SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of August 2004
PETROCHINA COMPANY LIMITED
16 ANDELU, DONGCHENG DISTRICT
BEIJING, THE PEOPLE'S REPUBLIC OF CHINA, 100011
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F X Form 40-F
--- ---
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes No X
--- ---
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- )
---------
PetroChina Company Limited (the "Registrant") is furnishing under the cover
of Form 6-K, the Registrant's announcement of its interim results for the six
months ended June 30, 2004.
This announcement contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are, by their nature, subject to significant risks and uncertainties. These
forward-looking statements include, without limitation, statements relating to:
o the Registrant's plan to focus its exploration efforts for oil and
natural gas on the Erdos, Junggar, Tarim, Songliao and Bohai Bay
basins;
o the Registrant's anticipated capital expenditures for each of its
segments for the year ended December 31, 2004 and non
segment-specific capital expenditures for the same period;
o the Registrant's plan for segment operations, including:
- continuing to enhance oil and gas exploration and production;
- speeding up the development of its marketing network;
- adopting various measures to improve the profitability of the
refining and chemicals businesses; and
- continuing to carefully organize the construction of key natural
gas pipeline projects to achieve various construction targets;
o the Registrant's plan to continue to develop its overseas operations;
o the Registrant's plan to continue to improve the qualifications of its
staff and maintain strict control over the size of its workforce;
o the Registrant's plan to further streamline its production facilities
for the next several years and the anticipated impact of such plan on
the results of operations and financial position of the Registrant;
o the Registrant's plans to adopt various measures to enhance its value
and maximize shareholders' value; and
o the Registrant's other future plans and prospects.
These forward-looking statements reflect our current views with respect to
future events and are not a guarantee of future performance. Actual results may
differ materially from information contained in these forward-looking statements
as a result of a number of factors, including, without limitation:
o fluctuations in crude oil and natural gas prices;
o failure to achieve continued exploration success;
o failure or delay in achieving production from development projects;
o change in demand for competing fuels in the target market;
o continued availability of capital and financing;
o general economic, market and business conditions;
o changes in policies, laws or regulations of the PRC and other
jurisdictions in which the Registrant and its subsidiaries conduct
business; and
o other factors beyond the Registrant's control.
We do not intend to update or otherwise revise the forward-looking
statements in this announcement, whether as a result of new information, future
events or otherwise. Because of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this announcement might
not occur in the way we expect, or at all.
You should not place undue reliance on any of these forward-looking
statements.
[Logo of Petrochina]
[PETROCHINA NAME IN CHINESE]
PETROCHINA COMPANY LIMITED
(a joint stock limited company incorporated in the People's
Republic of China with limited liability)
ANNOUNCEMENT OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004
FINANCIAL AND BUSINESS SUMMARY
Output of crude oil for the first half of 2004 was 388.5 million barrels,
representing an increase of 0.54% from the first half of 2003.
Output of marketable natural gas for the first half of 2004 was 410.3 billion
cubic feet, representing an increase of 17.40% from the first half of 2003.
Total output of crude oil and natural gas was 456.9 million barrels of oil
equivalent, representing an increase of 2.74% from the first half of 2003.
Consolidated turnover for the first half of 2004 was RMB179.552 billion,
representing an increase of 21.35% from the first half of 2003.
Consolidated net profit for the first half of 2004 was RMB45.292 billion,
representing an increase of 17.28% from the first half of 2003.
Basic and diluted earnings per share for the first half of 2004 were RMB0.26,
representing an increase of RMB0.04 from the first half of 2003.
THE BOARD OF DIRECTORS HAS RESOLVED TO DISTRIBUTE AN INTERIM DIVIDEND FOR 2004
OF RMB 0.115919 PER SHARE.
The Board of Directors (the "BOARD") of PetroChina Company Limited (the
"COMPANY") is pleased to announce the unaudited consolidated interim results of
the Company and its subsidiaries (the "GROUP") for the six months ended June 30,
2004 and its financial position as of June 30, 2004:
CONSOLIDATED PROFIT AND LOSS ACCOUNT
NOT SIX MONTHS ENDED JUNE 30
--------------------------------------
2004 2003
------------- -------------
(UNAUDITED) (UNAUDITED)
------------- -------------
(RMB MILLION) (RMB MILLION)
------------- -------------
TURNOVER 2 179,552 147,960
-------- -------
OPERATING EXPENSES
Purchases, services and other (52,699) (40,465)
Employee compensation costs (10,487) (8,275)
Exploration expenses, including exploratory dry holes (5,630) (4,811)
Depreciation, depletion and amortization (24,673) (20,909)
Selling, general and administrative expenses (12,776) (11,094)
Taxes other than income taxes (9,285) (7,872)
Other income, net 248 461
-------- -------
TOTAL OPERATING EXPENSES (115,302) (92,965)
-------- -------
PROFIT FROM OPERATIONS 64,250 54,995
-------- -------
FINANCE COSTS
Exchange gain 35 26
Exchange loss (25) (90)
Interest income 451 241
Interest expense (1,386) (1,364)
-------- -------
TOTAL FINANCE COSTS (925) (1,187)
-------- -------
SHARE OF PROFIT OF ASSOCIATED COMPANIES 720 308
-------- -------
PROFIT BEFORE TAXATION 3 64,045 54,116
TAXATION 4 (18,019) (15,201)
-------- -------
PROFIT BEFORE MINORITY INTERESTS 46,026 38,915
MINORITY INTERESTS (734) (296)
-------- -------
NET PROFIT 45,292 38,619
======== =======
BASIC AND DILUTED EARNINGS PER SHARE 5 0.26 0.22
======== =======
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(UNAUDITED) (UNAUDITED)
------------- -----------------
(RMB MILLION) (RMB MILLION)
------------- -----------------
NON CURRENT ASSETS
Property, plant and equipment 434,388 433,419
Investments in associates 6,193 5,571
Available-for-sale investments 1,742 1,839
Intangible and other assets 4,903 4,732
------- -------
447,226 445,561
------- -------
CURRENT ASSETS
Inventories 34,939 28,872
Accounts receivable 3,871 3,263
Prepaid expenses and other current assets 20,518 13,528
Notes receivable 4,546 2,416
Receivables under resale agreements 37,464 24,224
Time deposits with maturities over three months 800 2,640
Cash and cash equivalents 17,808 11,231
------- -------
TOTAL CURRENT ASSETS 119,946 86,174
------- -------
CURRENT LIABILITIES
Accounts payable and accrued liabilities 71,981 64,180
Income tax payable 8,838 12,043
Other taxes payable 9,884 8,916
Short-term borrowings 28,608 28,890
------- -------
119,311 114,029
------- -------
NET CURRENT ASSETS/(LIABILITIES) 635 (27,855)
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES 447,861 417,706
======= =======
- 2 -
FINANCED BY:
Share capital
-State-owned shares of RMB 1.00 each 158,242 158,242
-H shares of RMB 1.00 each 17,582 17,582
------- -------
175,824 175,824
Retained earnings 120,922 89,577
Reserves 91,212 91,212
------- -------
Shareholders' equity 387,958 356,613
------- -------
Minority interests 6,191 5,608
------- -------
NON CURRENT LIABILITIES
Long-term borrowings 40,049 41,959
Deferred credits and other long-term obligations 2,248 2,000
Deferred taxation 11,415 11,526
------- -------
53,712 55,485
------- -------
447,861 417,706
======= =======
NOTES:
1. ACCOUNTING POLICIES
The consolidated interim condensed financial statements have been prepared
in accordance with International Accounting Standards ("IAS") 34 "Interim
Financial Reporting". The accounting policies used in the preparation of
the consolidated interim condensed financial statements are consistent
with those used in the preparation of the financial statements for the
year ended December 31, 2003.
The consolidated interim condensed financial statements presented herein
should be read in conjunction with the consolidated financial statements
and notes thereto included in the annual report of the Group for the year
ended December 31, 2003. The consolidated interim condensed financial
statements as of June 30, 2004 and for the six-month periods ended June
30, 2004 and June 30, 2003 included herein are unaudited but reflect, in
the opinion of the Board of Directors, all adjustments (which include only
normal recurring adjustments) necessary to properly prepare the
consolidated interim condensed financial statements, in all material
respects, in accordance with IAS 34. The results of operations for the six
months ended June 30, 2004 are not necessarily indicative of the results
of operations expected for the year ended December 31, 2004.
Costs that incur unevenly during the financial year are anticipated or
deferred in these consolidated interim condensed financial statements only
if it would also be appropriate to anticipate or defer such costs at the
end of the financial year.
Income tax expense is recognized based on the best estimate of the
weighted average annual income tax rate expected for the full financial
year. The estimated average annual tax rate used for the six months ended
June 30, 2004 is principally 33% (six months ended June 30, 2003: 33%).
- 3 -
2. TURNOVER
Turnover represents revenues from the sale of crude oil, natural gas,
refined products and petrochemical products and from the transportation of
crude oil and natural gas. Analysis of turnover by segment is shown in
Note 8.
