOOC Offshore Oil Engineering Company Limited,
provide us with technical and labor services for our offshore oil and gas
production activities, including:
o offshore drilling;
o ship tugging, oil tanker transportation and security services;
o well surveys, well logging, well cementing and other related
technical services;
o collection of geophysical data, ocean geological prospecting, and
data processing;
o platform fabrication service and maintenance; and
o design, construction, installation and test of offshore and
onshore production facilities.
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For the three years ended December 31, 2004, the amounts we paid to
subsidiaries of CNOOC for these services totaled approximately Rmb 3,280
million, Rmb 3,828 million and Rmb 6,362 million, respectively, representing
12.4%, 9.3% and 11.5%, respectively, of our total revenue in that year. We
generally conduct an open bidding process to select these services providers
and the charges for these services are based on arm's-length negotiations
between the parties and reflect considerations such as volume of sales, length
of contracts, overall customer relationship and other market factors.
Research and development services. Various subsidiaries and
affiliates of CNOOC, including CNOOC Research Center, have been providing us
with research and development services, including:
o geophysical exploration services;
o seismic data processing;
o comprehensive exploration research services; and
o information technology services.
In July 2003, we established our own research center, CNOOC (China)
Limited Research Center, to undertake most of our research and development
activities.
During the three years ended December 31, 2002, 2003 and 2004, we
paid approximately Rmb 110 million, Rmb 56 million and Rmb 8 million,
respectively, to CNOOC Research Center for its provision of general research
and development services. We occasionally also hired research institutes,
including CNOOC Research Center, through an open bidding process for specific
research and development projects.
Lease and property management services. We have entered into lease
and property management agreements with CNOOC and its subsidiaries for
premises located in Beijing, Tianjin, Zhanjiang, Shanghai and Shenzhen in the
PRC and in Singapore. Most of the premises are necessary for our operations,
and the agreements are based on normal commercial terms. For the three years
ended December 31, 2004, the aggregate rentals and management fees payable by
us to CNOOC and its subsidiaries were approximately Rmb 54 million, Rmb 57
million and Rmb 77 million, respectively.
Sales of crude oil, condensate oil and liquefied petroleum gas. We
sell crude oil, condensate oil and liquefied petroleum gas to affiliates of
CNOOC that engage in the downstream petroleum business. The prices for these
products are based on prices in the international market. For the three years
ended December 31, 2004, subsidiaries of CNOOC paid us approximately Rmb 4,362
million, Rmb 8,324 million and Rmb 13,946 million, respectively, representing
approximately 16.5%, 20.3% and 25.3% of our total revenues for the respective
periods.
Waiver Conditions
The waiver granted by the Hong Kong Stock Exchange to us in January
2003 contains the following typical conditions:
i. in relation to the ongoing connected transactions referred to in
the paragraphs headed "Contracts with foreign petroleum
companies," "Trademark license agreements" and "Lease agreement
in respect of the Nanshan Terminal" the transactions, and the
respective agreements (if any) governing such transactions, must
be on terms that are fair and reasonable so far as our
shareholders are concerned and in relation to the ongoing
connected transactions referred to in the paragraphs headed
"Provision of materials, utilities and ancillary services,"
"Technical services," "Research and development services," "Lease
and property management services" and "Sales of crude oil,
condensate oil and liquefied petroleum gas" the transactions, and
the respective agreements (if any) governing such transactions
must be:
a. entered into by us in our ordinary and usual course of
business;
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b. either on normal commercial terms or, where there is no
available comparison, on terms no less favorable than those
available to or from independent third parties; and
c. on terms that are fair and reasonable so far as our
shareholders are concerned;
ii. brief details of the continuing connected transactions in each
year as required by Rule 14.25(1)(A) to (D) of the Hong Kong
Stock Exchange Listing Rules then in force before March 31, 2004
(i.e., the date or period of the transaction, the parties thereto
and a description of their connected relationship, a brief
description of the transaction and the purpose of the
transaction, the total consideration and the terms, and the
nature and the extent of the interest of the connected person in
the transaction), must be disclosed in our annual report and
accounts for the relevant year;
iii. our independent non-executive directors must review annually the
transactions and confirm, in our annual report and accounts for
the year in question, that such transactions have been conducted
in the manner stated in (i) above and, where applicable, within
the annual limit stated in (v) below;
iv. our auditors must carry out review procedures annually in
relation to the connected transactions and must confirm in
writing whether the transactions:
a. received the approval of our board of directors;
b. have been entered into in accordance with the pricing policies
as stated in our financial statements; and
c. have been entered into in accordance with the terms of the
agreement governing the transactions or, where there is no
agreement, on terms that are not less favorable than terms
available to or from independent third parties;
For the purpose of the above review by our auditors, CNOOC has
undertaken to us that it will provide the auditors with access to its relevant
accounting records;
v. the aggregate annual volume of transactions shall not exceed the
proposed annual limits set out in the following table:
-----------------------------------------------------------------------------------------------------
Transaction Annual Limit Basis for Determining the Annual Limits
-----------------------------------------------------------------------------------------------------
Materials, 10% of our audited Under our original waiver, the annual limit for
utilities and consolidated total this category of transactions was 3.91% of our
ancillary revenues in the preceding total revenues. The new annual limit is based on
services supply financial year past transaction amounts and future projections.
agreements We believe that new projects warrant the
additional flexibility.
-----------------------------------------------------------------------------------------------------
Technical In respect of the Under our original waiver, the maximum amount for
services three financial years this category of transactions was Rmb 2,367 million
ending December 31, for the year ended December 31, 2002. The new
2005, Rmb 5,853 annual limits take into consideration continued
million, Rmb 7,338 expansion of existing oilfields and the
million and Rmb 4,880 development of two new oilfields in the Bohai Bay.
million, respectively
-----------------------------------------------------------------------------------------------------
Research and In respect of the three Under our original waiver, the annual limit for
development financial years ending this category of transactions was Rmb 52 million.
services for December 31, 2005, Rmb The new annual limits are based on the amounts in
particular 141 million, Rmb prior years and a projection of
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projects 148 million and Rmb 153 our future needs for such services.
million, respectively
-----------------------------------------------------------------------------------------------------
Sales of crude In respect of the three Under our original waiver, the maximum amount for
oil, condensate financial years ending this category of transactions was Rmb 1,950
oil and December 31, 2005, 42%, million (representing 18% of our audited
liquefied 56% and 82%, respectively, consolidated revenues for the year ended December
petroleum gas of our audited 31, 2002). The new annual limits are based on the
consolidated total amount of past sales and expected increases in
revenues in the preceding this category because of the ongoing development
financial year of existing oilfields and the development of two
new oilfields in the Bohai Bay. The increases
also reflect our anticipated need to use CNOOCs
refining processes for heavy crude oil from new
developments and the possibility that we may sell
an increasing proportion of our oil and gas to
CNOOC because of generally lower transportation
costs.
-----------------------------------------------------------------------------------------------------
General research Rmb 110 million The new annual limit for this category of
and development transactions is the same as the limit under the
services agreement original waiver granted by the Hong Kong Stock
Exchange and takes into consideration our
anticipated need for these services.
-----------------------------------------------------------------------------------------------------
Lease and Rmb 78 million Under our original waiver, the maximum amount for
management this category of transactions was Rmb 49 million.
services The new waiver amount is based on possible future
expansion and the unavailability of alternative
providers.
-----------------------------------------------------------------------------------------------------
vi. we undertook that if any of the terms of the agreements or
arrangements referred to above are altered or if we enter into
any new agreements with any connected persons (within the meaning
of the Hong Kong Stock Exchange Listing Rules) in the future or
if the limits stated in (v) above are exceeded, we will comply
with the standard disclosure and shareholder approval provisions
in the Hong Kong Stock Exchange Listing Rules unless we apply for
and obtain a separate waiver from the Hong Kong Stock Exchange.
In addition to the connected transactions disclosed above, from time
to time we place cash deposits with CNOOC Finance Corporation Limited, or
CNOOC Finance. CNOOC Finance is a majority-owned subsidiary of CNOOC and
operates as a non-bank finance company under the supervision of the People's
Bank of China, or PBOC, the PRC central bank. We acquired a 31.8% interest in
CNOOC Finance in September 2003. The interest rates offered by CNOOC Finance
were the same as the rates promulgated by the PBOC which were applicable to
account deposits with PRC banks or finance companies and ranged from 0.72% to
2.07% per annum. As of December 31, 2004, we had cash and cash equivalents and
time deposits aggregating Rmb 3,298 million placed with CNOOC Finance. On
April 8, 2004, we entered into a framework agreement with CNOOC Finance.
Pursuant to the framework agreement, we and our subsidiaries will from time to
time utilize financial services from CNOOC Finance, including placing of cash
deposits and other settlement services. The maximum outstanding balance for
deposits, including interest receipts in respect of these deposits, placed
with CNOOC Finance during the term of the framework agreement will not exceed
Rmb 6,800 million. Such arrangement with CNOOC Finance was approved in the
extraordinary general meeting of our shareholders on April 28, 2004.
111
During 2004, we also imported oil into the PRC for trading, using
CNOOC's import license. As of December 31, 2004, total sales to our customers
through such arrangements amounted to approximately Rmb 446,923,000 (2003: Rmb
1,470,832,000). The commission paid by the third party customers to CNOOC for
the year amounted to approximately Rmb 2,682,000 (2003: Rmb 8,825,000).
For further information regarding related party transactions, see
note 26 to our consolidated financial statements attached to this annual
report.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See pages beginning on page F-1 following Item 19.
Legal Proceedings
We are not a defendant in any material litigation, claim or
arbitration, and we know of no pending or threatened proceeding which would
have a material adverse effect on our financial condition.
Dividend Distribution Policy
We intend to declare and pay dividends in the future. The payment and
the amount of any dividends will depend on our results of operations, cash
flow, financial condition, the payment by our subsidiaries of cash dividends
to us, future prospects and other factors which our directors may consider
relevant. In addition, as our controlling shareholder, CNOOC will be able to
influence our dividend policy. Holders of our shares will be entitled to
receive such dividends declared by our board of directors pro rata according
to the amounts paid up or credited as paid up on the shares. Subject to the
factors described above, we currently intend to pursue a dividend policy
consistent with other international oil and gas exploration and production
companies. Based on current share prices and dividends of international oil
and gas exploration and production companies, we currently intend to target an
initial dividend yield of approximately 1% to 3%.
Dividends may be paid only out of our distributable profits as
permitted under Hong Kong law, which does not restrict the payment of
dividends to nonresident holders of our securities. To the extent profits are
distributed as dividends, such portion of profits will not be available to be
reinvested in our operations.
Holders of our ADSs will be entitled to receive dividends, subject to
the terms of the deposit agreement, to the same extent as holders of our
shares, less the fees and expenses payable under the deposit agreement. Cash
dividends will be paid to the depositary in Hong Kong dollars and, will be
converted by the depositary into U.S. dollars and paid to holders of ADSs.
Stock dividends, if any, will be distributed to the depositary and will be
distributed by the depositary, in the form of additional ADSs, to holders of
the ADSs.
Following the reorganization of CNOOC and our establishment as a
separate legal entity in October 1999, we paid a dividend of Rmb 1,045.4
million in 1999 and declared and paid a final dividend of Rmb 6,426.4 million
in 2000. In 2001, 2002 and 2003, we declared and paid dividends totaling Rmb
871.1 million, Rmb 2,265.1 million and Rmb 5,403.7 million, respectively. In
2004, we declared dividends totaling Rmb 6,101.4 million (US$737.2 million)
and paid dividends totaling Rmb 6,091.4 million (US$736.0 million). The
difference between the amount of dividends declared and paid in 2004 was
because that we repurchased and canceled some of our shares in 2004. Out of
the total dividends declared and paid in 2004, Rmb 2,617.5 million (US$316.3
million) was attributable to a special interim dividend to replace the 2003
final dividend and final special dividend proposed by our board of directors
112
in 2003. On May 25, 2005, we declared a final dividend of Rmb 3,493.4 million
(US$422.1 million) for fiscal year 2004, which was paid in full on June 7,
2005. The amount of dividends we paid historically is not indicative of the
dividends that we will pay in the future.
Substantially all our dividend payments result from dividends paid to
us by CNOOC China Limited. CNOOC China Limited must follow the laws and
regulations of the PRC and its articles of association in determining its
dividends. As a wholly foreign owned enterprise in China, CNOOC China has to
provide for a reserve fund and staff and workers' bonus and welfare fund, each
of which is appropriated from net profit after taxation but before dividend
distribution according to the prevailing accounting rules and regulations in
the PRC. CNOOC China is required to allocate at least 10% of its net profit to
the reserve fund until the balance of this fund has reached 50% of its
registered capital. Appropriations to the staff and workers' bonus and welfare
fund, which are determined at the discretion of CNOOC China's directors, are
charged to expense as incurred in the consolidated financial statements, which
were prepared under Hong Kong GAAP. None of CNOOC China's contributions to
these statutory funds may be used for dividend purposes.
For the years ended December 31, 2002, 2003 and 2004, CNOOC China
Limited made the following appropriations to the statutory reserves:
For the year ended For the year ended For the year ended
December 31, 2002 December 31, 2003 December 31, 2004
------------------------- ------------------------ -------------------------
Percentage Percentage Percentage
of Net Rmb of Net Rmb of Net Rmb
Profits (in millions) Profits (in millions) Profits (in millions)
---------- ------------- ---------- ------------- ---------- -------------
Reserve fund........................... 10% 697.1 10% 818.1 10% 1,363.1
Staff and workers' bonus and
welfare fund........................ -- -- -- -- -- --
B. SIGNIFICANT CHANGES
First Quarter 2005 Financial and Operating Results
During the first quarter of 2005, our unaudited revenues from the
sale of oil and gas were Rmb 11.4 billion. Our daily average crude oil
production was 351,579 barrels per day during this period, compared to 306,980
barrels per day in 2004, while our daily average natural gas production was
348 million cubic feet per day, compared to 323 million cubic feet per day in
2004. The average net realized price of our crude oil was US$41.73 per barrel
during the first quarter of 2005, compared to US$29.79 per barrel in 2004,
while the average net realized price of our natural gas was US$2.92 per
thousand cubic feet, compared to US$2.80 per thousand cubic feet in 2004.
Changes of Directors and Management
Dr. Mark Qiu resigned as our Chief Financial Officer and Senior Vice
President with effect from January 1, 2005 and March 25, 2005, respectively.
Mr. Hua Yang succeeded Dr. Mark Qiu as our Chief Financial Officer on January
1, 2005.
Dr. Erwin Schurtenberger resigned as our independent non-executive
director on April 1, 2005 due to health-related reasons. He maintains his
position as a member of our International Advisory Board after his resignation
from our board of directors. Mr. Aloysius Hau Yin Tse succeeded Dr. Erwin
Schurtenberger as an independent non-executive director of our company with
effect from June 8, 2005.
Mr. Longsheng Jiang resigned from our board of director on June 1,
2005. Mr. Guangqi Wu succeeded Mr. Longsheng Jiang as a director of our
company on the same date.
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ITEM 9. THE OFFER AND LISTING
Not applicable, except for Item 9.A.4 and Item 9.C.
We listed our shares on the Hong Kong Stock Exchange and our ADSs on
the New York Stock Exchange in February 2001. Our shares are listed on the
Hong Kong Stock Exchange under the stock code "883" and our ADSs are listed on
the New York Stock Exchange under the symbol "CEO." On March 17, 2004, our
shareholders approved a five-for-one stock split of our shares. The stock
split was effected by dividing each of our issued and unissued shares of
HK$0.10 each into five shares of HK$0.02 each. The ratio of our American
depositary shares listed on the New York Stock Exchange also changed such that
each ADS now represents 100 subdivided shares of HK$0.02 each, as opposed to
20 shares of HK$0.10 each prior to the stock split. The following table sets
forth, for the periods indicated, the high and low closing prices per share,
as reported on the Hong Kong Stock Exchange and adjusted retroactively to
reflect the stock split, and per ADS, as reported on the New York Stock
Exchange.
Hong Kong Stock Exchange New York Stock Exchange
-------------------------- -------------------------
Period High Low High Low
(HK$ per share) (US$ per ADS)
2002....................... 2.33 1.48 29.44 19.01
2003....................... 3.54 1.96 42.78 23.83
2004....................... 4.53 2.75 58.73 35.00
2003 Financial Quarters
1st Quarter............. 2.19 1.96 26.72 23.83
2nd Quarter............. 2.32 1.98 29.00 24.11
3rd Quarter............. 2.92 2.28 37.45 30.18
4th Quarter............. 3.54 2.66 42.78 34.52
2004 Financial Quarters
1st Quarter............. 3.4 2.95 43.65 38.80
2nd Quarter............. 3.45 2.65 44.23 35.00
3rd Quarter............. 4.07 3.20 52.60 41.75
4th Quarter............. 4.53 3.97 58.73 51.21
2005 Financial Quarter
1st Quarter............. 4.57 3.85 57.91 49.50
Last Six Months
December 2004........... 4.40 4.05 56.39 52.28
January 2005............ 4.18 3.85 53.54 49.50
February 2005........... 4.53 3.88 57.40 49.83
March 2005.............. 4.57 4.20 57.91 53.82
April 2005.............. 4.40 3.95 55.75 51.20
May 2005................ 4.40 4.08 56.59 52.62
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ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
We were incorporated with limited liability on August 20, 1999 in
Hong Kong under the Companies Ordinance of Hong Kong. Our company registration
number in Hong Kong is 685974. Under section three of our memorandum of
association, we have the capacity and the rights, powers and privileges of a
natural person and in addition and without limit, we may do anything which we
are permitted to do by any enactment or rule of law. The following are
summaries of provisions of our memorandum of association and articles of
association and the Companies Ordinance (Chapter 32 of the Laws of Hong Kong).
For further details, you should read our memorandum of association which was
filed as an exhibit to our registration statement on Form F-1 (Registration
No. 333-10862) and our articles of association, as amended, which is filed as
an exhibit to this annual report.
Issue of Shares
Under the Companies Ordinance of Hong Kong, our directors may,
without prior approval of the shareholders, offer to allot new shares in our
company to existing shareholders pro rata. The directors may not allot new
shares of our company in any other manner without the prior approval of the
shareholders in a general meeting. Any approval given in a general meeting
shall continue in force until the earliest to occur of the following events:
o the conclusion of the following annual general meeting,
o the expiration of the period within which the next annual general
meeting is required by law to be held, or
o when revoked or varied by an ordinary resolution of the
shareholders, in a general meeting of our company.
If such approval is given, the unissued shares of our company shall
be at the disposal of the board of directors. The directors may offer, allot,
grant options over or otherwise dispose of the unissued shares to persons at
such times and for such consideration and upon such terms and conditions as
the directors may determine.
In accordance with the listing rules of the Hong Kong Stock Exchange,
any such approval of the shareholders must be limited to shares with an
aggregate nominal value not exceeding 20% of the aggregate value of our share
capital in issue plus the aggregate nominal amount of share capital
repurchased by us since the granting of such approval.
Dividends
Subject to the Companies Ordinance of Hong Kong, the shareholders in
a general meeting may declare dividends to be paid to shareholders. However,
under our articles of association, dividends cannot be declared in excess of
the amount recommended by the board of directors.
In addition to dividends declared in a general meeting, the board of
directors may declare and pay to the shareholders interim dividends as appear
to the board of directors to be justified by our financial position. The board
of directors may also pay any fixed dividend on any shares of our company
semi-annually or at other suitable intervals, whenever our financial position,
in their opinion, justifies such payment.
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Winding Up
If we are wound up, the liquidator may, with the sanction of a
special resolution, divide among our shareholders in specie or in kind the
whole or any part of our assets or vest any part of our assets in trustees
upon such trusts for the benefit of our shareholders or any of them as the
resolution shall provide.
Voting Rights
Under the Companies Ordinance of Hong Kong, any action to be taken by
the shareholders in a general meeting requires the affirmative vote of either
an ordinary or a special resolution passed at such meeting.
o An ordinary resolution is a resolution passed by the majority of
shareholders that are entitled to, and do, vote in person or by
proxy at a general meeting.
o A special resolution is a resolution passed by not less than 75%
of shareholders that are entitled to, and do, vote in person or
by proxy at a general meeting.
Generally, resolutions of shareholders are passed by ordinary
resolution. However, the Companies Ordinance of Hong Kong provides that some
matters may only be passed as special resolutions. These matters include:
o alteration of the object clause,
o alteration of the articles,
o change of a company's name,
o reduction of share capital, and
o voluntary winding up.
Voting at any meeting of shareholders is by a show of hands unless a
poll is demanded. If voting is by a show of hands, every shareholder who is
present at the meeting in person or by proxy has one vote. On a poll, every
shareholder who is present in person or by proxy has one vote for every share
held or represented by him. A poll may be demanded in some circumstances by:
o the chairman of the meeting,
o at least three shareholders present in person or by proxy and
entitled to vote at the meeting,
o shareholders present in person or by proxy who represent in the
aggregate not less than 10% of the total voting rights of all
shareholders having the right to attend and vote at the meeting,
or
o shareholders present in person or by proxy and holding shares
conferring a right to amend and vote at the meeting on which
there have been paid up sums in the aggregate equal to not less
than 10% of the total sum paid up on all shares conferring that
right.
Any action to be taken by the shareholders requires the affirmative
vote of the requisite majority of the shares at a meeting of shareholders.
There are no cumulative voting rights. Accordingly, the holders of a majority
of the shares voting for the election of directors can elect all the directors
if they choose to do so.
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General Meetings
We are required to hold an annual general meeting of shareholders
each year within 15 months from the date of our last annual general meeting.
We may also hold extraordinary general meetings of shareholders from time to
time. Our board of directors may convene an extraordinary general meeting at
will, and shall on requisition in accordance with the Companies Ordinance of
Hong Kong, proceed to convene an extraordinary general meeting. Our annual
general meeting and any extraordinary general meeting called for the purpose
of passing a special resolution requires at least 21 days' prior notice, and
any other general meeting requires at least 14 days' prior notice. The notice
must specify the place, day and time of the meeting and, in the case of
special business, the general nature of that business. The quorum for a
general meeting is two shareholders present in person or by proxy. If within
thirty minutes from the time appointed for the meeting a quorum is not
present, the meeting, if convened upon requisition in accordance with the
Companies Ordinance of Hong Kong, must be dissolved; but in any other case it
must stand adjourned to the same day in the next week at the same time and
place, or to such other day, time and place as the Chairman of the meeting may
determine. If at such adjourned meeting a quorum is not present within thirty
minutes from the time appointed for the meeting, the member or members present
in person or by proxy shall be a quorum and may transact the business for
which the meeting is called.
Modification of Rights
Subject to the Companies Ordinance of Hong Kong, any of the rights
attaching to any class of shares, unless otherwise provided for by the terms
of issue of the shares of that class, may be varied or abrogated with the
written consent of the holders of not less than 75% of the issued shares of
that class or with the sanction of a special resolution passed at a separate
general meeting of the holders of shares of that class.
Borrowing Powers
Our board of directors may exercise all the powers of our company to
borrow money and to mortgage or charge all or any part of our undertaking,
property and asserts, whether present or future, and uncalled capital. Our
board of directors may issue debentures, debenture stock, bonds or other
securities of our company, whether outright or as collateral security for any
debt, liability or obligation of our company or of any third party. These
borrowing powers are subject to variation by a special resolution of our
company.
Interested Transactions
Subject to the exceptions described below, none of our directors may
vote on any contract, arrangement or proposal in which the director or any of
his or her associates is materially interested. For this purpose, existence of
material interest is presumed if a company, in which the director and/or his
or her associates beneficially own 5% or more of any class of its shares or
voting rights, is materially interested in the transaction. Our directors may,
however, vote on the following matters:
o any contract or arrangement to give security or indemnity to the
director or his or her associates for money lent or obligations
undertaken by such director or his or her associates at the
request of or for the benefit of our company or subsidiaries;
o any contract or arrangement to give security or indemnity to a
third party for our debts or debts of our subsidiaries for which
such director or his or her associates assumed responsibility by
giving guarantee or security;
o any contract or arrangement concerning offering of securities by
us (or any company which we may promote or be interested in
purchasing) for which the director or his or her associates
participate in the underwriting or sub-underwriting;
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o any contract or arrangement in which the director or his or her
associates are interested only by virtue of their interest in our
securities;
o any contract or arrangement concerning any other company in which
the director or his or her associates are interested as an
officer or executive or a shareholder in which the director or
his or her associates are beneficially interested in shares of
that company other than a company in which they in aggregate
beneficially own more than 5% of the issued shares of any class
or voting rights;
o any proposal or arrangement concerning employee benefits that do
not provide privileges to our directors or their associates,
including employee share schemes and retirement, death or
disability benefits schemes; and
o any proposal or arrangement concerning the adoption, modification
or operation of any employees' share scheme involving the issue
or grant of options over shares or other securities by us to, or
for the benefit of, our employees or employees of our
subsidiaries under which the director or his or her associates
may benefit.
C. MATERIAL CONTRACTS
Incorporated by reference to our registration statement on Form F-1
(Registration No. 333-10862), to which most of our current material contracts
were filed as exhibits. For additional information on our material contracts,
see "Item 7--Major Shareholders and Related Party Transactions--Related Party
Transactions" and "Item 19--Exhibits."
D. EXCHANGE CONTROLS
A portion of our Renminbi revenue may need to be converted into other
currencies by our wholly owned principal operating subsidiary in the PRC,
CNOOC China Limited, to meet our foreign currency obligations. We have
substantial requirements for foreign currency, including:
o debt service on foreign currency denominated debt;
o overseas acquisitions of oil and gas properties;
o purchases of imported equipment; and
o payment of dividends declared in respect of shares held by
international investors.
CNOOC China Limited may undertake current account foreign exchange
transactions without prior approval from the State Administration for Foreign
Exchange. It has access to current account foreign exchange so long as it can
produce commercial documents evidencing such transactions and provided that
they are processed through certain banks in China. Foreign exchange
transactions under the capital account, including principal payments with
respect to foreign currency denominated obligations, will be subject to the
registration requirements of the State Administration for Foreign Exchange.
Since 1994, the conversion of Renminbi into Hong Kong and United
States dollars has been based on rates set by the People's Bank of China,
which are set daily based on the previous day's PRC interbank foreign exchange
market rate and current exchange rates on the world financial markets. The PRC
government has stated publicly that it intends to make Renminbi freely
convertible in the future. However, we cannot predict when the PRC government
will allow free conversion of Renminbi into foreign currencies. Renminbi
devaluation and fluctuations in exchange rates may adversely affect the value,
translated or converted into U.S. dollars or Hong Kong dollars, of our net
assets, earnings and any declared dividends. Renminbi devaluation and exchange
rate fluctuations may adversely affect our results of operations and financial
condition and may result in foreign exchange losses because of our substantial
U.S. dollar and Japanese yen-denominated debts, expenses and other
requirements. In addition, we may not be able to increase the Renminbi prices
of our domestic sales to offset fully any
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depreciation of the Renminbi due to political, competitive or social
pressures. We do not hedge exchange rate fluctuations between the Renminbi and
foreign currencies and currently have no plans to do so. For further
information on foreign exchange risks, foreign exchange rates and hedging
activities, see "Item 3--Key Information--Selected Financial Data" and "Item
11--Qualitative and Quantitative Disclosure about Market Risk."
E. TAXATION
The taxation of income and capital gains of holders of our shares or
ADSs is subject to the laws and practices of Hong Kong and of jurisdictions in
which holders of our shares or ADSs are resident or otherwise subject to tax.
The following is a summary of taxation provisions that are anticipated to be
material based on current law and practice, is subject to change and does not
constitute legal or tax advice. The discussion does not deal with all possible
tax consequences relating to an investment in our shares or ADSs. In
particular, the discussion does not address the tax consequences under state,
local and other laws, such as non-Hong Kong and non-U.S. federal laws.
Accordingly, we urge you to consult your tax adviser regarding the tax
consequences of an investment in our shares and ADSs. The discussion is based
upon laws and relevant interpretations in effect as of the date of this annual
report, all of which are subject to changes. There is no reciprocal tax treaty
in effect between Hong Kong and the United States.
Hong Kong
Tax on Dividends
Under the current practices of the Hong Kong Inland Revenue
Department, no tax is payable in Hong Kong in connection with dividends paid
by us.
Profits Tax
No tax is imposed in Hong Kong in respect of capital gains from the
sale of property, such as the shares and ADSs. Trading gains from the sale of
property by persons carrying on a trade, profession or business in Hong Kong
where such gains are derived from or arise in Hong Kong from such trade,
profession or business will be chargeable to Hong Kong profits tax which is
currently imposed at the rate of 17.5% on corporations and at a maximum rate
of 16% on individuals. Gains from sales of the shares effected on the Hong
Kong Stock Exchange will be considered to be derived from or arise in Hong
Kong. Liability for Hong Kong profits tax would thus arise in respect of
trading gains from sales of shares or ADSs realized by persons carrying on a
business of trading or dealing in securities in Hong Kong.
Stamp Duty
Hong Kong stamp duty, currently charged at the rate of HK$1.00 per
HK$1,000 or part thereof on the higher of the consideration for or the value
of the shares, will be payable by the purchaser on every purchase and by the
seller on every sale of shares. For example, a total of HK$2.00 per HK$1,000
or part thereof is currently payable on a typical sale and purchase
transaction involving shares. In addition, a fixed duty of HK$5 is currently
payable on any instrument of transfer of shares. The withdrawal of shares upon
the surrender of ADRs, and the issuance of ADRs upon the deposit of shares,
will also attract stamp duty at the rate described above for sale and purchase
transactions unless the withdrawal or deposit does not result in a change in
the beneficial ownership of the shares under Hong Kong law. The issuance of
the ADRs upon the deposit of shares issued directly to the depositary or for
the account of the depositary does not attract stamp duty. No Hong Kong stamp
duty is payable upon the transfer of ADSs outside Hong Kong.
Estate Duty
The shares are Hong Kong property under Hong Kong law, and
accordingly such shares may be subject to estate duty on the death of the
beneficial owner of such shares, regardless of the place of the owner's
residence, citizenship or domicile. We cannot assure you that the Hong Kong
Inland Revenue Department will not treat the ADRs as Hong Kong property that
may be subject to estate duty on the
119
death of the beneficial owner of the ADR even if the ADRs are located outside
Hong Kong at the date of such death. Hong Kong estate duty is imposed on a
progressive scale from 5% to 15%. The rate of and the threshold for estate
duty has, in the past, been adjusted on a fairly regular basis. No estate duty
is payable when the aggregate value of the dutiable estate does not exceed
HK$7.5 million, and the maximum rate of duty of 15% applies when the aggregate
value of the dutiable estate exceeds HK$10.5 million. The Hong Kong Government
is considering abolishing estate duty in Hong Kong.
United States
Federal Income Tax Considerations
The following is a summary of United States federal income tax
considerations that are anticipated to be material for U.S. Holders, as
defined below. This summary is based upon existing United States federal
income tax law, which is subject to change, possibly with retroactive effect.
This summary does not discuss all aspects of United States federal income
taxation which may be important to particular investors in light of their
individual investment circumstances, such as investors subject to special tax
rules including: partnerships, financial institutions, insurance companies,
broker-dealers, tax-exempt organizations, and, except as described below,
non-U.S. Holders, or to persons that will hold our shares or ADSs as part of a
straddle, hedge, conversion, or constructive sale transaction for United
States federal income tax purposes or that have a functional currency other
than the United States dollar, all of whom may be subject to tax rules that
differ significantly from those summarized below. In addition, this summary
does not discuss any foreign, state, or local tax considerations. This summary
assumes that investors will hold our shares or ADSs as "capital assets"
(generally, property held for investment) under the United States Internal
Revenue Code. Each prospective investor is urged to consult its tax advisor
regarding the United States federal, state, local, and foreign income and
other tax considerations of the purchase, ownership, and disposition of our
shares or ADSs.
For purposes of this summary, an U.S. Holder is a beneficial owner of
shares or ADSs that is for United States federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation, partnership or other entity created in or
organized under the laws of the United States or any State or
political subdivision thereof;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its
source;
o a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust; or
o a trust that was in existence on August 20, 1996, was treated as
a United States person, for United States federal income tax
purposes, on the previous day, and elected to continue to be so
treated.
A beneficial owner of our shares or ADSs that is not a U.S. Holder is
referred to herein as a "Non-U.S. Holder."
A foreign corporation will be treated as a "passive foreign
investment company" or "PFIC", for United States federal income tax purposes,
if 75% or more of its gross income consists of certain types of "passive"
income or 50% or more of its assets produce or are held for the production of
passive income. Based on our current and projected income, assets, and
activities, we presently believe that we are not a PFIC and do not anticipate
becoming a PFIC. This is, however, a factual determination made on an annual
basis. Because the classification of certain of our interests for United
States federal income tax purposes is uncertain and the PFIC rules are subject
to administrative interpretation, however, no assurance can be given that we
are not or will not be treated as a PFIC. The discussion below under "U.S.
Holders-Dividends" and "U.S. Holders-Sale or Other Disposition of Shares or
ADSs," assumes that we will not be subject to treatment as a PFIC for United
States federal income tax purposes.
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U.S. Holders
For United States federal income tax purposes, a U.S. Holder of an
ADS will be treated as the owner of the proportionate interest of the shares
held by the depositary that is represented by an ADS and evidenced by such
ADS. Accordingly, no gain or loss will be recognized upon the exchange of an
ADS for the holders' proportionate interest in the shares. A U.S. Holder's tax
basis in the withdrawn shares will be the same as the tax basis in the ADS
surrendered therefore, and the holding period in the withdrawn shares will
include the period during which the holder held the surrendered ADS.
Dividends. Any cash distributions paid by us out of our earnings and
profits, as determined under United States federal income tax principles, will
be subject to tax as ordinary dividend income and will be includible in the
gross income of a U.S. Holder upon receipt. Cash distributions paid by us in
excess of our earnings and profits will be treated as a tax-free return of
capital to the extent of the U.S. Holder's adjusted tax basis in our shares or
ADSs, and after that as gain from the sale or exchange of a capital asset.
Dividends paid in Hong Kong dollars will be includible in income in a United
States dollar amount based on the United States dollar to Hong Kong dollar
exchange rate prevailing at the time of receipt of such dividends by the
depositary, in the case of ADSs, or by the U.S. Holder, in the case of shares
held directly by such U.S. Holder. U.S. Holders should consult their tax
advisors regarding the United States federal income tax treatment of any
foreign currency gain or loss recognized on the subsequent conversion of Hong
Kong dollars received as dividends to United States dollars. Dividends
received on shares or ADSs will not be eligible for the dividends received
deduction allowed to corporations.
Under current law, "qualified dividend income" received by an
individual for taxable years beginning after December 31, 2002 and for taxable
years beginning before January 1, 2009 is subject to United States federal
income tax rates lower than those applicable to ordinary income. The top
federal income tax rate on such qualified dividend income received by an
individual is 15%, or 5% for those individuals whose incomes fall in the 10 or
15% brackets. Based upon our existing and anticipated future operations and
current assets, we believe that we are a "qualified foreign corporation" and
that our dividends paid to U.S. Holders who are individuals will be eligible
to be treated as "qualified dividend income" provided that such U.S. Holders
satisfy applicable holding period requirements with respect to the ADSs and
other applicable requirements. Dividends paid by foreign corporations that are
classified as PFICs are not eligible to be treated as "qualified dividend
income". See "PFIC Considerations" below.
Dividends received on shares or ADSs will be treated, for United
States federal income tax purposes, as foreign source income. A U.S. Holder
may be eligible, subject to a number of complex limitations, to claim a
foreign tax credit in respect of any foreign withholding taxes imposed on
dividends received on shares or ADSs. U.S. Holders who do not elect to claim a
foreign tax credit for federal income tax withheld may instead claim a
deduction, for United States federal income tax purposes, in respect of such
withholdings, but only for a year in which the U.S. Holder elects to do so for
all creditable foreign income taxes.
In addition, the United States Treasury has expressed concerns that
parties to whom depositary shares are pre-released may be taking actions that
are inconsistent with the claiming of foreign tax credits by the holders of
ADSs. Accordingly, the analysis of the creditability of foreign withholding
taxes could be affected by future actions that may be taken by the United
States Treasury.
Sale or Other Disposition of Shares or ADSs. A U.S. Holder will
recognize capital gain or loss upon the sale or other disposition of shares or
ADSs in an amount equal to the difference between the amount realized upon the
disposition and the U.S. Holder's adjusted tax basis in such shares or ADSs,
as each is determined in U.S. dollars. Any such capital gain or loss will be
long-term if the shares or ADSs have been held for more than one year and will
generally be United States source gain or loss. The claim of a deduction in
respect of a capital loss, for United States federal income tax purposes, may
be subject to limitations. If a U.S. Holder receives Hong Kong dollars for any
such disposition, such U.S. Holder should consult its tax advisor regarding
the United States federal income tax treatment of any foreign currency gain or
loss recognized on the subsequent conversion of the Hong Kong dollars to
United States dollars.
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PFIC Considerations
If we were to be classified as a PFIC in any taxable year, a U.S.
Holder would be subject to special rules generally intended to reduce or
eliminate any benefits from the deferral of United States federal income tax
that a U.S. Holder could derive from investing in a foreign company that does
not distribute all of its earnings on a current basis. In such event, a U.S.
Holder of the shares or ADSs may be subject to tax at ordinary income tax
rates on (i) any gain recognized on the sales of the shares or ADSs and (ii)
any "excess distribution" paid on the shares or ADSs (generally, a
distribution in excess of 125% of the average annual distributions paid by us
in the three preceding taxable years). In addition, a U.S. Holder may be
subject to an interest charge on such gain or excess distribution. Prospective
investors are urged to consult their tax advisors regarding the potential tax
consequences to them if we are or do become a PFIC, as well as certain
elections that may be available to them to mitigate such consequences.
Non-U.S. Holders
An investment in shares or ADSs by a Non-U.S. Holder will not give
rise to any United States federal income tax consequences unless:
o the dividends received or gain recognized on the sale of the
shares or ADSs by such person is treated as effectively connected
with the conduct of a trade or business by such person in the
United States as determined under United States federal income
tax law, or
o in the case of gains recognized on a sale of shares or ADSs by an
individual, such individual is present in the United States for
183 days or more and certain other conditions are met.
In order to avoid back-up withholding on dividend payments made in
the United States, a Non-U.S. Holder of the shares or ADSs may be required to
complete, and provide the payer with, an Internal Revenue Service Form W-8BEN,
or other documentary evidence, certifying that such holder is an exempt
foreign person.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are also subject to the informational requirements of the Exchange
Act and accordingly file reports and other information with the Securities and
Exchange Commission. You may inspect and copy our reports and other
information we file with the Securities and Exchange Commission at the public
reference facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549.
You may also inspect such documents at the office of the New York Stock
Exchange, Wall Street, New York, New York 10005. Copies of such material may
also be obtained from the Public Reference Section of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information regarding the Washington D.C.
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330 or by contacting the Securities and Exchange Commission over
the internet at its website at http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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Our market risk exposures primarily consists of fluctuations in oil
and gas prices, exchange rates and interest rates.
Commodity Price Risks
We are exposed to fluctuations in prices of crude oil and natural
gas, which are commodities whose prices are determined by reference to
international market prices. International oil and gas prices are volatile and
this volatility has a significant effect on our net sales and net income. We
do not hedge market risk resulting from fluctuations in oil and gas prices.
See "--Overview" and "Item 3--Key Information--Risk Factors--Risks relating to
our business--Our business, revenues and profits fluctuate with changes in oil
and gas prices."
Currency Risk
Our foreign exchange exposure gives rise to market risk associated
with exchange rate movements.
Substantially all of our oil and gas sales are denominated in
Renminbi and U.S. dollars. In the last ten years, the PRC government's policy
of maintaining a stable exchange rate and China's ample foreign reserves have
contributed to the stability of the Renminbi. Recently, there has been wide
expectation in the international market that the Chinese government will
deregulate the Renminbi exchange rate. However, the Chinese government has not
yet determined if or when the exchange rate will be deregulated. Currently,
the Renminbi exchange rate remains stable. In case of any Renminbi exchange
rate deregulation going forward, our existing assets denominated in U.S.
dollars will face book conversion risks from the appreciation of Renminbi. As
we prepaid majority of our Yen-denominated loans in 2002, the balance over
Yen-denominated loans as of the end of 2004 was only 810 million yen.
Currently, since this outstanding of our Yen loans is hedged against foreign
currency swaps, we do not expect any exchange risks relating to Japanese Yen
in the future. For a discussion of our currency risk, see "Item 3--Key
Information--Risk Factors--Risks relating to the PRC--Government control of
currency conversion and future movements in exchange rates may adversely
affect our operations and financial condition."
Interest Rate Risk
We are exposed to interest rate risk arising from our loans. An
upward fluctuation in interest rates increases the cost of new debt. We may
use interest rate swap transactions, from time to time, to adjust our interest
rate exposure when considered appropriate, based on existing and anticipated
market conditions.
To balance our overall debt interest structure and to reduce our
financial cost benefiting from the low interest rate market environment,
during the period from July to September 2003, we arranged for an interest
rate swap with three financial institutions by swapping the offering of US$200
million 10-year global guaranteed notes in 2003 into floating interest rate.
After the swap, we received fixed interest rate of 4.125% and paid floating
interest rate at LIBOR minus 0.771% (weighted average interest rate). During
the first interest swap in November 2003, LIBOR was approximately 1.2%.
Through this swap, we made interest savings of US$2.02 million.
Based on the series of robust economic data announced by the US in
late 2003, we believed that the US economy had entered into a rapid growth
period, with interest rate taking an upward trend. In January 2004, we
captured the opportunity of significant drop of US treasury yield with the
US's announcement of the poor performance of certain economic data, and
terminated the above interest swap arrangement with net gains of US$10
million. This, in addition to the interest savings of US$2.02 million for the
year 2003, resulted in cumulative net gains of US$12.02 million, representing
the reduction of interest rate of the US$200 million guaranteed notes from
4.125% to 3.53%. As of December 31, 2003, our total outstanding debt,
including both foreign currency-denominated and Renminbi-denominated loans,
was US$110.0 million, all of which were fixed rate debts.
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As of the end of 2004, all of our debts were fixed interest rate
debts. The term of the weighted average balance was approximately nine years.
The weighted average interest rates of our debts, including the convertible
bonds issued in December 2004, was 3.6%.
The following table sets forth additional information about the
expected maturity dates of our outstanding debt as of December 31, 2004.
Fair value
2010 as of
and December
2005 2006 2007 2008 2009 after Total 31, 2005
---- ---- ---- ---- ---- ----- ----- ---------
(Rmb in millions, except percentages)
Long-term debt, including current
portion
Fixed rate....................... 24 846 19 -- -- -- 889 968
Average interest rate............ 8.829% 8.962% 4.100% --%
Long-term guaranteed notes
Fixed rate....................... -- -- -- -- 8,164 8,150 16,314 16,428
Average interest rate............ 3.330% 3.330% 3.330% 3.330% 3.330% 5.664%
The above table takes into account our early repayment of certain
loans in 2003. For additional discussions of our market risks, see "Item
3--Key Information--Risk Factors."
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
A. MATERIAL MODIFICATIONS TO THE RIGHTS TO SECURITY HOLDERS
None.
B. USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) We have carried out an evaluation under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries as required to be disclosed
in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported as and when required.
(b) There were no significant changes in our internal controls or, to
our knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Kenneth S. Courtis,
our independent non-executive director, is an audit committee financial expert
serving on our audit committee. Mr. Courtis is independent as defined in the
listing standards of the New York Stock Exchange.
ITEM 16B. CODE OF ETHICS
Our board of directors adopted a Code of Ethics on August 28, 2003 as
a guide to sensitize our senior managers to significant legal and ethical
issues and to the mechanisms available to report illegal or unethical conduct.
The Code is available on our internet website, www.cnoocltd.com. The Code
addresses areas including regulatory compliance, insider trading, market
misconduct, conflict of interest, corporate opportunities, protection and
proper use of company assets, and public company reporting responsibility. All
our senior managers must know and follow these principles of conduct to ensure
our business is conducted with integrity and in compliance with the law. Any
violation of our Code of Ethics is subject to disciplinary action, up to and
including termination.
Our Code of Ethics may be amended, modified or waived only by our
board of directors. Any change or waiver, explicit or implicit, with respect
to our Code of Ethics must be disclosed to our stockholders either in our
annual report or on our internet website, www.cnoocltd.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by our
principal accountant for the audit of our annual financial statements or
services that are normally provided by the accountant in
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connection with statutory and regulatory filings or engagements were Rmb
5,790,000 for fiscal year 2003 and Rmb 6,887,000 (US$832,115) for fiscal year
2004.
Audit-Related Fees
The aggregate fees billed for assurance and related services by our
principal accountant that are reasonably related to the performance of the
audit or review of the our financial statements and are not reported under
"Audit Fees" were Rmb 2,044,345 for fiscal year 2003 and Rmb 993,180
(US$120,000) for fiscal year 2004. The audit-related services provided
included accounting advice, transaction support services and advisory to our
implementation of Section 404 of the Sarbanes-Oxley Act.
Tax Fees
The aggregate fees billed for professional service rendered by the
principal accountant for tax compliance, tax advice and tax planning were Rmb
778,000 for fiscal year 2003 and Rmb 99,318 (US$12,000) for fiscal year 2004.
All other fees
The aggregate fees billed for products and services provided by our
principal accountant, other than the services reported above, were Rmb 420,000
for fiscal year 2003 and nil for fiscal year 2004.
Audit Committee's pre-approval policies and procedures
The audit committee under our board of directors is responsible for
the appointment, compensation and oversight of the work of our independent
auditor. In 2003, our audit committee adopted a policy calling for the audit
committee's pre-approval for the engagement of independent auditor for audit
and permitted non-audit services. Our board of directors has also ratified the
policy and procedures. Under this audit committee policy, proposed services
may be pre-approved by the audit committee either on an annual basis or on a
case-by-case basis. Appendices to the audit committee policy sets forth (1)
the audit, audit-related, tax and other services that may be subject to the
general annual pre-approval of the audit committee; (2) non-audit services of
a routine and recurring nature that may be subject to specific pre-approval
from the audit committee on a case-by-case basis; and (3) a list of prohibited
non-audit services. The audit committee will periodically review and revise
these attached lists based on its subsequent determinations. The audit
committee policy also provides for procedures to establish annual fee levels
or budgets for pre-approved services and ratios between different categories
of pre-approved services. In addition, the audit committee policy contains
provisions that deal with compliance, monitoring, reporting and other related
matters.
During 2004, all of the audit-related services, and all of tax fees
paid to our principal accountant were approved by the audit committee. Our
principal accountant audited our financial statements for 2004 solely through
its full-time, permanent employees, without involvement of its part-time or
temporary employees.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
On May 17, 2004, our board of directors approved a management
proposal that allowed us to repurchase shares in the open market based on the
general mandates approved by shareholders on May 29, 2003 and June 14, 2004.