- 4 -
3. PROFIT BEFORE TAXATION
SIX MONTHS ENDED JUNE 30
--------------------------------------
2004 2003
------------- -------------
(RMB MILLION) (RMB MILLION)
------------- -------------
Profit before taxation is arrived at after crediting and
charging of the following items:
Crediting
Dividend income from available-for-sale investments 62 44
Reversal of impairment of receivables 274 -
Reversal of write down in inventories 122 12
Reversal of impairment of available-for-sale investments 4 -
Charging
Amortization on intangible and other assets 523 301
Cost of inventories (approximate cost of goods sold)
recognized as expense 77,301 62,447
Depreciation on property, plant and equipment, including
impairment provision
- owned assets 24,142 20,592
- assets under finance leases 8 16
Impairment of available-for-sale investments 28 6
Impairment of receivables 1,023 1,132
Interest expense (Note (i)) 1,386 1,364
Loss on disposal of property, plant and equipment 98 123
Operating lease rentals on land and buildings and equipment 1,564 1,448
Repair and maintenance 2,493 1,804
Research and development expenditure 906 676
Write down in inventories 123 -
====== ======
Note (i) Interest expense
Interest expense 1,733 1,872
Less: amounts capitalized (347) (508)
------ ------
1,386 1,364
====== ======
4. TAXATION
SIX MONTHS ENDED JUNE 30
--------------------------------------
2004 2003
------------- -------------
(RMB MILLION) (RMB MILLION)
------------- -------------
Income tax 18,010 14,494
Deferred tax (111) 661
Share of tax of associated companies 120 46
------ ------
18,019 15,201
====== ======
In accordance with the relevant PRC income tax rules and regulations, the PRC
income tax rate applicable to the Group is principally 33% (2003: 33%). The
Group in the last quarter of year 2002 obtained approvals from several
provincial and local tax authorities whereby a
- 5 -
portion of the taxable income of the Group's qualifying operations in these
locales through 2010 are assessed income tax at a reduced rate of 15% instead of
the statutory rate of 33%.
The tax on the Group's profit before taxation differs from the theoretical
amount that would arise using the basic tax rate in the PRC applicable to the
Group as follows:
SIX MONTHS ENDED JUNE 30
--------------------------------------
2004 2003
------------- -------------
(RMB MILLION) (RMB MILLION)
------------- ------------
Profit before taxation 64,045 54,116
------ ------
Tax calculated at a tax rate of 33% 21,135 17,858
Prior year tax return adjustment 2 (323)
Effect of preferential tax rate (2,668) (2,156)
Income not subject to tax (517) (204)
Expenses not deductible for tax purposes 67 26
------ ------
Tax charge 18,019 15,201
====== ======
5. BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share for the six months ended June 30, 2004 and
2003 have been computed by dividing net profit by the number of 175,824 million
shares issued and outstanding for each of the periods.
There are no dilutive potential ordinary shares.
6. CHANGES IN SHAREHOLDERS' EQUITY
SHARE RETAINED
CAPITAL EARNINGS RESERVES TOTAL
(RMB (RMB (RMB (RMB
MILLION) MILLION) MILLION) MILLION)
-------- -------- -------- --------
Balance at January 1, 2003 175,824 59,004 81,848 316,676
Net Profit from January 1 to June
30, 2003 - 38,619 - 38,619
Final dividend for 2002 (Note 7) - (12,299) - (12,299)
------- ------- ------ -------
Balance at June 30, 2003 175,824 85,324 81,848 342,996
======= ======= ====== =======
Balance at January 1, 2004 175,824 89,577 91,212 356,613
Net Profit from January 1 to
June 30, 2004 - 45,292 - 45,292
Final dividend for 2003 (Note 7) - (13,947) - (13,947)
------- ------- ------ -------
Balance at June 30, 2004 175,824 120,922 91,212 387,958
======= ======= ====== =======
- 6 -
7. DIVIDENDS
SIX MONTHS ENDED JUNE 30
--------------------------------------
2004 2003
------------- -------------
(RMB MILLION) (RMB MILLION)
------------- ------------
Final dividend for 2002 (Note (i)) - 12,299
Final dividend for 2003 (Note (ii)) 13,947 -
------ ------
13,947 12,299
====== ======
(i) A final dividend in respect of 2002 of RMB 0.069951 per share amounting to
a total of RMB 12,299 million was paid on June 12, 2003, and was accounted
for in shareholders' equity as an appropriation of retained earnings in
the six months ended June 30, 2003.
(ii) A final dividend in respect of 2003 of RMB 0.079324 per share amounting to
a total of RMB 13,947 million was paid on June 2, 2004, and was accounted
for in shareholders' equity as an appropriation of retained earnings in
the six months ended June 30, 2004.
(iii) As authorized by shareholders in the Annual General Meeting on May 18,
2004, the Board of Directors, in a meeting held on August 26, 2004,
resolved to distribute an interim dividend in respect of 2004 of RMB
0.115919 per share amounting to a total of RMB 20,381 million. These
financial statements do not reflect this dividend payable, as it was not
authorized until after the balance sheet date.
8. SEGMENT INFORMATION
The Group is engaged in a broad range of petroleum related activities
through its four major business segments: Exploration and Production,
Refining and Marketing, Chemicals and Marketing, and Natural Gas and
Pipeline.
The Exploration and Production segment is engaged in the exploration,
development, production and sales of crude oil and natural gas.
The Refining and Marketing segment is engaged in the refining,
transportation, storage and marketing of crude oil and petroleum products.
The Chemicals and Marketing segment is engaged in the production and sales
of basic petrochemical products, derivative petrochemical products and
other chemical products.
The Natural Gas and Pipeline segment is engaged in the transmission of
natural gas, crude oil and refined products, and the sale of natural gas.
In addition to these four major business segments, the Other segment is
engaged in research and development and in providing business services to
the operations of other business segments of the Group, including the
management of assets, income and expenses relating to the headquarters,
capital management and financing services.
- 7 -
Substantially all assets and operations of the Group are located in the
PRC, which is considered as one geographic location in an economic
environment with similar risks and returns. In addition to its operations
in the PRC, the Group conducts exploration and production of crude oil and
natural gas in Indonesia.
The accounting policies of the operating segments are the same as those
described in Note 1 -- "Accounting Policies".
Operating segment information for the six months ended June 30, 2004 and
2003 is presented below:
PRIMARY REPORTING FORMAT - BUSINESS SEGMENTS
EXPLORATION REFINING CHEMICALS NATURAL
AND AND AND GAS AND
PRODUCTION MARKETING MARKETING PIPELINE OTHER TOTAL
----------- --------- --------- -------- -------- --------
SIX MONTHS ENDED (RMB (RMB (RMB (RMB (RMB (RMB
JUNE 30, 2004 MILLION) MILLION) MILLION) MILLION) MILLION) MILLION)
----------------- ----------- --------- --------- -------- -------- --------
Turnover (including intersegment) 99,526 137,149 25,434 8,917 - 271,026
Less: Intersegment sales (78,818) (9,504) (1,332) (1,820) - (91,474)
------- ------- ------ ------ ---- -------
Turnover from external customers 20,708 127,645 24,102 7,097 - 179,552
======= ======= ====== ====== ==== =======
Depreciation, depletion and amortization (14,511) (4,836) (4,002) (1,274) (50) (24,673)
Segment result 55,607 17,066 3,190 1,321 (406) 76,778
Other costs (2,906) (8,088) (1,237) (88) (209) (12,528)
------- ------- ------ ------ ---- -------
Profit/(loss) from operations 52,701 8,978 1,953 1,233 (615) 64,250
------- ------- ------ ------ ----
EXPLORATION REFINING CHEMICALS NATURAL
AND AND AND GAS AND
PRODUCTION MARKETING MARKETING PIPELINE OTHER TOTAL
----------- --------- --------- -------- -------- --------
SIX MONTHS ENDED (RMB (RMB (RMB (RMB (RMB (RMB
JUNE 30, 2003 MILLION) MILLION) MILLION) MILLION) MILLION) MILLION)
----------------- ----------- --------- --------- -------- -------- --------
Turnover (including intersegment) 91,485 106,213 18,928 7,777 - 224,403
Less: Intersegment sales
(65,714) (8,064) (1,064) (1,601) - (76,443)
------- ------ ------ ------ ---- -------
Turnover from external customers 25,771 98,149 17,864 6,176 - 147,960
======= ====== ====== ====== ==== =======
Depreciation, depletion and amortization (12,534) (4,345) (3,210) (769) (51) (20,909)
Segment result 53,309 9,866 1,197 1,377 (121) 65,628
Other costs (3,039) (6,799) (549) (56) (190) (10,633)
------- ------ ------ ------ ---- -------
Profit/(loss) from operations 50,270 3,067 648 1,321 (311) 54,995
------- ------ ------ ------ ----
- 8 -
SECONDARY REPORTING FORMAT - GEOGRAPHICAL SEGMENTS
CAPITAL
TURNOVER TOTAL ASSETS EXPENDITURE
--------------------- ------------------- --------------------
2004 2003 2004 2003 2004 2003
---------- -------- -------- -------- -------- --------
RMB (RMB (RMB (RMB (RMB (RMB
SIX MONTHS ENDED JUNE 30 (MILLION) MILLION) MILLION) MILLION) MILLION) MILLION
------------------------ ---------- -------- -------- -------- -------- --------
PRC 179,044 147,434 563,521 506,667 28,453 26,362
Others (Exploration and Production) 508 526 3,651 3,091 400 186
------- ------- ------- ------- ------ ------
179,552 147,960 567,172 509,758 28,853 26,548
======= ======= ======= ======= ====== ======
9. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP
The consolidated interim condensed financial statements have been prepared
in accordance with International Financial Reporting Standards ("IFRS"),
which may differ in certain material respects from the accounting
principles generally accepted in the United States of America ("US GAAP").