The authorization permits the purchase of up to 10% of the issued share
capital on the Hong Kong Stock Exchange in conformity with relevant regulatory
conditions. Shares purchased under the program will be canceled. We have made
the following purchases:
126
Issuer Purchases of Equity Securities
Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares that May Yet
Total Number of Average Price Paid Announced Plans or Be Purchased Under
Period Shares Purchased per Share Programs the Plans or Programs
------------- ---------------- ------------------ ------------------ ---------------------
May 18, 2004 5,427,000 HK$2.8615 5,427,000 4,101,655,827
May 24, 2004 3,450,000 HK$3.0964 8,877,000 4,098,205,827
June 17, 2004 7,140,000 HK$3.2673 16,017,000 4,099,055,127
June 21, 2004 876,000 HK$3.1329 16,893,000 4,098,179,127
July 2, 2004 500,000 HK$3.275 17,393,000 4,097,679,127
July 8, 2004 1,060,000 HK$3.2882 18,453,000 4,096,619,127
127
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages beginning on page F-1 following Item 19.
ITEM 19. EXHIBITS
The following documents are filed as part of this annual report:
Exhibit
Number Document
------ --------
1.1 Articles of Association of the Registrant, incorporated by reference
to Exhibit 1.1 to our annual report on Form 20-F for fiscal year
2003 filed with the Securities and Exchange Commission (File Number:
1-14966).
1.2 Memorandum of Association of the Registrant, incorporated by
reference to Exhibit 3.2 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
2.1 Form of Indenture, incorporated by reference to Exhibit 2.1 to our
Annual Report on Form 20-F filed with the Securities and Exchange
Commission (File Number: 1-14966).
2.2 Trust Deed dated December 15, 2004 among CNOOC Limited, CNOOC
Finance (2004) Limited and J.P. Morgan Corporate Trustee Services
Limited.
4.1 The Asset Swap Agreement dated July 20, 1999 between CNOOC and
Offshore Oil Company Limited, incorporated by reference to Exhibit
10.1 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.2 The Asset Allocation Agreement dated July 20, 1999 between CNOOC and
Offshore Oil Company Limited, incorporated by reference to Exhibit
10.2 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.3 The Reorganization Agreement dated September 13, 1999 between CNOOC,
Offshore Oil Company Limited and CNOOC Limited, incorporated by
reference to Exhibit 10.3 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.4 Form of the Equity Transfer Agreement between CNOOC and CNOOC
Limited, incorporated by reference to Exhibit 10.4 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.5 Form of the Transfer Agreement dated October 1, 1999 between CNOOC
and Offshore Oil Company Limited regarding the transfer of the
rights and obligations of CNOOC under the 37 production sharing
contracts and one geophysical exploration agreement, incorporated by
reference to Exhibit 10.5 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
128
Exhibit
Number Document
------ --------
4.6 Form of Equity Transfer Agreement between China Offshore Oil East
China Sea Corporation and Offshore Oil Company Limited regarding the
transfer of the rights and obligations under Joint Venture Contract
of Shanghai Petroleum and Natural Gas Company Limited dated July 28,
1992 to Offshore Oil Company Limited, incorporated by reference to
Exhibit 10.6 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number: 333-10862).
4.7 Transfer Agreement dated September 9, 1999 between CNOOC and
Offshore Oil Company Limited regarding the transfer of the rights
and obligations of CNOOC under the Natural Gas Sale and Purchase
Contract dated December 22, 1992 to Offshore Oil Company Limited,
incorporated by reference to Exhibit 10.7 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.8 Transfer Agreement dated September 9, 1999 between CNOOC and
Offshore Oil Company Limited regarding the transfer of the rights
and obligations of CNOOC under the Natural Gas Sale and Purchase
Contract dated November 7, 1992 to Offshore Oil Company Limited,
incorporated by reference to Exhibit 10.8 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.9 Transfer Agreement dated September 9, 1999 among CNOOC, Offshore Oil
Company Limited, the four PRC subsidiaries and CNOOC's affiliates
regarding the transfer of the rights and obligations of the
technical services agreements to Offshore Oil Company Limited,
incorporated by reference to Exhibit 10.9 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.10 Nanshan Terminal Leasing Agreement dated September 9, 1999 between
CNOOC, Hainan China Oil and Offshore Natural Gas Company and
Offshore Oil Company Limited, incorporated by reference to Exhibit
10.10 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.11 Trademark License Agreement dated September 9, 1999 between CNOOC,
Offshore Oil Company Limited and CNOOC Limited, incorporated by
reference to Exhibit 10.11 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.12 Trademark License Agreement dated September 9, 1999 between China
Offshore Oil Marketing Company, CNOOC Limited and Offshore Oil
Company Limited and CNOOC Limited, incorporated by reference to
Exhibit 10.12 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number: 333-10862).
4.13 Agreement for provision of materials, facilities and auxiliary
services dated September 9, 1999 with CNOOC affiliates, incorporated
by reference to Exhibit 10.13 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File Number:
333-10862).
129
Exhibit
Number Document
------ --------
4.14 Agreement for provision of materials, facilities and auxiliary
services dated September 9, 1999 with CNOOC affiliates, incorporated
by reference to Exhibit 10.14 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File Number:
333-10862).
4.15 Agreement for provision of materials, facilities and auxiliary
services dated September 9, 1999 with CNOOC affiliates, incorporated
by reference to Exhibit 10.15 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File Number:
333-10862).
4.16 Agreement for provision of materials, facilities and auxiliary
services dated September 9, 1999 with CNOOC affiliates, incorporated
by reference to Exhibit 10.16 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File Number:
333-10862).
4.17 General Research and Development Agreement dated September 9, 1999
between China Ocean Oil Research Institute and Offshore Oil Company
Limited, incorporated by reference to Exhibit 10.17 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.18 Property Leasing Agreement dated September 9, 1999 between Wui Hai
Enterprise Company Limited and Offshore Oil Company Limited in
respect of the office premises at 6th, 7th and 8th Floors, CNOOC
Plaza, No. 6 Dong Zhi Men Wai Xiao Jie, Beijing, incorporated by
reference to Exhibit 10.18 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.19 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Western South China Sea Corporation and Offshore Oil
Company Limited in respect of the office premises at 1st to 9th
Floors, Nantiao Road, Potou District Zhangjiang, Guangdong,
incorporated by reference to Exhibit 10.19 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.20 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Bohai Corporation and Offshore Oil Company Limited in
respect of the office premises at 1st to 7th Floors and 9th Floor,
2-37 He Kou Jie, Tanggu District, Tianjin, incorporated by reference
to Exhibit 10.20 to our Registration Statement on Form F-1 filed
with the Securities and Exchange Commission (File Number:
333-10862).
4.21 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil East China Sea Corporation and Offshore Oil Company
Limited in respect of the office premises at 20th, 22nd and 23rd
Floors, 583 Ling Ling Road, Shanghai, the PRC, incorporated by
reference to Exhibit 10.21 to our Registration Statement on Form F-1
filed with the Securities and Exchange Commission (File Number:
333-10862).
4.22 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Eastern South China Sea Corporation and Offshore Oil
Company Limited in respect of the office premises at 3rd Floor and
6th to 11th Floors, 1 Second Industrial Road, Shekou, Shenzhen, the
PRC, incorporated by reference to Exhibit 10.22 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
130
Exhibit
Number Document
------ --------
4.23 Property Leasing Agreement dated September 9, 1999 between China
Offshore Oil Bohai Corporation and Offshore Oil Company Limited in
respect of the Chengbei Warehouse, Chengbei Road, Tanggu District,
Tianjin City, the PRC, incorporated by reference to Exhibit 10.23 to
our Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.24 Property Leasing Agreement dated September 9, 1999 between Overseas
Oil & Gas Corporation Ltd. and China Offshore Oil (Singapore)
International Pte. Ltd. in respect of the residential premises at
10-01 and 17-002 Aquamarine Tower, 50 Bayshore Road, 13-05 Jade
Tower, 60 Bayshore Road, Singapore, incorporated by reference to
Exhibit 10.24 to our Registration Statement on Form F-1 filed with
the Securities and Exchange Commission (File Number: 333-10862).
4.25 Suizhong Pier Agreement dated September 9, 1999 between Offshore Oil
Company Limited and China Offshore Bohai Corporation, incorporated
by reference to Exhibit 10.25 to our Registration Statement on Form
F-1 filed with the Securities and Exchange Commission (File Number:
333-10862).
4.26 Form of Novation Agreement among CNOOC, CNOOC China Limited, the
Banks and other financial institution and the Fuji Bank Limited Hong
Kong Branch, as agent, in respect of the transfer of the US$110
million syndicated loan, incorporated by reference to Exhibit 10.26
to our Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.27 Form of the Undertaking Agreement between CNOOC and CNOOC Limited,
incorporated by reference to Exhibit 10.27 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.28 Employment Contract between CNOOC Limited and Liucheng Wei (Service
Agreement for Director, incorporated by reference to Exhibit 10.28
to our Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.29 Employment Contract between CNOOC Limited and Chengyu Fu (Service
Agreement for Director, incorporated by reference to Exhibit 10.29
to our Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.30 Employment Contract between CNOOC Limited and Shouwei Zhou (Service
Agreement for Director, incorporated by reference to Exhibit 10.30
to our Registration Statement on Form F-1 filed with the Securities
and Exchange Commission (File Number: 333-10862).
4.31 Form of Pre-Global Offering Share Option Scheme for the Senior
Management of CNOOC Limited, incorporated by reference to Exhibit
10.31 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.32 Form of Share Option Scheme for the Senior Management of CNOOC
Limited, incorporated by reference to Exhibit 10.32 to our
Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
131
Exhibit
Number Document
------ --------
4.33 Subscription Agreement dated March 17, 2000 among CNOOC Limited,
CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd., et al.,
incorporated by reference to Exhibit 10.33 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.34 Subscription Agreement dated May 31, 2000 among CNOOC Limited, CNOOC
(BVI) Limited, Overseas Oil & Gas Corporation, Ltd. and Hutchison
International Limited, incorporated by reference to Exhibit 10.34 to
our Registration Statement on Form F-1 filed with the Securities and
Exchange Commission (File Number: 333-10862).
4.35 Subscription Agreement dated May 31, 2000 among CNOOC Limited, CNOOC
(BVI) Limited, Overseas Oil & Gas Corporation, Ltd. and Hongkong
Electric Holdings Limited, incorporated by reference to Exhibit
10.35 to our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission (File Number: 333-10862).
4.36 Subscription Agreement dated June 28, 2000 among CNOOC Limited,
CNOOC (BVI) Limited, Overseas Oil & Gas Corporation, Ltd., et al.,
incorporated by reference to Exhibit 10.36 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.37 Corporation Placing Agreement dated February 6, 2001 among CNOOC
Limited, China National Offshore Oil Corporation, Shell Eastern
Petroleum (Pte) Limited and Merrill Lynch Far East Limited,
incorporated by reference to Exhibit 10.37 to our Registration
Statement on Form F-1 filed with the Securities and Exchange
Commission (File Number: 333-10862).
4.38 Equity Transfer Agreement dated September 5, 2003 between CNOOC
China Limited and CNOOC (Summary Translation), incorporated by
reference to Exhibit 4.38 to our annual report on Form 20-F for
fiscal year 2003 filed with the Securities and Exchange Commission
(File Number: 1-14966).
4.39 Framework Agreement dated April 8, 2004 with CNOOC Finance
Corporation Limited (Summary Translation), incorporated by reference
to Exhibit 4.39 to our annual report on Form 20-F for fiscal year
2003 filed with the Securities and Exchange Commission (File Number:
1-14966).
8.1 List of Subsidiaries.
10.1 Letter from CNOOC Limited dated May 23, 2002 regarding receipt of
certain representations from Arthur Andersen & Co pursuant to the
requirements of the Securities and Exchange Commission, incorporated
by reference to Exhibit 10 to our annual report on Form 20-F for
fiscal year 2001 filed with the Securities and Exchange Commission
(File Number: 1-14966).
12.1 Certification by the Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002
12.2 Certification by the Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002
13.1 Sarbanes-Oxley Act of 2002 Section 906 Certification furnished to
(not filed with) the Securities and Exchange Commission.
132
SIGNATURE
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
CNOOC Limited
By: /s/ Yunshi Cao
----------------------------------
Name: Yunshi Cao
Title: Company Secretary,
General Counsel and
Senior Vice President
Date: June 22, 2005
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-1
INDEX TO FINANCIAL STATEMENTS
Page
CNOOC LIMITED AND ITS SUBSIDIARIES
Report of Independent Public Accountants................................................... F-3
Consolidated income statements for the years ended December 31, 2004, 2003,
and 2002................................................................................. F-4
Consolidated balance sheets as of December 31, 2004 and 2003............................... F-6
Consolidated statements of changes in equity for the years ended December 31, 2004, 2003,
and 2002................................................................................. F-7
Consolidated cash flow statements for the years ended December 31, 2004, F-8
2003, and 2002...........................................................................
Notes to the consolidated financial statements............................................. F-9
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
CNOOC Limited
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of CNOOC Limited
(the "Company") and its subsidiaries (the "Group") as of December 31, 2004 and
2003, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years ended December 31,
2004, 2003 and 2002. These financial statements are the responsibility of the
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and Statement of Auditing Standards
issued by the Hong Kong Institute of Certified Public Accountants. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Group as of
December 31, 2004 and 2003 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in Hong
Kong ("Hong Kong GAAP").
Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of
such differences is presented in note 37 to the consolidated financial
statements.
/s/ Ernst & Young
----------------------------
Ernst & Young
Certified Public Accountants
Hong Kong
March 29, 2005
F-3
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Notes 2002 2003 2004 2004
---------- ----------------- ----------------- ----------------- -----------------
RMB'000 RMB'000 RMB'000 US$'000
REVENUE
Oil and gas sales 7,26 23,779,294 28,116,831 36,886,019 4,456,717
Marketing revenues 8 2,377,469 12,398,661 18,191,353 2,197,952
Other income 217,052 434,781 144,691 17,483
----------------- ----------------- ----------------- -----------------
26,373,815 40,950,273 55,222,063 6,672,152
----------------- ----------------- ----------------- -----------------
EXPENSES
Operating expenses ( 3,775,334) ( 4,512,809) ( 5,070,344) ( 612,619)
Production taxes ( 1,023,049) ( 1,238,598) ( 1,725,674) ( 208,503)
Exploration expenses ( 1,318,323) ( 848,072) ( 1,316,160) ( 159,024)
Depreciation, depletion and
amortisation ( 4,019,532) ( 4,642,753) ( 5,455,062) ( 659,103)
Dismantlement 27 ( 126,139) ( 167,326) ( 201,637) ( 24,363)
Crude oil and product purchases 8 ( 2,326,338) ( 12,295,238) ( 17,963,461) ( 2,170,418)
Selling and administrative
expenses 9 ( 1,006,540) ( 1,212,523) ( 1,057,706) ( 127,796)
Others ( 30,866) ( 350,232) ( 45,844) ( 5,538)
----------------- ----------------- ----------------- -----------------
( 13,626,121) ( 25,267,551) ( 32,835,888) ( 3,967,364)
----------------- ----------------- ----------------- -----------------
PROFIT FROM OPERATING ACTIVITIES 12,747,694 15,682,722 22,386,175 2,704,788
Interest income 147,870 183,576 206,872 24,995
Interest expenses 10 ( 294,792) ( 354,940) ( 441,825) ( 53,383)
Exchange gains/(losses), net ( 113,814) ( 6,746) 29,269 3,536
Short term investment income 193,277 123,483 72,438 8,752
Share of profit of associates 165,387 220,263 344,469 41,620
Non-operating income/(expenses), net ( 71,379) 314,968 519,206 62,733
----------------- ----------------- ----------------- -----------------
PROFIT BEFORE TAX 12,774,243 16,163,326 23,116,604 2,793,041
Tax 13 ( 3,541,416) ( 4,627,836) ( 6,930,826) ( 837,410)
----------------- ----------------- ----------------- -----------------
NET PROFIT 9,232,827 11,535,490 16,185,778 1,955,631
================= ================= ================= =================
The accompanying notes are an integral part of these financial statements.
F-4
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (CONT'D)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Notes 2002 2003 2004 2004
---------- ----------------- ----------------- ----------------- -----------------
RMB'000 RMB'000 RMB'000 US$'000
DIVIDENDS
Special interim dividend declared
in place of 2003 final dividend * -- -- 2,617,526 316,260
Interim 14 958,314 1,220,132 1,306,451 157,851
Special interim 14 -- 1,568,741 2,177,418 263,084
Proposed final* 14 1,307,408 1,050,460 1,310,022 158,282
Proposed special final* 14 1,307,408 1,575,691 2,183,371 263,804
----------------- ----------------- ----------------- -----------------
3,573,130 5,415,024 9,594,788 1,159,281
================= ================= ================= =================
DIVIDENDS PER SHARE
Special interim dividend -- -- RMB0.060 US$ 0.007
declared in place of 2003 final
dividend*
Interim 14 RMB0.024 RMB0.030 RMB0.030 US$ 0.004
Special interim 14 -- RMB0.038 RMB0.050 US$ 0.006
Proposed final* 14 RMB0.032 RMB0.026 RMB0.030 US$ 0.004
Proposed special final* 14 RMB0.032 RMB0.038 RMB0.050 US$ 0.006
EARNINGS PER SHARE
Basic 15 RMB0.22 RMB0.28 RMB0.39 US$ 0.05
Diluted 15 RMB0.22 RMB0.28 RMB0.39 US$ 0.05
EARNINGS PER ADS
Basic 15 RMB22.48 RMB28.09 RMB39.42 US$ 4.76
Diluted 15 RMB22.47 RMB28.06 RMB39.31 US$ 4.75
* The proposed final dividend and special final dividend for 2003 were
cancelled and replaced by the special interim dividend declared in 2004.
The accompanying notes are an integral part of these financial statements.
F-5
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Notes 2003 2004 2004
------------------- ------------------- ------------------- -------------------
RMB'000 RMB'000 US$'000
NON-CURRENT ASSETS
Property, plant and equipment, net 16 43,123,801 57,456,697 6,942,149
Investments in associates 17 1,117,640 1,327,109 160,347
------------------- ------------------- -------------------
44,241,441 58,783,806 7,102,496
------------------- ------------------- -------------------
CURRENT ASSETS
Accounts receivable, net 18 4,248,570 4,276,489 516,703
Inventories and supplies 19 1,092,926 1,147,294 138,621
Due from related companies 26 756,283 1,173,374 141,772
Other current assets 757,355 556,931 67,290
Short term investments 20 5,684,333 5,444,113 657,780
Time deposits with maturities over three
months 2,323,000 8,603,000 1,039,448
Cash and cash equivalents 26 14,400,394 14,091,524 1,702,595
------------------- ------------------- -------------------
29,262,861 35,292,725 4,264,209
------------------- ------------------- -------------------
TOTAL ASSETS 73,504,302 94,076,531 11,366,705
=================== =================== ===================
CURRENT LIABILITIES
Accounts payable 21 3,969,922 3,102,024 374,799
Other payables and accrued liabilities 22 1,955,783 4,191,024 506,376
Current portion of long term bank loans 23 20,618 24,364 2,944
Due to the parent company 25, 26 164,653 370,060 44,712
Due to related companies 26 474,223 211,425 25,545
Tax payable 13 2,721,331 2,503,466 302,479
------------------- ------------------- -------------------
9,306,530 10,402,363 1,256,855
------------------- ------------------- -------------------
NON-CURRENT LIABILITIES
Long term bank loans 23 889,575 865,211 104,538
Long term guaranteed notes 24 8,141,669 16,313,550 1,971,069
Provision for dismantlement 27 2,646,800 3,089,448 373,280
Deferred tax liabilities 13 5,783,196 6,688,498 808,131
------------------- ------------------- -------------------
17,461,240 26,956,707 3,257,018
------------------- ------------------- -------------------
CAPITAL AND RESERVES
Issued capital 28 876,978 876,586 105,913
Reserves 29 45,859,554 55,840,875 6,746,919
------------------- ------------------- -------------------
46,736,532 56,717,461 6,852,832
------------------- ------------------- -------------------
TOTAL EQUITY AND LIABILITIES 73,504,302 94,076,531 11,366,705
=================== =================== ===================
The accompanying notes are an integral part of these financial statements.
F-6
CNOOC LIMITED AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Statutory
Cumulative and non-
Share Share Revaluation translation distributive Retained
capital premium reserve reserve reserve earnings Total
--------- ---------- ----------- ----------- ------------ ----------- -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Balances at January 1, 2002 as
previously stated 876,978 20,761,205 274,671 ( 5,648) 1,535,360 9,867,940 33,310,506
Cumulative effect of change in
accounting policy - - - - - 298,157 298,157
--------- ---------- ----------- ----------- ------------ ----------- -----------
Balances at January 1, 2002
as restated 876,978 20,761,205 274,671 ( 5,648) 1,535,360 10,166,097 33,608,663
Net profit for the year - - - - - 9,232,827 9,232,827
Appropriation to statutory
reserve - - - - 697,050 ( 697,050) -
Dividends - - - - - (2,265,054) (2,265,054)
Foreign currency translation
differences - - - ( 7,948) - - ( 7,948)
--------- ---------- ----------- ----------- ------------ ----------- -----------
Net losses not recognised in
the income statement - - - ( 7,948) - - ( 7,948)
--------- ---------- ----------- ----------- ------------ ----------- -----------
Balances at January 1, 2003 876,978 20,761,205 274,671 (13,596) 2,232,410 16,436,820 40,568,488
Net profit for the year - - - - - 11,535,490 11,535,490
Appropriation to statutory
reserve - - - - 818,079 (818,079) -
Dividends - - - - - (5,403,689) (5,403,689)
Transfer to / (from) reserve - - - - 5,000,000 (5,000,000) -
Foreign currency translation
differences - - - 36,243 - - 36,243
--------- ---------- ----------- ----------- ------------ ----------- -----------
Net gains not recognised in
the income statement - - - 36,243 - - 36,243
--------- ---------- ----------- ----------- ------------ ----------- -----------
Balances at January 1, 2004 876,978 20,761,205 274,671 22,647 8,050,489 16,750,542 46,736,532
Repurchase of shares (note 28) ( 392) - - - - ( 60,761) ( 61,153)
Transfer of reserves upon
shares repurchase (note 28) - 392 - - - ( 392) -
Net profit for the year - - - - - 16,185,778 16,185,778
Appropriation to statutory
reserve - - - - 1,363,121 ( 1,363,121) -
Dividends (note 14) - - - - - ( 6,101,395) (6,101,395)
Foreign currency translation
differences - - - ( 42,301) - - ( 42,301)
Net losses not recognised in --------- ---------- ----------- ----------- ------------ ----------- -----------
the income statement - - - ( 42,301) - - ( 42,301)
--------- ---------- ----------- ----------- ------------ ----------- -----------
Balances at December 31, 2004 876,586 20,761,597 274,671 ( 19,654) 9,413,610 25,410,651 56,717,461
========= ========== =========== =========== ============ =========== ===========
* These reserve accounts comprise the consolidated reserves of
RMB55,840,875,000 (2003: RMB45,859,554,000; 2002: RMB39,691,510,000) in
the consolidated balance sheet.
The accompanying notes are an integral part of these financial statements.