Such differences involve methods for measuring the amounts shown in the
financial statements, as well as additional disclosures required by US
GAAP.
- 9 -
Effect on net income of significant differences between IFRS and US GAAP is as
follows:
SIX MONTHS ENDED JUNE 30
--------------------------------------
2004 2003
------------- -------------
(RMB MILLION) (RMB MILLION)
------------- -------------
Net income under IFRS 45,292 38,619
US GAAP adjustments:
Depreciation charges on property, plant and equipment revaluation gain 4,391 4,615
Depreciation charges on property, plant and equipment revaluation loss (465) (56)
Loss on disposal of property, plant and equipment 47 4
Income tax effect (1,311) (1,506)
Minority interests (30) (30)
------ ------
Net income under US GAAP 47,924 41,646
====== ======
Basic and diluted net income per share under US GAAP (RMB) 0.27 0.24
====== ======
Effect on shareholders' equity of significant differences between IFRS and US
GAAP is as follows:
JUNE DECEMBER 31,
30,2004 2003
------------- -------------
(RMB MILLION) (RMB MILLION)
------------- -------------
Shareholders' equity under IFRS 387,958 356,613
US GAAP adjustments:
Reversal of property, plant and equipment revaluation gain (80,555) (80,555)
Depreciation charges on property, plant and equipment revaluation gain 41,664 37,273
Reversal of property, plant and equipment revaluation loss 1,513 1,513
Depreciation charges on property, plant and equipment revaluation loss (945) (480)
Loss on disposal of property, plant and equipment 838 791
Deferred tax assets on revaluation 12,375 13,686
Minority interests 334 364
Effect on the retained earnings from the one-time remedial payments
for staff housing borne by the state shareholder of the Company (2,553) (2,553)
Effect on the other reserves of the shareholders' equity from the one-
time remedial payments for staff housing borne by the state
shareholder of the Company 2,553 2,553
------- -------
Shareholders' equity under US GAAP 363,182 329,205
======= =======
- 10 -
Changes in shareholders' equity under US GAAP for each of the periods ended June
30, 2004 and June 30, 2003 are as follows:
SIX MONTHS ENDED JUNE 30
------------------------
2004 2003
---- ----
(RMB MILLION) (RMB MILLION)
------------- ------------
Beginning of the period 329,205 283,464
Net profit for the period 47,924 41,646
Final dividend for year 2002 - (12,299)
Final dividend for year 2003 (13,947) -
------- -------
End of the period 363,182 312,811
======= =======
In preparing the summary of differences between IFRS and US GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the estimates of revenues and expenses. Accounting estimates have been employed
in these financial statements to determine reported amounts, including
realisability, useful lives of tangible and intangible assets, income taxes and
other areas. Actual results could differ from those estimates.
A summary of the principal differences and additional disclosures applicable to
the Group is set out below:
(A) REVALUATION OF PROPERTY, PLANT AND EQUIPMENT
The property, plant and equipment, excluding oil and gas reserves,
transferred to the Company by CNPC were appraised as of June 30, 1999, as
required by the relevant PRC regulations, by a firm of independent valuers
registered in the PRC, China Enterprise Appraisal. As at September 30,
2003, a revaluation of the Group's refining and chemical production
equipment was undertaken by a firm of independent valuers registered in
the PRC, China United Assets Appraiser Co., Ltd, on a depreciated
replacement cost basis.
The June 1999 revaluation resulted in RMB 80,549 million in excess of the
prior carrying value and a revaluation loss of RMB 1,122 million on
certain property, plant and equipment.
The September 2003 revaluation resulted in a RMB 872 million in excess of
the carrying value of certain property, plant and equipment immediately
prior to the revaluation and a revaluation loss of RMB 1,257 million.
The depreciation charge, which includes impairment charge, on the
revaluation surplus from January 1, 2004 to June 30, 2004 was RMB 4,391
million, and from January 1, 2003 to June 30, 2003 was RMB 4,615 million.
The depreciation charge, which includes impairment charge, on the
revaluation loss from January 1, 2004 to June 30, 2004 was RMB 465
million, and from January 1, 2003 to June 30, 2003 was RMB 56 million.
- 11 -
The loss on disposal of property, plant and equipment, from January 1,
2004 to June 30, 2004 was RMB 47 million, and from January 1, 2003 to June
30, 2003 was RMB 4 million.
For purposes of reconciling to the US GAAP financial data, the effect of
the revaluation, the related depreciation charges and loss on disposal is
reversed. A deferred tax asset relating to the reversal of the effect of
revaluation in 1999 is established, together with a corresponding increase
in the shareholders' equity. Under a special approval granted by the
Ministry of Finance, the effect of the revaluation in 1999 is available as
additional depreciation base for purposes of determining taxable income.
- 12 -
(b) Related party transactions
The Group has disclosed in its consolidated interim condensed financial
statements, which will be published on the website of The Stock Exchange
of Hong Kong Limited ("HKSE") (http://www.hkex.com.hk), transactions and
balances with its immediate parent, CNPC, and related companies. CNPC is
owned by the PRC government, which also owns a significant portion of the
productive assets in the PRC. IFRS exempts state controlled enterprises
from disclosing transactions with other state controlled enterprises. IFRS
also excludes from related parties government departments and agencies to
the extent that such dealings are in the normal course of business. US
GAAP contains no similar exemptions but requires disclosure of material
related party transactions. The Group believes that it has provided
meaningful disclosures. Although the majority of the Group's activities
are conducted with the PRC government and its affiliates and other state
controlled enterprises, none individually constitutes a major customer or
supplier other than those disclosed.
(C) ONE-TIME REMEDIAL PAYMENTS FOR STAFF HOUSING
The Ministry of Finance of the PRC issued several public notices and
regulations during the year ended December 31, 2000 and in January 2001
with respect to the one-time remedial payments for staff housing payable
to certain employees who joined the workforce prior to December 31, 1998
and have housing conditions below local standards as determined in
accordance with government regulations and guidelines. These Ministry of
Finance notices and regulations also provided that the portion of remedial
payments attributable to the periods prior to a restructuring of the
employer enterprise from a wholly state-owned status to a less than wholly
state-owned status is to be borne by the state shareholder of the
enterprise.
The restructuring that resulted in the formation of the Group took place
in November 1999. As such, the one-time remedial housing payments payable
to the eligible employees of the Group are to be borne by the state
shareholder of the Group.
Under IFRS, such direct payments to employees or reimbursements will not
be recorded through the consolidated profit and loss account of the Group.
US GAAP contains no such exemption but requires this principal
shareholder's action on behalf of the Company to be recorded in the
consolidated profit and loss account. In the last quarter of year 2002,
the Group and CNPC completed the process of estimating the amount payable
to qualified employees of the Group. This amount, RMB 2,553 million, was
reflected in determining net income of the Group for the year ended
December 31, 2002, under US GAAP. Since this amount is borne by CNPC, a
corresponding amount has been included as an addition to the other
reserves in the shareholders' equity of the Group.
(D) RECENT US ACCOUNTING PRONOUNCEMENTS
There are no recently adopted or pending pronouncements that would have a
material effect on the financial statements of the Group.
- 13 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated
interim condensed financial statements for the Group and the notes thereto
contained in the information required under paragraphs 46(1) to 46(6) of
Appendix 16 to the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited (the "LISTING RULES") and to be submitted to the
HKSE on or before September 9, 2004 and published on the website of the HKSE.
OVERVIEW
For the six months ended June 30, 2004, the profit before taxation of the Group
was RMB64,045 million, representing an increase of 18.35% from the corresponding
period of last year. Net profit was RMB45,292 million, representing an increase
of 17.28% from the corresponding period of last year. The continued rapid
improvement of the Company's operating results was attributable to the
streamlining of production activities and enhancement of operation management
during a period of continuous and rapid economic growth, sustained high oil
prices and strong demand for oil and petrochemical products.