F-7
CNOOC LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Notes 2002 2003 2004 2004
---------- ----------------- ----------------- ----------------- -----------------
RMB'000 RMB'000 RMB'000 US$'000
OPERATING ACTIVITIES
Cash generated from operations 31(a) 17,406,915 21,142,911 29,705,761 3,589,169
Income taxes paid ( 3,013,279) ( 3,514,807) ( 7,402,280) ( 894,373)
Income tax refund 167,065 - - -
Interest received 147,870 183,576 206,871 24,995
Dividends received 90,000 90,000 135,000 16,312
Short term investments income
received 79,679 55,840 4,626 559
Interest paid ( 136,222) ( 138,801) ( 322,118) ( 38,920)
----------------- ----------------- ----------------- -----------------
Net cash inflow from operating
activities 14,742,028 17,818,719 22,327,860 2,697,742
----------------- ----------------- ----------------- -----------------
INVESTING ACTIVITIES
Acquisition of and prepayment for
oil and gas properties 31(b) ( 4,734,174) ( 4,100,900) ( 5,779,140) ( 698,259)
Additions of property, plant and
equipment ( 6,832,746) ( 8,271,564) (12,842,905) (1,551,731)
Proceeds from disposals of property,
plant and equipment 446 - - -
Investment in an associate - ( 450,000) - -
(Increase)/decrease in time deposits
with maturities over three months ( 2,640,000) 2,367,000 ( 6,280,000) ( 758,775)
Additions of short term investments ( 3,399,413) ( 8,144,702) ( 5,735,093) ( 692,937)
Disposals of short term investments 5,882,305 9,087,581 6,029,946 728,562
----------------- ----------------- ----------------- -----------------
Net cash outflow from investing
activities (11,723,582) ( 9,512,585) (24,607,192) (2,973,140)
----------------- ----------------- ----------------- -----------------
FINANCING ACTIVITIES
Issue of long term guaranteed notes 4,059,345 3,995,773 8,154,085 985,209
Repayment of bank loans ( 3,367,347) ( 336,938) ( 21,075) ( 2,546)
Dividends paid ( 2,265,054) ( 5,403,689) ( 6,101,395) ( 737,195)
Share repurchases - - ( 61,153) ( 7,389)
----------------- ----------------- ----------------- -----------------
Net cash inflow/(outflow) from
financing activities ( 1,573,056) ( 1,744,854) 1,970,462 238,079
----------------- ----------------- ----------------- -----------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,445,390 6,561,280 ( 308,870) ( 37,319)
Cash and cash equivalents at
beginning of year 6,393,724 7,839,114 14,400,394 1,739,914
----------------- ----------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR 7,839,114 14,400,394 14,091,524 1,702,595
----------------- ----------------- ----------------- -----------------
ANALYSIS OF BALANCES OF CASH AND
CASH EQUIVALENTS
Cash and bank balances 7,839,114 14,400,394 14,091,524 1,702,595
----------------- ----------------- ----------------- -----------------
The accompanying notes are an integral part of these financial statements.
F-8
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
1. CORPORATE INFORMATION
CNOOC Limited (the "Company") was incorporated in the Hong Kong Special
Administrative Region ("Hong Kong"), the People's Republic of China (the
"PRC") on August 20, 1999 to hold the interests in certain entities
whereby creating a group comprising the Company and its subsidiaries.
During the year, the Company and its subsidiaries (hereinafter
collectively referred to as the "Group") were principally engaged in the
exploration, development, production and sale of crude oil, natural gas
and other petroleum products.
The registered office address is 65/F, Bank of China Tower, Garden Road,
Hong Kong.
In the opinion of the directors, the ultimate holding company is China
National Offshore Oil Corporation ("CNOOC"), a company established in the
PRC.
Particulars of the principal subsidiaries are as follows:
Place and date of Percentage of
incorporation/ Nominal value of equity
registration and issued ordinary attributable to
Name operations share capital the Company Principal activities
--------------------------- ------------------- ----------------- --------------- --------------------
Directly held subsidiaries:
CNOOC China Limited Tianjin, the PRC RMB15 billion 100% Offshore petroleum
September 15, 1999 exploration,
development,
production and sale
in the PRC
CNOOC International British Virgin US$2 100% Investment holding
Limited Islands
August 23, 1999
China Offshore Oil Singapore S$3 million 100% Sale and marketing of
(Singapore) May 14, 1993 petroleum outside of
International Pte., Ltd. the PRC
CNOOC Finance (2002) British Virgin US$1,000 100% Bond issuance
Limited Islands
January 24, 2002
CNOOC Finance (2003) British Virgin US$1,000 100% Bond issuance
Limited Islands
April 2, 2003
CNOOC Finance (2004) British Virgin US$1,000 100% Bond issuance
Limited Islands
December 9, 2004
Indirectly held subsidiaries*:
Malacca Petroleum Limited Bermuda US$12,000 100% Offshore petroleum
November 2, 1995 exploration,
development and
production in
Indonesia
F-9
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
1. CORPORATE INFORMATION (CONT'D)
Place and date of Percentage of
incorporation/ Nominal value of equity
registration and issued ordinary attributable to
Name operations share capital the Company Principal activities
--------------------------- ------------------- ----------------- ---------------- --------------------
Indirectly held subsidiaries* (cont'd):
OOGC America, Inc. State of Delaware, US$1,000 100% Investment holding
United States of
America
September 2, 1997
OOGC Malacca Limited Bermuda US$12,000 100% Offshore petroleum
November 2, 1995 exploration,
development and
production in
Indonesia
CNOOC Southeast Asia Bermuda US$12,000 100% Investment holding
Limited May 16, 1997
CNOOC ONWJ Ltd. Labuan, F.T., US$1 100% Offshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
CNOOC SES Ltd. Labuan, F.T., US$1 100% Offshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
CNOOC Poleng Ltd. Labuan, F.T., US$1 100% Offshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
CNOOC Madura Ltd. Labuan, F.T., US$1 100% Offshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
CNOOC Blora Ltd. Labuan, F.T., US$1 100% Onshore petroleum
Malaysia exploration,
March 27, 2002 development and
production in
Indonesia
F-10
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
1. CORPORATE INFORMATION (CONT'D)
Place and date of Percentage of
incorporation/ Nominal value of equity
registration and issued ordinary attributable to
Name operations share capital the Company Principal activities
--------------------------- ------------------- ----------------- ---------------- --------------------
Indirectly held subsidiaries* (cont'd):
CNOOC NWS Private Ltd. Singapore S$1 100% Offshore petroleum
October 8, 2002 exploration,
development and
production in
Australia
CNOOC Wiriagar Overseas Ltd. British Virgin US$1 100% Offshore petroleum
Islands exploration,
January 15, 2003 development and
production in
Indonesia
CNOOC Muturi Ltd. The Isle of Man US$7,780,700 100% Offshore petroleum
February 8, 1996 exploration,
development and
production in
Indonesia
* Indirectly held through CNOOC International Limited.
2. IMPACT OF RECENTLY ISSUED HONG KONG FINANCIAL REPORTING STANDARDS
("HKFRSs")
The Hong Kong Institute of Certified Public Accountants has issued a
number of new Hong Kong Financial Reporting Standards and Hong Kong
Accounting Standards, herein collectively referred to as the new HKFRSs,
which are generally effective for accounting periods beginning on or
after January 1, 2005. The Group has not early adopted these new HKFRSs
in the financial statements for the year ended December 31, 2004. The
Group has already commenced an assessment of the impact of these new
HKFRSs, but is not yet in a position to state when these new HKFRSs would
have a significant impact on its results of operations and financial
position.
F-11
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
--------------------
These financial statements have been prepared in accordance with Hong
Kong Financial Reporting Standards (which also include Statements of
Standard Accounting Practice and Interpretations) issued by the Hong Kong
Institute of Certified Public Accountants, accounting principles
generally accepted in Hong Kong ("Hong Kong GAAP") and the Companies
Ordinance. They have been prepared under the historical cost convention
as modified by the revaluation of land and buildings and short term
investments.
On March 16, 2004, the Company's shareholders approved a five-for-one
stock split of the Company's shares (the "Stock Split"). The Stock Split
was effected by dividing each of the Company's issued and unissued shares
of HK$0.10 each into five shares of HK$0.02 each, and to increase the
board lot size for trading on The Stock Exchange of Hong Kong Limited
(the "HKSE") from 500 shares of HK$0.10 each to 1,000 subdivided shares
of HK$0.02 each. The ratio of the Company's American Depository Receipts
("ADR") listed on the New York Stock Exchange also changed such that each
ADR now represents 100 subdivided common shares of HK$0.02 each, as
opposed to 20 common shares of HK$0.10 each prior to the Stock Split. All
references in the consolidated financial statements referring to share,
share option and per share amounts of the shares of the Company have been
adjusted retroactively for the Stock Split.
Basis of consolidation
----------------------
The consolidated financial statements include the financial statements of
the Company and its subsidiaries for the year ended December 31, 2004.
The results of subsidiaries acquired or disposed of during the year are
consolidated from or to their effective dates of acquisition or disposal,
respectively. All significant intercompany transactions and balances
within the Group are eliminated on consolidation.
Subsidiaries
------------
A subsidiary is a company in which the Company, directly or indirectly,
controls more than half of its voting power or issued share capital or
controls the composition of its board of directors.
The results of subsidiaries are included in the Company's income
statement to the extent of dividends received and receivable. The
Company's interests in subsidiaries are stated at cost less any
impairment losses.
F-12
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Associates
----------
An associate is a company, not being a subsidiary or a jointly-controlled
entity, in which the Group has a long term interest of generally not less
than 20% of the equity voting rights and over which it is in a position
to exercise significant influence.
The Group's share of the post-acquisition results and reserves of the
associate is included in the consolidated income statement and
consolidated reserves, respectively. The Group's proportionate interests
in the associates are stated in the consolidated balance sheet at the
Group's share of net assets under the equity method of accounting, less
any impairment losses. The results of the associates are included in the
Company's income statement to the extent of dividends received and
receivable.
Related parties
---------------
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they
are subject to common control or common significant influence. Related
parties may be individuals or corporate entities.
Impairment of assets
--------------------
An assessment is made whenever events or changes in circumstances
indicate that there is any indication of impairment of any assets, or
when there is any indication that an impairment loss previously
recognised for an asset in prior years may no longer exist or may have
decreased. If any such indication exists, the asset's recoverable amount
is estimated. An asset's recoverable amount is calculated as the higher
of the asset's value in use and its net selling price.
An impairment loss is recognised only if the carrying amount of an asset
exceeds its recoverable amount. An impairment loss is charged to the
income statement in the period in which it arises, unless the asset is
carried at a revalued amount, when the impairment loss is accounted for
in accordance with the relevant accounting policy for that revalued
asset.
A previously recognised impairment loss is reversed only if there has
been a change in the estimates used to determine the recoverable amount
of an asset, however not to an amount higher than the carrying amount
that would have been determined (net of any depreciation/amortisation),
had no impairment loss been recognised for the asset in prior years.
A reversal of an impairment loss is credited to the income statement in
the period in which it arises, unless the asset is carried at a revalued
amount, when the reversal of the impairment loss is accounted for in
accordance with the relevant accounting policy for that revalued asset.
F-13
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Property, plant and equipment
-----------------------------
Property, plant and equipment comprise oil and gas properties, land and
buildings, and vehicles and office equipment.
(i) Oil and gas properties
For oil and gas properties, the successful efforts method of
accounting is adopted. The Group capitalises initial acquisition
costs of oil and gas properties. Impairment of initial acquisition
costs is recognised based on exploratory experience and management
judgement. Upon discovery of commercial reserves, acquisition costs
are transferred to proved properties. The costs of drilling and
equipping successful exploratory wells, all development costs,
including those renewals and betterments which extend the economic
lives of the assets, and the borrowing costs arising from borrowings
used to finance the development of oil and gas properties before
they are substantially ready for production are capitalised. The
costs of unsuccessful exploratory wells and all other exploration
costs are expensed as incurred.
Exploratory wells are evaluated for economic viability within one
year of completion. Exploratory wells that discover potentially
economic reserves in areas where major capital expenditure will be
required before production would begin and when the major capital
expenditure depends upon successful completion of further
exploratory work remain capitalised and are reviewed periodically
for impairment.
Productive oil and gas properties and other tangible and intangible
costs of producing properties are amortised using the
unit-of-production method on a property-by-property basis under
which the ratio of produced oil and gas to the estimated remaining
proved developed reserves is used to determine the depreciation,
depletion and amortisation provision. Costs associated with
significant development projects are not depleted until commercial
production commences and the reserves related to those costs are
excluded from the calculation of depletion.
Capitalised acquisition costs of proved properties are amortised by
the unit-of-production method on a property-by-property basis
computed based on the total estimated units of proved reserves.
The Group estimates future dismantlement costs for oil and gas
properties with reference to the estimates provided from either
internal or external engineers after taking into consideration the
anticipated method of dismantlement required in accordance with
current legislation and industry practices. The associated cost is
capitalised and the liability is discounted and an accretion expense
is recognised using the credit-adjusted risk-free interest rate in
effect when the liability is initially recognised.
F-14
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Property, plant and equipment (cont'd)
--------------------------------------
(ii) Land and buildings
Land and buildings represent the onshore buildings and the land use
rights and are stated at valuation less accumulated depreciation and
accumulated impairment losses. Professional valuations are performed
periodically with the last valuation performed on December 31, 2000.
In the intervening years, the directors review the carrying value of
land and buildings and adjustment is made where in the directors'
opinion there has been a material change in value. Any increase in
land and building valuation is credited to the revaluation reserves;
any decrease is first offset against an increase in earlier
valuation in respect of the same property and is thereafter charged
to the income statement. Depreciation is calculated on the
straight-line basis at an annual rate estimated to write off the
valuation of each asset over its expected useful life, ranging from
30 to 50 years.
(iii) Vehicles and office equipment
Vehicles and office equipment are stated at cost less accumulated
depreciation and impairment losses. The straight-line method is
adopted to depreciate the cost less any estimated residual value of
these assets over their expected useful lives. The Group estimates
the useful lives of vehicles and office equipment to be five years.
The useful lives of assets and method of depreciation, depletion and
amortisation are reviewed periodically.
The gain or loss on disposal or retirement of property, plant and
equipment recognised in the income statement is the difference between
the net sales proceeds and the carrying amount of the relevant asset. Any
revaluation reserve relating to the fixed asset is transferred to
retained earnings as a reserve movement.
Research and development costs
------------------------------
All research costs are charged to the income statement as incurred.
Development costs (other than relating to oil and gas properties
discussed above) incurred on projects are capitalised and deferred only
when the projects are clearly defined; the expenditures are separately
identifiable and can be measured reliably; there is reasonable certainty
that the projects are technically feasible and have commercial value.
Development expenditure which does not meet these criteria is expensed
when incurred. No development costs were capitalised during the year.
Trade and other receivables
---------------------------
Trade and other receivables are stated at their cost, after provision for
doubtful accounts.
F-15
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Short term investments
----------------------
Short term investments are investments in debt and equity securities not
intended to be held on a continuing basis and are stated at their fair
values on the basis of their quoted market prices at the balance sheet
date, on an individual investment basis. The gains or losses arising from
changes in the fair value of a security are credited or charged to the
income statement in the period in which they arise.
Inventories and supplies
------------------------
Inventories consisting primarily of oil and supplies consist mainly of
items for repairs and maintenance of oil and gas properties. Inventories
are stated at the lower of cost and net realisable value. Costs of
inventories and supplies represent purchase or production cost of goods
and are determined on a weighted average basis. Net realisable value is
based on estimated selling prices less any estimated costs to be incurred
to completion and disposal. Supplies are capitalised to property, plant
and equipment when used for renewals and betterments of oil and gas
properties and have resulted in an increase in the future economic values
of oil and gas properties or are recognised as expenses when used.
Cash and cash equivalents
-------------------------
For the purpose of the consolidated cash flow statement, cash and cash
equivalents comprise cash on hand and demand deposits, and short term
highly liquid investments which are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes
in value, and have a short maturity of generally within three months when
acquired, less bank overdrafts which are payable on demand and form an
integral part of the Group's cash management. For the purpose of the
balance sheet, cash and cash equivalents comprise cash on hand and at
banks, and term deposits with maturities of three months or less which
are not restricted to use.
Provisions
----------
A provision is recognised when a present obligation (legal or
constructive) has arisen as a result of a past event and it is probable
that a future outflow of resources will be required to settle the
obligation, provided that a reliable estimate can be made of the amount
of the obligation.
When the effect of discounting is material, the amount recognised for a
provision is the present value at the balance sheet date of the future
expenditures expected to be required to settle the obligation. The
increase in the discounted present value amount arising from the passage
of time is included in interest expenses in the income statement.
Provisions for dismantlement are made based on the present value of the
future costs expected to be incurred, on a property-by-property basis, in
respect of the Group's expected dismantlement and abandonment costs at
the end of the related oil exploration and recovery activities.
F-16
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Income tax
----------
Income tax comprises current and deferred tax. Income tax is recognised
in the income statement or in equity if it relates to items that are
recognised in same or a different period directly in equity.
Deferred tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary
differences:
o except where the deferred tax liability arises from the initial
recognition of an asset or liability and, at the time of the
transaction, affects neither the accounting profit nor taxable
profit or loss; and
o in respect of taxable temporary differences associated with
investments in subsidiaries and associates, except where the timing
of the reversal of the temporary differences can be controlled and
it is probable that the temporary differences will not reverse in
the foreseeable future.
Deferred tax assets are recognised for all deductible temporary
differences, carryforward of unused tax assets and unused tax losses, to
the extent that it is probable that taxable profit will be available
against which the deductible temporary differences, and the carryforward
of unused tax assets and unused tax losses can be utilised:
o except where the deferred tax asset relating to the deductible
temporary differences arises from the initial recognition of an
asset or liability and, at the time of the transaction, affects
neither the accounting profit nor taxable profit or loss; and
o in respect of deductible temporary differences associated with
investments in subsidiaries and associates, deferred tax assets are
only recognised to the extent that it is probable that the temporary
differences will reverse in the foreseeable future and taxable
profit will be available against which the temporary differences can
be utilised.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the
deferred tax asset to be utilised. Conversely, previously unrecognised
deferred tax assets are recognised to the extent that it is probable that
sufficient taxable profit will be available to allow all or part of the
deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that
are expected to apply to the period when the asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been
enacted or substantially enacted at the balance sheet date.
F-17
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Revenue recognition
-------------------
Revenue is recognised when it is probable that the economic benefits will
flow to the Group and when the revenue can be measured reliably, on the
following bases:
(i) Oil and gas sales
Revenues represent the invoiced value of sales of oil and gas
attributable to the interests of the Group, net of royalties and PRC
government share oil that are lifted and sold on behalf of the PRC
government. Sales are recognised when the significant risks and
rewards of ownership of oil and gas have been transferred to
customers.
Oil and gas lifted and sold by the Group above or below the Group's
participating interests in the production sharing contracts results
in overlifts and underlifts. The Group records these transactions in
accordance with the entitlement method under which overlifts are
recorded as liabilities and underlifts are recorded as assets at
year end oil prices. Settlement will be in kind when the liftings
are equalised or in cash when production ceases.
The Group has entered into gas sales contracts with customers which
contains take-or-pay clauses. The clauses require those customers to
take a specified minimum volume of gas each year. If the minimum
volume of gas is not taken, those customers must pay for the
deficiency gas, even though the gas is not taken. Those customers
can offset the deficiency payment against any future purchases in
excess of the specified volume. The Group records any deficiency
payments as deferred revenue which is included in other payables
until any make-up gas is taken by those customers or the expiry of
the contracts.
(ii) Marketing revenues
Marketing revenues represent sales of oil purchased from the foreign
partners under the production sharing contracts and revenues from
the trading of oil through the Company's subsidiary in Singapore.
The title, together with the risks and rewards of the ownership of
such oil purchased from the foreign partners, is transferred to the
Group from the foreign partners and other unrelated oil and gas
companies before the Group sells such oil to its customers. The cost
of the oil sold is included in crude oil and product purchases.
(iii) Other income
Other income mainly represents project management fees charged to
the foreign partners and handling fees charged to customers and is
recognised when the services are rendered.
(iv) Interest income
Interest income from deposits placed with banks and other financial
institutions is recognised on a time proportion basis taking into
account the effective yield on the assets.
(v) Dividend income
Dividend income is recognised when the right to receive payment has
been established.
F-18
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Retirement and termination benefits
-----------------------------------
The Group participates in defined contribution plans based on local laws
and regulations for full-time employees in the PRC and other countries in
which it operates. The plans provide for contributions ranging from 5% to
22% of the employees' basic salaries. The Group's contributions to these
defined contribution plans are charged to expense in the year to which
they relate.
Share option schemes
--------------------
The Company operates share option schemes for the purpose of providing
incentives and rewards to eligible participants who contribute to the
success of the Group's operations. The financial impact of share options
granted under the share option schemes is not recorded in the Company's
or the Group's balance sheet until such time as the options are
exercised, and no charge is recorded in the income statement or balance
sheet for their cost. Upon the exercise of share options, the resulting
shares issued are recorded by the Company as additional share capital at
the nominal value of the shares, and the excess of the exercise price per
share over the nominal value of the shares is recorded by the Company in
the share premium account. Options which are cancelled prior to their
exercise date, or which lapse, are deleted from the register of
outstanding options.
Dividends
---------
Final and special final dividends proposed by the directors are
classified as a separate allocation of retained earnings within the
capital and reserves section of the balance sheet, until they have been
approved by the shareholders in a general meeting. When these dividends
have been approved by the shareholders and declared, they are recognised
as a liability.
Interim and special interim dividends are simultaneously proposed and
declared, because the Company's memorandum and articles of association
grant the directors the authority to declare interim dividends.
Consequently, interim dividends are recognised immediately as a liability
when they are proposed and declared.
Borrowing costs
---------------
Borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets, i.e. assets that necessarily take a
substantial period of time to get ready for their intended use or sale,
are capitalised as part of the cost of those assets. The capitalisation
of such borrowing costs ceases when the assets are substantially ready
for their intended use or sale.
To the extent that funds are borrowed specifically for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalisation on that asset is determined as the actual borrowing costs
incurred on that borrowing during the period less any investment income
on the temporary investment of those borrowings.
F-19
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Borrowing costs (cont'd)
------------------------
To the extent that funds are borrowed generally and used for the purpose
of obtaining a qualifying asset, the amount of borrowing costs eligible
for capitalisation is determined by applying a capitalisation rate to the
expenditures on that asset. The capitalisation rate is the weighted
average of the borrowing costs applicable to the borrowings of the
enterprise that are outstanding during the period, other than borrowings
made specifically for the purpose of obtaining a qualifying asset. The
amount of borrowing costs capitalised incurred during a period should not
exceed the amount of borrowing cost incurred during that period.
Borrowing costs include interest charges and other costs incurred in
connection with the borrowing of funds, including amortisation of
discounts or premiums relating to borrowings, and amortisation of
ancillary costs incurred in connection with arranging borrowings.
Foreign currencies
------------------
The books and records of the Company and its subsidiary in China are
maintained in Renminbi ("RMB"). Foreign currency transactions are
recorded at the applicable exchange rates ruling at the transaction
dates. Monetary assets and liabilities denominated in foreign currencies
at the balance sheet date are translated at the applicable exchange rates
ruling at that date. Exchange differences are dealt with in the income
statement.
On consolidation, the financial statements of overseas subsidiaries are
translated into RMB using the net investment method. The income
statements of overseas subsidiaries are translated into RMB at the
weighted average exchange rates for the year, and their balance sheets
are translated into RMB at the exchange rates ruling at the balance sheet
date. The resulting translation differences are included in the
cumulative translation reserve.
For the purpose of the consolidated cash flow statement, the cash flows
of overseas subsidiaries are translated into RMB at the exchange rates
ruling at the dates of the cash flows. Frequently recurring cash flows of
overseas subsidiaries which arise throughout the year are translated into
RMB at the weighted average exchange rates for the year.
Convenience Translation
-----------------------
Translations of amounts from RMB into United States dollars for the
convenience of the reader were calculated at the noon buying rate of
US$1.00 to RMB8.2765 on December 31, 2004 in the City of New York for
cable transfers of RMB as certified for customs purpose by the Federal
Reserve Bank of New York. No representation is made that the RMB amounts
could have been, or could be, converted into United States dollars at
such rate.
Repairs, maintenance and overhaul costs
---------------------------------------
Repairs, maintenances and overhaul costs are normally charged to the
income statement as operating expenses in the period in which they are
incurred.
F-20
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Financial instruments
---------------------
The Group has interest rate and currency swap contracts with financial
institutions. Those financial instruments not designated as hedging
instruments are carried at fair value, with any changes in fair value
thereof included in the income statement.
Operating leases
----------------
Leases where substantially all the rewards and risks of ownership of
assets remain with the lessor are accounted for as operating leases.