For the six months ended June 30, 2004, the Company's basic and diluted earnings
per share was RMB0.26.
COMPARISON BETWEEN THE SIX-MONTH PERIOD ENDED JUNE 30, 2004 AND THE SIX-MONTH
PERIOD ENDED JUNE 30, 2003
CONSOLIDATED OPERATING RESULTS
Turnover Turnover increased 21.35% from RMB147,960 million for the six months
ended June 30, 2003 to RMB179,552 million for the six months ended June 30,2004.
The growth was mainly attributable to the increase in prices of crude oil, the
increase in the prices and sales volume of refined products and chemicals, and
the rise in the sales volume of natural gas.
Operating Expenses Operating expenses increased 24.03% from RMB92,965 million
for the six months ended June 30, 2003 to RMB115,302 million for the six months
ended June 30, 2004. The change was mainly attributable to an increase in the
purchase of oil from external suppliers and increased depreciation, depletion
and amortization caused by an increase in the amount of property, plant and
equipment.
Purchases, Services and Other Expenses Purchases, services and other expenses
increased 30.23% from RMB40,465 million for the six months ended June 30, 2003
to RMB52,699 million for the six months ended June 30, 2004. This was due
primarily to the increase in the purchase cost of crude oil resulted from the
increase of crude oil price and the increase in the purchase volume of crude oil
by the Company's refineries.
Employee Compensation Costs Employee compensation costs rose 26.73% from
RMB8,275 million for the six months ended June 30, 2003 to RMB10,487 million for
the six months ended June 30, 2004. This was due primarily to the increase in
the wages and welfare expenses of staff
- 14 -
and workers as a result of strong operating results achieved by the Company, and
the increase in labour service costs as a result of further development of the
Company's retail network.
Depreciation, Depletion and Amortization Depreciation, depletion and
amortization increased 18.00% from RMB20,909 million for the six months ended
June 30, 2003 to RMB24,673 million for the six months ended June 30, 2004. This
was mainly attributable to an increase in impairment of assets, and increase in
depreciation and depletion and amortization caused by an increase in the amount
of property, plant and equipment.
Selling, General and Administrative Expenses Selling, general and administrative
expenses increased 15.16% from RMB11,094 million for the six months ended June
30, 2003 to RMB12,776 million for the six months ended June 30, 2004. This was
due primarily to an increase in transportation and storage costs caused by an
increase in the sales volume of refined oil and petrochemical products.
Taxes other than Income Tax Taxes other than income tax increased 17.95% from
RMB7,872 million for the six months ended June 30, 2003 to RMB9,285 million for
the six months ended June 30, 2004. The increase was due primarily to an
increase in consumption tax and surcharges as a result of an increase in the
sales volume of gasoline and diesel oil by the Company's refineries.
Profit from Operations As a result of the factors discussed above, profit from
operations advanced 16.83% from RMB54,995 million for the six months ended June
30, 2003 to RMB64,250 million for the six months ended June 30, 2004.
Net Exchange Gain (Loss) A turn from net exchange loss of RMB64 million for the
six months ended June 30,2003 to a net exchange gain of RMB10 million for the
six months ended June 30, 2004 was recorded. The turnaround was due primarily to
a depreciation of value of the Japanese Yen and the Euro against Renminbi of
1.17% and 2.63% respectively during the first half of this year. During the
corresponding period of last year, the value of the Euro and the British
Sterling appreciated against Renminbi significantly.
Net Interest Expenses Net interest expenses decreased 16.74% from RMB1,123
million for the six months ended June 30, 2003 to RMB935 million for the six
months ended June 30, 2004. The decrease in net interest expenses was due
primarily to the increase in interest income resulted from sufficient cash flow
generated from operating activities.
Profit Before Taxation Profit before taxation rose 18.35% from RMB54,116 million
for the six months ended June 30, 2003 to RMB64,045 million for the six months
ended June 30, 2004.
Taxation Taxation increased 18.54% from RMB15,201 million for the six months
ended June 30, 2003 to RMB18,019 million for the six months ended June 30, 2004.
The increase was mainly due to an increase in taxable profits.
Net Profit As a result of the factors discussed above, net profit increased
17.28% from RMB38,619 million for the six months ended June 30, 2003 to
RMB45,292 million for the six months ended June 30, 2004.
SEGMENT INFORMATION
- 15 -
EXPLORATION AND PRODUCTION
Turnover Turnover increased 8.79% from RMB91,485 million for the six months
ended June 30, 2003 to RMB99,526 million for the six months ended June 30, 2004.
The increase was mainly attributable to the further climbing of oil prices and
the increase in the sales volume of oil and gas. During the first half of 2004,
our average realized crude oil price was US$29.76 per barrel, representing an
increase of 5.98% from US$28.08 per barrel for the corresponding period in the
first half of 2003.
Intersegment sales increased 19.94% from RMB65,714 million for the six months
ended June 30, 2003 to RMB78,818 million for the six months ended June 30, 2004.
The increase was mainly due to the rise of oil prices and growth in sales volume
of natural gas.
Operating Expenses Operating expenses increased 13.61% from RMB41,215 million
for the six months ended June 30, 2003 to RMB46,825 million for the six months
ended June 30, 2004. The increase was principally due to the augmentation in
crude oil import from Russia, the increase in depreciation and depletion of
fixed assets, increases in staff costs and fixed asset impairment provisions.
Profit from Operations Profit from operations increased 4.84% from RMB50,270
million for the six months ended June 30, 2003 to RMB52,701 million for the six
months ended June 30,2004.
REFINING AND MARKETING
Turnover Turnover rose 29.13% from RMB106,213 million for the six months ended
June 30, 2003 to RMB137,149 million for the six months ended June 30, 2004. The
increase was caused by an increase in sales volume and prices of key refined
products.
Revenue from sales of gasoline grew 26.62% from RMB29,713 million for the six
months ended June 30, 2003 to RMB37,621 million for the six months ended June
30, 2004. The increase was mainly due to soaring prices and sales volume. The
average realized selling price of gasoline surged 11.96% from RMB3,003 per ton
for the six months ended June 30, 2003 to RMB3,362 per ton for the six months
ended June 30, 2004. The sales volume of gasoline increased 13.09% from 9.90
million tons for the six months ended June 30, 2003 to 11.19 million tons for
the six months ended June 30, 2004.
Revenue from sales of diesel grew 28.03% from RMB48,808 million for the six
months ended June 30, 2003 to RMB62,491 million for the six months ended June
30, 2004. The increase was mainly due to increased sales volume. The average
realized selling price of diesel increased 7.55% from RMB2,771 per ton for the
six months ended June 30, 2003 to RMB2,980 per ton for the six months ended June
30, 2004. The sales volume of diesel increased 19.05% from 17.62 million tons
for the six months ended June 30, 2003 to 20.97 million tons for the six months
ended June 30, 2004.
Revenue from sales of kerosene grew 27.99% from RMB2,056 million for the six
months ended June 30, 2003 to RMB2,632 million for the six months ended June 30,
2004. The increase was mainly due to increased sales volume.
- 16 -
Intersegment sales revenue increased 17.86% from RMB8,064 million for the six
months ended June 30, 2003 to RMB9,504 million for the six months ended June 30,
2004. The increase was mainly due to an increase in selling prices and sales
volume.
Operating Expenses Operating expenses increased 24.26% from RMB103,146 million
for the six months ended June 30, 2003 to RMB128,171 million for the six months
ended June 30, 2004. The increase was mainly attributable to the increase of the
purchase cost of crude oil and other feedstock from external suppliers.
Profit from Operations Profit from operations increased 192.73% from RMB3,067
million for the six months ended June 30, 2003 to RMB8,978 million for the six
months ended June 30, 2004.
CHEMICALS AND MARKETING
Turnover Turnover rose 34.37% from RMB18,928 million for the six months ended
June 30, 2003 to RMB25,434 million for the six months ended June 30, 2004. The
growth in turnover of this segment was principally due to an increase in the
sales volume and selling prices of chemical products.
Operating Expenses Operating expenses increased 28.45% from RMB18,280 million
for the six months ended June 30, 2003 to RMB23,481 million for the six months
ended June 30, 2004. The increase was mainly due to increased expenses in the
purchase of raw materials.
Profit from Operations Profit from operations increased 201.39% from RMB648
million for the six months ended June 30, 2003 to RMB1,953 million for the six
months ended June 30, 2004.
NATURAL GAS AND PIPELINE
Turnover Turnover increased 14.66% from RMB7,777 million for the six months
ended June 30, 2003 to RMB8,917 million for the six months ended June 30, 2004.
The increase was primarily due to an increase in the sales volume of natural
gas.
Operating Expenses Operating expenses increased 19.02% from RMB6,456 million for
the six months ended June 30, 2003 to RMB7,684 million for the six months ended
June 30, 2004. This was mainly due to increased expenses in the purchase of gas
and an increase in depreciation charges caused by the commencement of operation
of the eastern section of the West-East Gas Pipeline.
Profit from Operations Profit from operations decreased 6.66% from RMB1,321
million for the six months ended June 30, 2003 to RMB1,233 million for the six
months ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2004, the Group's primary sources of funds
were cash generated from operating activities, short-term and long-term
borrowings. The Group's funds were used for operating activities, capital
expenditures, repaying short-term and long-term borrowings and distribution of
dividends to shareholders.
- 17 -
For the six months ended June 30, 2004, short-term debts represented
approximately 6.18% of the Group's capital employed as compared with
approximately 5.97% for the six months ended June 30, 2003. Our ability to
obtain adequate financing may be affected by our financial condition and
operating results and the conditions of the domestic and foreign capital
markets. We must seek approvals from the relevant PRC government authorities
before raising funds in the domestic and foreign capital markets. In general, we
must obtain PRC government approvals for any project involving significant
capital investments in our Refining and Marketing segment, Chemicals and
Marketing segment and the Natural Gas and Pipeline segment.
We plan to fund our capital and related investments principally from the cash
generated from operating activities and short-term and long-term borrowings. For
the six months ended June 30, 2004, net cash generated from operating activities
was RMB66,668 million. As at June 30, 2004, we had cash and cash equivalents of
RMB17,808 million. Cash and cash equivalents were mainly denominated in Renminbi
(Renminbi accounting for approximately 79.56% and United States Dollar
accounting for approximately 20.44%).
The table below sets forth our cash flows for the six months ended June 30, 2004
and the six months ended June 30, 2003 and our cash equivalents at the end of
each period.
Six months ended June 30
---------------------------------
2004 2003
---------------------------------
(RMB million) (RMB million)
---------------------------------
Net cash generated from operating activities 66,668 66,828
Net cash used for investment activities (42,472) (36,976)
Net cash used for financing activities (17,619) (20,495)
Cash and cash equivalents at the end of each period 17,808 19,334
CASH GENERATED FROM OPERATING ACTIVITIES
Our net cash generated from operating activities during the first half of this
year was basically the same as that during the corresponding period of last
year. Our net cash generated from operating activities for the six months ended
June 30, 2003 and for the six months ended June 30, 2004 were RMB66,828 million
and RMB66,668 million respectively.
As at December 31, 2003, our working capital deficit was RMB27,855 million. As
at June 30, 2004, our working capital was RMB635 million. The increase in
working capital was primarily due to an increase in receivables under resale
agreements, inventories, prepaid expenses and cash and cash equivalents.
CASH USED FOR FINANCING ACTIVITIES
The table below sets out our net borrowings as at June 30, 2004 and December 31,
2003:
- 18 -
June 30, 2004 December 31, 2003
------------- -----------------
(RMB million) (RMB million)
------------- -----------------
Short-term borrowings (including current portion of long-term borrowings) 28,608 28,890
Long-term borrowings 40,049 41,959
------ ------
Total borrowings 68,657 70,849
====== ======
Less:
Cash and cash equivalents 17,808 11,231
Time deposits with maturities over three months 800 2,640
Receivables under resale agreements 37,464 24,224
------ ------
Net borrowings 12,585 32,754
====== ======
The maturity profile of the long-term borrowings of the Group is as follows:
Principal as at June 30, 2004
-----------------------------
(RMB million)
-------------
To be repaid within one year 17,199
To be repaid within one to two years 9,804
To be repaid within two to five years 24,356
To be repaid after five years 5,889
------
57,248
======
Of the total borrowings of the Group as at June 30, 2004, approximately 29.16%
were fixed-rate loans and approximately 70.84% were floating-rate loans. Of the
borrowings as at June 30, 2004, approximately 85.48% were denominated in
Renminbi, approximately 12.73% were denominated in US Dollars, approximately
0.57% were denominated in British Sterling, approximately 0.72% were denominated
in Japanese Yen, and approximately 0.50% were denominated in Euro.
As at December 31, 2003 and June 30, 2004, short-term borrowings owed to related
parties were both RMB610 million. As at December 31, 2003 and June 30, 2004,
long-term borrowings owed to related parties amounted to RMB24,578 million and
RMB22,576 million respectively.
As at June 30, 2004, short-term borrowings and long-term borrowings owed to
China Petroleum Finance Company Limited amounted to RMB610 million and RMB22,576
million respectively.
Our net cash used for financing activities decreased 14.03% during the six
months ended June 30, 2004 compared with the six months ended June 30, 2003.
This decrease was primarily due to lower net repayment compared with the
corresponding period of last year.
As at June 30, 2004, loans of the Group consisted of RMB104 million secured
loans (lease financing and bank loans) (RMB170 million as at December 31, 2003),
of which RMB73 million (RMB114 million as at December 31, 2003) were secured by
plant and equipment of
- 19 -
the Group valued at RMB152 million (RMB152 million as at December 31, 2003). As
ownership of leased assets will be transferred to the lessor in case of default,
lease obligations are in fact secured obligations. As at June 30, 2004, finance
lease obligations of the Group amounted to RMB31 million (RMB56 million as at
December 31, 2003), and the book value of properties, plant and equipment held
under finance lease was RMB144 million (RMB240 million as at December 31, 2003).
As at June 30, 2004, the debt to capitalization ratio was 15.04% (16.57% as at
December 31, 2003).
CAPITAL EXPENDITURES
The table below sets out our capital expenditures by business segment for each
of the six months ended June 30, 2004 and the six months ended June 30, 2003.
During the first half of 2004, capital expenditures increased 8.68% to RMB28,853
million from RMB26,548 million of the corresponding period in 2003. The increase
was due primarily to the continued increase in expenditures relating to oil and
gas exploration and development, and acquisition of service stations.
First half of 2004 First half of 2003 Estimate for 2004
------------------------- ----------------------- -----------------------
(RMB million) % (RMB million) % (RMB million) %
------------- ----- ------------- ----- ------------- -----
Exploration and Production 19,146* 66.36 17,336* 65.30 57,040* 62.66
Refining and Marketing 4,688 16.25 3,558 13.40 11,600 12.74
Chemicals and Marketing 1,062 3.68 1,123 4.23 6,190 6.80
Natural Gas and Pipeline 3,905 13.53 4,492 16.92 15,600 17.14
Others 52 0.18 39 0.15 600 0.66
------ ------ ------ ------ ------ ------
Total 28,853 100.00 26,548 100.00 91,030 100.00
====== ====== ====== ====== ====== ======
Note:
*If geological and geophysical exploration costs were included, the capital
expenditures and investments for the Exploration and Production segment for the
first half of 2003 and the first half of 2004, and the estimate of the same for
the entire 2004 would be RMB19,132 million, RMB21,646 million and RMB61,300
million respectively.
Exploration and Production
The majority of the Group's capital expenditures is related to the Exploration
and Production segment. For the six months ended June 30, 2004, capital
expenditures in relation to exploration and production amounted to RMB19,146
million, including RMB3,665 million for exploration activities and RMB14,481
million for development activities. For the six months ended June 30, 2003,
capital expenditures in relation to this segment totalled RMB17,336 million,
including RMB2,594 million for exploration activities and RMB13,909 million for
- 20 -
development activities. The increase in capital expenditures was mainly due to
the increased expenditures relating to oil and gas exploration and development.
It is estimated that for the twelve months ended December 31, 2004, capital
expenditures of the Group in the Exploration and Production segment will amount
to RMB57,040 million. Approximately RMB16,590 million will be used for oil and
gas exploration, and approximately RMB40,450 million will be used for oil and
gas development. Exploration and development will be mainly carried out in the
Erdos, Junggar, Tarim, Songliao and Bohai Bay basins.
Refining and Marketing
For the six months ended June 30, 2004, capital expenditures of the Group in the
Refining and Marketing segment amounted to RMB4,688 million, of which RMB3,386
million was spent on the expansion of the retail marketing network of our
refined products and storage infrastructure facilities, and RMB1,302 million was
spent on upgrading our refining facilities. For the six months ended June 30,
2003 , capital expenditures for this segment totalled RMB3,558 million. The
increase in capital expenditures was mainly due to increased expenditures for
acquisition of service stations.
It is estimated that capital expenditures of the Group for the Refining and
Marketing segment for the twelve months ending December 31, 2004 will amount to
RMB11,600 million, including approximately RMB5,100 million to be spent on
construction and expansion of refining facilities; and approximately RMB6,500
million to be spent on investments in our refined product retail marketing
network and addition of service stations and storage facilities.
Chemicals and Marketing
For the six months ended June 30, 2004, capital expenditures in the Chemicals
and Marketing segment decreased 5.43% from RMB1,123 million for the six months
ended June 30, 2003 to RMB1,062 million for the six months ended June 30, 2004.
This was mainly due to a decrease of chemical engineering expenditures.