Where the Company is the lessee, rentals payable under the operating
leases are charged to the income statement on the straight-line basis
over the lease terms.
Contingencies
-------------
Contingent liabilities are not recognised in the financial statements.
They are disclosed unless the possibility of an outflow of resources
embodying economic benefits is remote.
A contingent asset is not recognised in the financial statements, but are
disclosed when an inflow of economic benefits is probable.
Subsequent events
-----------------
Post-year-end events that provide additional information about the
Company's position at the balance sheet date or those that indicate the
going concern assumption is not appropriate (adjusting events) are
reflected in the financial statements. Post-year-end events that are not
adjusting events are disclosed in the notes when material.
Use of estimates
----------------
The preparation of financial statements in conformity with Hong Kong GAAP
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
4. ACQUISITIONS
(i) In 2003, the Company acquired from British Petroleum ("BP") an
equivalent of 12.5% interest in the proposed joint venture known as
the Tangguh LNG Project of Indonesia ("Tangguh LNG Project") for
approximately US$275 million (equivalent to approximately
RMB2,276,578,000) through the acquisition of certain interest in
production sharing contracts ("PSCs") which was effective from
January 1, 2003. The Tangguh LNG Project comprises three PSC areas:
the Berau PSC, the Muturi PSC and the Wiriagar PSC. The Tangguh LNG
Project partners have signed a conditional 25-year Liquefied Natural
Gas ("LNG") Supply Contract (the "LNG Supply Contract") to provide
up to 2.6 million tonnes per annum of LNG to the Fujian LNG project
in the PRC, beginning in 2008. The Company completed the Tangguh
acquisition on February 8, 2003. CNOOC has an equity interest in the
Fujian LNG project.
F-21
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. ACQUISITIONS
In addition, a repurchase agreement (the "Repurchase Agreement") was
entered into whereby put options and call options are granted to the
Company and the sellers, respectively, to sell or to repurchase the
interests in the above mentioned PSCs. The options are exercisable
if:
(1) the LNG Supply Contract is terminated due to the
non-satisfaction of the conditions precedent to the LNG Supply
Contract on or before December 31, 2004; or
(2) the LNG Supply Contract is otherwise legally ineffective on or
before December 31, 2004.
The exercise price of the options are determined based on the
original consideration paid plus adjustments stipulated in the
Repurchase Agreement.
The options lapsed on December 31, 2004. As such, although the
consideration was paid in full in 2003, the acquisition date for
accounting purpose is December 31, 2004.
During the year, the Company acquired from British Gas International
Limited a 20.767% interest in the Muturi Production Sharing Contract
("Muturi PSC") for a consideration of US$105.1 million (equivalent
to approximately RMB869,881,000), subject to a final price
adjustment. The purchase increased the Company's interest in the
Muturi PSC to 64.767% and its interest in the Tangguh LNG Project
increased from 12.5% to 16.96%. The Company completed the
acquisition on May 13, 2004. As at December 31, 2004, Tangguh LNG
project was still in the development stage.
(ii) On May 15, 2003, the Company entered into an equity sale and
purchase agreement and a Gas Production and Processing Agreement
(the "Agreements") with the existing North West Shelf ("NWS
Project") partners to acquire an interest in the upstream production
and reserves of the NWS Project. Under the Agreement, the Company
will acquire an interest of approximately 5.3% in the NWS Project
and a 25% interest in the China LNG Joint Venture, a new joint
venture to be established within the NWS Project. According to the
Agreement, the Company has the right to acquire more interest in the
NWS Project should the final quantity of LNG committed under the LNG
supply agreement to the facilities in Guangdong Province be
increased. The total consideration of the acquisition is US$348
million, subject to certain conditions, including the LNG supply
agreement to Guangdong becoming unconditional, have been fulfilled.
In addition, the Company will be required to make an upfront tariff
payment relating to certain LNG processing facilities amounting to
US$180 million. CNOOC has an equity interest in the Guangdong LNG
Project.
On December 23, 2003, the Company signed a Deed of Amendment to the
Agreement and a Deed of Amendment to the Gas Production and
Processing Agreements (the "Deeds") and agreed to pay US$483,577,000
representing deposit of the consideration and tariff payment, to the
NWS project participants by January 2, 2004. The Company made the
payment on January 2, 2004.
F-22
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
4. ACQUISITIONS (CONT'D)
On December 18, 2004, the Company paid the balance of the consideration
payable and concurrently entered into a side letter for the fulfillment
of a condition precedent to the purchase. As such, the consideration paid
of approximately US$567 million (equivalent to approximately
RMB4,693,809,000) including the payment of the tariff of US$180 million
plus direct incremental costs relating to the acquisition were included
as a prepayment in property, plant and equipment as at December 31, 2004.
As at December 31, 2004, NWS Project was still in the development stage.
(iii) Apart from the acquisitions above, during the year, the Company
also acquired from VANCO Energy Company an 11.25% interest in a
petroleum agreement in Ras Tafelney, Morocco for approximately
US$7.75 million. The PSC was still in an exploration stage as of
December 31, 2004.
(iv) In addition, the Company also entered into production sharing
contracts with Golden Aaron Pte. Ltd. and China Global Construction
Limited in Myanmar during the year. The PSCs were still in a
pre-exploration stage as of December 31, 2004. The Company is the
operator.
5. PRODUCTION SHARING CONTRACTS
PRC
---
For production sharing contracts in the PRC, the foreign parties to the
contracts ("foreign partners") are normally required to bear all
exploration costs during the exploration period and such exploration
costs can be recovered according to the production sharing formula after
commercial discoveries are made and production begins.
After the initial exploration stage, the development and operating costs
are funded by the Group and the foreign partners according to their
respective participating interest.
In general, the Group has the option to take a up to 51% participating
interest in a production sharing contract and may exercise such option
after the foreign partners have independently undertaken all the
exploration risks and costs and made viable commercial discoveries.
After the Group exercises its option to take a participating interest in
a production sharing contract, the Group accounts for the oil and gas
properties using the "proportional method" under which the Group
recognises its share of development costs, revenues and expenses from
such operations based on its participating interest in the production
sharing contract. The Group does not account for either the exploration
costs incurred by its foreign partners or the foreign partners' share of
development costs and revenues and expenses from such operations.
F-23
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
5. PRODUCTION SHARING CONTRACTS (CONT'D)
PRC (cont'd)
------------
Part of the Group's annual gross production of oil and gas in the PRC is
distributed to the PRC government as settlement of royalties which are
payable pursuant to a sliding scale. The Group and the foreign partners
also pay a production tax to the tax bureau at a pre-determined rate. In
addition, there is a pre-agreed portion of oil and gas designated to
recover all exploration costs, development costs, operating costs
incurred and related interest according to the participating interests
between the Group and the foreign partners. Any remaining oil after the
foregoing priority allocations is first distributed to the PRC government
as government share oil on a pre-determined ratio pursuant to a sliding
scale, and then distributed to the Group and the foreign partners based
on their respective participating interests. As the government share is
not included in the Group's interest in the annual production, the net
sales of the Group do not include the sales revenue of the government
share oil.
The foreign partners have the right either to take possession of their
allocable remainder oil for sale in the international market, or to
negotiate with the Group to sell their allocable remainder oil to the
Group for resale in the PRC market.
Overseas
--------
The Group and the other partners to the production sharing contracts in
Indonesia are required to bear all exploration, development and operating
costs according to their respective participating interests. Exploration,
development and operating costs which qualify for recovery can be
recovered according to the production sharing formula after commercial
discoveries are made and production begins.
The Group's net interest in the production sharing contracts in Indonesia
consists of its participating interest in the properties covered under
the relevant production sharing contracts, less oil and gas distributed
to the Indonesian government and the domestic market obligation.
6. SEGMENT INFORMATION
The Group is organised on a worldwide basis into three major operating
segments. Segment information is presented by way of two segment formats:
(i) on a primary reporting basis, by business segment; and (ii) on a
secondary segment reporting basis, by geographical segment.
Intersegment transactions: segment revenue, segment expenses and segment
performance include transfers between business segments and between
geographical segments. Such transfers are accounted for at cost. Those
transfers are eliminated on consolidation.
(a) Business segments
The Group is involved in the upstream operating activities of the
petroleum industry that comprise independent operations, production
sharing contracts with foreign partners and trading business. These
segments are determined primarily because the senior management
makes key operating decisions and assesses performance of the
segments separately. The Group evaluates performance based on profit
or loss from operations before income taxes.
F-24
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
6. SEGMENT INFORMATION (CONT'D)
(a) Business segments (cont'd)
The following tables present revenues, profit and certain assets,
liabilities and expenditures information for the Group's business
segments.
Independent operations Production sharing contracts
---------------------------------------------- -----------------------------------------------
Segment revenue 2002 2003 2004 2002 2003 2004
--------------- --------------- -------------- --------------- --------------- --------------- ---------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales 10,318,549 12,040,587 15,177,621 13,460,745 16,076,244 21,708,398
Marketing revenues - - - - - -
Intersegment revenues - - 920,669 1,023,547 3,730,797 2,551,181
Other income 43,513 8,468 6,139 133,108 424,493 136,942
--------------- -------------- --------------- --------------- --------------- ---------------
Total 10,362,062 12,049,055 16,104,429 14,617,400 20,231,534 24,396,521
--------------- -------------- --------------- --------------- --------------- ---------------
Segment results
---------------
Operating expenses (1,268,360) (1,579,004) (1,828,614) (2,506,974) (2,933,805) (3,241,730)
Production taxes ( 556,583) ( 626,897) (775,210) ( 466,466) ( 611,701) (950,464)
Exploration costs (1,241,759) (590,541) (1,136,055) (76,564) (257,531) (180,105)
Depreciation, depletion and
amortisation (1,635,131) (1,855,983) (2,235,064) (2,384,401) (2,786,770) (3,219,998)
Dismantlement ( 72,751) ( 96,206) (117,310) ( 53,388) ( 71,120) (84,327)
Crude oil and product purchases - - (920,669) (1,023,547) (3,730,797) (2,551,181)
Selling and administrative expenses (38,548) (62,247) (50,721) (553,537) (666,369) (557,521)
Others - (36,406) - (30,866) (313,826) (45,844)
Interest income - - - 3,831 14,302 2,077
Interest expenses (62,081) (60,358) (135,119) (17,100) (20,817) (64,956)
Exchange gains/(losses), net - - - 794 124 (15,308)
Short term investments income - - - - - -
Share of profit of associates - - - - - -
Non-operating income/(expenses),
net (85,414) - - (220) - -
Tax - - - - -
--------------- -------------- --------------- --------------- --------------- ---------------
Net profit 5,401,435 7,141,413 8,905,667 7,508,962 8,853,224 13,487,164
--------------- -------------- --------------- --------------- --------------- ---------------
Other segment information
-------------------------
Segment assets 16,899,455 36,087,581 20,670,651 22,446,447 26,821,223 37,767,197
Investment in associates - - - - - -
Total assets 16,899,455 36,087,581 20,670,651 22,446,447 26,821,223 37,767,197
Segment liabilities (3,033,327) (3,554,720) (3,913,905) (10,200,032) (12,620,113) (11,453,307)
Capital expenditure 2,770,640 5,960,071 6,309,397 4,396,933 2,264,625 13,145,839
=============== ============== =============== =============== =============== ===============
Trading business Unallocated
---------------------------------------------- -----------------------------------------------
Segment revenue 2002 2003 2004 2002 2003 2004
--------------- --------------- -------------- --------------- --------------- --------------- ---------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales - - - - - -
Marketing revenues 2,377,469 12,398,661 18,191,353 - - -
Intersegment revenues - - - - - -
Other income - - - 40,431 1,820 1,610
Total 2,377,469 12,398,661 18,191,353 40,431 1,820 1,610
Segment results
Operating expenses - - - - - -
Production taxes - - - - - -
Exploration costs - - - - - -
Depreciation, depletion and
amortisation - - - - - -
Dismantlement - - - - - -
Crude oil and product purchases (2,326,338) (12,295,238) (17,963,461) - - -
Selling and administrative
expenses - - - (414,455) (483,907) (449,464)
Others - - - - - -
Interest income - - - 144,039 169,274 204,795
Interest expenses - - - (215,611) (273,765) (241,750)
Exchange gains/(losses), net - - - (114,608) (6,870) 44,577
Short term investments income - - - 193,277 123,483 72,438
Share of profit of associates - - - 165,387 220,263 344,469
Non-operating income/(expenses),
net - - - 14,255 314,968 519,206
Tax - - - (3,541,416) (4,627,836) (6,930,826)
Net profit 51,131 103,423 227,892 (3,728,701) (4,562,570) (6,434,945)
Other segment information
Segment assets 630,704 2,629,009 1,712,212 20,581,722 6,848,849 32,599,362
Investment in associates - - - 537,377 1,117,640 1,327,109
Total assets 630,704 2,629,009 1,712,212 21,119,099 7,966,489 33,926,471
Segment liabilities (21,665) (2,173,828) (809,663) (7,272,193) (8,419,109) (21,182,195)
Capital expenditure - - - 37,652 46,868 164,775
Eliminations Consolidated
---------------------------------------------- -----------------------------------------------
Segment revenue 2002 2003 2004 2002 2003 2004
--------------- --------------- -------------- --------------- --------------- --------------- ---------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Sales to external customers:
Oil and gas sales - - - 23,779,294 28,116,831 36,886,019
Marketing revenues - - - 2,377,469 12,398,661 18,191,353
Intersegment revenues (1,023,547) (3,730,797) (3,471,850) - - -
Other income - - - 217,052 434,781 144,691
Total (1,023,547) (3,730,797) (3,471,850) 26,373,815 40,950,273 55,222,063
Segment results
Operating expenses - - - (3,775,334) (4,512,809) (5,070,344)
Production taxes - - - (1,023,049) (1,238,598) (1,725,674)
Exploration costs - - - (1,318,323) (848,072) (1,316,160)
Depreciation, depletion and
amortisation - - - (4,019,532) (4,642,753) (5,455,062)
Dismantlement - - - ( 126,139) ( 167,326) (201,637)
Crude oil and product purchases 1,023,547 3,730,797 3,471,850 (2,326,338) (12,295,238) (17,963,461)
Selling and administrative expenses - - - (1,006,540) (1,212,523) (1,057,706)
Others - - - (30,866) (350,232) (45,844)
Interest income - - - 147,870 183,576 206,872
Interest expenses - - - (294,792) (354,940) (441,825)
Exchange gains/(losses), net - - - (113,814) (6,746) 29,269
Short term investments income - - - 193,277 123,483 72,438
Share of profit of associates - - - 165,387 220,263 344,469
Non-operating income/(expenses),
net - - - (71,379) 314,968 519,206
Tax - - - (3,541,416) (4,627,836) (6,930,826)
Net profit 9,232,827 11,535,490 16,185,778
Other segment information
Segment assets - - - 60,558,328 72,386,662 92,749,422
Investment in associates - - - 537,377 1,117,640 1,327,109
Total assets - - - 61,095,705 73,504,302 94,076,531
Segment liabilities - - - (20,527,217) (26,767,770) (37,359,070)
Capital expenditure - - - 7,205,225 8,271,564 19,620,011
F-25
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
6. SEGMENT INFORMATION (CONT'D)
(b) Geographical segments
In determining the Group's geographical segments, revenues and
results are attributed to the segments based on the location of the
Group's customers, and assets are attributed to the segments based
on the location of the Group's assets.
The Group mainly engaged in the exploration, development and
production of crude oil and natural gas in offshore China. Any
activities outside PRC are mainly conducted in Indonesia and
Singapore. An analysis by geographical segment is as follows:
PRC Outside PRC
----------------------------------------------- -----------------------------------------------
2002 2003 2004 2002 2003 2004
-------------- -------------- --------------- -------------- -------------- ---------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
External sales 22,781,301 25,416,466 30,453,453 3,592,514 15,533,807 24,768,610
Segment assets 50,647,452 61,357,931 75,298,171 10,448,253 12,146,371 18,778,360
Capital expenditures 6,453,798 7,727,171 12,014,894 751,427 544,393 7,605,117
Total
-----------------------------------------------
2002 2003 2004
-------------- -------------- ---------------
External sales 26,373,815 40,950,273 55,222,063
Segment assets 61,095,705 73,504,302 94,076,531
Capital expenditures 7,205,225 8,271,564 19,620,011
(c) An analysis of sales to major customers by business segment is as
follows:
2002 2003 2004
----------------- ---------------- -----------------
RMB'000 RMB'000 RMB'000
Production sharing contracts
----------------------------
China Petroleum & Chemical Corporation 3,707,536 3,848,361 6,932,008
PetroChina Company Limited 1,187,571 1,446,169 1,944,709
Castle Peak Power Company Limited 1,247,639 841,285 1,070,436
--------- --------- ---------
6,142,746 6,135,815 9,947,153
--------- --------- ---------
Independent operations
----------------------
China Petroleum & Chemical Corporation 3,183,341 3,126,708 3,702,058
--------- --------- ---------
9,326,087 9,262,523 13,649,211
========= ========= ==========
7. OIL AND GAS SALES
2002 2003 2004
----------------- ---------------- -----------------
RMB'000 RMB'000 RMB'000
Gross sales 26,086,646 30,556,967 39,955,702
Royalties ( 464,113) ( 478,454) ( 610,055)
PRC government share oil ( 1,843,239) ( 1,961,682) ( 2,459,628)
------------ ------------ ------------
23,779,294 28,116,831 36,886,019
============ ============ ============
F-26
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
8. MARKETING PROFIT
2002 2003 2004
----------------- ---------------- -----------------
RMB'000 RMB'000 RMB'000
Marketing revenues 2,377,469 12,398,661 18,191,353
Crude oil and product purchases ( 2,326,338) (12,295,238) (17,963,461)
------------ ---------- ----------
51,131 103,423 227,892
============ ========== ==========
9. SELLING AND ADMINISTRATIVE EXPENSES
2002 2003 2004
----------------- ---------------- -----------------
RMB'000 RMB'000 RMB'000
Salary and staff benefits 390,376 393,165 265,007
Utility and office expenses 100,502 90,801 115,817
Transportation and entertainment 64,319 74,218 75,675
Rentals and maintenance 75,738 107,310 128,579
Management fee 151,860 219,771 218,087
Selling expenses 38,548 30,686 36,015
(Reversal) of/Provision for inventory obsolescence - 8,745 ( 2,710)
Other 185,197 287,827 221,236
------------ ---------- ---------
1,006,540 1,212,523 1,057,706
============ ========== ==========
10. INTEREST EXPENSES
2002 2003 2004
----------------- ---------------- -----------------
RMB'000 RMB'000 RMB'000
Interest on bank loans which are:
- wholly repayable within five years 177,156 81,539 80,829
- not wholly repayable within five years - - -
Interest on long term guaranteed notes 215,028 391,005 485,812
Other borrowing costs 12,426 34,933 163
---------- --------- -------
Total interest 404,610 507,477 566,804
Less: Amount capitalised in property, plant
and equipment (note 16) ( 187,714) ( 245,783) (244,686)
---------- --------- -------
216,896 261,694 322,118
Other finance costs:
Increase in discounted amount of provisions
arising from the passage of time (note 27) 77,896 93,246 119,707
---------- --------- -------
294,792 354,940 441,825
========== ========= =======
The interest rates used for interest capitalisation represented the cost
of capital from raising the related borrowings and varied from 4.1% to
9.2% per annum for the year ended December 31, 2004. (2003:4.1% to 9.15%,
2002:2.35% to 9.15%).
F-27
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
11. DIRECTORS' REMUNERATION
Directors' remuneration for the year, disclosed pursuant to the Listing
Rules and Section 161 of the Companies Ordinance, is as follows:
2002 2003 2004
----------------- ---------------- -----------------
RMB'000 RMB'000 RMB'000
Fees for executive directors - - -
Fees for non-executive directors 890 1,000 851
Other emoluments for executive directors
- Basic salaries and allowances 6,654 6,327 6,556
- Bonus 1,109 2,100 -
- Pension scheme contribution 214 207 62
- Other 1,500 1,425 1,200
The number of directors whose remuneration fell within the following
bands is as follows:
Number of Directors
----------------------------------------------------------
2002 2003 2004
----------------- ---------------- -----------------
Nil to HK$1,000,000 8 6 6
HK$1,000,001- HK$1,500,000 - 1 -
HK$1,500,001- HK$2,000,000 2 - -
HK$2,000,001- HK$2,500,000 1 - -
HK$2,500,001- HK$3,000,000 - 2 1
HK$3,000,001- HK$3,500,000 - - 1
----------------- ---------------- -----------------
11 9 8
================= ================ =================
There was no arrangement under which a director waived or agreed to waive
any remuneration during the year.
No value in respect of the share options granted during the year (note
28) has been charged to the income statement, or is otherwise included in
the above directors' remuneration disclosures.
F-28
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
12. FIVE HIGHEST PAID EMPLOYEES
Details of the remuneration of the five highest paid employees during the
year are as follows:
2002 2003 2004
--------------- -------------- -------------
RMB'000 RMB'000 RMB'000
Basic salaries and allowances 8,227 15,857 18,227
Bonus 2,518 2,550 4,589
Pension scheme contributions 505 1,332 1,509
Other 2,732 2,743 2,282
------ ------ ------
13,982 22,482 26,607
====== ====== ======
Number of directors 4 - -
Number of employees 1 5 5
The number of highest paid employees whose remuneration fell within the
following bands is as follows:
Number of employees
-----------------------------------------------------------
2002 2003 2004
------------------- ------------------- -------------------
Nil to HK$1,000,000 1 - -
HK$1,500,001- HK$2,000,000 2 - -
HK$2,500,001- HK$3,000,000 1 - -
HK$3,000,001- HK$3,500,000 - - 1
HK$3,500,001- HK$4,000,000 - 3 1
HK$4,000,001- HK$4,500,000 - - 1
HK$4,500,001- HK$5,000,000 1 - -
HK$5,000,001- HK$5,500,000 - 2 -
HK$5,500,001- HK$6,000,000 - - 1
HK$6,000,001- HK$8,000,000 - - -
HK$8,000,001- HK$8,500,000 - - 1
------------------- ------------------- -------------------
5 5 5
=================== =================== ===================
No value in respect of the share options granted during the year (note
28) has been charged to the income statement, or is otherwise included in
the above five highest paid employees disclosures.
F-29
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
13. TAX
(i) Income tax
The Company and its subsidiaries are subject to income taxes on an
entity basis on profit arising in or derived from the tax
jurisdictions in which they are domiciled and operated. The Company
is not liable for profits tax in Hong Kong as it does not have any
assessable income currently sourced from Hong Kong.
The Company's subsidiary, CNOOC China Limited, is a wholly
foreign-owned enterprise established in the PRC. It is exempt from
the 3% local surcharge and is subject to an enterprise income tax of
30% under the prevailing tax rules and regulations.
The Company's subsidiary in Singapore, China Offshore Oil
(Singapore) International Pte Ltd., is subject to income tax at
rates of 10% and 20%, for its oil trading activities and other
income generating activities, respectively. The Company's
subsidiaries owning interests in oil and gas properties in Indonesia
along the Malacca Strait are subject to corporate and dividend tax
at the rate of 44%. The Company's subsidiaries owning interests in
oil and gas properties in Indonesia acquired from Repsol YPF, S.A.
are subject to corporate and dividend tax at the rate of 43.125% to
51.875%. All of the Company's other subsidiaries are not subject to
any income taxes in their respective jurisdictions for the year
presented.