It is estimated that for the twelve months ended December 31, 2004, capital
expenditures of the Group in the Chemicals and Marketing segment will amount to
RMB6,190 million. The capital expenditures will mainly be used for upgrading
ethylene facilities in Daqing, Jilin and Lanzhou, expansion of the production
capacity of the chemical fertiliser plants in Daqing, Ningxia and Urumqi and the
PTA project at Liaoyang Petrochemical Company.
Natural Gas and Pipeline
For the six months ended June 30, 2004, capital expenditures in the Natural Gas
and Pipeline segment amounted to RMB3,905 million. We spent RMB3,858 million of
these expenditures on construction of long distance pipelines and RMB850 million
of such amount on the West-East Gas Pipeline project. For the six months ended
June 30, 2003, capital expenditures in the segment totalled RMB4,492 million.
The decrease in capital expenditures was mainly due to a dramatic decrease in
expenditures relating to the West-East Gas Pipeline project.
It is estimated that for the twelve months ended December 31, 2004, capital
expenditures of the Group in the Natural Gas and Pipeline segment will amount to
RMB15,600 million, of which approximately RMB13,400 million will be invested in
the West-East Gas Pipeline project, the
- 21 -
Zhongxian-Wuhan pipeline, and the second Shaanxi-Beijing pipeline and
approximately RMB2,200 million will be invested in natural gas storage
infrastructure facilities and natural gas, crude oil and refined product
transmission pipelines.
Others
The Group's non segment-specific capital expenditures for the six months ended
June 30, 2003 and for the six months ended June 30, 2004 were RMB39 million and
RMB52 million respectively. These capital expenditures were mainly used for non
segment-specific equipment purchases and research and development activities.
It is estimated that the Group's non segment-specific capital expenditures for
the twelve months ended December 31, 2004 will amount to RMB600 million. These
capital expenditures will be used for the construction of water and power supply
systems, roads and telecommunications system for the benefit of various
segments.
MATERIAL INVESTMENT
For the six months ended June 30, 2004, the Group did not hold any material
investment.
MATERIAL ACQUISITION OR DISPOSAL
The Group had no material acquisition or disposal of subsidiaries and associated
companies for the six months ended June 30, 2004.
FOREIGN EXCHANGE RATE RISK Renminbi is not a freely convertible currency. Future
exchange rates of Renminbi could vary significantly from the current or
historical exchange rates as a result of controls that could be imposed by the
PRC government. The exchange rates of Renminbi are affected by changes in PRC
government policies. The exchange rates of Renminbi are also affected by
economic developments and political changes domestically and internationally,
and supply and demand for Renminbi. The official exchange rate for the
conversion of Renminbi to United States Dollar has generally been stable
recently. As Renminbi is the measurement currency of the Company and most of its
consolidated entities, the fluctuation of exchange rates of Renminbi may have
positive or negative impacts on the results of operations of the Group. As the
prices of the Group's crude oil and refined products are set generally with
reference to United States Dollar-denominated prices in the international
market, a devaluation of Renminbi against United States Dollar may not have a
negative impact on the Group's turnover but may increase the cost incurred by
the Group to acquire imported materials and equipment as well as the foreign
currency-denominated obligations of the Group. On the other hand, an
appreciation of Renminbi against United States Dollar may decrease the Group's
turnover, but the cost for acquiring imported materials and equipment may be
reduced. The results of operations and the financial position of the Group may
also be affected by fluctuations in exchange rates against Renminbi of a number
of other foreign currencies other than United States Dollar.
COMMODITY PRICE RISK
The Group is engaged in a wide range of petroleum-related activities. The global
oil and gas market is affected by international political, economic and military
developments and global demand for and supply of oil and gas. As the prices of
Chinese crude oil and refined products
- 22 -
are determined by reference to international benchmark prices, fluctuations of
prices of crude oil and refined products in the international market will
directly or indirectly, affect prices of Chinese crude oil and refined products.
A decrease in the prices of crude oil and refined products could adversely
affect the Group's financial position. Historically, the Group has not used
derivative instruments to hedge against potential price fluctuations of crude
oil and refined products. Accordingly, the Group is exposed to general price
fluctuations of oil and gas commodities in 2004 and will remain to be so exposed
thereafter.
INDUSTRY RISK
Like other oil and natural gas companies in China, the Company's operating
activities are subject to regulation and control by the PRC government in many
aspects. Regulation and control, such as by way of grant of exploration and
production licences, the imposition of industry-specific taxes and levies and
the implementation of environmental and safety standards, is expected to have an
impact on the Company's business operations. As a result, the Company may be
subject to relatively significant restrictions when implementing its business
strategy, developing and expanding its business or maximising its profitability.
Any future changes in PRC governmental policies on the crude oil and natural gas
industry may also affect the Company's business operations.
EMPLOYEES
Number of Employees
As at June 30, 2003 and June 30, 2004, the Group had 419,415 and 417,163
employees respectively. The table below sets out the number of employees of
business segments as at June 30, 2004:
Number of Employees % of total
------------------- ----------
Exploration and Production 234,768 56.28
Refining and Marketing 111,513 26.73
Chemicals and Marketing 57,701 13.83
Natural Gas and Pipeline 10,367 2.49
Others* 2,814 0.67
------- ------
Total 417,163 100.00
======= ======
Note*: Including management staff of PetroChina Exploration & Development
Research Institute, PetroChina Planning & Engineering Institute, Oil Refining
and Petrochemical Technological Research Centres, Company headquarters and
business segment head offices.
Employee Compensation
For the six months ended June 30, 2004, the total employee compensation payable
by the Group was RMB5,564 million, being the total salaries of employees during
the reporting period. Compensation of employees is determined according to
industry practice and the actual conditions of the Group, and is based on the
principles of attracting and retaining high calibre personnel, and motivating
all staff for the realization of the best results.
- 23 -
The Company's senior management remuneration system links senior management
members' financial interests (including those of executive directors and
supervisors) with the Company's operating results and the market performance of
its shares. The senior management members have entered into performance
contracts with the Company. Under this system, the senior management members'
compensation has three components, namely, fixed salaries, performance bonuses
and stock appreciation rights. The variable components account for approximately
70% to 75% of the senior management officers' total potential compensation,
including approximately 0% to 25% forming the performance bonus component and
approximately 50% to 70% forming the stock appreciation rights component.
Variable compensation rewards are linked to the attainment of specific
performance targets, such as net profit, return on capital and cost reduction
targets. The chart below sets forth the components of the total potential
compensation for key officers.
Fixed salary(%) Stock appreciation rights (%) Performance bonus (%)
--------------- ----------------------------- ---------------------
Chairman 30 70 0
President 25 60 15
Vice-President 25 60 15
Departmental General Manager 25 50 25
Details of the directors' and supervisors' emoluments as at June 30, 2004 and
June 30, 2003 are as follows:
As at June 30, 2004 As at June 30, 2003
------------------- -------------------
(RMB'000) (RMB'000)
------------------- -------------------
Fees for directors and supervisors 58 33
Salaries, allowances and other benefits 647 611
Contribution to retirement benefit scheme 17 18
--- ---
722 662
=== ===
The number of directors and supervisors whose emoluments fall within the
following band (including directors and supervisors whose term expired during
the current period):
As at June 30, 2004 As at June 30, 2003
------------------- -------------------
Number Number
------------------- -------------------
Nil - RMB1,000,000 24 19
== ==
- 24 -
Upon exercise of their share options, senior management staff will not receive
any shares in the Company. Instead, they will receive, by way of stock
appreciation rights, a monetary sum which is calculated on the basis of the
share price of the H shares listed on the HKSE.
Workforce Reduction Plan
During the period from 1999 to 2002, a total of 58,300 people were laid off,
which has met the target of laying off 50,000 employees originally committed by
the Company.
The Company has no plan for any substantial reduction of its workforce in the
next few years, but will continue to keep a strict control on the total number
of employees. Workforce required for new projects or expanded production
capacity will first be obtained by way of tapping existing resources and making
use of any spare capacity, with the aim of keeping the workforce at its present
size. The target is to maintain zero growth in head count while striving to
reduce head count.
Training Programmes
In order to develop the Company into a first class international oil company,
the Company will focus on exploring the possibility of establishing a
learning-oriented enterprise in its training programme. The Company will focus
on the training of core employees, actively promote the training of all of its
employees and strive to build up an operating and management team, a technology
renovation team and a skillful operators' team so as to achieve an overall
improvement in the quality of its staff and ensure the supply of talents
required for the continuous, steady and rapid development of the Company.
Medical Insurance
Since October 1, 2002, the Company's headquarters and its regional branches
based in Beijing are members of the basic medical insurance scheme organized by
the Beijing Municipality, making contributions at 9% of the total salaries of
the employees. Other regional companies of the Group have also participated in
their respective local basic medical insurance schemes.
Basic medical insurance is organized by local authorities. The dates of
implementation, rates of contribution and reimbursement methods vary with
localities. The rate of contribution is generally set at 6% to 10% of the total
basic salaries of the employees of various companies.