An analysis of the provision for tax in the consolidated income
statement was as follows:
2002 2003 2004
--------------- -------------- -------------
RMB'000 RMB'000 RMB'000
Overseas income taxes
- Current 406,493 654,988 755,568
- Deferred 26,094 (179,134) ( 170,118)
PRC enterprise income tax
- Current 2,786,938 3,623,157 6,411,417
- Deferred 321,891 528,825 ( 66,041)
--------- --------- ---------
Tax charge for the year 3,541,416 4,627,836 6,930,826
========= ========= =========
A reconciliation of the statutory PRC enterprise income tax rate to
the effective income tax rate of the Group is as follows:
2002 2003 2004
--------------- -------------- -------------
% % %
Statutory PRC enterprise income tax rate 33.0 33.0 33.0
Effect of tax exemption granted (3.0) (3.0) (3.0)
Effect of different tax rates for overseas
subsidiaries 0.2 (0.1) 0.3
Tax credit from government (2.1) (1.5) (0.3)
Tax effect on other permanent differences (0.4) 0.2 0.3
--------------- -------------- -------------
Effective income tax rate 27.7 28.6 30.3
=============== ============== =============
F-30
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
13. TAX (CONT'D)
(i) Income tax (cont'd)
The tax effect of significant temporary differences of the Group was
as follows:
2002 2003 2004
--------------- --------------- ---------------
RMB'000 RMB'000 RMB'000
Deferred tax assets
- Provision for retirement and termination benefits 86,602 114,758 112,150
- Provision for dismantlement 671,796 775,725 926,834
- Provision for impairment of property, plant and
equipment and write-off of unsuccessful exploratory
drillings 933,636 759,454 869,286
--------------- --------------- ---------------
1,692,034 1,649,937 1,908,270
--------------- --------------- ---------------
Deferred tax liabilities
- Accelerated amortisation allowance for oil and gas
properties (7,833,190) (7,433,133) (8,596,768)
--------------- --------------- ---------------
Net deferred tax liabilities (6,141,156) (5,783,196) (6,688,498)
=============== =============== ===============
As at December 31, 2004, there was no significant unrecognised
deferred tax liability (2003: Nil) for taxes that would be payable
on the unremitted earnings of certain of the Group's subsidiaries
and associates as the Group had no liability to additional tax
should such amounts be remitted.
There are no income tax consequences attaching to the payment of
dividends by the Company to its shareholders.
(ii) Other taxes
The Company's PRC subsidiary pays the following other taxes:
-- Production taxes equal to 5% of independent production and
production under production sharing contracts; and
-- Business tax of 3% to 5% on other income.
14. DIVIDENDS
On April 28, 2004, the board of directors declared an interim dividend
and a special interim dividend of HK$0.06 per share in place of 2003
final dividend and final special dividend, totaling HK$2,464,249,697
(equivalent to approximately RMB2,617,526,000) (2003: nil). The board of
directors also withdrew its recommendation that the Company declared any
final or special final dividend for the year ended December 31, 2003.
On August 25, 2004, the board of directors declared an interim dividend
of HK$0.03 per share (2003: HK$0.028 per share), totaling
HK$1,231,618,058 (equivalent to approximately RMB1,306,451,000) (2003:
RMB1,220,132,000), and a special interim dividend of HK$0.05 per share
(2003: HK$0.036 per share), totaling HK$2,052,696,764 (equivalent to
approximately RMB2,177,418,000) (2003: RMB1,568,741,000).
F-31
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
14. DIVIDENDS (CONT'D)
The board of directors have recommended a final dividend of HK$0.03 per
ordinary share, totaling HK$1,231,571,258 (approximately equivalent to
RMB1,310,022,000), and a special final dividend of HK$0.05 per ordinary
share, totaling HK$2,052,618,764 (approximately equivalent to
RMB2,183,371,000) for the year ended December 31, 2004.
The payment of future dividends will be determined by the Company's board
of directors. The payment of dividends will depend upon, among other
things, future earnings, capital requirements, financial conditions and
general business conditions of the Company. The Company's ability to pay
dividends will also depend on the cash flows determined by the dividends,
if any, received by the Company from its subsidiaries and associated
companies. As the controlling shareholder, CNOOC will be able to
influence the Company's dividend policy.
Cash dividends to the shareholders in Hong Kong will be paid in Hong Kong
dollars and dividends to the American Depositary Receipts ("ADR") holders
will be paid to the depositary in Hong Kong dollars and will be converted
by the depositary into United States dollars and paid to the holders of
ADRs.
15. EARNINGS PER SHARE
2002 2003 2004
---------------------- ------------------ -------------------
RMB'000 RMB'000 RMB'000
Earnings
--------
Net profit attributable to shareholders,
used in the basic and diluted earnings
per share calculations 9,232,827 11,535,490 16,185,778
Shares (after Stock Split) Number of shares
--------------------------
--------------------------------------------------------------------
2002 2003 2004
---------------------- ------------------ -------------------
Weighted average number of ordinary shares
for the purpose or basic earnings
before effects of shares repurchased 41,070,828,275 41,070,828,275 41,070,828,275
Effects of shares repurchased - - (10,587,616)
---------------------- ------------------ -------------------
Weighted average number of ordinary shares
for the purpose of basic earnings per
share 41,070,828,275 41,070,828,275 41,060,240,659
Effect of dilutive potential ordinary
shares
under shares option scheme 25,598,645 39,510,820 66,720,503
Effect of diluted potential ordinary
shares for convertible bonds - - 52,552,274
---------------------- ------------------ -------------------
Weighted average number of ordinary shares
for the purpose of diluted earnings
per share 41,096,426,920 41,110,339,095 41,179,513,436
====================== ================== ===================
Net income per ADS for the three years ended December 31, 2004 has been
computed by dividing net income by the number of ADS outstanding. Each
ADS represented 100 shares.
F-32
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
16. PROPERTY, PLANT AND EQUIPMENT, NET
Movements in the property, plant and equipment of the Group are as
follows:
2004
----------------------------------------------------------------------
Vehicles and
Oil and gas Land and office
properties buildings equipment Total
RMB'000 RMB'000 RMB'000 RMB'000
----------------- ---------------- ----------------- -----------------
Cost or valuation:
At beginning of year 70,137,828 824,781 139,902 71,102,511
Additions 12,845,367 116,797 47,977 13,010,141
Acquisition (including prepayments) 6,934,951 - - 6,934,951
Disposals and write-off ( 3) - ( 174) ( 177)
Exchange realignment ( 249) - - ( 249)
----------------- ---------------- ----------------- -----------------
End of year 89,917,894 941,578 187,705 91,047,177
================= ================ ================= =================
Analysis of cost or valuation
At cost 89,917,894 116,797 187,705 90,222,396
At revaluation - 824,781 - 824,781
----------------- ---------------- ----------------- -----------------
89,917,894 941,578 187,705 91,047,177
================= ================ ================= =================
Accumulated depreciation, depletion
and amortisation:
At beginning of year ( 27,839,105) ( 106,401) (33,204) (27,978,710)
Depreciation provided during the ( 5,575,114) ( 26,054) (10,882) ( 5,612,050)
year
Disposals - - 5 5
Exchange realignment 83 - 192 275
----------------- ---------------- ----------------- -----------------
End of year (33,414,136) (132,455) (43,889) (33,590,480)
================= ================ ================= =================
Net book value:
Beginning of year 42,298,723 718,380 106,698 43,123,801
================= ================ ================= =================
End of year 56,503,758 809,123 143,816 57,456,697
================= ================ ================= =================
Had the property, plant and
equipment been carried at cost
less accumulated depreciation,
depletion and amortisation, the
carrying amount of each class
would have been:
Cost 89,917,894 666,907 187,705 90,772,506
Accumulated depreciation, depletion
and amortisation (33,414,136) (88,246) (43,889) (33,546,271)
----------------- ---------------- ----------------- -----------------
56,503,758 578,661 143,816 57,226,235
================= ================ ================= =================
F-33
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
16. PROPERTY, PLANT AND EQUIPMENT, NET (CONT'D)
2003
----------------------------------------------------------------------
Vehicles and
Oil and gas Land and office
properties buildings equipment Total
----------------- ---------------- ----------------- -----------------
RMB'000 RMB'000 RMB'000 RMB'000
Cost or valuation:
At beginning of year 58,321,780 824,781 93,720 59,240,281
Purchase price allocation adjustment ( 707,623) - - ( 707,623)
Additions 8,538,930 - 46,868 8,585,798
Acquisition (including prepayments) 4,025,441 - - 4,025,441
Disposals and write-off ( 39,798) - ( 604) ( 40,402)
Exchange realignment ( 902) - ( 82) ( 984)
----------------- ---------------- ----------------- -----------------
End of year 70,137,828 824,781 139,902 71,102,511
================= ================ ================= =================
Analysis of cost or valuation
At cost 70,137,828 - 139,902 70,277,730
At revaluation - 824,781 - 824,781
----------------- ---------------- ----------------- -----------------
70,137,828 824,781 139,902 71,102,511
================= ================ ================= =================
Accumulated depreciation, depletion
and amortisation:
At beginning of year (23,059,600) ( 81,027) (27,834) (23,168,461)
Depreciation provided during the ( 4,779,271) ( 25,374) (6,045) ( 4,810,690)
year
Disposals - - 584 584
Exchange realignment ( 234) - 91 ( 143)
----------------- ---------------- ----------------- -----------------
End of year (27,839,105) (106,401) (33,204) (27,978,710)
================= ================ ================= =================
Net book value:
Beginning of year 35,262,180 743,754 65,886 36,071,820
================= ================ ================= =================
End of year 42,298,723 718,380 106,698 43,123,801
================= ================ ================= =================
Had the property, plant and
equipment been carried at cost
less accumulated depreciation,
depletion and amortisation, the
carrying amount of each class
would have been:
Cost 70,137,828 550,110 139,902 70,827,840
Accumulated depreciation, depletion
and amortisation (27,839,105) ( 71,348) (33,204) (27,943,657)
----------------- ---------------- ----------------- -----------------
42,298,723 478,762 106,698 42,884,183
================= ================ ================= =================
F-34
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
16. PROPERTY, PLANT AND EQUIPMENT, NET (CONT'D)
During the year, additions to the Group's property, plant and equipment
amounted to approximately RMB13,010,141,000 (2003: RMB8,585,798,000). The
consideration paid of US$567 million (equivalent to RMB4,693,809,000) for
the NWS project (see note 4(ii)) has been included as a prepayment in oil
and gas properties as at December 31, 2004.
Included in the current year additions was an amount of approximately
RMB244,686,000 (2003: RMB245,783,000) in respect of interest capitalised
in property, plant and equipment.
The land and buildings of the Group are held outside Hong Kong with lease
terms of 50 years.
The land and buildings were revalued by an independent valuer, Sallmanns
(Far East) Limited, Chartered Surveyors (the "Valuer") as at December 31,
2000 using a depreciated replacement cost approach. The depreciated
replacement cost approach considers the cost to reproduce or replace in
new condition the property being appraised in accordance with current
construction costs for similar property in the locality with allowance
for accrued depreciation as evidenced by observed condition or
obsolescence present, whether arising from physical, functional or
economic causes. The Valuer assumed that the assets would be used for the
purposes for which they are presently used and did not consider
alternative uses. Certain land use rights which were previously granted
by the PRC government at no cost.
17. INVESTMENTS IN ASSOCIATES
Investments in associates represent (1) a 30% equity interest of CNOOC
China Limited in Shanghai Petroleum and Natural Gas Company Limited
("SPC"). SPC was incorporated on September 7, 1992 in the PRC with
limited liability and is principally engaged in offshore petroleum
exploration, development, production and sale in the South Yellow Sea and
East China Sea areas. The issued and paid-up capital of SPC is RMB900
million; and (2) a 31.8% equity interest of CNOOC China Limited in CNOOC
Finance Corporation Limited ("CNOOC Finance"). CNOOC Finance was
incorporated on May 13, 2002 in the PRC with limited liability and is
principally engaged in deposit-taking and money lending activities for
the CNOOC Group. The issued and paid-up capital of CNOOC Finance is
RMB1,415 million.
2003 2004
--------------------- -------------------
RMB'000 RMB' 000
Share of net assets 1,117,640 1,327,109
===================== ===================
The directors are of the opinion that the underlying value of the
investments in associates is not less than the carrying amount of the
associates as at December 31, 2004 and 2003.
F-35
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
18. ACCOUNTS RECEIVABLE, NET
The Group's trading terms with its customers are mainly on credit, except
for new customers, where payment in advance is normally required. The
customers are required to make payment within 30 days after the delivery
of oil and gas. As at December 31, 2004 and 2003, substantially all the
accounts receivable were aged within six months.
19. INVENTORIES AND SUPPLIES
2003 2004
----------------- -----------------
RMB'000 RMB'000
Materials and supplies 809,827 879,300
Oil in tanks 291,844 274,029
Less: Provision for inventories obsolescence ( 8,745) ( 6,035)
----------------- -----------------
1,092,926 1,147,294
================= =================
20. SHORT TERM INVESTMENTS
As at December 31, 2004 and 2003, short term investments mainly
represented investments in liquidity funds and were stated at fair value
at the balance sheet date. Details of the short term investments were as
follows:
2003 2004
----------------- -----------------
RMB'000 RMB'000
Unlisted investments, at fair value
Liquidity funds 3,767,179 3,763,959
Corporate bonds 1,876,880 1,639,956
Common stock 40,274 40,198
----------------- -----------------
5,684,333 5,444,113
================= =================
21. ACCOUNTS PAYABLE
As at December 31, 2004 and 2003, substantially all the accounts payable
were aged within six months.
F-36
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
22. OTHER PAYABLES AND ACCRUED LIABILITIES
2003 2004
----------------- -----------------
RMB'000 RMB'000
Accrued payroll and welfare payable 149,532 156,706
Provision for retirement and termination benefits 290,955 292,128
Accrued expenses 926,867 2,818,785
Advances from customers 10,864 12,588
Royalties payable 205,113 142,638
Other payables 372,452 768,179
----------------- -----------------
1,955,783 4,191,024
================= =================
As at December 31, 2004, deferred revenue from gas sales contracts
amounted to approximately RMB1,050,000 (2003: RMB1,208,000) and was
included in other payables.
23. LONG TERM BANK LOANS
As at December 31, 2004, the long term bank loans of the Group were used
primarily to finance the development of oil and gas properties and to
meet working capital requirements.
Interest rate and final maturity 2003 2004
------------------------------------------------ ------------ ------------
RMB'000 RMB'000
US$ denominated bank Fixed interest rate of 9.2% per annum with
loans maturities through 2006 827,615 827,650
Japanese Yen
denominated bank Fixed interest rate of 4.1% per annum with
loans maturities through to 2007 82,578 61,925
------------ ------------
910,193 889,575
Less: Current portion of long term bank loans ( 20,618) (24,364)
------------ ------------
889,575 865,211
============ ============
As at December 31, 2004 and 2003, all the bank loans of the Group were
unsecured and none of the outstanding borrowings were guaranteed by
CNOOC.
F-37
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
23. LONG TERM BANK LOANS (CONT'D)
The maturities of the long term bank loans are as follows:
2003 2004
--------------- --------------
RMB'000 RMB'000
Balances due:
- Within one year 20,618 24,364
- After one year but within two years 24,364 846,471
- After two years but within three years 846,471 18,740
- After three years but within four years 18,740 -
- After four years but within five years - -
--------------- --------------
910,193 889,575
Amount due within one year shown under current liabilities ( 20,618) ( 24,364)
--------------- --------------
889,575 865,211
=============== ==============
Supplemental information with respect to long term bank loans:
Maximum Average Weighted
Weighted amount amount average
average outstanding outstanding interest rate
Balance interest rate during the during the during the
For the year ended at year end at year end year year* year**
December 31 RMB'000 RMB'000 RMB'000
----------------------- ------------- ------------- -------------- ------------- --------------
2004 889,575 8.81% 910,193 899,884 8.37%
2003 910,193 8.69% 1,238,611 1,074,403 7.94%
* The average amount outstanding is computed by dividing the total of
outstanding principal balances as at January 1 and December 31 by
two.
** The weighted average interest rate is computed by dividing the total
of weighted average interest rates as at January 1 and December 31
by two.
F-38
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
24. LONG TERM GUARANTEED NOTES
On March 1, 2002, CNOOC Finance (2002) Limited, a company incorporated in
the British Virgin Islands on January 24, 2002 and a wholly-owned
subsidiary of the Company, issued US$500 million of a principal amount of
6.375% guaranteed notes due in 2012. The obligations of CNOOC Finance
(2002) Limited in respect of the notes are unconditionally and
irrevocably guaranteed by the Company.
On May 21, 2003, CNOOC Finance (2003) Limited, a company incorporated in
the British Virgin Islands on April 2, 2003 and a wholly-owned subsidiary
of the Company, issued US$200 million of a principal amount of 4.125%
guaranteed notes due in 2013 and US$300 million of a principal amount of
5.500% guaranteed notes due in 2033. The obligations of CNOOC Finance
(2003) Limited in respect of the notes are unconditionally and
irrevocably guaranteed by the Company.
On December 15, 2004, CNOOC Finance (2004) Limited, a company
incorporated in the British Virgin Islands on December 9, 2004 and a
wholly-owned subsidiary of the Company, issued US$1 billion zero coupon
guaranteed convertible bonds due 2009, unconditionally and irrevocably
guaranteed by, and convertible into shares of the Company. The bonds are
converted at HK$6.075 per share, subject to adjustment for, among other
things, subdivision or consolidation of shares, bond issues, right
issues, capital distribution and other dilutive events. Unless previous
redeemed, converted or purchased and cancelled, the bonds will be
redeemed on the maturity date at 105.114% of the principal amount.
25. BALANCES WITH THE PARENT COMPANY
As at December 31, 2004 and 2003, the balances with CNOOC were unsecured,
interest-free and were repayable on demand.
26. RELATED PARTY TRANSACTIONS
Companies are considered to be related if one Company has the ability,
directly or indirectly, to control the other Company or exercise
significant influence over the other Company in making financial and
operating decisions. Companies are also considered to be related if they
are subject to common control or common significant influence.
The Group has entered into several agreements with CNOOC and its
affiliates, which govern the provision of materials, utilities and
ancillary services, the provision of technical services, the provision of
research and development services, and various other commercial
arrangements.
In addition to the transactions and balances detailed elsewhere in these
financial statements, the Group had the following material transactions
with related parties during the year:
F-39
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
26. RELATED PARTY TRANSACTIONS (CONT'D)
Notes 2002 2003 2004
--------- --------- ---------
RMB'000 RMB'000 RMB'000
Materials, utilities and ancillary services (i) 789,167 1,018,066 1,295,598
Technical services (ii) 3,279,596 3,828,282 6,362,206
Research and development services (iii) 167,354 83,280 7,800
Lease and property management services (iv) 54,421 56,867 76,721
Included in:
Exploration expenses 593,059 487,293 960,031
Operating expenses 993,825 1,176,601 1,405,877
Selling and administrative expenses 190,449 191,349 326,004
Capitalised under property, plant and equipment 2,513,205 3,131,252 5,050,413
(i) Materials, utilities and ancillary services
CNOOC China Limited has entered into materials, utilities and
ancillary services supply agreements with the affiliates of CNOOC.
Under these agreements, the affiliates of CNOOC provide to CNOOC
China Limited various materials, utilities and ancillary services.
The materials, utilities and ancillary services are provided at:
-- state-prescribed prices; or
-- where there is no state-prescribed price, at market prices,
including the local or national market prices or the prices at
which CNOOC's affiliates previously provided the relevant
materials, utilities and ancillary services to independent
third parties; or
-- where neither of the prices mentioned above is applicable, at
the cost to CNOOC's affiliates of providing the relevant
materials, utilities and services, including the cost of
sourcing or purchasing from third parties, plus a margin of not
more than 5% before any applicable taxes.
(ii) Technical services
CNOOC China Limited has entered into technical service agreements
with certain affiliates of CNOOC. According to the agreements, the
Group uses the technical services including:
-- offshore drilling;
-- ship tugging, oil tanker transportation and security services;
-- well survey, well logging, well cementation and other related
technical services;
-- collection of geophysical data, ocean geological prospecting,
and data processing;
-- platform fabrication service and maintenance; and
-- design, construction, installation and test of offshore and
onshore production facilities.
F-40
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
26. RELATED PARTY TRANSACTIONS (CONT'D)
(iii) Research and development services
The Group has revised the original research and development services
agreement with CNOOC's subsidiary, China Offshore Oil Research
Centre, due to the restructuring of operations in 2004.
(iv) Lease and property management services
The Group has entered into lease and property management services
agreements with the affiliates of CNOOC for the leasing of various
office, warehouse and residential premises. Lease charges are based
on the prevailing market rates.
(v) Sale of crude oil, condensated oil and liquefied petroleum gas
The Group sells crude oil, condensated oil and liquefied petroleum
gas to CNOOC's affiliates which engage in the downstream petroleum
business at the international market price. For the year ended
December 31, 2004, the total sales amounted to approximately
RMB13,945,565,000 (2003: RMB8,324,108,000).
During the period, the Company, through its wholly-owned subsidiary,
China Offshore Oil (Singapore) International Pte., Ltd. imported oil
into the PRC for trading, using CNOOC's import license. For the year
ended December 31, 2004, the total sales to its customers through
such arrangements amounted to approximately RMB446,923,000 (2003:
RMB1,470,832,000). The commission paid by the third party customers
to CNOOC for the year amounted to approximately RMB2,682,000 (2003:
RMB8,825,000).
(vi) Deposits with CNOOC Finance Corporation Limited
The Company entered into a framework agreement with CNOOC Finance
Corporation Limited ("CNOOC Finance") on April 8, 2004. Under the
framework agreement, the Group utilises the financial services
provided by CNOOC Finance, a 31.8% owned associate company of the
Company that is also a subsidiary of CNOOC. Such services include
placing of the Group's cash deposits with CNOOC Finance, and
settlement services for transactions between the Group and other
entities including CNOOC and its subsidiaries. The charges by CNOOC
Finance for its financial services to the Group are comparable to
those charged by PRC banks for similar services.
For the year ended December 31, 2004, the maximum outstanding
balance for deposits (including interest received in respect of
these deposits) placed with CNOOC Finance amounted to approximately
RMB5,300,381,000.
F-41
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
27. PROVISION FOR DISMANTLEMENT
Provision for dismantlement represents the estimated costs of dismantling
offshore oil platforms and abandoning oil and gas properties. The
provision for dismantlement has been classified under long term
liabilities. The associated cost is capitalised and the liability is
discounted and an accretion expense is recognised using the
credit-adjusted risk-free interest rate in effect when the liability is
initially recognised. The current year income statement charge represents
the amortisation charge on the dismantlement liabilities capitalised in
accordance with SSAP 28 and is included in the accumulated depreciation,
depletion and amortisation in note 16.
The details of the provision for dismantlement are as follows:
2003 2004
-------------- ---------------
RMB'000 RMB'000
At beginning of year: 2,239,320 2,646,800
Additional during the year and capitalised in oil and gas properties 314,234 322,941
Increase in discounted amount of provisions arising from the
passage of time 93,246 119,707
-------------- ---------------
End of year 2,646,800 3,089,448
============== ===============
28. SHARE CAPITAL
Shares (after stock split)
--------------------------
Number of Shares Share capital
------------------ ---------------
HK$'000
Authorised:
Ordinary shares of HK$0.02 each at
December 31, 2004 and 2003 75,000,000,000 1,500,000
================== ===============
Share capital
Share capital equivalent of
Number of Shares HK$'000 RMB'000
------------------ ----------------- ---------------
Issued and fully paid:
Ordinary shares of HK$0.02 each
As at January 1, 2004 and January 1, 2003 41,070,828,275 821,417 876,978
Repurchased and cancelled ( 18,453,000) ( 369) ( 392)
------------------ ----------------- ---------------
As at December 31, 2004 41,052,375,275 821,048 876,586
================== ================= ===============
The repurchase of the Company's shares during the year were effected by
the directors, pursuant to the mandate from shareholders received at the
last annual general meeting.