In accordance with relevant regulations of the PRC government, the Company has
given permission to regional companies that have participated in local basic
insurance schemes to establish a supplemental medical insurance scheme from
2002. Contributions to the schemes are set at not more than 4% of the total
salaries and are expensed.
CONTINGENT LIABILITIES
Information on the Group's contingent liabilities as of June 30, 2004 is as
follows:
- 25 -
BANK AND OTHER GUARANTEES
As at June 30, 2004, the Group had contingent liabilities in respect of bank and
other guarantees and other matters arising in the ordinary course of business
from which it is anticipated that no material liabilities will arise.
June 30, 2004 December 31, 2003
------------- -----------------
(RMB million) (RMB million)
------------- -----------------
Guarantees in respect of borrowings
of associated companies 211 448
=== ===
ENVIRONMENTAL LIABILITIES
CNPC and the Group have operated in China for many years and certain
environmental problems have developed. China has adopted extensive
environmental laws and regulations that affect the operation of the oil
and gas industry. The impact of environmental liabilities under proposed
or future environmental legislation cannot reasonably be estimated at
present, and could be material. Under existing legislation, however, the
management believes that there are no probable liabilities, except for the
amounts which have already been reflected in the financial statements,
that will have a material adverse effect on the financial position of the
Group.
LEGAL CONTINGENCIES
The Group is the named defendant in certain insignificant lawsuits as well as
the named party in other proceedings arising in the ordinary course of business.
While the outcome of such contingencies, lawsuits or other proceedings cannot be
determined at present, the management believes that any liabilities which may
arise will not have a material adverse effect on the financial position of the
Group.
LEASING OF LAND, ROADS AND BUILDINGS
According to the Restructuring Agreement entered into between the Company and
CNPC in 1999 upon the formation of the Company, CNPC has undertaken to the
Company as follows:
- CNPC will use its best endeavours to obtain formal land use right
certificates to replace the entitlement certificates in relation to the 28,649
parcels of land which were leased or transferred to the Company from CNPC,
within one year from August, September and October 1999 when the relevant
entitlement certificates were issued;
- CNPC will complete, within one year from November 5, 1999, the necessary
governmental procedures for the requisition of the collectively-owned land on
which 116 service stations owned by the Company are located; and
- CNPC will obtain individual building ownership certificates in the name of
the Company for all of the 57,482 buildings transferred to the Company by CNPC,
before November 5, 2000.
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As at June 30, 2004, CNPC obtained formal land use right certificates in
relation to 24,046 out of the above-mentioned 28,649 parcels of land, and some
building ownership certificates for the above-mentioned buildings, but did not
complete the necessary governmental procedures for the above-mentioned service
stations located on collectively-owned land. The Directors of the Company
confirm that the use of and the conduct of relevant activities at the
above-mentioned parcels of land, service stations and buildings are not affected
by the fact that the relevant land use right certificates or individual building
ownership certificates have not been obtained or the fact that the relevant
governmental procedures have not been completed. In the management's opinion,
the outcome of the above events will not have a material adverse effect on the
results of operations or the financial position of the Group.
GROUP INSURANCE
Except for limited insurance coverage for vehicles and certain assets subject to
significant operating risks, the Group does not carry any other insurance for
property, facilities or equipment with respect to its business operations. In
addition, the Group does not carry any third-party liability insurance against
claims relating to personal injury, property and environmental damages or
business interruption insurance since such insurance coverage is not customary
in China. While the effect of under-insurance on future incidents cannot be
reasonably assessed at present, the management believes that it may have a
material impact on the operating results but will not have a material adverse
effect on the financial position of the Group.
RE-ALLOCATION OF PRODUCTION AND OPERATION FACILITIES
The Group may further streamline its production facilities within the next
several years to further improve the operating efficiency and competitiveness of
the Group. The management has not approved all significant actions to be taken
to complete such plans. The management does not believe such plans will have a
material adverse impact on the Group's financial position, but may have a
material adverse effect on the Group's results of operations.
OTHERS
In December 2003, a gas blow-out incident occurred at one of the gas wells of
the Group. The blow-out caused the leakage of a large quantity of sulfurated
hydrogen, causing injuries and deaths to many residents living in the
surrounding area. As a result of an investigation conducted by the PRC
government, CNPC, which provided drilling services for the well, was held liable
for this blow-out. The incident has not had, and the Company does not believe it
will have, a material adverse effect on the results of operations and financial
position of the Group.
MARKET REVIEW
Crude Oil Market Review
During the first half of 2004, international crude oil prices hit an all-time
high due to geopolitical and economic developments and regional demand and
supply imbalance. The average oil price soared. WTI, Brent and Minas crude oil
in the first half of the year averaged US$36.81, US$33.66 and US$33.14 per
barrel respectively, representing an increase of US$5.36, US$4.89 and US$3.08
per barrel respectively from the first half of 2003. Domestic
- 27 -
crude oil prices rose under the impact of international oil prices. The average
realized price was higher than that of the first half of 2003.
Chinese import of crude oil continued to grow during the first half of 2004.
Chinese net crude oil import surged 46.12% to 57.95 million tons compared with
the same period of last year. Chinese crude oil output and crude oil processed
reached 86.38 million tons and 127 million tons respectively.
Refined Products Market Review
The domestic refined products market performed well during the first half of
2004. Nominal consumption increased 24.6% to 75.75 million tons compared with
the same period of last year. Except for January and February in which
consumption was low, demand for refined products, driven by rapid GDP growth,
was strong in the other four months. The supply of refined products was
relatively tight. By the end of June, the refined products inventory held by our
company and Sinopec dropped to 8.14 million tons, a reduction of 0.38 million
tons compared with the corresponding period of last year.
The PRC government has made appropriate adjustments to the prices of domestic
refined products during the first half of 2004. However, under the impact of
international oil prices, the average benchmark prices of gasoline and diesel
were still higher than the level during the corresponding period of last year.
Chemical Products Market Review
During the first half of 2004, domestic investment and production activities
were still growing rapidly. The Chinese GDP growth rate for the first quarter
and the second quarter was recorded at 9.7% and 9.5% respectively. A strong
market demand for petroleum and chemical products was created. Owing to
sustained high crude oil prices in the international market and strong demand
for downstream products, output of key petroleum and chemical products grew
rapidly during the first half of 2004. Prices continued to surge, market sales
were active and imports and exports grew steadily. Key economic targets hit
historical high. Prices of all chemical products increased markedly from those
of the corresponding period of last year.
There was a tight supply of resources in the first half of the year. Inventory
as a whole dropped to a low level. The PRC economy grew steadily in line with
the global economic recovery. The increase in demand for chemical products
outpaced the growth of the domestic gross product. There was a strong demand for
plastic and textile products and demand for aromatics soared in particular. As
there was limited domestic production capacity, prices and output of chemical
products increased.
It is estimated that in the second half of the year the global economy will
continue to grow. In particular, economic development in the United States will
accelerate and the European economy will also speed up its recovery. There will
be increased demand for basic chemical materials which will lead to an increase
in prices of chemical products. Global demand for chemical products will rise
steadily.
In the second half of the year, prices of domestic chemical products will remain
high, although prices may drop mildly compared with the first half of the year.
Overall, it is expected that prices on average will be higher than those of the
second half of last year.
- 28 -
In summary, persistent high crude prices will inevitably lead to US opposition
and result in increased output by OPEC. This will push crude prices down
gradually. The macro-economic control measures implemented by the PRC government
will curb inappropriate investments in real estates and small-scale enterprises,
which will in turn affect demand. Owing to sustained high prices, downstream
enterprises are forced to operate at high costs for a long period of time which
will affect the rate of operation of these enterprises. Over a certain period of
time, this will result in excess supply over demand.
BUSINESS REVIEW
For the six months ended June 30, 2004, total oil and gas output of the Company
was 456.9 million barrels of oil equivalent, including 388.5 million barrels of
crude oil and 410.3 billion cubic feet of marketable natural gas, representing
an average daily crude oil output of 2.12 million barrels and an average daily
marketable natural gas output of 2,254 million cubic feet. A total of 366
million barrels of crude oil and 381 billion cubic feet of natural gas were
sold. The Company sold approximately 81% of its crude oil to its refineries.
During the first half of 2004, lifting cost of the Company (including overseas
operations) was US$4.45 per barrel. For the same period of 2003, lifting cost
was US$4.35 per barrel.
For the six months ended June 30, 2004, the Company's refineries processed 347
million barrels of crude oil, representing an average daily processed output of
1.91 million barrels. The Exploration and Production segment provided
approximately 86% of the crude oil processed by the Company's refineries. The
Company produced approximately 30.22 million tons of gasoline, diesel and
kerosene and sold approximately 33.18 million tons of these products. The
Company is actively expanding its sales network, and its retail network in
particular in order to benefit from the synergy created by the integration of
refining and marketing. As at June 30, 2004, there were 16,677 service stations
either owned, controlled or franchised by the Company or owned by CNPC but to
which the Company provided supervisory support. The cash processing cost of the
Company's refineries is constantly decreasing, from RMB132 per ton during the
first half of 2003 to RMB129 per ton for the same period of 2004.
During the six months ended June 30, 2004, the Company produced 0.923 million
tons of ethylene, 1.287 million tons of synthetic resin, 0.6293 million tons of
synthetic fibre raw materials and polymer, 0.133 million tons of synthetic
rubber, and 1.902 million tons of urea.
The Natural Gas and Pipeline segment is the Company's core business segment for
development. For the six months ended June 30, 2004, the Company sold 321.4
billion cubic feet of marketable natural gas through its Natural Gas and
Pipeline segment. As at December 31, 2003, the Company owned and operated 15,144
kilometres of regional natural gas pipeline network, of which 14,017 kilometres
of the pipeline network were operated by the Natural Gas and Pipeline segment.
The Company owned and operated 9,141 kilometres of crude oil pipeline and owned
2,276 kilometres of refined product pipeline.
THE SECOND HALF OF 2004 AND BEYOND
During the first half of 2004, the Company availed itself of the opportunity
created by high oil prices and strong market demand for oil and chemical
products, improved production organization and strengthened management of
operation and in so doing, achieved rapid growth of operating results. The
following exemplifies the excellent operating results: oil exploration
- 29 -
realized important achievements and showed good development prospects; crude oil
output increased steadily, natural gas output surged; marked increase in crude
oil processed and refined products output, and key technological and economic
indicators hit an all-time high; marketing efforts were enhanced, and sales and
profitability grew at the same time; smooth progress of construction of key
pipelines was made.
At present, international oil prices remain high. The effect of macro-economic
control measures is becoming apparent. The Company is developing under
favourable internal and external circumstances. During the second half of 2004,
the Company will step up its exploration and development activities so as to
locate more reserves and bring them into stream; further optimise the
petrochemical business operations and conduct necessary structural adjustments
to ensure the realization of increased output, sales and profits; make further
efforts to the construction and commencement of operation of key pipelines in
order to promote the fast development of natural gas business; accelerate merger
and acquisition for the purposes of achieving rapid development; emphasise safe
production to create a favourable environment for development.
In terms of the Exploration and Production segment, the Company will continue to
give top priority to the exploration of resources. The Company will develop its
oil and gas operations simultaneously, promote the integration of exploration
and development, and achieve a benign cycle of replacement of resources, stable
increase of crude oil output and speedy growth of natural gas output. In the
development of oil and gas fields, there should be meticulous design of
production efforts and co-ordination, active implementation of measures to
increase output, consolidate the basis for stable output in aging oilfields, and
speed up commencement of production in new oilfields. The Company will implement
natural gas projects as a matter of priority in order to create new production
capacity as soon as possible.
In terms of the refining and chemicals sectors, the Company will make full use
of the current flourishing market demand to improve allocation of resources,
promote technological advancement, improve processing procedures and the quality
of processing, make prompt adjustments to the product mix and increase output of
value-added products and readily marketable products. The Company will also
strengthen management of the production process, plan for repair and maintenance
arrangements in a scientific manner, ensure full-load operation of key
facilities in a safe and stable manner and realization of the target of improved
production and profitability, and speed up the pace of construction of key
refining projects.
In terms of marketing, the Company will carry out market development actively,
orderly and efficiently, and speed up the establishment of the marketing
network. The Company will adhere to the principle of quality first, and focus on
the development in central cities, main arteries and key locations, taking the
rate of return on investment into consideration. The Company will strengthen
management of existing stations and terminals as well as sales centres in order
to enhance daily sales of individual stations and profit generating capability
of sales centres. The Company will also broaden its institutional and consumer
client base in order to increase the ratio of sales to end-users. Finally, the
Company will speed up the establishment of the information infrastructure for
marketing so as to build up a loyal customer base.
In terms of the Natural Gas and Pipeline segment, the Company will endeavour to
improve the balance and connection between upstream resources, pipeline
operation and downstream users
- 30 -
carefully. The Company will co-ordinate the production, transmission and sale of
natural gas, and ensure safe and stable supply of gas. The Company will strive
to commence natural gas transmission from Lunnan in the western section of the
West-East Gas Pipeline project on October 1, and to commence commercial supply
of natural gas to Shanghai from Tarim by the end of this year. The
Zhongxian-Wuhan main trunk line and the Xiangfan-Huangshi branch line will be
ready for commercial gas transmission by the end of this year. The Company will
speed up construction of the Shaanxi-Beijing Pipeline. The Daliangshan Tunnel
and the Zhangjiawan Tunnel have been completed. The Company will strive to
complete construction of the trunk lines before October 30 this year.
The Company will continue to further develop its overseas operations, secure
overseas resources and enhance the value of the Company.
In future, the Company will keep up its efforts in accelerating the development
of key operations, take advantage of its edge in resources, and consolidate its
leading position in the upstream sector in order to drive forward and
co-ordinate the development of its business segments.
The management of the Company will strive to continue to enhance the value of
the Company and maximise benefits and value for its shareholders. The Company
intends to invest substantial efforts in technological and management
innovations and promote the continuous, effective and speedy development of the
Company.
INTERIM DIVIDEND AND CLOSURE OF REGISTER OF MEMBERS
The Board was authorized by the shareholders to approve the distribution of an
interim dividend for 2004 at the shareholders' meeting held on May 18, 2004. The
Board has resolved to pay an interim dividend of RMB0.115919 (inclusive of
applicable tax) for the six months ended June 30, 2004 on the basis of 45% of
the net profit for the period. The interim dividend will be paid to shareholders
whose names appear on the register of members of the Company at the close of
business on September 16, 2004. The Company will suspend registration of
transfer of shares from September 11, 2004 to September 16, 2004 (both days
inclusive). In order to qualify for the interim dividend, all transfer documents
must be lodged with the relevant share certificates at the Computershare Hong
Kong Investor Services Limited not later than 4 p.m. on 10 September 2004.
In accordance with Article 149 of its Articles of Association, the Company shall
declare dividends payable to shareholders in Renminbi. Dividends payable in
respect of State-owned shares shall be paid in Renminbi. Dividends payable in
respect of H shares shall be paid in Hong Kong Dollar. The amount of Hong Kong
Dollar payable shall be calculated on the basis of the average closing exchange
rate between Renminbi and Hong Kong Dollar published by the People's Bank of
China during the week before the Board declares the dividend on August 26, 2004,
which is RMB1.0608=HK$1.00. Accordingly, the amount of dividend payable per H
share will be HK$0.109275.
The interim dividend will be paid on or about October 8, 2004.
REPURCHASE, SALE OR REDEMPTION OF SECURITIES
- 31 -
For the six months ended June 30, 2004, none of the Company or its subsidiaries
has sold any other type of securities of the Company nor has any of them
repurchased or redeemed any of the securities of the Company.
DISCLOSURE OF OTHER INFORMATION
Save as mentioned above, there have been no material changes in respect of
matters required to be disclosed under paragraph 46(3) of Appendix 16 of the
Listing Rules since the publication of the annual report of the Group for the
year ended December 31, 2003.
COMPLIANCE WITH THE CODE OF BEST PRACTICE
Following its listing of H shares on the HKSE, the Company has complied with the
Code of Best Practice contained in Appendix 14 to the Listing Rules.
AUDIT COMMITTEE
The audit committee of the Company has reviewed and confirmed the interim
results announcement and the interim report for the six months ended June 30,
2004.
PUBLICATION OF RESULTS ON THE WEBSITE OF THE HKSE AND OF THE COMPANY
The Company will submit to the HKSE and publish on the website of the HKSE
(website:http://www.hkex.com.hk) all the information as required under
paragraphs 46(1) to (6) of Appendix 16 to the Listing Rules on or before
September 9, 2004. This information will also be published on the website of the
Company (website:http://www.petrochina.com.cn).
DIRECTORS OF THE COMPANY
As at the date of this announcement, the Board of Directors comprises Mr. Chen
Geng as the Chairman, Mr. Jiang Jiemin and Mr. Ren Chuanjun as Vice Chairmen,
Mr. Su Shulin, Mr. Duan Wende and Mr. Wang Fucheng, as executive directors, Mr.
Zheng Hu, Mr. Zhou Jiping, Mr. Gong Huazhang and Mr. Zou Haifeng as
non-executive directors and Mr. Chee-Chen Tung, Mr. Liu Hongru and Mr. Franco
Bernabe as independent non-executive directors.
By Order of the Board
PETROCHINA COMPANY LIMITED
CHEN GENG
Chairman
Beijing, PRC
August 26, 2004
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PetroChina Company Limited
Dated: August 27, 2004 By: /s/ Li Huaiqi
-----------------------------
Name: Li Huaiqi
Title: Company Secretary