F-42
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
28. SHARE CAPITAL (CONT'D)
Share options
-------------
The Company has adopted share option schemes which provide for the grant
of options to the Company's senior management. Under these share option
schemes, the remuneration committee of the Company's board of directors
will from time to time propose for the board's approval, the recipient of
and number of shares underlying each option. These schemes provide for
the issuance of options exercisable for shares granted under these
schemes as described below not exceeding 10% of the total number of the
Company's outstanding shares, excluding shares issued upon exercise of
options granted under the schemes from time to time.
On February 4, 2001, the Company adopted a pre-global offering share
option scheme (the "Pre-Global Offering Share Option Scheme"). Pursuant
to the Pre-Global Offering Share Option Scheme:
1. options for an aggregate of 23,100,000 shares have been granted;
2. the subscription price per share is HK$1.19; and
3. the period during which an option may be exercised is as follows:
(a) 50% of the shares underlying the option shall vest 18 months
after the date of the grant; and
(b) 50% of the shares underlying the option shall vest 30 months
after the date of the grant.
The exercise period for options granted under the Pre-Global Offering
Share Option Scheme shall end not later than 10 years from March 12,
2001.
On February 4, 2001, the Company adopted a share option scheme (the "2001
Share Option Scheme") for the purposes of recognising the contribution
that certain individuals had made to the Company and attracting and
retaining the best available personnel to the Company. Pursuant to the
2001 Share Option Scheme:
1. options for an aggregate of 44,100,000 shares have been granted;
2. the subscription price per share is HK$1.232; and
3. the period during which an option may be exercised is follows:
(a) one-third of the shares underlying the option shall vest on the
first anniversary of the date of the grant;
(b) one-third of the shares underlying the option shall vest on the
second anniversary of the date of the grant; and
(c) one-third of the shares underlying the option shall vest on the
third anniversary of the date of the grant.
F-43
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
28. SHARE CAPITAL (CONT'D)
Share options (cont'd)
-------------
The exercise period for options granted under the 2001 Share Option
Scheme shall end not later than 10 years from August 27, 2001.
In view of the amendments to the relevant provisions of the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited (the "Listing Rules") regarding the requirements of share option
schemes of a Hong Kong listed company effective on September 1, 2001, no
further options will be granted under the 2001 Share Option Scheme.
In June 2002, the Company adopted a new share option scheme (the "2002
Share Option Scheme").
Under the 2002 Share Option Scheme, the directors of the Company may, at
their discretion, invite employees, including executive directors, of the
Company or any of its subsidiaries, to take up options to subscribe for
shares in the Company. The maximum aggregate number of shares (including
those that could be subscribed for under the Pre-Global Offering Share
Option Scheme and the 2001 Share Option Scheme) which may be granted
shall not exceed 10% of the total issued share capital of the Company.
The maximum number of shares which may be granted under the 2002 Share
Option Scheme to any individual in any 12-month period up to the next
grant of share options shall not exceed 1% of the total issued share
capital of the Company from time to time.
According to the 2002 Share Option Scheme, the consideration payable by a
participant for the grant of an option will be HK$1.00. The subscription
price of a share payable by a participant upon the exercise of an option
will be determined by the directors at their discretion at the date of
the grant, except that such price may not be set below a minimum price
which is the highest of:
1. the nominal value of shares;
2. the average closing price of the shares on The Stock Exchange of
Hong Kong Limited (the "HKSE") as stated in the HKSE's quotation
sheets for the five trading days immediately preceding the date of
the grant of the option; and
3. the closing price of the shares on the HKSE as stated in the HKSE's
quotation sheet on the date of the grant of the option.
F-44
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
28. SHARE CAPITAL (CONT'D)
Share options (cont'd)
-------------
On February 24, 2003, the board of directors approved a grant of options
in respect of 42,050,000 shares to the Company's senior management under
the 2002 Share Option Scheme. The exercise price for the options is
HK$2.108 per share. The market price was HK$2.11 per share preceding the
options granted. Options granted under the 2002 Share Option Scheme may
be exercised, in whole or in part, in accordance with the following
vesting schedule;
1. one-third of the shares underlying the option shall vest on the
first anniversary of the date of the grant;
2. one-third of the shares underlying the option shall vest on the
second anniversary of the date of the grant; and
3. one-third of the shares underlying the option shall vest on the
third anniversary of the date of the grant.
The exercise period for options granted under the 2002 Share Option
Scheme shall end not later than 10 years from February 24, 2003.
On February 5, 2004, the board of directors approved a grant of options
in respect of 50,700,000 shares to the Company's senior management under
the 2002 Share Option Scheme. The exercise price for the options is
HK$3.152 per share. The market price was HK$3.146 per share preceding the
options granted. Options granted under the 2002 Share option Scheme may
be exercised, in whole or in part, in accordance with the following
vesting schedule:
1. one-third of the shares underlying the option shall vest on the
first anniversary of the date of the grant;
2. one-third of the shares underlying the option shall vest on the
second anniversary of the date of the grant; and
3. one-third of the shares underlying the option shall vest on the
third anniversary of the date of the grant.
The exercise period for options granted under the 2002 Share Option
Scheme shall end not later than 10 years from February 5, 2004.
2,300,100 share options granted under the 2002 Share Option Scheme and
the 2001 Share Option Scheme have been exercised since the respective
dates of grant and up to the date when the board of directors approved
the financial statements. The total number of options exercisable as of
December 31, 2004 was 54,533,267.
F-45
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
29. RESERVES
According to the laws and regulations of the PRC and the articles of
association of CNOOC China Limited, CNOOC China Limited is required to
provide for certain statutory funds, namely, the general reserve fund and
staff and workers' bonus and welfare funds, which are appropriated from
net profit (after making good losses from previous years), but before
dividend distribution. CNOOC China Limited is required to allocate at
least 10% of its net profit as reported in accordance with the generally
accepted accounting principles in the PRC ("PRC GAAP") to the general
reserve fund until the balance of such fund has reached 50% of its
registered capital. Appropriation to the staff and workers' bonus and
welfare funds, which is determined at the discretion of CNOOC China
Limited's directors, is expensed as incurred under Hong Kong GAAP. The
general reserve fund can only be used, upon approval by the relevant
authority, to offset against accumulated losses or to increase capital.
The staff and workers' bonus and welfare fund can only be used for
special bonuses or collective welfare of employees, and assets acquired
through this fund shall not be taken as assets of CNOOC China Limited.
As at December 31, 2004, the general reserve fund appropriated amounted
to RMB4,413,610,000 (2003: RMB3,050,489,000), representing approximately
29.4% (2003: 20.4%) of the total registered capital of CNOOC China
Limited.
Included in retained earnings is an amount of RMB877,109,000 (2003:
RMB577,640,000), being the retained earnings attributable to associates.
The Company's ability to distribute dividends will largely depends on the
dividends it receives from its subsidiaries. The dividends distributable
by the Company's subsidiaries to the Company are determined in accordance
with the relevant accounting principle required by the local authorities.
As of December 31, 2004, the aggregate amount of the subsidiaries'
retained earnings available for distributions to the Company amounted to
approximately RMB16,652,414,000.
The cumulative translation reserves and revaluation reserves are
accounted for in accordance with the accounting policies adopted for
foreign currency translation and the revaluation of land and buildings.
As at December 31, 2004, the distributable profits of the Company
amounted to approximately RMB1,852,482,000 (2003:
RMB2,573,082,000;2002:RMB2,945,280,000).
30. RETIREMENT AND TERMINATION BENEFITS
All the Group's full-time employees in the PRC are covered by a
government regulated pension, and are entitled to an annual pension. The
PRC government is responsible for the pension liabilities to these
retired employees. The Group is required to make annual contributions to
the government-regulated pension at rates ranging from 9% to 22% of the
employees' basic salaries.
The Company is required to make contributions to a defined contribution
mandatory provident fund at a rate of 5% of the basic salaries of all
full-time employees in Hong Kong. The related pension costs are expensed
as incurred.
F-46
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
30. RETIREMENT AND TERMINATION BENEFITS (CONT'D)
The Group provides retirement and termination benefits for all local
employees in Indonesia in accordance with Indonesian labour law, and
provides employee benefits to expatriate staff in accordance with the
relevant employment contracts. The Group has adopted an accounting policy
to record liabilities for the retirement and termination benefits.
The total amount of contributions and provisions made by the Group for
the above mentioned retirement and termination benefits for the year
ended December 31, 2004 amounted to approximately RMB30,304,000 (2003:
RMB95,147,000; 2002; RMB53,392,000).
31. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) Reconciliation of profit before tax to cash generated from operations
2002 2003 2004
----------- ----------- -----------
RMB'000 RMB'000 RMB'000
Profit before tax 12,774,243 16,163,326 23,116,604
Adjustments for:
Interest income ( 147,870) ( 183,576) ( 206,872)
Interest expense 294,792 354,940 441,825
Exchange losses/(gains), net 113,814 6,746 ( 29,269)
Share of profit of associates ( 165,387) ( 220,263) ( 344,469)
Short term investments income ( 193,277) ( 123,483) ( 72,438)
(Reversal) of/provision for inventory obsolescence - 8,745 ( 2,710)
Depreciation, depletion and amortisation 4,019,532 4,642,753 5,455,062
Loss on disposals and write-off of property,
plant and equipment 437,799 39,818 155,876
Dismantlement 126,139 167,326 201,637
Amortisation of discount of long term
guaranteed notes 6,100 11,276 15,634
----------- ----------- -----------
Operating cash flows before movements in working
capital 17,265,885 20,867,608 28,730,880
Increase in accounts receivable 497,959 ( 1,185,304) ( 27,466)
Increase in inventories and supplies ( 20,211) ( 129,678) ( 96,307)
Decrease in other current assets ( 705,664) 312,559 267,168
Increase in amounts due from related companies ( 276,771) ( 302,993) ( 417,091)
Increase/(decrease)in an amount due to the
parent company 144,945 ( 105,785) 205,407
Increase in accounts payable, other payables
and accrued liabilities 353,452 1,448,645 1,318,415
Increase/(decrease) in other taxes payable 73,551 ( 4,772) ( 12,447)
(Decrease)/increase in amounts due to related
companies 73,769 242,631 ( 262,798)
----------- ----------- -----------
Cash generated from operations 17,406,915 21,142,911 29,705,761
=========== =========== ===========
F-47
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
31. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (CONT'D)
(b) Acquisitions
2002 2003 2004
----------------- ------------------ -----------------
RMB'000 RMB'000 RMB'000
Acquisitions
------------
Net assets acquired:
Property, plant and equipment, net 8,646,487 1,579,726 4,686,857
Accounts receivable 2,367,045 -- 453
Other current assets 35,175 8,959 66,744
Inventories and supplies 187,619 122,777 --
Cash and bank balances 1,652 17,580 --
Accounts payable (1,577,214) ( 8,294) ( 81,547)
Other payables and accrued liabilities ( 952,911) ( 47,983) --
Tax payable ( 70,247) -- --
Deferred tax liabilites (3,901,780) -- (1,141,461)
----------------- ------------------ -----------------
4,735,826 1,672,765 3,531,046
Prepayment for NWS Project -- -- 4,693,809
Prepayment for Tangguh Project -- 2,445,715 --
----------------- ------------------ -----------------
4,735,826 4,118,480 8,224,855
================= ================== =================
Satisfied by:
Prepayment made in 2003 -- -- 2,445,715
Cash paid (including cash calls for
Tangguh Project) 4,735,826 4,118,480 5,779,140
----------------- ------------------ -----------------
4,735,826 4,118,480 8,224,855
================= ================== =================
An analysis of the net outflow of cash and cash equivalents in
respect of the acquisition is as follows:
2002 2003 2004
----------------- ------------------ -----------------
RMB'000 RMB'000 RMB'000
Cash consideration 4,735,826 4,118,480 5,779,140
Cash and bank balances acquired ( 1,652) ( 17,580) --
----------------- ------------------ -----------------
Net outflow of cash and cash equivalents 4,734,174 4,100,900 5,779,140
================= ================== =================
Further details of the acquisition of the Tangguh LNG Project and
NWS Project are included in note 4 to the financial statements. The
purchase price allocations for Tangguh Project are still preliminary
pending for the confirmation of the tax basis of the underlying
assets.
32. CONTINGENT LIABILITIES
As of December 2004 and 2003, there were no material contingent
liabilities not provided for in the financial statements.
F-48
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
33. COMMITMENTS
(i) Capital commitments
As at December 31, 2004, the Group and the Company had the following
capital commitments, principally for the construction and purchase
of property, plant and equipment:
2003 2004
------------- -------------
RMB'000 RMB'000
Contracted for 2,534,468 9,568,971
Authorised, but not contracted for 17,489,791 20,331,504
As at December 31, 2004, the Group had unutilised banking facilities
amounting, to approximately RMB20,662,120,000 (2003:
RMB32,455,229,500).
(ii) Operating lease commitments
(a) Office properties
The Group leases certain, of its office properties under
operating lease arrangements, leases properties are negotiated
for terms ranging from 10 months to 3 years.
As at December 31, 2004, the Group had total minimum lease
payments under non-cancelable operating leases falling due as
follows:
2003 2004
------------- -------------
RMB'000 RMB'000
Commitments due: 17,222 24,824
- Within one year 3,174 549
------------- -------------
- After one year but within two years
20,396 25,373
============= =============
(b) Plant and equipment
During the year, the Group also entered into an operating lease
arrangement for certain plant and equipment for a term of 20
years. As at December 31, 2004, the total minimum lease
payments under non-cancelable operating lease attributable to
the Group falling within one year were RMB149,360,000, in the
second to fifth years were RMB597,442,000 and after five years
were RMB1,834,023,000.
(iii) Commitment to invest in the Gorgon Joint Venture
In October 2003, the Company entered into an agreement with the
participants in the Gorgon Joint Venture to place a significant
volume of Gorgon LNG to supply the growing Chinese market. Subject
to the completion of formal contracts, the Company will purchase a
certain equity stake in the Gorgon gas development and its parent
company, CNOOC, will arrange to purchase LNG directly from Gorgon.
F-49
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
33. COMMITMENTS (CONT'D)
(iv) Financial instruments
(a) Currency swap contracts
As at December 31, 2004, the Group had a currency swap contract
with a financial institution to sell United States dollars in
exchange for Japanese Yen in order to hedge against future
repayments of certain Japanese Yen denominated loans. The
hedged Japanese Yen loans bore interest at a fixed rate of 4.5%
per annum. The interest stipulated in the swap contract for the
United States dollars was the floating LIBOR rate.
The details are as follows:
2003 2004
------------------------------------- -------------------------------
Weighted Weighted
Notional average Notional average
contract contractual contract contractual
amount exchange rate amount exchange rate
(JPY'000) (JPY/US$) (JPY'000) (JPY/US$)
Year
2004 271,470 95.00 -- --
2005 271,470 95.00 271,470 95.00
2006 271,470 95.00 271,470 95.00
2007 271,470 95.00 271,470 95.00
(b) Fair value of financial instruments
The carrying value of cash and cash equivalents, time deposits
and short-term investments approximated fair value due to the
short maturity of these instruments.
The estimated fair value of long term bank loans based on
current market interest rates was approximately RMB967,770,000
as at December 31, 2004 (2003: RMB1,064,895,000).
The estimated fair value of long term guaranteed notes based on
current market interest rates was approximately
US$1,985,009,900 as at December 31, 2004 (2003:
RMB8,304,647,000).
F-50
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
34. CONCENTRATION OF RISKS
(a) Credit risk
The carrying amount of cash and cash equivalents, time deposits,
liquidity funds and bond investments, accounts receivable and other
receivables, and due from related parties and other current assets
except for prepayments represents our maximum exposure to credit
risk in relation to financial assets.
The majority of our accounts receivable is related to sales of oil
and natural gas to third party customers. We perform ongoing credit
evaluations of our customers' financial condition and generally do
not require collateral on accounts receivable. We maintain a
provision for doubtful accounts and actual losses have been within
management's expectation.
No other financial assets carry a significant exposure to credit
risk.
(b) Currency risk
Substantially all of our oil and gas sales are denominated in
Renminbi and US dollars. In the past decade, the PRC government's
policy of maintaining a stable exchange rate and China's ample
foreign reserves have contributed to the stability of the Renminbi.
Recently, there has been wide speculation in the international
market that the Chinese government will deregulate the Renminbi
exchange rate. However, the Chinese government has not determined if
or when the exchange rate will be deregulated. Currently, the
Renminbi exchange rate remains stable.
In the event of the deregulation in Renminbi exchange rate in the
future, we may be adversely affected. At present, we are seriously
conducting investigation on this issue, and will actively seek a
strategy for its resolution.
As of the end of 2004, the balance of our yen-denominated loans was
only 0.81 billion yen. Since we have hedged our yen loans against
foreign currency swaps, we do not expect any exchange risk relating
to Japanese yen in the future.
(c) Interest rate risk
As of the end of 2004, the interest rates for all balance of our
debts were fixed. The term of the weighted average balance was
approximately 9 years, with very low weighted average interest
rates. The weighted average interest rates of our debts, including
the newly issued convertible bonds in 2004, was only 3.6%.
Therefore, if interest rates of US dollars increase in future, our
debt combination can effectively avoid the risk of such increase.
(d) Business risk
The major operations are conducted in the PRC and Indonesia and
accordingly are subject to special considerations and significant
risks not typically associated with investments in equity securities
of the United States of America and Western European companies.
These include risks associated with, among others, the oil and gas
industry, the political, economic and legal environments, influence
of the national authorities over price setting and competition in
the industry.
F-51
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
34. CONCENTRATION OF RISKS (CONT'D)
(e) Concentration of customers
A substantial portion of the oil and gas sales of the Group is made
to a small number of customers on an open account basis. Details of
the sales to these customers are as follows:
2002 2003 2004
-------------- ------------- ----------------
RMB'000 RMB'000 RMB'000
China Petroleum & Chemical Corporation 6,890,877 6,975,069 10,634,066
PetroChina Company Limited 1,187,571 1,446,169 1,944,709
Castle Peak Power Company Limited 1,247,639 841,285 1,070,436
35. ADDITIONAL FINANCIAL INFORMATION
As at December 31, 2004, net current assets and total assets less current
liabilities of the Group amounted to approximately RMB24,890,362,000 and
RMB83,674,168,000 (2003: RMB19,956,331,000 and RMB64,197,772,000),
respectively.
As at December 31, 2004, net current assets and total assets less current
liabilities of the Company amounted to approximately RMB13,635,306,000
and RMB23,490,665,000 (2003: RMB7,649,024,000 and RMB24,211,265,000),
respectively.
36. SUBSEQUENT EVENT
The Company, through its wholly owned subsidiary has signed an agreement
with a Canadian based Company, MEG Energy Corporation ("MEG"), to acquire
a 16.69% stake of MEG. The Company completed the transaction and paid
C$150 million for the acquisition of 13,636,364 common shares of MEG in
March 2005. MEG is principally engaged in the production of the oil
sands.
37. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP
The accounting policies adopted by the Group conform to Hong Kong GAAP,
which differ in certain respects from generally accepted accounting
principles in the United States of America ("US GAAP").
(a) Net profit and net equity
(i) Revaluation of land and buildings
The Group revalued certain land and buildings on August 31,
1999 and December 31, 2000 and the related revaluation surplus
was recorded on the respective dates. Under Hong Kong GAAP,
revaluation of property, plant and equipment is permitted and
depreciation, depletion and amortisation are based on the
revalued amount. Additional depreciation arising from the
revaluation for the year ended December 31, 2004 was
approximately RMB9,156,000 (2003: RMB9,156,000). Under US GAAP,
property, plant and equipment are required to be stated at
cost. Accordingly, no additional depreciation, depletion and
amortisation from the revaluation are recognised under US GAAP.
F-52
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37 SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (cont'd)
(ii) Short term investments
According to Hong Kong GAAP, available-for-sale investments in
marketable securities are measured at fair value and related
unrealised holding gains and losses are included in the current
period's earnings. According to US GAAP, such investments are
also measured at fair value and classified in accordance with
Statement of Financial Accounting Standards ("SFAS") No.115.
Under US GAAP, related unrealised gains and losses on
available-for-sale securities are excluded from the current
period's earnings and included in other comprehensive income.
(iii) Impairment of long-lived assets
Under Hong Kong GAAP, impairment charges are recognised when a
long-lived asset's carrying amount exceeds the higher of an
asset's net selling price and value in use, which incorporates
discounting the asset's estimated future cash flows.
Under US GAAP, long-lived assets are assessed for possible
impairment in accordance with SFAS No.144, "Accounting for the
impairment or disposal of long-lived assets". SFAS No. 144
requires the Group to (a) recognise an impairment loss only if
the carrying amount of a long-lived asset is not recoverable
from its undiscounted cash flows and (b) measure an impairment
loss as the difference between the carrying amount and fair
value of the asset. SFAS No. 144 requires that a long-lived
asset to be abandoned, exchanged for a similar productive
asset, or distributed to owners in a spin-off be considered as
held and used until it is disposed of.
SFAS No. 144 also requires the Group to assess the need for an
impairment of capitalised costs of proved oil and gas
properties and the costs of wells and related equipment and
facilities on a property-by-property basis. If an impairment is
indicated based on undiscounted expected future cash flows,
then an impairment is recognised to the extent that net
capitalised costs exceed the estimated fair value of the
property. Fair value of the property is estimated by the Group
using the present value of future cash flows. The impairment
was determined based on the difference between the carrying
value of the assets and the present value of future cash flows.
It is reasonably possible that a change in reserve or price
estimates could occur in the near term and adversely impact
management's estimate of future cash flows and consequently the
carrying value of properties.
F-53
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (cont'd)
(iii) Impairment of long-lived assets (cont'd)
In addition, under Hong Kong GAAP, a subsequent increase in the
recoverable amount of an asset is reversed to the income
statement to the extent that an impairment loss on the same
asset was previously recognised as an expense when the
circumstances and events that led to the write-down or
write-off cease to exist. The reversal is reduced by the amount
that would have been recognised as depreciation had the
write-down or write-off not occurred. Under US GAAP, an
impairment loss establishes a new cost basis for the impaired
asset and the new cost basis should not be adjusted
subsequently other than for further impairment losses.
For the year ended December 31, 2004, there were no impairment
losses recognised under Hong Kong GAAP and US GAAP.
(iv) Stock compensation schemes
As at December 31, 2004, the Company had three stock option
schemes, which are described more fully in note 28. Prior to
2003, the Company accounted for those plans under the
recognition and measurement provision of APB Opinion No.25,
"Accounting for Stock Issued to Employees"' and related
Interpretation since certain of the options granted under those
plans had an exercise price below the market value of the
underlying common stock on the date of grant, stock-based
employee compensation costs of RMB5,632,000 for the year ended
December 31, 2002 was reflected in previously reported results.
In 2003, the Company accounted for those plans under the fair
value recognition provision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", as amended by FASB
statement No. 148, for stock-based employee compensation.
Compensation costs recognised for the stock option schemes
amounted to RMB46,642,000 (2003: RMB37,747,000) for the year
ended December 31, 2004. All prior periods presented have been
restated to reflect the compensation cost that would have been
recognised had the recognition provision of Statement 123 been
applied to all awards granted to employees after January 1,
1995.
The weighted average fair value of the options at the grant
dates for award under the schemes was HK$0.84 per share which
was estimated using the Black-Scholes model with the following
assumptions: dividend yield of 2%; and expected life of five
years; expected volatility of 44%; and risk-free interest rates
of 5.25%. The weighted average exercise price of the stock
options was HK$2.06 per share.
F-54
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(v) Acquisition of CNOOC Finance
Under HK GAAP, the Company adopted the purchase method to
account for the acquisition of 31.8% equity interest in CNOOC
Finance in December 2003. Under the purchase method, the
acquired results are included in the consolidated results of
operations of the Company from the date of the acquisition.
As the Company and CNOOC Finance are under common control of
CNOOC, under US GAAP, the acquisition is considered to be a
transfer of businesses under common control and the acquired
assets and liabilities are accounted at historical cost in a
manner similar to the pooling of interests method. Accordingly,
the consolidated financial statements for all periods presented
have been retroactively restated as if the current structure
and operations had been in existence since inception. The cash
consideration paid by the Company is treated as an equity
transaction in the year of the acquisition for US GAAP purpose.
(vi) Accounting for convertible debt
Under HK GAAP, prior to December 31, 2004, there were no
requirements to segregate the equity and derivative components
of convertible debt. As such, convertible debt was stated at
amortised cost.
Under US GAAP, the derivative components will need to be
bifurcated from the debt components if it contains a compound
derivative or fails to fulfill certain criteria for not
bifurcating. The derivative components are marked to market at
each balance sheet date and the differences will be
charged/credited to income. The debt components are stated at
amortised cost.
F-55
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (cont'd)
(vi) Accounting for convertible debt (cont'd)
The effects on net profit and equity of the above significant
differences between Hong Kong GAAP and US GAAP are summarised
below:
Net Profit
-----------------------------------------------
2002 2003 2004
-------------- ---------------- ---------------
RMB'000 RMB'000 RMB'000
(Restated)
As reported under Hong Kong GAAP 9,232,827 11,535,490 16,185,778
Impact of U.S GAAP adjustments:
- Reversal of additional depreciation, depletion and
amortisation charges arising from the revaluation
surplus on land and buildings 9,156 9,156 9,156
- Equity accounting for the results of CNOOC Finance 10,663 30,913 -
- Unrealised holding gains from available-for-sale
investments in marketable securities ( 36,965) (21,503) 25,228
- Realised holding gains from available-for-sale
marketable securities 26,940 27,088 2,972
- Additional dismantlement based on unit-of-production
method ( 197,079) - -
- Impact of income tax 59,124 - -
- Recognition of stock compensation cost ( 19,144) ( 37,747) ( 46,642)
-------------- ---------------- ---------------
Income before cumulative effect of change in accounting
policy 9,085,522 11,543,397 16,176,492
Cumulative effect of change in accounting policy for
dismantlement liabilities - 436,112 -
-------------- ---------------- ---------------
Net profit under US GAAP 9,085,522 11,979,509 16,176,492
============== ================ ===============
Net profit per share under US GAAP
-Basic
Before cumulative effect of change in accounting policy
for dismantlement liabilities RMB0.22 RMB0.28 RMB0.39
Cumulative effect of change in accounting policy for
dismantlement liabilities - RMB0.01 -
-------------- ---------------- ---------------
RMB0.22 RMB0.29 RMB0.39
============== ================ ===============
-----------------------------------------------
-Diluted
Before cumulative effect of change in accounting policy
for dismantlement liabilities RMB0.22 RMB0.28 RMB0.39
Cumulative effect of change in accounting policy for
dismantlement liabilities - RMB0.01 -
-------------- ---------------- ---------------
RMB0.22 RMB0.29 RMB0.39
============== ================ ===============
F-56
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(a) Net profit and net equity (cont'd)
Net Equity
--------------------------------------
2003 2004
--------------------- ----------------
RMB'000 RMB'000
As reported under Hong Kong GAAP 46,736,532 56,717,461
Impact of US GAAP adjustments:
- Reversal of revaluation surplus on land and buildings ( 274,671) ( 274,671)
- Reversal of additional accumulated depreciation, depletion
and amortisation arising from the revaluation surplus on
land and buildings 35,051 44,207
- Equity accounting for the results of CNOOC Finance 41,576 -
- Dividend distribution made by CNOOC Finance CNOOC ( 41,576) -
--------------------- ----------------
Net equity under US GAAP 46,496,912 56,486,997
===================== ================
Apart from the derivative components with a total credit balance of
approximately RMB450 million that are required to be bifurcated from
the convertible debt, there are no other significant GAAP
differences that affect classifications within the balance sheet or
income statement but do not affect net income or shareholders'
equity.
(b) Comprehensive income
According to SFAS No. 130, "Reporting Comprehensive Income", it is
required to include a statement of other comprehensive income for
revenues and expenses, gains and losses that under US GAAP are
included in comprehensive income and excluded from net income.
2002 2003 2004
----------- ----------- ------------
RMB'000 RMB'000 RMB'000
(Restated)
Net income under US GAAP 9,085,522 11,979,509 16,176,492
Other comprehensive income:
Foreign currency translation adjustments ( 7,948) 36,243 ( 42,301)
Unrealised gains on short-term investments 36,965 21,503 ( 25,228)
Less: Reclassification adjustment for realised gains
included in net income ( 26,940) ( 27,088) ( 2,972)
----------- ------------ ------------
Comprehensive income under US GAAP 9,087,599 12,010,167 16,105,991
=========== ============ ============
F-57
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(b) Comprehensive income (cont'd)
Roll forward of accumulated other comprehensive income components
are as follows:
Foreign Unrealised Accumulated
currency gains on other
translation short-term comprehensive
adjustments investments income
------------------ ------------------ ------------------
RMB'000 RMB'000 RMB'000
Balance at January 1, 2003 (13,596) 53,821 40,225
Reversal of current year realised gains -- (27,088) (27,088)
Current year change 36,243 21,503 57,746
------ ------ ------
Balance at January 1, 2004 22,647 48,236 70,883
Reversal of current year realised gains -- ( 2,972) ( 2,972)
Current year change (42,301) (25,228) (67,529)
------ ------ ------
Balance at December 31, 2004 (19,654) 20,036 382
====== ====== ===
The gross realised gains on sales of short-term investments totalled
RMB2,972,000, RMB27,088,000 and RMB26,940,000 in 2004, 2003 and
2002, respectively. The cost of securities sold is determined based
on weighted-average costing method.
(c) Derivative instruments
The Group had a currency swap contract with a financial institution
to sell United States dollars in exchange for Japanese Yen in order
to hedge certain Japanese Yen denominated loan repayments in the
future. In accordance with SFAS No. 133 "Accounting for derivatives
instruments and hedging activities", the derivative contract was
recorded as "Other payables and accrued liabilities" in the
accompanying consolidated balance sheet at fair value. For the year
ended December 31, 2004, the Group recognised related changes in
fair value, a gain of RMB2,581,000 (2003: RMB10,038,000; 2002:
RMB14,485,000), and included the amount in "Exchange gains
/(losses), net" in the consolidated income statement.
During 2003, the Group also entered into interest rate swap
agreements to partially hedge the fixed-rate debt for interest rate
risk exposure management purposes with notional contract amount of
US$200 million. The interest rate swap agreements utilised by the
Company effectively modifies the Company's exposure to interest risk
by converting the Company's fixed-rate debt to a floating rate.
These agreements involve the receipt of fixed rate amounts in
exchange for floating rate interest payments over the life of the
agreement without an exchange of the underlying principal amount.
The interest rate swap agreements were settled during the year and
the total net gain was RMB84,168,000.
F-58
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(d) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates pertain to
proved oil and gas reserve volumes and the future development,
provision for dismantlement as well as estimates relating to certain
oil and gas revenues and expenses. Actual amounts could differ from
those estimates and assumptions.
(e) Segment reporting
The Group's segment information is based on the segmental operating
results regularly reviewed by the Group's chief operating decision
maker. The accounting policies used are the same as those used in
the preparation of the Group's consolidated Hong Kong GAAP financial
statements.
(f) Impact of recently issued accounting standards
Statements of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets",
were issued by the Financial Accounting Standards Board in June 2001
and became effective for the Group on July 1, 2001 and January 1,
2002, respectively. In 2003, the Emerging Issues Task Force (EITF)
considered the issue of whether FAS 141 and 142 require interests
held under oil, gas and mineral leases to be separately classified
as intangible assets on the balance sheets of companies in the
extractive industries. If such interests were deemed to be
intangible assets by the EITF, mineral rights to extract oil and gas
for both undeveloped and developed leaseholds would be classified
separately from oil and gas properties as intangible assets on the
corporation's balance sheet. Historically the Group has capitalized
the acquisition cost of oil and gas properties interests in
accordance with statement of Financial Accounting Standard No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing
Companies". Also, consistent with industry practice, the Group has
reported these assets as part of property, plant and equipment.
In 2004, the EITF reached a conclusion that mineral rights are
tangible assets and the balance sheet classification and disclosures
for drilling and mineral rights of Oil and Gas Producing entities
are within the scope of Statement of Financial Accounting Standard
No.19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies". Accordingly, there is no implication to the Company.
F-59
CNOOC LIMITED AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(All amounts expressed in Renminbi unless otherwise stated)
37. SIGNIFICANT DIFFERENCES BETWEEN HONG KONG GAAP AND US GAAP (CONT'D)
(f) Impact of recently issued accounting standards (cont'd)
The Financial Accounting Standards Board (FASB) has proposed an
amendment to Statement No. 19, "Financial Accounting and Reporting
by Oil and Gas Producing Companies" (FAS No. 19) that may change the
way oil and gas producers account for deferred exploratory drilling
costs. Under the current rules, there is a presumption that all
exploratory drilling costs will be expensed within one year
following completion of drilling if proved reserves have not been
recorded, except for costs related to areas where additional
exploration wells are necessary to justify development plans and
such additional wells are under way or firmly planned for the near
future.
The new standard would relax the one-year limitation, so long as oil
and gas reserves have been discovered and an enterprise "is making
sufficient progress assessing the reserves and the economic and
operating viability of the project." The FASB staff has developed
indicators to help determine whether sufficient progress is being
made. The Company believes the adoption of the proposed amendment
(once finalized) will have no impact on its consolidated financial
statements.
In December 2004, the Financial Accounting standards Board ("FASB")
issued SFAS No. 153, "Exchanges of Non-monetary Assets an amendment
of APB Opinion No. 29". This Statement, which addresses the
measurement of exchanges of non-monetary assets, is effective
prospectively for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of this
Statement is not expected to impact the Company's consolidated
financial position or results of operations.
In December 2004, the FASB issued Statement No. 123 (revised 2004),
"Share-Based Payment" (FAS No.123R), which replaces FAS No. 123 and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." FAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values
beginning with the first interim period after June 15, 2005, with
early adoption encouraged. Under the SEC's rule, FAS No. 123R is now
effective for the Company beginning January 1, 2006. The pro forma
disclosures previously permitted under FAS No. 123 no longer will be
an alternative to financial statement recognition. The Company
believes the adoption of the FAS No. 123 will have no material
impact on its consolidated financial statements as the Company
currently accounts for the stock options under the fair value
recognition provision of FAS No. 123.
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Liabilities and
Equity", to address the balance sheet classification of certain
financial instruments that have characteristics of both liabilities
and equity. The Statement, already effective for contracts created
or modified after May 31, 2003, was originally intended to become
effective July 1, 2003, for all contracts existing at May 31, 2003.
However, on November 7, 2003, the FASB issued an indefinite deferral
of certain provisions of FAS No. 150. We continue to monitor and
assess the FASB's modifications of FAS No. 150, but do not
anticipate any material impact to our financial statements.
F-60
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
The following disclosures are included in accordance with the United States
Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and
Gas Producing Activities".
(a) Reserve quantity information
Crude oil and natural gas reserve estimates are determined through
analysis of geological and engineering data which appear, with reasonable
certainty, to be recoverable at commercial rates in the future from known
oil and natural gas reservoirs under existing economic and operating
conditions.
Estimates of crude oil and natural gas reserves have been made by
independent engineers. The Group's net proved reserves consist of its
percentage interest in reserves, comprised of a 100% interest in its
independent oil and gas properties and its participating interest in the
properties covered under the production sharing contracts in PRC, less
(a) an adjustment for the Group's share of royalties payable by the Group
to the PRC government and the Group's participating interest in share oil
payable to the PRC government under the production sharing contracts, and
less (b) an adjustment for production allocable to foreign partners under
the PRC production sharing contracts as reimbursement for exploration
expenses attributable to the Group's participating interest, and its
participating interest in the properties covered under the production
sharing contracts in Indonesia less an adjustment of share oil
attributable to the Indonesian government and the domestic market
obligation.
Proved developed and undeveloped reserves (net of royalties and PRC
government share oil):
PRC Indonesia Total
------------------------- ------------------------ --------------------------
Oil Natural gas Oil Natural gas Oil Natural gas
(mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf)
--------- ------------ -------- ------------ --------- ------------
December 31, 2001 1,279 3,248 -- -- 1,279 3,248
Purchase of reserves -- -- 143 241 143 241
Discoveries and extensions 150 169 -- -- 150 169
Production ( 96) (79) (13) (26) ( 109) (105)
Revisions of prior estimates ( 46) ( 5) 8 -- ( 38) ( 5)
--------- ------------ -------- ------------ --------- ------------
December 31, 2002 1,287 3,333 138 215 1,425 3,548
Purchase of reserves 53 142 -- -- 53 142
Discoveries and extensions 114 506 1 2 115 508
Production ( 97) (69) (15) (37) ( 112) (106)
Revisions of prior estimates ( 24) 42 (21) 20 ( 45) 62
--------- ------------ -------- ------------ --------- ------------
December 31, 2003 1,333 3,954 103 200 1,436 4,154
Purchase of reserves 6 161 -- -- 6 161
Discoveries and extensions 129 414 4 157 133 571
Production (106) (103) (11) (31) ( 117) (134)
Revisions of prior estimates ( 8) (101) 5 ( 5) ( 3) (106)
--------- ------------ -------- ------------ --------- ------------
December 31, 2004 1,354 4,325 101 321 1,455 4,646
========= ============ ======== ============ ========= ============
F-61
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
(a) Reserve quantity information (cont'd)
Proved developed reserves:
PRC Indonesia Total
--------------------------- --------------------------- ---------------------------
Oil Natural gas Oil Natural gas Oil Natural gas
(mmbls) (bcf) (mmbls) (bcf) (mmbls) (bcf)
---------- ------------- --------- -------------- ---------- -------------
December 31, 2002 542 724 115 101 657 825
December 31, 2003 459 2,054 91 135 550 2,189
December 31, 2004 617 2,134 85 138 702 2,272
(b) Results of operations
2002 2003
--------------------------------------------------- --------------------------------------------------
PRC Indonesia Total PRC Indonesia Total
--------------- -------------- -------------- -------------- -------------- --------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Net sales to customers 20,280,746 3,498,548 23,779,294 23,644,659 4,472,172 28,116,831
Operating expenses (2,440,210) (1,335,124) (3,775,334) (2,903,094) (1,609,715) (4,512,809)
Production taxes (1,023,049) -- (1,023,049) (1,238,598) -- (1,238,598)
Exploration (1,286,670) (31,653) (1,318,323) (764,165) (83,907) (848,072)
Accretion expense -- -- -- (93,246) -- (93,246)
Depreciation, depletion
and amortisation
(including
dismantlement) (3,121,381) (898,151) (4,019,532) (3,700,349) (1,109,730) (4,810,079)
--------------- -------------- -------------- -------------- -------------- --------------
12,409,436 1,233,620 13,643,056 14,945,207 1,668,820 16,614,027
Income tax expenses (3,816,008) (592,138) (4,408,146) (4,483,562) (719,695) (5,203,257)
--------------- -------------- -------------- -------------- -------------- --------------
Result of operations 8,593,428 641,482 9,234,910 10,461,645 949,125 11,410,770
=============== ============== ============== ============== ============== ==============
2004
---------------------------------------------------
PRC Indonesia Total
--------------- -------------- --------------
RMB'000 RMB'000 RMB'000
Net sales to customers 32,723,277 4,162,742 36,886,019
Operating expenses (3,643,182) (1,427,162) (5,070,344)
Production taxes (1,725,674) -- (1,725,674)
Exploration (1,202,203) (113,957) (1,316,160)
Accretion expense (119,707) -- (119,707)
Depreciation, depletion
and amortisation
(including
dismantlement) (4,670,988) (985,711) (5,656,699)
--------------- -------------- --------------
21,361,523 1,635,912 22,997,435
Income tax expenses (6,408,457) (705,487) (7,113,944)
--------------- -------------- --------------
Result of operations 14,953,066 930,425 15,883,491
=============== ============== ==============
(c) Capitalised costs
2002 2003
--------------------------------------------------- ------------------------------------------------------
PRC Indonesia Total PRC Indonesia Total
---------------- ------------ --------------- ---------------- --------------- ---------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Proved oil and gas
properties 46,426,684 9,605,744 56,032,428 57,537,676 9,440,843 66,978,519
Unproved oil and gas
properties 521,880 -- 521,880 713,594 -- 713,594
Accumulated
depreciation,
depletion and
amortisation (21,161,905) (993,316) (22,155,221) (25,740,836) (2,098,269) (27,839,105)
---------------- ------------ --------------- ---------------- --------------- ---------------
Net capitalised costs 25,786,659 8,612,428 34,399,087 32,510,434 7,342,574 39,853,008
================ ============ =============== ================ =============== ===============
2004
------------------------------------------------------
PRC Indonesia* Total
---------------- --------------- ---------------
RMB'000 RMB'000 RMB'000
Proved oil and gas
properties 70,931,798 10,100,116 81,031,914
Unproved oil and gas
properties 437,513 4,696,237 5,133,750
Accumulated
depreciation,
depletion and
amortisation (30,462,658) (3,083,933) (33,546,591)
---------------- --------------- ---------------
Net capitalised costs 40,906,653 11,712,420 52,619,073
================ =============== ===============
F-62
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
(d) Costs incurred
2002 2003
--------------------------------------------------- --------------------------------------------------
PRC Indonesia Total PRC Indonesia Total
-------------- --------------- --------------- -------------- -------------- --------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Acquisition costs -- 4,735,826 4,735,826 1,579,726 -- 1,579,726
Exploration costs 1,519,683 32,405 1,552,088 1,225,926 102,067 1,327,993
Development costs** 5,458,199 750,532 6,208,731 7,489,472 512,064 8,001,536
-------------- --------------- --------------- -------------- -------------- --------------
Total costs incurred 6,977,882 5,518,763 12,496,645 10,295,124 614,131 10,909,255
============== =============== =============== ============== ============== ==============
2004
---------------------------------------------------
PRC Indonesia* Total
-------------- --------------- ---------------
RMB'000 RMB'000 RMB'000
Acquisition costs -- 3,531,046 3,531,046
Exploration costs 1,806,556 137,361 1,943,917
Development costs** 11,693,183 645,501 12,338,684
-------------- --------------- ---------------
Total costs incurred 13,499,739 4,313,908 17,813,647
============== =============== ===============
* The amounts do not include prepayments made for the NWS Project of
RMB4,693,809,000.
** The development costs include estimated future dismantlement costs
of dismantling offshore oil platforms and gas properties.
(e) Standardised measure of discounted future net cash flows and changes
therein
In calculating the standardised measure of discounted future net cash
flows, year-end constant price and cost assumptions were applied to the
Group's estimated annual future production from proved reserves to
determine future cash inflows. Year end average realised oil prices used
in the estimation of proved reserves and calculation of the standardised
measure were US$32 as at December 31, 2004 (2003: US$30; 2002: US$28).
Future development costs are estimated based upon constant price
assumptions and assume the continuation of existing economic, operating
and regulatory conditions. Future income taxes are calculated by applying
the year-end statutory rate to estimate future pre-tax cash flows after
provision for the tax cost of the oil and natural gas properties based
upon existing laws and regulations. The discount was computed by
application of a 10% discount factor to the estimated future net cash
flows.
Management believes that this information does not represent the fair
market value of the oil and natural gas reserves or the present value of
estimated cash flows since no economic value is attributed to potential
reserves, the use of a 10% discount rate is arbitrary, and prices change
constantly from year-end levels.
F-63
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
(e) Standardised measure of discounted future net cash flows and changes
therein (cont'd)
Present value of estimated future net cash flows:
2002 2003
----- ---------------------------------------------- --------------------------------------------------
Notes PRC Indonesia Total PRC Indonesia Total
-------------- -------------- ---------------- --------------- -------------- ----------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Future cash
inflows (1) 389,025,791 37,242,644 426,268,435 422,329,692 30,135,721 452,465,413
Future production
costs (89,657,677) (22,386,603) (112,044,280) (106,854,167) (17,532,095) (124,386,262)
Future development
costs (2) (44,699,729) ( 5,381,081) ( 50,080,810) ( 52,917,280) ( 4,114,091) ( 57,031,371)
Future income
taxes (73,757,925) ( 4,301,926) ( 78,059,851) ( 72,124,755) ( 3,346,547) ( 75,471,302)
-------------- -------------- ---------------- --------------- -------------- ----------------
Future net
cash flows (3) 180,910,460 5,173,034 186,083,494 190,433,490 5,142,988 195,576,478
10% discount
factor (84,478,856) ( 1,463,589) ( 85,942,445) ( 84,550,531) ( 1,226,300) ( 85,776,831)
-------------- -------------- ---------------- --------------- -------------- ----------------
Standardised
measure 96,431,604 3,709,445 100,141,049 105,882,959 3,916,688 109,799,647
============== ============== ================ =============== ============== ================
2004
----- ---------------------------------------------
Notes PRC Indonesia Total
-------------- -------------- ----------------
RMB'000 RMB'000 RMB'000
Future cash
inflows (1) 467,336,822 37,198,784 504,535,606
Future
production
costs (115,267,250) (20,472,914) (135,740,164)
Future
development
costs (2) ( 60,319,348) ( 6,709,341) ( 67,028,689)
Future income
taxes ( 78,717,296) ( 4,001,019) ( 82,718,315)
-------------- -------------- ----------------
Future net
cash flows (3) 213,032,928 6,015,510 219,048,438
10% discount
factor ( 91,755,987) ( 1,905,679) ( 93,661,666)
-------------- -------------- ----------------
Standardised
measure 121,276,941 4,109,831 125,386,772
============== ============== ================
(1) Future cash flows consist of the Group's 100% interest in the
independent oil and gas properties and the Group's participating
interest in the properties under production sharing contracts in PRC
less (a) an adjustment for the royalties payable to the PRC
government and share oil payable to the PRC government under
production sharing contracts and (b) an adjustment for production
allocable to foreign partners under the PRC production sharing
contracts for exploration costs attributable to the Group's
participating interest, plus its participating interest in the
properties covered under the production sharing contracts in
Indonesia, less an adjustment of share oil attributable to
Indonesian government and the domestic market obligation.
(2) Future development costs include the estimated costs of drilling
future development wells and building the production platforms.
(3) Future net cash flows have been prepared taking into consideration
estimated future dismantlement costs of dismantling offshore oil
platforms and gas properties.
F-64
CNOOC LIMITED AND ITS SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(All amounts expressed in Renminbi unless otherwise stated)
(e) Standardised measure of discounted future net cash flows and changes
therein (cont'd)
Changes in the standardised measure of discounted future net cash flows:
2002 2003 2004
-------------- ----------------- ----------------
RMB'000 RMB'000 RMB'000
Standardised measure, beginning of year 51,082,458 100,141,049 109,799,647
Sales of production, net of royalties and production costs (18,980,911) ( 22,345,781) ( 30,090,001)
Net change in prices, net of royalties and production 58,471,355 22,321,949 17,826,421
costs
Extensions discoveries and improved recovery, 14,603,893 13,790,936 20,772,271
net of related future costs
Change in estimated future development costs (13,947,849) ( 14,673,054) ( 21,766,234)
Development costs incurred during the year 6,208,731 7,718,863 11,768,916
Revisions in quantity estimates (3,301,510) (2,942,902) ( 1,954,130)
Accretion of discount 6,873,378 13,428,654 14,202,072
Net change in income taxes (23,296,206) ( 6,290,099) ( 5,515,547)
Purchase of properties 15,899,375 5,363,142 2,352,004
Changes in timing and other 6,528,335 ( 6,713,110) 7,991,353
-------------- ----------------- ----------------
Standardised measure, end of year 100,141,049 109,799,647 125,386,772
============== ================= ================
F-65